Risk vs. reward: protecting margins in a volatile market
Commodity prices this spring has made watching the markets an exciting part of nearly every day, especially for farmers who are anticipating a satisfactory yield and who are biding their time locking in prices. However, with many volatile factors contributing to those prices, experts are saying to weigh options carefully and take assurances where you can.
Brian Voth, president of intelliFARM, says marketing strategies have shifted dramatically this year not only because of the high prices, but also because of the high downside risk potential.
“We have bought more put options with clients in the last month than I think I have in the last 16 years combined,” says Voth. “Obviously, a big part of that has to do with, we’ve got phenomenal new crop pricing opportunities out there, but anything that you’re pricing, to a buyer to an elevator, a crush or anything like that also comes with the associated production risk.”
To describe a put option and what it means, Voth refers to it as insurance on your profits, or margins. If you think of it in the same sense of house insurance he says, where if you buy it and don’t need it, that’s not a bad thing. Same rings true for put options he explains, “you’re essentially protecting your downside risk.”
Last year, many farmers fell victim to weather woes in the last half of the growing season which sunk yields under par, leaving many with very unsavoury contract buy-outs. With last year’s pains still fresh in the minds of many farmers, it’s no surprise that there is some caution being taken when looking to lock in at high prices with yields still largely undetermined. This is where put options tend to be a good option for producers, says Voth.
Although weather can still play a factor this year, Voth says he doesn’t believe it to be a main driver of prices at the current state. More-so is the ever evolving Russia/Ukraine war, where millions of tonnes of exports remain idle as the war continues. Even this situation though makes Voth raise an eyebrow.
“I’m a little skeptical about some of those things out there, because with Belarus last week, offering to move Ukrainian grain through Belarus and Ukraine refusing, and I get it, you know, Belarus is a Russian ally, there’s politics there. But if there is an opportunity to move grain over Ukraine, in whatever fashion, it may be, if it’s not a political decision, then why not use any avenue there is,” says Voth.
At any rate, the shortage is certainly a main player in the commodity prices we are seeing today, yet no one knows if and when that will break or how much demand has been destroyed due to these high prices. At what point will it start to ebb in the opposite direction?
With all of these points on the table, again Voth says it’s wise to protect profits and margins and from his recent experience outlined above, put options seem to be the solution in an otherwise unpredictable market