Selling in Volatile Markets

By Melvin Brees

Volatile markets can make deciding when to sell difficult. Since predicting how high price will go and when the high will occur is uncertain, attempting to sell at a market high depends on luck and is not a realistic marketing goal. Selling in the top 1/3 or 1/2 of the annual price range and avoiding selling at market lows represents a more reasonable approach to marketing.

A number of marketing strategies and sales tools can be used to manage some of the risk occurring in volatile markets. These strategies probably won’t capture the “high,” but they offer opportunities to achieve reasonable price goals and capture profits. It is important to understand that volatile markets can produce surprises and the results of some strategies can be disappointing. However, having a strategy to capture higher prices usually beats having no strategy at all.

It just makes sense to not sell everything at once when markets are volatile and uncertain. Unexpected events can quickly change the price outlook. Selling a portion of grain inventory at favorable prices insures that some is sold at profitable prices. If prices increase, more is available for sale and when sold at higher prices increases the average price of grain sold. Similarly, if prices decline, some grain has already been sold at higher prices and provides a higher average price by offsetting later sales as prices decline.

Having a price goal tends to make selling somewhat easier. Using upside price targets together with spreading of sales allows following a market uptrend with “scale-up” sales. When a higher price target is reached, a portion of the grain is sold. If prices continue to increase, additional sales are made at higher price targets, resulting in increasingly higher average prices. Price charts or technical analysis can be helpful to identify price targets. Setting price targets at or just below technical price resistance is one method of identifying price goals. Resistance prices represent earlier price highs that previous rallies failed to exceed or where prices “resisted” going higher.

 In volatile markets, having downside price targets or “price traps” is also important. While everyone likes to focus on upside price targets, being prepared to make sales if the market declines can help salvage higher average prices early in the price decline. These sales are difficult to make because prices were recently “better,” but the objective is to capture favorable (or at least decent) prices before prices decline to much lower levels. Setting price traps just below technical price support (previous price lows where prices reversed and moved higher) or below chart uptrend lines are two possible methods of identifying price traps.

Cash sales or forward contracting for later delivery of remaining old crop inventories are the most common method producers use to spread sales and capture price goals. The same techniques for identifying sales targets can be used to liquidate futures contracts or call options purchased to re-own previous cash sales.

The same price targeting methods can be used to establish price objectives for pre-harvest sales of production expected to be delivered at harvest time. Other objectives such as setting price traps that produce returns above production cost/return break-even may be given higher priority in pre-harvest sales. However, production risk associated with delivery requirements and potentially weak basis bids may sometimes make new crop forward cash contracts less appealing.

Hedging by selling futures contracts or buying put options can avoid delivery requirements or weak basis, but margin requirements on futures positions or high put option premiums may be worrisome to some. More complex option strategies (covered calls, fences, bear-put spreads, etc.) are recommended by some market advisors and offer some attractive ways to mange price risk and lock-in favorable prices at a low net option premium cost. While these can be very effective risk management strategies, it is important to understand how they work and the potential financial or contract obligations associated with them.

Brees is a University of Missouri extension ag economist.  Read his monthly column “Decisive Marketing” on the web: http://valueadded.missouri.edu/newsletter/dmarket/.

While drought stress will result in higher wheat proteins in some hard red winter and hard red spring wheat growing areas, there will be lower proteins in spring wheat areas with above-average yields, and in some HRW areas affected by late-season rains.  Premiums of 30 to 50 cents are possible for 14 to 15% protein wheat.

High premiums are usually short-lived, and peak early—usually occurring during or after harvest (as do market discounts).  Thereafter , the premiums (and discounts) ease as the marketplace adjusts to the crop that’s coming in. That’s why NDSU extension crops economist George Flaskerud advises producers not to sit too long on high-protein wheat. Complete sales of 15% protein wheat during September-November, and 14% pro during November-January. Elevators that operate off of the “to-arrive” market may not see and thus offer premiums on protein as high as the Mpls cash market. The late rains in some HRW growing areas resulted in low falling numbers and test weights, as well as some sprout damage.  Thus, as the trade seeks high quality milling wheat, the Minneapolis market can be expected to trade at a premium over Chicago. (Source: George Flaskerud, NDSU).