What type of grain farmer are you? The risk-taker looking for an edge, or the ROI-oriented analyst looking for solid returns? Learn how both types of grain marketers need support – and how FarmLead can provide that advantage.
This type of farmer is often asking “why?”. Not just the philosopher, this farmer looks for “more” – and thinks of themselves as having some sort of edge. They are often found challenging the fundamentals of the marketplace. When something happens that goes against their theory, they posit that the market is rigged.
Some will attribute this perma-skepticism to years of hoping for things to get better: hoping for Mother Nature to hear prayers, hoping for policy to help them out when the land couldn’t turn a profit…but it doesn’t happen. One could argue that this skepticism has been programmed generation-after-generation; to be cautious of all the things that cannot be controlled.
To be fair, this is good advice. Don’t know if something is hot? Don’t touch it with a bare hand! Not sure how deep that soft spot goes when seeding? Probably a good idea to turn the wheel and take it a little wider (If you don’t, you’ll become Facebook or Twitter famous perhaps!).
However, this cautiousness holds The Gambler back from managing risk. They have a biased view of how the market operates, framing it as a detractor to their success. Too many times they are heard saying “if only this happened” or “I thought there was more room to rally” or even “someone is influencing markets”
Some may disagree with this assessment of “The Gambler”, but if you are a participant in the market, especially as a farmer in the grains market, you definitely have a bit of “let’s roll the dice” in you.
The Hedge Fund Manager
This type of farmer is constantly evolving, measuring their results as they seek better yields, better returns, and a stronger farm. This is the type of farmer who seeks to understand what is working, what is not working, and if not working – why is it not working. They ask more questions than suggest answers and want to learn, and rely on experts around them to help manage what they can’t do all by themselves: risk.
This type of risk includes agronomic risk, fertility risk, equipment risk, and, yep, you guessed it, market risk. Now these experts aren’t necessarily on the payroll but perhaps it’s the studies they read on soil fertility from the agricultural department of the local university or, market reports as to what’s moving the markets. Over time, the Hedge Fund Manager can clear out noise as to what is sensible to act on versus what is just noise.
For example, let’s use the recent rally that we saw in 2Q2017 where flooding in Argentina caused concerns over the size of the soybean crop there. Over the course of the next 2 months, we saw the grains market hit multi-year highs. While the fundamentals of the marketplace were rumour-driven, there were no other markets generating significant returns and so we started to see a whole bunch of speculative money pile into commodities.
This speculation helped drive up the price artificially, until the rumours rolled over and the Argentinian soybean harvest was better than expected and the weather premiums on the North American markets dripped away. The rally that took 2.5 months to hit its yearly highs took 2 weeks to lose all of the gains and then some.
Overall, the “Hedge Fund Manager” admits that they do not know everything but tries to weigh the upside potential versus the likelihood of downside risks. There is no way the Hedge Fund Manager can exactly know when the market has hit its peak or its bottom, but they do a better job than most understanding when those potential scenarios start to skew to one side or the other. More simply, they don’t risk not touching something that could be hot or think about getting too close to that soft spot with the drill.
Some actual hedge fund managers may disagree with this very general assessment of their job (honestly, it is more complicated than this) but at its core, it comes down to weighing risks and clearing the noise.
Which of the 2 types above are you more like?
If you haven’t read between the lines yet, our mission here at FarmLead is to help you manage your grains market price risk exposure. Let’s work together on clearing some noise. Learn more about our process and how we help maximize grain marketing opportunities while minimizing risk.