Lock in some profit to protect against the downside risk

(Kara Oosterhuis/RealAgriculture)

As the next few weeks progress, many farmers are beginning to look at those new crop prices. In a typical year, these conversations and discussions would normally occur at the various conferences and tradeshows.

Many questions are arising without that ability to have face-to-face conversations, so to help us navigate through some of this, Brennan Turner of Combyne Ag Trading Network provides some key things to keep in mind when it comes to locking in prices.

At the point of deciding whether to lock in any new crop prices, Turner says it’s a matter of really looking at the cash flow you have available in your operation, and whether or not you are hedging.

“My recommendation is that if you are taking on some new crop contracts, you should always be hedging against the downside risk in that parameter — and use professionals to do so if you aren’t sure how to — because it protects your bottom line,” Turner explains. “At these levels of volatility that we’ve seen already in the past couple of months, it’s impossible to say it’s not going to happen, that the market isn’t going to pull back a little bit at some point before next fall. So just be sure to protect that downfall.”

From a percentage standpoint, Turner suggests being at that 25 to 30 per cent sold mark, so you are able to guarantee your operations profit, regardless of the amount of acres you are looking at.

“After that, I’m still looking at 70 to 75 per cent of that crop that I’m able to sell once I do harvest that crop, or in the subsequent months between now and then. We’re at multi-year highs. We’re at values that we know everyone is going to be making money at, so it’s hard to ignore. But my rule of thumb is to always protect against the downside risk using hedging,” he notes.

“I honestly wouldn’t even be surprised if I get comfortable with almost getting to a 60 per cent forward contract, forward new crop sold, before we even plant a seed. But we will see where the next month or so goes, as there might be some higher opportunities yet to pay on the reports out of South America and some of these trade flows.”

It’s hard to ignore the opportunities that are in front of us right now, and as Turner concludes, “if you do, frankly, that’s just a very wrong play to make.”

Want to hear more? Listen to Turner’s full discussion on the t0pic during this Q&A!