Well, it looks as though it’s time to get back into spring mode. Within just a few weeks (depending just where you are located) you could very well be working ground and getting prepared for spring planting.
Some months are busier than others, but we are all working at something all the time. In 2022, the futures markets were volatile, to say the least. Producers had opportunities to contract wheat at very good levels early in the year. Following 2021 when yields were less than desirable, many were hesitant to contract bushels that they may not produce.
This is very understandable, but it also gives you the opportunity to look at other methods of being able to take advantage of the volatility in the markets without necessarily contracting actual bushels. The first method of protecting yourself against an adverse movement in the futures market is simply using futures contracts to hedge yourself.
Yes, I did say “simply,” and hedging with futures is simple and complicated all at the same time. I know it sounds as though I am talking out of both sides of my mouth, but when we look at the big picture, we see that nothing is perfect and nothing is as simple as it may look at first.
Let’s look at some different methods of protecting ourselves from an adverse move in the market. A cash-forward contract is very simple. You agree to deliver a specified amount of bushels at a specific price and delivery time. The challenge is if you don’t produce the bushels or the quality that was contracted. Now either you or the buyer needs to replace those bushels, and this could be a challenge. Either way, it’s usually not all that fun. But in the long run, these are usually very good contracts to enter into.
Options on futures contracts are a good method to protect yourself against an adverse move in the market. These contracts will protect you, but there is a premium that needs to be paid upfront, just as there is in an insurance policy. So we can say that buying options is a good method to protect yourself, but it isn’t perfect either.
Then we have the strategy of using futures contracts to hedge ourselves in the market. Futures contracts are easy to understand; they are also easy to enter into as well as exit out of. This sounds easy (and it is), but you will need to have cash in an account to cover initial margin as well as margin calls. Margin calls may not occur all the time but can and will occur when using futures contracts. There is some education that will be needed just for the fact that you will not want to enter into any of these different types of contracts without understanding just how they will work for you and what you will need in order to use them in your operation.
Anything we do in agriculture depends on our personal comfort level. Nothing is one-size-fits-all, simply because every operation is different. You know as well as anyone that just because the neighbor did it doesn’t mean it will work for you or anyone else. The key to any price protection program is your own personal study and education. We all need to continue to learn simply for the fact that the markets continue to change all the time. What worked well last year may not this year because prices are different, and time frames may differ. An example could be that a flour mill may have already contracted enough wheat for the first quarter of the year and may have a bid, but it will be for a deferred-delivery timeframe.
Just as we adjust our production, we need to adjust our marketing. Let’s look at a plan to diversify our marketing. First, use forward cash contracts on a percentage of our production; second, buy options on futures to protect another percentage; and third, simply use futures contracts. Each of these strategies is very good and positive and each one has challenges – and just because they may have a challenge doesn’t mean we ever want to dismiss it.
We hope the best for all of you and are looking forward to a productive and profitable year.
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