Hedging simply is the process of shifting risk to a third party. The most common type of hedging is the purchase of insurance to shift risk for fire, wind, hail, drought, flooding, accidents, liability, etc. The concept is the same, but don’t let advisors tell you that you need to have price risk insurance in place at all times to maximize revenue. Unlike the perils listed above, prices don’t always fall, and you almost always have time to buy price insurance later if you need it.
Agricultural producers routinely shift price risk with contracts of various types (cash, futures, options, etc.) to avoid falling product prices. Timing is important because the prices offered throughout the production cycle can vary dramatically. That volatility is the challenge and the opportunity.
Simply stated, Selective Hedging is choosing when to place or lift a hedge rather than being hedged at all times.
The goal of a selective hedger marketing commodities should be threefold:
1) remain open or unhedged when the major price trend is up,
2) recognize when the price trend is turning down so that price risk protection can be put in place, and
3) recognize when the price trend is turning up so that price risk protection can be removed, if desired.
This is a very different approach to price risk management than traditional approaches which have been taught and used for decades. New tools are available which make assessment of major price trends relatively easy.
Most important, many of the traditional approaches to price risk management are flawed and can lead to very unexpected outcomes. Studies cited on the Resources page clearly document the weaknesses of many traditional approaches.
If you didn’t sell December 2012 corn for more than $10 (futures price), or 2019 corn for more than $4.30, then you should look in the mirror and ask yourself why? The opportunity was there. The tools were there. If you accepted less, you left a lot of money on the table in 2012 and struggled to cover costs in 2019.
If you need help evaluating when price trends are changing and/or making the “sell” decisions, contact Keith Rogers at hedging@grics.net or call 309.255.1160.
