Trying to sell at the market high is not a strategy, it is a dangerous game

Trying to call the top of the market is dangerous, arrogant and completely unrealistic.

One thing 2008 taught us about marketing grain is that incremental selling does work. We have ridden the ultimate roller-coaster from an extreme bull market in commodities to the wrath of the bear in the past two months. For those who waited to find the $20 canola and the $15 field pea market without selling a single tonne of their 2008 production, this has been a real lesson. Incremental selling allows you to grab some of the prices on the way up and also not be left with full unsold bins when the bears push the market to new near term lows.

When putting together your crop marketing plan, the goal should not be centred on selling 100 per cent at the top of the market. Data shows in the stock market that only two per cent of people sell at the high. This leaves 98 per cent selling at lower prices. Trying to call the top of the market is dangerous, arrogant and completely unrealistic. Market timing is very difficult under the best of circumstances, and when you add on the volatility that the North American market is experiencing it is impossible.

I’ve seen three basic strategies that farmers use to sell their crops.

Strategy one: Price

Sometimes the price just sounds right to make some sales. This is not exactly a sophisticated way to make decisions, but it has merit in some applications. Every commodity has price points that are mental triggers for growers. Last winter, for the fortunate who had daily price contracts with the Canadian Wheat Board, large amounts of wheat were locked at $10 because the price was better than anything we had seen in recent memory. The same was true a year ago when contracts became available for $10 canola. As prices are rising it can be dangerous to get too aggressive in locking up your inventory just because the price sounds right. Incremental sales into a rising market will pay better returns than knee jerk reactions to certain prices.

Strategy two: Profit calculation

Some farms sell their crop based on what price brings them a calculated loss or profit. “If we sell our canola at $10, we will make $50 per acre based on our cost of production this year.” This strategy works very well for farms that have adequate cash flow and bin space to be patient. For some farms that followed this strategy and did not lock their entire crop in at the highs, they can at least feel good that they sold at prices that made the farm an adequate return. Making money is not a bad thing and your banker will appreciate your quantitative approach to selling your inventory.

Strategy three: Cash-flow needs

For many farms, selling last year’s crop is based on planning for next year. “Inputs are not cheap and sometimes deferred payment plans from input retailers are too expensive in the long run, so we use our previous crop to create cash flow,” says Todd Quinn who farms in Enchant, Alta.

This strategy takes out trying to time the market and focuses you on the needs of your business. The drawback is that it does not allow you to be patient and take advantage of market trends. An example of this strategy would be selling some canola off the combine in the fall in order to pre-buy fertilizer.

No matter which of the above strategies that you use, they are all better than waiting to time the top of the market. In reality, successful farms use all three strategies depending on the crop or the circumstances at the time.

Mark Wobick, farm management consultant with Meyers Norris Penny in Lethbridge, gives the following advice to farmers: “First, understand your cost of production and not just your direct costs, but overhead as well.” Then, he says, “know your target prices and write them down to take out the emotion of a volatile market.”

Mark also recommends keeping a selling diary to record why you made a sale at given prices. This will allow you to pick up on common mistakes that you are making and prevent you from getting caught up in hindsight analytics. In your diary, write down your target prices to make sure that you remind yourself at what prices you need to sell based on your farms needs. Writing down your target prices will also prevent you from constantly moving your targets higher with a rising market. In my mind, this is what happened to a lot of farmers this past year: they continued to raise their target prices without ever selling on the way up.

It is quite ironic that with all the information we have at our fingertips, crop marketing is getting tougher instead of easier. Much of this is due to the global market forces, higher volatility and speculation that pressure the agricultural commodity market. With crop marketing getting more difficult and the economic stakes rising, it is more important than ever that you commit time to marketing your crop. You have spent spring, summer and fall in the field ensuring that your crop was the best it could be. Now commit the time necessary to ensure that you have a marketing plan to get the best return within your circumstances. Also remember that now is not a bad time to start working on the 2009 crop marketing plan as well.

Shaun Haney publishes the Haney Farms Quarterly and his blog, which can be found at Farms is located in Picture Butte, Alta., and is involved in the grain, seed and beef business. You can contact Shaun at 1-877-738-4517 or [email protected]

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