Farmers are always focused on fundamentals, not price. This is the first and biggest mistake a farmer can make.
The future exchange was created so the producer would not have to also be the gambler, not only gambling on his crop yield, but what the price will be when it gets out of the ground.
About a century and a half ago, the Mid America Commodity Exchange (taken over by the CBOT several years back) offered futures contracts that were backed with exchange held money, which would allow banks to feel secure to lend money to the producers to buy seed, fertilizer, and all his needs until he could get his crop in the bin. Before then, it was very difficult to get a loan not knowing what the price will be when harvested. With the futures contract, the bank was secure in their loan no matter the price at harvest.
With that being said, I see many advisors, brokers, elevators, tell farmers their take on the market and where prices will be in the future. Well guess what? That is not what the farmer needs to know, he needs to know how to market his grain, same as 150 years ago, and so he can sleep at night. He wants to be a farmer, not a speculator. He listens to his never-ending optimistic fellow farmers, who do nothing and wait until harvest, and he seeks advice from the grain elevators, brokers, trade publications, and they always give THEIR take on predicting the future. Some or most even tell the farmer what to do based solely on their ideas but not the farmers, and the farmer becomes a gambler waiting for the price levels that the advice says they will be able to obtain if they wait to market. They NEVER talk about what the farmer should do if the market heads lower, even turning into a bear market, where is the advice then? What was the strategy if corn does not get to $5 and does turn down, can the farmer take that gamble? The answer is simple, he went for advice on how to market his grain so he does not gamble in the future price, and any strategy that does not protect the downside completely to his needs, makes him a gambler until the price for his grain is locked in. He does not need a plan to sell 10% here and 20% there; he needs a plan to sell all his grain especially at these levels that were never seen until last year. He needs that risk taking out of his hands but still have the potential for further gains.
I say, the farmer can lose his own money; he does not need to let someone else lose it for him. If there is any gamble to future price, he should decide on his own fate and not listen to others. He should take all the information he has gathered and make his own decisions.
What I recognize is the need for a farmer to be able to get solid advice on how to lock in the current price, have upside potential, and not have a margin call. He will be able to know what he got for his crop and not have to worry about margin calls that could bankrupt him, or if the market plunges to below his costs.
Selling calls or worse yet futures is the wrong thing to do in today's world. Look at last year and the disaster that occurred when a major gain firm that has a huge grain elevator base recommended selling twice the needed CZ '08 $6 corn calls. When corn went to $7.50 and higher in both June and July '08, the calls were worth $1.50 in the money or $7500 for 1 contract, and worth a lot more than that for the $6 calls. When any futures market is in a bull market, the margins are raised to hold a futures contract. This combination, and an amazing rally never seen before in the corn market, forced producers who at this point had no money and the banks refused to lend any more to hold their position, were forced to buy back those calls, take a beating in losses, and then were faced with an un-hedged crop. To refresh your memory, corn had a high of $4.21 in November and December '08, with lows of $3.38 and $2.90 respectively. He could have hedged his crop for a low of $4.59 since the start of 2008 until the high in June '08 at $7.62 1/2, and July at $7.50. Instead, he saw the lows of the year at harvest time.
I warn you with all my knowledge the one thing for certain that you should be concerned about is MARGIN CALLS. When someone tells you "Do not be afraid of the margin calls when hedging"; this way of thinking insures that you will be an accident waiting to happen.
Why would you put a farmer who is looking for protection in harm's way? My 20+ years of option knowledge and trading, has earned me the right to be considered an expert. I market your grain based on your thoughts and ideas, because in the end it is your money and you should be in control. I can lock in a given price, with no margin calls, known cost, and still leave unlimited upside potential. I can market December corn at $4.50 for $.10 1/2 cents plus commission, if the market is at where I did so at that price on 100,000 bushels on Friday 5/22/09.
My clients all have told me how pathetic their grain was marketed in the past, after learning from me in a few hours of what I am doing; they feel empowered.
Lastly, all doctors, lawyers, and Indian chiefs are not equal. Just because they passed the exam, got a license, does not make them equal. You do not expect a general practitioner to do brain surgery; do not expect people who give good intended advice to be brain surgeons.
My services are second to none. Do yourself a favor; inquire about my hedging services Tel. 312-573-2699.
Attention all Producers
Are you still a victim of outdated hedging programs?
Are you paying $20,000 for advice on hedging that is nothing more than another person's view about where the market is going?
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Disclaimer: No guarantee of any kind is implied or possible where projections of future conditions are attempted. Futures trading involve risk. In no event should the content of this be construed as an express or implied promise, guarantee or implication by or from Howard Tyllas, that you will profit or that losses can or will be limited in any manner whatsoever. No such promises, guarantees or implications are given. Past results are no indication of future performance.