How to manage downside price risk using all the tools available – RealAgriculture
Concerns have increased across the board as producers eye commodity markets. Many people feel less confident that the markets are on stable ground.
AgMarket.net’s Tyler Schau says we’ve had a pretty good three-year run, and if we follow the cliché, all good things must come to an end.
“We’re right at the tipping point where we’re starting to see these markets, unless they fall apart, moving lower. And that increases the nervousness,” explains Schau at the Commodity Classic in Orlando, Florida. “It’s kind of an ‘okay, what do we do now’ mentality.”
This is where Schau says your risk management plan comes into play. It’s critical every year – but when the markets start a downtrend, you really need to think about your risk management plan. (The story continues under audio)
“Find a way to manage that risk, be a little flexible, give yourself some headroom. Nobody likes to sell grain after the market is down $0.40 to $0.50. But there’s still a lot of room for improvement between us,” he explains. “If this were March 2021, we would be very happy about these awards. So we have to take that step back and look at the bigger picture.”
Whenever you want to manage risk, Schau says, remember it won’t come for free. Giving up some of the advantage has to happen anyway.
“There are ways to cheapen that option — Can can sell call options, we can sell other put options,” says Look at how the options work so you don’t blindly fly in.”
Some markets are more difficult to manage downside risk than others, especially specialty contracts. They’re a much less liquid market, and there’s no futures market, so it pretty much doesn’t make it for options, he says.
As Schau explains, one must steer clear of guessing where things are going and instead pay attention to the controllable variables.
“You have to be very, very careful about knowing your production costs and your breakeven point, and then making smart, rational financial decisions. If they put you on a deal and you feel confident that you can get the production and it makes financial sense, taking some risk and signing the deal will make you money,” he says.
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