Drone attacks, election interference, international espionage, currency manipulation, trade conflicts and economic sanctions are throwing world markets into a frenzy and becoming destabilizing factors in the world economy.
When ag commodity markets react to these non-agricultural situations, what do you do? As a primary producer focusing on your costs of production, you also have to pay attention to all of these extraneous events. There is no getting away from it.
Rapid swings in currency values are becoming all too common as governments enact policies to manage debt or become more competitive. Some of these governments are the world’s largest economies, buying the vast majority of the agricultural commodities produced here. Currency fluctuations impact your net returns.
As I am no longer a licensed commodities broker, I must preface my following comments by saying that these are merely strategy suggestions to consider but are in no way trading recommendations. I advise you to consult your accountant, broker, banker or financial advisor to determine if any of these suggestions make sense for your farm business before proceeding.
What can you do to mitigate risk? Should you hedge the Canadian dollar against the U.S. dollar? If so, should you use an actual hedge contract or convert Canadian dollars to U.S. dollars?
If cashflow is not an issue, you may want to simply convert currency to U.S. dollars at your bank to mitigate your currency risk. Use the U.S. funds to make purchases when the U.S. dollar has increased in value.
If cashflow is a concern, a hedge contract may be a better way to cover your currency risk with less money tied up. If your currency hedge is in a positive position, unwind it and use the gains to offset the cost of future purchases.
Changes in markets
Looking at the trade dispute between China and the U.S. strictly from the perspective of ag commodities, the Chinese ban on U.S. soybeans doesn’t only impact U.S. soybean growers, but also farmers in South America and elsewhere who now have greater access to the Chinese soybean market. U.S. farmers have been hit hard as soybean prices have fallen since the ban was put in place, but Canadian canola producers have also been impacted. Our canola price is closely tied to U.S. soybean prices. Add on the Chinese ban on canola shipments and canola values fell even further.
China is now sourcing soybeans and meal from South America, as is evident from the most recent trade agreement China made with Argentina in September to buy soybean meal.
This is changing global trading patterns for soybeans and oilseeds and could be a permanent change in world trading patterns. How could this impact your profits? U.S. farmers will likely rethink their cropping options and rotations. If soybeans are no longer profitable and they switch to other crops, that will add more supply of those commodities, pressuring markets lower.
How do you make marketing decisions based on events like this? Your marketing focus needs to remain locked in on your numbers — your costs of production and breakeven numbers. And you need to sell at a profit when you can.
This must be the core of your marketing strategy. When an unforeseen event happens, determine if you think it will be a short-term situation or a long-term change.
If you think it will be a short-term situation that will negatively impact prices, can you ride it out and wait for prices to come back? Or should you sell now before prices drop too far?
If you suspect there will be a longer-term negative price impact, decide when to sell your grain. You don’t want to sit on it for a year or more, waiting for markets to rebound when maybe they never will.
Consider the cause and effect in these situations, and determine how that could impact your business before making reactionary marketing decisions.