Options called ideal marketing tool

An ag risk management consultant says they help manage the markets without knowing where prices are heading

ANAHEIM, Calif. — Dave Fogel knows one surefire way to navigate through all the dizzying array of market advice: don’t believe any of it.

“Nobody knows where price is going, and I think you’ll find if you want to get on board with that, then marketing starts getting easier,” he said.

The good news is there is a way to manage the markets without knowing where prices are heading.

One of the features of a good marketing plan is to use options, which protect farmers against any potential market downside.

“I like options. Options have worked so well for us over the years,” said Fogel, an ag risk management consultant with Advance Trading Inc.

Options are particularly attractive right now because market volatility has been low the last couple of years, and that reduces the cost of buying options.

Fogel said they are the lowest cost they have been in about a dozen years, with new crop corn options of about 15 to 25 cents per bushel, soybeans at 35 to 40 cents and wheat at 20 to 25 cents.

“I believe if you use options, it will be the cheapest way to avoid a mistake,” he said.

Farmers tend to take beatings when prices fall because they are reluctant to sell in a downward trend, but as soon as there is a rally they sell like crazy, as evidenced by the recent small corn rally when growers went from about 25 percent sold to 75 percent sold in a matter of weeks.

“I don’t think it works in any type of trading environment to take quick profits and to take beatings on the downside,” Fogel told farmers attending the 2018 Commodity Classic.

“There has got to be a better way, and I don’t know how to stop that without options.”

However, he said farmers are a funny bunch. They love him if corn drops from $4 per bu. to $2 and they make $1.50 per bu. on options, but they give him a dirty look if corn goes from $4 to $5 and they lose 10 cents per bu. on options.

“Don’t you want corn to go up if you raise it for a living?” he said.

Fogel encouraged farmers to consider using hedge loan agreements as a way to fund their hedging activity. He said to think of them as an input.

“It’s going to cost money to plant a crop. It’s going to cost money to market the crop,” he said.

“If you don’t have that hedge loan set up, you might not make a decision you should make.”

Fogel isn’t a big fan of futures, and he doesn’t like basis contracts. Instead of using a basis contract, farmers should just know when to sell into the cash market.

“Basis is pretty simple. When basis is good you guys should be selling,” he said.

“People want your grain now. Give it to them.”

Farmers don’t need to hold out for the last nickel in basis because the board price may go down 20 cents per bu. during the time they are waiting for basis to improve just a little bit more.

A consideration for farmers who are holding their grain is rising interest rates. If soybeans are $10 per bu. and interest rates are at five percent, soybean prices would have to increase 50 cents per bu. over the course of a year to break even.

Another component of a good marketing plan is locking in the cost of carry, which can be done one of three ways.

“You can sell cash for deferred, you can sell futures for deferred or you can buy a preferred put option,” said Fogel.

This fall there was a 25 to 30 cent per bu. carry in corn from the fall to July, but very few farmers locked it in.

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