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Warning

Agriculture.com Staff 01/28/2008 @ 11:13am

As volatility picks up, so do margins requirements as well as cash flow needed to hold positions.

Elevators and co-ops throughout the country have felt the financial pinch of the rally in corn and soybeans, as margin calls have mounted. Strategies have changed. Elevators are backing away from long-term forward contracting as well as hedge-to-arrive contracts.

A hedge-to-arrive contract is where you agree to deliver grain to an elevator, and they will sell futures for you agreeing to meet the margin requirement. Basis is not set. While this can be a great marketing tool, it can also be a nightmare for margin requirements, especially for long-term contracts.

The warning to you, as a producer, could come from the concern that elevators could rapidly run out of money or lines of credit to meet margin calls. If you have a position, they may need to liquidate it. This occurred in 1996 when corn prices rallied well beyond expectations, creating a significant margin requirement. As credit lines dried up and liquidation occurred, the farmers were left holding the loss. This same type of scenario could occur again. Many farmers have looked ahead using hedge-to-arrive contracts for one, two and even three years out, as the market has offered historic opportunity.

Therefore, if wanting long-term hedges, you may want to sell futures on your own. Consider establishing your own line of credit with a bank and work with an advisor or broker who can execute transactions for you. You will have to meet daily margin requirements, but a good advisor can help you to manage your risk. A well informed lender will partner and help you meet margin calls as well.

The message is simple. Exercise caution! Be careful and understand all aspects of all marketing tools you are using. This is especially true in times of heightened volatility and margin requirements. If using hedge-to-arrive contracts, ask questions so you are confident the provider of this contract can meet margin calls, especially if a weather market develops, dramatically driving prices higher.

If you have questions or comments or would like help structuring a hedging program, contact Top Farmer at 1-800-TOP-FARM ext. 129.

As volatility picks up, so do margins requirements as well as cash flow needed to hold positions.

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