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Manternach: Stop second-guessing your marketing decisions

By Jennifer M. Latzke

Dan Manternach wants farmers to stop second-guessing their marketing decisions and start using some price risk management tools to be more successful.

Manternach, Ag Services director for Doane Advisory Services, St. Louis, Mo., headlined the 2013 Small Grain Solutions dinner with his speech on price risk management. He told farmers there are three things to remember for successful marketing and risk management.

First, there is always a price risk on all of a farmer’s output. Second, marketing plans have to be well thought out, written down and followed. And third, there is a difference to scale-up and scale-down approaches to pricing.

“The first element of price risk management is you must be aware as a producer that at any given time you face price risk on 100 percent of your output,” he said. “Yes, there is price risk on the crop that is not yet sold, where prices might be lower. But there are also opportunity costs on the wheat you’ve already sold if you sell and watch the market go up.” This is why it is important that farmers not only understand the difference in the scale-up and scale-down approaches to pricing, but they also write down and follow their marketing plans.

Manternach told of a farmer who approached him and shared his marketing plan—he sold wheat when a bill was due or a note was due. The farmer figured that spreads out his risk throughout the year and averaged his prices. Manternach cautioned that was not the best approach.

“The most common approach to scale-up selling is to sell one-third of the crop at your first target price,” he said. “You’ve set up your marketing plan that you’ll start selling your crop at, say, $4. But the price keeps going up and so you second-guess yourself. You sell a smaller amount at $5. The market keeps going up. You’re kicking yourself, so you sell a smaller amount at $5.50.

“Once the market reaches your died-andgone-to-heaven price of $6.50, all you have left to sell is the last 5 percent of the crop,” he said. This is human nature, Manternach said.

Selling this way averages a price of $5.15. But if the goal is to average in the top third of the price spread, from $4.50 to $6.50, then it would take and average price of $5.83 or better to meet that goal.

But, if farmers use the correct approach to scale-up selling, then they can sell bigger and bigger amounts at higher prices.

“As the market goes up, your upside potential that’s left is less, but your downside risk is getting bigger,” Manternach said.

“Logic says if the downside risk is increasing in a bull market, and the upside is smaller, I should be selling bigger portions of the crop as the price goes up.”

In scale-down marketing, the adage “trend is my friend” is true as long as the market is going up. It’s still an acceptable way to market crops, but it takes discipline to follow the plan.

“It means waiting until you are sure the top of the market is in, and then sell a bunch of your production,” he said. “But, we are never sure of the top of the market until it’s obviously in our rearview mirrors on the chart. There’s uncertainty and reluctance to make that first sale of a major portion of the crop. Then, the market keeps declining and the fear factor takes over the decision making.”

Manternach said some farmers, after they’ve seen the top of the market disappear in the rearview mirror, tell themselves that they’ll catch the market on the rebound. “But how often does the market give you a second chance?” he asked. “You’re lucky if it retraces to 50 percent of the high.”

In scale-down marketing, the trick is to sell smaller and smaller amounts of the crop as the market declines. “Most people will sell 5 percent of the crop at $6.50, they’ll kick themselves when the market drops to $6 and sell 15 percent,” he said. Then, the market breaks $5.50 and they’ll sell 20 percent, and on it goes until the market gets to the bottom price of $4.50 and they’ll just give up and sell the rest of the crop, he added.

Instead, in a bear market, farmers should look at scale-down marketing as an inverted pyramid. When the market reaches that optimum price in the marketing plan, sell a large chunk of the crop. Then, as the price goes down, there’s less of the crop at risk. Manternach also offered up key bullish and bearish drivers for the wheat market this year.

Bullish factors include:

The Dec. 1 stocks reported higherthan-expected feed usage in the fall quarter leading to lower ending stocks.

Winter Wheat Seedlings report showed only a 1 percent rise in acreage seeded for 2013.

Final fall condition ratings of winter wheat were the second poorest in 20 years.

Much of the U.S. Southern Plains is still in drought status despite precipitation in February because there are no subsoil moisture reserves.

Bearish factors include:

International Grains Council forecasted global acreage to rise 2.2 percent from 2012, the highest pre-season forecast in 15 years.

Soft red winter wheat seedlings are up 16 percent from 2012 and soil moisture situations are much improved.

February precipitation over much of the U.S. central and southern Plains equaled the amount usually received from December through February.

Winter wheat prospects are good to excellent outside of the U.S. Plains and isolated areas of the Black Sea region.

Jennifer M. Latzke can be reached at 620-227-1807 or jlatzke@hpj.com.