Increased volatility means increased opportunity – if you’re prepared
Over the past year we have seen dramatic shifts in commodity price volatility. It’s highly likely that this shift in volatility is here to stay for the foreseeable future. Agricultural commodity markets were relatively stable in the recent past due to factors such as large supplies, favorable weather, and high carryover stocks. In the past market environment, producers may have used simple crop marketing strategies because the market fundamentals were more stable, and prices were less volatile. But now times have changed, and we will likely see further price volatility in the coming months.
We could first start to see this kind of wild volatility emerge this winter; price rallies to compete and buy acreage are likely. Traders will also eye weather conditions in South America, as they now supply most of the global soybean production. Also, outside markets such as crude oil and other energy markets are also thrust back into the spotlight.
Adding to this volatility are the Funds. Investors look for opportunities. Those who are shrewd and see a changing world and marketplace understand the relevance that commodity markets play. Managers of large pools of money, also referred to as hedge managers or fund managers, seek opportunities to leverage assets using futures and options markets.
When it comes to volatility, the commodity price pendulum will have intense swings. If you are on the right side of these volatile swings, you will feel like a champion! But if you are on the wrong side, or no side, the financial pain could be severe. The world is well aware of tight inventories of grain in the United States and Canada and how important world commerce, weather, and other supply and demand factors can quickly change price outlook.
Increased volatility means increased opportunity. Those who are prepared will likely fare well. As prices increase and inputs follow, farmers are probably at greater risk than ever that one year of marketing mistakes could wipe them out. Therefore, the challenge to farmers is to be acute marketers; aware of all marketing tools and the knowledge and discipline to use them.
When working with farmers and their marketing, we’ve found that no matter how much money, time, and knowledge a person has, everything falls apart if there is no discipline. Discipline is required in two main areas:
- PRIOR PLANNING — It’s important to do what I have referred to in the past as “market scenario planning.” First imagine all the possibilities of what the market might do. Then develop your strategy for each scenario and decide what indicators you are using to trigger action.
- IMPLEMENTATION — When your indicators signal that it is time to act, implement your strategies! It is far too easy to let opportunity slip past you when an important market signal is hit, and you do not act. You may have a trigger point set many months in advance and reaffirmed many times over, but when that signal is hit, you don’t follow through because there is some market news that just sounds too tempting. That’s where lack of discipline hurts.
With anything that requires discipline, you must first find will power. Self-discipline eventually becomes a habit. Until then, however, you are likely faced with the challenge of overcoming your old habits while trying to form new ones. When it comes to your marketing, do your best to avoid outside influences (USDA reports, waiting one more day, listening for export news…) to make your choices for you. Instead, turn your attention inward and make a conscious decision about your strategies and your actions. Keep the end goal and your overall average price per bushel in perspective!
In addition to shifting your marketing from an outlook-based approach to a strategic approach, you will also likely need to upgrade the marketing tools you are using.
With increased market volatility, be aware of how to implement various futures and options strategies. Advanced option strategies may very well become a necessity to help manage price risk.
If you would like assistance learning about these strategies and learning how to apply them, Total Farm Marketing and I are here to offer you a helping hand. We encourage you to do so soon, because the market volatility may be just around the corner. Discipline is essential to any short- or long-term goal. Discipline is also an essential component to farm marketing.
Disclaimer: The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. No representation is being made that scenario planning, strategy or discipline will guarantee success or profits. Any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to Total Farm Marketing. Total Farm Marketing and TFM refer to Stewart-Peterson Group Inc., Stewart-Peterson Inc., and SP Risk Services LLC. Stewart-Peterson Group Inc. is registered with the Commodity Futures Trading Commission (CFTC) as an introducing broker and is a member of National Futures Association. SP Risk Services, LLC is an insurance agency and an equal opportunity provider. Stewart-Peterson Inc. is a publishing company. A customer may have relationships with all three companies. SP Risk Services LLC and Stewart-Peterson Inc. are wholly owned by Stewart-Peterson Group Inc. unless otherwise noted, services referenced are services of Stewart-Peterson Group Inc. Presented for solicitation