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Living with market volatility

What has this summer taught us about market volatility? That it is alive and well and causing all kinds of market mayhem!

Adequate moisture and good growing conditions in the U.S. and Western Canada increased production estimates for all crops, which drove futures values lower daily.

Cool wet weather in parts of the U.S. and across the Canadian Prairies increased yield potential, but it has also brought pest and disease concerns and delayed maturity that makes frost a real concern.

Weather situations around the world have caused production concerns in certain areas.

China, for example, experienced the worst heat wave in 140 years in its eastern regions. This dramatically impacted production, and brought China to the market to secure inventories for the coming year.

In Europe most of the planted area has been hot and dry for some time and looks to stay that way, causing crop stress and potential yield losses.

Russia, Ukraine and the Former Soviet Union area experienced some dryness issues, but intermittent rains helped alleviate concerns in some areas.

At this time of year any weather news that promotes potential yield increases or decreases anywhere in the world creates market volatility and sends futures markets jumping up and down.

Will the markets go higher? Will they stop going down? When should I sell?

These situations become very emotional for farmers watching markets run or crash based on current market conditions.

How do you avoid going through emotional marketing situations year after year?

You need to have a solid marketing plan in place that you are comfortable with. It should include marketing strategies that will help you avoid making emotional pricing decisions during times of volatile price movement.

A marketing plan

1. Know your costs of production. This is critical so you can establish acceptable profit levels and price points for selling your grain.

2. Set a pricing strategy of selling increments of production, or use options or futures contracts to secure prices at various price levels in an up and or down market scenario.

3. Follow markets closely so you can make timely decisions based on good intelligence. This can be accomplished in many ways — from talking to local grain buyers and buying market newsletter subscriptions to hiring an ag marketing consultant.

4. Get an understanding of what the technical charts and fundamental market information are telling you. What way are the markets trending and why?

5. Decide if you are comfortable selling actual physical grain or if you are prepared to spend money putting a futures or options contract in place to protect a futures price to sell your grain against later.

6. Start by putting together a marketing plan where you sell increments of your crop utilizing a price averaging strategy along with an options contract to protect you.

Putting the plan in action before the growing season will keep you from getting caught up in an emotional roller coaster ride when markets are the most volatile.

Pricing risks

There are a number of risks you need to consider when deciding how to price your grains.

These include moisture at seeding time, seeding dates and weather during the growing season. You could end up with a good crop or a poor crop and you don’t want to be overcommitted with physical delivery contracts if the weather turns on you.

If the weather is starting out against you early in the year, the safest way to consider securing a price for your grains is on paper with put option contracts and or a futures hedge strategy.

As the year progresses, if you decide to do any physical pricing, you may want to consider using call options to help protect you in case the weather catches you with a hail storm or a frost. A weather disaster could alter your production and leave you short of grain and unable to deliver against your contracts.

A matter of balance

How much physical grain should you price?

How much can you afford to spend on futures or options contracts?

Or, should you sit back and do nothing?

Which of these choices will give you the best results with the least risk?

These are questions that only you can answer for your farm.

Do you have the cash flow early in the new year (pre-seeding) to put an option or futures contract in place if need be?

Do you have a brokerage account set up to do that?

Do you understand how futures and options work and how they can be used to protect your farms profitability?

These are questions that others can help you with. If you are looking for some help in this regard, give me a call or send me an email. †

About the author

Columnist

Brian Wittal

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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