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Be ready for anything
In the three years since the 2008 global economic meltdown, veteran marketing adviser Bryan Doherty has seen a definite shift in farmers' questions about the markets.
“I hear fewer questions like ‘What's going to happen?’ and more questions like ‘How do I prepare my business for what's going to happen?’ ” he says.
Doherty believes this is a good shift for producers. “It's a realization that, although you can't control the market, you can control your preparation,” he says.
The new mind-set reflects what has gone on in businesses worldwide: Risk management within corporations is no longer something to do in a crisis, according to a 2011 survey of business executives by the consulting firm Accenture. Since 2009, companies have improved their risk-management capabilities and view it as essential to sustainable profitability.
Basically, companies are putting people and systems in place to help them prepare and succeed in the new era of volatility. As the world's leading CEOs are getting their risk-management houses in order, farm businesses are looking to do the same, especially when it comes to commodity marketing.
How can farmers create a marketing plan that is dynamic enough to flex with today's markets? Again, agriculture can learn some lessons from the wider world of business, says Scott Stewart, president and CEO of Stewart-Peterson Inc.
Stewart's firm uses a process called scenario planning and applies it to commodity marketing. In business, scenario planning is used to make flexible long-term plans. It is often used when:
● There is a great deal of uncertainty in a market.
● There is a history of costly and unpredicted surprises in the market.
● There is significant and ongoing change present that could result in any number of future scenarios.
For farmers, those conditions sound familiar, especially when it comes to marketing.
“Aside from the weather, price volatility is one of the most uncertain aspects of farming,” Stewart says. “Just when you think you have it figured out, you find out something new or the unexpected happens, and you've missed an opportunity.”
Stewart says marketing plans need to be dynamic, taking into account rapid change. “That's why I don't like the word plan,” Stewart says. “Who can plan for an earthquake or currency failure or a political development that completely shakes the markets? Marketing today needs to be a dynamic process rather than a static plan.”
A better way
In the late 1960s and early 1970s, a corporate planner named Pierre Wack at the Shell Oil Company saw an uncertain future and potential for an energy crisis. Wack was an imaginative thinker. He thought, “What if the predictions and assumptions we make about the world are wrong?” Shell Oil could throw its strategic plan out the window.
Wack then led the company through scenario thinking, strategizing for what Shell Oil would do if any number of scenarios emerged as true. As a result, Shell Oil was prepared for the 1973 oil shock (while other companies were still trying to figure out what was happening) and how to adapt their strategic plans.
Since Shell Oil's success with scenarios in the 1970s, the practice of scenario planning has grown considerably. Scenario thinking led the New York Board of Trade in the 1990s to build a second trading floor outside the World Trade Center, a decision that was validated after September 11, 2001. Today, almost every business consulting firm does scenario planning in some form.
“It is uncertainty – the lack of ability to count on anything anymore – that has decision makers of all types trying to think differently about the future,” says Thomas J. Chermack, who has led scenario planning for many Fortune 500 companies, including Cargill and General Mills. “They need a structured way to explore possibilities and ask, ‘What if?’ ”
Chermack, who in 2010 founded the Scenario Planning Institute at Colorado State University, says scenario planning allows you to build uncertainty into your planning so that you end up with a robust strategy that is resilient, yet it can be adjusted quickly based on events in the environment that have already been explored as possibilities.
Scenario Planning By Definition
Market scenario planning is the process of thinking through price possibilities and planning strategies with trigger points for action.
Step 1: The process begins with analyzing all the possible scenarios based on fundamental and technical analysis, along with what-if scenarios that could also happen.
Step 2: Marketing strategies are developed for each possible price scenario. Trigger points are set to signal that a particular scenario is unfolding.
Step 3: Strategies are discussed in advance, along with the impact of those strategies on the overall price. When triggers are hit, clients know which strategies to execute because they've previously gone through the decision-making process.
Step 4: The process starts all over again. “It's a constant exercise to find the hole in the plan and to plug the hole,” says Mike Hogan, who leads Stewart-Peterson's team of scenario thinkers. “It's a living, breathing process that is constantly being updated.”
It's that flexibility that drew Stewart to the idea of market scenario planning.
“So often farmers will make decisions in the heat of a market move, based on emotion, without any forethought as to how that decision will play out,” Stewart says. “Or they will freeze, unable to make a decision until they gather more information.”
Convinced that farmers needed a better way of thinking about markets, Stewart and his team began applying scenario planning to the marketing process. Basically, the team thinks about all the possible directions a market might go and plans strategies for each possibility. Then an adviser discusses those possibilities and potential outcomes in advance with the client, so that the client understands what the outcome of each strategy will be before it actually happens (see example chart on page 39).
“It's a lot more work to approach marketing this way,” Stewart says. “You are strategizing for price possibilities that might never materialize.”
Stewart says the effort is worth the time, because clients feel much more confident about how a proposed strategy will impact their price. They are far more comfortable about executing the strategy, because it has been discussed in advance.
“When triggers are hit that signal a particular scenario is developing, the clients are prepared,” Stewart says. “And the beauty is, we are prepared whether the market goes up or down, slowly or quickly.”
Not the easy way
For market scenario planning to be successful, a shift in focus – and energy – is required.
“All the time people spend gathering information and trying to guess where the market will go is better spent preparing for multiple scenarios,” Stewart says.
That's true for all scenario thinking, according to Chermack. “Modern times have convinced so many that admitting you do not know the answer is the kiss of death. Scenario thinking encourages you to do the opposite, to ask questions, explore, understand your assumptions, take nothing for granted, and perhaps most of all, explore what if the trends and crowds are wrong?” he says.
Stewart says market scenario planning is more comprehensive and, therefore, a better substitute for a marketing plan that is one dimensional and based on a prediction of where the market might go.
Shell Oil's Wack, were he alive today, would likely agree. He once said, “Forecasts are someone else's understanding and judgment crystallized in a figure which then becomes a substitute for thinking for the person who uses it.”
For farmers who are tuning up their risk-management plans, it's sound advice. Don't try to predict or rely on predictions. Instead, get thinking about scenarios and how you would respond.
Rehearsing the Future
Scenario thinking is “rehearsing the future,” according to Peter Schwartz, author of the best-selling book, The Art of the Long View.
A key benefit of market scenario planning, says Scott Stewart, is the ability to see the impact of various marketing strategies on the overall average price.
“Make it all about the math,” Stewart says. “Go over the results in advance of a price move. The more systematic, the less emotional it is, and better decisions result.”
Below is a simplified example of a market scenario planning table that can help rehearse the future. The table shows the impact of specific strategy decisions in light of various potential price moves.
He Rehearses The Future
Jon Bakehouse, Hastings, Iowa
The story around town is that Jon Bakehouse's great-great grandfather, who homesteaded Maple Edge Farm, was a great businessman. Bakehouse is striving to fill those big shoes, by focusing on better business practices.
“Marketing was always something on again and off again for our operation,” Bakehouse says. “I was always of the mind-set to put it in the bin at harvest and wait for a higher price. That may be fine for some. For us, it's not very good business.”
Bakehouse has been market scenario planning for four years with Stewart-Peterson. “Every week we get an email with the outline something like, ‘If we do × strategy and the market goes down to $4, our weighted average price will be Y. Or if it goes up to $7, our weighted average price will be Z.’ And we have a chance to decide if we think those positions are acceptable.”
It's those price scenario tables that make the whole decision-making process “more concrete,” he says. “We have a tool to evaluate our position, whether the market goes one way or another.
“When it was just my dad and me doing the marketing, it was more like, ‘Well, if it gets to $4 we might sell some.’ And then it would hit $4, and we'd say, ‘Well, it's going up, so we might as well just hang on.’
“You know all those top 10 mistakes in marketing people talk about? That was us, over and over again,” he says.
The price scenario tables are handy when it comes to communication. Bakehouse's father, Bach, trusts his son to take care of the marketing, but he quizzes him from time to time on what he's doing and why.
“He wants to make sure I know what I am doing. So it's really nice to be able to say, ‘If the price goes up, here's what we're going to do. If it goes down, here's what we're going to do. Here is how much it is going to cost us, and this is how much we will net per bushel in each scenario.’
“Those spreadsheets outline exactly where we are or could be in the future. And it's up to us to discuss if that is acceptable,” Bakehouse says.
An example of how market scenario planning worked for them was this summer's corn market. (See the Maple Edge Farm example below.)
“For months my adviser and I had been talking about when the other shoe would drop, because prices just kept going higher and higher,” Bakehouse says. “So we were watching the charts very closely because they were starting to show signs of weakness for corn. The charts showed every sign possible that it was going to break to the downside, so we talked about puts. We said if it hits a $6.70 trigger, we would execute the puts. So the trigger was hit and we did that.
“And then, of course, the market started wandering higher. At the time we put the puts on, we had decided that if prices started showing bullish signals again, we would sell what's left in the value of the puts and turn them into calls. That happened in mid-August. We were able to start taking advantage of the rally,” he says.
“And now, of course, everyone thinks the prices are going up and up and up. So I sort of think it might go the other way,” he quips.
Spoken like a true scenario thinker.
She's Ready For Any What-Ifs
Debbie Little, Ontario, Canada
For Debbie Little, hindsight is 20/20 and it teaches valuable lessons. But foresight is priceless.
“My philosophy has always been to watch the markets and to sell a little bit. That has worked for me,” Little says. She's been responsible for her family farm's marketing for nearly her entire career, beginning with her family's dairy partnership and now as she and her husband grow cash crops on their own.
Little began doing market scenario planning in 2010 with her adviser from Stewart-Peterson, Marianne Janka. “The idea behind it is if the market goes up to a certain point, it will trigger a sale; if it goes down, it will trigger a sale. The daily volatility can give you heartburn. You can't help but watch it. But the difference is, I know I have a basic plan,” Little says.
The basic plan is in place, and yet it is flexible. “I have certain cash flow needs that don't necessarily fit the plan, and so we tailor decisions based on those needs,” she says. “If I need to make a cash sale before a trigger is hit, I might stay in the market by using an option. Or if I am going to incur a charge for delivery to the elevator, I might sell more at once than what the model calls for and take an option to replace it. It's what works for my operation.”
Little has always loved marketing and strives to get better at it. In her experience, market scenario planning does not always get to the top of the market.
“I remember last year when the wheat market was going crazy and everyone was wondering what was going on,” she says. “Obviously, the drought in Russia was much worse than everyone thought. And I had sold most of my wheat. There just was nothing in the news that signaled anything. Then all of a sudden, the markets just went crazy.
“We were prepared with an options strategy that eventually triggered; we just didn't capture all of the gain. The cost of trying to secure all of the gain was too high.
“That's the thing to remember,” she continues. “Maybe we won't always get the top price. But we are going to make a profit. When sales trigger, you need to be disciplined to sell.”
For Little, developing that discipline has paid dividends that are even more important than her average price in any given year – dividends such as knowing that someone has her back when life happens.
In 2009, before she began working regularly with her adviser, a family member began having health issues and Little ended up doing much of the caregiving.
“I thought I was watching the markets, but I got distracted,” she says. “I missed huge opportunities to sell because I didn't read the volatility in the market. I missed signals, and it hurt us financially.”
That's when she decided the family business needed a what-if plan. She did her homework on consulting firms and ultimately felt that Stewart-Peterson's approach best fit her needs.
Now, Little is confident that if the ultimate what-if happens, her family farm operation is in good hands. “My adviser is my backup. I know she understands us and will help my husband and daughters carry on the operation if I'm not there. You have to have a plan,” she says.
Plans in hand, Little is ready for whatever the markets – and life – throw her way.
He Removes Emotions
Dave Applegate, Oakland, Iowa
“I remember when 4¢ was a big move on corn. Now that's nothing. It jumps 20¢ to 30¢ and sometimes even more. That's really nerve-wracking,” Dave Applegate says.
Applegate, who farms 2,500 acres with his dad and oldest son, doesn't have time to be nerve-wracked. He also has an electrician business on the side and custom-feeds hogs.
“I'm busy trying to make enough opportunity for my sons,” he says. Dustin, Derek, and Collin all want to work with their dad in some way.
Applegate uses market scenario planning as a way to minimize the effects of volatility – and stress – in his life.
“I don't stress out over markets the way I used to, because I've pretty much planned ahead,” he says, referring to the market scenario planning he does. “When the market starts crashing down, I don't worry about it. I'm covered. The main goal is we're not trying to get the highs; we're trying to keep from getting the lows and just be on a more even keel.”
So what does Applegate's plan look like?
“Right now, we're locking in a bottom with options. So if it does crash down, we're covered. If it goes up, I've only spent 20¢, but I gain everything above that when I sell my cash corn. The market scenario planning tables my adviser shows me are real comforting, because I pretty much know where I'm going to be when the market moves either up or down,” he says.
Applegate only uses option strategies with cash sales; he dislikes hedges with margin calls. “It might cost me 20¢ a bushel to lock it in with options, but with the market being so volatile, that's nothing. That's less than a days' move in corn,” he says.
Benefits of scenario planning–in business and in commodity marketing
● Uncertainty managed. Scenario thinkers can break away from the generally accepted view of the world and see what might be overlooked in the current forecasts.
● Strategies prepared. Scenario thinkers can recognize scenarios unfolding in early stages and have the strategies they will use prepared.
● Impact known. Scenario thinkers have rehearsed the impact of each decision, so they are prepared to act and are more comfortable with the potential outcomes of decisions.
Source: Stewart-Peterson Inc.
By Angie Wolketin