Futures Hedging Advisers

[JimMeade]

I must not have made my point well.  Cargill simply knowing you have the grain and are using their service is valuable data for their market strategists and benefits them.

The University of Illinois points was that only a small percentage - 17-25% were in the top third and repeatability is not high.  Having a good advisor this year doesn't make them a good advisor next year, and I can't imagine any advisor being able to react quickly and accurately to black swan events.

Hedges remove price risk but add delivery risk.  Now one has to put XX bushels of grain of YY quality in the buyers hands, so it only changes, doesn't eliminate, risk.  Farmers are usually more prepared to deal with delivery or production risk than price risk.

What is the function of an advisory service?  To make a decision for the farmer?  Then it is not an advisory service it is a marketing service.

To recommend pricing strategies to the farmer?  The bottom line is the farmer has to be willing to make and accept responsibility for a decision.  

All farmers could see corn prices - why didn't they sell?  Would an advisory service have made them sell?

[JimMeade]

Based upon your comments I doubt if you have read and studied the reports.  I recall following them when they were being published and found them enlightening and useful.

It would probably help us all if you would take one or two aspects of the reports and give us your detailed examination with specific references so we can see and learn from your expertise in how to interpret them.

Again, I do my own hedging analysis and don't use any advisory services so maybe I'm looking at this all wrong.

[rayfcom]

If you have a good adviser who can execute the futures hedges for you, it would not take much of your time once s/he explains the program to you. 

[rayfcom]

I certainly did read up to the point where they describe their methodology. Once I read that I didn't need to read any further because I knew from experience that the results were meaningless. Those who can do, and those who can't teach. 

[rayfcom]

The corn market is far too big for any one player to move it for very long against the factors that ultimately determine price. You see this all the time in the largest financial market in the world, the Foreign Exchange market, Not even the Central Bank of a country can defend its currency against fundamentals of the supply/demand dynamic. So to think that an adviser would use knowledge of your hedging decisions to benefit themselves by setting positions opposite to yours really does not fit well into what actually occurs in the buying and selling of hundreds of thousands of futures contracts per day. 

Furthermore it would be stupid for any entity to take on the risk of a position based on the hedging actions of any one producer. Firstly the foundations of the position would have little sense - just because you are hedging they should take the risk of loss, regardless of the fundamental and technical forces driving market price at that time ? No decent trader would subject themselves to loss potential based solely on such flimsy evidence. Additionally, even if they could move the market against you based on your hedging decisions, it would not benefit their business because if the market continually moves against their hedging recommendations they will lose you as a client.

Think of another point...I advocate hedging only a portion of your inventory. Even if your adviser could move the market price against the price of your hedge, it would be of great benefit to you. If by selling 20% of your inventory through a hedge you could guarantee the price you will sell the other 80% will be higher because you sold the first 20% through the hedge, why would that be a bad thing. Actually if your scenario was correct it would give you even more reason to hedge a portion of your inventory.

Regarding how often an adviser can be correct, this is why I recommend researching the proven track record of any adviser who seeks to manage a hedging program for you. The issue is not one of the adviser being profitable every year, but rather (as I have written) their recommendations being consistently profitable over a longer period. If an adviser is profitable three out of every five years and produces a 5+% profit for you relative to if you did not hedge, that is an adviser worth listening to. And there are advisers and traders who can and have done that. Look at the commodity hedge funds, the ones that have been in business for a while have had to produce profits or their investors would have deserted them.

Hedges remove price risk but they do not increase delivery risk to you, the producer. You already know you have the corn to deliver, all the hedge does is lock in the price you will sell some of that inventory at times when there is a strong likelihood that prices will be lower when you sell the deliverable than they are when you set the hedge.

I don't care what you want to call it, advisory or marketing...what it really constitutes is a program to protect and enhance your profits and cash flows at times when the price of the product you produce seems more likely to go down than up. I consider marketing to be a sales strategy intended to increase the number of buyers you sell to. An advisory service advises you how to maximize the financial outcome of your business. Hedging doesn't focus on gaining you clients, it focuses on getting you the best possible prices for your product.

I recommend pricing strategies to the farmer because the farmers primary expertise is growing food, not understanding the supply/demand equation of a vast and complex market that determines the price s/he will sell product. Its kind of hard to be an expert in all facets of your business. This is why you hire a bookkeeper or an accountant to take care of your finances. For something as important to you as optimizing your revenue, you should also have an expert to assist you. Its also a matter of time commitment...do you have several hours a day or per week to analyze the macro-fundamentals of the overall economy, the corn market, as well as the internal forces that predict price movements ? A good advisory firm can do that for you, that's their expertise. And you'll find that the costs they charge for doing it are rather small in the whole big picture. Something like $20 for every 5,000 bushels of corn you seek to hedge the price of.