7/22/2010

Tom Neher - Grain Angles
July 22, 2010 - The grain markets continue to rally, even as the crop gets bigger. Crop condition ratings remain strong as the weather induced stress has been nearly nonexistent. With the $.50 rally in corn we now enjoy an additional $100 per acre gross income on a 200 bushel per acre yield. The $1.00 rally in soybeans has added $50 per acre gross income on a 50 bushel per acre yield. This a significant margin to manage.

I was visiting with my friend the other night on the telephone and he told me that this was the best corn crop that he has ever had for this time of year. The population was high and pollination was ahead of schedule. He mentioned that his soybeans were looking much better than they did a few weeks ago. We visited about storage space and what the basis could be at harvest.

Then I asked my friend about his sales of new crop grain. I heard a pause on the other end of the telephone and then a groan. He explained that he had made a few sales last winter and then a month ago at lower prices. He indicated that he had about 50% of his 2010 crops un-priced. I asked him if he thought this might be a good time to get some more grain sold. He said, “Yes, but I think the price will go higher and I want to raise my average on the lower sales.”

I was tempted to go into my lecture on margin management and making marketing decisions as financial decisions rather than trading decisions. I knew he didn’t want to hear that from me again, he told me so in our last conversation. I decided to take a different approach to this conversation. I brought up the tactic of using a “trailing stop.”

I explained the strategy of a placing sell order under the market that would only be filled if the market brakes below the predetermined level. I explained that he would then raise the sale price as the price continued to rally. This would allow him to ride the rally and then make his sale after the market changed direction. I mentioned that there were a few cash contracts and hedging platforms that would do this for him, but that mostly he would have to make the changes himself.

My friend told me that he had tried that once and it didn’t work so well for him. I asked him what happened. He said, “I placed my ‘stop’ order with the elevator and then the price started going down and I cancelled the order before it got filled. I was sure that it was going to go back up after my ‘stop’ order was filled.” I asked him what happened after he made that decision. There was a pause, before he told me, “The market kept going lower.”

Discipline in executing a marketing plan is one of the hardest things to master. One can develop the best marketing plan possible, but if they second guess themselves and fail to execute the plan, it will reinforce the lack of confidence in their marketing ability.
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