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Woulda, shoulda, coulda

Market risk strategies can lower the risk of pre-pricing grain early in the year

You can’t evaluate your grain marketing decisions until much later in the year, when you can look back to see what happened in the markets. What can you do to make it easier to make these decisions?

First, knowing your costs of production is likely the most important aspect to helping you make good marketing decisions. When you know what you have in the crop and what you need from it to break even or make a profit, you can start putting together a marketing plan that will help you maximize pricing opportunities.

With the early start to spring this past year and the warm dry weather that followed, prices offered for new crop grains started to rise in late May to mid June. Then, fortunately, we started to get some rains and continued to get even more through July. That prompted new crop prices to fall as the potential for a good crop was much better.

During that time the price for new crop peas reached between $10 and $12/bu. Lentils reached $0.35/lb., canola futures were above $530/tonne and wheat values were in the $6.50 to $7/bu. range for a No. 1 CWRS 13.5 per cent.

Did you price any of your new crop at those levels? If not, why not?

The most common rebuttal I get to this question is “I don’t want to risk pricing any grain now because what if I don’t get a crop and have to buy back the contract later at a higher price? It’s too risky!

This is no doubt the biggest reason that many farmers do not pre-price new crop grain early in the year when prices may be at the best levels you may see for the year. You won’t really know until six to 12 months down the road when you can look back to see if your decision to price was the right one to make or not! The old “woulda, coulda, shoulda” dilemma.

So let’s look at what you can do to help reduce that risk and feel more comfortable about pre-pricing new crop grains at profitable levels early in the year.

Pre-pricing

You could use traditional hedging strategies to lock in futures prices when they are at attractive levels, such as when canola reached a high of $535/t last June and when Minneapolis wheat futures were trading at US$5.80/bu. The cost of doing a hedge could range from $40 to $75/acre or more depending on your projected yields. You will need to be prepared to keep additional money in a hedge account to pay for potential margin calls to keep your hedge active if the markets move against you, until you are able to unwind your hedge after harvest. You could also face currency exchange risk between the U.S. and Canadian dollars. Another issue is that you can only hedge canola, corn, beans, oats or wheat. Pre-pricing all other crops would leave you with price or delivery exposure, unless you have an Act of God clause in the contract.

Because hedging doesn’t give you a good way to pre-price all of the grains you grow, you’re still faced with a fair bit of marketing risk.

Using option contracts to pre-price grain is a good strategy, but again you are only able to get options contracts on canola, corn, beans, oats and wheat, and you could face exchange risk.

Options

Some say options are less risky, as you know what they will cost up front, and there are no margin calls so you don’t have to keep money in a margin account.

Depending on the volatility in the markets and your projected production your cost to use options could range from $5 to $50/acre or possibly more depending on the position you want to take in the market.

You could use Put options to establish a minimum price for your grain until you are ready to sell the physical grain. Or, if you pre-price some grain for new crop delivery you can use a Call option to keep you in the market should futures rally higher. This will also provide you revenue protection should you not be able to deliver against your contract at harvest and futures prices have gone higher meaning you will have to pay a buyback cost. Your Call option will have increased in value, helping to offset some or maybe all of the costs of the buyback.

Options can provide you with some good risk management strategies but again they are not available for all grains.

Before you can use hedging or options contracts you need to set up a trading account through a commodities broker. The process takes time. If you think this is something you want to do, find a broker you can work with and set up an account now, so you’re prepared when the time is right.

Crop Insurance and hail insurance provide protection from production loss. Crop insurance also offers some quality loss coverage but remember it is first and foremost production loss insurance; if you end up with a good yield above your coverage threshold but poor quality (as many have this fall) you likely won’t get an insurance payout.

If you did pre-price some grain this year, hopefully you will be able to deliver your poor quality grain and take a grade discount on the contract. Otherwise, you’ll have to buy out the contract if your buyer won’t take the poor quality grain. Read the fine print details in your contract about deliverable grades and discounts.

Global Ag Risk Solutions has been offering a revenue-based insurance program across the prairies for the past six years. Its product offers grain producers a guaranteed level of grain revenue protection for their farm, based on their individual historical financial records. This way, farmers are covered for production loss, quality loss and/or market value loss.

Regardless of what may cause your grain revenue loss, even spoiled grain in a bin, you know the coverage will protect your farm’s overall grain revenue.

Another aspect of this insurance is that it provides farmers with the incentive to maximize their production from an agronomic perspective, knowing that input costs are covered.

Global Ag Risk Solutions offers farmers an incentive to be more aggressive when it comes to pre-pricing their grain when profitable prices are available early in the year. If farmers who pre-price end up in a situation where they cannot meet delivery commitments because of production loss and have to buy back contracts, if they are in a revenue claim scenario with GARS the costs of the buybacks will be deducted as an expense from their overall grain revenues. In essence the insurance will pay the cost of the buybacks.

These are some of the best options available to help you reduce your overall marketing and pricing risks. Knowing and understanding how these programs work is the first step to determining if they will work for your farm. Talk to a broker for details on hedging and options; and call your local insurance office to talk crop insurance and call a Global Ag Risk Certified Agent to talk about their revenue insurance program.

About the author

Columnist

Brian Wittal has 30 years of grain industry experience and currently offers market planning and marketing advice to farmers through his company Pro Com Marketing Ltd.

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