As a professional marketing advisor with over 30 years of hard-earned marketing experience, I thought I knew something about managing risk. Past markets made that quite clear. Protecting profitable prices early in the marketing season had a very profitable track record. I gave many a marketing lecture on the subject.
As it turned out, I didn't know as much as I thought.
The marketing tsunami which swept in last season has taken the concept of risk management and smashed it all to pieces. Most likely, if you had a marketing plan in 2008, you wish you hadn't. Taking your chances and not doing anything turned out to be a winning strategy. Success has gone to the risk taker not the risk manager. Needless to say it has been a humbling experience.
We are now dealing with the aftershocks. The concept of forward pricing, especially the hedge-to-arrive, is being seriously questioned. Elevators and cotton buyers alike have found the current market volatility too hard to manage and are reluctant to book very far out.
Traditional risk management strategies are in disfavor and in many cases are no longer available. It is a marketing landscape no one is familiar with.
Exactly how we got to this point is open to debate, but the contributing factors are well-known. A weak dollar, high energy costs, inflationary fears and a push for biofuels have all contributed.
There were even some bullish fundamentals to consider. But unlike other bull markets, the primary market movers were not involved in the production and distribution of our commodities. They weren't even the broad array of speculators we are used to seeing.
Instead, the real market movers could be found in a few select boardrooms. Huge amounts of speculative money pooled together and controlled by a relatively few fund managers have overwhelmed the traditional market participants.
For those of us on the supply side of the equation, this avalanche of speculative money has turned out to be a mixed blessing. We certainly appreciate the high prices, especially when you consider rising input costs. But it is now too much of a good thing.
The dominating power of the trading funds has brought a disconnect between the futures markets and our cash markets; just ask your local elevator manager or your local cotton buyer.
Price moves in the futures markets are not necessarily reflected in the cash markets. That makes it very difficult on traditional short hedgers and has forced our buyers to the sidelines. Most participants agree the markets are simply not working the way they used to.
While regulatory agencies and market participants try to figure out how to deal with this broken market problem, producers and those of us who work with producers have several questions to consider.
Should we shelve risk management strategies that have worked in the past and take a more speculative wait-and-see approach in seasons to come?
If buyers no longer book crops one, two and even three seasons ahead, should a producer who wants to protect a profitable price be encouraged to carry the hedge position or stay at risk?
Will our lenders be willing to become more involved? What role should options play? How about crop insurance? How will the new farm bill affect marketing strategy?
We certainly have more questions than answers at this point. I expect managing marketing risk will continue to be important but the strategies we use may look quite different. This is definitely a work in progress, stay tuned.
Scott & Associates Agricultural Marketing, Inc., provides marketing advice to farmers and other commercial interests in Arkansas, Mississippi, Louisiana, Missouri and Tennessee.