The USDA report and a good hedge process

Published on: 16:28PM Aug 15, 2017

When it comes to hedging and many other things in life, amateurs focus on being right but professionals focus on getting the best outcome.  Last week’s USDA crop report caught a lot of market players offside. Regardless whether we agree with the USDA’s national yield numbers, they came in higher and the market traded lower. Some predictions were right but many were wrong.

For most decision makers, this drives home the point that the risk-reward of making bold price predictions is too high. Creating a portfolio of strategies that pays off across different market outcomes is the key.  Each potential market scenario; rising, declining or sideways, has a place in the portfolio. What varies from week to week is the amount of conviction attached to each scenario. 

Prior to the USDA report, Pack Creek Capital updated its Corn Producer Hedge Portfolio. 

Here is what worked:

  • Long December Put Spread
  • Long In-the Money Asian Put Option

Here is what didn’t:

  • Reduced short futures position
  • Increased ‘No Hedge’ position

Bottom line:

The report had minimal impact on the Corn Producer Hedge Portfolio. The option positions did a good job of insulating against cash market losses and continue to give the producer the ability to participate if prices move higher. 

A good hedge process is one of the most important factors impacting the trajectory of your business.  We never know which market scenario will unfold but a diversified approach will deliver a stable outcome. In futures posts I’ll comment on managing the cost of option hedges, when to re-strike positions and some basics on OTC hedging.

Pack Creek Capital constructs and manages hedge portfolios for companies in the grains, softs and energy markets. Contact [email protected] for more information.

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