Marketing in today’s envionment
It has been several years since producers have had to deal with a depressed commodity market, both financially and emotionally. In many such years producers have a tendency of ignoring what is taking place and hoping the market will fix itself. Unfortunately this is not usually the case.
The greatest obstacle in a depressed market is the opinion of risk management being a luxury that cannot be afforded. In all reality, this is when risk management is needed the most.
A downfall of risk management is that when it comes to devising a plan, many producers simply think too hard.
A person tends to panic when it comes to the unknown and do nothing, which is in itself a marketing choice. Many producers have also heard stories of farmers in the old days getting caught on the wrong side of the market that were forced to make huge margin calls, sometimes costing them more than the risk they were trying to manage. While this has in fact happened, it is usually the result of a poorly managed plan, or possibly a plan that was not structured to manage risk at all.
First of all, when developing a risk management plan, be realistic. The worst mistake a producer can make is to develop a marketing plan for conditions they want, rather than what they actually have. Every client wishes they were still marketing $7 corn and $12 soybeans, but this is currently not realistic.
A producer also needs to be realistic with expenses in risk management. We all know it takes more than seed, fuel and fertilizer to grow a crop, so make sure you include those numbers in your marketing plan as well.
When developing a risk management plan it is also critical to find a provider that will work with you and your operation. This means develop a strategy based on your farming operation’s specific needs. Too often farmers enroll in a cookie cutter type program that simply markets your inventory for you. While this does reduce the stress of marketing, you have to ask if it is really your best solution. Very few clients have the same risk management needs, and therefore, should have their own risk management program.
Most importantly, develop a marketing plan and stick to it. There are several different structures that can be used when managing risk, but none of these will work if not allowed to work the way they are intended to work.
The simplest way to manage risk in a market is with simple cash sales. Once you know what your breakeven is, simply make cash sales at or above that level. These can be done in the spot market or forward contracting. Either way, a client knows he has locked in profit on these bushels.
Another form of risk management is to use options to cover cash sales in case of movement after a sale is made. Options are less risky than straight futures as a client knows his total cost up front. Options do not have margin calls if used to cover a cash sale, so all risk can be factored in. This makes them much more attractive to use.
A producer may also use straight futures for risk management if they choose to. While this does in fact provide risk management, it can be a costly method to use. This is from the fact that when using futures to hedge risk, a producer may have to make margin calls. Margin calls are simply used to offset losses in a futures position, but these can add up over time. There also tends to be more volatility in futures trade than other risk management tools, which can make for uncertainty at times.
One last thought. Be aware of what is going on around you. Filter your research to what impacts you and your farming operation. While we can and often do see ripple effects in futures, these are not as common in the cash market. A tight or weak basis in one region of the United States can have little if any impact in your market area.
The same is true for news on a whole. In today’s world, it is easy to get wrapped up in the abundance of news that can be found. Many times this can cause a state of paralysis when it comes to making a decision.
Karl Setzer is a commodity trading advisor/market analyst based in the West Bend office of MaxYield Cooperative.
He can be reached at (800) 383-0003.
The opinions and views in this commentary are solely those of Karl Setzer. Data used for this commentary obtained from various sources believed to be accurate. This commentary is intended for informational purposes only and is not intended for developing specific commodity trading strategies. Any and all risk involved with commodity trading should be determined before establishing a futures position.
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