TAMING THE BULLS & BEARS

Staying Grounded in a Bullish Market
Don’t fall prey to ‘hope-greed-fear’ marketing trap

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

For once, grain farmers are finally in the driver’s seat when it comes to profitability. We have the ability to lock in profits for the 2007 crop year, or take the profits from the 2006 crop year.

Unfortunately, that is not something we are able to do very often. In the past, we have relied on LDP payments to make our forward sales profitable, or we have tried to minimize the losses from crop production, but not this year.  It looks like we have the ability to make money in 2007, but how can we guarantee profits for 2007?

I am finding myself getting wrapped up in the bullish enthusiasm, so I had to call in reinforcements to help calm me down. I am tempted to run through the elevator yelling “We’re in a new era, and prices will never drop again,” but emotions and common sense need to be balanced. 

Steve Metzger, a farm business management instructor in Carrington, N.D., offered this advice: “I often think that we spend too much time trying to figure out why the market is at a certain high point, rather than just taking the price and using it to our best advantage.”

Darn it, but that makes sense.

The markets have been highly irrational this year, and many of the prices we are seeing are not justified by the fundamentals.  You can drive yourself crazy asking why aren’t soybeans rallying, how high will corn go, if wheat will go higher, when instead we need to sit down with a pencil and paper and figure out how much money we can make on soybeans or with wheat or with corn.  It is much easier to calculate profits than it is trying to calculate and justify price movements. 

Steve also offered the advice to get a cash flow done early, to assist with marketing. How does the farm cash flow at $4 wheat, or $4.50, or even $5? I was miserable last year as I struggled to find cash flows to work for the 2006 crop year. Wheat at $3.50, corn at $1.85 and soybeans at $5.50 just did not work with high energy, fertilizer and interest expenses. I’ll have a better go of it this year.

As you develop your own cash flow and selling plans, find out your average price and calculate how much value your marketing plan will add to the farm, if you can reach all your price targets.  Myself, and nearly everyone in my marketing groups, has sold some 2007 crop too early, but as long as the market continues to rally, profits increase as well. 

Sheldon Schmiess, a FBM instructor in Barnesville, Minn., had these words of wisdom:  “Make up for your mistake by selling the next year’s crop. Sooner or later the next year’s crop prices will be lower.”  The only guarantee in crop marketing is that prices will go up, and then they’ll go down. If you stick with a consistent plan, it will pay off eventually.

Texas crop producer David Swinford had similar advice in an article in Prairie Grains nearly 10 years ago that pertains still today. He wrote that farmers tend to use a three-step approach to price risk management: hope, greed and then fear.

Hope toward the next growing season in terms of both optimistic production and price. Greed sets in when the price goes up, even when it climbs above thresholds we know to be profitable.

“Are we ready to capture this opportunity? Heck no! They will have to pry this wheat out of my dead hands! No one will get my wheat for less than $5.00 a bushel,” Swinford wrote. “Farmers tend not to sell on an up market. If the market starts down, he waits. He’s not going to let them steal his wheat.” Then if the price keeps going down, fear of even lower prices causes him to sell at a price that’s lower than what he wanted or could have locked in earlier.

As prices have been rallying during 2006, and into 2007, I have been referring to the farmers in my groups as “Those of you who want to make money, and those of you who don’t.” I say it as a joke, but it really is the truth.  To lock in profits, I recommend the following steps:

Calculate your cost of production, especially if you are considering planting a new commodity such as corn or sunflowers.  Develop a marketing plan that covers your cost of production. Even if you sold too early, if prices continue to move higher, your average price will increase as well. 

Determine your crop insurance bushel guarantee, which helps determine the number of bushels you can forward contract.  Any sales above this guarantee should be done with put or call option strategies.

When you start to doubt yourself, re-run that cash flow. What will happen to profitability if prices move to more historical averages, instead of the high prices that we are offered today? A little stroll down memory lane might help you realize how fortunate we are to have high commodity prices to help offset the high input prices we face.  Just five years ago, NDSU was recommending sales if Mpls Dec wheat reached price targets of $3.60- $3.95, and to make corn sales if Chicago Dec corn reached price targets of  $2.33 to $2.95. Those were pricing objectives then. Would you be happy selling at those kind of futures levels now, on top of high fertilizer prices in the spring?

My parting advice as we head into a promising New Year: It’s OK to let your horns grow and be bullish, but always keep profitability in the forefront. It is hard to ignore the bullish coffee shop talk, but it is your bottom line and not theirs at risk. 

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.