Producers need to diversify!
Aug 31, 2009
I would suggest the future is going to force producers to be more focused on controlling risk than ever. This implies that not only do producers have to worry about getting the crop planted and harvested but they are also going to have to manage things such as interest rate exposure, fuel cost exposure, fertilizer exposure and price risk of commodities.
While most producers are currently focused on if it’s going to frost or not I would challenge producers that you need to start diversifying your hedging program. Sell bonds on rallies to protect against long term interest rate exposure. Second, start looking aggressively at buying natural gas to protect your nitrogen exposure in anhydrous ammonia. We believe we are in a unique time period to start looking at protecting this risk exposure. We will be very soon adding a review of the T-year notes and natural gas to our Web site to advise of the development of a hedge position in these two commodities.
At this time we are looking at preparing ourselves to be ready to sell the T-notes on any strong price bounce over the next few months if the Fed is forced to lower interest rates on the concern of a double bottom in the economy in the first half of 2010. As for natural gas we are watching very carefully the triple bottom that’s in place. We like the strategy of scale-down buying at current levels but clients must be prepared for some margin risk exposure. To reduce exposure, sell out of money calls against the long position could be recommended for the first position. We would only move to a maximum position if and when the market closes above the long term averages.
Again, the producer of the future has to strive to manage risk by managing the profit margin. Producers need to focus on not only the selling of product but on the protection of inputs as much as possible.
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