Have you given up trying to know when to market corn and soybeans and for how much? Were you bullish on both on July 4, then watched prices tumble by $2 on corn and more on beans?
Maybe the matrix can open better futuristic marketing windows.
The “Matrix” science fiction movie series takes virtual reality to the limit. The pricing matrix from the University of Illinois (U of I) farmdoc program takes the farmer's reality of marketing decisions to the limit by verifying how a grower's combination of strategies impacts his overall marketing program.
“It's like having a portfolio of marketing strategies,” says Darrel Good, U of I agricultural economist. He and Scott Irwin, also a U of I ag economist, helped develop the matrix program as a way for growers to partially get away from traditional marketing strategies that, overall, haven't been the most profitable for corn and soybean producers in recent years.
“Sales prior to harvest have not been as high as prices after harvest the past two years,” says Good. “Higher prices are much more random now. Just about the time we encourage people to do preharvest selling, we find it's possibly the wrong thing to do.
“In the current marketing environment, the challenge and frustration of pricing corn and soybeans are likely to increase,” Good says.
Frustration about huge price fluctuations has growers baffled, along with the frequent inability to make distant trades due either to limitations set by a grain handler — or other buyers — or to the massive margin requirements for some futures positions.
Among the baffled is Ralph Sangmeister, corn and soybean grower from Peotone, IL. He no longer relies strictly on historical trends and early marketing.
“I used to get a lot more corn and beans marketed early,” says Sangmeister, whose farm is seeing Chicago suburbs inch closer every year. “Now, I wait a little longer to market.”
He had only about 20% of his corn sold before late July. It was cash forward-contracted at about $6/bu. About 20% of his soybeans were cash contracted at about $14/bu.
Even after the price fall in July, he was expecting another sound grain rally in the volatile market. He expected to have the majority of his corn and beans sold by harvest.
IRWIN SAYS NOT knowing when to sell has many growers anxious about their marketing. “Producers remain very frustrated by the decision-making process,” he says, adding that U of I surveys show that most growers believe producers sell two-thirds of their crop in the bottom third of the annual price range.
The matrix portfolio's new approach to grain marketing aims to ease the frustration. In the marketing system, growers use contracts to price a fixed number of bushels according to a set of rules.
First, the grower selects the appropriate time window for pricing. A common window would begin at the start of initial production planning and continue through the storage season, probably a 20-24-month period.
Second, the grower sets a relevant set of pricing strategies. They can be self-directed or externally managed strategies. “Self-directed strategies may include mechanical strategies that routinely price bushels at predetermined intervals,” says Good.
“External strategies are those where someone else makes pricing decisions. They may include mechanical pricing, as well as timing decisions based on the active price analysis of a professional market advisor.”
Irwin says the new approach can help growers decide which proportion of the two pricing strategies are best for them, depending on their situation.
He says these percentages with the pricing matrix will likely be influenced by five factors: the view on market efficiency, risk preference, financial position, pricing skill and decision-making discipline.
Rows or columns in the matrix are divided based on marketing discipline (see chart). Disciplined marketers usually prefer more of a self-directed approach, while less-disciplined prefer external help.
“Discipline is characterized by the grower's ability to stay within a pricing plan once it is formulated and pull the trigger when pricing decisions should be made,” says Irwin.
The matrix's two columns are divided based on various factors.
“If a producer believes that cash, futures and options markets are efficient in fully reflecting available information, then he should follow mechanical pricing strategies that assume it is not possible to beat the market,” says Good
“People who believe markets are efficient should follow active or external pricing strategies only if they possess information not available to the market or have superior analytical skills.”
If a grower believes cash, futures and options are inefficient, then active or external will likely be the preferred marketing method.
Irwin says growers with higher debt will likely prefer mechanical strategies that are likely less risky than active or external strategies. In general, producers with poor pricing skills will prefer mechanical strategies and those with good pricing skills will prefer active strategies.
Where would you fit? Sangmeister is still content with making his own marketing decisions, but not until he has studied the many trends facing corn and soybean prices.
“I read a lot of what comes from universities and private marketing analysts,” he says. “I keep track of how my trades work at different times of the year. But again, you can't always count on what worked one year working the same the next.”
One of his information sources is the MarketMaxx game from Corn & Soybean Digest. His use of options had him in the top 10 of both the corn and soybean pricing contests much of the year. The reaction of call option positions to the volatile market helped him better understand that making solid cash contracts can be as customary as having good futures or options strategies in place.
IRWIN POINTS OUT that there are numerous combinations with the matrix. All factors of a grower's operation and marketing philosophy and savvy will impact it percentage wise.
In one example, a grower with preference for risk, who has good pricing skills, is strong financially, believes markets are inefficient, but is undisciplined, might use matrix proportions close to this (see chart):
Self-directed — 0% mechanical and 25% active.
Externally managed — 25% mechanical and 50% active.
“Recognizing that marketing discipline is a problem and markets are inefficient, the proportions are heavily weighted toward externally managed strategies,” says Good.
In a second example, a grower with no preference for risk, poor pricing skills, financially weak, believes markets are usually efficient and is a disciplined marketer might use these matrix proportions (see chart):
Self-directed — 60% mechanical and 10% active.
Externally managed — 20% mechanical and 10% active.
“The proportions are heavily weighted toward mechanical strategies due to the producer's beliefs about market efficiency, risk preferences and financial position,” says Irwin. “However, since he is a disciplined marketer, the proportions are tilted toward self-directed strategies.”
The value of the matrix mix of marketing strategies can be determined by finding the net price for each comparable pricing allocation and crop year.
“Evaluation must be based on facts, not impressions,” says Good. “Net price received should be a weighted average across bushels priced and adjusted for storage costs and government program benefits. Net price received can then be compared across allocations and to different benchmarks.”
He says market benchmarks measure the price offered by the market. Peer benchmarks measure the price received by other farmers. Professional benchmarks measure the price received by professional marketing services.
Good and Irwin conclude that most growers are “substantially under-diversified” in their marketing programs.
“Diversification across the four cells of the pricing matrix would likely improve marketing performance for these producers,” says Irwin. “Diversification would more than likely also reduce the risk and frustration of making corn and soybean decisions for most producers.”