WIKIFX REPORT: Take the gamble out of marketing

It is hard to find an occupation that forces you to place more bets than a farmer does on a yearly basis. Other than a professional poker player, not many come to mind. Betting that its the right time to lock in inputs, betting that the right thing to do is plant before a possible flooding rain, betting that the weather will cooperate throughout the growing season – that leads to a lot of anxiety.

Marketing a crop is one of the biggest “bets” a farmer makes throughout the crop year. With how volatile the commodity markets have been these last couple of years, selling at the low versus the high makes hundreds of thousands of dollars difference to your bottom line. Just in the first six months of 2022 we have seen a $2.24 range in December corn futures and a $3.10 range in November soybean futures.

With these types of ranges in commodity prices, there is an extreme amount of stress put on the farmers back and a helpless feeling along with it. So, is there anything we can do to relieve some of that stress and get away from betting on the markets？

There are countless tools and types of contracts farmers may use while marketing their crop. Straight cash sales, HTA‘s, and averaging programs are just a few. In addition, the use of puts and calls in a marketing plan can take away huge amounts of the price risk that farmers face every day. Options have been available for farmer use since the 1980’s but are still only used by a small percentage of producers. The USDA claims that as little as 12% of corn and soybean farmers used options as recently as 2016. What is the reason for that？ Lets go through a few of the common claims we hear against the use of options.

Options are too hard to

understand

There are a lot of options strategies out there with fancy names that make things too complex. However, if options are used properly, they can make marketing so much simpler. Ultimately options give you the ability to lock in a floor price while keeping your upside open if we rally. It does not matter if you havent planted a seed or if you just wrapped up a record crop, options are there to keep things simple and give you some control.

Puts and calls are too expensive

Spending 35 cents on a put to lock in a floor on 100,000 bushels isn‘t cheap, but neither is watching the futures market drop $1.10 in two weeks during the middle of the growing season when it’s 100 degrees outside. Spending 35 cents on a call to give you upside potential on 100,000 bushels you just sold isnt cheap, but neither is making a sale off the combine at $5.15 and then watching futures hit $6.50 just 4 months later like we saw last year.

Using options is speculation

Many of us have heard of a neighbor losing large amounts of money using options because the market “went against them.” If used to speculate, options are just another bet. If options are used to hedge and offset risk, losing money in your trading account isnt always a bad thing.

Losing money by paying for insurance on your truck isnt a bad thing. Neither is spending money to lock in a price above your breakeven, while at the same time leaving the upside open for future sales. Options are a great way to take out price speculation.

Most of us have heard the phrase “farming is always a gamble,” and that seems to ring true today more than ever. The war in Ukraine, extreme weather and recession worries are just some of the things that can deal you a pair of aces or two/seven off-suit. No one knows what kind of hand youre going to get dealt, just like no one knows where the market is going.

When someone knew where commodity prices were headed, they wouldnt be offering advice. They would be on a beach with their feet up trading from their phone. Instead of going all-in and hoping for the best, we recommend finding a risk management advisor you can trust and start to implement options on your operation. They may not be able to manage input prices or the weather, but they will be able to help you take control of marketing your crop, giving you one less thing to worry about.