Top three reasons why diversification helps mitigate market risk
Markets are a lot more complex than they used to be and it's becoming significantly more important to diversify your grain marketing plan.
When Russia invaded Ukraine, markets reacted overnight. This large-scale invasion very quickly disrupted various grain flows, creating significant volatility. In cases like this, having several different strategies in your marketing plan allows you to change things up if anything unforeseen happens so you don’t have all your eggs in one basket. Using a variety of contracts that can allow you to capture rallies and create a floor versus waiting for a price you like also helps you capture potential profit while cutting down on any regrets on grain sales. When thinking about your grain marketing plan this year, here are three reasons why diversification could help you mitigate market risk:
1. Create base to your marketing plan
As we start off the new year, it is important to have a plan for your “must move” bushels. By creating a pricing strategy for these bushels, you are essentially creating the “base” for your upcoming crop year plan. To establish this base, use an averaging contract, a managed contract, or even cash sales as a way to get started on those first bushels. Taking those bushels off your plate will give you peace of mind in the months to come.
2. Lock in profits, while preserving upside potential
Now that you’ve established your base, you are free to focus on more intuitive marketing for the remainder of your sales. Let’s say you have some profit locked in your base but now you believe market prices will go up and you want to express your bias and participate in that potential upside, you can diversify further using a floor contract. A floor contract allows you to lock in a guaranteed floor price, ensuring that you are locking in a minimum price you are satisfied with. A floor can also protect from any adverse market moves, while allowing you to continue participating in the market to take advantage of any upside.
Weather can be a coin flip and who can time market highs and lows perfectly? Make a floor strategy part of your diversified approach to become a more active market participant without worrying about pricing on market lows.
3. Take advantage of opportunities as they arise
As you become more comfortable with your estimated cost of production and production volumes, you understand what levels are profitable and where you would be willing to sell. By using a wider range of grain contracts, you can not only pull the trigger on a price you like, but you can also use enhancement contracts to capture a premium from the market. When you add variety to your tried and true grain marketing approach – in moderation – you may be able to get premiums for sales you’d have already been willing to make.
Being intentional with your marketing plan helps mitigate the complexities and volatility of grain markets. Conditions can change very quickly so when you diversify your grain marketing, you can better take advantage of opportunities as they arise throughout the year while protecting profit and ensuring you meet your ROI goals.