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3 questions on minimizing risks in changing markets

Farm Press Staff cotton-bolls-staff-dfp-8493-for-online.jpg
"Cotton has made a very impressive run," Jordan Thomas said. "Since last April when the market began to bottom, there has been a slow, steady grind higher."
The markets on cotton, soybeans, corn, and milo are experiencing some good prices. Using a combination of cash sales and put options will provide downside protection in shifting markets.

When it comes to crop markets, it is important to minimize risk, but with fluctuating markets, how do you minimize risk and increase profits?

Jordan Thomas, vice president of Scott Agri Crop Marketers, answered a few questions about how the markets currently look as well as how to reduce risk in an ever-changing market.

What do prices look like right now for the row crop commodities?

"For futures, soybeans are over $12, and corn is about at $5," Thomas said. "The basis is extremely attractive right now and adding more of a premium to these good prices. Cotton is above $86 today as of March 2. Those are all extremely attractive prices. The milo basis is anywhere from a dollar to $1.20, depending on the area. Even though prices are good now, I know a lot of people are still hesitant as far as taking advantage of these opportunities because they don't want to miss out on any other future rallies. However, that could also hurt you if this market decides to roll over at some point.

What are your recommendations to help minimize risk?

"At the end of the day, our whole goal is to establish downside protection with upside potential. The first method of establishing downside protection is to sell cash production. That eliminates downside risk and locks in profit at the same time.

"It certainly makes sense to be considering some cash bookings right now. Also, put options are a great tool in these markets because as the market goes higher, puts become cheaper. Puts will establish a price floor beneath unsold production, so they protect bushels from the price heading lower. This is especially important in these markets if you don't want to sell now. You don't want to oversell, but you want to protect the bushels you haven't sold, so a put is a great tool for that.

"With put options, the bushels are still in the market, so if the market moves higher, that is great because the value of those bushels increases as well. However, if the market heads lower, those bushels are protected because they have that safety net.

"When it comes to protecting your downside risk, a lot of people are super optimistic when the markets look good, but the problem with these big money markets is you see some big swings, especially on the downside. When the downside hits, it can hit hard and suddenly, and we don't know where the top is until it's behind us, and it's too late.

"Again, a combination of cash sales and put options will provide that downside protection, but you will still have the upside because you'll still have some bushels unsold. Put options can lock in a floor that’s lower than the market, but if there are upsides in the markets, you can participate in future rallies while having protection from a worst-case situation. It is the best of both worlds.

Could you talk specifically about cotton, and what is happening in the cotton market now versus last year?

"Cotton has made a very impressive run. Since last April when the market began to bottom, there has been a slow, steady grind higher. We have had a few minor setbacks here and there, but it has been an impressive move higher and higher. Now, we are getting into that territory where it is extremely appealing again. We are seeing some profitable levels and good equities out there. That is due to a combination of an acreage battle, mainly in the Delta and Texas, and also with milo up again, there is a battle between acres right now with milo and cotton.

"Demand could always be better, but it picked up towards the end of 2020. Also, production was off last year. I think the main thing you are seeing there is the production from 2020 was continuing to head lower because of the drought in Texas.

"There is certainly some upside. Cotton closed today, March 2, at a little over $86.50. Keep in mind though, we never know what is going to move the market one way or another, so it is important to minimize risk when possible."

To contact Jordan Thomas for help navigating markets, you can email him at [email protected] or call his office at 501-851-7300. To learn more about Scott Agri Crop Marketers, go to their website at http://bit.ly/scott-agri.

 

Scott Agri Crop Marketers' disclaimer: The risk of loss in trading futures and/or options is substantial and each investor and/or trader must consider whether this is a suitable investment. Past performance, whether actual or indicated by simulated historical tests of strategies, is not indicative of future results. Trading advice is based on information taken from trades and statistical services and other sources that Scott Agri believes are reliable. We do not guarantee that such information is accurate or complete, and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades.
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