In this era of spreadsheets and QuickBooks accounting, I still like to take a pen and pad and write down trading strategies and ideas for future articles. I find it rewarding to write and then review my ideas as I update my hand-drawn charts. Only then do I pull out my laptop.
I have been working with farmers to help them make better marketing decisions for more than 40 years. I even have third-generation customers! I have watched some of these farms grow from 320 acres to over 3,000 acres.
The farms that expand and stay profitable do a lot of things right. They know how to maximize yields, how to hire and retain key employees, how to adapt to new technologies, and how to create a flexible marketing plan.
The grain markets have been very volatile in the past year. It has been interesting to see how farmers manage the decisions they make. For farmers with a good marketing plan — and good execution of their plan — the volatile markets can create a sense of pride as prices and profits work higher. On other farms, the day-to-day volatility creates a sense of anxiety: They have sold too soon, and they are frustrated by not hitting “the top.”
This corn monthly continuation chart shows the high, low, and close over the past 10 years. The highest high came in August 2012 at $8.44. The low came in April 2020 at $3.00. (This chart shows only the closing price each month so it does not show the highest high and lowest low.) The 10-year high-to-low is $5.44 per bushel. The bottom third of the 10-year range is $3.00 to $4.81. The middle third is $4.81 to $6.62, and the top third is $6.62 to $8.44. With higher production costs in 2023, going into the bottom third of the 10-year trading range will take prices below most farmers’ cost of production.
But each year can be a new beginning.
January is a good time to review and evaluate how well your farm did last year. Here are suggestions on how to first review and then evaluate your plan. Grab a pad and pen. (As a bonus, getting this material together now will save you time when you are preparing for your tax appointment in February.)
Start by making a list, month by month, for 2022. For each month, record your grain sales, how many bushels you sold, the futures price and basis the day you sold, and, most importantly, why you made the sale. Be very honest about why you made the sale. This is key to improving your plan next year.
Farmers who struggle with marketing and find that it creates a lot of anxiety — and even family conflicts — will often sell when they panic. Others sell when they need money or make a sale based on something they read on the internet. They are reluctant to make a series of sales as prices move higher because they have FOMO (fear of missing out) about not hitting the top. This sets up panic sales when prices turn lower, especially if the news they read on the internet turns super bearish (as it usually does at the bottom). A lot of these farmers will make only cash sales.
The farmers who have success in marketing have a plan. Even more important, they use the plan. They control their emotions and have realistic expectations. These farmers are willing to sell as prices go up, knowing that each sale is at a higher profit level. They manage their FOMO.
They still have FOMO, but in a different way: They are not worried about prices going higher, but about what happens if prices turn lower and they are left holding too much inventory. These successful farms usually turn to a combination of marketing tools, including cash sales, hedges, hedge-to-arrive contracts, and put options.
This soybean monthly continuation chart shows the high, low, and close over the past 10 years. The highest high came in August 2012 at $17.94. The low came in May 2019 at $7.80. (This chart shows only the closing price each month so it does not show the highest high and lowest low.) The 10-year high-to-low is $10.14 per bushel. The bottom third of the 10-year range is $7.80 to $11.18. The middle third is $11.18 to $14.56, and the top third is $14.56 to $17.94. As with corn, if prices move to the bottom third of the 10-year trading range, it will take prices below most farmers’ cost of production.
Once you complete your review and evaluation, it is time for the next logical question: How do I improve my marketing plan in 2023? Here are three steps.
Step One: Make a marketing team, if you haven’t already.
Create a team to share the decision-making process. Involving your spouse, children, or in-laws in talking through decisions is beneficial. It is also likely to reduce your anxiety — and theirs. Building teams is a normal routine in any well-run company. It is even more important in a farm operation, where your marketing team members have a stake — and often a lifelong investment — in the business.
I had to learn this the hard way for my business early in my career. My publishing and brokerage businesses were starting to grow. I had a trusted employee who had to move on for positive reasons. After he left, I wanted his insight, so I called and asked him, “What is it like to work for Al?” After a long pause, he said, “Well, ah … it is like working for a benevolent dictator.” Wow, at least he used the word benevolent. I changed and made an effort to have weekly staff meetings. I sought and used the input from all the team members. It helped me make better decisions.
Step Two: Make time each week to review and update your plan together.
Do this even if it’s just you and one other team member. Don’t dwell on your marketing during a sleepless night. Instead, sit with your team and talk marketing. On every farm, it takes planning to get the bushels hauled in at the right time. You need to monitor who has the best basis, be aware of how much and what percent you have sold, and know what you still need to price. To do this right, it takes a team. Just the act of saying the plan and goals out loud in your meetings will make it more likely to work. There is a real power in writing down a plan and then saying it out loud. Give it a try.
Step Three: Keep a grain marketing journal.
You need to write why you are making your decisions. Putting a gut feeling into words is very difficult sometimes, especially if that gut feeling is simply panic. But trying to put it into words makes it become more clear to you, whether you like it or not. An important (and sometimes unpleasant) part of this process is being aware of how you are making decisions. That’s how you can make better decisions and build a stronger and more profitable farm operation.
Remember that the news is always bullish as prices are going higher and bearish as prices are going lower. Your journal of notes from your weekly team meetings can help you avoid panic sales at the bottom and instead make better decisions in the future. You need to think of your crops like money, because they are.
I like to teach my Kluis Grain Trading Academy each winter. It is always rewarding for me to see how farmers can change and improve their marketing when they learn and adopt new marketing concepts. A lot of the long-term success of your farm will depend on the financial and marketing decisions you make. Make sure the next generation is learning more each year.
Note: The risk of loss in trading futures and/or options is substantial, and each investor and/or trader must consider whether this is a suitable investment. Past performance — whether actual or indicated by simulated historical tests of strategies — is not indicative of future results. Trading advice reflects good- aith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice given will result in profitable trades.
Al Kluis, Commodity Trader
Al Kluis has been trading grain futures since 1974. Sign up for a free trial to his daily morning email and weekly “Kluis Report” by going to kluiscommodities.com.
Kluis Commodity Advisors 901 – 12 Oaks Center Drive Suite 907, Wayzata, MN 55391