TFM Perspective 12-10-2021


Keep it Balanced

It is hard to remember a time when farmers were faced with so many variables in the year that lies ahead. High price volatility, inflation, skyrocketing fertilizer prices, and overall concerns of other inputs are just a few of the variables facing farmers when deciding what to produce in the coming year. On one hand, it may make sense to lean toward planting more soybean acres. On the other hand, if everyone is thinking the same way, maybe more corn acres is a better idea.  If you have inputs priced, there is probably some comfort. Still, availability could be a factor. If you feel somewhat confused, lost, or uncertain, you are not alone.

As you weigh the potential consequences of decisions you make, keep in mind that, as a producer, you are also responsible for marketing your projected supply. Often, when volatility is high and uncertainty overwhelming, people may tend to do nothing. While that could prove beneficial, the odds probably don’t favor it. Ignoring the uncomfortable isn’t very strategic. Instead, think about the year ahead and map out potential scenarios. What happens if prices skyrocket, and what happens if prices plunge? What happens if prices trade in a sideways pattern and don’t move much at all? At what point do you make decisions to manage the marketing of your crop? It is not unusual for people to make decisions when pain becomes an issue or enough time passes that your hand is forced. These are questions you cannot ignore. You have to answer them at some point. Embrace current prices and volatility. Read on to learn how to take a balanced approach.

From a farm marketing perspective, trying to outguess what will happen is nearly impossible. Consider some of the variables that could affect prices: the cost of energies, South American weather, planting conditions, U.S. weather, just to mention a few. It may be best to keep in mind the time of year and assume normal production. Here is a basic outline to use to insure against the unexpected: Consider forward contracting up to half of your expected production between now and the end of spring. Purchase call options against your forward contracts, which then puts you in an ownership position on your sold bushels, should prices rally. Snug supplies and uncertain weather could be a factor leading to higher prices. Buy call options as you are forward contracting, or consider buying the call options prior to forward contracting. Purchase put options on half of your expected production between now and spring. This will establish a price floor, leaving unpriced expected production in a position to benefit from a price rally.

This approach keeps you an owner of 100% of expected crop production and, at the same time, defends against lower prices. A balanced approach strategy will take management, which implies spending time reviewing and executing. If you are confident in your production capability, recognize that you will likely have an average to above-average crop. The need to manage the value of this crop becomes more and more critical in tighter margin, high volatility environments.

As with any strategy, consider the risks and potential rewards before initiating any position. Seek out a trusted advisor to help you, and take control of the uncertainties.

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

Sign up to get daily TFM Market Updates straight to your email!

back to TFM Market Updates