So Much the Same, But Like Never Before

Heather Moffatt, Grain Risk Management Advisor

This volatile market environment is exciting. Excellent historical commodity prices are in front of us, but input costs are keeping pace. This can also create an environment of fear and confusion. For many of us this is a much different environment than we’re used to. Should we be marketing differently than we have in the past or do the same principles apply? The answer to that question is yes and yes.

Predicting price direction is a very dangerous game. I’d rather walk a tight rope across Niagara Falls than stand in front of a group of farmers and emphatically predict which direction prices will head. It’s really an amusing exercise. We all flock to hear the “expert’s” analysis, process all the information we’ve been presented, and bravely go home and market our grain. From experience, we also know the grain market is a constantly changing environment because we are very much in a global marketplace. So, what we just heard will be very old news in about two weeks. We’re also quite adept at hearing only the good news. I could refer to myself as a politician. I state facts, reflect current market conditions, weigh out the pros and cons of various strategies and potential outcomes and leave the audience to ponder it all. Some day, you will make a decision and time will tell if it was the right move. The important thing is that you know how to manage it. In that aspect this wild and unpredictable environment is no different.

As a producer who has farm storage, it has often been advantageous to market grain at harvest into future delivery time slots. Pay yourself to carry grain into the future. This will also allow you to secure a known price for future cash flow needs. Is this still a good strategy? Yes, the same rules apply. Calculate your cost to carry grain and look at deferred values. If you’re hesitating, cover your sale with a call option a couple of strikes out-ofthe-money.

The concept of using futures or options to hedge sounds easy enough, but involves a total change in thinking from being a cash only seller. Options are useful for hedging price risk, but entail management. If you sell your corn and purchase a call option to stay long the market, you can feel satisfied that you’ve covered all possible outcomes. Should prices drop after your sale, you feel relieved that you sold your corn before the price decline even though you spent some money
for the call “insurance”. If prices rally, the call option will return some additional profit to your sale price……..right? This is possible, but remember, if corn does rally, being long on paper is the same as being long the physical grain. When do you sell? Do you have an exit strategy? “If you don’t know where you’re going, how do you know when you get there?” Puts bought in a rallying market will expire out out-of-the-money. Have you managed the puts and “rolled” them up
under the market and continued to protect values, or have you reached your projected price target?

Grain values are great, and we are in a demand-driven, friendly market. Speculative money and outside markets have been strong forces in this market. Continuing to work with a marketing plan by diversifying and locking in values to ensure profitability need to remain your primary focus. Know how to
hedge your marketing decisions. Past marketing discipline should remain as you go forward into a continued unpredictable marketing environment.