TFM Perspective 07-29-2022


Juggling Chain Saws: What was Learned?

The volatility of the agricultural markets with outside forces of a war, inflation, recession talk, rising interest rates, and an uptrending U.S. dollar have analysts and farmers feeling like they might be juggling chainsaws when it comes to analyzing prices. It has been an extraordinary year with the equity markets experiencing their worst returns since 1970. Who could have imagined a war in Europe and continuing fallout from a pandemic? Yet, is has happened, and each day rolls out with new changes. No longer is the market only concerned with U.S. events. When China sneezes, traders take notice. A drought in Brazil added more to the mix, helping push soybean prices to near all-time highs. Then summer unfolded, and the entire commodity complex unraveled. Are the bull markets of 2022 over? Probably…maybe…well, no one knows. What will weather do for the rest of the growing season?

What was learned, and how do we make sense of it? From a marketing perspective, rising prices offer selling opportunities for your production. Only with hindsight will you know the right decisions for 2022. Many lamented early sales as prices rallied into winter. If you sold early and often, you were increasing your average selling price. After grain prices peaked and tipped over in June, those early sales suddenly looked good. What was learned is that rallies offer selling opportunities and, despite the emotional stress, selling price appreciation makes good sense. Also learned was that price, despite bullish news and rationale, can still drop, sometimes viciously. Many commodity contracts lost 20% or more of their value in less than two months.

Using a variety of tools to shift risk helps to develop a well-rounded and balanced approach to marketing. Purchasing put options is a strategic step to defend price while leaving expected production unpriced. It can be difficult to purchase price protection when the futures markets are moving higher. Yet, by doing so, you are prepared when futures drop. High-priced markets coupled with high volatility can increase the cost of options. Yet, when you have them in place, you have the needed price protection when the drop occurs, which is better than chasing the market after it drops. Lastly, when you make early sales, covering those sales with call options provides for a fixed-risk reownership position. It also provides a level of confidence to make additional sales, as the strategy helps to alleviate the second guessing and fear of selling too soon. You are more likely to add to cash sales, bringing the average price higher.

Trying to outguess the future is difficult. Often, market movements do not match the fundamental picture as we believe it to be. Still, the futures market is the centralized auction place where buyers and sellers come together and, in essence, vote daily on the expected end of contract price. How anyone can (with regularity) correctly outguess all the moving parts that determine price is certainly a challenge. To that end, using tools such as forward contracting, puts, and calls is a strategic way to prepare you for future price moves.

Learn about the tools available that can put you in a position to prepare for any market move. Visit with a professional and learn what may work best for your and your operation.

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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