Some farmers get hung up on a misperception about risk that screws up effective marketing and risk management plans.
Simply put, they’re scared that prices might go up after they’ve sold their crops and that stops them from marketing and hedging in a planned manner. They take their fingers off the trigger instead of selling when opportunities arise.
Two risk managers recently addressed this and some other marketing misperceptions farmers have during a webinar for American grain growers.
“Your risk is not, ‘oh, I sold and the market went up,’ ” said Angie Setzer of Citizens Grain.
“Your risk is, ‘I didn’t sell and the market went down.’ ”
What I think she’s saying is that what happens to prices after you sell a commodity is irrelevant. You need to sell at some point, and if the sale was part of a plan, then selling when you sold made sense.
It doesn’t make sense to hang on to a commodity based on a fear of missing out (FOMO) on a possible future rally, unless catching those rallies is part of an existing marketing plan.
Farmers, like all commodity producers, need to decide how much market speculation they want to include in their marketing plans. There are lots of ways to do that, such as leaving percentages unpriced or selling percentages into each rally that comes along. There are many ways to skin the marketing cat, many that leave some unpriced crop free to take advantage of rallies.
But being paralyzed by the fear that prices will rise after grain has been sold is probably a significant cause of the famous phenomenon of most grain being sold in the bottom third of the market. Farmers tend to be bullish and optimistic so when a rally comes along, many hold out, hoping that it runs further than what actually turns out to be the case. If you add FOMO to that bullishness, you’ve got a combination that can confound careful marketing.
This is a surprisingly widespread phenomenon among large-scale commodity producers outside agriculture. During the commodity boom there were numerous reports of various mining companies and energy producers abandoning hedging strategies because they “lost money” by using them. Shareholders became grumpy when they read about mineral, metal and oil prices going through the roof yet their companies didn’t see the same results.
That seems to be the case when prices are increasing, but the reverse occurs when prices fall.
Regardless, if the approach truly is hedging, neither situation is considered a gain or a loss, except within the accounting of the hedging position itself. If it’s a hedge, the point is to remove some element of price risk from a physical commodity. Price for that amount of commodity becomes irrelevant.
“Coulda, woulda, shoulda” thinking doesn’t achieve anything and it doesn’t teach any lessons. It’s just another distraction and a potentially dangerous one.