The market appears to be trading sideways until new year when traders get back to a full week of trading. Also many in the industry are waiting for direction from the January USDA report.
The Importance of Setting Goals
Last week I discussed the market volatility facing producers in 2015. There will be opportunities to maximize profits, but farmers need to be prepared to take them when they become available. How does a producer do that?
The most important (and profitable) preparation farmers can do is determine their operation’s goals. Smart farmers determine in advance what price they need versus the price they want. Typically the questions I ask my farmer clients are:
· What price do you need and why?
· What price do you want and why?
· What price will you settle for and why?
The answers to these questions provide an outline for me and my clients for the upcoming as well as the next few years (for many of my clients we are working through 2016 plans and looking as far out as 2017).
Write Your Goals Down
I actually encourage clients to write these answers down on paper. By doing this, we can look back throughout the year to remember the rationale for why they sold (or didn’t). Sometimes it’s hard to remember 9-12 months later reasons for trades, especially when farmers may spread trades of 8-12 transactions over the year. It’s easy for farmers to get into the habit of hindsight trading, which leads farmers to only look at the negative side of a decision. By having the reasons listed next to trades, it helps my clients remember months later the difficult decisions we were faced with at that time and that we made the best choice possible (while lowering their risk). There isn’t stewing over mistakes this way, instead we learn from the past and apply this knowledge to next year.
Date the Goals
I also encourage farmers to date the goals, when they want them accomplished. For instance, how much grain you want to have priced and when. Then when prices hit those points it will be much easier to “pull the trigger.” With decisions laddering back up to goals and strategies, the grain selling decisions become easier with more piece of mind.
Savvy farmers stay disciplined with their goals. Then regardless of where prices go, the decisions will be based on goals and objectives, not emotion. This will help you sleep soundly at night.
With my background in grain merchandising and trading experience of nearly 20 years, I have become passionate about optimizing a basis strategy to increase farm profits. This is actually rare among many other grain marketers (who often focus more on futures trading and hedging only and expect farmers to navigate local basis on their own). As a basis specialist I have added more money to my bottom line every year than the average farmer.
However, when explaining my approach and the benefits of a basis strategy to some farmers, many mention 1996 as the year that basis went backwards and how they lost money. Unfortunately, this is true, 1996 basis trading was not profitable and some farmers lost money. But it’s important to point out, this was 18 years ago and the amount was not staggering. In the last 18 years there have been so many opportunities for increased profits and basis price premiums, that pointing out one year that was limited in opportunity is short-sided thinking.
Since then farmers without a basis strategy have left money on the table by worrying about the one rare year that didn’t work.
Some also may point to 2012 as an example of why selling grain before harvest is not advantageous. While drought will definitely happen again in the future, the chances of such a widespread drought across the Midwest is between 10% to maybe as high as 20%.
Others may point out 2013 and 2014 both had a corn market rally of $1/bu after harvest. From a historical trend perspective, this is rare. So, why did it happen…twice? There could be several factors causing the market to adjust like this, but largely it centers on increased farmer flexibility than in years past that most people didn’t plan for:
· The increased on-farm storage
· The better financial situations farmers are in – that can allow them to hold their grain when they perceive a loss or wait for a potential rally
It’s hard to tell for sure if the market has adjusted enough to absorb these variables in the future. End users have been fooled these past few years, but will they again next year. I’ll admit that I have been surprised by the market response since 10/1. However in both years it was still advantagous to sell much ealier in the growing season.
In general, humans are not very good at accessing risk. Many people happily pay the lottery with the idea “somebody has to win.” However on the flip side, most people don’t think they will be struck by lightning because it’s so infrequent (but your chances are so much higher than playing the lottery – 1 out of 6 million versus 1 out of 176 million). Even Warren Buffet proved humans don’t understand risk when he placed a billion dollar wager on somebody filling out a perfect March Madness bracket last year.
My point – it’s impossible for anyone to predict crop prices next year. There are too many variables. However, farmers can minimize their risk by understanding break even points and having a plan in place that reduces emotional selling. Therefore, if the market or weather does unpredictable things, farmers will be in a better place to take advantage of the opportunities rather than reacting to them.
I hope your Christmas was merry and your new year will be profitable.