The Cost of Comfort
I called Autie the morning of March 6, 2018, to tell him to lock in the futures on 100% of his expected 2018 soybean production at $10.44 on November, 2018, with a HTA contract. He agreed he should do it, but he said he could not.
Autie is a long-time grain marketing client of mine and a good friend. Autie is conservative. Although he has never traded futures in his own futures account, he fully understands how the futures market works and how it influences cash grain prices. He understands the need to separate the day he locks in the basis from the day he locks in the futures price. In fact, he has been doing that since the late 1980’s. Autie will even go so far as to say he should have his own futures trading account. But…
Autie will not open a futures hedge account. He has been farming for 74 years on his own without a futures hedge account, so I certainly am not going to tell him he has to have one to survive.
The reason Autie could not lock in his 2018 bean production at $10.44 HTA on March 6, 2018, was because he grows seed beans and his buyer would not allow seed producers to price beans before July. On the first day in July, November 2018 beans opened at $8.85 and settled at $8.69. So, no, I did not recommend he price beans that day.
Since then, May 2019 soybean futures have traded sideways in a narrowing range channel as we waited for the China trade negotiations to be resolved. Autie was comfortable with that.
Last Tuesday (April 9, 2019), Autie called to tell me he had to price his 2018 seed beans no later than the close of business today (April 15, 2019). If he did not price them, the seed processor would price them on the close of the CBOT. I sure wish he had told me that a year ago! My task this past week has been to try to pick the top of the bean market between Tuesday morning and the close of business today.
If Autie had hedged his beans at $10.44 in his own hedging account, he would have rolled from November 2018 beans to May 2019 beans on September 18 and gained 40 cents by buying November beans at $8.14 on the close and selling May beans at $8.54 on the close. That would have put him at $10.84 with a May HTA ($10.44 in November plus the gain of 40 cents on the roll). His delivery window would have had nothing to do with his futures pricing nor his basis. That was fixed at +80 cents over the May when he agreed to grow the seed beans. Instead of being paid $11.64 net cash price for his beans, he would get about $9.80 because May beans are right at $9.00 now.
All our lives, all of us make decisions for no particular reason other than we never did it any other way before. We like the comfort of familiarity. If you are comfortable with your marketing program and making all the money you need, that is great. I am happy for you. But if you are not making all the money you need (or want), you need to expand your comfort zone and do some marketing things you never did before each year. That may be using HTA contracts for the first time to separate the day you lock in basis from the day you lock in futures, buying a put option to attach to your HTA, or using futures to do what your seed buyer will not let you do.
If you are seeking to maximize your marketing income, each new crop year you should do something you never did before, but be sure you fully understand the best that can happen and the worst that can happen to you BEFORE you do it. That takes time. You need to invest the time…
If you are not learning something new about grain marketing and getting comfortable with it every year, you are not doing as good a job marketing your grain as you could and should be. I have been doing this grain market consulting for decades. I learn something new several times a year, and it takes some time for me to get comfortable with them. However, I am better grain market consultant every year because of what I have learned.
For Autie, his desire to be comfortable (a futures account makes him uncomfortable) cost him $73,600 on his 2018 bean crop.
What did your desire to be “comfortable” cost you on 2018 and 2019 crops?