“What If I’m Wrong” Strategies

There is always price risk in the markets.  Have you ever sold on an early season price rally and then watched prices surge to new highs after you had sold?  Have you ever delayed sales because “prices were going higher” only to see prices fall to new lows?  Most of us have experienced both of these—probably several times.  The markets are dynamic, the unexpected happens and prices often do not perform as we had anticipated.  We try to make decisions based on the best information available, but it is inevitable that sometimes we will be “wrong” about market direction and when to sell. That is the nature of the markets; there is always price risk.

 If you have will grain that must be moved at harvest, this year may be especially challenging.  Supply and demand numbers suggest avoiding harvest time sales, so early sales on any summer rallies appears to be a good plan.  However, prices are low and rally opportunities could be limited unless severe weather problems occur.  This creates the risks of selling too early in a “weather market” rally or waiting too long and missing the opportunity.  In a situation like this, it is always a good idea to plan for “what if I’m wrong” when deciding on a marketing plan.

There are a number of ways to manage this risk.  One of the easier ways is to simply spread out sales.  Start by forward contracting (cash market) or hedging (futures market) a small percentage of your crop when a weather rally occurs, this insures that you have captured higher prices on some of your crop if the rally fails to move higher.  However, if prices continue to move higher, you can sell additional percentages on higher prices and end up with a higher average price than the initial contract sale.  You won’t get the “high” with this strategy, but you also won’t get caught with nothing sold if prices are very low at harvest time.

 Another strategy is to use minimum price contracts (cash market) or put options (futures market).  These strategies allow you to establish a price floor if prices rally.  However, you are not obligated at these prices if the rally continues.  Both would allow selling cash grain at higher prices if they were available at or before harvest.

A similar strategy would be offsetting forward contracts or hedges with call options.  The forward contract or hedge would lock-in a price that occurred on a weather rally.   If the rally continued to higher price levels, the premium gains on the call option would allow capturing some of the higher prices

Right now, it appears that any summer price rallies may be very limited and making sales decisions at low price levels is a difficult decision.  It is also important to manage risk and be prepared to avoid potential harvest time low prices.  A marketing plan that includes “what if I’m wrong strategies” can help make these difficult marketing decisions somewhat easier. --Melvin

Decisive Marketing - May 18, 2001
http://outreach.missouri.edu/agconnection/DCT/DM010518.html -- Revised: April 20, 2004
breesm@missouri.edu