Strong Commodity Prices... Do I Still Need a Risk Managed Grain Program?

Heather Moffatt, Grain Risk Management Advisor, Agricultural Marketing First

As a risk management advisor I’ve been trained to be a skeptic. It’s my responsibility to look at the current and upcoming market environment and assess risk. Sometimes I see potential risk in commodity prices that doesn’t materialize. Often times, price protection has been well rewarded. Remember that your goal should be long-term price averages. Trying to stay in the long-term top third of the marketing
range every crop year is a goal you can strive for. What if every year you could guarantee yourself $8.00 per bushel for soybeans and $4.00 per bushel cash for corn and wheat? Input prices may deviate somewhat and yield can vary widely, but you could lock in your commodity price. If you are a cash seller, your target price is locked in. As a hedger, you have the ability to further participate in price strength
through offsetting contracts.

This sounds like a great way to market grain. Wheat and corn futures prices are trading in the top 10% of their trading range. The acreage tossup, and concern over potential U.S. soybean acres plus anticipated demand for biodiesel equates to possible soybean strength. Life is good. Right……..? The demand side of the corn balance sheet has come very fast on the heels of the renewable fuel standards, fuel subsidies and
the phasing out of MTBE. This demand is starting to outstrip available supply. The market is closely assessing any changes in the balance sheet. If you’ve ever looked at commodity price cycles, you know that eventually supply will catch up with demand – in both corn and ethanol. Don’t fool yourself. You know it’s a very real possibility. Ethanol producers stand at the mercy of several price cycles – corn (currently ethanol producers are driving up the price), natural gas (the primary fuel), gasoline and crude. What might happen if supply outstrips demand, and fossil fuel prices drop significantly? Carefully weigh out both sides of the balance sheet and possible outcomes. Have a “contingency plan” which takes into account unknowns such as weather and world supplies.

The current market volatility and uncertainty has created great price opportunities. At the same time option coverage comes at more of a premium in this environment. This can be attributed to volatility (increased risk to the seller) and the value of the underlying asset (futures
values). Don’t let the premiums dissuade you from using “insurance” coverage. You might consider a strike or two, further out-of-the-money. With increased volatility comes an increased premium. Your intention of using options to re-enter the market should be to better enable you to
participate in volatility and large price moves.

Don’t become complacent, caught up in bullish momentum. Know how to protect values and work within the current environment. As we go forward there are a multitude of variables that can affect price direction before crops come off in 2007. Risk management in all price environments can provide financial stability for your business.