Hedging helps manage risk and create opportunities in volatile markets

Grain markets have gone through two years of extreme volatility. The combination of COVID-19, historic drought on the Prairies, war in Ukraine and rising inflation have caused the kind of uncertainty in markets that hasn’t been seen in decades. And while some of the most intense swings might be behind us, the past few years have shown that there is always something unexpected around the corner.

Price volatility can be unnerving for farmers. After all, it’s difficult to watch the value of a crop you worked so hard to plant and harvest go significantly up and down in value on what can seem like a whim. But volatility doesn’t have to cause feelings of helplessness and sleepless nights. In fact, volatility can provide opportunity if one is prepared and has a good marketing and risk management plan in place for the business. One critical part of an effective plan is knowing the various tools that are available to protect margins and enhance price potential for each individual crop you grow.

For crops that trade on futures exchanges, hedging with futures and options can be a highly effective way to reduce risk and improve the selling price for grain on the farm. When used correctly, these tools can achieve a number of different things, such as: locking in minimum prices, including doing so without the need to commit physical grain; increased opportunities to secure values while working with physical delivery periods that fit the farms’ needs; and more flexibility in managing positions as circumstances change in the markets or your individual business.

Many operations already use pricing programs offered through various grain companies, and therefore may not see the need to have their own hedging account. Industry programs can be useful, but there are times when the ability to manage one’s position independently is more favorable. Knowing when the environment is best suited for utilizing a program offered by your local buyer, and when the opportunities are better in managing a position oneself through a hedge account, can make a significant difference to the net selling price a farm receives for their grain.

One common reason why farmers may hesitate to open their own hedging account is because it can be perceived as being ‘risky’. No doubt, many of us have heard stories of someone that ‘lost a lot of money’ in the futures market (which is usually the result of the account being used to speculate in the markets rather than manage risk on the farm). This type of bad experience is easily avoidable with even a very basic understanding of how these contracts work, combined with working with a futures broker that is trustworthy and understands your goals.

Even if a farm decides that having their own hedging account isn’t the right decision for them, there are benefits to better understanding how futures and options work. Farmers should consider the Understanding Hedging Grain course hosted by the Alberta Wheat Commission in Lethbridge, Alberta, on February 27-28, 2023. Regardless of whether someone is completely green in their knowledge of futures and options, or if they are already actively using these tools on their farm, there is much to be gained in furthering your knowledge in this area. Given the current market climate, this could be one of the most valuable investments you make in your business this winter.