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The keys to better marketing in extreme volatility

Getty/iStockphoto Illustration of man walking on volatile trend lines
Utilize these market tools to be proactive, not reactive, to market movement.

Wow, what a year it has been already, and we are only through the first quarter of the year. Since the first of the year, May corn futures are up $1.73, or 29%, and December corn is up $1.70, or 31%. For soybeans, May futures are up $3.40, or 25%, and November futures are up $2.26, or 18%. If we tracked this back to last harvest, the gains would be even greater.

We should be happy that the market went higher, but for some, that is likely not the case. The market gave many producers a profitable price at harvest, and making the sale was not a bad decision. We consistently encourage risk management and the use of options, and in these volatile markets, they work very well.

How?

If grain was sold this past harvest and call options were purchased, you are still in the market and gaining as the market rallies. Had the market fallen instead, the sales at harvest would have looked very good. Regardless of the direction the market went, your marketing plan would have been in good shape.

Now let’s look ahead

The same thing can be said for the 2022 crop. If new crop sales were made back in the fall, or early winter, they were likely good sales, even with higher input costs. However, the market has gone up significantly since then. If call options were purchased at the time of those sales, you would be adding value to those sales as this market rallies.

I realize you always know what you should do after the fact, but if you take the same marketing approach every year, you will not be surprised when something in the market changes. You would be proactive rather than reactive.

We had a drought in southern Brazil and Argentina this past winter, and then a Russia/Ukraine conflict right in a major agricultural area. These are major world events that did move the market dramatically. What will be the next ‘left hook’ that changes the market outlook?

Consistent approach

As you go forward, the use of options can help keep your marketing approach consistent. Have some call options against sales. We don’t know how high this market could go. You should also have put options on grain that isn’t sold. You are looking at protecting the most profit you likely have ever been able to make before, and the crop isn’t even planted yet.

And yet, I would not have the mindset that this market can’t go lower. Anything can happen and you cannot begin to predict what event may change the marketing narrative. What you know today is that you have a lot of revenue potential, and you should be doing things to protect it.

As we roll the calendar forward, you should also be looking at 2023. Like I said, we have a lot that can happen and there is a long time before we get to next year’s harvest. However, that doesn’t mean we can sit here and be paralyzed by this market and do nothing.

Input costs remain the biggest unknown as we sit here today. However, if costs are going to be even higher for 2023, then you have even less room for error if this market falls. Look at your 2022 crop budget now and look to add whatever you think you may need to for 2023. You will find that you simply can’t afford a market drop. If you incorporate sales with calls, and then puts on what isn’t sold, you can likely establish a floor that keeps you in the game if we go higher, but also a floor that gives you profit if we fall.

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.

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