Agricultural Risk Management

I have made it my goal here at Farm Direction to help America’s farmers improve their overall grain and livestock marketing results.

Most firms want you to believe this is an extremely complex and complicated task in order to charge you over inflated consulting fees and commissions. I have attempted to simplify this process and provide you with the most economical yet professional service int he industry.

As many will tell you, I provide the best information, market commentary, and strategy in the industry at the most affordable rate.

We provide our agricultural clients with the following services:

  • Cash Marketing Strategies – We begin by designing a custom  annual cash marketing program specific to your inputs, break even’s, and financial goals. The program is designed by using complex seasonal pricing patterns and formulas in association with over 50 years of historical price data and analysis. Once your estimated yields and inputs are entered into the system you will start receiving automated recommendations telling you not only the best price to sell at, but also how much of your projected production to price at that time.
  • Risk Management Advise – We help each of our clients design and build custom hedging strategies that best fit their needs. We believe that no two farm operations are the same. Most firms simply design a hedge strategy that best fits their top clients, they then have their advisors or brokers sell that strategy to all of their clients. Unfortunately for most the strategy is not what is best for their financial situation or farm needs. Often times it leaves the farmer cash strapped chasing margin calls or holding a bag of worthless options and a small fortune in losses. We take a completely different approach, and work individual with each client developing the best strategy for their particular situation.
  • Free Text Quotes – Market quotes sent directly to your cell phone three times a day, featuring the opening price, mid day update, and closing bell.
  • Weekly One-On-One Advisor Consultation – Each week our clients receive a call from their personal marketing advisor to discuss recent news, developments, and conditions that are affecting the marketplace both here in the US and abroad. Clients stay updated on South American production estimates, crop conditions reports, global demand numbers, with highlights from China, India, Brazil, Russia, etc..and how they are affecting the markets.

Our Ag Risk Management Program can certainly help you reduce the stress and risk you face everyday as a producer. From our  highly acclaimed Cash Sales Program, to our individual designed hedging strategies and one-on-one consultations we simply offer more for less.

It Starts By Having The Right Plan

As prices become more and more volatile farmers can no longer afford to have a sit, wait and watch approach to marketing. To be successful in today’s marketplace farmers need to have a proactive approach to pricing their grain and livestock.

Throughout my career, and especially as I began working with more and more farmers I realized that very few had a detailed or strategic type marketing plan in place that was producing quality results.

Similar to being a professional trader, farmers are often faced with tough split second decisions regarding market timing and price direction. Without a solid plan and program in place more times than not we find ourselves making emotional type decisions based on a knee-jerk reaction to the market and recent news or information that has moved the market.

Generally speaking these types of emotional decisions rarely turn out the way we had hoped. For years farmers have been plagued with making often hasty or poor marketing choices, I blame it simply on not having a plan or more importantly the right plan in place.

You need a plan specific for you and your operation. A plan that takes into account your available cash flow, your needs and your objectives for your farm.

As a member of Farm Direction one of our first steps will be to build and design just such a plan and program for your farm.  With a handful of specific inputs from you regarding your operational costs, inputs, yields, etc… we are now able to generate a completely automated marketing program for your farm.

The FD PRO Marketing Program will help you take the guess work out of marketing. No longer will you have to worry about making those emotional decisions regarding the market. You will now have an easy to understand and easy to follow approach to marketing your cash grain. You will know such things as when to sell, how much to sell, when to hedge, how much to hedge, seasonal price tendencies, and much more.

The best part is the program is yours to keep and is completely customizable year after year. Simply change your projected estimates and yields and you will be given a completely new set of objectives and strategies to complete your marketing needs.

Similar to being successful as professional trader, today’s farmer needs a successful plan.

“Do you have the right marketing plan for today’s volatile market, is your plan proactive enough to compete, lets explore…”

I always like to tell my clients that we have to be “proactive” and not “reactive” with our marketing approach. This formula requires that we plan ahead and have a well developed detailed marketing plan in place. The plan has to include Pre-Harvest and Post-Harvest pricing decisions based on our projected production costs and include selling strategies and concepts that you will implement along the way too take advantage of strong seasonal price tendencies.

It is my belief that too many operations market their agriculture in a reactive manner. I didn’t realize it until I started having more and more first time clients call up with similar problems and questions. One of the big ones I hear every year is when harvest thoughts start coming into mind and there is still grain in the bin. The first reactive approach is to take the grain that is in the bin and go sell it to make room for the crop that will be harvested. Unfortunately that is the reactive approach of about every farmer out there and in turn the market is hit with heavy supply. You can’t allow yourself to become reactionary to these outside influences.

I constantly preach having a strategy and plan mapped out so you can avoid these reactionary mistakes. I am not however preaching that you go nuts and hedge or buy options every month in an effort to be proactive. I think most advisory services or brokerage operations often become too overly proactive and ultimately cost you money with the purchase of worthless out of the money options, or rolled positions that simply continue to rack up fees and commissions. Somewhere in the middle of the road is a happy medium.

I like to believe here at Farm Direction we provide our clients with a simple, easy to follow, result driven approach to marketing. Not reactionary, and not over the top with exotic futures and options strategies or complicated hedging programs.

“The debate continues over using futures or options, as a general rule I do not like using them, but there are certain situations where they need to be considered…”

As you all know I professionally traded futures and options for a number of years. Along the way I have heard the horror stories of how farmers have often been misguided or mislead in using these instruments to properly hedge risk or price their crops.

I rarely recommend using either futures or options for many farmers, but there are certainly some circumstances and market conditions that warrant a close look and some consideration.

To make certain we are on the same page lets review a few simple basics. Straight futures contracts when purchased or sold have significantly more risk associated with them than do the purchasing of calls or puts. Futures contracts have unlimited upside potential and unlimited risk. When options such as calls and puts are purchased they only have the downside risk of their initial purchase premium.

Example: You buy 2 December $3.50 corn puts to try and establish a price floor in the market. You pay $1000 each for the put options (a total of $2,000). On expiration the market settles above your $3.50 strike price, therefore causing your options to expire worthless (what the industry likes to call out-of-the-money). Poof your $2000 is gone and you are mad as can be thinking you would have been better off simply doing nothing at all. The truth is you may actually be correct, the exchanges have done study after study and found that over 80% of all options purchased actually expire worthless. Don’t get me wrong I think there may be a few select times when purchasing a put to build a price floor or buying a call for re-ownership might be a good play, but for the most part I believe there are other less costly strategies available.

This is why many professional traders prefer to turn the odds in their favor and sell the options. There are definitely some times when selling options could be a profitable play for the farmer. Lets look at a simple post harvest strategy that would work well.

Example: You have 20,000 bushels of corn stored in the bin. The market is trading at $4.00 but you think we could push higher in the coming months and would be a much happier seller at $5.00. You go out and see that the December $5.00 call is selling for $1000. Each contract is equal to 5,000 bushels. With 20,000 bushels in the bin you elect to “sell” 4 December $5.00 calls. In turn you collect $4,000. If on expiration the market settles at or below the $5 dollar mark you keep the entire $4,000. Anything above $5.20 and you start to lose $200 a penny on the option contracts you sold, but you are also gaining penny for penny in the cash. You can also elect to to use some of the $4,000 premium to purchase puts if you are worried about downside risk. This way you are using the markets money to buy the options. There are several times through out the year when the market and your particular situation could warrant selling options to generate revenue.

Straight futures can also be a viable option in certain circumstance, you just have to understand the dynamics of the risk associated and how you can best manage it. Lets look at a simple example of how futures could have helped some people out recently with the wild price swings.

Example: We have all heard about the corn producers who made a few great forward sales in the $5 and $6 range to the ethanol plant (these guys had a marketing plan and executed on it) the only problem was when they went to deliver the ethanol plants had declared bankruptcy and it wiped away their contracts and commitments they had made. I am starting to think we might see more and more of this in the coming years as the price fluctuations get larger and larger. Companies will make costly mistakes in hedging their inventories and deliveries and will ultimately force them out of business.

The only way I see to avoid this situation would have been to sell the futures contracts directly rather than forward contracting with the ethanol plant. The exchange is certainly more financially stable than the ethanol plant. Assume the futures price was trading in the $5-$6 range when you forward contracted with the ethanol plant, rather than contracting with the plant you decide to sell straight futures. You sell the futures contract at $6. When you are ready to deliver your corn you close out the futures contract and have even some additional advantages now by being able to deliver your grain to what ever market is offering the best basis. That could be a local hog operation, an ethanol plant, or a local elevator.

The downside is you will have some margin call responsibility if the market moves higher, but you will be earning penny for penny on your cash side to offset it.

To summarize, no I do not think futures and options should be your primary tool for marketing. I do not own a brokerage firm or sell crop insurance so I have no vested interested like so many others in steering you in that direction. I have however professionally traded and advised many clients through the years on futures and options trading. I believe there is a specific time and place for these marketing tools to be considered, but how well you manage the risk and what strategies you use will ultimately determine your outcome. If you are wanting to travel down this path I suggest developing a good relationship with a licensed broker, make certain you know the entire risk of the strategy, and remember what i said about options more times than not expiring worthless.