I was listening to an older video recently where a grain marketing analyst advised shorting the market in the top 1/3 of its annual range and buying back in the bottom 1/3.
That sounds like fun to me!!
And while we’re at it, I’d like to:
- Buy that half section down the road 15 years ago that sold for 1/3 of today’s value
- Not sell the stock I did in 2009 that’s now 10x where it is today
- Buy some Bitcoin a few years ago when it was sub-$50
- Buy some shares of Google on the private market when it was trading at 1% of today’s value
- Bet on Mine That Bird before the 2009 Kentucky Derby, a 50-1 underdog that won the race
I think you get my point here…..hindsight is 20/20!
Here’s my main problem with the goal of marketing in the top third….
We only know the ranges of the market when they are in the past.
If we don’t know what the top third price values are today, it makes it very hard to make a proactive decision today if that’s your goal.
If you’ve been following along with our blog posts, you likely know that we’re in the camp of it being very hard to predict the future. We don’t think anyone has a secret system to give them a long-term edge in commodity market trading.
What should a person do that’s heard of this “top third” goal for years?
Pick a Different Goal
In a business that’s influenced by commodity prices that are changing daily in the public view of all participants, it’s very easy to focus on past grain marketing decisions.
The problem is that 99.99% of grain marketing decisions will be wrong if your goal is to beat the market.
You may catch yourself thinking:
“Why the heck did I sell before that bullish crop report?”
“Why the heck didn’t I sell everything before that bearish crop report?”
You see….in 99.9% of grain marketing situations you should of either 1) sold everything or 2) sold nothing.
If your goal ensures that you’re “wrong” 99.99% of the time, you need to choose a new goal.
A “beat the market” goal is a recipe for you taking a volatile ride on the grain marketing roller coaster of emotions!
Furthermore, the uncertainty of the future can make it very hard to make proactive risk management decisions.
“Why would I sell any grain before harvest if I don’t even know what my yield will be?”
How about framing these grain marketing decisions a bit differently?
I think you should think of them similar to how you think about your agronomic decisions.
Marketing with an Agronomic (ROI) Mindset
If you split-apply nitrogen in a drier year where the ROI is lower than most (or negative), will you abandon splitting your N applications every year in the future? Likely not.
If you drain tile a wet spot ahead of a multi-year dry cycle, will you completely quit drain tiling? Likely not.
Nothing is a certainty in farming.
You try the best you can to put the agronomic odds in your favor knowing that it’s highly unlikely you’ll be correct 100% of the time.
You should have the same mindset when you approach your marketing.
You should be asking, “How can I put the odds in my favor?”
Here’s a great chart on seasonal odds (from the corn market but similar trends apply to most ag commodities) from White Commercial Corporation.
Instead of judging your sales based on where they sit vs. the market price, you could judge them based on how much grain you sell during the seasonally opportune time frame (spring/summer) vs. the seasonally weak (harvest).
You can’t control where the market is headed, but you can control your actions.
In addition to using the seasonal trends to your advantage, you should also layer on some additional goals.
Additional Goals to Consider
Above everything else, your long-term goals should be to build equity while reducing risk (along with the often forgotten goal of enjoying your life!).
Pick some financial goals that work for your farm.
- Working capital
- Net worth
If these goals are met, who cares what time of the year it is or what the market outlook is for the future. Take action.
When corn was $7 cash at harvest in 2012 (even though it was off $1 from the highs), it’s highly likely that any financial goal you came up with for the 2012, 2013, and maybe even the 2014 crop would’ve been met.
Assume that 1 out of every 5 years you need to throw these seasonal odds out the window and use a rally to build equity and reduce risk.
If you’re in the midst of a short crop, make it a habit to start building your budgeted P&L for the following year to objectively evaluate your forward-looking opportunities on that day. It will be very easy to focus on your past decisions when this happens, but what’s done is done!
That’s the key….reduce your focus on hindsight and predictions and focus on what action you can be taking today to meet your long-term goals.
Regarding goals, I heard the following quote a couple years ago.
“Business is like a game of soccer. You need goals. If there are no goals in your business, it’s impossible to win.”
All-in-all, pick a goal that’s different than simply trying to beat the market. It will greatly help you smooth out the emotional roller coaster that is grain marketing.
You likely live and breath farming, but oftentimes staying on top of your numbers gets put on the back burner.
If you’re interested in seeing if our software’s full-season revenue/cost/profit tracking tools are a fit for your farm, sign up for a full-access free trial below.
In addition, check out the blog posts below for more content on grain marketing.