When futures aren’t used as part of a grain marketing strategy it’s like a farmer going to the field with only a hammer, screwdriver, crescent wrench and vice grip in his toolbox. While these tools can fix some problems, a farmer will be more effective and efficient if he has a more diverse set of tools.
The hammer. It’s easy to understand what will happen when you use a hammer, but it doesn’t give you many choices. Hit something just right, and all the problems are solved. Swing too hard or in the wrong spot, and you can break something. The hammer is the equivalent of selling cash grain. Sometimes you succeed and sometimes you fail, but it’s pretty easy and takes little skill. Selling at the right price at the right time (a direct hit) feels great. Selling at the wrong price or time is hard to fix and causes frustration.
The screwdriver. The screwdriver is also an easy tool to use, but it’s limited in function. It can be useful in the right situation, but unless you have the right screw or bolt, this tool might not
be the answer. This is similar to just counting on insurance revenue programs or government payments to set a floor price or make up for a short fall in prices. It’s a tool you can’t live without, but it won’t fix everything.
The crescent wrench. When you aren’t sure what size of bolt you need to loosen (or maybe you have a surprise metric bolt), the crescent wrench can come in handy. However, if the bolt is really tight you can round off its corners and be in an even worse position. This is similar to buying a put or call option. There are times when buying a put or call is the right tool, but there are situations where it doesn’t work as well or makes a problem worse. In less volatile markets, options can cost farmers more than they can potentially gain from them.
The vice grip. As a companion tool, you can keep your fingers safe by using a vice grip to hold a nail when swinging a hammer. A vice grip can work with a screwdriver or crescent wrench to hold a nut in place when screwing in a bolt head. This is like selling grain to an end user. It can be handy on its own or when used with other tools, such as hedge-to-arrive or minimum-priced contracts or deferred pricing. However, it can lock you in tight, resulting in limited options and flexibility. For example, what if a weather event results in fewer bushels? Or, what if another end user pays more down the road?
A socket set. It’s nice to have a complete standard and metric socket set, with all sizes and extensions, for any task. While a little heavier to carry, keep organized and more complicated to use, the flexibility and versatility is worth it. Futures, like sockets, allow the flexibility to pick an exact price to sell grain. Deep sockets are like using deferred contracts that allow a farmer to sell late in the year and pick up market carry. Different drives are like futures contracts that allow selecting the desired year to market grain. Extensions, like futures, provide the flexibility to take advantage of basis opportunities.
Open-ended box wrenches.
When sockets don’t fit, an open-ended box wrench is nec-
essary to reach a difficult bolt head or nut. While not as handy as a socket, it can be the perfect tool for a specific and tricky fix. This is like using straddles in a stubborn sideways market to increase profits. When a futures contract isn’t good enough to meet profitable price points, these types of trades can provide a little extra. Straddles can also complement futures trades, like using a socket on one end of a bolt and an open-ended box wrench on the other.
WD-40. Sometimes a little extra help is necessary to loosen tight bolts. This is like selling calls. Does it work all the time? No, but when things are tight and none of the other tools are working, picking up a little extra premium to add to a future sale is all that’s needed to get the job done.
Your grain marketing toolbox should be just as diverse as your mechanic’s toolbox to take advantage of every opportunity and challenge you will face.
By Jon Scheve