Taming the Bulls & Bears

2008 Marketing Plan: The Quest for Profitability

by Betsy Jensen, Ag Commodity Instructor, Northland Community
& Technical College, betsy.jensen@northlandcollege.edu

For Christmas I gave my niece a collection of Sesame Street episodes from 1975 to 1979, back when Cookie Monster actually ate cookies instead of vegetables.  Imagine my surprise when there was a disclaimer before the episodes: “These early Sesame Street episodes are intended for grown-ups and may not suit the needs of today’s pre-school child.” I guess I should be lucky I can even walk and chew gum after viewing those early episodes, which I can now blame for everything that has gone wrong in my life. 

I’ve decided to use the same philosophy for my marketing articles: Any ‘Taming the Bulls and Bears’ article written prior to February 2008 are intended for entertainment purposes only and may not suit the needs of today’s farmers. Things have changed and it is time we change with it. 

Here is just a review of some of the things I’ve never anticipated seeing: Cash wheat higher than cash soybeans; wheat trading $6 higher than corn; $20 durum; wheat basis swings of almost $1.50 in just 3 months; diesel prices consistently over $3; and wheat fertilizer expenses well over $50 per acre.  So how does this change your marketing plan?

The primary goal of farming is still to make money, and your marketing plan has to follow the same principle.  Can you write a marketing plan that guarantees you will make money, at least with an average crop?   That has always been the purpose of a marketing plan and that has not changed.  Farming is still a risky business, and a marketing plan should still be included as part of your risk management plan. 

Economic theory suggests that the profits in farming will not last forever.  Suppliers will increase their prices, land owners will want to farm instead of rent out, and even farmers become their own worst enemy by purchasing equipment at auction sales and bidding up the value of land. While it is easy to pencil in profits for 2008, this won’t last forever.  One side the equation, either income or expenses, will even things out and in time, profits won’t be quite so easy to come by.

Although it is tempting to try and correct the 2007 marketing mistakes of selling too early, by not selling any 2008, remember the value of a marketing plan:  It locks in sales above your cost of production and it helps reduce your price risk by spreading out production into several smaller sales across a long period of time.

One of the biggest things to change for 2008 marketing is cash contracting versus hedge-to-arrive versus selling futures with a broker.   The wild swings in the futures market were very visible, but the wild swings in the basis also put us at an increased risk.  Many farmers sold futures too early, and to add insult to injury, the wheat was delivered while basis was very weak.  Basis offers for the 2008 crop are already available, and always remember to look at the bottom line. Perhaps basis is a little weaker than you would like, but if the bottom line is still profitable, you might want to consider a cash contract.  Most elevators are charging a fee for a hedge-to-arrive contract, but not for a cash forward contract, so do not forget to take that fee into consideration.  You may save a nickel or dime by using a cash contract, so maybe the basis isn’t quite so bad. 

If you sold futures with a broker in 2007, and managed to make your own margin calls, congratulations. Elevator managers know all about margin calls , and if you want to pass that pain to them for 2008, go right ahead.  Before you abandon your trading account, just remember those farmers who did hedge to arrives, and were forced to deliver with a horrible basis.  When you use a broker, you have more cash flexibility, but those margin calls may keep you up at night. 

The only guarantee we have for 2008 is volatility, and volatility means sharply higher and lower prices. The only certainty for 2008 is that you should not rely on your price forecasting skills.  We were all severely wrong in 2007, and we will probably all be severely wrong on our price guesses in 2008.  Use the form on page 38 of this magazine to help remind you how horrible you are at price forecasting. Someone will get lucky and correctly guess the fall price, but the other 99% of you will be wrong.  Your marketing plan should focus on risk management, and not price guesses.  

I have already made 2008 sales, and of course I am wrong.  But I am profitability wrong, and I can live with that. Although things have changed, the quest for profitability remains the same.  Earlier ‘Taming the Bulls and Bears’ may refer to $3.50 wheat and $1.50 diesel, but the underlying theme of keeping profits in the farm remains the same. Let the preschoolers watch Sesame Street, and break out the old ‘Taming the Bulls and the Bears’ articles.  The basic principles never change, even if the methods may need to be tweaked once in a while. 

Jensen puts her marketing strategies to work farming with husband Brian near Stephen, Minn.  Her market education activities including this column, are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council.