November 28, 2020

Hedging 101: How MaxYield’s Risk Management Benefits You

MaxYield West Bend IA cornHedging isn’t just for farmers. It’s also a smart risk management strategy for MaxYield Cooperative.

“Hedging allows an elevator to hold its grain until a favorable marketing opportunity comes along,” said Karl Setzer, grain solutions team leader for MaxYield. “This ultimately benefits our clients.”

To help you understand how this works, we’ve compiled some questions and answers to give you an insider’s perspective on hedging and risk management.

Q: Why does MaxYield hedge?

A: Hedging is a critical price protection strategy. Since grain elevators don’t have revenue insurance, we have to make our own through hedging. Think of this as an insurance policy that helps protect MaxYield from the time we purchase grain from clients until the time we sell a trainload of grain (which equals 360,000–400,000 bushels).

“Hedging allows a cooperative like MaxYield to accumulate inventory, with the ultimate goal of adding value,” said Bruce Nelson, senior risk consultant with FCStone in West Des Moines. “By combining small grain purchases from clients, MaxYield can offer large purchasing opportunities for major end users and processors that are interested in buying up to one million or more bushels at a time.”

Hedging also helps protect MaxYield from market volatility, added Setzer, who noted that price swings of 15 to 20 cents per day aren’t uncommon. “In years past, we’d tally up how much grain the co-op took in that day, and we wouldn’t put on hedges until the end of the work day,” said Setzer, who has spent 17 years of his career with MaxYield. “Now, I hedge each bushel of grain within seconds of MaxYield buying it to eliminate risk.”

Q: What could happen if MaxYield didn’t hedge?

A: Grain terminals and ethanol plants have gone out of business by failing to hedge properly, said Setzer, who noted that the majority of large commercial grain handlers and cooperatives hedge their grain. “We have an important responsibility to our members, and we’re not in the business of speculating.”

This is a smart solution, Nelson said. “In my 27 years in this business, I’ve never seen a customer get in trouble by running a legitimate hedge, but I can’t count the number of people who’ve lost big by speculating.”

Q: How does MaxYield hedge?

A: Straight futures contracts are the most common hedging tool, although options can also be used. MaxYield tends to use straight futures contracts, because they are more defined. “We use a back-to-back system, so as soon as we make a grain purchase, we make a sale on the Board of Trade,” Setzer said. “We hold that futures position until we sell the cash grain.”

Q: How does hedging influence MaxYield’s grain bids?

A: A disciplined hedging program allows MaxYield to find more grain marketing opportunities, which can translate to higher bids. “The better we can hedge, the more attractive bids we can publish,” Setzer said. To understand why competing elevators or end users sometimes offer higher bids, it’s important to understand basis (the difference between futures and cash values). Basis is determined primarily by transportation costs, handling fees (the money it costs to put grain in the bin, take it back out, and load it), and insurance costs. “Basis is like a choke or a throttle,” Setzer said. “When you tighten it, it means you need more grain, and when you widen it, you need less grain.”

Since end users need a constant supply of grain and don’t store grain, they pay farmers a premium to give up some of the opportunities provided by the local cooperative.

Q: What are some other ways that hedging benefits MaxYield’s clients?

A: MaxYield understands the importance of risk management in agriculture. “Each time we buy a bushel of corn, we know what we paid for it, but we don’t know how much we can sell it for,” Setzer said. “That’s why we rely on hedging for price protection. It’s also why we promote risk management so heavily to our clients, because we know how critical it is.”

Clients can feel comfortable with MaxYield’s grain marketing solutions, Nelson said. “MaxYield is a phenomenal company with a solid risk management plan in place.”

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