Joe Federowich isn’t afraid to take risks.
Not only does he grow hemp and organic grain, crops that have had stomach-churning market volatility over the years, but he’s been willing to go where few farmers of his generation have dared to tread: the world of futures and options trading.
The experience left him wiser about risk management and wiser about his own
limitations.
“It’s not for me. It’s for other people,” said the 52-year-old farmer from Ashville, Man.
“Once you start playing the futures positions, you start to try to play the commodity. There’s enough to worry about on the farm without getting into that.”
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A few years ago, after easing into futures and options trading to minimize the risk to his crops’ returns, Federowich found he couldn’t resist the temptation to speculate, so he took a position that moved him beyond simple risk management.
Then commodity prices went crazy. In one day his position showed a loss of $52,000. Soon after, it shot back up by $47,000. He got out of the position at that point, breathing a sigh of relief at losing only $4,300.
“I have the receipt framed in my office,” Federowich said with a laugh.
“I keep that to remind me to never go out in the market again and try that.”
Even if he had resisted gambling with futures and used options only as price insurance, it still wouldn’t have fit his personality.
“Options gave us piece of mind, but I couldn’t get the cost out of my mind,” he said.
Most farm advisers say that futures and options, when used carefully for risk management, are less dangerous than leaving a crop unpriced in the bin. An unpriced crop, they say, is a huge gamble on commodity prices in the future. Using futures and options is a way of protecting a crop’s value, even if they have costs and risks.
But futures and options aren’t the only ways to manage risk. Forward contracts with grain companies and other buyers accomplish the same result and carry their own unique costs and risks. Even the judicious use of the phone can help manage risk, giving a producer access to many more buyers and offers than an unprepared drive to the nearest elevator.
This new column is dedicated to helping farmers understand what risk management can do for them and what hedging tools are available.
I hope to help farmers find a risk management strategy that suits their needs and personalities. I’ll talk to experts about various risk strategies and how they work. I’ll describe the attractive opportunities Ð and maybe hidden risks Ð that farmers can consider.
I want to tell true stories about real farmers and how they came to find a risk management strategy that works for them. I’ll talk about their successes, but perhaps more importantly, talk about the mistakes they made and their advice to other growers.
That’s what I’ve been trying to do with Federowich’s story. After his experience with futures and options, in which he scared himself by getting caught up in the excitement of trading, he found a risk management strategy that suits his personality and doesn’t offer silly temptations.
Federowich now uses forward contracts to lock in his crops’ prices. In November, half a year before his next crop is seeded, he begins locking in basis levels. Then, after an early winter holiday that lets him forget the grain business for a little while, he begins locking in the underlying crop prices in January and February, making sure that everything he locks in covers his cost of production plus a reasonable margin.
“I have to make money,” he said.
“If your cost is $6 a bushel, you need to lock in $6.50. You need to have margin.”
This year he contracted 10 bu. per acre of canola at $9 per bu. and followed that with another 10 bu. per acre at $8.25, taking advantage of specialty canola offers. He expects a yield of 30 bu. per acre, and as the season progresses if it looks like that 30 bu. will actually make it to the bin, he’ll probably contract another five bu. per acre.
When looking for an offer, he calls more than just the obvious buyers. Sometimes he’s found better oats prices from a local feed manufacturer than the milling oats bid offered by the grain companies. He uses the phone to find weird market kinks, practicing a low-tech form of arbitrage.
Above all, Federowich tries to grow crops and varieties that bring a premium because “if you can get that 25 or 30 cent or 50 cent premium, often that’s the only margin you’ll get.”
That’s what drew him to hemp and organics – the chance for a premium.
Federowich said locking in prices, finding the best local offers and always trying for a premium is the best risk management system he has been able to find.
“Sometimes it’s all that will make or break you,” he said. “Sometimes it’s enough to let you survive to next year.”
