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| These are my random thoughts and experience in my area.
Some factors to consider:
What is your risk tolerance? Not just your mental makeup but your balance sheet numbers.
What crops, corn and soybeans?
Crop Insurance?
How is off farm storage? Do you need a guaranteed home for your bushels or delivery is no problem?
Banker and his understanding of crop marketing. The following is mostly assuming delivery is no problem.
Forward contract:
Pro – Just have to deliver the crop. No margin calls. The price is known.
Con – Have to deliver the crop to specified destination. There are situations that crop insurance may not provide enough cash if delivery is required. This is less likely to be a problem with corn or soybeans.
Hta:
Pro - Just have to deliver the crop. No margin calls. The price should be a good average. Possibly can set a good basis
Con – Much like forward contracts, have to deliver the crop to specified destination. Also have to set basis sometime. Possibly wind up with a poor basis
Don’t be fooled into thinking there are free HTAs. Someone is footing the margin calls and now with interest higher, the cost of funding margin calls is also higher. My first experience with HTAs several years, the small elevator was covering the margin calls and deducting his actual additional cost (interest) when contract was paid. I think the elevator was put at risk that year with high margin calls. The next year the elevator would handle $X amount of margin calls, the market moved higher than that farmer was required to deposit $Y. Basically the farmer was funding unexpected margin calls. I currently do a contract based on the Dec board. It uses an average of Dec daily high for roughly 3 months, April-June. It has a fee associated with it that can be split into 2 parts, contract type and HTA. Basis can be set anytime.
Pro - Just have to deliver the crop. No margin calls. The price should be a good average. Possibly can set a good basis
Con – Much like forward contracts, have to deliver the crop to specified destination. Also have to set basis sometime. Possibly wind up with a poor basis
Hedge:
Pro – Delivery point is open. Can search for best basis. Can exit hedge at any time, this is also a con.
Con – You are responsible for margin calls and funding. Can exit hedge at any time. Need to have funding in place. Also limited amount of time to fund margin calls.
Also what I call slippage can work both to your advantage or disadvantage. I have worked with my elevator to exchange contracts to eliminate that.
I had a hedge in place one year that required a large amount of margin money. In the end the hedge worked the way it was intended, but there was a huge amount of money that left and then came back. Make sure you and/or your banker have the funding in place and can stick with the plan. Don’t enter and exit hedges without a good reason.
Selling Calls:
Pro – May pick up a few cents. Can encourage you to do something. Selling options usually ‘wins’ over purchasing options.
Con – Subject to margin calls. May have to buy back at a loss. May limit other marketing possiblities.
Buying Puts:
Pro – sets a minimum price. Don’t have to actually deliver bushels.
Con – Insurance has a cost. May not have a place to deliver bushels.
This is a incomplete picture of the options available. | |
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New Crop Forward Sales Strategy
