Don’t be a gambler when it comes to marketing your grain, Brennan Turner, FarmLead president and CEO, urged farmers at this year’s CropConnect.
“It seems like most farmers view their grain as casino chips and they don’t have too much rhyme or reason on which number on the roulette wheel that they place those chips on,” says Turner. “Put another way, a farmer often does not have a process to sell grain other than, ‘I needed some cash,’ or, ‘The price was pretty good.’”
He says hedge fund managers are just like farmers in a number of ways in that they too must weigh numerous different variables, manage an operation with multiple people, and face many outside factors they can’t control.
The difference is the hedge fund manager better understands, respects and manages risk.
A risk manager with a crop to sell would think and act far differently than a typical gambler.
The gambler, for instance, is more likely to hold out for $12-a-bushel canola and would resist selling at $11.50, even if prices over the previous few months had been under $11.
A risk manager, however, would acknowledge the price premium and sell into strength, Turner says.
“You have no idea what the market is going to do. A risk manager acknowledges this and manages their exposure to the market,” he says.
They’ll weigh the upside potential versus downside risk, and decrease their price risk exposure as the market reaches new heights as well as shows signs of more downside risks.
“Just because you have lots of cash in the bank doesn’t mean you should stop managing your risk exposure of the grain in the bin/field,” Turner says.
Don’t be myopic
He encourages farmers to minimize their sense of loss aversion.
“This is the bad feeling that one has when they didn’t sell anything and then the market went down, versus the feeling when you sell some grain and the price does go higher a few weeks/months later, but you still have more grain to sell at that higher price.”
Turner also cautions against confirmation bias or your own echo chamber.
All farmers desire the price of their grain to go up, and so when everyone else around them says it will, they can become overwhelmingly biased that grain prices will indeed rise, even if there aren’t enough catalysts to make that happen.
“How often is coffee row right about where grain prices go?”
A system to go by
Besides understanding their cost of production, farmers also need to know what it is they have to sell, and Turner strongly encourages them to test their grain.
They also should keep on top of news about the markets that affect their farm, explore their marketplace options, and ask their potential buyers questions: what are the discount schedules, premiums and storage fees?
He advises farmers to break their sales into 10 to 30 per cent blocks, and urges them to review their marketing plans every month of the growing season.
“Farmers, in addition to the many other hats they wear, they’re also portfolio managers: they are literally acquiring assets (grain) for a cost, and then trying to sell them at a profit.”