Put options were the standout hedging winner for many farmers in 2013, but what will be the silver bullet marketing tool for 2014?
It’s a stunningly different market today from the one that existed when most farmers were pricing the 2012-13 and 2013-14 crops , with radically different dynamics, so one can’t assume what worked last year will work this year.
Put options worked so well last calendar year because farmers were caught in a long declining market and weren’t sure how much and what quality of crop they would produce.
That was true not only during the winter before anything got seeded, but also well into the growing season, when the late spring and cool summer made many farmers extremely cautious about locking into future commitments they might not have the crops to match.
That uncertainty meant farmers couldn’t confidently lock in forward prices with futures or firm cash contract commitments for a large percentage of their crop, or even a small percentage.
However, put options offered a way to buy a guarantee of existing forward prices without worrying about having enough crop to cover the contract.
When prices fell off a cliff post-harvest, those puts really shone.
The same tool has also been used by farmers and pushed by some options specialists since the beginning of the 2013-14 crop year to protect prices for the 2014-15 crop.
With a big risk of yet further price declines ahead, some farmers used put options to lock in still-profitable 2014-15 new crop prices.
From harvest until now, November 2014 canola futures have fallen about a dollar a bushel, so those put hedges have already worked out well.
But put options, which shine in a falling market, might not be the tool for today.
The market has dropped so much that it isn’t obvious that downside risk is still the predominant concern for growers.
How much of the downside risk is already built into forward prices? That’s a question that will help determine how advisers and farmers design risk management programs to sell the remainder of the 2013-14 crop and the 2014-15 crop.
I called several analysts to get their take on whether there’s a silver bullet strategy for this year.
The answer I got was a clear “no.” This is not a no-brainer year where the risk seems almost all one-way, and the way to deal with it simple.
It’s a complicated, murky situation — like it is in a normal year, at least “normal” in the way things were before 2007.
We’re back to comfortable supplies of crops and a commodities complex that isn’t overheated, so crop prices will likely follow the ebb and flow of weather and consumption and that is hard to predict.
What does that mean for designing a 2014 hedging plan?
The boring answer is that farmers will need to take marketing and hedging seriously, especially those who got used to the bull market and didn’t bother worrying about it much.
In the bull market farmers didn’t like to lock in prices even though they were historically high because they might rise even more.
Now, many likely don’t want to lock-in prices that might provide only a break-even or a loss.
There isn’t likely to be one simple profit-guaranteeing mechanism or tool this year, but there are a host of tools available to cover various market risks that affect farmers’ incomes.
Pricing won’t be fun this year, unless there’s a weather disaster somewhere that lifts the market.
But with margins expected to be tight, it’s more important than ever for farmers to do what they can to make sure they’re protected against the downside while able to get the gains of any rallies.