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Respect for big markets
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.
Buying options (puts or calls) or making cash sales
is a more conservative, yet effective hedge, therefore defining your total risk capital
needed to hold good hedge positions. If you want/need to own grains, you can buy call
options or bull call spreads to own grain with a defined risk (effective after making sales).
If you want to sell short, you can buy puts or put spreads to sell grain with a defined risk.
In short, by reducing futures/short option trading, producers should be able to ride the
tidal wave of higher prices with less risk and exposure for as long as it lasts, and practice
a more conservative way of pricing grains at good levels. This will reduce the angst of
selling in an ever-rising marketplace if it continues.
The information contained, while not guaranteed as to accuracy or
completeness, has been obtained from sources we believe to be reliable.
The opinions and recommendations contained are based on our judgment
and do not guarantee that profits will be achieved or that losses will
not be incurred. Recommendations should not be construed as an offer to
buy or sell commodities. There is substantial risk of loss in trading
futures and options on futures.
If you have questions about this column, call 1-800-450-1404 to talk to
a Progressive Ag representative, or email email@example.com
Markets have shown a great deal of volatility in the past year, with wheat, corn, and soybeans making some unprecedented moves in the marketplace.