RISK MANAGEMENT IN 2005
BE A PRICE "MAKER" NOT A "TAKER"
by Heather Moffat
Grain Risk Management Advisor
Agricultural Marketing First

In previous articles this winter I stressed the fact that first and foremost we cannot predict commodity price direction. This is once again evident as grain prices rally while we are correspondingly faced with some of the largest global grain stocks in history! Thank the speculative portion of the market once again. Their participation in the commodity markets (all sectors) has sky rocketed.

The Chicago Board of Trade was created in 1848. "To meet the need for a central market place, the Chicago Board of Trade (CBOT) was founded by 82 Chicago merchants..." In 1856 the CBOT formalized grain trading by developing standardized agreements called "futures contracts." Obviously, this exchange was created to satisfy the need for a fair and equitable means of buying and selling grain using daily and future delivery contracts. While researching the beginning of trade in Chicago I was surprised to read that in 1877, as trading futures became more formalized, "speculators" entered the market. Step ahead to 2005. On January 3, 2005, the CBOT announced that 2004 was the Exchange's most successful year ever with an increase in volume of 32% over 2003, making 2004 the third consecutive record-breaking year for the CBOT. The huge influx of speculative money entering the market the past three years has greatly influenced price. This has created volatility, uncertainty and opportunities. Fundamental information, frequently used to foresee price possibilities, can get "kicked to the curb" as "fund" positions and technical trade take over. In trading circles the term "buy the rumour - sell the fact" is often quoted. Commodity fund managers strive to own a commodity before a problem in production is actually validated. If no problems arise, or upcoming production looks promising, they sell or liquidate their positions as was seen in 2004. The funds do create liquidity, and violent price swings, which are opportunities for actual producers.

The Canadian dollar is the highest it has traded in 13 years. Be cautious with flat cash objectives based on previous years' experience. Take the time to assess futures and basis levels separately to paint a true picture of cash prices. November bean futures at $6.00 using a $.70 dollar, equates to $8.60 cash. November bean futures at $6.00 changing the currency to today's value of $.83 equates to $7.20 cash. Using a December corn futures target of $2.45 with a $.70 dollar equates to a cash price of $3.50. Change the value of our dollar to $.83 and the cash price drops to $2.95.

The complexity of marketing agricultural commodities creates a continuing challenge. If you are struggling to keep up with the ever changing barrage of information associated with agricultural commodities, you might want to look for some reliable resources. These could take the form of a newsletter, veteran hedger, Ontario merchandiser or advisory service. You have to find someone who has pertinent information and sound advice that you relate to. If you are new to a hedge program find someone who can walk you through this process, and help you learn. Partner with someone who will objectively work with you in the decision process.

Follow these risk management rules to success:

• Create a plan with the assistance of an advisor
• Discipline - Record a realistic plan and stick to it
• Diversify - Reward price rallies
• Have a hedge account in place to protect price decisions - Buy price insurance
• Establish a strong understanding of futures, options and local basis
• Identify your personal "stumbling blocks" to success