Manage Risk in a Grain Price Run-Up

By: Nate Birt

While unrest in Ukraine might appear to be the primary factor pushing grain prices higher, experts tell the U.S. Farm Report Market Roundtable it’s one of several contributors. What’s more, producers should be protecting their bottom line even as a bullish tone prevails.

"I think there are other factors," says Chip Nellinger, Blue Reef Agri-Marketing, Inc. "We started this rally ahead of problems developing in Ukraine. That was kind of the final dose of diesel fuel on the fire. We got undervalued in the place of corn, we started doing a lot of export business. So fundamentally we were undervalued, and that stimulated demand. The funds, also, huge change of ownership. They went from short 150,000 contracts of corn to now long 150,000 contracts of corn in less than two months."

The swing in prices shows how much marketing has changed over the years, adds Tommy Grisafi, Trade the Farm.

"In the old days when there was a pit, you would see someone who was representing a fund come in and see them bid for 1,000 or 2,000. Now on the screen, it’s hard to keep track, it all happens so fast, and a lot of it happens at night or over a Sunday," Grisafi notes. He continues: "In the rest of the world, our Sunday is Monday. I think we did record volume last Sunday on the Ukraine news, and my heart goes out to anyone who doesn’t have access to a real platform in the markets. But the things to watch, from a speculator’s view of protecting my own risk, at some point when we get a run-up like we have, even as a professional trader, I couldn’t react fast enough for how vicious these moves were, especially in oats and corn and everything else."

Looking ahead, the spreads are signaling what might lie ahead for prices – and are serving as an indicator that producers should be thinking about ways to protect their bottom line.

"The spreads are tightening in corn," Nellinger explains. "It’s a bullish scenario for corn, yet the cash basis levels have dropped off dramatically in most areas of the Corn Belt. So that’s telling you, or at least telling me, that we’re probably getting a little overvalued now on corn futures. Beans are a little different story. You’ve got such a dynamic there with old crop-new crop, but even the bean spreads, and what oil and meal spreads have done, are still hinting to me—although this week didn’t show much of a side of this—that we may be in the process of trying to top this bean market and the meal market."

In any case, have a plan and be comfortable with your decision, Grisafi adds.

"Hedging and futures and derivatives overall, it’s a great concept, but the exit strategy is so difficult," he explains. "There’s so many ways to protect this. But what’s most important for the person watching is that they’re comfortable with the risk they’re taking. Even though they have the physical product, they sell the futures or buy the puts or do any combination of a derivative, there’s so much risk and they’re locking in a profit. But they start to see the money and unlimited opportunities. In the end, you have to be comfortable with those opportunities."

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