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Better Farming Ontario magazine is published 11 times per year. After each edition is published, we share featured articles online.


Better Decisions: Five steps to making better marketing decisions

Wednesday, May 5, 2010

Events – and reactions to them – can make a mockery of the best-laid plans.
Here are some tips to help you make and stick to the right marketing decisions for your farm


by KEVIN SIMPSON

At a marketing skills workshop I led recently, there was plenty of buzz about the difficulty of making – and sticking to – marketing decisions. More specifically, my workshop participants were frustrated by market pundits and advisors with facts, figures and outlooks that sounded right, but turned out to be just plain wrong.


Even I've been guilty of feeling like I know where the market's going. Several times, I've been invited to present a market outlook to producers. Sometimes I've been wrong and, when I have been right, did it make any difference to the decisions to the marketing plans of more than a couple of members of the audience?

Another frustration expressed by my audience is about U.S. Department of Agriculture (USDA) reports. Surely you can trust the USDA! However, surprises do happen and, by definition, a surprise is unexpected. Although the regularly scheduled USDA reports are painstakingly assembled on the best available information, the results can be completely unexpected and are usually revised several times.

Take, for example, the corn market news and outlook in January this year. Opinion from the corn "experts" went from being bullish to being bearish in one day.

In early January, news and opinion stories told of thousands of acres of unharvested corn in the Midwest, light test weight corn, storage problems, fears of a weak U.S. dollar, strong ethanol processing margins and hopes of large-scale investment fund buying in corn. On that bullish note, December 2010 corn futures traded as high as $4.49¾. This price was a great price for my cash crop clients – as high as last year.

A day later, the bears prevailed. The market news focused on the USDA's estimate of yields  rising to a record high, an increase in planted acres and an increase in harvested acres. Additionally, a drop in USDA estimates of winter wheat plantings led the trade to assume an increase in upcoming new crop corn plantings. Meanwhile, over the ensuing month, energy prices fell

17 per cent and the U.S. dollar rallied five per cent. December 2010 corn dropped to $3.85, a loss of almost 65 cents or 14 per cent.

So how can you make your marketing decisions more reliable? Here are some guidelines that can help. 

1.Know your costs. If you don't know how much it costs you to produce a bushel of corn on your farm, how can you tell a good price from a mediocre price?

2.Create a marketing plan . . . and stick to it. Set your goals for next year's crop before you harvest your current crop. Calculate the profit you want to make, and consider selling some of your crop if that is available early in the season.

3.Take advantage of the carry in the market. If prices rally to within 80 per cent of the previous year's high seriously, consider making some sales. The 80 per cent rule is a great guideline for people who might be perfectionists.

4.Get to know your banker. Bankers tend to be conservative people, but there are many good lenders who know the farming business and understand the idea of a calculated risk. If you share your marketing plan with them, they'll be there for you when you get that inevitable margin call. If you need a referral to a knowledgeable banker, give me a call.

5.Use hedging as a tool to help you achieve your marketing goals. Successful farmers know the price they want for their crop and use hedging as a tool to get that price.
If you're new to the concept, take a course or do some reading. One excellent resource is the CME Group's "Self-Study Guide to Hedging with Grain and Oilseed Futures and Options," available online through my website. I also offer seminars that are well attended.

In short, plan your work and work your plan. There's no guessing, no pundits and, best of all, no surprises. BF

Kevin Simpson, CFA, is an investment advisor with the Simpson/Caputo Group, specialists in managing price risk using futures and futures options, at the Waterloo Branch of RBC Dominion Securities.
Website: www.kevinsimpson.ca

 

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