Producers' Watch

Geopolitical Risk


The market peaked on May 29th...since then, it's been all about weather and geopolitical risk.

Geopolitical Risk defined: Investopedia defines Political Risk as the risk an investment's returns could suffer as a result of political changes or instability in a country.  Instability affecting investment returns could stem from a change in government, legislative bodies, other foreign policy makers or military control. Political risk is also known as "geopolitical risk," and becomes more of a factor as the time horizon of an investment gets longer.

Read more: Political Risk https://www.investopedia.com/terms/p/politicalrisk.asp#ixzz5Lixz8Q00

One Tweet:

One Tweet from a global leader could send Grain and Oilseed prices higher or lower from where we are at today.  Producers that still have old crop Corn and Beans are faced with the following concerns:

  • Low Prices
  • Grain Quality
  • Cash-flow
  • Time

 

Make a plan:

If you're concerned about the quality of the grain in your bins, have them probed and take representative samples to a local grain facility or inspection service to know the condition of your grain.  If you feel you need to move the grain before a quality issue develops or gets worse, or if you need the cash flow but are disappointed with current price levels - consider the following:

Step 1: Look at your options (Old Crop)

  1. Do Nothing - Doing nothing is, in fact, a legitimate choice if you're not concerned about the quality of your grain, you don't need the cash flow, and you feel prices may improve.
  2. Spot contract - A Cash contract that provides a spot price at the time of delivery.  This tool can be combined with a Long Call Option through a commodity broker, which provides downside risk protection through the Spot contract and upside potential via the Long Call Option.
  3. Basis contract - A basis contract will allow you to move the grain and receive up to a 70% advance of the cash price upon delivery, and still have upside potential based on the respective futures month (you also have downside risk).
  4. Minimum Price contract - A Minimum Price contract enables you to move the grain and receive up to a 100% advance of the Minimum Price (Futures, +/- Basis, less the Option premium, less applicable service fee).  This product eliminates downside risk, and still provides unlimited upside potential until the expiration of the contract.
  5. Delayed Price contract - A DP contract allows you to deliver the grain now and price it at a later date.  Applicable service fees may apply and not all grain elevators offer DP.

Step 2: Okay, what about New Crop?

Consider, what you have sold for New Crop delivery for the 2018/2019 harvest.  I've attached charts below for December Corn and November Beans, overlayed with Fibonacci Retracement levels.  Consider these retracement levels, provided they are at or above your break-even/cost of production and if those targets are reached, consider using tools that protect your downside risk at those levels, while still maintaining upside potential.  We don't want profitable levels to escape us twice, and unless the political climate becomes extremely solid with finalized trade negotiations, geopolitical risk still remains.

chart (003)

chart (004)

Step 3: Ask Questions

Finally, ask questions about these tools from a trusted advisor.  Every decision comes with risk, but instead of trying to outguess the market, practice risk management.  Know your breakeven in cents per bushel.  It's not enough just to know it on cost per acre.  Knowing it in cents/bu, based off of your APH empowers you to "pull the trigger" once those levels are met.  Also, check out my previous blogs on Diversification.

Geopolitical risk is not going away anytime soon and we still have weather to think about; however, I think these factors are already priced into the market at current levels.  From a fundamental standpoint, world demand is strong and ending stocks are not overly burdensome.  Let's look on the bright side - at least it's not poor demand and oversupply that has depressed our markets recently.

News, commentary, data, charts, research reports, ratings and analyst opinions and other information provided on this page are the opinions of the authors and intended for informational purposes only and should not be considered investment advice or guidance, an offer of or a solicitation of an offer to buy or sell, or a recommendation or endorsement by Gavilon of any product, service or investment strategy. Gavilon makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from its use.

 

Rob Huston, Vice President

Written by Rob Huston, Vice President

Vice President, Origination at Gavilon Group, LLC. An innovative leader with a successful background in risk management, sales & digital marketing, futures, options and OTC Derivatives. More than 20 years of successful, progressive experience with a demonstrated performance record and diversified management expertise.

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