First of a four-part series on how to build and monitor your marketing plan
It’s a cold snowy day in early February. You’re just running into the house to warm up and to listen to the radio for updated grain prices. At that very same moment, meanwhile, many miles away at the Chicago Board of Trade,
traders are yelling and making frantic hand signals. “March corn, up 15 cents,” someone shouts. “May wheat, up 41 cents… March soybeans, up 61.”
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At that same moment, at uncountable locations through the countryside and around the world, market fundamentals are in play too. Canola prices for instance are rolling higher, powered by buying decisions by myriad U. S. food makers and by their counterparts who drive the booming export business out of Vancouver.
It seems all madness and frenzy, yet somehow, out of all this crazed activity, Canadian grain and oilseed prices are discovered.
Price quotes are instantly transmitted globally to thousands of people. These price movements are analyzed by governments, exporters, end users, grain companies and producers. “June canola 500 calls… bid $22.30/MT, March soyoil flaring one cent/lb. higher… March oats up 12 cents/bu.”
So at that same moment, grain executives gather in a boardroom in Winnipeg. They’ve called a meeting to figure out how to better manage their risk. They plan to reduce the price risk inherent in exporting grain to international destinations. Their strategies involve using futures and options as risk management tools. Big decisions are being made. Any slip they make can erase profits overnight.
But now you turn off the radio. The farm market report is over and you spend a moment in wonder. All this market turmoil seems so irrelevant to the work you’ve got planned for this afternoon. Yet you also know that it will help determine the income you’ll make over the next year.
Well, it’s time to warm up the truck again. You need to haul another load of barley to the local hog feeder this afternoon. Feed prices have jumped with this cold snap. The price is right, but it sure is cold.
Far away in Brazil, combines are getting last-minute adjustments. The start of the South American harvest is only days away. The hot sun beats down on moisture-starved soybeans. It’s been dry in the Brazilian Rio Grande. Soybean yields may be threatened. This dry spell could soon affect prices in Canada. You feel excited about the recent rally in grain prices.
Plans that don’t work
Strong feelings, strong markets and logic don’t always go hand-in-hand. It’s part of the reason why making a plan to price your crops is often most difficult when markets are in a bull run. The Achilles heel of many producers is their inability to control bullish emotion.
The most common farm selling strategy is the “wait and see” approach. You can’t sell at the top if you sell too early, right? Often, producers store grain unpriced on farm until cash flow needs dictate grain must be priced. Procrastination and greed can team together, distorting sound marketing judgements even through the most bullish times.
This combination virtually guarantees that many growers will price grain into falling markets.
Another true weakness of marketing grain is the “holdout” strategy. “I’m not going to sell my flax unless it hits $18 per bushel. When it hits $18 I’ll think about it.” As a strategy, this ensures a lower-than-average selling price.
The price is never good enough. Typically what happens is that storage needs or upcoming land or fertilizer payments force a cash sale, often into a fallen market. Why has the market fallen? Because many growers face a cash flow or bin space crunch during a similar time period. Cash prices dip due to heavy producer selling.
The natural cycle of greed
There’s a common emotional path. A commodity market traces the natural cycle of greed, then hope, fear and finally panic. As a producer, you need to be aware of the human psychology rippling through markets at all times. Once you understand the nature of a market and how it reflects human emotion, you’ll be better able to anticipate swings in grain and oilseed prices.
Marketing requires pricing discipline in order to control your ego. It is human nature to want to speculate on higher prices, whether you’re selling stocks and bonds, land or grain. So, in order to start understanding the nature of markets, one has to understand the typical graph of human emotion, more commonly known as the greed-and-fear cycle.
The typical human reaction in a rallying upward-trending (bullish) market is “greed.” Prices are racing higher. The natural human tendency is to hold back deliveries in an attempt to sell at the top. Selling into a rising market means you may be forfeiting any possibility of hitting the jackpot. Just as soon your neighbours start talking “beans in the teens” in the local coffee shop, the market approaches a peak.
Once an overheated commodity market peaks and starts its swift descent, greed turns to hope. You are
