Normally known as the winter doldrums, this market season has been everything but cold and dull.
It’s nearly impossible to read a market report that doesn’t include the word volatility, and commodity risk managers probably haven’t slept since New Year’s Day.
Given the continuing market turmoil, how are grain traders coping with the unpredictable price swings?
“We have a group of merchants that are seasoned over years of experience and they have the ability and capability of dealing with volatility in these markets,” said Mayo Schmidt, chief executive officer and president of Viterra.
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Schmidt and most grain handlers were reluctant to reveal their market strategies.
But Peter Rowe, vice-president of merchandising and transportation for Cargill Ltd. in Winnipeg, said more farmers are looking at options, especially puts.
With higher prices and volatility, options have become more popular in the last three months, Rowe said.
Farmers have become more wary of locking into a contract for a crop that may not fill the bin if weather or disease are problems.
In the past, Rowe said, the high premiums for options would deter many producers, but not now.
“Quite frankly, in a relatively flat market, they (options) were expensive. But when we have this huge market volatility now,” producers are more willing to pay for that insurance.
Rowe said most of the demand for options is now coming from Cargill’s farm customers, with less interest from processors.
In the United States, the turbulent market is also affecting risk management for grain growers and users.
Market analysts in the U.S. said more traders are using mini contracts to hedge their risk.
“Maybe a person doesn’t want to jump all the way in; they only want to wet their feet,” said Dax Wedemeyer, an analyst with U.S. Commodities in Iowa, who noted rising volumes in mini contracts.
The mini corn contract on the Chicago Board of Trade, for instance, is for 1,000 bushels, which translates into less cash up front and lower margin calls. In comparison, the standard corn contract represents 5,000 bu.
As well, different strategies may be required, based on a producer’s penchant for risk.
“It totally depends on your risk tolerance, or your pain tolerance,” said Brenda Tjaden-Lepp, co-owner of Farm Link Marketing Solutions in Winnipeg.
“If you feel like you’ve got to hedge, you better have deep pockets.”
Another alternative, Tjaden-Lepp said, is simply to stay out of the hedging game.
“You don’t have to be trading futures in order to be a good farmer marketer,” she said.
“If that’s not something you’re comfortable in doing, or you don’t believe it’s going to add value, then don’t do it.”
