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Riding the cusp of hope and fear
There is an old adage in the marketing world that there are three emotional phases of marketing: Greed, Hope and Fear.
Greed refers to times of high commodity prices. During a period of high prices, complacency sets in, and producers might opt not to price any portion of their grain or livestock because the prevailing thought is "surely prices must remain high for an unspecified duration of time."
Well, along comes a down market, and then the producer thinks that surely she must not sell, because she hopes it will rebound higher, back to those levels from weeks prior. And finally, fear kicks in, when the market plummets lower, panic selling kicks in and the producer is left with less than stellar sales.
And so today, we stand on the cusp of Hope and Fear. Prices for many grains, livestock, and the stock market have retreated lower and hover around long-term support levels, teetering back and forth&
Much to the disappointment of many producers who still have old and new crop to price, grain and livestock prices have slid lower in recent weeks. Seasonally, this move lower makes sense. Furthermore, on the grain side, the early planted crop with a current lack of weather stress bodes well for high yields. Producers now hope for demand to improve, hope the stock market retreats and turns higher, hope that we get a weather rally, hope the funds come in and buy, hope for higher prices.
If the market turns lower and hope runs out, fear will set in...
Fear to sell because the market is going down.
Fear to sell because if I sell, surely it will turn higher tomorrow.
Fear to sell and frozen with indecision, not knowing what to do.
Am I hoping for higher prices? Absolutely! Am I prepared for potentially lower prices? Absolutely! And you should be too. There are ways to limit risk exposure in down markets. If you think about them ahead of time, you avoid the tendency to do nothing because of indecision. In fact, you can be brave and smile in the face of lower prices, because you are empowered with the marketing tools needed to capture prices, before those prices occur.
If December corn futures close below $3.50 (which would take out the harvest lows from last fall), I could see prices potentially sliding down to $3.00 for December futures prices. Here are strategies you can use for corn to protect against lower prices:
- If you can handle higher risk and stomach margin calls: Sell December corn futures on a close below $3.50. Have a risk order in place so that, if corn should close back above $3.55, you can step aside of your hedge, as higher prices might be on the horizon. As the market moves lower, continue to lower that risk order, thus continuing to lock in your profits.
- If you have a moderate risk tolerance: Buy a December corn $3.50 put (on a futures close below $3.50) and at the same time sell a December corn $4.00 call. This is called a fence strategy. The premium cost will most likely be approximately 20 cents, with a combined delta of near 75%. (Note that if the market works higher, you would be subject for margin call, initially approximately 25% of the value of the futures move higher.)
- If you have a low risk tolerance: Buy a December corn $3.50 put (on a futures close below $3.50). It will cost approximately 30 cents and yield a delta of near 50%. Place a profit order of 20 cents on that put (one that will work around the clock on the electronic market).
These are some ideas using many of the tools available to us as marketers. Once again, knowing how these tools work and thinking about them ahead of time will serve you well and help you avoid the stress of making decisions in the heat of a market move. Hope is not a good strategy, but good strategy can give you hope, even when prices are falling.
If you have questions, you can e-mail Naomi, or post in the Women in Ag forum.
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