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If you’re a grain farmer, be thankful for risk management tools

tolgart/iStock/GettyImagesPlus Black background with word Risk in reverse white type. Across bottom are five factors to consider when managing risk.
Turkey producers do not have ways to mitigate unforeseen turkey prices --but grain producers sure do.

It’s post-Thanksgiving weekend and like many of you I’m working on finding a new dish to create with the many Ziplock bags full of leftover Turkey.

On Thanksgiving morning I wondered just how many turkeys we go through on a typical year and surprisingly enough, a quick internet search pushed out an article by my Alma Mater, the University of Illinois. The U.S. consumes roughly 46 million turkeys for Thanksgiving and will consume another 22 million for Christmas. This year with the coronavirus, a number of families likely chose smaller get-togethers with more immediate family; others kept to tradition. Either way, the consumption of turkey was thought to have been affected – smaller groups were possibly cooking up a smaller turkey or maybe even a boneless breast. 

Stable production and uncertain or possible demand changes because of the pandemic drove turkey prices lower. Unfortunately, turkey producers do not have a means to mitigate unforeseen turkey prices like a grain producer would. Turkey futures do not exist, although turkey producers can manage input feed costs through corn and meal futures/options. 

Fundamentals to watch

We’ve just gone through a very polarized presidential election, China remains a strong buyer of U.S. beans and corn, Black Sea corn production is down significantly due to drought conditions, South American weather remains arid affecting their first and possibly second season crops. U.S./global coarse grain/corn and bean stocks are tightening. A South American crop problem will amplify price volatility going into spring of 2021. Markets will soon begin to debate 2021 acreage – each may have to “buy acres” from the other. 

Production agriculture has seen significant volatility over the decades.  In my almost 30 years involved in commodity markets I’ve seen some of the most extreme. Though the fundamentals of those past years are different than today’s, the way in which the market may be setting itself up in many ways “feels” similar to past markets.

In times like this, it is imperative that you trust the information sources that help you build your marketing and risk management plans. Seek out other sources if you’re not content with service or advice you are getting. Get together with other producers to collectively share what you’ve been advised.

Transparent tools to mitigate risk

Unlike the turkey producer, today’s grain producer has transparent and very liquid trade tools to manage next week’s, next month’s, or next year’s price risk. The broad menu of products allows those who wish to mitigate risk to narrow the time and price they want to manage, while remaining open to advantageous price moves.

Are you comfortable in understanding and knowing what is available today? If not, seek out the knowledge to learn about those products to ensure your operation is making decisions based on all tools available. 

One thing that makes production agriculture unique is the ability to effectively set up a guaranteed gross income while still maintaining the ability to grow that gross income before the year is over.

Throw out the uncertainties for one minute and think of a normal year with average yields and good harvest. All things normal, production agriculture has the ability to guarantee a worse case gross income today on a crop months away from getting in the ground. Businesses in many cases can lock in margins on products they manufacture, but not many can also participate in higher product price moves after setting their forward pricing on those products.

The key to taking advantage of this unique ability is knowledge of the many simple tools available to customize a marketing plan unique to the needs and wants of your operation. Do you feel confident you know and understand what is available to you? 

Markets have already been influenced by some extreme unknowns in 2020, and by the looks of it are in for some serious influence going into 2021 - several unknowns yet to discuss and the market to trade in 2021. The saying, “the only thing in life guaranteed is death and taxes” or “the only certainty is uncertainty” remain appropriate. Challenge yourself to see if you feel comfortable using and knowing all that is available to you to manage through the unknowns yet to come in 2021. 

Contact Advance Trading at (800) 664-2321 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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