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Minimize risk in a low margin environmentMinimize risk in a low margin environment

Predicting price is impossible but managing price risk is something all of us can control.

Dave Lechtenberg

April 6, 2020

3 Min Read
Businessman pointing at risk management concept on screen
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Critical measures have been implemented to protect our health and the health of our loved ones. Many of these measures will have lasting affects to agriculture, our economy, our food supply, our educational system, and our workforce.

This spring has been a reminder that prices and events will always be impossible to consistently predict. Market change, often without warning. The challenges we face impact everyone across the globe and agriculture is not exempt. 

The American farmer will find a way to produce and harvest a 2020 crop in the face of extraordinary obstacles. Farmers’ production skills increase every year and this year will not be an exception. If the ability to produce were the only component of profitability, agriculture would be flush with available assets. 

Unfortunately, profitability is also based on marketing and too often marketing is left to chance. Expecting upside and not respecting downside is dangerous. It is difficult to predict when or if risk will happen. As students of the market, we learn that price prediction is impossible, but managing price risk is something that all of us can control. 

Tune out market ‘noise’

The industry is now tasked with getting marketing control of the crop we are about to plant. Too often market “noise” clouds our ability to make unbiased marketing decisions. The uncertainty of today’s markets has left many reluctant to market the expected production. 

What is the solution?  Success will depend on a risk management strategy to manage ever increasing and unpredictable price moves. Consider both favorable and unfavorable price moves equally when structuring your risk management strategies. This will allow your operation to limit the uncertainty in your marketing plan and develop an expectation of success.

Growers have the tools available to create a floor or a substitute sale on the expected production, while waiting for prices needed to achieve profitability goals. An option-based marketing strategy allows you to identify and quantify your financial risk. A quality marketing plan will protect your operation from lower prices, while leaving you positioned to benefit in the event the markets recover and trend higher.

The time is now to find a trusted adviser to help navigate an ever-changing market. If you are not currently using risk-management tools, now is the opportunity to educate yourself. There is no single formula that works for everyone.

I encourage producers to seek out a trusted advisor that will instill an understanding of the available tools. Take that information and combine it with consistent marketing habits to develop what works best for your operation.

Advance Trading

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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. 

About the Author(s)

Dave Lechtenberg

ag risk management advisor, Advance Trading, Inc.

Dave is an Iowa State University graduate in Agriculture Education who started his career as a High School Agriculture Education Instructor. He spent time as a Grain Merchandiser in the Cooperative Elevator business before joining Advance Trading in April 2006. He serves customers throughout Iowa and southern Minnesota. 

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