It is not uncommon to hear people in the hedging space to say things like, “even a blind squirrel finds a nut every now and then,” or “it’s better to be lucky than good.” The problem with those statements are that they are usually indicative of a lack of grain hedging strategies. You see, those that have a well defined process and plan in place don’t need luck on their side, they know that their hedges will achieve the goals of their organizations.
Taking this one step further, assuming that you are getting “lucky” in your grain hedging is essentially the same thing as admitting you have no idea whether your strategy will bring success to your organization or not. Lottery ticket winners are lucky – corn, soybean, wheat, and other agricultural hedgers should not be lucky with their strategies.
Truly successful grain hedging programs have plans. They have broad alignment across their business as to the goals and objectives of the program. Successful grain consumers know what their elasticities and pricing windows are. Successful grain producers know what their cost of production is. In both instances, they know what they are protecting and they know the how to implement the right tools to accomplish the job.
You see, truly successful hedging programs are not relying on luck for their success. Actually, it’s just the opposite. Truly successful grain hedging programs and doing everything they can to remove the aspect of luck. How do you remove luck from your grain hedging strategies?
You have to have done your pre work. Pre work is all the analysis done before a trade even occurs. If you have successfully done your pre work the execution and post work of a trade becomes the easy part.
As I mentioned above, this means the consumer needs to know their pricing windows and producers need to know their cost of production. There also need to be broad based alignment across your organization. Success in hedging does not equal a positive PnL. Success in hedging means protecting cash flows. Some of the best organizations I have ever dealt with have viewed their hedging programs as a form of insurance.
Additional pre work thoughts and questions for grain hedging are:
- If the market goes up or down by X%, will my organization accept the difference?
- Has there been money set aside for option premiums?
- What’s more important, a completely firm price or staying close to, or below, the market?
Once you’ve answered questions like these, you should have a better understanding of what success means in your grain hedging strategies. One thing i can promise you is that the answer is never going to be luck.