Hot, dry weather affects emotions, marketing decisions
Mark Gold, managing partner with Top Third Ag Marketing, says weather has been a fundamental concern for wheat producers across the central and southern United States. The hot, dry conditions have also put the heat on farmers to discover creative ways to make ends meet through marketing strategies.
For the next five months, Gold says volatility will rule the wheat market. As emotions run high, he advises producers to be careful about the marketing decisions they make. Specifically he says to avoid margin calls and instead, use put options.
“Don’t try to out trade this market,” he says. “The odds of producers beating the pros in Chicago [Board of Trade] are 7 percent—why play a game with these odds? Take negativity and speculation out of the game to eliminate risk.”
A put option, Gold says, works like an insurance policy to protect crops until the farmer is ready to sell. Once grain is sold, farmers should consider a call option, which is like buying a lottery ticket. Once a producer pulls the trigger to sell wheat, the odds they’ll win the lottery are small but Gold says it may be worth the cost if it gives you the confidence to sell the grain at high prices.
“You guys are best in world at producing crops but if the heat continues, no one can predict how high these markets can go,” Gold says.
Russia, he says, is on the rebound from severe drought and heat that nearly ceased the country’s export market and reputation in 2010. This year, however, Russia’s wheat crop is up 50 percent to 90 million metric tons, putting it back in the fold as a serious competitor in the next six to nine months.
“Russians are going to be aggressive trying to sell wheat and win back clients they lost as they defaulted on contracts,” Gold says. “They are selling wheat cheap to offset what they lost a year ago.”
Gold says he expects prices to go back down to the cost of production in the next 18 months. As the commodity market tries to force out inefficient producers, he told the Profit Maximizer crowd to be prepared and protect themselves against the looming risk. And though the tough part of risk management is often writing the check, Gold says farmers should think about marketing as insurance. When money is spent on put options, the producer should be happy to see the put premium decrease as the increase in the value of the cash crop can far and away exceeds the loss of the put premium.
“Think about the price as the cost of the insurance policy,” he says. “The higher it goes, the cheaper the policy premium. That’s how you start to manage this risk.”