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334171

Follow 3 simple methods to manage margins in a volatile year

A nervous farmer (and longtime friend and customer) gave me a call recently. “The grain markets are crazy,” he said. “How do you make the right decisions these days? Those algorithm traders are pushing soybean prices up — and then down — over $1 per bushel every week.”

I told him one of the keys to success in farming is working hard and making the right long-term decisions. I knew he was a number cruncher who had good records and understood his cost of production. He works hard year after year, not just growing a good crop but also having a good marketing plan.

I explained that the concepts he had used to build a large and profitable farm could also be applied to making good grain marketing decisions. 

  1. Take incremental steps. This works in farming, and also in marketing. Start small and add to your sales based on the number of bushels you sell. The customer I talked with had started raising pigs in a rented barn. Next, he rented 160 acres. Then he bought 160 acres. He eventually grew his farm to more than 2,000 acres, one acquisition at a time. For his marketing, he needs to make new-crop sales based on his farm size. However, he found he had a hard time getting the recommended number of bushels sold ahead as his farm increased in size, but he would keep trying.
  2. Make (and use) a total risk management plan. My longtime customer used to worry about weather — a lot. “What if it turns dry?” or “What if I get hit with a hailstorm?” Fortunately, he worked with a good crop insurance professional. Over time, he learned how RP crop insurance protected you not only with downside protection in the futures market, but also with protection if you had a crop failure. By managing those risks — and not simply worrying — he made the right risk management plan for his farm. (He told me he also sleeps better.) 
  3. Accept the reality of risk — you can’t win every time. The goal is risk management, not risk elimination. A risk-free life is not realistic for a farm operation; not every decision works out the way you want. One customer would get really upset when he sold grain ahead and then the futures went higher. In 2008, he had some new-crop corn hedges in place that went against him by more than $1.50 per bushel. Furthermore, he had new-crop soybean hedges in place that went against him by over $3.00 per bushel. He was really upset ... until harvest, when he delivered on those contracts. By then, the corn contracts were $2.00 per bushel in the money and the soybean hedges were over $5.00 per bushel in the money. He called me to apologize. “It finally makes sense,” he told me. “I shouldn’t just try to hit the top. Instead, I need to stay consistent. Some years I might leave some money on the table, but if I stick to my plan, it will make my farm more profitable with less risk.” Well said.

(Note for the younger readers who may not have been farming in 2008: The December corn 2008 contract had a contract high of $7.99 and a contract low in December of $2.90 per bushel. For soybeans in 2008, the November 2008 contract had a high of $16.36 and a low of $8.25. That was a roller-coaster year!)

I enjoy speaking at grower conferences and seminars. The input I get at these meeting is invaluable to me as I help develop strategies and try to answer complex marketing questions. I also enjoy hearing success stories from many of my long-term customers. Here are some from farmers who told me how they handled making marketing decisions over the past two years.

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The first one told me she learned that if you are making scale-up sales of cash and new-crop grain, you do not hit the top, but you will come out with a good average that keeps the farm profitable. This individual started hedging new-crop December 2022 corn at $5.45. She did more at $5.95. She placed additional 10% hedges at every 50¢ higher and placed her last hedge at $7.45. For soybeans, she started with a 10% hedge at $13.00 and made additional hedges every 90¢ up with her last sale at $15.70.

For corn and soybeans, the last 10% hedge was right near the high, but most important was that she came out with a really good average.

The second success story was from a farmer who had taken my Kluis Grain Trading Academy. He said he learned a lot of important concepts, especially seasonal selling and using both a price and time plan. He was an avid chartist and kept up his hand-drawn charts. He noticed how often the grain markets put in a major high or low on Fridays in the extremely volatile grain markets this summer. Starting April 15 and wrapping up by June 24, he placed five 10% hedges, getting a total of 50% of his new-crop December 2022 corn hedged and 50% of his new-crop November 2022 soybeans hedged. At harvest, he was very happy with the results and called to make sure I would send out some new blank charting paper for next year.

The third farmer, from South Dakota, was also an alumnus of my grain trading academy. He told me he enrolled in the Kluis Grain Trading Academy after having the elevator price his DP corn and soybeans in 2016 and 2017 on August 31. He now was a dedicated seasonal seller who had turned around his marketing after attending the academy. For him, the old “hold-and-hope” strategy of trying to hit the top was over. He replaced the old plan with a plan that made a series of 5% and 10% sales. In the 10 weeks between April 15 and July 1, he made eight sales that got him up to more than 60% hedged on his new-crop corn and soybeans. If the markets were up big, then he would make a 10% sale. On the lower weeks he sold 5%, unless prices were in a free fall. In that case, he did not make any sales. 

Three farmers, three strategies. What did these farmers have in common? They all invested in learning more about the grain markets. They all had a plan. The plans were different, but they were all executed. They all used the key seasonal time period from mid-April through June to make a series of sales. They kept selling as prices went higher, and they never looked back. The markets are going to stay volatile through 2023. Make sure you have a disciplined plan, and you execute the plan. When the markets are volatile, it can be scary to make decisions and act. But that is exactly why you need to have a plan. Make the plan while you can think calmly. Then when the markets are soaring or plunging, you can simply grit your teeth and follow your plan, one small step at a time.

Note: The risk of loss in trading futures and/or options is substantial, and each investor and/or trader must consider whether this is a suitable investment. Past performance — whether actual or indicated by simulated historical tests of strategies — is not indicative of future results. Trading advice reflects good-faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice given will result in profitable trades.

Al Kluis Commodity Trader

Al Kluis has been trading grain futures since 1974. Sign up for a free trial to his daily morning email and weekly “Kluis Report” by going to kluiscommodities.com.

Kluis Commodity Advisors, 888/345-2855.

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