Strategies for protecting your downside risk

Every now and then, we all need to take a step back and remove ourselves from our day-to-day activities to see the big picture. At this time of year coming into the fall and winter, we speak a lot with clients about protecting not just any of this year’s crops sitting in the bins but also next year’s that will be sitting in the fields.

The question we ask is, “Have you thought enough about the protection plan for your crops both sitting in the bins and to be harvested next year?”

That was then, this is now

While current prices aren’t nearly as high as they were in the fall/winter of 2012, it still does make sense to follow the process again this year to analyze next year’s futures prices for your grains:

Current soybean futures are about $13/bu. while next November is sitting near $11.50/bu., not a bad level given farm break-even and margin levels. November 2014 canola is at $520/tonne, close to today’s prices of $490-$500.

Minneapolis wheat futures are showing some decent levels at about $7.40/bu. all throughout 2014.

While a lot of things can and will happen between now and next year, there are many ways to put protection in place in case grain prices fall further. Consider the following strategies to help diversify your decisions across time, strategy and price:

  • Time: Put on protection for a portion, initially 25 per cent, of your production without having to be too concerned about the final acres and bushels produced. As time goes on, increase this to 33 per cent, 50 per cent or 75 per cent.
  • Price: Be a little more proactive adding protection if prices do go lower over time. However, maybe you get a really big rally and prices move back to the highs of the past year, be more aggressive up at those higher levels. Lock in your basis when you want knowing you at least have some part of the outright price risk taken care of.
  • Strategy: Greater storage capability gives you some flexibility to sell your grain when you want. This is a big advantage, but along with this opportunity comes greater risk. If you store your grain without putting some protection in place, you are actually taking on more risk.

Diversification

All these ideas are about diversifying your grain marketing so you are not setting your prices all at the same time or at the same level.

While there are many futures and options strategies available, consider a straightforward put option purchase strategy to protect your downside and give you some peace of mind:

  • Soybeans: With November 2014 at $11.60/bu., a new-crop option to protect an $11.20/bu. level costs about $0.50/bu. If you assume a basis of about $1, this still gives you a floor price of almost C$10/bu.
  • Wheat: Establish a six-month floor price on wheat at today’s price level using options for approximately $0.40/bu.

In both these option scenarios, you have downside protection, but still have the opportunity to benefit if prices move higher.

Bottom line

Despite many ideas and strategies available, there is still hesitancy on the part of farmers towards hedging so I ask you this question:

“You buy insurance on equipment, buildings and tractors. Why not get a bit of protection on one of your biggest assets: your crops sitting in the fields and in the bins?”

There are many ways to protect against falling prices by managing your risk across time and many tools you can use. Don’t be afraid of all the hedging tools available — understand how to use them. This will let you focus on next year’s crop, not the next month’s prices.

Using all the tools in your tool box means using a combination of futures and options to determine how and when to put those strategies into play. This marketing approach gives you the flexibility to determine where, to whom and how much of your crop you will ultimately deliver, or store in your bins.

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