Opinions and Their Failures 6/9/16

Enrolling your grain production in any marketing program based on opinion is short-sighted. Let us be clear; our intent is not to begrudge any person’s performance. Our intent is to show that there is a better way to address risk and profitability than opinion based approaches. Opinion based marketing tries to take known data in order formulate price direction.There are too many variables and unknown factors to project price consistently and accurately. Risk management with directional bias discredits market potentials, limits opportunities, and discounts operational specifics.

One of the greatest risks to sustainable profitability is confirmation bias. This means you will seek out what you want to hear. Opinion based marketers choose the bull or bear camp and align their thoughts and convictions accordingly. In spite of market movement they will cling to their opinion over reality. Directionally biased strategies are gambling a grower’s price with preconceived opinions. Many large grain companies use opinion based approaches with their managed bushel programs.

The cost of these marketing programs vary. Some large managed bushel programs charge 10-15 cents/bushel. That is over 10% of last year’s entire corn range, right off the top! These “market experts” try to impress with their knowledge and grasp of fundamentals and technicals. If someone knows nothing about your cost of production, expected yield, or crop insurance policies, how can they tell you when and where to market? Their advice is based on assumptions and opinions, not operational specifics. The attachment to opinions drives emotions. When the market goes against their bias, they will defend and throw their analysis at you. They will miss opportunities while defending their opinions.

Historically in the agricultural community people have been accustomed to discussing price. This is a flawed approach for marketing grain. Price dependencies beget opinions and opinion based strategies are missing the point entirely. As an industry, too much time is spent on things that can’t be controlled such as price, weather and yields. It is a liberating moment when you accept that price, yield, and weather are out of your control. If anyone has a chance to succeed at price projecting it should be the large, multinational grain companies.

A pension fund consultant commented on one grain company’s foray into proprietary trading in 2012.

“As a result of their position as dominant player in the agriculture market, this fund seeks to take advantage of the fundamental market insights and replicate the firm’s proprietary positioning in the futures and listed options markets.”

That fund was closed in 2015. That same company now manages bushels for thousands of growers across the country. They are not confident enough to trade their own money but are willing to charge a high fee to speculate with your bushels. When the largest grain companies in the world are failing at price projecting, why would anyone else expect to succeed? No matter how “connected” a person or group might be, no one can outguess the market.

There is a much better way to manage revenue on the farm. The question should be “how do price and yield scenarios affect my operation?” AgYield will address the potential outcomes and create a well constructed revenue plan. A well constructed revenue plan includes multiple components of a grower’s operation. These include, cost of production, crop insurance, and valuing production.

Once a grower’s operation has been defined, Agyield can precisely show a grower their profitability based on varying yield and price in real time. The AgYield platform allows the grower and the strategist to apply what-if scenarios to show how different transactions affect their profitability. By modeling operational transactions, a grower can make informed decisions. Thinking objectively about their marketing and risk allows producers efficiencies not afforded by opinion based strategies. This approach is fluid, transparent, precise and informative. It removes as much price dependency and speculation as possible.

Jesse Livermore, a great trader, once said, “The market is never wrong, only your perceptions of it are.” Wrong perceptions and opinions can be very costly to growers. It is not mandatory to be bullish or bearish. Prudence is to be operationally specific and understand the profitability outlook of your operation. The path to profitability for the American farmer is to abandon opinion based approaches and embrace a well constructed, flexible revenue plan.