To Hedge or Not to Hedge; That is the Question
To hedge or not to hedge
A farmer recently asked me if I utilized a grain hedging line of credit separate from my operating line of credit. The answer? ABSOLUTELY!! This question was followed by a discussion about the inability to find a lender that was comfortable extending this type of line of credit. I wasn’t surprised as I had encountered this in the past. Obviously, creditworthiness would be a priority for any lender. That is understood. But if a farmer can obtain an operating line of credit, then a hedging line of credit should go hand in hand.
I will preface that I am not a lender, nor do I know all there is to lending. I am a farmer, and I can say with confidence that the ability to hedge my crop has taken a portion of price risk off the table. Lenders who do not have a full understanding of the basics of grain hedging are reluctant to offer that type of credit. On the flip side, we as farmers must be confident in our understanding of how hedging works. I have made some costly mistakes in this process as well. And I don’t mean simply selling (hedging) when the market was low and not having the chance to participate in the higher market on those bushels later. Here is how that went. I had hired marketing consultants for years and thought I knew better. I would not follow their advice and then be sorry when I did not. A new marketer convinced me to hire them, and I promised myself I would follow all their recommendations. My mistake was not fully understanding all the possibilities of the transaction and it was an expensive lesson. Any education that you truly learn from is expensive.
So, you might be saying to yourself “Well I am not hiring someone to cost me money.” I would argue that you need to learn the mechanics of grain hedging, basis, spreads, carry, roll, cash, etc. and not rely on someone else’s education of the process. What you are hiring is a marketing assistant. This person works for you from your information and enters it into a marketing plan. Their number one job is to hold you accountable. When your market objectives are attainable, they consult with you and make the transaction. Better yet, you have market orders in, and the transactions happen as the market moves through your targets.
This hire is much different than other advisors on your farm. For instance, your accountant will take your financial information and prepare your tax return. They are experts in this area, and it is their responsibility to know all the tax laws and depreciation schedules for your tax return to be prepared correctly. You never plan to learn tax laws or all the forms you need in your return. You are hiring their knowledge. You are in charge of the data they are in charge of the outcome.
Your marketing advisor assistant is not in charge of the outcome- you are. You are also in charge of the data. This consultant is there to help you build your plan and execute it.
3 simple items I use to build our marketing plan BEFORE hiring a marketing assistant.
Know my cost per bushel based on average yields.
Understand what the capital cost per acre is for the next 12 - 18 months.
Are there any investments I should plan for next season?
As we look to 2025 after an exceedingly difficult 2024, these are tough questions to address. In general, I believe a farmer should budget to be able to pay off their operating line of credit and all capital payments for the following 12 months. Of course, your hedging line of credit will be paid from market proceeds if you have made margin calls along the way. The third question may be a wish list in order of importance until we work our way out of negative margins. But you still need the list to be ready when the time comes for equipment purchases.
Having a budget and a marketing plan along with your financials should give your lender confidence to extend the hedging line of credit, as long as you have the confidence too. If you have questions, please email me at fieldgoodlife@gmail.com.