Stop the Gamble-Hedge!
Feb 19, 2010
Stop the Gamble-Hedge!
I am not going to write about where I think grain prices are going from here. That has nothing to do with this article and I will use this going forward to have new clients read my mindset. My subscribers know well about everything I think relating to the grain markets and price in time. All my producers have hedged most or all of their crops both old and new, custom tailored to their need for protection and their desire for the upside. Their task is now to produce at least their average trend yields on their farm.
I do not want to talk about price with you because it really does not matter where the price is now or in the future to YOU, because until you sell or "hedge" in some way, the price does not matter. No matter higher as in 2008 when soybeans went to $16+, it really did not matter to YOU, unless you sold it somewhere on the way up or down. Until you do sell, you are long cash grain and gambling risking your money to make money.
With the proper option strategy, you would have captured money all the way up and have protection on the way down. You would have captured money no matter how high the market would go. Your only risk is in producing the crop you have hedged, a below normal trend yield would need to be adjusted if and when you feel some crop loss will occur. Your risk if I can say so casually, but we know there is plenty of risk if weather does not cooperate, but also rewards you when it does. This is all the risk a producer should have to deal with, being un-hedged and never knowing what you will ultimately get for your crop is stressful, and not necessary when prices are profitable after input costs are figured, and profits are kind. You just hedge it the best way you can, and with my knowledge I believe I have empowered the producers that are on my book with knowledge, and most tell me they know more now than the people who helped them before.
What I do want to talk about is a person who is a gambler and uses the farm as an excuse to gamble. As in 2008 when prices went to the moon and back, without a hedge you saw $7.50 soybeans and $2.90 corn at harvest. So whatever you did not sell somewhere on the way up or down, was no different than being in a casino and making more money than you ever dreamed of, and watched yourself turn into a loser, without ever leaving the table when you still had good profits. A professional gambler or trader knows that you should never turn a good winner into a loser. They also know how to manage money and manage risk, and this is where a producer runs into trouble, no different than a speculator who lacks these necessities of successful trading.
All my producers who have paid for services in the past, or been doing it themselves for decades, tell about and know what to do if the market goes up in price, but have little plans if it goes down. The most common mistake I see being made is, the risk reward in what they do is like a player betting on the long shots and not even getting decent odds to make the gamble worthwhile.
Most farmers have a price in their mind where they will sell their crop if it goes higher from here, but how many have a plan of where they will sell if it goes down? Take the January 12, 2010 USDA Final Crop Report which is always big and this year turned out to be a game changer. I had been recommending for weeks no matter the day to hedge 100% of your crop before that report. At those profitable levels almost never seen before, the prudent thing to do was to have a business mentality of locking in profits and try to make more next year, by hedging your crop. Almost everyone on my book hedged most or all, and some limited to their account value, indeed hedged.
Now for the first time in my producers lives they called to tell me that they did not care what the report shows, up or down, because they are hedged where they are protected if the market would go down, and they know if it really rallied hard, they would make much more money. A few said the same thing, they are bored, but I like it when they tell me I gave them their life back.
Before the report I made it clear almost daily and the slow to hedge picked up the pace when I asked, how much higher are you going to sell, and if they go down instead how much lower is your plan to sell? If you said 50 cents higher in soybeans, I hope that you did something on the way down, hopefully selling not more than 50 cents lower as when asked the question. If not, you could be losing over $1.50 right now. Does that sound like a professional gambler? Does that sound like a professional trader? With odds like that, now you can see why the casino gives people free dinners, rooms, and show tickets, because when the casino loses they give you 50 cents, and when they win they get $1.50. Now it is only a matter of time before they build another casino, and the player goes home to make more money so they can come back.
Now ask yourself, in 2009 you could have gotten around $4.50 for December 2009 corn during planting intentions. What did you do when it went to the $3.20 area in late summer? This time you did get a second chance to sell at a $4+ level going into the Final report. If it went to $5 was it really worth the money found in the bush rather that the money that was in hand and the pain you had to go through to get it? And would you have sold if it did go to $5?
The producers I had on my book since planting intentions in 2009 had protection all the way down to $2.90 and were always protected, and rolled into March where they had locked in $4, plus they had 38 cents in their pocket picked up through the option strategy used since planting intentions (including all costs). With the burden of the gamble off their plate they went fishing and hunting, or just got more time to know their children, did normal things, and wake up in the morning without care as to what the market was doing on any given day. This time even with $1 protection to the downside when originally hedged, they got their protection for free and outperformed the market. That is like getting free life insurance. What is it worth to become a producer and not a gambler?
Need to take it further? "Bet the farm", why is that a known expression? Because that is what so many farmers have done for 150 years, some with no choice, and many had a choice (like now) but chose to gamble. They used the farm as an excuse to gamble. I tell all my producers, hedging is not going short hoping the market goes down. Rather it is a way to have no position, long or short, but a way to market your grain and take your paycheck. If you do not hedge it is no different than calling your wife and telling her "I have my paycheck (the last trade price) but I am going to Vegas and I will let you know what we made from working when I see what I bring home (when you actually sell or hedge). I do not know too many households that can get away with that in the city, but it is almost programmed into farmers from birth.
But I must make you face the truth, unless you hedge and lock in a profit for your hard work and risk, you are a gambler. I also say that you should be like every businessman that likes to gamble, you lock in income from your business, and take a small % of your income to gamble with. Now since you are hedged you are truly "without position", you are truly free to go long or short. If you do not run your farm as a business, you are truly at the mercy of the market when you need money.
Maybe some years you hedge higher than where the market is after you do, and sometimes the market goes higher after you hedge, it really does not matter, what matters is that you put yourself and your family needs over what your next door neighbor is doing. It really does not matter to your family if they got more or less than you did, what matters to them is what you provide for them.
I tell my producers, "The most important thing to protect is the downside, because .50 to $1 lower can really hurt you and have you work for nothing or worse, but not making $.50 to $1 more if they go higher will NOT hurt you". With the right option strategy you will still own your crop if they go higher.
Let's be real about gambling. The "thrill" of making money and the "sadness" of losing more than you should is produced by the drugs your brain produces, before, during, and after the wager is over. These drugs produce emotions that will insure failure in any form of gambling including the farmers favorite betting parlor wager "what will be the price of corn in the future" game. There is a percentage of your income you can do that with, but not the amount that turns the farm into the gambler and not you, because it is really you gambling with the farm.
With gamblers, the only "high" they get from winning is that they are allowed to gamble again. It is not the money they are truly after, it is that drug release, the shot is in the air on the buzzer and if they make the basket you win the bet, and if he misses you lose the bet....... that is the moment in time that your brain is giving you the shot in the arm full dose of drugs it produces including good old adrenaline to boost it up. That feeling is the ultimate rush, after the basket is made, the feel good is still there but the rush is over and what a feeling that you welcome repeating. Throw in a little ego (as well as other things) and we can add to the problem. If you lose the bet, maybe you like the "sadness" you feel. Maybe you feel you do not deserve to be successful and put yourself in that situation, a kind of masochism. The more that is bet, the more the drug release. But if you do keep the gamble to a minimum so it never becomes emotional and could jeopardize your lifestyle, the "thrill is taken out".
Another problem is that many farmers are more worried about what their neighbors get for their crop, than worried about what they themselves are getting for theirs. If they get $11 for their beans and their neighbor gets $12 they feel bad they only got $11. But the next year your neighbor got $9 and you got $10, but now you are happier than the year before when you got $1 more. Why? It is almost like betting against them. In reality like in all pari-mutuels wagering, you are not betting against your neighbor, you're betting alongside him.
I know by talking with my producers that 1. They did not like sending me margin money (known risk and margin) even though they knew they were actually making more money from what was in their bins than what they were losing in their hedge account and 2. as the market went down their accounts swelled, they felt great, even though they were not making or losing money on the way down because what they made in their hedge account they were equally losing in the bin. That is what a hedge is intended to do, protect you on the way down and with my strategies could cost you nothing for the protection, and still allowed you to make unlimited profits if the market should take off and rally.
I know you must overcome the way we as humans are wired when it comes to money. Logic tells me If you hedge 50% of your crop you could be no worse than being 1/2 right or 1/2 wrong in doing so. When it doubt, this is always my choice in what I should do. For that reason alone it is the right thing for a producer to do who does not want to hedge.
The size of the gamble in relation to your net worth is what really matters when it comes to gambling, and again if you do not hedge you are gambling. I have no problem in gambling but seeing thousands of new members not lasting more than 6 months, because of the wrong mindset, exposure to too much risk, or the unimaginable happened, instilled in me to always manage risk.
Most traders do not make money, why do you expect you will be successful in trading? I encourage all my producers as well as my speculators to "gamble on a future outcome" but always keep the risk insignificant, and if in time you prove to trade well, your account will reflect that and the gains will increase your size. If you are in for the long haul, it is not what you did in a year; it is what you do at all time, because without the right risk management, you are an accident waiting to happen.
My job is not to tell you at what price to hedge, my job is once you make that decision, is to hedge you the best way possible custom tailored to your thoughts ideas, and of course I know the time frames. My daily numbers service does give you my comments daily, and at what price is best on the day you decide to hedge. With all the information we have to work with that is provided to us all, my daily commentary is like on the trading floor, everyone who has been around for awhile has a few people in the morning who they ask "what do you think about the market today". The first couple of years I gave my numbers for free but then started to sell them. I always gave my thoughts for free, but if I was going to be bothered every day, and some of these people I would have liked to have made 1/2 of what they paid in taxes, so why not. I will say this, unless you have been trading for at least 6 months to a year, nobody will talk to you let alone provide you information. My daily service is just that, "Howard, what do you think today, and can I have your numbers".
I do not take credit or profit if you get more than the last trade price, as well as I take no loss if you do not hedge and they go down. This is your business and you must do what is right for you. I will try and keep your hands on the wheel as you get to your destination. I see almost all the services telling you what to do if they go up, but no plan at all if they go down.
I really do not have a problem in finding a farmer who wants to learn a better way to hedge, but it is very rare to find someone with my knowledge, let alone 34 years of actually having traded the grain market and the wisdom and experience that goes with it. Trading options since their inception on the Chicago trading floors helped launch a learning experience for me that have me regarded by people who know me on the trading floor as an option expert.
As long as I have good health, I have everything that I will need in life. That leaves me in the position to continue to make money the old fashioned way, "by earning it" and providing real knowledge, as well as in my opinion the best service for order execution on the trade floor. You will know from the first hedge by using a 3 way call into the trading pit where you will hear my friend bid and offer your options and while you are in control of your bid and offer you can change the price in a heartbeat. You could not fill your order better if you had your own membership and was on the floor executing it yourself. What I offer is a service that is priceless if you can find it, and ask people who do 200 contracts at a time and they will tell you they cannot find this high profile service. No producer is too small or too large to use my service.
Open an account and start to hedge some of your crop and in time I will earn most or all your business because you will see for yourself how my strategies work out. I always make sure you understand in full what you are doing before you do it. You are in control of what you want to do.
I will make it clear about the give and take for whatever upside you want, and what downside you need to protect. I am your calculator, you put in the information and press total, and you see the answer. In time you will know how to do it when the battery dies. That is how I am your market strategist, you give me your thoughts and my answer is based on 20+ years of real time trade experience in options, and I give you the "total" answer. I save you the years of knowledge and put it on your plate, made easy. It is not difficult and requires simple math using addition and subtraction for you to learn.
What services are out there to help you hedge even if they are honest and ethical is limited to their knowledge. They could be the best grammar school teacher, but they cannot teach a PhD program with a Master's degree, let alone a 4 year college degree. I am the person that teaches the "PhD program".
Without the proper option strategy you could be wrong in how and what you do and it would turn out to not bring you the desired result. I will pass my knowledge to you and explain a better way to hedge based on your thoughts and ideas, and I realize it is your decisions on what you want to accomplish in your hedge. Without the proper option strategy you can be right the market and wrong what you do, and with the right one you can be wrong the market and still make money. Knowledge is power if you want to use options.
You are not a trader, it does not matter what they did an hour ago, yesterday, tomorrow, next week, or even next month, what matters is that you no longer have the same risk or reward with what the market might do, and you have accepted a paycheck for your hard work, and risk in production. What I can do is try and capture basis using options against futures, the same way you look to gain basis in cash for futures, but going after more than a dime, and more than once.
So whatever you do, however you do it, take the gamble out of the farm when you have good income for your work. Then you can gamble part of your income on whatever you think. I hope you will be right, but I know the farm will never go broke taking the income.
You are a unique business, and one that has years where there is no choice than to gamble, but you do have years where profits are able to be locked in before production begins. You cannot open a clothing store, or 7-11 and be guaranteed an income before you start the business, where you can lock in costs and if production goes as planned, lock in income no matter what the market bears when your production is completed. On years when you are forced to gamble is one thing, but on years like 2010, income above your average should be locked in.
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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.