Tell me. Are you risk averse, or a risk taker?
Here’s where me and the Farm Guy Next Door sit on the scale of risk tolerance: If we’re making a bet on something trivial, I’m more likely to bet $5-10. He’s more likely going to bet at least $50-100.
Now, my track record on winning bets with him isn’t great, so that might play into my low risk tolerance. However, I can attest that this holds pretty true across the board when it comes to taking on risk.
Regardless of whether your risk tolerance is similar to mine or the Farm Guy Next Door’s, I think we all get a bit of apprehension prior to USDA reports. Often, we display this apprehension by asking a variety of questions to people in the industry prior to the report:
“Do you think we’ll have a bearish or bullish report?”
“Do you think we should we sell more before report day?”
“So what if the numbers are bearish, isn’t there a weather story later this summer that could bring a rally?”
“What if we sell now and end up missing out on a rally?”
Here’s the deal. You can go round and round with these questions and you might never get the answer you’re looking for. We all love to talk, hear others’ opinions, and formulate our own. But remember, no one can predict the report. And if they do this time, watch out, because next time they probably won’t.
Usually, I find that people are stuck in a place of indecision.
Not willing to sell because they don’t want to miss out on a rally or are apprehensive about forward selling any more bushels.
But also nervous about doing nothing, because they worry the market will fall and they’ll have missed an opportunity.
So what do you do?
Let’s talk about options. If you’re stuck in a place of indecision and apprehension pre-report, a put or call might be something to explore depending on what you’re worried about or want to protect.
Put option: Provides downside price protection. With a put option, you lock-in a price floor so that if the market falls below the strike price of the option, you have the right to sell at a price higher than the market. Your risk of loss is limited to the premium and fees paid to buy the option.
Relating this back to your pre-report thoughts, if you’re in the camp of concern over unprotected, unsold bushels and your risk of market prices falling if the report is bearish, buying a put option might be a strategy worth looking into.
Call option: Provides an opportunity to benefit if prices rally. When you buy a call option and the market rises above the strike price of the option, the call gains value. However, if the market doesn’t rally, your risk of loss is limited to the premium and fees paid to buy the option.
Let’s bring this back to your pre-report thoughts. Maybe you’re thinking about selling some bushels before the report, but you’re on the fence because you don’t want to miss out if the report is bullish and the market rallies. Buying a call option allows you to mitigate your FOMO (fear of missing out) 🙂 and capture value if the market rallies. Having a call in place so you won’t miss out if there’s a rally gives you the confidence to make a sale.
Takeaways:
– Remember to focus on making decisions based on your marketing plan, breakeven, and profit goals. Don’t make marketing decisions that are just bets on report opinions/expectations – that’s not a risk management strategy.
– Talk to your commodity broker or marketing advisor to discuss and determine if buying a put or call would be a good strategy for you and your operation. Our operations are unique, so it’s important to understand what’s a good decision for YOUR operation specifically.