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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Very good points and insights. Its also wise to remember that hedges in forward futures markets are not irreversible in the time until delivery dates of the underlying crop. As I wrote earlier, I think there is a pretty good chance that December corn prices can have a rather healthy upmove at some point after the double top objective at $3.29 is satisfied. Depending on what other economic and chart factors are telling me at the time, it may be a good time to remove the 2019 hedges or at least lighten up on them and book some profits.

 

If the market does move higher, the hedges that were taken off can be put back on again. With even a small amount of luck and some good analysis of the factors influencing corn prices during the next year, hedge employment can make profits several times over, especially if the market gets into a pretty steady and stable range. So if a hedge makes 20-30 cents every time it is put on and subsequently taken off, the farmer can wind up with a anywhere from 20 cents to a dollar and twenty cents of profits from his hedge positions, regardless if all of those hedges were entered at prices that were below break even for the ultimate 2019 crop that will be brought to market. 

 

Which is why its wrong to say that putting on a hedge is locking in a loss. The profits from the hedges that are put on and taken off during the months leading up to delivery actually can turn ultimate crop losses into overall farm profits. This is what the large farming companies are doing every trading day of the year...Cargill is one of if not the largest Futures market participant in the world, and a good deal of their work is hedging their huge future inventories before the seeds even touch soil. If it good for those guys, its sure enough good for everyone else to the degree that the small farmer either can devote time to watching the forward futures markets or have a sharp futures broker to provide the kind of advice necessary to succeed in a hedging program.

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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

There is the problem rayfcom! As a producer having the time to devote to research. A broker? Well I would have to tie a quarter to any ive ever dealt with to say they were worth anything. I never call them brokers, I call them salesmen. Why? Because I am considered a retail investor, not an institutional investor by the salesmen of equities!
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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Wrightcattle yes they were cheap but I'm looking at forward contracts September 19 to be exact.
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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Also rayfcom while advising to hedge can you also advise how to get out of position without a loss or margin call if market turns against hedge? I know for a fact that stoplosses don't work because they can be seen by market makers and will be taken taken out by them every time.
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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Yes sir, that is a big problem, finding good advice for the retail producer. I am surprised the farm coops have not put together departments that focus on packaging hedge programs for their retail clients, sort of like a fund in which a farmer can invest that provides pro-rata shares of the profits while the client is invested in the hedging fund. Necessity being the mother of invention, perhaps a futures merchant will come up with the idea and begin marketing it to either the coops or directly to the farming clients themselves.

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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

I've been watching open interest as well. Yes contracts are closing but that doesn't mean overall demand is falling, just positions sitting on the sidelines
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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Fact is our corn crop is traded in chigaco four or five times a year, so I don't watch Chicago for an indicator for world supply and demand.
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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Which is better? A hedge against downside which in theory has an unlimited loss potential, or sale at harvest and buy grain back below cost of production in Chicago which has a limited loss potential. Also no storage costs or loss of bushels or quality, no expense in depreciation on storage facilities, operating Capital from sale of grain
And buying support for the market. The only reason I've been able to find for owning storage is being able to get grain out at higher moisture than elevators willing to take. Any opinions on this?
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Honored Advisor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Reasons for bins.

 

NO WAITING IN LIne TO UNLOAD AT HARVEST., No waiting for them to be open,. My bin site is always open till full.

 

Capture the usual basis carry into spring, CBOT cannot will not deal in basis changes.

 

Cheaper drying costs.

 

Flexibility to market to different buyers, this can be worth up to 30¢ on any given day here.

 

Income tax management

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Senior Contributor

Re: Excellent Article On Where US Economy & Asset Prices Are Heading

Well as with all investments, those in the ground as well as those in securities or commodities, there are few guaranteed against any loss. Which is why I do not advocate hedges for more than a portion of a farm's projected inventory for a future time period, that can be adjusted for the amount of time remaining until delivery is due on the contract, 

 

The good news is that even though the hedge may be losing money at some point during its existence, the rise in market prices causing the loss is also providing a much larger gain on the 85% of projected inventory that is unhedged. So really what was lost by the hedge was opportunity cost. The projected overall inventory still is more valuable than it was at the time when the hedge was put in place, just not as valuable as it would have been had it not been established. That is what you can call the insurance premium to buy insurance against falling prices through the times of delivery. And remember, as long as the hedge position has not been closed out, the loss on the hedge is just a paper loss. It requires more margin money to defend the position, which increases the cost basis of the ultimate inventory, but is not necessarily a real loss until the hedging position is closed.

 

Which brings into the equation your second point, how to determine when to close a hedge position ? And I think that you should employ the same standards of measure you would use to select any vendor with whom you do business. When you receive a solicitation from a futures broker or advisory service that wants to help you execute hedges for your forward inventories, ask them for a record of account about their past success in advising clients like yourself. Do they publish their recommendations in a medium in which you can determine the date of the recommendation, like in a time-stamped internet blog or a written communication to clients that contains the date of the publication ? Do they have brokerage statements they can share with you to evidence that the trades they recommended in the past actually were performed ? Can they provide references of clients who they have advised with contact information for you to speak with those references ? Eventually you will find someone who has a track record of success in calling the direction of the markets for which you produce, and when you do you can follow their recommendations in real time for a while – perhaps a few months of a full growing season – and if they come close to what they claim is their prior track record, you have a new member of your team. I would caution against you trying to do this yourself the same way I would caution a futures broker or advisory service from trying their hand at farming.

 

Be mindful as well that no futures broker or advisory service is going to be right or wrong all the time. What I would look for is someone who has demonstrated a consistent track record of profitability in their recommendations. Somneone who in the last five years had one really spectacular year and four dismal performances is not nearly as good as someone who has had three, four or five of the last five years of profitable recommendations, even if the more consistent advisor has not generated as many profits as the shooting star.

 

The important thing to remember is that your profit center still is in the fields, the hedge is an insurance policy to help protect the profits from those fields. Hedging should not be a way of life, but should be selectively chosen as a tool to assist you in your overall enterprise when there are storm clouds on the economic horizon. That’s not to say that you cannot hedge frequently as a part of your overall activities – you can and if you have an adviser who makes you added profits through the hedges on a consistent basis then its worth being a more than passive participant. But my feeling is that hedging should be primarily employed when there are good reasons to believe, both from macro-economic data as well as market data, that your profits in the field are in jeopardy during the coming year.

 

I hope this helps provide you with some clarity as to how a hedging strategy can be another weapon in enhancing your success, and how to select a hedging strategy that will work within the confines of your comfort level and business objectives.

 

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