Marketing Lemming

TWELVE STEPS TO AVOID BEING A MARKETING LEMMING

by Alan Brugler

With the end of harvest and the upcoming end of the calendar year, many of us will be evaluating what we have done marketing-wise during the year. The following are some helpful recommendations from experienced farm marketers. With a little interpretation, they apply equally well to those selling strictly via cash markets and forward contracts, to those who use the futures and options markets, and to those buying inputs.

1) Find a method that works for you and stick with it. Each sound trading approach is valid for a certain personality. Find one you are comfortable with, refine how you use it, and stick to it. Some folks need a mechanical, chart-based system to take the emotion out of their marketing decisions. Some are better suited to looking at the long-term fundamentals and then making spaced sales as part of the big picture.

2) Don't gather data that inevitably contradicts. If you find that technical analysis works for you, then minimize your reliance on fundamental news. Skip that paragraph of our commentary! If you use an advisor whose strategy is based on ag fundamentals, a speculator oriented letter based on astrological signs or ancient Chinese wisdom is likely to only confuse you. Healthy skepticism is valuable, but conflicting information tends to result in doubt. Doubt, when present, tends to allow your emotions to rule your marketing decisions, rather than the logic that results in big profits.

3) Remember that the market satisfies need, not greed. Set realistic price goals, based on your operating costs, typical annual trading ranges, Price & Probability© forecasts, charts, and fundamental value studies. When you reach those goals, sell something, and then leave the market until you can identify new goals. As the old trader's saying goes, "Bulls and Bears both win, but Hogs are usually slaughtered".

4) Don't demand consistently high returns. In a four-year price cycle like the one in corn, the best you can hope for is one big year, one good year, and two years where your foresight and marketing skills give you a little better than breakeven. The market has to go below cost of production periodically, to winnow out the least efficient producers, whether those are in Ukraine, Mato Grosso, or Minden. The incremental supply from those producers is what really depresses prices.

5) Beware of your success threshold. Most people have a limit of financial success beyond which they have trouble functioning. For some, that is $10,000, for others $100,000 or $100 million. For psychological reasons, when they reach it, they begin to lose everything they have made. When the profits get too good to be true, take the money and run, far from the market.

6) Make your own final decisions. You need to develop market "feel" by reviewing market action and news daily. Find interpreters you trust (Brugler Marketing, Extension, etc.) to filter the enormous quantities of raw data that is out there. Use their opinions, but take responsibility for the final decisions you make. In particular, examine your mistakes for valuable lessons that can be applied in the future.

7) Isolate emotion from order time. If conversations with your broker or elevator grain buyer are emotional and lead to "I knew better" decisions, don't make them during trading hours. Make those decisions at home, and then call the broker or buyer with the order. Don't trade when you are sick, either!

8) Don't argue your position with friends. Discussing how their understanding of the market differs from what you are hearing can be useful, but once you take a public stand, you have a potential problem. Merely arguing your viewpoint in public can emotionally lock you into an inflexible attitude, and a potentially bad position.

9) Avoid highly leveraged positions. You can't make rational decisions when you've just bet the farm. The short run will cloud your long run perspective. Use spaced selling techniques most of the time. That means you won't sell everything at the top, or buy everything at the bottom, but the reduced risk will also clarify your thinking.

10) Remember that your current market position is never perfect. You will be wrong on at least 4 of 10 trades, regardless of whether they are hedges, forward contracts, basis contracts, minimum price agreements or LDP decisions. Even if you are right that often (60%), 5 or 10 winners out of 100 will account for the majority of your profit. If you can't accept this reality, you may not belong in the markets.

11) It doesn't matter why, it matters which way. The market collectively knows more about the dynamics of the commodity than ANY individual participant. Price moves often begin long before the fundamental reason for them is evident. Your job as a producer is to get the best price. If you are positioned right for the direction the market is going, it doesn't matter if you really know the reason why. Your job is to look for signs that it is done going, and then sell or buy as appropriate.

12) Make marketing a habit. Some of the best prices of the year occur when the majority of the farmers are in the field, and paying less attention to the market. A neglected hedge position can be an invitation for a disaster, but so can a bin full of soybeans that have $500/day of value flying out the bin door. Set aside a time every market day when you at least check the current prices of the things you produce or buy. If you don't have the physical commodity yet, you can still forward contract or hedge, if the market says it is the right time and price to do so. If you can't set aside time consistently to do a full analysis of the market, get someone in your stable of professionals (along with your tax man, attorney, accountant, parts man, agronomist, vet, etc.) who will.

THERE IS A RISK OF LOSS IN FUTURES AND OPTIONS TRADING. FUTURES TRADING IS NOT APPROPRIATE FOR ALL INDIVIDUALS. ANYONE ACTING ON THIS INFORMATION IS DOING SO AT HIS/HER OWN RISK. CONSULT THE FUTURES AND OPTIONS RISK DISCLOSURE STATEMENTS YOU SIGNED WITH YOUR BROKER BEFORE TRADING. PAST RESULTS ARE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.