Would like to start using the futures market to hedge some of my production. I have taken courses in the past but they always seem to be quite theoretical. I am looking for more down to earth info like how to chose a broker and how to get started without taking a major risk. Any ideas out there?
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MBFarmer1,
When you said: "without taking a major risk" it made me chuckle!
Farming is all about risk... especially grain farming.
We put our life's savings in the ground, plus a healthy injection from a bank/input supplier/gov. advance... and hope we will get all these resourses back from a harvest 4 months later.
It has been proven over time; that over 80% of ag futures trades by farmers are speculation and not to hedge risk.
This is the real problem... to be able to make this seperation.
Risk Management vs. Speculation.
But risk management can only reduce risk, if properly implemented, to a somewhat lower risk... than having done no risk management at all.
The point is, it is all a major risk... no matter what!
Question:
DO you want your broker to advise you on what futures trades you should make?
DO you have a cost of production done on the crops you have decided to trade?
DO you know what is the profitable price that you WILL sell at.... and have you stuck with these plans in the past?
Options have much less risk than futures... but cost more. Are you planning to use options in your marketing plan?
I believe these are all answers that you must be able to sort out... to pick your best risk management advisor.
When you have these answers... be aware... good advice does not come cheap... and cheap advise often costs the most!
The track record of a advisor should be examined... very carefully!
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MBFarmer1, I'm not aware of any courses here in MB that would teach you how to choose a broker. I think MAFRI has some one or two page information bulletins on how to do that. You could google the topic and I'm sure you'd find some resources somewhere, it should be pretty basic.
My recommendation is to look for a firm with a strong analysis department (a firm like Refco, although there are others). To me there is no substitute for the fundamentals of supply and demand. Referrals from other farmers with FCM accounts might help as well.
I also found your statement on "risk" as amusing as Tom. And Tom is right, too many farmers start using futures in a speculative manner. It is easy to get caught up in futures trading and lose the distinction between hedging and speculating. Many dollars have changed hands in what I like to call "paying tuition". A marketing plan and the discipline to stay with and be happy the decisions that make up the plan is the only way it works for me.
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I'm part of the Alberta Ag crew that developed (and delivers) a course called FutureSim 3. FS3 is a course and accompanying materials designed to teach just the things you are interested in learning. It's a comprehensive course designed to teach farm managers (and, yes, we do clue-in a fair number of ag lenders, too) about how to use the futures market to manage price risk.
It could be available in Manitoba if some Manitoba Ag staff were to come here to take the instructor training course. In the past Man Ag staff have come and taken the training.
Choosing a broker isn't quite as onerous a task as you'd think. In fact, in my experience, a toughter task is choosing the trades you want to initiate. Go to:
http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/sis7483?opendocument
and click on "Choosing a Commodity Broker". The article needs updating since Benson-Quinn was taken over by Union Securities but the phone numbers are all correct. I'll get it updated in the next few days.
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Just a couple of my comments.
1) With regards to risk, your focus in a hedging (or for that matter deferred delivery) is profit that you are willing to live with and ensuring the ability to cash flow next fall. I can guarantee with 100 % certainty the price this fall will be different than what you locked in but that factor as a hedger is irrelevant as long as you are happy with the price.
2) You need to involve your banker with the discussion about margin requirements/potential margin calls. You need to be aware of cashflow implications and have the banker on side.
3) Separate out production risk from price risk. I like to put more priority on crop insurance if you have significant amounts hedged to improve the sleep factor. Not available Manitoba but Alberta has the variable price benefit that increases coverage prices/levels if price rise by more than 10 % above the spring set coverage prices.
4) Learn to do by doing (you would never learn to swim without getting into the pool) but start small with potentially even B train (40 tonne trades). As you get more comfortable, increase your trade sizes.
5) Have a plan. If the market goes against you, are you going to throw margin money in as long as it takes or are you going to set yourself a limit as to when you lift hedges/take your lumps. You may also make similar decisions if the market goes down and you have positive margin. My strategy (others with be different) is to decide this up front at the time of the trade versus when the market is potentially going wild/you are feeling all the emotions that go with this.
What are others trading/school of hard knock advice?
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