Pressure to take the Wrong Actions at the Wrong Times
Brought to you by Total Farm Marketing Consultants Eric Fransen and Scott Masters
Like the grain producers we’ve worked with over decades, we’ve lived through a roller coaster of emotions tugging at us over every market upswing and downswing. To explain what we mean, take a look at Figure A, illustrating the market cycle of emotions. As the market rises through Phase D (beginning of a market upswing) into Phase A (a definite bull market), the excitement builds in anticipation of an ever-increasing price, and the temptation to wait to make sales takes root. The risk? Missing the top of the market and waiting in vain for prices to go back to previous higher prices. Then, after the market continues to fall deeply into Phase B and especially Phase C (a definite bear market), desperation and fear kick in. The risk? Finally giving in and making sales near or at the bottom of the market because you see no light at the end of the tunnel (and, in the meantime, you have bills to pay).
In other words, people in the market – whether producers, advisors, or investors – all feel pressure to do nothing when prices are the most advantageous, and to take action when prices are the least advantageous. We call this the market cycle of emotions, though it’s probably more apt to be called the market cycle of eternal anxiety and bankruptcy.
Breaking the Cycle: Create A Plan to Reduce Anxiety and Increase Profitability
We feel that the best way to counteract the emotional tug of the market is by knowing what actions you’re going to take when the market is advantageous to you BEFORE you enter into any marketing decision. In other words, build a plan to help you (1) target how you will drive income during key time frames, (2) smartly capitalize on the ebbs and flows of the market, and (3) increase your farm profitability.
This is not to say that a plan should be rigid or inflexible against specific dates or time frames. A plan that doesn’t adapt to market realities can be as unproductive and anxiety-producing as marketing completely on the whims of emotion. With that in mind, here are some of the basic building blocks of a plan that we keep in mind as we help producers approach farm marketing with consistency and discipline.
Step 1: Decide What You Need to Sell to Manage Deadlines
Your first step is to build an action plan around key, can’t-be-missed dates. Build out a calendar identifying what needs to happen by what date and the steps to take to meet those deadlines. Here are two common deadlines producers typically need to plan for:
• Old crop: set a date that old crop must be sold by, such as June 10 or July 4.
• New crop: decide how much grain you would like to have priced by harvest. More specifically, determine how much can you store vs. what must be delivered at harvest. If you have storage, decide on a percentage of your expected total (possibly 30% to as much as 70% or more).
Of utmost importance, also think about your cash on hand and your cash flow needs over the next year. Are there certain times when you need a big cash influx, like a loan repayment? Build that into your plan. Do you need a steadier cash inflow for ongoing expenses? Build those needs into your plan as well, to help you determine when sales need to be made.
Step 2: Sell to the Trend
Here’s a dirty little secret of every advisor across the industry. While we like to think we’re good at determining whether the market is ripe for an upturn or downturn (trend!), not one of us can say with any certainty when the market is going to top or bottom out. That’s why taking advice to sell everything at the top of the market can be so detrimental to both your emotional well-being and your bottom line. More often than not, people miss the top and then fruitlessly wait to sell in hopes the market will come back. Because of this, we advise you to take advantage of one of our advisor strengths, determining trend.
When trend is in your favor (going up), sell your crop in bite-sized pieces to take advantage of rising prices. This approach allows you to protect increasing portions of your revenue at good prices, while still leaving you open to more market upside as prices rally. Over time, you price more and more grain closer to the market high, helping you to build a better weighted average price.
If prices are particularly advantageous to your overall profitability, remember that you can also use this approach to market crop for the following one or two years as well as this year’s crop. While it’s emotionally hard to sell that far into the future (what if there is a drought next year?), there have been years in which prices peaked one year or more before harvest, such as 2001, 2003, 2005, 2009, 2010, 2013, 2014, and 2015.
Finally, if you simply feel you can’t or don’t want to sell more and want to wait to capture potentially higher prices, consider buying puts to help protect you against a downward change in trend.
Step 3: Act on How You Feel – When to Your Advantage
We talked about how people behave based on extreme market feelings – excitement moving into greed at the top of the market, and fear and despair at the bottom of the market. We also discussed how this motivates people to make poor decisions.
Feel confident about your feelings before they become extreme. More specifically, if you’re feeling good about prices and their impact on your finances, it’s likely a good time to make a sale. Holding out for more can lead to more risk, as more and more people become greedy about prices (and hold on too long). Conversely, if you’re feeling terrible about prices, think about sitting tight. Other people are also likely to be feeling bad and are more likely to capitulate and sell, which is the spark to turning the market. To put it more bluntly, the greed and fear of the market is the driver of the high and low prices. Use your feelings to help you smartly decide when to participate and when to wait it out.
We’re Here to Help
The TFM360 team drives our decision-making based on a strategic approach to farm marketing, using the same foundational beliefs we’ve been talking about – taking emotions out of decision-making, capitalizing on market trends, and taking a more contrarian view to the market’s key drivers – fear and greed. Let us know if you have more questions about our approach and how we can help you on your path to long-term financial stability and success.
Eric Fransen, Director of Total Farm Marketing and member of the TFM360 analytics and consulting teams. Eric has been with Total Farm Marketing since 2007, focusing primarily on grains and cattle. He excels at helping clients manage their operations’ market opportunities and risks.
Scott Masters, Director of Market Analytics for TFM Cash+. Scott has been with Total Farm Marketing since 2021 and brings 29 years of grain marketing experience to TFM . Scott’s primary focus at TFM is helping grain farmers implement cash marketing tools.
If you have questions, reach out to one of our consultants at
800.334.9779 or visit us at TotalFarmMarketing.com.
©August 2022. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Suggestions or examples of seasonal price moves are not meant to imply that such moves or conditions are common occurrences or are likely to occur. Futures prices have already factored in seasonal aspects of supply and demand. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. Stewart-Peterson Inc. is a publishing company. SP Risk Services LLC is an insurance agency and an equal opportunity provider. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. A customer may have relationships with all three companies. TFM360 is a service of Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Cash+ is a service of Stewart-Peterson Inc.. The TFM360 analytics team is provided by Stewart-Peterson Inc. The TFM360 consulting team is provided by Stewart-Peterson Group Inc. No representation is being made that consistency, strategy or discipline will guarantee success or profits.