Most operators approach grain marketing with good intentions, unfortunately, sometimes they can be lead astray and down the path of accidental market speculation. Don’t get me wrong, speculation can be great, if it is intentional. When a producer or consumer unintentionally ends up speculating when their intent was to hedge, the results can be disastrous.
Consider the following two midwest corn and soybean producers, Joe Planned and Tom Wingit. Tom Wingits operation grows 2,000 acres of of corn and 1,000 acres of soybeans each year. On average, he yields 190 bu/ac corn and 50 bu/ac beans leaving him with 300,000 bushels of corn and 50,000 bushels of soybeans that need to be marketed each fall. Tom sells his grain in the cash markets when he thinks that grain prices are good relative to where they have traded historically. The quantity that he chooses to sell, and timeline as well, is usually dictated by how firmly he believes that the market has reached a peak – If he has strong conviction he will sell more and further along the curve, if he does not feel that strongly he will not sell many bushels or far along the curve.
On the other hand, you have Joe Planned. Joe has similar production practices and grows 2,000 acres of corn and 1,000 acres of soybeans. Likewise, his average production leaves him with 300,000 bushels of corn and 50,000 bushels of soybeans that need to be marketed each year. Joe works closely with a marketing advisor to put together a grain marketing plan. Each year, Joe gets with his advisor to determine his cost of production, his cash needs, his insurance requirements, and others to put together a plan that mitigates the market risk and ensures that the operation has the best chances of surviving any market conditions. To help achieve these goals, Joe, his advisor, and all other decision makers put together a plan before the growing season that clearly lays out all of the goals and how they should be achieved.
As part of their plan, Joe’s advisor has done extensive research and determined that they will be able to meet their goals, regardless of what the grain markets do, if they hedge 65% of their production using rolling 12 month options strategies. Joe and team decided that this was ultimately a good strategy because it hedges their production in a way that closely matches their risk tolerance and ensures that the business will maintain the cash flow necessary to stay in business if grain prices decline.
In this example, it is easy to see that Tom’s practices are little more than a series of “bets” on the market. These bets are essentially market speculation because ultimately, Tom does not have a plan to meet his cash flow goals and profit objectives. Joe, on the other hand, has a very well defined plan that has been vetted by a third party and ensures that his operation will stay in business.