Home / Market Analysis / The gamble of lifting hedges
Photo by Lea Kimley.

The gamble of lifting hedges

By Jon Scheve, Superior Feed Ingredients, LLC

The USDA confirmed there will be slightly more bean acres planted than corn acres for the first time in over 35 years. There were 1 million more corn acres and a half million more bean acres planted than what was estimated back in the March report. This wasn’t bullish news, and was still in line with most pre-report estimates so it probably is just neutral. Now Mother Nature and political agreements (or lack of any) will be driving the market.

The President and Secretary of Agriculture continue to promise that American farmers won’t be negatively affected by tariffs. This sounds good, but there haven’t been any details provided. It seems Labor Day would be the soonest that any “help” would be made. Even then there is no guarantee that any “help” will actually be provided.

Should I be bullish or bearish? It is rarely clear if farmers should be completely bullish or bearish at any given time. Instead there are usually several reasons why farmers could be either.


My reasons to be bullish

  • There are still two more months of growing season left and the weather is uncertain.
  • For corn, a record 180+ national yield would have to be achieved to keep prices down.
  • Nighttime temps are still extremely warm. If that continues past pollination yields likely suffer.
  • A record U.S. crop would still mean a reduction in world corn stocks.
  • Some beans have been getting too much rain.
  • Some corn roots aren’t very deep and dry weather could suppress yields.
  • South American crops can only sustain world demand in a trade war for so long.
  • Dry weather in other parts of the world could increase need for U.S. corn through increased exports.
  • Market technical indicators suggest that corn and beans are oversold and due for a correction.


My reasons to be bearish

  • The weather has been very good for a very large part of the country.
  • The weather forecasts don’t have a lot of negative outlooks at the moment.
  • With increased corn acres even a 177 national corn yield won’t likely push corn above $4.
  • Exports don’t have to increase and feed demand could slow from tariffs.
  • If the trade war continues it will be difficult for beans to sustain any significant rally.
  • A sideways drift in the markets could negate any positive technical signals in the market allowing prices to push even lower.


Lifting hedges

Should I be buying corn or beans back right now?
Many are trying to estimate the bottom of this market. I have heard analysts suggest buying beans anywhere from $10 a couple weeks ago to Friday when they closed at $8.79. Everyone seems to be trying to pick the bottom to this market.

Some farmers have asked me if I want to “lift hedges” in the corn or bean markets. The short and simple answer is, no.

“Lifting hedges” is code for speculating (i.e. gambling), and I want to minimize risk in my farm operations’ marketing plan.

With the hedges I currently have in place, I know exactly where my grain is marketed. Right now 100% of my 2018 bean crop is hedged at profitable levels with a normal yield. Unfortunately, not enough of my 2018 corn is sold above breakeven prices. I need a rally in bean prices to occur to pull corn values up as well. So, like all farmers I want and need both beans and corn to rally, but they may not if the great weather continues.

While I don’t usually lift hedges I know that sometimes it works. My issue with that is that there is always next years’ crop — which right now is 15 months away — that also needs to be sold. I don’t want to worry about more bushels in an uncertain market. If prices would continue to fall after I “lift my hedges” it adds more risk to my operation. That would not help me sleep well at night.


Understanding the difference between speculating vs. hedging

Over the years I’ve made several trips to Las Vegas. I’ve noticed on the flights there everyone is all smiles. Many are talking about all the ways they have heard to beat the casinos at different games. Some are even reading books on how to win at blackjack, roulette, or poker hoping to have an edge when they sit down at the tables. It’s about the only flight that I have been on that everyone breaks into applause and cheers when the plane lands.

The trip home isn’t nearly as fun. Many are tired and moody. Some talk about how they should have stopped while they were ahead. I have not yet been able to ride home on a private jet with my winnings or even had friends win enough to bring us all home in style.

The reason is because the gambler doesn’t have an edge. The gambler needs luck and that can work in the short term. However in the long run the casino has a built in edge to every game that is offered and they will win.

As I mentioned above speculating on the grain market is gambling. Similar to gambling, there are highs and lows as speculators generally either win big or lose big. Either way, speculators usually only tell you when they win big, and rarely mention how much they’ve lost getting to that win.

Lifting hedges is not about having an edge in the markets. Lifting hedges is about being lucky. The speculator that bought beans at $9.50 a couple weeks ago because the market had fallen a $1 per bushel is certainly not very happy today.

Hedging is very different from gambling. Hedgers have an edge because they only have to worry about selling their crop at some point. The odds also favor the hedger because at some point a hedger will have an opportunity to sell at a profitable point. The problem though is that hedgers never feel good about their sales. If they sell and prices go up, they shouldn’t have sold. If prices go down, they’re frustrated they didn’t sell more when prices were higher. But, while hedgers may never be happy, they are STILL playing the game.

I have seen plenty of people go on a winning streak in Las Vegas or speculating on the grain markets. Unfortunately the odds catch up with most of them and they fall behind. I also know that nobody who gambles thinks they will lose when they place their bet.


Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.

Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results. He can be contacted at jon@superiorfeed.com.

Check Also

Capturing carry and paying for storage

By Jon Scheve, Superior Feed Ingredients, LLC Due to the government shutdown this month’s USDA …

Leave a Reply

Your email address will not be published. Required fields are marked *