The Rural Voice, 1981-06, Page 17GUEST COLUMN
Hedging takes discipline
Art Lawson, Assoc. Ag. Rep.
"Hedging" implies reducing risk. In terms of marketing many
people automatically think of the futures market. In fact, a hedge
can be accomplished by several means. The future market is just
one type of hedge.
The futures market offers some opportunities and advantages.
High interest rates and volatile markets make holding
inventories both costly and risky. Margin requirements on a corn
futures market, for example, allow you to control 5,000 bushels
of corn for about $1,000 (or less, depending on your broker's
requirements). You could control the equivalent of your whole
crop of corn for about 10% as much investment as if you owned
and stored the crop.
On the other side of the ledger, the futures market is very
risky. Surveys show small traders tend to lose four times as often
as they win in the market place. Futures trading doesn't suit
everyone psychologically. There seems to be more stress
associated with trading futures than in holding inventory of
equal or greater value. Greed, fear or lack of self discipline can
be your undoing in futures trading.
The futures trader must also meet some fairly strict financial
requirements. Brokerage firms expect their clients to keep them
up-to-date on their financial position. A trader's bank may also
want some input into whether he should trade futures or not.
Young farmers may just not be in a financial position to trade
futures.
If you wish to become a trader, you start by contacting a
brokerage firm such as Merrill Lynch, Richardson's or
Shearson's. A registered representative of the brokerage firm
will handle your trading orders. The trades are then transacted
through the appropriate market of your choice.
The brokerage firms usually offer some information services -
weekly reports and special bulletins on specific commodities.
Some of these are helpful, but in general these bulletins are
aimed at the speculative trader. The advice is probably not
suitable for the serious hedger.
Newspapers offer good daily reports of market activity.
Generally, feature articles or editorials are not good sources of
advice. By the time the newspaper reports an activity it's too
late. The market has already made its move. Your problem is to
anticipate or predict market trends.
Advisory services can be useful whether you trade futures or
not. A couple of these are "Pro Farmer" and "Top Farmer"
from the U.S. Both of these services have mail services as well as
telephone reports. Such services are good practical tools for
the serious marketer. Their main drawback is their strictly
American perspective. Local markets will not parallel the U.S.
market perfectly. You may be missing local opportunities. Local
trade newsletters make a good supplement to the advisory
services.
Futures trading is very flexible. You can either buy or sell. You
aren't locked into any position. If you don't like a position you
have taken, you can quickly cancel it - take a small loss and look
for a better trade.
Flexibility can be a problem. If you've invested in advisory
services and developed some technical market analysis skills you
will see lots of trading opportunities. You will probably be
tempted to speculate even though that wasn't your original
intent. That's part of the psychological aspect of futures trading.
You can get too involved and ultimately you'll lose. The net
movement of money out of the futures market is zero. Each trade
has a winner and loser. If you start playing against the
professional speculators, chances are very good that you'll lose.
Cash contracting with a grain elevator is a much safer type of
hedge. Unlike the futures market, you can't change your mind
once you've made the commitment. You need to have a price
objective and when you see it - take it. There is no financial or
margin requirement to deal with an elevator, so it will appeal to
the person who doesn't have spare cash to devote to marketing.
Cash contracts will also keep you conservative. You know,
you'll have to deliver, the grain so you won't sell more than
you're sure you'll have. You really can't gamble too much with a
delivery contract.
Farm storage can also be considered a hedge. You can hold
grain off the market when the prices are usually under the most
pressure - at harvest.
History has shown that usually the winter and early spring are
the best marketing periods for grain (taking interest, insurance
and shrinkage into account). Keeping bins full into late summer
is expensive and risky.
A wise marketing plan won't depend on any single hedging
tool. Several hedging tools can be used together to capture good
prices and reduce risk.
As Karl Stumpf at Denfield suggests, if you use all the
marketing tools available you can really extend the marketing of
any single crop over about two years. There is almost always a
profitable price to be had in that length of time. The problem is
to have the self-discipline to take the profit when you see it. If
you keep waiting for that profit to get bigger before you grab it -
you may miss it completely.
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SEE NEXT PAGE FOR MORE INFO
THE RURAL VOICE/JUNE 1981 PG. 15