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The difference between a speculator and a farmer

The South American harvest is expected to be a record with few shipping problems.

Expect the market to be range-bound until March 31, when U.S. planted acre estimates are published.


Market action

With few South American harvest concerns, I moved some of my bean hedges, which were originally placed anticipating a South American production issue similar to last year. On Oct. 5, 2016 I moved my beans hedge position:

  • 70% moved to Aug 2017 futures — 22-cent premium
  • 30% moved to Nov 2017 futures — 5-cent premium.

My rationale at the time for using Nov 2017 futures was that last October I thought we would likely have a South or North American weather scare at some point before next August. Therefore, I thought the only downside risk to the Nov/Aug spread position meant I could miss out on 25 cents of market carry. Plus, the July/Nov spread would likely go from a 20-cent inverse to a 12-cent carry — meaning another 32-cent loss. That is quite a bit of risk, so I only exposed 30% of my production.

If there was a weather scare, the upside potential of this trade was as much as $2 per bushel. Last year the premium on this trade was $1.80, and the last couple of years premiums ranged $2 to $3. I didn’t necessarily expect profits that high this year, but the potential outweighed the added risk for me.

The spread between Aug and Nov 2017 widened through mid-Jan to a point I could have received 60-cent premium rolling my Nov futures back. But, I held out for levels similar to the last few years (i.e. $2-3). Then with all the positive South American harvest news through February, the market narrowed.

Last week I rolled the 30% from Nov 2017 back to Aug for a 15-cent premium. With this combined with the initial 5-cent premium, I’m only 2 cents behind the 70% placed in August initially. In retrospect I should have made the trade in January, but I didn’t know at the time this would be the high through mid-March. Now, I don’t want to lose any more opportunity waiting, hoping for a problem in South America, which is looking less and less likely.


2017 bean spread trade

Seeing Aug futures trading at a 15-cent premium over Nov, I also moved 25% of my 2017 crop hedged in Nov 2017 back to Aug. Note, this trade adds some risk. If the South American harvest does encounter unexpected problems like last year, I could lose money. For instance, I would have lost 22 cents on this trade last year.


Why make it then?

The world bean supply is very high. Add the record 2016 U.S. crop and the probable record Brazil and good Argentina harvest, the market will likely have to pay someone to store beans. This trade basically allows me to use my fields as an “artificial bin” until harvest. I’m looking to add another 15 cents to this trade in later months, which would potentially mean a total of another 30 cents on 25% of 2017 production.


Are you a speculator or a farmer?

Many advisors shy away from this trade because of the potential risks. I’ll admit that the above trade leans speculative, but I clearly understand the risks and am willing to accept all potential outcomes. Basically, I’m prepared to take a 25-cent loss for the potential of a 30-cent gain. Also keep in mind, this is on only 25% of my production, so I won’t lose or make a lot of money either way. Essentially my goal is to just make a little extra with the information I have today, because I think odds are in my favor. Also if the market caused me to lose value on this trade there is a very likely chance that future bean prices will be higher and that would be good for me long term. A speculator doesn’t have the additional bushels to fall back on if their trades go bad. A farmer is in a unique situation because of this ability to spread risk between marketing years.


The difference between a speculator and a farmer

Usually experts offering grain marketing advice in the trades are “speculator-type” traders. In my opinion, this can be a big disservice to farmers, because speculators and farmers think and should trade very differently.

  • Speculators try to predict market direction and optimize buying or selling strategies to be profitable either way. They are not forced to buy or sell at any time.
  • Farmers are less flexible and must sell their grain, ideally at profitable levels. Farmers always have more grain to sell, so buying more corn (buying calls or futures) isn’t necessary, and is usually not profitable for farmers like it is for speculators.

Speculators benefit from market movement. They may hope the market goes up, but they have to protect themselves if they are wrong. They don’t have breakeven points to worry about, they just need to make sure they aren’t losing money on all of their trades at the end of the day. Farmers on the other hand always have more grain to sell and they must sell grain at profitable levels after expenses.

Be careful when listening to marketing experts in the trade because most of the time their advice is based upon how to be a profitable speculator, not a profitable farmer. There is a big difference.

Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.


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