AgCountry Farm Credit Services / Grow / June 2021
Guidelines For Hedging Your Crops Written by Katie Tangen, Marketing Education Specialist Over the past six to nine months, commodity markets have seen volatility the likes of which we have not seen for some time. While this is offering producers opportunities with pricing they haven’t seen in several years, it also creates some pressures and strains that can be difficult to deal with. This is especially true for producers utilizing hedging accounts to remove a portion of their revenue risk. With that in mind, here are some reminders and guidelines to manage those hedge accounts:
• You shouldn’t hedge more than 25% of your production the
first time you hedge until you are familiar with the mechanics of hedging. In fact, hedging 5,000 bushels (one contract) is preferable for the first trade.
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• You shouldn’t sell more than the prevented plant maximum of any crop, including multiple years, until you can see it in the field.
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• Avoid more than 25% of your crop at any one time unless you are anxious to pass risk away fast and achieve some specific management objective.
• Spread your sales out. Try to avoid selling more than half of your
crop during one quarter of the year, unless you have a very strong reason and market objective for doing so.
• Never hedge 100% of a growing crop regardless of how sure
you are that you will get it to harvest. Producers should stay underneath their crop insurance guaranteed bushels until they have harvested.
Keep in mind, these are generalizations. Each operation is different and the points above are where discussions should begin on your farm and with your lender. Another question we get asked lately is, “How much money should I have available to hedge?” During initial establishment of a hedge line, we would recommend planning for a $2-$3 move in corn and wheat, $2-$4 move for soybeans, and $10-$15 move in cattle and hogs. For illustration purposes, we will assume a farm with 1,000 acres of corn & soybeans in a 50/50 rotation would like to set up a hedge line to market 25% of their projected corn production. Actual Production History (APH) of the operation is 200 bpa and they carry 85% coverage.
STEP ONE Initial set-up of the hedge loan In order to provide the recommended liquidity needed to support the hedging needs, first determine how many contracts worth of production you are looking to hedge. Remember – one contract equals 5,000 bushels of corn. So,
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