Using paper

[mbdog]

Was reading agtalk and read an interesting thread about risk reward/reward of trading paper. Whether hedging use or spec, was interesting to read peoples experiences, thoughts and questions.
Opened a trading account about 20 years ago. Hedging intentions inevitably lead to spec investing. Net-net through the years....its been good, but not without many, many sick feeling days when you have to feed the animal. Regardless, the good includes playing in the game and understanding how the game is played, who's playing, and what I learned having skin in the game. The account surplus/deficit was important, but in reflection, not as important as applying what I learned about the game in my business.
Was going to bail after year one, but glad I didn't. Luckily survived the cocky invincible trading stage that everyone goes though...got smarter about what and why I used paper for.
Anyway,raining here again....thot I'd start a thread...share experiences that may help others considering using the paper markets.

[SASKFARMER3]

Good thread I have one about 20 years ago play very little got bit when I got cocky! Ha ha! Kind of only use once In A while! Need help!

[farmaholic]

I'm all ears....

What I don't understand is why people take huge risks actually trying to produce a crop or product then take somemore trading paper, spending money on options that some say expire worthless a large percent of the time. More gambling? A way of selling physical(for cashflow reasons) and staying in the market?


If you're looking for a survey, I don't trade in the futures market. I assume you've done ok over the 20 years to still be doing it.

[farmaholic]

mbdog.

If you had the actual physical and didn't need the cash flow and weren't worried about storage risk, would you sell anyway and play the market. Depending which direction you "felt" things were going to move?

[TOM4CWB]

MBdog,

There is the****utic value to having an account. When in the market with options on futures position... I tend to make myself more aware of market factors.... not a bad thing at all. This tends to flow over into other grain marketing positions... and has been good overall... looking at when prices are in the top 70 percent of prices over the past 5 years... etc. Cheers!

[mbdog]

Never started in it to speculate/invest...just turned out that way. Everyone's attitude to risk is different. Farmaholic...for me the futures market is like everyone elses stock account or investment portfolio. That's what I learned, so that what I watch and am comfortable investing in. So the answer is yes, but I consider it personal/non-farm related investing. For hedging, there lots of tools available, not just paper. Although I can, and will consider paper strategies at all times when marketing...I'm not trading lots...just when it seems to fit/make sense to me...and yes, when something looks good. No different than a hot stock tip! Have I texas hedged canola...you bet...what farmer who's into paper market hasn't. Can't remember it ever being a good bet tho.
Tom says its the****utic and I agree.
Got bit enough times to respect it, but in the end it has been worth it.
Just curious on how others view being in the paper market is all.

[mbdog]

Farmaholic...more specific to your question. Would I sell and play market in the context you framed. I wouldn't simply do it just to own paper instead of physical if that's what you're asking. Not an easy question to answer....other than to say it depends. IMO, paper "replacement" strategies are tools ... and if you own the physical unpriced that's playing the market to.

[farmaholic]

Thanks mbdog, as I said I'm all ears. I know basically nothing about the trade. I guess the only activity I see in the futures is locking in a futures month and basis for delivery of a physical. I think calls let you participate in price hikes and puts establish a floor, am I right? But how to effectively use them eludes me.

As I've said in the past....Ive been production oriented all my life. And not having to market our own cereals have in effect made me lazy in that department, add to that we havent been growing specialty crops that required marketing ourselves
my whole farming career.

I look forward to others opinions.

[malleefarmer]

I guess I trade paper via bank swaps and options only when its a no brainer to do so such as this year back in feb march
Im a hedger not a speculator
along with physical sales I try to cover up to 40% of my expected production never anymore but if opportunity doesn't arise I do nothing which could be the case in 15

But lets say for intstance Ukraine situation get out of control as does Syria and gaza and other conflicts wheat rockets up 700 cents plus would do so again for next season production

[malleefarmer]

agricultural arms of the banks here actually encourage it when its a good sell and they will not allow to go long ie buying wheat now and hoping for a rise and taking profit always always shorting the market

without going into details sold a 272 tonne contract and a 136 back in feb and 136 tonne in march and bought back last week as mentioned now I add that profit to my wheat sales

[malleefarmer]

also have a stop loss 80 cents above the sales when I make them in case it spirals upwards

[mbdog]

Farmaholic....your take on options use/function is correct from a sellers perspective. Using them costs money...I understand their function as a hedge, but I rarely use them. Not saying they're bad...they are what they are...but the option costs/trade off the futures. When you take a futures position rather than an option position, you are exposed to the full price move in futures...winning or losing from the position you took. Choosing the option route, you are buying protection upfront against losing, and/or the market going against what you thought. Probably a crappy coles notes explanation I gave. The different option strike prices/volume/interest seem to correlate to different price points/technical objectives derived from futures charts. I think one has to study futures charts to sift out whats value in different option values....or when trying to get a grasp how the "cost" is derived. I'm certainly no expert in this department, but options do work as an intended hedge instrument, and market does the job of pricing them given the different circumstances/risks.
Having said this, I participate little in options trade. Rather use futures, with stops. Hate paying the option premiums.

[mbdog]

Is AV anything BUT a commodity marketing forum?

[charliep]

Perhaps the biggest advantage of using paper (futures and options) is the ability to separate a pricing decision and a delivery commitment. You can use futures to lock in a price without committing your product to a specific buyer. Farmers have more alternatives if the market situation changes or there is a production problem.

It may be worthwhile to commit delivery but not price. That is where basis contract can come in.

It can also fit with a storage strategy. I was chastized for an ARD article on storage and the fact that the market will quite often pay you to store grain. You can use futures markets to capture carry at times.

I note that everyone highlights the expense side of puts but I still like to think of as insurance. Having a put expire worthless is not necessarily a bad thing. It means you have higher prices than the put.

We are talking about crops that have an underlying futures markets. I note the challenges of managing price around pulses has been noted in another thread. Using paper (futures/options) is not the end result - they are tools that can be used when appropriate to the farms overall financial and marketing strategy.

[charliep]

Perhaps another comment is that a farmer is likely using futures/options whether they do it directly or using grain company contracts. Unless grain companies can make sales to processors/exporter at the same time they are buying crop from you, they will be using futures to manage their risk. So it becomes a matter of who maintains the futures account.