Recent price movement and volatility in various ag commodities has prompted an increased amount of conversation at our bank and with our customers regarding the role of marketing in a farm operation’s success.
We have the benefit of seeing the risk management approaches of many customers over a number of years. We see some farms consistently demonstrating know-how, discipline and objectivity in developing and executing their marketing strategies, and year after year the positive impact is noticeable. But we also see operators who approach the topic with unrealistic expectations and limited knowledge, and results are often disappointing, if not downright disastrous. And then there are the farms that stay away from the topic altogether and just take what the market gives them.
In our internal conversations we often ask ourselves what role we as bankers should take in encouraging that customers pay greater attention to this important topic. We obviously have to be careful that we don’t inadvertently become the farm’s marketing advisor. That’s not our role, and we aren’t equipped to carry it out effectively. But we can and do actively encourage more education and pursuit of the advice of experts to help use the tools that the marketplace provides in today’s commodity world. We see how an effective approach to marketing can make a difference in the financial performance of a farm over time.
• Never underestimate the importance of a partnership with a trusted professional marketing advisor. They spend their day keeping up on what’s going on in the commodities markets, and if they’re good at what they do they will help provide the discipline that is often lacking in the development and execution of a sound marketing plan.
• Spend time learning about various tools available to you. Make sure you fully understand insurance programs, hedging, options and forward contracting if you plan to use any of them. Keep your marketing strategy simple while you develop a deeper understanding of all of the tools.
• Make sure you understand the day-to-day financial impact of using these tools. If you decide to hedge, do you have an adequate hedging line set up with your banker to cover margin calls? If you decide to use options, do you understand the temporary cash flow impact of purchasing those options? Are you clear on the potential impact of hedging more crop than the weather gives you in a given year?
• Have a meaningful plan. Selling 10 percent of your production and calling it a marketing plan is only fooling yourself. Waiting for corn to reach $5 per bushel while it is trading at $3 may not be realistic. Understand the impact that one sale will have on your bottom line, whether the price goes higher or lower. Do this again and again as you continue to make sales with an eye on what your ultimate goal is.
• Fundamentally understand that developing and executing a sound marketing plan is not likely to make you more money. The objective should be to help you even out the price volatility in the market and have a more manageable cash flow. Producers who get in with the primary objective of making more money almost always end up disappointed. They tend to get frustrated, determine it’s not for them and decide to never get involved again.
• Price volatility has been much more pronounced in all commodities over the past several years. We produce more ag products than we can consume here in the U.S. That means we depend extensively on exports and that leads to substantial opportunities for price volatility. World politics, monetary policy and worldwide cropping conditions all play a role in determining the prices American farmers receive for their products. Weather conditions here in the U.S. aren’t always the primary factor anymore.
Marketing strategies need to be developed to lessen the volatility and even out cash flow.
Agriculture has very much become a knowledge-based business. If you aren’t already an effective marketer, I encourage you to start the journey of learning how to become one. It’s likely to pay dividends over time.
(Views provided in this column are general in nature for your consideration and are not legal, tax, or investment advice. Investors Community Bank (ICB) makes no warranties as to accuracy or completeness of information, including but not limited to information provided by third parties, does not endorse any non-ICB companies, products, or services described here, and takes no liability for your use of this information. Information and suggestions regarding business risk management and safeguards do not necessarily represent ICB’s business practices or experience. Please contact your own legal, tax, or financial advisors regarding your specific business needs before taking any action based upon this information.)Dave Coggins is chief banking officer/executive vice president for Investors Community Bank.