December 2, 2020

Ask the Grain Expert: Understanding the Basics of Hedging

Karl SetzerBy Karl Setzer, grain solutions team leader

You buy life insurance, right? You probably insure your tractors and combine, too. With any of these policies, you don’t think twice about paying the premium, even though you hope you never have to collect.

Hedging your grain is like an insurance policy. When you hedge, you’re protecting your price. You’re not trying to make money.

In other words, a true hedge is a net zero move in the market. A hedge isn’t used in place of a cash sale. It’s used to offset a cash sale. That means a true hedge needs to be tied bushel for bushel to a cash contract, be it in the spot market or the deferred market. This means it can be a new-crop sale.

There are two ways to hedge. You can either use straight futures, or you can use options. My tool of choice is the option. Many farmers balk at options, however, because they don’t understand them.

Options aren’t that hard. An option might cost you 35, 40, or 50 cents, but you know your cost up front, just like you do when you buy life insurance or property insurance. In addition, there is no margin call with options.

Marketer, beware!

However, if hedging isn’t done correctly, it’s speculating. If you’re taking a futures position but not making a cash sale, it’s speculation.

I encourage you to take a look at options as you develop your grain marketing strategies. They can offer priceless peace of mind, especially in today’s volatile markets.

For more information on options or other grain marketing tools, contact your nearest MaxYield Cooperative location.

Editor’s note: Grain Solutions Team Leader Karl Setzer will offer his insights into different grain marketing topics in each issue of My Solutions. If you have a topic you’d like Karl to address in future issues, e-mail us at cmeyer@maxyieldcooperative.com or ksetzer@maxyieldcooperative.com.

 

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