Uncertain Markets Increases the Need for Risk Management Tools

Navigating markets has always been a challenge for farmers, one that has become increasingly difficult. In addition to the unpredictability of weather, often the single biggest influence on values, geopolitical uncertainty has significantly increased grain price volatility in recent years. All indications point to volatility staying elevated going forward.

When it comes to marketing decisions, the current environment can be especially difficult. Prices for many markets are at their lowest level in several years, and yet remain relatively high from a historical perspective. For a number of crops, the supply and demand table is not particularly tight, but also not heavy. Any meaningful swing in production prospects, shifts in export demand or changes to government policy can tip the balance in a way that triggers an outsized impact on prices, but in which direction is unknown.

This magnifies the two-sided nature of price risk. Downside risk is what we naturally think of for most farms, and the prospects of watching the value of a crop erode after having ‘not sold enough’. But there is also upside price risk, and the potential lost opportunity if one is aggressively sold only to see markets move higher.

For crops not yet harvested, farmers must also weigh the trade-off between price risk and yield risk, and if the possibility of values deteriorating warrants the chance of production falling short of what was committed.

In all cases, risk can never be fully eliminated, but instead gets shifted in a way that (hopefully) benefits the overall health of the business. But the extent to which one can do so is largely dependent on the risk management tools available for a particular crop.

For crops that have contracts that trade on an exchange, hedging with futures and options can help in navigating the difficult trade-offs. This includes enhancing the ability to reduce downside risk while still capturing upside potential, securing prices without the need to commit physical grain or simply increasing the flexibility to manage marketing for the farm in general.

Some grain companies provide programs that offer similar things. But there can be benefits to having your own hedging account with a broker. And even if one still primarily uses contracts through buyers, a knowledge of how futures and options work helps in better assessing with of those programs are the best fit for your farm.

Whether or not one decides to open their own hedging account, the Understanding Hedging Grains course hosted by Alberta Grains in Leduc on February 12 and 13 is a great opportunity to increase your knowledge along with other farmers. Regardless of whether these concepts are completely new to you or if hedging has been a part of your farm marketing plan for some time, there will be something new to learn and fresh ideas to share.

We don’t have to like volatility, but we also don’t need to be in a place where it leaves us feeling helpless and vulnerable either. Given the state of the grain markets, this is an investment that could pay benefits for years to come.