Don't Lose the Farm in This Market

July 19, 2012 09:04 AM

When prices get hot, keep a cool head and stick to a plan

Farmers checked the markets on their phones throughout the day Thursday at Corn College, as corn approached $8 and soybeans hit historical high prices of $16.85 yesterday. Even the markets can’t deny the drought has done significant damage to corn and soybeans, and this week’s crop progress report rated the corn crop at 38% poor to very poor.

"Crop insurance will have significant claims," notes Mark Gold of Top Third Ag Marketing, who spoke during this year’s Corn College luncheon. "Those of you who have revenue insurance will have some huge payouts this year."

For those without crop insurance, Gold says he would be hesitant to forward price much grain.

"If you want to sell it, maybe the elevator will roll to next year if you don’t have it, but I wouldn’t count on the elevators rolling forward," he says. Gold recalls 1998, when elevators allowed farmers to roll wheat from one year to next, and then they had double margin calls. "We came close to losing elevators because of that margin call issue," he says.

For farmers with insurance who know they will have a loss, Gold says to remember that the crop insurance company is going to average prices with the October price. He suggests thinking about a put option as an insurance policy. For example, to protect new crop corn you can buy a $7 December put option for 35¢. If the prices move to $8, $9 or $10, you will lose your 35¢ premium but you still have corn to sell at higher prices, Gold says.

"If prices go back to $5 where they were four weeks ago, you are protected at $7.50," Gold says. "I know there are still some lenders out there who still believe buying options don't work. But not one of our 3,000 clients at Top Third who follows our marketing recommendations has had one margin call on short positions, and every client in the program is participating in the rally."

"Don’t assume these markets can’t go right back down," he notes. "All it would take is putting the President in front of a press conference and have him mention putting an end to the ethanol mandate or reducing exports."

Farmers who own put options are protecting the bushels that are really out there. "It’s the only legitimate way to manage risk whether you are in a drought or if you have abundance," Gold says.

Survival tips

To survive in this "superheated" trading environment, you must follow some basic rules:

  1. Don't speculate.
  2. Don't think the markets can't go down.
  3. Don't put on marginable positions (i.e. trading futures or selling calls to pay for puts).
  4. Don't try to pick a top.

Margin calls will make you emotional, and cause you to start trying to speculate. Take the emotions out of your marketing by sticking to a plan, Gold says.

Hear more tips from Mark Gold:


Thank you to the 2012 Corn College sponsors:

AgLeader, AgriGold, Agrotain, BASF, Chevrolet, ESN/Agrium, Great Plains, NCGA, Novazymes, Precision Planting, SFP, Schaffert, Top Third Marketing, WolfTrax

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Spell Check

7/21/2012 02:23 AM

  Best way not to lose the farm? Cash sales and cash sales ONLY. Same as always.

7/31/2012 03:51 PM

  Let's say you set up an account, make some hedges, and sometimes win and sometimes lose and in the end end up only a little ahead after years of playing the hedging game. Then one time you get way ahead and the other guy goes broke (as is happening more and more often) So then you really lost. Maybe when you can get to lock in a really good price ( like right now) and protect your downside it makes sense to put part of your crop into it, but most of the rest of the time you had better not have too much money in any account that is not FDIC insured. Remember you can do the same thing by setting up a grain bin and selling when things are high and not when things are low, the grain never leaves your control and you pay no fees on trades. But a good rule of thumb is that if you do too well the company you did too well against will go broke, but if you sell too low you will eat that for sure unless you go BK yourself.


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