TOP FARMER WEEKLY PERSPECTIVE 3/31/2023 BY BRYAN DOHERTY

Sell and Defend

You have probably heard the phrase: sell and defend. What, however, does this exactly mean? In the context of marketing, sell and defend usually refers to the practice of selling cash (what you produce) and defending this position with the purchase of call options. While this is the basic concept, it can go deeper. Let’s first ask the question: why sell? Then let’s address: why defend?

When you decide to sell, you are doing so because you probably believe the price you can receive today is better than what you might receive in the future. If you didn’t believe this, you wouldn’t sell. The defend part of my strategy is to reinvest dollars to retain ownership for a longer period. Why do this? You’ve already determined the odds are better that prices are going lower. The answer is because you don’t know, with certainty, where prices are headed. You don’t want to miss out on an opportunity. In the world of commodity marketing, it is one of the few industries where the producer of goods can sell and retain ownership. This is a very powerful concept. The idea then of selling and defending makes perfect sense. You are going with the odds of what you believe will happen, and your Plan B is in place.

If defending a sale, there are many questions that need to be answered: What type of tool should you use? A call option or perhaps bull call spread?  How much time do you buy to be in the market? When do you execute? These are all questions that need to be answered before you make the sale. The answers will make Plan B, or the defend part, easy to implement. To start, consider how many dollars you want to invest. Also consider using fixed-risk call options. This makes sense, as you don’t want to put yourself in a position that has the same risk as holding cash (futures).  If you forward sell soybeans in spring for fall delivery, do you want to spend a lot of money to buy an option that is at the money? Or are you better off spending less money on an out-of-the money option that likely won’t work on a small rally, and still could do very well if prices rally substantially, say on a crop production weather scare? If you ask these questions before making the sale, you’ll generally find it’s a seamless transition to make the sale and then retain ownership with the tools that best fit you and the situation at the time.

As with any strategy, make sure that you have conversations with your advisor. Understand the risks and rewards before executing. For many, the idea of buying a call option after making a sale doesn’t make sense, because you believe the market will go down. Remember though, you are not in the business of trying to out-guess price fluctuations. By making a sale and re-owning, you are now balanced and ready for whichever way the market moves. Good strategy and planning will likely go further than hoping and seeing what happens.

If you have any questions on this Perspective, feel free to contact Bryan Doherty at Total Farm Marketing: 800-334-9779.

Futures trading is not for everyone. The risk of loss in trading is substantial. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. Past performance is not necessarily indicative of future results.

Author

Bryan Doherty