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AMMO: Marketing at three speeds

Ag economist Dan Manternach discusses his approach to selling wheat

March 2018
By Trista Crossley


The Agricultural Marketing and Management Organization’s 2018 schedule kicked off in high gear last month with ag economist Dan Manternach speaking in front of a packed house. Manternach reviewed current wheat markets, previewed the 2018 growing season under three different weather scenarios and showed producers a three-speed approach to marketing.

“The main takeaway is that it is very, very important to have a marketing plan that is flexible and where you can shift gears, because this early in the season, nobody knows what kind of weather we are going to have,” he explained in an interview after his presentation. “Everybody always tells farmers you want an average price in the top third of the price range for the year. Well, any farmer that knows farm-boy math can figure out what the thirds are if you tell them what the range is going to be. That’s the hard part because that range is a moving target. It keeps shifting around with Mother Nature.”

Manternach’s approach to marketing is based on three possible scenarios: one scenario is the assumption that it will be an average year with trend-line yields; the second scenario is that there’s adverse weather and U.S. wheat yields are below trend; and the final scenario is a perfect year with bumper crops. He has developed a proprietary forecasting model that takes the supply and demand numbers out of the U.S. Department of Agriculture’s (USDA) monthly World Agricultural Supply and Demand Estimates Report (WASDE) and works them into some key ratios that tell him if the “fundamentals of supply and demand are getting better or worse for prices.”

Current situation in global wheat markets

Manternach’s advice for producers who are thinking about selling is to only sell enough crop to cover cash flow needs for the next 30 to 45 days.

“That’s all I would be selling right now, certainly no new crop,” he said.

Manternach uses something called the “threshold of tightness” to help him judge supply and demand balances. The threshold of tightness references projected ending stocks in days of supply at current usage. For most food crops, including wheat, 90 days is the basic requirement. Drop below that 90 days, he said, and markets get nervous.

In all classes of wheat, except white wheat, stocks are well above that 90-day threshold (see slide 1). Soft red winter wheat is especially abundant, sitting at approximately 280 days of supply.

“It’s a basket case in terms of oversupply,” Manternach said. “It’s a big drag on prices, and the only way we are going to get rid of that surplus is that if we get to the point where wheat becomes competitive as a feed grain. We have to feed it.”

Manternach also talked about a mathematical equation, called the Fibonacci theory, that says when there’s a long break in the market, retracements come to a halt at certain predictable points that correlate to the most recent bear market: 38 percent, 50 percent and 62 percent.

“If you can get over 62 percent retracement, the Fibonacci theory says you’re likely to retrace the whole bear market and get 100 percent retracement and go back to prior highs,” he explained. Using daily and monthly charts from Chicago, Kansas and Minneapolis, Manternach showed that all markets are currently below that 38 percent line.

“I think it is worth going very, very slowly on your sales,” he said.

Looking ahead to 2018

Manternach brought out his WASDE Wizard, a tool he developed that allows him to plug in WASDE numbers and then forecast average prices underthree scenarios: an average weather year, an adverse weather year and an excellent weather year. The wizard then breaks the average price into baseline prices for the top third, middle third and bottom third of prices. He overlaid those prices onto current bar charts to show how current prices line up with his forecast models (see slides 2, 3 and 4).

“Until Mother Nature gives you reason to think otherwise, always use the middle column (average year),” he told producers. “Don’t sell anything unless you are at least at the low end of your price forecast range, and only sell a little bit. In the middle third, you can be more aggressive but not overly aggressive. But if you happen to have a bull market that puts you in that top window, that’s where you not only want to sell a pretty good chunk of this year’s crop, but that’s where you want to start selling some of next year’s crop as well.”

Referencing the U.S. Drought Monitor and temperature and precipitation charts from the National Oceanic and Atmospheric Administration, Manternach said it looks like the U.S., especially the southern Plains, may have sub-optimum growing conditions this year.

“I think we are going to have between the average price scenario and the adverse price scenario,” he said.

Revving up to a three-speed marketing plan

According to Manternach, to set up your three-speed marketing plan, producers first need to determine how much of their production they’ll be marketing under this plan. Producers will then need to:

• Use the WASDE price range and adjust for their class of wheat as a “normal” weather scenario price range. Their “first-gear” pricing plan will shift the futures range higher for estimated rally potential under sub-trend yields. Their “second-gear” pricing plan will adjust cash bid forecasts with trend-line yields to the futures market equivalent by adjusting for the national average basis for that class. And the “third-gear” pricing plan will shift the range lower for rising downside risk with ideal weather and a bumper crop.

• Divide all three of your price ranges into thirds: a top third, a middle third and a lower third.

• Start with pricing in second gear (the middle third), assuming a normal growing season with trend-line yields prior to the March prospective plantings report from USDA.

• Pick an initial pricing target no lower than the middle of the middle third of the price range under the normal season scenario.

• Decide which of two main approaches to marketing suit you best: the “scale up” approach or the “scale down” approach. Under the scale-up approach, you pick a conservative initial price target, and then price larger and larger portions of the crop as prices continue rising. This approach works best when prices are already in an uptrend. Under the scale-down approach, a producer begins with fairly aggressive sales and then sells smaller and smaller quantities as prices continue to erode. This approach works best when prices are already trending lower from bull market peaks in the prior season and are still in the top third of your selected range for the coming season (see slides 5 and 6).

“So if the market is going up, you want to reward rallies,” Manternach said, explaining the scale-up approach. “Sell into a rising market by selling larger and larger quantities as the price goes up. That’s easy for me to stand up here and say, but that’s psychologically very difficult for farmers.”

Under a scale-down approach, producers start out aggressive and then sell smaller and smaller quantities. By doing that, they are concentrating their biggest sales at the highest price levels.

One of the things Manternach emphasized was producers need to find benchmarks they can use to compare their marketing strategy against.

“The one I recommend is from USDA, and it’s their ag prices bulletin. They’ll report the average prices received by farmers by crop by state, and that is a good basis of comparison to see if you did better than the average guy reported by USDA,” he explained.

To read more about Manternach’s three-speed approach to marketing and to see his WASDE Wizard in action, visit the website, farmersbusinessnetwork.com. Manternach will be writing about grain marketing as a guest economist for the next few months there. Producers can also subscribe to Manternach’s Bare Knuckles blog where he discusses ag issues, including his WASDE Wizard. Sign up at perfectfitpresentations.com.

Editor’s note: All images included in this article were based on the January WASDE report.