By: Dr. Matt Stockton, Agricultural Economist and TAPS Team Member
The big question for the coming year is when will the market high occur, as no one wants to leave any possible profit on the table by acting too soon or too late. Questioning when to sell the grain crop advantageously seems like an eternal struggle of ‘should I sell’ or ‘should I hold?’ This quandary is especially challenging when considering the possibility that markets may improve. The following discussion is not focused on discovering that one best time to market grain, but more on the individual seller’s understanding of the dilemma they face, and the ability to choose the strategy that they feel best helps achieve their goal(s).
To accomplish this, it is necessary for the person responsible for marketing to clearly define their objective(s). Some would oversimplify this by stating that marketing is all about getting the highest price. For some, this may be the goal, and they might find this discussion seems short-sighted and nonapplicable. In truth, this may be the ideal objective, as more is better than less, and nothing could be more than the most. Unfortunately, markets don’t take kindly to being consistently predictable, not to say they are without some characteristics that often help in showing direction or providing insight into the current situation, but, truthfully, predictability must be reliable and consistent, in order to always be helpful, and this is not the case. This is why, for example, the corn market doesn’t always follow the expected, seasonal, behavioral pattern of highest prices usually occurring in spring and early summer.
In the four complete seasons of the TAPS program, the seasonal prices have generally behaved. Historically from 1979 to 2019 and 70% of the time, October’s average December futures prices were lower than February’s average December futures prices. This is what many would call a normal seasonal pattern for prices, but this was not the case for the 2020 season. Instead, the typical March through July seasonal high was replaced by a later fall seasonal high. Those familiar with commodity markets call this an inverted market. Does the 2020 price pattern alter the choices to be made in the 2021 season, especially considering the recent price increases? This begs the question of whether it is therefore wise to forward contract? How does one best capture any price swings in the market? Unfortunately, I have little confidence in my (or anyone’s) ability to accurately predict the 2021 seasonal price pattern. There is an infinite number of price patterns that could be realized. From my experience as a professional Agricultural Economist, I suggest that nobody really knows the answers to these questions. I do have confidence in saying, however, that the market is uncertain and unexpected price changes will happen, but when is unknown. There are five basic principles of practicing good marketing and developing a solid marketing strategy that can provide individuals the clarity to make the best decision(s) for their operation. What may not be so clearly understood, whether realized or not, is that everyone who has corn to sell has a strategy in place, even if that is no strategy at all. These five principles are based on what is known, require a degree of commitment, and account for individual operations and operator goals. Furthermore, these principles allow the individuals using them to be flexible in their application, which encourages and allows creativity and variation among operations and operators.
Principle #1: Make sure that your short-term choices match your long-term objectives. If your objective is to maintain an ongoing business over time, you cannot afford to pass-up choices that would assure that goal in hopes of hitting a home run. Goal drift can create problems and removes the stability of making good choices. Oftentimes, measured, steady progress, which requires understanding and discipline, leads to success, whereas a Hail Mary pass of a decision has a high probability of failure. There is nothing wrong with Hail Mary passes when you have no other choice, but the key is to never find yourself in the situation where the odds are long, and the probability of success is small. Consistently relying on this type of choice will eventually lead to failure. This type of decision is closely related to the old idiom of ‘don’t put all your eggs in one basket.’ You can see how this relates to marketing.
Principle #2: It is impossible to make good decisions with good outcomes consistently, when decisions are based on speculation and not fact. Someone once said that even a broken clock is right twice a day. Risk-taking is inherent in farming and there is no need to exacerbate this by knowingly taking unnecessary risks in hopes of hitting it big. This seems to be what happens when opportunities to make a profit are missed in favor of possible further price increases. Additionally, this suggests that any opportunity to forward contract grain for a profit should be considered carefully and used appropriately, regardless of what you may think the future holds.
Principle #3: Decide first on what type(s) and how much risk you are willing to accept, and then make decisions accordingly and consistently. Most good business decisions are often those that are carefully thought out and require thorough understanding. While no one wants to miss an opportunity, hasty decisions may lead to less-than-ideal results. Do not confuse those decisions that are understood and well-considered with the speed of making said choices. For example, the actual execution of selling grain at a specific price may be completed in a split second but may have been contemplated and decided months beforehand, using information about current markets and understanding of the year’s production costs. Avoid making seat-of-the-pants calls, as much as possible. This does not mean you will not have decisions like this to make, but those decisions should be guided by conscientious consideration and understanding of their impact to your farm and its viability.
Principle #4: Always be open to new information and new ways, but do so thoughtfully, cautiously, and carefully. As pointed out in the introduction of this article, last year’s pricing happened last year, and this year’s pricing is a completely new story with new circumstances. All of us are subject to heuristic bias. Simply put, complexity is often simplified into rules of thumb, which often results in making misjudgments and achieving less than desired results. While rules of thumb can be valuable in general, it is important to always be looking for new information, new techniques, and improved ways to make better marketing choices.
Principle #5: While you might be the only one making sales decisions, there are many resources, advisors, and experts, who can assist. Each of us has those things that we do well and like to do, and those things that we find difficult or disinteresting. If marketing is something that makes you feel negatively, the results will likely suffer and be less than optimal. I encourage you to seek information, assistance, and/or advice, so as to make this part of your operation perform at a higher level.
My experience with the TAPS program has shown me that there is a lot of variation among producers and average price received for their crop. In the 2020 sprinkler corn competition, out of 26 competitors, the difference between the high and low price received was $1.43 per bushel. That difference would amount to $308.19 per acre at an average yield of 216 bushels per acre. In a business where cents per bushel can make a difference between profit and loss, it seems obvious that marketing proficiency is integral to building and maintaining a successful farming operation.