TFM Perspective 06-10-2022


Volatility: Stay Balanced

Throughout most of the winter and spring months, grain and oilseed prices traded higher, with price setbacks shallow. In hindsight, these are viewed as buying opportunities. As planting progressed and talk of Russia potentially allowing Ukrainian grain shipments, prices weakened. From a time-of-year perspective, this is not unusual. Still, many would argue that, in a tight supply situation the world is facing, a downturn in price is unwarranted. Others might argue prices are too high and should have never reached current levels. Bottomline, most would agree that prices are historically high. With high prices comes high volatility. Price movements can be exaggerated. This is called volatility. When prices move in your biased direction, well, that is how it is supposed to happen. When they move otherwise, frustration mounts, as the market just does not recognize how important the news and events are that support your argument.

The key is to understand that you can manage volatility by positioning yourself for both higher and lower prices, despite the outlook. Outlook can change daily. The goal is to position yourself to capture both higher and lower prices. For grain and oilseed farmers, this means forward selling to capture high prices on half your crop. What about the other half? Purchase put options. Puts give you the right (not the obligation) to be a hedger (seller of futures). If prices decline, you will either convert your put into a short futures or sell the put back to the marketplace. What if prices rally? Your puts can lose value, though half your expected production (still unpriced) can appreciate in value. The forward sold bushels cannot participate in a price rally. However, if you purchase call options on those bushels, now you have re-ownership. Call options can participate in a price rally and, if they have value, can be sold or converted into a long (buy) in futures.

The end goal is to position yourself so that, no matter what the market does, you are able to participate on a price rally or decline for all your expected production. This strategy takes management and should be discussed thoroughly with your advisor. Make sure you’re implementing options that best fit your risk tolerances and can complete the job of taming the volatility you are likely to face. In general, people tend to react as events unfold rather than preplan and prepare for them. With prices at critical levels this early summer, take time now to map out the what-if scenarios, and execute strategy to manage them.

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.


Bryan Doherty

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