Love the volatility. Well — maybe not. Commodity price volatility is not exactly something that all producers enjoy. Volatility makes marketing decisions difficult and stirs up emotions almost as much as not getting any rain for a month.
For the last 18 months, there has been no lack of extreme volatility in corn, soybeans or cotton. As a matter of fact, the same could be said for rice, crude oil, gold and the stock market.
So what are the opportunities in a volatile world? For one thing, keep in mind that whether you prefer a market going up or a market going down, everyone needs to be humble because volatility makes everyone look smart or dumb at least a couple of times a month. Volatile markets are humbling markets no matter what side of the equation you are on.
With that said, volatility creates tremendous opportunities for producers who are willing to make small incremental sales. Sharp price rallies in volatile times give you the opportunity to make sales of 5 percent to 10 percent of your production at a time as the market is ratcheting upward. These are not markets that you would want to make big decisions in all at one time. The only way you can be 100 percent wrong in a market is to sell 100 percent all on one day!
So if you are a soybean producer, here is an example. Let’s assume your cost of raising soybeans might be $12 per bushel this year. September ’12 futures are over $14 as I write this article. So why not on sharp rallies sell 10 percent at $14, 20 percent at $14.25 and 30 percent at $14.75? As the market spikes higher you are selling at increasingly larger increments and thus your average selling price is going up.
The same can work in corn. With September corn futures over $5.70, sell 10 percent at $5.95, 20 percent at $6.25 and 30 percent at $6.60. Your average keeps going up and at a price significantly above what should be your breakeven.
Watching your back door
One other important aspect to keep in mind of extremely volatile grain markets is that as prices spike higher, the down turns are severe. It’s very similar to a homeowner waiting to hit the top of the market to sell their home in 2007. It’s always better to be a month early than a month late! Prices go down a lot faster than they go up and make it difficult for people to get on board. That will undoubtedly be the case as we go into the end of the growing season this year — assuming we have a reasonable crop on the way. Sharp rallies in a volatile market such as we are currently witnessing are opportunities for producers to lock in another record year.