Melvin Brees
Farm Management Specialist
University of Missouri Extension

 

 

 

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Please send your comments and send suggestions to Melvin Brees, Farm Management Specialist, University of Missouri Extension, #1 Courthouse Square,  Fayette, MO 65248, call 660-248-2272, or send messages by e-mail to: breesm@missouri.edu.
December 10, 1999

What If I'm Wrong?

A significant amount of this year's corn and soybean crop remains in storage. Prices were low at harvest and basis was weak, a market situation signaling storage for higher prices. The weak basis also made the LDP attractive and it has been claimed on a sizeable portion of the crop leaving it unprotected against lower prices. In recent weeks, basis has strengthened for both corn and soybeans. Dry weather in Brazil has been supporting soybean prices (at least until the last couple of days). Corn exports have been doing better than many expect. These and other factors suggest prices could improve. However, South American weather may be improving and corn prices have been going nowhere. Increased carryover supplies and expectation of large production in 2000 are among factors that could send soybean prices back to last summer's lows near $4.00 and some believe corn could plunge to lows near $1.50 set in the mid-80s. If you're storing corn and beans that are no longer protected by the LDP, you need to ask yourself--what if I'm wrong?

One "what if I'm wrong" marketing strategy is to have downside price targets as well as upside price goals. These are sometimes also referred to as "trap prices" or "stop prices." While you are storing in expectation of higher prices, these lower price targets are prices where you accept that you may be wrong and trigger sales to "cut your losses." These are always difficult sales to execute. They go against your market expectations or hopes for better prices. They require you to admit being wrong and sell at prices that are worse than they were just a few days ago. They are not a desirable outcome--they are a risk management strategy!

Where do you set these downside price targets? There are several ways; here are a couple of examples. One way is to use support prices derived from technical market analysis. For example, if futures price penetrates and closes below a support price--this could trigger a sale. Another method is to set the target based upon how much you want to risk. For example, suppose you took the soybean LDP earlier when it was near $1.05. Recently it has been $0.85 or less, so you would have "gained" about twenty-cents. Setting a price target about twenty-cents lower than the current price represents risking the twenty-cent "gain" on higher prices. If prices decline the twenty-cents, triggering a sale, you give up the "gain" and still hope to at least net near the market loan price while avoiding further losses.

Marketing plans and strategies should be based upon market signals and price expectations. However, being wrong about expected price direction is a common occurrence in marketing that we have all experienced. Nobody wants to use downside price targets, but they can help manage the risk for those times "that you are wrong!". -- Melvin


University of Missouri ExtensionDecisive Marketing - December 10, 1999
http://outreach.missouri.edu/agconnection/DCT/DM991210.html -- Revised: April 20, 2004
breesm@missouri.edu