How to manage downside price risk using all the tools available

Tyler Schau Agmarket.net at Commodity Classic 2023

Anxiety levels have been increasing across the board, as producers have their eyes on the commodity markets. Many people are feeling less assured the markets are on stable ground.

Tyler Schau, of AgMarket.net, says we’ve had a pretty good three-year run, and if we follow the cliché, all good things must come to an end at some point.

“We’re right at that cusp layer where we’re starting to see these markets — unless they fall apart — move lower. And that’s increasing nervousness,” Schau explains at Commodity Classic at Orlando, Florida. “It’s kind of that ‘okay, what do we do now’ mentality.”

This, says Schau, is when your risk management plan comes into play. It’s critical every year — but as the markets begin a downward trend, you really have to be thinking about your risk management plan. (Story continues below audio)

“Find a way to manage that risk, stay a little bit flexible, leave yourself some room to the upside. No one likes selling grain after we’ve seen a $0.40-$0.50 drop in the market. But there’s still a lot of room to go below us,” he explains. “If this was March of 2021, we’d be plumb excited about these prices. So we’ve kind of got to take that step back, look at the overall picture.”

Whenever you want to manage risk, Schau says to remember it’s not going to come free. Giving up some of the upside is going to have to happen, regardless.

“There are ways to cheapen that option up — can can sell call options, we can sell other put options,” Schau says, “And that’s where it really becomes important to have a relationship with either a broker or someone that understands the mechanics of how the options work so that you’re not just flying blind into it.”

Some of the markets are harder to manage downside risk to than others, especially in the specialty contracts. They are way less liquid of a market, and there are no futures market, so it creates next to nothing for options, he says.

As Schau explains, you have to take off the hat of trying to guess where things are going and instead pay attention to the controllable variables.

“You need to be very, very diligent of knowing your cost of production, your breakevens, and then making smart, rational financial decisions. When they lay a contract in front of you, and you feel comfortable that you can get the production and it makes financial sense, it’s going to make money for you to lay off some risk and sign the contract,” he sasy.

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