Farm Progress is part of the Informa Markets Division of Informa PLC

This site is operated by a business or businesses owned by Informa PLC and all copyright resides with them. Informa PLC's registered office is 5 Howick Place, London SW1P 1WG. Registered in England and Wales. Number 8860726.

Expect volatility to continue

Getty/iStockphoto Close-up financial trading chart on digital LCD display
Find the opportunity volatility offers to you as a producer.

We have seen crazy volatility lately. On July 18, beans had a high of $13.93. On July 22, they had a low of $12.88, or $1.05 loss in less than a week. Then from that low on July 22 to the high on July 29, we saw beans rally $2.01. That is wild movement that we won’t see every week, but I do think you have to market expecting volatility to continue.

We have a big report coming out on Friday that will give us an update on crop size, both here in the U.S., and around the world. It will be survey-based, but it will be the first attempt at pegging the crop size this year. We have a West vs. East crop setting up it seems. The Eastern Corn Belt has seen rains, while the Western Corn Belt has been lacking rain most of the year. In Europe, it has been hot and dry all summer, and their crop is likely much less than what the current USDA estimate is.

Beyond supply, we have geopolitical activity that is affecting demand. We have had high prices due to inflation and the Russian/Ukraine war. Demand seems to be lacking in areas of the world. We also have a potential conflict with China/Taiwan that can affect grain movement and demand. In a few months, we will be in the heart of the South American growing season, and plenty more uncertainty. All of this potential uncertainty is where the volatility comes from in the market.

How to market with volatility

Having a marketing plan that keeps you flexible is the key to handling anything the market does. If you don’t want to sell because you don’t know what your crop size will be, then cover yourself with put options. If this market does fall because the crop size is bigger, you at least know what your worst-case scenario will be. If we rally, then your corn is worth more when you sell it.

Puts work well post-harvest also. If you are going to put the crop in the bin and not sell it, then you have downside risk. What if the South American crop is bigger, and the world goes to Brazil for corn and soybeans? The market could fall and now your grain is worth less than it was at harvest. Having the failsafe with puts makes sure that you are protecting your investment from something unforeseen.

If you feel that you have a great crop, or that you will sell what you do have across the scale this fall, then you should look at buying back with call options. The call options will gain in value if the market rallies. The past two years we have seen the market rally significantly after harvest on adverse South American weather and then also the Russian/Ukraine war. If you sold at harvest and didn’t have call options, you likely missed out on the rally.

Call options are a great way to stay in the market without taking a lot of risk. Can you lose what you put into the calls? Yes, but if that happens, the market likely went lower, and you would have lost even more if you stored the grain and sold at that lower price. 

Market volatility is an opportunity for you the producer. If we don’t have volatility, then you likely don’t get a chance to better your position. Protect yourself in the face of volatility, stay flexible with options, and defend your balance sheet. You will find the market volatility will not affect you as much emotionally and you will not be as discouraged when the market goes against you.

Contact Advance Trading at (800) 747-9021 or go to www.advance-trading.com.

Information provided may include opinions of the author and is subject to the following disclosures:

The risk of trading futures and options can be substantial. All information, publications, and material used and distributed by Advance Trading Inc. shall be construed as a solicitation. ATI does not maintain an independent research department as defined in CFTC Regulation 1.71. Information obtained from third-party sources is believed to be reliable, but its accuracy is not guaranteed by Advance Trading Inc. Past performance is not necessarily indicative of future results.

The opinions of the author are not necessarily those of Farm Futures or Farm Progress.

Hide comments
account-default-image

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Publish