A Percent Hedged State of Mind—How to Manage Risk in Grain Marketing
Most farmers are used to thinking about their marketing progress in terms of the percentage of crop production they’ve committed to deliver, or their percent sold.
This percent sold figure is an important number, but cash sales are just one of the tools you can use to protect against commodity price changes.
Here’s why a percent hedged mindset belongs in your grain marketing strategy
You are always at risk of loss when dealing with commodities, but adopting a percent hedged mindset can help you manage that risk.
Hedging strategies—including futures and options trades and crop insurance policies—are designed to limit your risk of loss from changes in the price of your crop.
So while percent sold is an important number to know throughout the crop year, you should also be monitoring your percent hedged. This figure tells you what percentage of your price risk is hedged right now, given everything you’ve done.
Hedge: A risk management strategy used to limit or offset the risk of loss from changes in the price of your commodity.
Percent Sold: What percent of your bushels are priced given your cash sales?
Percent Hedged: What percent of your price exposure is hedged right now given everything you’ve done?
A percent hedged approach looks at everything you do to manage price risk: your cash sales, structured contracts and OTCs, futures and options as well as your crop insurance. Thinking in terms of percent hedged pulls all of these products into a single number that reflects the amount of price risk you have taken off the table.
Your hedging activities should not be managed independently of each other. For example, if you’ve got a particularly high level of crop insurance coverage, you might take more risk with your crop sales. If you’re less protected by insurance, you might consider other tools for risk mitigation to compensate.
Want to know more? Hear an overview from Devin Lammers, VP of FBN Crop Revenue and Risk Management, in this quick video as he walks through the definition of this percent hedged thought process and how it can impact your operation's marketing strategy:
Disclaimer: Futures and Option trading involves substantial risk, and may not be suitable for everyone. Trading should only be done with true risk capital. Past performance, either actual or hypothetical, is not necessarily indicative of future results.
Use HedgeCommand to apply a percent hedged approach
HedgeCommand, available to FBN Market Advisory members inside the FBN app, allows you to track and manage your percent hedged.
With HedgeCommand, we’ve created a methodology, framework and technology to help you understand how hedged you are given your underlying crop economics and everything you've done to manage price risk. This helps you leave some of the emotion at the door when making grain marketing decisions.
FBN Market Advisory services are offered by FBN BR LLC, dba FBN Brokerage and FBN Advisory NFA ID: 0508695
DISCLAIMER: The risk of trading futures and options can be substantial and may not be suitable for all investors. All information, publications, and reports, including this specific material, used and distributed by FBN BR LLC shall be construed as a solicitation. FBN BR LLC does not distribute research reports, employ research analysts, or maintain a research department as defined in CFTC Regulation 1.71. This material contains information obtained from sources believed to be reliable, but its accuracy is not guaranteed by FBN BR LLC. Past performance is not necessarily indicative of future results. For the purposes of quality assurance and compliance, phone calls to and from FBN BR LLC may be recorded.
HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.
ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS.
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