Hedging should be based on farm risk, not analyst forecasts

How the heck can farmers hedge loonie exposure when there’s no general consensus on where it’s heading?


That’s what you could have thought after hearing Todd Hirsch of ATB Financial tell the Canola Council of Canada’s annual convention that currency traders expect to see the loonie in the next year go anywhere from US62 to 89 cents.


“That range is enormous,” he said March 8.


However, it’s not what I thought. To me it seems like a golden opportunity to realize again that hedging isn’t about speculating but about identifying risks and minimizing them. 


When there’s no generally accepted guess on where the loonie is likely to head in the next year, you have to look at your own loonie exposure, free from projections, and realize how vulnerable you would be to a dangerous move.


Too often I hear people talking about hedging a particular part of their farm’s exposure, which could be crop prices, fertilizer prices, foreign exchange rates or feed costs, based on some analyst’s prediction of a big move coming. 


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Does that make sense? As good as the analyst is, he or she is just making an informed guess.


Meeting halls at farm conferences are packed when the market analysis session is scheduled with farmers eager to hear forecasts on crop prices, livestock prices, fertilizer prices, interest rates and exchange rates. 


I’m one of those with a keen interest in where the analysts think the markets will likely go. I try to pin them down to hard numbers for their predictions.


I have probably written 1,000 stories that include analyst expectations of some price, and I love writing those stories. 


The markets are fascinating and a large part of a farm’s results comes from that year’s market action. As a result, we want and need to follow those developments.


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However, that focus on predictions, projections, estimates and guesses can distract from a disciplined hedging strategy based on identifying a farmer’s biggest risks, regardless of outlook, and finding ways to protect a farm against an unexpected move in the markets.


That’s where the real risk often lies. It’s not in the areas that people flag as risky or in the areas where there is no consensus, such as Hirsch’s loonie comments. 


The real risk is in the places where everyone agrees, everyone is comfortable and nobody has bothered covering.


That’s where farmers need to ensure they are not becoming distracted. All else is noise.


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