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Respect for big markets

Agriculture.com Staff 02/09/2016 @ 5:49am

Markets have shown a great deal of volatility in the past year, with wheat, corn, and soybeans making some unprecedented moves in the marketplace.

Almost every futures price offered today is a profit ($10 soybeans, $4+ corn, and $7 wheat offered for the next 3 years in futures markets), an unprecedented offering for producers. At the same time, we are in an agricultural boom where the price environment looks like it could become even more favorable for the foreseeable future. Quite honestly, the similarities to the 70's ag boom is striking, which makes for some interesting comparisons (for example, inflation adjusted 1974 highs in wheat today would be about $24 wheat).

We need to have a plan to ride this wave of high prices that doesn't put needed capital in jeopardy. The old rule of 'Selling at profitable levels' now could mean holding three years or more of hedges, which with this volatile atmosphere is almost impossible for any modest-sized producer. The capital requirements and risks (like input cost inflation) could be significant. Perhaps this brings a need for some new rules:

1) Let's try to take advantage of the most favorable price offerings, and take what the market will give us. The goal is to reduce some of the risk by pricing a little bit. But do not try to sell too much (like multiple years) of grain.

2) If a crop price offering is more attractive than anything else, sell some of it.

3) Less attractive markets that have not had the price appreciation as the traded products (wheat, corn, soybeans) should not be priced. This could include many of the minor crops as they do not have funds driving up their prices with speculative positions. Instead, the fundamentals of the market have to 'catch up' with the speculator bids in traded commodities.

4) Do not oversell, or try to 'speculate' in this market environment with funds in such strong control. Be very respectful of markets, and what they can do.

Remember, all the price move during a short options or futures hedge has to be margined up in an account, meaning the cash requirement to hold a hedge in this market environment is typically very large. Given the past year of volatility and the constant decline of the US dollar/rise in energy/metals outside markets, it doesn't look like the volatility will end anytime soon. In fact, with the right conditions the volatility could increase this winter once the fall harvest is over, and prices could keep rising for the foreseeable future. If its like the 70's, it could make 2007 look like a minor price move!

This might be a time for producers to abstain from adding futures or short options positions. For those already in futures/short option positions, we'd encourage you to consider your cash flow needs to stay in these positions given the high volatility of the market. If this risk is too great, we'd suggest converting to cash sales, buying options, or covering some or all of the position.

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