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We have all heard the sages advise us on grain marketing -- sell in the upper-third of the market or know your cost of production then start marketing above it. Or the most profound advice for any trader, buy low and sell high. Why is grain marketing so difficult? The reasons may lie in the efficiency of our grain markets and the natural human tendency to delay decisions when faced with uncertainty.

Flipping a Coin
Efficient markets are frequently referred to as a random walk: over time, the expected average change in price is zero. Add all the up and down days in the corn market over the last ten years and you will find on average the market didn't change. Between 1987 and 1996, the average change in daily prices was - 0.003 cents per bushel. Some years the market traded higher, some years lower, but on average virtually no change.

Forecasting grain prices is similar to flipping a coin. The fact that one toss comes up heads or five tosses all come up heads, has no bearing on whether the sixth toss will be a head or tail. Each side of the coin has a 50-50 chance of appearing each and every flip, regardless of the previous outcome. Grain markets are much the same. Tomorrow's opening has a 50-50 chance of being higher or lower. Some days the market goes up several days in a row and others it might go down several days in a row. Over time however, the average change in price approximates zero.

Take a moment and imagine in your mind what a chart depicting randomness looks like. Imagine flipping a coin a thousand times and giving yourself a dollar every time the coin comes up heads and losing a dollar every time the coin comes up tails. If an event has a 50-50 chance, we might imagine the chart remaining very close to the zero line. After all, the more we flip the coin, the more likely we will end up with the same number of heads as tails. To see for yourself what a random market chart looks like, check out the coin toss game on AgriBiz (http://www.agribiz.com/ngfa/CoinToss/cointoss.html). This fun program plots your fortune in the make-believe game of heads and tails -- heads you win a dollar, tails you lose a dollar. You can specify the "number of coin tosses" and hit "simulate" to view. Continue hitting simulate to view another 1000 flips. Was it what you expected?

Random Patterns
It's easy to see patterns in random events. Take a close look at the coin toss chart and you'll find all your favorite charting signals -- uptrends and downtrends, double tops and double bottoms or even a few head-and-shoulder formations. Random events have patterns and these patterns can persist over time. But are they predictable? How successful have your market predictions been in the past? How successful have your marketing advisors' predictions been? For the last question, we fortunately have some real data to share with you.

AgMAS Project
During the Gold Rush last century, the term "pick-and-shovel" companies emerged to describe the fact that the only people who made real money during the gold rush were those who sold supplies to the miners. Is grain-marketing advice a "pick-and-shovel" business? The Agricultural Market Advisory Service (AgMAS) project addresses the need for objective information on the performance of agricultural advisory services geared towards producers. Darrel Good and Scott Irwin of the University of Illinois at Urbana-Champaign jointly direct the project. (You can find AgMAS online at (http://web.aces.uiuc.edu/farm.doc/agmas/). Each year since 1994, the project has recorded every recommendation of over 20 marketing services. It applies these recommendations to an average farm in central Illinois and compares the marketing results to a benchmark average price constructed from the daily closing prices over the course of the marketing year.

Results? Given our discussion of efficient markets and your experience with the coin toss game, what would you expect the AgMAS results to show? From 1995 through 1999, only one marketing service has topped the simple benchmark average price for corn, two have done so for soybeans but not one firm has beat the simple benchmark average price for both corn and soybeans.

You can download the entire report from the AgMAS web site, including a listing of all the grain-marketing services' actual four-year results. Four years is not long enough to say with absolute certainty that the grain markets are unpredictable, but the project does provide very compelling results.

What is risk management?
Risk management is the approach an individual or organization chooses to manage uncertainty. Managing unpredictability is quite different than controlling unpredictability. The difference lies in who or what is in control. In the case of markets, the market is all-knowing, encompassing the knowledge and information of traders, businesses and producers from around the world -- a humbling thought useful for consideration prior to one attempting to "outsmart the market."

Coping with market uncertainty also creates many emotional responses in humans, of which regret is the most powerful. If we sell grain today and the market goes up tomorrow, we feel regret. If we hold on to grain today and the market goes down tomorrow, we feel regret. The most common strategy used to overcome regret is to simply not make a decision -- the decision not to decide.

As a producer, you are an individualist and an entrepreneur. And as such, accepting the fact that a very important part of your business is fundamentally beyond your control is difficult, to say the least.

But that is the very nature of grain markets. The markets we know -- and often curse -- are a model of efficiency. They compile all the information and knowledge of traders, businesses and producers from around the world and express these data in the form of a price. The market is all-knowing. Consistently outguessing or outperforming it is impossible no matter how much technical expertise you possess.

When you realize you can't outsmart the market, you may be tempted to throw yourself at its mercy. But risk management -- the foundation of effective grain marketing -- isn't about controlling uncertainty, it's about managing it. Perhaps most importantly, it's about managing the emotions that influence and shape decisions.

Managing regret

Regret management is probably a more accurate term for risk management. There is a very natural tendency to avoid regret. In grain marketing, this is often embodied in a decision not to decide. For instance, if you sell grain today and the market goes higher tomorrow, you're likely to feel bad. To avoid this feeling, you become passive and choose to not make a decision.

Obviously, regret can significantly impair our ability to make rational choices. Behavioral economists have found this impaired decision-making ability rears its ugly head in other ways, as well. As an example, which of the following would you choose?

A) Winning a guaranteed $3,000, or;
B) Taking an 80 percent chance of winning $4,000.

Now consider this option:

A) Lose $3,000, or;
B) Take an 80 percent chance of losing $4,000.

Believe me, you're not alone if you said you'd take the $3,000, but roll the dice and risk losing the $4,000. These are the same choices that at least 70 to 80 percent of people in my audiences make when I pose these questions in my presentations. As human beings, we don't deal with losses the same way we do with gains. We'll ride out a loss to the bitter end while cutting a gain short.

Contributing to this mindset is a condition known as the gambler's fallacy, which is the belief that a successful outcome is due after a run of bad luck. It's important to understand, though, that chance -- or the randomness of an efficient market -- is not self-correcting. A run of bad luck is just that, a run of bad luck. It does not mean that an equivalent run of good luck is bound to occur. This rule applies to both coin-tossing and grain marketing. Flipping 10 consecutive heads does not increase the chance that the eleventh toss will yield a tails any more than a trend of lower grain prices ensures an up- or downswing in tomorrow's market. Both the coin toss and the change in grain prices represent a 50/50 chance of one event or the other occurring.

Another common emotional or behavioral trap is the condition of escalation. This occurs when an individual who enters a transaction hoping for a favorable outcome finds it difficult to liquidate that position when the situation becomes unfavorable.

Avoid the mind games

Emotion leads to mind games that can wreak havoc on your grain marketing decisions. Developing a plan that executes automatically will help you get out from underneath the weight of this emotional baggage.

The Internet has been a tremendous boon for automating grain marketing. This technology has made it possible for E-Markets to develop and offer an important tool known as Decision Rules for Contracts (DRC TM). At its simplest level, DRC enables you to participate in the market every day. It removes emotion and automates the decision-making process that far-too-often hinders effective grain marketing.

While it's impossible to accurately predict the ups and downs of an efficient market, it's a tool that will help you leverage its randomness and better manage the risk associated with grain marketing.