TOP FARMER WEEKLY PERSPECTIVE 01/08/2021 BY BRYAN DOHERTY
Do Not Become Fearful
The extraordinary rally that has occurred in the grain market since August has been historic and, by some descriptions, epic. There have been several variables that have come into play. When connecting the dots, the rationale behind the rally seems logical. Yet, many producers are lamenting the fact that they sold into the rally and are not participating to its full extent. We believe this is normal human emotion. To date, doing nothing may prove the most beneficial, and it is the riskiest. Would you really put your farm at risk by not selling at higher prices? If you sold into a rally, you kept your pay raise and shifted risk. This was likely the right thing to do at the time. If you balanced your approach by reinvesting some dollars into call options, you are now working with call option capital, which still requires management. If you did not retain ownership, it is easy to beat yourself up and tell yourself you should not have sold. There is no point in doing this. The horse is out of the barn. Concentrate on what you can now control.
Focus on current market strategies and opportunities. Continue your efforts on the things that made you the success that you are. From a marketing perspective, this means not being fearful to look ahead at 2021 (and even 2022) and make good decisions for that crop year. While new crop prices have not rallied at the same pace as old crop, they are offering substantial opportunity for producers to lock in good levels on a portion of their crop. Let’s call these initial sales value sales. That is, they are sales that act as a pivot point. If these are the only action you take, early sales will act as a pully and lift your overall bottom line average. If they act as an anchor, it seems a good problem to have, as you will average higher than your initial sales. Know the amount you want to sell up to. Most producers are probably happy selling 25 to 50% of expected production. Averaging into a higher price level has merit and keeps your business operation solvent. Also, take a few minutes to study how marketing tools work. For many farmers, purchasing call options in recent years to cover sales probably has not worked to the advantage they would like. Don’t focus on the past. Focus on a balanced approach and utilize call options to cover cash sales, or allow the call option to be a catalyst to make cash sales. When bull markets end, they often do so in a violent fashion and begin a downtrend that lasts for a long time.
Have a conversation with your market advisor on which tools may be best suited for you. Do not spend time trying to analyze why options are priced where they are. The marketplace will price options based on volatility, time value, and proximity to futures. Spending more money on put or call option premium is expected in a more volatile market. If you want to be more advanced in your approach, talk to your advisor about other alternatives that could be cost-saving such as bull call spreads, bear put spreads, or fence strategies. Every strategy has different risks, objectives, and cost. Whatever tools you use, make sure you have a full understanding and appreciation for how they work – the expectations as well as risk potential. 2021 looks to be a promising year, so take advantage. Do not be afraid to sell at good prices. If you’re wrong, it only means prices get better and you average your net farm price to a higher level.
If you have comments, questions, or suggestions, contact Bryan Doherty at Total Farm Marketing. You can reach him at 1-800-top-farm, extension 300.
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.