MARKETING

By Errol Anderson
T O O L M A N
Throw out your marketing plan?
t’s time for some straight talk. Listening to some
market advisers — including me — may not have
been the best medicine this crop year. The disastrous
American Midwest drought of 2012 not
only shook up U.S. and global grain and oilseed
markets, it shook up farmers’ marketing plans as well,
and it has certainly shaken a lot of people’s confidence in
what they thought they knew about marketing.
In hindsight, your best strategy in 2012 might have
been to throw out your marketing plan. But who could
have known the severest U.S. drought in decades was
on our doorstep?
When there are major global weather events, there
can be years when tossing out the marketing plan might
be the strategy that pays off the best. We’ve seen it happen
before, and the American drought of 2012 may be
another example.
What has happened in the U.S. this year is nothing
short of a disaster, and the ramifications will be felt for
months, extending well into next year. Growers who
followed traditional advice this past winter and spring
likely sold a good chunk of their production before
drought shot prices up.
So it begs the question, wouldn’t it have been smarter
if you had ignored all the advice and simply held your
grain until you got the best price?
Before you jump to a conclusion, consider this. If
markets go up and never come down, the short answer
is that market planning and forward pricing is of little
use. But in reality, we all know that this isn’t possible.
Markets simply do not act that way for the long haul.
No matter how bullish the bull market, it will always
have a shelf life.
This year the scale of the drought losses is no doubt
staggering, and it will be some time before that grain can
be replaced. It will be months before new crop production
from South America hits the global stream, replenishing
export supplies.
So you ask yourself, what if Brazil and Argentina suffer
production problems? Is this the beginning of short
crop after short crop? Is this the beginning of a global
food shortage?
But that’s looking at only half the equation.
One thing markets do very well is to drive substitution
and eliminate demand when supplies get tight and
prices soar. This will definitely be put to the test in 2013.
Industries find a way to survive. The cattle business is a
key example. Burnt-out pastures will market cattle more
quickly and various types of forage (including corn)
will act as replacement. The cattle cycle will eventually
repair itself, but it takes years. Grains will as well, but at
a much quicker rate.
Any major global weather event can make best-laid
plans of little use for weeks or even months. So yes, a
year like this might mean that the last grower to sell is
the one who wins. But no matter how bullish a market is,
there will be price setbacks. And the old saying, “expect
the unexpected” may haunt us before it’s all over.
Despite this incredible bullishness, with any sharply
rising market comes an eventual price peak. The sky is
not the limit. Higher prices ration demand. It’s a system
that works, even in this market.
Then, a price correction ultimately occurs. Eventually,
prices reach a point where demand is truly rationed or a
new global event possibly in the financial world surprises
commodity traders.
Marketing through volatile times can be highly stressful
or extremely profitable for growers depending on
how it is handled. No doubt, it’s during these times that
prices and profits can really excel.
But you have to look at yourself in the mirror. Do
you simply want to speculate on unpriced grain? Or do
you want to ensure a profit?
These are two different individuals.
Day-to-day market swings are watched closely by the
farm speculator whose goal is to sell at the peak of market
prices. This individual calculates the money lost if the
top of the market is missed.
By contrast, a farm business manager has long-term
growth foremost in mind. This is a person who calculates
production costs and assesses the cash price needed
to cover expenses, and who often includes marketing
objectives in the farm’s financial and production plan.
The gold standard for grain pricing in my opinion
is to maintain a market plan that ensures some form of
pricing discipline even during the incredibly bullish crop
year we are now in. Prices can go up quickly, but down
quickly as well. And without a pricing plan, marketing
opportunities may be entirely missed even in the drought
year of 2012. Even worse, some growers get caught up
in speculative furor adding even more risk to their farm
business. Buying futures while leaving grain unpriced in
the bin is high risk and a recipe for market losses. This
market gamble is fondly known as a Texas hedge.
Remember that while the futures market takes
no hostages, a savvy marketer can race to the finish
line taking advantage of sweet price gains along the
way — even if prices will never be at the top without
a whole bunch of luck.
So, is it best to throw out your marketing plan?
Maybe in the 2012-13 crop year, the answer will be yes.
Or maybe it won’t. The year isn’t over yet.
And what about next year? Well, the answer really
goes back to what kind of farmer you are. Are you the
kind to bet everything on a hunch? Or are you the kind
to manage your way to long-term profitability, which
gets us back to the original question. Is it better to throw
those marketing plans out this year?
You know where I stand. Market plans and pricing
discipline always have their place in a well-run
farm business. CG
Errol Anderson is a commodity broker located in Calgary
and authors ProMarket Wire, a daily grain and livestock
risk report. He can be reached at 403-275-5555 or
email prowire@shaw.ca.
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