Taming the Bulls & Bears

Finding Ways to Manage Market Volatility – And Sleep Better at Night

Oh, the good old days of marketing.  When wheat moved 30 cents in a year, instead of a day.  We consistently lost the carrying charge, and we knew what to expect.  Now the market has moved $2 since last year.  And even though prices have leveled off a bit from levels of a few months ago, the market is still a good $2 more than last year, and remains in a bullish trend.

The question is, how long will it last?

There hasn’t been much volatility in the markets for several years, and this year has been a big surprise for many farmers. It’s also been tough on the nerves.  Nearly every farmer I’ve spoken with feels more stress with wheat over $4, than we did with wheat prices down around $3.   We knew what to expect with wheat prices around $3, and now with more price volatility, we have more uncertainty about marketing, such as when and how much to sell.

We need to find ways to deal with the volatility—this might help many of us sleep better at night.

Using put and call options in volatile markets is one of the best ways to minimize your risk, but you have to pay for them.  Options become very expensive in volatile markets, because there is more risk involved. 

It’s up to you to determine if the extra cost is worthwhile. I believe paying more for an option is worthwhile, because at least you stand some chance of making money on the option. Wheat options were cheap when wheat only moved 30 cents a year, but you also stood very little chance of making money on them. Now that wheat has moved $2 higher, wheat options are expensive, but I believe you stand a much better shot of making money on those options. You get what you pay for, the same lesson we’ve learned in everything from buying a used tractor to using bin-run seed to choosing crop insurance.   It may be inexpensive, but does it have any value?

I find it easier to justify spending money on put options this year because I can lock in a profit.  For several years we’ve had to pay 15 cents for a put option that didn’t guarantee us a profit.  Now we can purchase put options on our grain inventory that will guarantee we won’t lose money on 2002 wheat. I would much rather pay 20 cents for a $4.50 put, than 10 cents for a $3.00 put. The premium may be twice as expensive, but at least I’m getting some worthwhile protection.  A $3.00 put gives me very little protection. 

While volatility in markets may cause some sleepless nights, it also presents some excellent sales opportunities.  When the wheat market has a 30-cent trading range in one day, there could be a favorable selling price in there somewhere. If you have unsold grain, you need to have a marketing plan in place with firm price targets.

I also recommend you place sell orders at your local elevator or with a broker.  It’s much too difficult to try to watch the markets every day, and the direction may change drastically from open to close. A “good til cancelled” order can help ensure that your marketing plan is executed. The GTC is a directive to sell at a specified price which remains in force until executed or cancelled by you, the customer.

Actually, there are more opportunities than pitfalls in a volatile commodity market.  The trick is to position yourself to take advantage of the opportunities. Doing nothing will get you nothing, but a few put or call options and a few GTC orders at your elevator may help make your marketing less stressful and more profitable.  You just might sleep a bit better at night too.

Jensen farms with her husband Brian near Stephen, Minn.  Her market education activities including this column are supported in part by the Minnesota wheat checkoff, directed by the Minnesota Wheat Research and Promotion Council. If you have a question or topic related to marketing that you’d like to see addressed in this feature, call 1-800-242-6118, or email Jensen: bjensen@nctc.mnscu.edu

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Weather: “Anything Can Happen”
Given the unusual weather trends in past months, many are wondering what kind of weather to expect in the future. John Enz, North Dakota State University agricultural climatologist, notes that the National Climate Prediction Center is predicting an El Nino condition for this winter. El Nino has typically generated warm, dry winters in the Northern Great Plains, minimizing soil water recharge.  However, Enz cautions that long-term forecasts including those found in the Old Farmer’s Almanac should not be considered accurate weather predictors.  “As with all weather outlooks, you should be aware that anything can happen,” he says.  A 2002 growing season weather summary for North Dakota, compiled by Enz and Barbara A. Mahoney, can be found online at www.soilsci.ndsu.nodak.edu/Enz/index.html .