TOP FARMER WEEKLY PERSPECTIVE 6/19/20 BY BRYAN DOHERTY
Nickel and Dime
All too often in life, it is feels like we’re being nickeled and dimed to death on fees or taxes or small increases at the gas pump. You know the situation. From a producer’s perspective, however, due to low prices and a forecast of oversupply of grains and oilseeds in the current marketplace, farmers are struggling for every penny. While not so for everyone, an approach used by some is to nickel or dime one’s way to success. We’re not necessarily talking about trading futures or options to gain value, yet those tools are available and should be familiar to every producer. If you produce crops, you produce an inventory. Whether you like it or not, you are an inventory manager. So why not take an aggressive approach (in a year of oversupply and little expectation for prices to rally) by seeking out every advantage to nickel and dime your way to success?
First, we would suggest making sure you pay attention to basis level and carry. These two ingredients are important in any cash marketing strategy. We may be stating the obvious. Often, farmers don’t really look at carry or basis until it becomes urgent or it becomes too good to pass up. In big supply years, as harvest approaches, basis generally widens. This can put carry in the market. Rather than delivering at harvest, consider selling on deferred futures for later delivery. If it pays more than the cost of storage, it is a way to add pennies. Then try and work a basis contract.
Futures and options offer opportunities as well as risk. Before using either of these tools, make sure you understand what you’re getting into, the costs and potential margin calls, and how it could affect your bottom line. Challenging the market to move higher by selling call options is a way to add to your bottom line, or accept a higher hedge price for your commodity than where the current market is at the time you sell the call. (Remember, you are selling out-of-the-money calls.) This is a more complex strategy and needs to be discussed with your advisor. Other ways might be a fence strategy in options, where you purchase a put and sell one (or perhaps two) call options. What you’re doing is providing a window for prices to move higher with a cap, and at the same time, helping to finance (or perhaps totally finance) the cost of your put option.
The futures market can offer opportunity. It is flexible and liquid. Price rallies have been opportunities to sell, yet most farmers are not interested in forward contracting early in the season when the price of their product is at or below the cost of production. Selling rallies in a downtrend may be a way to hedge your crop. You are not married to holding a futures position. There are different strategies to utilize when you enter the market. Namely, setting stops below current prices or targets above. You should have strategies to exit your position as well, once it is established. As an example, let’s say December corn futures rally to $3.50 and you hedge by selling a futures contract. If prices move lower and find support at $3.30, you have an opportunity to buy back this contract and add $0.20 to your bottom line (less commissions and fees). However, you should also be prepared for prices to move higher. In that case, if you sell at $3.50 and prices move higher, you will either exit this position with a defined risk order, or hold this hedge into the harvest season until you deliver. Once delivery is made, you will lift the hedge. You will also be looking to lock in a basis along the way. Keep in mind that futures positions may incur margin calls.
They say desperate times create desperate measures. We’re not sure if that’s true or applicable in this case. A more plausible way to view this would be: tough times create tough people. Consequently, innovative and creative ideas can separate the average marketer from the great marketers. Everything you do in life can be viewed as a cost or risk. You need to measure this and decide what is best for you. If you feel like you’re on an island and don’t understand all of your opportunities or how to manage them, make sure you talk with someone who is well versed, experienced and will talk to you in a manner that you can understand, and help you make the appropriate decisions. In a year like this, multiple nickels and dimes in your favor may be the difference between losses, break-even, or profits. As an inventory manager, do the best you can to manage your inventory using the right tool at the right time. You can’t outguess the weather and news. You can manage how you respond to the market moves.
If you have questions or comments, contact Top Farmer at 1-800-TOP-FARMER extension 129. Ask for Bryan Doherty.
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.
Author
Bryan Doherty