By: Angie Setzer
June 11, 2015
Angie Setzer spent her life on a farm before returning to agriculture from a cash grain perspective. Her years of experience running a diverse and unique direct ship cash grain program, coupled with her current position as the Vice President of Grain for Citizens LLC in Charlotte, MI has given her an in-depth understanding of basis, spreads and futures. This knowledge and experience translates into her ability to help her customers see the flow of cash grain and prices, maximizing margins and returning solid results. “Cash is King” focuses on the developments in the cash market, as well as ways you can take advantage of potential opportunities as they develop. Angie is known as the @GoddessofGrain on Twitter.
The 11 years I have been trading cash grain have been perhaps some of the most tumultuous years in the grain trade overall. Looking at the chart hanging on the wall in my office dating back to 1950 it is easy to see the years where selling grain was a much easier task. Throughout that period of time rallies were well defined, as was the relative supply and demand outlook each crop year. Aside from those wild years where weather played a limiting factor in production, volatility was somewhat limited and pricing opportunities were easy to spot.
Then came the ethanol boom, the Chinese import boom and the 2012 drought all in one decade. The soaring levels of demand were the first to drive prices into levels we had only dreamed of, and in the year supply was anticipated to catch up with the hefty demand the worst drought in nearly 70 years dropped the national average yield to levels not seen in over 20 years. Couple the general supply and demand headaches with a boom in all commodities, a low valued dollar and failing outside economic factors and it appeared as though we would never see $3 corn, $4 wheat and $8 beans again.
Fast forward a couple years and here we sit. The market is flat, trade sentiment is negative and daily I have growers coming to me asking if there’s any way to get some lipstick on this pig. Time after time I find many growers suffer from the same struggles when it comes to approaching their marketing strategies. Marketing psychology, understanding what the market is telling you and taking lessons from both the good and the bad that came from $8 corn are what we’re going to discuss today.
You’ve heard it said countless times, so many times in fact you can finish the sentence before it starts even, but honestly-the trend is your friend.
Markets trapped in a bearish trend will find any reason they can to trade lower, while the opposite holds true in a bullish market structure. You can try to fight market trends, you can argue against them until you’re blue in the face, but that will not change sentiment. It’s almost as though you’re trying to turn the titanic when it comes to shifting market feel. The inability to shift gears is especially and most painfully evident in bearish market structures like we’re in now. And while market feel is cyclical and will change eventually refusing to acknowledge a market structure can be very dangerous for your margin health. Being aware of market sentiment will help you take a realistic approach to target orders and selling opportunities.
Use incremental sales when marketing your crop. Too many times I find growers are afraid to commit bushels out of fear they will miss out if the market were to take off. While other times growers give up, or get overly aggressive on sales because they’re sick of waiting. Taking an incremental approach to your marketing helps you keep an even head, while also capturing any upside potential the market offers.
Many times I work with my growers on making sure a certain amount of bushels are sold by a certain point in the growing season. I like to see growers set realistic price orders in a reverse pyramid type incremental sale approach. For instance 5% of production at price levels A, B and C, 10% at price levels D, E and F, and 20% at levels G, H and I or something similar. Of course having an understanding of your production history, production potential and market outlook is necessary when putting these types of plans in place, but I’ve found those that approach the market this way are much more comfortable marketers.
An additional benefit to scale selling can be seen in years where price rallies just don’t show up as expected. Starting with incremental sales allows you to at least get something locked in; even at a time you may not particularly be excited about the price. I always tell my growers I hope every sale is their worst sale, but there are times when those starting sales are the ones that end up propping up their selling average. You can’t go broke making money-remember this when looking at starting pricing levels.
When selling don’t forget your new crop. So many times we get bogged down focusing on what is coming out of the bin, or what is coming off the combine this fall we forget about the other years of production we have coming our way. The good news about the recent swoon in grain prices is the likelihood of seeing a stagnation or possible decline in input prices going forward. The potential of limited pricing increases on the input side of things means you can look at contracting much further ahead than some would have recommended even a year ago.
For many of you if the price of beans is good for this November it is also likely to be very good for the following. In Chicago Wheat July 2016 is trading 50 cents better than July 2015, while in corn December 16 is still hanging above $4 and trading nearly 30 cents better. When pricing opportunities in the nearby are presenting themselves, it’s likely even better opportunities are lurking out on the horizon. And while extraordinarily wide basis levels may eat into most of the deferred gains on the cash side, having a good understanding of HTA’s allows you to capture solid futures values and keep flexibility in spreads, delivery and basis.
When looking at making sales make sure to keep historical pricing levels in mind. Having a general understanding of what domestic and global carryout numbers may mean when it comes to pricing opportunities will help you approach the market from a more sound direction as well. Realize where we are compared to where we have been. In soybeans for instance, knowing that the amount of stocks leftover worldwide at the end of the new crop year could be over a billion bushels larger than we had in the 2013-14 crop year is all one really needs to know when it comes to wondering why we are no longer trading in the teens.
In the end, keep an even head. When you’re winning it is easy to feel as though you will never lose again. So many times when corn was trading $8 I remember hearing it would never trade to $4 again. While at the same time, when losing it’s easy to feel as though you’ll never win again-and of course those calling for low prices forever will have their time when the cycle changes. Shutting out the noise and focusing on what you’re trying to accomplish is key in determining the right marketing approach for you and your operation.
Writing down goals, pricing targets and being aware of your struggles when it comes to making marketing decisions will make you a better marketer and someone who is more comfortable with the day to day ebb and flows in price. Do everything you can to remove the emotion from your business and you will find improvements not only in margins, but quality of life as well.
Next week we will look ahead to the month-end acreage report and what it could mean for cash prices in both old and new crop as we move ahead. In the meantime don’t hesitate to call with any questions, we’re here to help!
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