Taming the Bulls and Bears

Using the “Lightning Strike Price”

By Betsy Jensen,
NCTC Ag Instructor,
bjensen@nctc.mnscu.edu

On top of the Chicago Board of Trade building sits a statue of Ceres, the Roman Goddess of Agriculture.  According to legend, Ceres created winter as punishment for the kidnapping of her daughter.  Living in the northern plains, I recognize that Ceres certainly knows how to punish us, and I would prefer if we did not upset her even more.

In my marketing groups, I have asked each member to consider what I like to refer to as a “lightning strike price.” You must fill in the blank with the appropriate commodity and prices:  May lightning strike me dead if I hold any (commodity name) beyond a cash price of (fill in the blank). A concept like this has worked very well this year in soybeans, where prices have rallied well beyond the hopes any farmer had last spring. 

The lightning strike price (or LSP, as we abbreviate our new clutch phrase) is intended to keep your emotions in check, even when the market is going crazy. Like “shooting the moon” in pinochle, it’s not something we’ll use often, but it can sure make you money in years when markets rally sharply, such as wheat in the fall of 2002, and soybeans in the fall of 2003.

There are several rules when creating your LSP.  The first rule is that the LSP must be at a level where you can actually sell any remaining grain in your bin.  If I would have asked you in April 2003 if you would sell all your beans for $7 cash, you would have laughed and said “You bet!”  Yet now soybeans have gone well above $7, and you might still have some in the bins.  If the price looked ridiculously high in April, why has it suddenly become unacceptable?  Do you always want 50 cents more than the market is offering?  That’s a great way to make sure you never get any grain sold.

The second rule for using an LSP: never increase it. Decreases are perfectly acceptable, but increases are an absolute no.  Raising the bar of your LSP defeats the whole purpose of setting a level in the first place. As you set the LSP early, make sure it’s high enough. Some of my groups set a 2004 wheat LSP over $5, and others choose $4.75 or so.  For 2004 soybeans, it wouldn’t be unreasonable to set an LSP of $8.00 cash, or even higher.  At what price will you be able to walk away and not look back?  As we get closer to planting season and as prices drop, you can lower the LSP. By the time you’re done harvesting the crop, the LSP may be $1 or $2 lower than the original.

The LSP is different from a marketing plan because a marketing plan uses reasonable price targets that stand a good shot of being hit at some point.  An LSP is the point at which the markets have clearly zoomed above your early expectations, and you stop trying to determine price direction, give the elevator all your grain and vacation in the Caribbean, where you don’t have to listen to the commodity markets all day long on the radio, wondering if prices will zoom even higher.

This fall’s action in the soybean market illustrates the importance of an LSP. This spring many farmers would have set an LSP of $7, which means all your soybeans should be gone.  Even though prices went higher than $7, I think there’s a pretty good chance that we’ll look favorably on those $7 beans next summer. Take a look at a monthly price chart that shows prices for the past 20 years. How long do sharp rallies like this last?  Just for reference, in June of 1988, soybean prices peaked at almost $11 nearby.  By November, they had dropped over $3, and by harvest of 1989, prices were back under $6.

Don’t give temperamental Ceres a reason to strike you down, or worse, dish out more winter.  When prices skyrocket above your sales target, but greed pressures you to want even more, use the lightning strike price to stay grounded and sell your grain.

Jensen farms with her 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. If you have a question or topic related to marketing that you’d like to see addressed in this feature, call 1-800-242-6118, or email Jensen: betsy.jensen@northlandcollege.edu .