Posted on July, 18, 2024 at 10:40 am
More than a front row seat at a baseball game or pit tickets to a country superstar concert, farmers experience their own form of fear of missing out (FOMO). It’s all tied to the highs and lows of grain marketing.
“Farmers are like everybody - they are susceptible to wanting as high a price as possible. And they fear missing out if they do risk management, which locks them in at a price,” said Andrew McKenzie, associate director of the University of Arkansas Fryar Price Risk Management Center.
While FOMO is a common term for a generation of young adults paralyzed by the prospect of missing a social media moment, in behavioral economics the phenomenon is framing. Basically, producers set a priority in their mind- to achieve a higher price than the year prior for example – and then frame the success of their marketing decisions based on that goal.
“The referencing of framing is against the price level that they have in their mind. Right now, even if they're making a profit based on production cost levels, they would still see that as a loss in their mindset,” McKenzie said. “I think that's where farmers go wrong.”
Selling at a reasonable price point – one that ensures reasonable profit - should be the ultimate marketing goal, McKenzie said. Even if prices move higher, a marketing decision that guarantees profitability for the farm should not be considered a loss.
“Elevators will encourage farmers to get into target contracts, because they want to get the bushels locked in from their point of view and gain ownership. They have the motivation of wanting to get farmers to sell,” McKenzie said. “But what they often complain about is the farmer will set the targets of these higher market price levels. And then as the price tracks up towards the target levels, they will remove the targets. Why? Because they don't want to miss out on even higher prices.”
The first step to limiting FOMO’s ability to impact marketing decisions is to have a specific, profitable price in mind. Vague goals hoping for the “best” price or a higher price than a previous marketing year can create uncertainty and inaction when faced with marketing decisions.
“The big starting point is to know your production costs, and to have that breakeven price in mind, and then look at where prices are in relation to that breakeven level,” McKenzie said. “There are other things you need to do on top of that, but that is the basis of profit-based marketing.”
Utilizing target contracts without pulling targets as prices increase is a good way to set and remain true to specific pricing goals as the seasonal grain market evolves. One reason producers might avoid target contracts or other forward marketing contracts prior to harvest is the risk of non-delivery and incurring related fees.
In those circumstances, McKenzie said crop revenue insurance can offer peace of mind, as well as the freedom to pursue the higher prices forward marketing can offer.
“If you are trying to aggressively forward contract in the pre harvest period, which is what I was advocating, and the price was there, then you do run the risk of non-production on a forward contract with the elevator,” McKenzie said. “What I would advocate for, is to buy crop revenue insurance as part of an overall marketing portfolio. I see it as a double layer strategy to try and mitigate risk.”
Eventually, the main purpose of growing grain is to sell it, which requires marketplace action on the producer’s part. Holding grain year after year often leads to disappointment and additional cost rather than the best possible price.
“Over a 10-year period, typically on corn and beans, you'll see the highest on average prices offered during the summer or late spring months,” McKenzie said. “I would be setting targets before that timeframe at higher levels with the hope history repeats itself and you can get those higher targets.”
Selling set portions of production at target prices helps producers spread risk over time and lessens the pressure associated with selling all a year’s production at a single rate.
“Setting target contracts is a smart thing to do that at least takes some risk away from your position,” McKenzie said. “If we think of this as gambling to a certain extent, which farmer marketing is to some extent, you're at least taking some of your stake money off the table.”
When prices fluctuate frequently in a given season or even over a several-year period, it’s easy for uncertainty to take a toll on farmers’ marketing confidence. Evaluating decisions based on what could have been instead of the current reality is rarely satisfying.
“Instead of trying to project where price is going to go, I would look at it more in terms of is the market giving me a profitable level to sell out right now?” McKenzie said. “And if so, you don't have to sell everything that you think you're going to have come harvest time, but you could at least sell some of it ahead of time.”
Knowing break-even levels versus market price can help lead to questions relevant to assessing the changing tides of the marketplace less emotionally. With the right mindset, executing a strategy for whole farm profitability can happen without fear.
“I think you have to ask things like, ‘If I sold at that level, what profit would that give me?’” McKenzie said. “’And once I make a return on my investment, what could I use the money for as an ultimate use? How good does that number really look to me on a personal level?’”
Source: Farmer Progress