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Knowing yourself

Agriculture.com Staff 12/21/2007 @ 1:49pm

A strong uptrend in grain prices the past two months has many farmers thinking about different marketing strategies they may incorporate for 2008. Strategy selection can become overwhelming, so for many, no strategy is used.

This may work well in a bull market, but when prices drop, there is not enough price protection. Understanding your risk tolerance and willingness to either be a risk taker or a risk shifter can help determine which strategies may be best suited for you.

We have generally found that farmers who do not use futures and options usually do not because they are concerned with risk. While just cash marketing can be beneficial, there can also be a lot of inventory left unmarketed and unprotected by year's end. If there is a large crop, prices are usually lower at harvest. Ironically, those who do not use marketing strategies for fear they are too risky may actually be the biggest risk-takers.

For those who use alternative marketing tools and are risk adverse, you should consider using options which have a fixed risk component. As a buyer of a PUT or CALL, you have the right to either sell or buy futures, but not the obligation. These tools can help shift risk and yet let you sleep at night, knowing what your risk is. More advanced option users can become more sophisticated by selling options or executing multiple option strategies at one time. Generally, as the complexity grows, so may the risk, but not necessarily. Make it a goal for 2008 to increase your option knowledge.

Using futures can provide great leverage, but a thorough understanding of risk and cash flow is necessary. In high volatility you must be prepared, as margin calls can add up in a hurry. A good relationship with your lender (prior to margin calls) is necessary. Make sure you have a good check on your risk tolerance and ability to handle market volatility.

The old saying, "knowledge is power" holds true. Understanding strategies can provide more comfort when executing your choices. Knowing how you feel when tackling risk can also aid in your choice of tools and strategies.

If you have any questions or comments, please contact Bryan Doherty at Top Farmer: 1-800-TOP-FARM.

A strong uptrend in grain prices the past two months has many farmers thinking about different marketing strategies they may incorporate for 2008. Strategy selection can become overwhelming, so for many, no strategy is used.

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