Farmers Manage Risk with Commodity Futures Trading
The Commodity Exchange plays a vital role in the agricultural industry of our region. A global marketplace for the exchange of grains, livestock and other commodities, it allows farmers to manage risk.
Like the stock market, the commodities market took a dive in 2020 due to the impact of the COVID-19 pandemic.
“It was a black swan event, something that absolutely changes things,” Greg Goebel said. “The biggest effect was in the livestock industry due to packing plants losing labor. Some grain exports were also affected because of how COVID affected loading and unloading of ships.”
Goebel is a market analyst at Investors Commodity Services Inc., a full-service brokerage and market advisory company in Mankato. ICS was established in 1982 and is now in its third generation of leadership by the Persson family. Goebel shares his thoughts on the current state of the commodity futures market and its impact on the agricultural sector.
Who are your customers and why do they need you?
Our customers are farmers, businesspeople and investors. We help them establish prices and manage risk. If they are selling commodities, they are hoping we can help time the market. You also look for chances of basis improvement.
Speculators and investors in the market think that the market is going to go up. So, they establish a position based on that. It’s just like investing in any other market. The difference with the futures market is the degree of leverage. In the stock market, I think you can leverage up to 50 percent, whereas in the futures market you are leveraging 75 to 80 percent of it. In this case, you’re putting in roughly 20 percent of the money, but you are responsible for 100 percent of the gain or loss.
The futures market has a substantial amount of risk. People who are in it should either be active hedgers or investors. It’s money that you can lose. But with active hedgers and farmers, it is a great way for them to do their marketing.
How do you help your clients manage risk?
We try to look at both the cash side and the opportunity side of it with them. We also keep track of our customers and keep an eye on who is offering the best bids on grains. Part of it is simply reminding people when things should be done. At certain times of year, we will call people up and help them manage the movement of their cash grain and then help lift their futures contract. We are helping them make money and trying to take advantage of market opportunities.
What led you to become a market analyst in the commodities market?
I started in 1993. Prior to that I used the futures market on my own farm in my hog operation. I’ve been on both sides of it. In my first year, I established a price for my hogs, then the market dropped considerably, so I picked up money that way. The following year I ended up having to pay in the futures market, but I also made a whole lot more money because I didn’t have everything hedged. I know exactly how it works.
What is a typical day like for you?
It involves both looking at the market and observing any news that might affect the market. The commodities market can be affected by weather changes, it can be affected by political things happening and it can be affected by crop conditions in other countries. Today in the case of the beef trade, they are reporting BSE, the mad cow disease, in South America. Any little thing can change the market. We also look at what the value of the dollar is doing in different currencies.
Other markets can also affect farm commodities. The commodity that’s moving the most right now is natural gas. There’s higher commercial use of natural gas for production. That affects a number of things, as natural gas is what our nitrogen fertilizers are derived from.
What is the difference between working with a broker to sell your grain on the futures market or working directly with a grain elevator to sell it?
If you work with a grain elevator, that’s called a forward contract. The elevator takes a futures position, and they also figure their basis, which accounts for the transportation and interest costs of carrying a market.
If you do the futures market on your own, you can establish that price but leave where and when you will deliver it wide open. You’re locking in the price and nothing else.
You do need to be prepared for the market to change. In the futures market, whoever is carrying the position is responsible for any change in the market. So, if the market were to go up, whoever was holding that position must put money in on that position. If the market drops, they in effect gain on that.
When does a farmer typically plan their pricing?
You can plan your pricing at almost any time. Typically, especially with corn, sometimes good prices are established while you’re planting it. By making the sale on the futures market, you can lock in the futures and that price.
We’re already looking into years from now. They have futures contracts on corn out into the harvest time period two to three years out. It’s the same thing with soybeans.
Let’s say I’m a farmer and I’ve locked in the price of my grain at $10 a bushel. By the time I harvest my grain, the price of grain has risen to $20. What happens then?
You’re going to always end up with $10 no matter what happens. Now in this case, you’ve got the price you locked in, but somebody else got a good deal. The futures market is a way of establishing a price in the future that works for the individual.
Let’s look at another scenario. What happens if there’s a drought and the farmer can’t produce that crop?
If you have a futures position, you simply lift the position and take the loss. Whereas if you have a forward contract, you will have to buy grain someplace to fulfill that contract. On a longer term outlook, a futures position gives you much more flexibility than forward contracting with the end user or elevator.
I have heard that the market’s been volatile lately. Is that true and what is the cause?
Markets were volatile, but they’re kind of settling down. This year most of the volatility has come from uncertainty about the weather and supply concerns. Rain affects yield and whether a crop is planted on time. It hit the corn and soybean markets worst.
At this point, when the harvest is within a few weeks, the market is not really concerned about supply, whereas two months ago it was. Right now, things are looking good for December 2022. The futures price of corn is about $5, which is normally considered excellent.
Are you seeing any other trends in the commodity futures market?
We’re seeing the markets move much faster than they have in the past. The commodity fund market is affecting other markets more than it has in the past. There are large groups of investors that put all their money together in different commodity funds. So, there is a lot of money there that can help drive a market higher to allow farmers to have better pricing opportunities.
How much does what is happening in other parts of the world impact the prices that farmers here in the GreenSeam are experiencing?
It will affect the underlying price of the futures market because it’s a world trade. When people look at prices in wheat, for instance, they look at what comes out of the Black Sea, what comes out of Australia. We also look at the continent of Africa. They are really expanding their grain production.
Prior to the ‘70s, there really was no South American production. Now we’re seeing increasing production of livestock in South America, and China is attempting to produce more livestock using methods similar to the U.S.
You mentioned that mad cow disease is impacting meat production in some countries. Are there other animal diseases affecting livestock production and the corresponding commodity markets?
China is dealing with African swine fever. One of the biggest fears in the U.S. right now is that African swine fever might come into the U.S. In fact, the closest case of African swine fever is in the Dominican Republic and that is causing some concern that it could end up coming into the U.S.
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