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A Real Marketing Strategy Needed This Year, Analyst Says
As markets move up and down, you are provided with different marketing choices for shifting risk or taking advantage of opportunities. Not one tool fits all occasions. We'll look at the right time, place, and tool to be used given various scenarios.
Cash sales: If grain prices rally into the winter months, you could utilize cash sales by forward selling or using hedge-to-arrive contracts. While these commit grain that you have not yet produced, they shift risk and provide a set price. For producers who grow more than they can store or would just like to move crop at harvest, utilizing the right cash tool early in the year may be the appropriate choice. Often, if a good crop is produced, harvest prices are usually lower. Our bias is to start slow and sell often, building an average. Cash tools are a good way to market grain well in advance of harvest if you are willing to accept a price. It is possible that grains are currently near their low. Now is not a good time or place to aggressively use cash tools.
Sell futures: This is a good strategy when prices are low and you believe they could go even lower. Futures are flexible and can be exited at any time. In addition, each penny down is a penny gained. This is a contrast to a put that might not change penny for penny with futures.
Puts/fence strategy: Buying a put establishes a price floor. At current prices, this is recommended. This leaves cash grain unpriced with unlimited upside potential. A fence strategy is an option strategy in which you purchase a put and sell a call. We feel this is a desired position if grain prices are high and there is an expectation of lower prices. You don't mind being exercised on the short call at higher levels should prices rally. An exercise would turn the short call into a short futures, establishing a hedge. However, after dropping significantly the past few months, we would not suggest a fence strategy at current price levels. It's still July, and a turnaround in prices could create a marginable position on the short call option, not to mention a potential exercise into a low price on futures. Our point is that a fence is desirable at high prices but not at low prices. However, the opposite strategy should now be used by end users (buyers) of grain. If you're an end user and you are utilizing call options, you may attempt to lessen the costs of calls through the purchase of a call and simultaneous sale of an out-of-the-money put.
Another example of the right tool for the right time with current grain prices as low as they are is what we will term a backward fence. This is the purchase of a call and selling of a put. Prices could rebound for almost any reason and perhaps significantly (because of early frost). The general assumption that prices could go lower is probably accurate, assuming continued good growing conditions. Should prices rally, by purchasing a call option, you will have shifted your risk. Is it worth buying a futures? Perhaps, but bear in mind that if prices continue to go lower, this is a marginable position. The right tool for end users or buyers is likely a call option or buy call/sell put fence.
We have provided some examples of when different marketing tools can be implemented. However, the real goal of this Perspective is to help you identify that there are multiple tools that can be utilized. By knowing which tools to work with, you can implement strategy that best fits your situation. In addition to knowing your tools, we suggest working with someone who has an intricate knowledge of how these tools can be utilized to help you achieve your goals.
If you have questions or comments, or would like help implementing strategy for the year ahead, please contact Bryan Doherty at 1-800-TOP-FARM ext. 129.
Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.