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Navigating an Uncertain Marketplace

Jun 29, 2020

Wheat harvest has started and I know everyone is itching to get the grain out of the fields and into the bins where we can reap the benefits of months of hard work.
 
Thinking about that grain, I want to take a minute to reiterate the importance of having an idea of what your break-even prices are and developing some sort of marketing plan. Having these numbers in place will make you a more successful grain marketer. However, this year has definitely had added challenges that even the best marketing plan could not fully prepare any producer for. From COVID-19 to the trade war that continues to impact the market to many weather issues, it’s hard to see any sort of silver lining. So, what do we do? I want to discuss a few different approaches we can take to protect ourselves from uncertainty in the marketplace.
 
A part of grain marketing that has often been overlooked and undervalued is the simple hedge strategy. When you hedge grain, you are taking a position on both sides of the market. You are both long and short in the marketplace, which allows you to minimize your risk should the market move against you. As producers, you are almost always long (owners of the physical grain). So, while your crop is in the field or under your ownership in the elevator, you want to have an opposite position in the futures market — for example, sell the board or own a put option. This gives you both the long and short side.
 
If the market moves higher, then your physical grain gains in value. If it moves lower, your short side (futures position) gains value. Therefore, you protect your risk. When you decide to sell your physical grain, you simply lift your hedge (paper position) and offset your positions.
 
By hedging at $5 futures in this example, you added .50 cents to your short side. You sold the cash wheat at $4.15 and earned .50 cents on your hedge, giving you a $4.65 final price.
 
You can also sell your physical grain and buy the board with either a long paper position or a call option. This allows you to stop storage while still participating in the market and provides opportunity if the market rallies.
 
If the board goes back to $5, you sell the option and collect the premium associated. This approach gives you a price floor by taking your sell option cost ($4.15 - .15 cents = $4 price floor). If the market rallies back to a favorable futures price, you can collect the premium and your sold position gains in value.
 
These strategies do have cost and you may be liable for a margin call. If you want to learn more about these or other marketing strategies, please reach out to me at the Hope office. Agri Trails is here to help you put all the pieces together from start to finish — planting to harvesting and finally, marketing. We have the team in place to help you and want to be a part of your success and growth.
 
We are constantly trying to push forward through challenges and look for ways we can help your operation. When you producers succeed, we as a coop succeed. Call me at the Hope office, 785-366-7213.

This article was featured in the Summer 2020 Trail Blazer 

Written by Jake Leis, Grain Originator/Merchandiser
 


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