25 th Annual Joint Conference NC Cotton Producers, Corn, Small Grain & Soybean Associations January 15-17, 2014 Presented by Dave Fogel, Risk Management Advisor 800-664-2321 www.advance-trading.com
Who we are. • Company started in 1979 and was incorporated in 1982. • Producer marketing division began in 1984. • 94 total employees • 16 commercial brokers, 27 employees branches, 29 non- employee branches, and 7 other AP’s • Customer base spanning the U.S.- most all states that grains are produced, processed, or fed • 33 total branches offices- employee and non-employee.
Who we are. • International customer base in Canada, Switzerland, British Virgin Islands, Mexico, Brazil, and Egypt, with other business relationships with Lebanon, Ukraine, and Tokyo. • Full-time economic staff. • Network of around 3,500 customers • Largest IB (Introducing Broker) outside of Chicago, IL • Currently have a relationship with 4 different FCM’s (Futures Commission Merchant) and are currently working on a fifth (before the end of the year)
We have no way to predict if we will see prices like we did from 2008-2012 or if 2013-14 is more likely- . However, we can predict if the latter is the case, we need to be well educated on defending our balance sheet 4
Defend your balance sheet! The time to use risk management is when your balance sheet is good. If you don’t defend, you risk putting yourself in a position where others make decisions for you. 5
What does it take to defend your balance sheet? 1. Education on marketing tools 2. Belief in a simple philosophy 3. A plan/execution 4. Common Sense Risk Management 5. The knowledge to combine: crop insurance + marketing + cash sales 6
Simplicity offers the best solutions to everyday challenges, fortunately, the same is true for managing price risk 7
Each marketing year is unique. Managing price requires a consistent approach each year. Follow a philosophy you can trust and will work in all market environments. 8
Any strategy/risk management plan should be simple enough in that it can be explained and understood in a typical conversation… 9
Many spent the past summer challenging USDA Reports In the meantime what did price do? 10
We have customers in Iowa and Minnesota. I also drive through there to visit customers. We understand the frustration of planted acres-not planted acres- prevent plant acres. 11
There is nothing to be gained by disputing government/USDA numbers. There is, however, much to be gained by: -learning -managing risk -being in control 12
End Result on the USDA Debate: So far we missed price breaking from $6.70 on Mar. ‘14 Corn futures and $14.09 ¾ on Mar. ‘14 Soybean Futures ….even though you were right 13
What makes you believe there are advisors, brokers or any Ag Industry person has this ability? 14
Once you accept and believe price is not predictable, you then become an effective marketer. 15
Until then, you are just winging it, taking chances, risks-speculating 16
3 Keys to Managing Risk Education on 1. Marketing Tools 2. Crop Insurance 3. Cash Markets/Sales 17
You have heard, even before me about the importance of having a marketing plan. However, in order to build a solid plan you must understand all the marketing tools and alternatives. 18
A plan should work in all market environments-in all directions. However, how can you build a plan until you understand all tools available? 19
Futures Pros and Cons 20
Selling Options Pros and Cons 21
Cash Forward Sales 22
Options fit Risk Management for Farmers Those who like to say options do not work either have limited experience with them or did not manage them properly. 23
Do you want to risk a long premium, fixed amount or give away hard earned equity? 24
If an option position turns out positive, that is very good. If an option position turn out negative, that is perfectly okay. Better, in fact. 25
We understand the logic of not selling cash bushels if the weather is not cooperating. Where it gets difficult is the scenario where the weather improves but now price is significantly lower. 26
Learn how to incorporate the purchase of a put into your marketing plan. This provides price protection without causing you to have concern. Should I sell? But what if it doesn’t rain? 27
Managing your cash bushels is one of the 3 keys to successfully managing risk 28
Purchased Call Options In order to gain from higher prices most tend to do this by owning unsold cash bushels There are times this can be done in a much better, more economical way. 29
An inverse is an inverse- needs to be sold 30
Short Dated Options You need to understand how they work 31
New Crop Short Dated Options Currently, these options are listed for 2014 and that is the 3 rd crop year these have been available. These are a rival for OTC contracts. These options allow you to manage new crop prices while using a lesser amount of time vs. the traditional new crop option. They are currently available for corn, soybeans, and wheat. 32
Short Dated vs. Traditional Options Find a way to educate yourself on how they work and if there is a fit for you business. 33
As a grower, its okay to root for higher prices as long as downside risk is managed There is risk of getting too bearish. 34
Be wary of bearish strategies: Accumulators Short calls 35
Accumulators-OTCs Knockouts Double ups Do you fully understand what these mean? -Until you know- Stay Away! 36
Options = 100% Price Managed 37
Change happens… And it happens fast. 38
Change happens fast! On July 7, 2013, December 2013 corn futures traded at $6.65 On November 19, 2013, December corn futures dropped to $4.11 This is a drop of $2.54/bu in just 4 months. How did you defend this? 39
Change happens fast! On July 14, 2013, January 2014 bean futures traded at $14.09 On November 19, 2013, January bean futures dropped to $12.68 This is a drop of $1.41/bu in just 4 months. How did you defend this? 40
The more things change… The more they stay the same. Pendulum swings from 1 extreme to another- never parks in the “comfort zone” 41
At a recent meeting, a question was asked whether the market understands we are at or near break-even prices. 42
Well... The market may or may not be aware, but it is not a factor if you expect it to increase price. Does the market react because the end user side/ethanol plants, livestock, feeders were under pressure with high grain prices? 43
Cost of production has been increasing with higher prices Now that prices are lower, are your costs coming down equally to price? With prices near break-even levels for some, doesn’t this mean we need a plan to manage price? Margin? 44
How do we manage new crop when below the cost of production? Does the market have to trade above breakeven? 45
Looking ahead to 2014 • What is your plan? • When will you lock in your inputs? • Are you planning on taking crop insurance? • What type of policy are you looking for? • Are there add-on product for your crop insurance policy you are interested in? • Are you taking a weather policy? 46
Are we heading to an environment where price is not above breakeven all year? 47
Livestock producers have learned to manage margins. Now the grain guys may have to grind out a profit- may not be profitable all year 48
Are you long 2 crops? What's the plan? 49
It Really Is This Simple! Stored Bushels risk of lower prices to loan. Buy puts OR sell bushels with purchase of calls. Sold bushels risk of higher prices buy calls. 50
Crop insurance is one of the 3 keys to managing risk 51
Crop insurance is a very important part of your plan Adding Crop Insurance to a well designed marketing plan is a great way to manage risk 52
Crop Insurance Has Many Benefits But It Is Not A Marketing Program • What do you plan to do prior to when the crop insurance average is set? • What do you plan to do when/if prices rise above average price level? • Lastly, what will you do after 2 nd averaging period ends? Typically harvest/post harvest time period? 53
If today was 3/1/14, we would be looking at a Feb. average price for crop insurance of $4.65 on Corn and $11.65 on Soybeans. 54
For many, marketing has turned into procrastinating due to adverse weather Is this a sustainable plan year after year? Summer 2012 Summer 2012 Spring 2013 55
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