I was reading in Agweb this morning “Ag Lender Encourages Farmers to Make Financial Decisions Based on Numbers, Not Emotions”. When I first saw this I said to myself, yep, makes sense. But then I saw three things that they recommended: Lock-in loan rates, consider equipment needs, and reduce use of inputs. Each of these three suggestions all have something to do with lowering the expense side of the equation. But nothing was said about removing the emotion of the markets and marketing decisions.
Let’s look at a simple example in corn taking numbers from the University of Minnesota Southern MN 2024 Corn Budget: Planting 1000 acres. APH is 205. Cost per acre: $831. Potential Revenue at current 3.60 cash price: $738,000 or $738 per acre (already not looking good!). On an average day, corn futures (yes the price all cash buyers start at!) has a price swing of 7.22 cents per bushel. Based on these APH numbers, that is a daily swing of 14.801 per acre. Since January 1, 2024, Dec corn futures have fallen from 5.0225 to todays 4.10. Revenue has been reduced by $189.11 per acre. Do you really think that taking emotion out of managing inputs and expenses is going to a) make up this difference and take the emotion out of running your business? I do not think so. If the markets are uncertain, emotion will reign. That is why we developed the revenue management non-marketing marketing approach. A play on words? You bet. Let’s get back to basics.
The Chicago Board of Trade was established in 1848. It was established as a marketplace to transfer risk as a producer to the speculator who wants to make a fortune trading (fact, not many do!) When you are watching the market daily, receiving market news from a multitude of suppliers and vendors, are you more of a speculative position taker or a bona fide hedger? I often say that most marketing and market advisors enable an adventure in speculation.
If you were to come to us today and you are asking how we could help you get emotion out of managing your farm, here is what we would do:
• Look at what you have coming in:
o Your acres planted;
o Your APH and potential estimates of yield off your APH;
o Your estimated expenses;
o The type of crop insurance you have;
o Your current sales and hedges in place.
• We then build a proforma income statement with a price shock analysis:
o Here is where your estimated revenue is today;
o Here is what your revenue will look like if the market moves either up or down;
o We will ask you at what level in the market do prices need to go for you to be in a non-panic mode where emotion can be taken out of your decision making process?
• Finally, we will work with you to gain an understanding on how options can be used in building your non-emotional risk profile to meet revenue thresholds;
o How do options work as a bona fide hedging tool;
o Through our proprietary modeling, we will show you the total impact of option positions before we “pull the trigger” or execute such transactions;
o We will continue to send updated reports to you showing how we are headed on the revenue roadmap.
o We will maintain reporting that demonstrates the cash flow of options to assist in your accounting for tax purposes.
• How much does it cost?
o The U of M says the average farmer will spend $6.00 an acre on marketing per year.
o We can live with that.
We would welcome the opportunity to have a no pressure introductory presentation that will demonstrate to you that you can take emotion out of marketing.
Commodity Trading, Hedging and Analytics