Hitting singles in the market

Hitting singles in the market

Nickel-and-diming your way to a profit may be better than swinging for the fences in 2016

Home run hitters make a lot of money in Major League Baseball. But they also tend to strike out a lot. The star who goes down swinging in the bottom of the ninth disappoints fans. And swinging for the fences with your marketing plans in 2016 could also lead to a loss.

With prices below breakevens, making money won’t be easy. Gone are the days when a simple forward contract or Revenue Protection crop insurance guaranteed a profit. Still, growers who can scratch their way forward, with the equivalent of bunts, singles, stolen bases and sacrifice flies may be able to stay in the black.

Swinging for the fences in your marketing plan may not be your best move. (Photo: OSTILL/Thinkstock)

Creativity, persistence and flexibility are required. The key is to nickel-and-dime your marketing without digging a hole you can’t get out of. Here are some do’s and don’ts to consider.

Don’t give up hope. Markets never trade in only one direction. Rallies are possible even in bear markets. But be willing to sell bounces, which typically come every six to 10 weeks.

Do sell in increments. Selling a little at a time ensures you get sales on the books. And it’s psychologically easier. Trying to sell large amounts risks canceling orders when second thoughts derail your plans. Pulling the trigger every dime higher in corn is one way to scale into sales.

Do be prepared. The El Niño warming of the equatorial Pacific disrupted weather around the world in 2015. But this phenomenon could end in 2016, bringing new risks. Changing weather patterns increase potential for below-normal corn and soybean yields. Plan for the unexpected, with crop insurance and perhaps option strategies.

Do be ready to change. Price targets set in March may need adjustment by May. Supply-and-demand changes can shift expectations. But at times the market’s mood changes, too. A financial panic can spill over into commodities, forcing prices lower regardless of other factors.

Do break up your price. Your cash price is composed of basis and futures. Just selling on the cash market may work when prices are good. But squeezing every penny you can from the market means separating the cash and futures parts of your price, trying to fix each when it’s strong. Cash basis and futures sometimes move together, sometimes apart, but they follow different seasonal patterns. Those who don’t trade futures directly can use basis and hedge-to-arrive contracts instead.

Do consider options. Options on agricultural futures have traded for 30 years. But most farmers still don’t use them. Some try, lose money on expensive premiums and give up. Options can be an effective tool for managing risk. But using them means learning how they work. Puts and calls can be complicated and involve some math. So be prepared to spend time figuring them out.

Do take a look at short-term protection. Most options expire worthless. Buy-and-hold strategies have their place in options. But these contracts can also provide coverage for short periods of time. Weekly, monthly and short-dated new crop options offer protection at crucial market inflection points, such as USDA reports.

Do watch the funds. Farmers have a love-hate relationship with big speculators. These money managers can drive prices higher when they’re bullish. But they also can force prices lower. Tracking their movements with Friday’s Commitment of Traders reports from the Commodity Futures Trading Commission is one way. Watching open interest reports, especially for options, is another. Heavily traded options can be a tip-off about what professional traders think, and the strategies they’re using to profit from it.

Don’t panic. Making knee-jerk decisions can be hazardous, so learn how to control your emotions.
A screaming headline or surprising report can be significant. But every story must be put into context. And forget about trying to trade events. Computers can do that in a nanosecond, with programs that respond to special data feeds from wire services. The good news: Computers aren’t always right.

Don’t shop for forecasts. A common mistake is to read a lot of advisories, but only follow the ones that are bullish. Stacking the deck won’t work in Las Vegas, and it doesn’t work in Chicago, either. FF

- Knorr is senior grain market analyst for Farm Futures.


Decision Time: Risk Management is independently produced by Farm Futures and brought to you through the support of Case IH. For more information, visit farmfutures.com/decisiontime.

TAGS: USDA
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