Top Priority for 2014: Protect the Balance Sheet

January 31, 2014 12:47 AM
Top Priority for 2014: Protect the Balance Sheet

The No. 1 job for crop producers in 2014 is to protect their capital positions created from an unprecedented run of near-record prices. "Defend your balance sheet," advises Dave Fogel, vice president with Advance Trading. "It’s important not go give it all back." In Fogel’s view, that means employing price protection strategies—the combination of options with cash sales—that protect against prices dipping sharply below the cost of production. For some, even locking in a 10 cent per bushel loss now beats being exposed to additional price declines later, he says.

Fogel acknowledges that it’s difficult to execute marketing strategies, particularly with so much information—often from competing viewpoints—available nonstop in real time. In his view, producers are well served to pay less attention to price outlook information and more attention to strategy. "Some of the same people now predicting $3 corn were those predicting $9-$10/bu. when prices were $8 two years ago," he says. Fogel thinks it’s wise to not get caught up in either overly optimist outlooks or—as is the case today—extremely pessimistic ones.

Fogel told producers at the Top Producer Seminar on Jan. 30 in Chicago that it’s possible corn prices could dip further—although he isn’t predicting it—and that it’s a mistake to think both corn and soybean prices can’t drop below the cost of production.

With less than 20% of 2014 anticipated corn production priced—and some think it’s far less than that—and just half of 2013’s, many producers are in the unenviable position of potentially facing two years of production with market prices less than breakeven, he says. "Chicago commodity traders don’t care what your breakeven is." Prices could either head lower or higher and nobody yet knows the events that will occur that drive them because they haven’t yet occurred, he notes.

Fogel believes the best marketing tools to protect producer balance sheets in 2014 against downside risk are put options, and such a strategy is actually quite easy to understand and implement. "If you can’t understand the strategy your market advisor tells you within five minutes it’s too complicated," Fogel says. Even though options have premiums—with corn December puts about 30 cents and 50 cents for November soybean puts, Fogel is not a fan of selling calls to offset part of the cost of buying a put. Two reasons: selling calls raises the specter of margin calls and makes the strategy more complicated.

Unlike the excitement surrounding market news, market strategies that protect your balance sheet are quite the opposite. "Good marketing is really boring, but it works," he says.

While not a fan of selling calls, Fogel says there is a reason to sometimes buy them. That’s when producers sell grain in the cash market, but want the opportunity to enhance their price on the upside.

When basis is strong, combining cash forward sales and buying call options can be a strategy that works, he says. Using puts and calls in the manner he describes "put you ahead of 90% of those marketing grain," he says.

In Fogel’s view, one of the challenges producers have had in forward pricing both 2013 and 2014 crops is that in 2012, those who sold early saw rapid price escalation occur after they sold. That has made them less likely to market in recent months. Unfortunately, that left them unprotected against the huge drop in corn and soybean markets. In 30 years, there has never been a lower percentage of corn booked. "A lot of corn is yet to move," he says.

Fogel sees another marketing challenge. That’s exaggerated attention on news of production problems in localized areas last summer and whether USDA reports were accurate. Last summer, he says, many were so focused on reports of production problems in southeast Minnesota and Northeast Iowa—which were real—and whether USDA was accurately accounting for them that they lost sight of excellent conditions in the Eastern Corn Belt.

"When you start fighting with USDA, you lose," he says. Because of concern over Upper Midwest production, many failed to implement risk reduction marketing strategies, he says. "The market crashed while everyone was looking at Iowa. That cost producers a lot of money." Instead of challenging the market, it’s a far better strategy to defend against moves that can go against you, Fogel says.


For more information on the Top Producer Seminar or Tomorrow’s Top Producer events, visit


Thank you to the 2014 Top Producer Seminar sponsors:

Premier Sponsors: Agrigold, Apache Sprayers, BASF, Bayer CropScience, Cargill, Case IH, Challenger, Dow AgroSciences, DuPont Pioneer, ESN, Firestone, Koch Agronomic Services, RCIS, SFP, Syngenta, Top Third Ag Marketing

Co-Sponsors: Advance Trading, CliftonLarsonAllen, The Gulke Group, Kennedy and Coe, Michelin, Novozymes, OPI Integris, Soybean Premiums, Wyffels Hybrids


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