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Harnessing volatility

Al Kluis 11/16/2012 @ 11:14am

This was a volatile year for corn and soybean farmers, with corn and soybean prices soaring to new all-time highs. The grain markets went higher, as global demand kept increasing, and we had a drought for three crop years in a row. By that, I mean the drought in the U.S. in the summer and fall of 2011, in South America in 2012, and the extreme drought in the U.S. in 2012.

How you came through this year depended a lot on which area of the Corn Belt you farmed and the risk-management decisions you made.

In the seminars and webinars I've held over the last three months, I have heard lots of stories of extreme winners and losers in the huge price swings that we have lived through in 2012. With tight global stocks of corn and soybeans, odds are good that prices will stay very volatile through the first two quarters of 2013.

For the last several years, I have recommended this three-step risk-management plan:

  • Buy the right RP crop insurance policy for your farm. In 2012, for many of you, this decision was probably the most important decision you made.
  • Get 60% to 100% of the insured bushels hedged ahead. How much you hedged and at what price level also had a huge impact on your bottom line.
  • Buy puts on the bushels that were not covered by crop insurance. The puts ended up being worthless, but it was a lot less painful than paying in margin calls on hedges.

Which group are you in?

Which farmers were successful in using the volatile markets in 2012 to make more money? And which farmers had a tough time turning a profit in 2012 even though prices went to new all-time highs?

The first big difference between the two groups was yield. The farmers in North Dakota who had a crop that was 10% larger than their five-year average had the potential to make more money than the producers in southern Illinois who had 20-bushel-corn and 10-bushel-soybean crops. The farmers in Illinois needed the price protection from their RP crop insurance policy.

The second major difference was in how much the farmers sold ahead. The farmers who were aggressive early on with hedges or forward contracts that were over 50% sold before planting time took the biggest hit. Many farmers who were in the extreme drought area ended up being closer to 100% sold when they saw their crops burn up. The last $3 rally in the corn market and the $5 rally in the soybean market did not do them any good. In fact, if they were oversold, it increased their cost of buying back the oversold bushels.

May 2013 CBOT Soybeans

May 2013 CBOT Corn

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