Grain Marketing 101 The fundamental mistake of no exit plan
Avoiding assuming you know what the grain futures market will and won’t do. Have an exit plan. Or don’t plan on trading or hedging for very long.
Trading risk management always involves an exit plan. You should have one too.
We all know that guy who lost his assets doing something that they didn’t even think was risky. Whether it was a bad business idea, a poor investment in stocks, trading grain futures and options, or fill in the blank. But what do all these stories of loss have in common? The absence of an exit strategy.
Take, for example, the grain marketing hedging technique or strategy of using a basis contract, this occurred in late 2023; where farmers were lured into corn basis contracts. (I say lured because they where by buyers, I will have a future article on this but here is a hint of what I mean by lured.) The board had a wide carry, which represents more upfront supply than demand. So farmer shouldn’t have been utilizing basis contracts to start with. But some grain merchandisers, corn buyers, and grain origination salespeople are very good at selling.
Without a clear exit strategy in place, many found themselves compelled to roll from December to March, consequently widening out their basis by more than 20 cents. Many still have no exit plan, which opens up the question of what will they do? Experience tells me with no exit plan many will end up rolling again, thus widening out the basis even more. I have seen it happen several times in my life when a farmer does a basis contract at a zero basis only to see it at 50 to 1.50 under the future after they get done rolling it over and over.
This scenario underscores the critical need for a well-defined exit plan in grain marketing, just as in any other financial venture such as trading grain futures.
In this article from www.dailymarketminute.com, as part of our series on Grain Marketing/Trading Mistakes to Avoid, we explore why being a Grain Price Maker requires a robust exit strategy, especially when trading futures and options in agriculture.
Texas Hedging? Still needs a risk plan or an exit strategy!
When it comes to trading futures and options sometimes you will see where farmers want to “Texas Hedge” or buy futures or calls, which the majority of the time wouldn’t be considered hedging and is something that you hear horror stories about all the time. It is those horror stories why an exit strategy is so important. A exit strategy is a pre-defined reason that one is leaving the trade, it can be because objective is met, a price parameter has tricked to the upside or downside, and or a time element has been achieved. Or a combo of all of them.
I am not going to debate if long futures is a true hedge for a farmer or is 100% speculative every single time no matter the situation. What I am going to talk about is what is one of the biggest mistakes that I have seen when trading. That is also one of the biggest mistakes in grain price risk management or grain marketing strategies. That is not having a clear exit plan.
Understanding the Risks of Futures and options in Grain Trading
If you are going to have long futures. Before you trade you should ask yourself what am I going to do if I am wrong? If you are buying call options that have an exit plan in that they expire worthless in a down market. Nearly everything you do in trading or grain marketing should have an exit plan.
For trading we recommend using a pricing method for your exit plan. We always recommend that one has a clear objective or reward, which is something that very seldom farmers do when they buy futures. We also recommend that anytime one has a futures position that they have defined the risk via having a stop order in or they have purchased an option that will work as a stop or worst case scenario. Trading will make you think that something can’t happen or won’t happen. But if you are wrong how much do you really want to bet on that? The whole farm?
Do you want to lose the farm because you failed to put a stop in. That is possibly what one is betting when you don’t have an exit strategy. I have seen this happen where generations worth of hard work and sacrifice is lost because of no exit plan.
Exit Plan - Triggers
You don’t have to have a “stop” order in but it is recommended that you have something that triggers one exiting the trade, both as a winning trade and a losing trade. It can be as simple as a moving average, or moving average crossovers. Or we trade to a spot on the chart that was a line in the sand. Or at a price trend change.
What does a Grain Marketing Plan Look Like?
In marketing the same exit plan is needed. It can be either a pricing action that gets hit. Or a timing action. Preferably one is utilizing both pricing and timing. For example, I will sell corn at X price, if X price isn’t hit by X date I will make a sale on X date for X number of bushels.
Ed Usset has a good format for marketing plans , here is a link to hedge plan templates as well as some of Ed Usset’s old marketing plans. Keep in mind that yours shouldn’t be the same as him because of your unique situation. https://www.cffm.umn.edu/grain-marketing-plans/
Many farmers and advisers are into seasonal patterns for the grain markets. So it could be that I will sell X bushels every week from May 1 to June 30.
Spec Trade or Hedge? It is NOT BOTH!
Anytime one does anything in a futures account you should decide if you are speculating or hedging prior to entry. It is not both, yet both need an exit plan. One is price only typically while the other includes price and time.
What does proper risk management of a Speculative Trade using Corn Futures Look Like?
I don’t like timing to be the exit strategy when I am speculating. Because I really believe that a spec trade should look something like this. I will buy X at Z price, risking it to Y, while having an objective of A. Which could be I will buy March corn at 4.73 Fridays close, I will risk 4.67 a penny below recent lows, with an objective of 4.90 a couple pennies below the Dec high.
There you have created a risk of 6 cents provided you are using a stop that doesn’t have any slipage,with an objective of 17 cents. If you analyze the market correctly 50% of the time and when you are right you make 17 cents and when you are wrong you lose 6 cents you have an expected profit per trade of 11 cents with just under a 3 to 1 risk reward trade. That is how one makes money trading, by having defined risk reward objectives.
Take a look at the mentioned March Corn chart. You will notice it has 3 labels, Buy, Stop loss 6 cents, Objective 4.90 18 cents. All speculative trades should have a similar risk reward and objective. You don't want to let trades go against you further then one though was possible.
Not Every Trade, Every Hedge Idea, Every Grain Marketing Move is for Every Farmer.
Just because one has a good risk reward doesn't guarantee profits when trading. So please don’t take this as trading advice. It is simply a conceptual idea applied to marketing.
Grain Marketing Plans need to be tied to your operation so that they align.
What I mean by that is if you decide to bin grain, you should have an exit plan for any grain that needs to be moved by any particular date. Such as if you need to move grain in January for loan payments, then have exit strategies that are not just you puking out and selling because of having to pay the loan back. It is an exit strategy that time is part of. But it is also an exit strategy that involves you taking a price on a date.
In the scenario where one will simply build more bins if his price isn't hit, make sure you can keep doing that. At some point grain goes bad and eventually most every operation needs cash.
I don’t mind having a TBD exit strategy for grain that has 6-18 months to price, just make sure that you have a solid exit strategy when you have to move that grain within 6 months and preferably have an exit strategy when you have to move that grain within a year.
Separate Cash Price into Futures and Basis, have an exit plan for both.
When hedging grain or doing grain marketing one also needs to have an exit strategy for both the futures portion and the basis portion of pricing grain. It is a mistake to not separate cash price into futures price and basis. (Hint this will be a future article)
Basis contracts, HTA contracts typically have dates when they either need to get rolled or priced by. It is the rolling portion that gets one in trouble because it doesn’t have a defined end period. It can be no different than paying storage, if you have a basis contract in a carry market and you are rolling it while widening your basis out every time.
In closing almost everything that one does in life has some sort of exit plan. If you go to college you exit when you graduate, if you plant corn you exit when you harvest it, If you go out to supper, you exit after you eat. Everything has some sort of exit plan, some action that ends your present task at hand. Even life itself has an exit plan, death.
So when you decide to trade futures or market grain have an exit plan, because you don’t want to end up like a life exit plan. Death or in this case going broke and margined to death.
If you need help having an exit plan give us our grain advisor newsletter a try for free by clicking here. We will help educate you on ways to make your operation more successful.
Are you tired of being caught off guard by margin calls? Does your current broker leave you hanging with long positions that only get attention when it’s time to pay up? It’s time for a change. Connect with Jeremey for a trading experience where you’re never left in the dark. With Jeremey, you’ll have a proactive exit strategy in place, ensuring that you’re not just blindly holding positions but actively managing your trades to avoid costly surprises. Don’t let your hard-earned investment go to waste. Take control of your trading future. Give Jeremey a call, or click here to open a hedge account with him today. Secure your investments with a strategy designed to prevent going broke. Act now – your future in trading depends on it!”
Jeremey Frost
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