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Thank goodness for mistakes

Agriculture.com Staff 10/10/2008 @ 2:10pm

As agricultural commodity prices raced higher through spring and into early summer, we heard from many producers concerned that early sales were a mistake.

So, any sale was a poor sale. In the end, however, sales made during the winter and spring months will be beneficial and provide real economic relief. Farmers who were disciplined to sell value that made financial sense to their bottom line will be rewarded for their actions. It can be painful selling in an uptrend. However, when prices drop, they can be unforgiving. Then panic really sets in because now you do not have enough sold.

View yourself as a business manager. As a manager, if you can make a solid return on investment, especially in highly volatile markets, you may often find you are better off securing this return rather than taking the risk to ride it. The definition of 'solid' varies for everyone, but you will probably know it when you see it. Most farmers did a good job selling part of their production and securing good prices but held off due to increasing concerns that prices may continue moving upward. Any additional sales would compound the "mistake" of selling too soon. A disciplined approach of selling up to a level that you are comfortable with is appropriate. When completed, you should then look at tools to protect against a downward price move on unpriced bushels. The use of put options becomes important.

While many farmers used puts successfully this year, probably just as many shied away from them. Reasons for not using puts were high premium and a strong futures price uptrend which, again, suggested buying puts also was a mistake. The beauty of put options is they provide a floor with a fixed risk. Therefore, while December puts purchased during winter or spring may have lost much of their value by July 4, they are currently providing an excellent price floor.

Good communication with a lender who understands the use of strategy is critical. Strategy and discipline, in the end, may prove to be two of the most beneficial aspects to this year's marketing. Much can be learned from this year. Having enough finances available to manage either hedge margin or PUT or CALL purchases can help you be a confident marketer, almost regardless of price direction.

If you have comments or questions, call Top Farmer at 1-800-TOP-FARM ext. 129 and ask for Bryan Doherty.

As agricultural commodity prices raced higher through spring and into early summer, we heard from many producers concerned that early sales were a mistake.

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