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DFP-Staff-Soybean-Harvest.jpg Delta Farm Press Staff
Three things farmers should pay attention to yearly are production analysis, keeping up with charts, and knowing how to use call options.

Crop markets and risk management

Scott Agri associate Jordan Thomas says the company's philosophy boils down to preparing for the unknowns in an unpredictable market.

With unpredictable futures markets, it is important that farmers be as prepared as possible.

Scott Agri Crop Marketers, a business whose associates are marketing advisors, helps plan for market-related decisions. Scott Agri associate Jordan Thomas says the company's philosophy boils down to one specific idea.

"There are all kinds of estimates and projections out there based on things like projected numbers and weather patterns, but at the end of the day, our philosophy boils down to: we don't know what's going to happen exactly," he said. "We expect volatility to come at some point, but we just don't know when, so we try to prepare our clients for the unknowns."

Market outlook

Currently, the market outlook for soybeans and corn has a lot to do with this past year's weather conditions.

"The weather has been a huge factor this year, probably more so than a lot of other years," Thomas said. "You throw in the trade war on top of that, you had a lot of volatility and chances to take advantage of that volatility. For corn, the demand side is weak. I think a lot of global buyers filled up on supply from other parts of the world when there was the corn rally this past season. That left the U.S. without a lot of options as far as demand goes."

Demand for soybeans, on the other hand, is picking back up with China back in the market.

"Moving forward, yields may come in a bit lower," he said. "There's certainly the chance for volatility and possibility for some strength. Of course, if the market gets surprised, it could move lower. Going into 2020, it's going to be interesting to see how the delayed harvest and possible lower yields play into the next crop."

Three things farmers should pay attention to yearly are production analysis, keeping up with charts, and knowing how to use call options.

"First, I would say farmers should have a good production analysis for cost per acre," Thomas said. "I know it can be tough to divide it out amongst the commodities, but first off, have a general plan on your break-even and profit goal per acre.

"Second, know when to book or keep up with charts. We can't really predict anything exactly, but knowing the break-evens and profit goals, and then looking at charts for technical analysis is important in having those resting orders in place with a buyer. This way, when you are busy in the field, you don't necessarily have to pay attention to it knowing those resting orders are in place.

"The third thing is knowing how to use call options and having access to options, not necessarily having to use them, but at least knowing what they do, how they work, and having access to them. Call options will appreciate when the market goes up, so those are good tools for producers to have in place to help them maybe make a cash sale."

He said they call them courage calls, so if a farmer has unlimited upside with a call option, it gives a little bit more courage to book, knowing you are still in the market if it goes up. You won't miss out by selling too early.

Put options

Then there are put options, which protect you when the markets are lower.

"It goes back to identifying your cost per acre and your break-even," he said. "If you can get a put option, that will protect those prices, especially your break-even, and then your profit goal. It makes a lot of sense to have a put that guarantees you a price in case the market does fall out.

“Put options are a great tool for farmers because the market is up, and they're not committing themselves to any buyer. They're protecting bushels that haven't been sold yet, so if the market keeps going up, those bushels are in the market, and they may have the opportunity to roll that put higher to ride that market further up."

Put options are the right but not the obligation to sell X amount of bushels at a certain price, and they are calculated with the strike price and premium. For instance, if you buy a $10 soybean put for 30 cents, the floor is then $9.70, and so you're guaranteed that price. If the market falls to $8, you know the put is going to be worth at least $2 because it's valued at that $10 strike price, so if the market falls out, the put gains in value.

"Now, you're losing value, of course, on the cash side of your soybeans, but since the put gains value, it offsets it," Thomas said. "This is an important tool we try to use every single year if we get the opportunity. Puts are able to generate a higher premium during bear markets, so put options are one of the farmers' best friends.

"I think marketing really boils down to educating yourself on the ins and outs of the market and how these tools work. At the end of the day, it's really the timing and the finessing of those positions that are challenging and where a marketing adivsor comes into play."

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