It must have been farmers who invented Texas Hold ’em Poker.
I recently took part in a poker fun night with about 40 farmers. After playing for an hour, you see a lot of similarities between the luck of the cards and the highs and lows of farming.
You start the year out in the spring optimistic that it’s going to be a good year. (You get dealt a pair of aces.)
The growing season is good to you with timely rains and good heat. (The flop is a Jack, 10 and a three, so no threat to your pair of aces.)
Harvest starts and things look good, but then there is a rain delay. (A six comes on the turn.)
Harvest starts again after a two-week delay. You get a good run, but then it snows. (A three comes on the river). You’re still hopeful you can get it done.
In October, just as you get close to finished, more snow falls and it’s over. (You show your pair of aces confident you have the best hand, only to have Mother Nature show a three and a 10 for a full house and blow your aces out of the water.)
Things can look good all year, but it all comes down to the river card. That last card will determine how your hand, or your whole year, will pay out.
Betting with discipline
The way different people approached the poker game paralleled how different farmers make selling decisions. Some were aggressive and bet based on gut instinct. Others were methodical, taking their time to make every decision. Some were cautious and wouldn’t play a hand unless they had a pair to start. When farmers use these approaches to sell grain, sometimes it works to their advantage, but other times it can be a detriment to their ability to make smart marketing decisions.
The hardest thing for farmers to do is change their marketing approach and become more consistent and disciplined.
In my work as a marketing advisor, I sat down with farmers to review their pricing strategy from the previous year. We compared the results from their approach to a pricing strategy based on following futures charts, basis offerings and forward price contracts.
The comparison showed that a more disciplined strategy produced better net results. This made it easy for me to convince them to change their strategy to a more disciplined approach for the following year.
We used market information to make pricing decisions. We used world grain inventories as our guide as to how fast we should price in the new year. If there was a potential decline in total production of a specific grain, we planned to be less aggressive in pre-pricing early in the year. Conversely, if world inventories were expected to be the same or higher than last year, we planned to price aggressively for early harvest movement. This would also help with bin space concerns and provide cash flow for paying bills and pre-buying inputs at cash deal values.
We watch futures charts and set target price points based on what the charts show for resistance levels. We also consider using options to set a floor price or buying protection to cover delivery risk if we’re signing deferred pricing contracts with grain companies.
We follow grain companies’ basis offerings and when we feel an offer is good, we lock some tonnes in, leaving the futures unpriced if the charts show upside potential for futures.
Another strategy is to watch deferred months’ pricing values. If grain companies offer attractive premiums for forward months, consider basis-only contracts, if the futures may run higher before the delivery period. If futures look weak, lock in a flat price and consider using put options (depending on the cost) to create extra value if futures go lower.
Following a plan makes it easier to pull the trigger on pricing, and less stressful than the old way.
Gambling is fun when you’re doing it for fun. But if you’re making grain marketing decisions, a little more discipline will drive success for your business.