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Market analyst offers tips for risk management

Market analyst offers tips for risk management

While farmers in the Midwest were looking at high temperatures and wet conditions this past week, the grain market has been playing a sideways game for quite a while.

“We’re pretty much treading water here,” says Karl Setzer, a grain market analyst with MaxYield Cooperative. “It looks pretty quiet.” But that doesn’t mean farmers should just shut off the computer and call in sick when it comes to grain marketing.

Setzer says it has been a few years since commodity prices have been low, and as a result, some farmers are rusty in their low-price marketing skills.

The greatest obstacle in dealing with a depressed market is the idea that risk management is a luxury that can’t be afforded, he says. This is exactly when risk management is most important.

With that in mind, he offers a few bits of advice.

First, he says, when developing a risk-management plan, be realistic. The worst mistake a producer can make is to develop a plan for the conditions they want instead of the conditions that actually exist. Everyone wants to deal with $7 corn, but that isn’t realistic. Because of that, a market plan needs to include all costs of production.

He says farmers working with lenders and marketing specialists also need to find the right fit. Very few people have the same needs and costs.

Most important, he says, is to develop a reasonable plan and stick to it. No plan will work if you don’t stick to it.

The simplest way to manage risk is with simple cash sales, he explains. Know your break-even point and make cash sales above that level. This can be done on the spot market or through forward contracts.

A second way to manage risk is to use options to cover cash sales in case of movement in the market after a sale is made. These are less risky than straight futures.

A farmer may also use straight futures pricing. This provides risk management but can be costly if the producer faces margin calls.

Finally, Setzer says, farmers need to be aware of what is going on around them. The weather and crop conditions can affect the local market and the local basis price for grain. Be aware of your local or regional market during a growing season.

(Source – http://www.iowafarmertoday.com/news/crop/market-analyst-offers-tips-for-risk-management/article_dce34354-2b04-11e5-a786-eb7931fedfd4.html)

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