April 1998
Taming the Bulls & Bears
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Prairie Grains is the
official publication of
the Minnesota
Association of
Wheat Growers,
North Dakota Grain
Growers Association,
South Dakota Wheat,
Inc., and the
Minnesota Barley
Growers Association.
By Stephanie Sorensen
Sitting in a Randy Allen marketing seminar feels a little like being at a religious retreat. Pacing the front of the room in one instance he allows a long, uncomfortable silence to settle in, then whirls around and shouts, "ninety-four percent of farmers list marketing as their worst management skill!"
The self-proclaimed "Billy Graham of marketing" has a brash, in-your-face, fire-and-brimstone style that is guaranteed to anger at least a few farmers in his audience. That's likely intended.
His dramatic style may be unorthodox, but his points aren't soon forgotten. After painting an image of farmers crossing their fingers and peering anxiously at the commodity screen for a price, Allen says it's time to put a stop to it.
Taking the mysticism out of the market
There's nothing mystical about Allen's marketing strategy. His mission, in fact, is to take the mysticism out of the market.
Here's the deal, he tells his audience: the market is unpredictable to everyone, from the highest-paid marketing expert to the greenest amateur investor. And yet farmers are expected to decipher a maze of information and numbers describing the details of the markets. Forget about "market outlooks," says Allen. They can tell you what the market has done, not what it's going to do. "You can't call up and say, 'I see wheat was $4.50 on March 8. I'd like that price, please.'"
Forget about the maze and focus on the bottom line. Use the market, he insists, don't let the market use you. To be a good businessman, know your numbers: production costs, living expenses, and above all, what price you need to sell at in order to maintain your standard of living.
Emotionalism a common pitfall
Sounds easy. So why is it never really that easy? One word, says Allen: discipline. A businessman can remain emotionally detached from his practices and do whatever he has to do to make a profit. Farmers ride a rollercoaster of emotions along with the market: when the market's down, they wait for it to go up. When the market's up, they wait for it to go higher. The result? "We have a net holding program," says Allen. American farmers together make the grain trade look small-and yet it's farmers who are holding the grain and taking the risk.
Allen pointed out that wheat prices were above $4 for fifty days in 1997, and above $4.50 another eleven days. Why didn't every farmer cash in on this? For two reasons, as Allen sees it. One is, waiting in the hopes that the price would go even higher, and missing the good price altogether as a result. Or, being afraid to forward price. Forward pricing doesn't have to cover all of a crop, insists Allen. The fear of not producing what you contracted for will hardly be realized if you forward price 25% of a crop.
The root of both of these mistakes is the lack of a marketing plan. If a plan is made and followed through, Allen says, farming will be more profitable.
Not having a marketing plan is becoming more dangerous. There is increasing volatility in the marketplace, which leads to bigger mistakes on the part of those who "gamble" with the market, says Allen. Waiting to guess when the price is highest leads to losses.
However, deciding according to your cost of production what price you need to sell at to make a profit, and selling it when the price reaches that pre-determined level rather than waiting, makes for profit.
Don't hold your grain
Allen says it so often during his presentation it becomes a chant: Don't hold your grain. GM dealers don't hold their cars, he insists. Don't hold your grain.
There are three acceptable reasons to store your grain, according to Allen: 1) efficiency at harvest, 2) to get the January tax, and 3) to use for feed.
The commercial companies love when farmers store their grain-it saves them the storage costs. Once calculated, the costs of storage are weightier than one might think: storing 20,000 bushels of wheat at a $3.54 break-even price means that $70,800 is tied up in the bin. Storage per bushel per month costs one and one-quarter cents ($250 per month). At a 9% rate of interest ($521 per month), storage costs $771 per month. The average storage time is five months: that means storage has cost $3,855 just this season.
Making your marketing plan work
Marketing is divided into two equal parts, according to Allen. First, production is all expenses: to the elevator, implement dealer, bank, seed dealer, accountant, hardware store, fuel company. Second, marketing is where all profit comes from. Therefore, he reasons that the farmer's personal income is 50% marketing skills and 50% production skills.
Most farmers spend 100% of their time worrying about production, he says. The average U.S. farmer spends 20 minutes per week on marketing.
The three steps to arrive at your marketing plan:
1) Calculate your break-even. Decide what kind of lifestyle you want (a new pickup, trips, education), how much that will cost, and figure out at what price you need to sell your commodity to achieve that lifestyle.
2) Make your marketing plan. Allen illustrates the importance of having a plan with this scenario: a farmer without a marketing plan calls the elevator and finds out the current price is, for example, $3.49. He then says to his wife, "I sure wish the price would go up." A farmer with a marketing plan hangs up and says, "Our break-even is $3.41. We're eight cents out."
3) Execute your plan. This is the hardest part, says Allen. You can have a perfect plan and it doesn't mean a thing unless you have the discipline to carry it out. Have a target price as part of your marketing plan, a price at which you will sell. Deal with the fact-what the price is right now, not what it might become. Wait for the market to come to your target price, says Allen, don't chase the market.
("Taming the Bulls and Bears" is a market education feature of Prairie Grains. If you have a question or topic you'd like to see addressed in this feature, send it to: Minnesota Wheat, attn: Prairie Grains editor, 2600 wheat drive, Red Lake Falls, MN, 56750. Phone: 1-800-242-6118. Email: mnwheat@means.net.)n