Is it just me, or does the summer feel as though it is passing us by quite rapidly? Well, it’s not just me – and time does feel like it is moving faster every year. In just a few weeks, the kids will be back in school, and we will begin looking at the fall work.
Last month, we visited about the deferred months and if we had opportunities to protect ourselves against lower prices before we actually reached the 2023 and 2024 harvest. (When I talk about harvest, I could also throw in your calf crop.) I can say there will be opportunities to do just that. Notice, I said “opportunities,” as there will be multiple times during the next year you can enter into a price protection strategy.
We have all experienced higher input costs during the year, and as with most input costs we are somewhat limited as to what we can do to manage those risks. It may be very difficult to feel good about what is taking place, but at the same time there are opportunities to manage a profit margin in your operation.
In the past, there have been many articles written about knowing your input costs and then contracting commodities based on the opportunity to make a profit. We all know things are very volatile at this time, and we certainly don’t know just where our inputs will be next spring and summer, but we do know where they are right now.
If we take our current market costs and then add, let’s say 20%, that may or may not be enough, but it is a starting point. When we look back at the cost of diesel between February 2021 and February 2022, prices increased a little over 60%. Diesel increased another 45% from February this year to the first of July. So maybe 20% isn’t enough, but it all boils down to your comfort level. Whatever level you are comfortable with, use it in your budget – after all, we need a starting point. Do the same with your other costs.
Now that we have an idea of our costs, the real marketing begins. We can’t let the markets move for a few weeks without seeing just what is going on. We need to look at the markets daily to see the direction the markets are moving. Let’s make a plan and then make adjustments on a daily basis depending on what the market is going to let you do. Remember, you are managing your price risk in the market.
At the time I wrote this article, the Chicago December wheat contract was down 27% from the middle of May and was at the same level that traded back on the first of March. Between the first of March into the middle of May, the market moved $3.46 higher and then retracted $3.46. Now, hindsight is always good, but do you think there were opportunities to hedge your wheat during this time frame?
Let’s look at feeder cattle for just a minute. November feeder cattle futures traded $14.47 per hundredweight (cwt) lower between the end of March and the third week of May. Then the market reversed itself and traded $9.39 cwt higher into the last week of June. Did the market give you an opportunity? I know some cow-calf operators who did sell futures and then buy them back during this time frame. Now I’m not going to tell you they made $14.47 cwt, but they did protect themselves in the market. The way they protected themselves and made some money was because they weren’t trying to guess where the top of the market was – they were simply managing price risk.
Managing your price risk is at times a difficult concept to wrap our heads around. After all, many producers still look at hedging using futures as a risky business. Whether it is risky or not is up to you and your comfort level. When you study the futures market and understand how it works and understand how you can use these markets to manage your price risk, you will become more comfortable using the tools available to you. There will never be a good time to begin your study regimen, there will just be a time when you make the commitment to do it. This will take some time and effort on your part, but it will be worth it.
Remember, as big as the challenges are this year, next year could very well be the same if not more challenging.
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