Head to Head: Manage Risk Ahead of Spring

February 24, 2016 02:32 AM

Q: As we speed through winter and begin preparing for planting season, important marketing decisions need to be considered. Can you provide some insight into how you are guiding your customers with their marketing decisions in terms of price and insurance as we move into the second half of winter?

  Ted Seifried
  Chief Market Strategist, Zaner Ag Hedge

Adopt Call Strategies and Watch the Weather

Our marketing strategy this year is markedly different from the approach we have taken in recent years. In most years, we recommend producers be about 30% sold or hedged in row crops going into planting. This year, the focus has been more on finding ways to re-own upside potential on bushels sold while still maintaining cost-effective risk management.

With low prices, the challenge this year is to seek out low-cost risk-management options such as shallow vertical put spreads for a good complement to crop insurance and to use call options to add value on a rally. 

We feel much of the most bearish fundamental news could be behind us. Producers should never base their marketing strategy on long-term weather forecasts alone, but this year there are compelling seasonal concerns. We have the potential for the collapse of the strongest El Niño in 100 years, and we could see La Niña of equal and opposite strength. 

We are recommending call strategies to recapture opportunity on sold bushels as well as complement unsold bushels. Owning call spreads on the new crop can allow producers to make cash sales on a rally without worrying about giving away further upside potential. 

Contact Ted at tseifried@zaner.com.

  Brian Roach 
  President, Roach Ag Marketing

Dribble Cash-Flow Sales as El Niño Wanes

Weather risk in South America failed to push prices to a level growers could be excited about, as early drought in Brazil and Argentina faded on regular late-season rains. 

We expect professional money to trade the short side of corn, soybeans and wheat early on, adopting the attitude crops are at least going to produce trendline yields until proven otherwise. Hopefully, prices will get down to levels commercial traders will extend coverage before spring planting.

Our plan has been to dribble cash-flow sales on early Roach Ag Sell Signals, holding for hopefully better peaks this spring and summer as we transition into important northern hemisphere growing when weather risk typically gives our markets the best prices. We are encouraging a scale-up approach to sales on Sell Signal peaks using stronger-than-average yields, using various futures and options strategies to manage upside risk.

Do not back off of normal Revenue Price (RP) coverage levels this year, as higher actual production histories could be helpful if prices finish the year higher. This is not a year to take the harvest price (HPE) option, which excludes a higher harvest price than spring.

Contact Brian at broach@roachag.com.

Disclaimer: There is substantial risk of loss in trading futures or options, and each investor and trader must consider whether this is a suitable investment. There is no guarantee that the advice we give will result in profitable trades.




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