Hedging Strategies: Spreads Know - After Harvest, Spreads Tend to Paint Accurate Picture
Prior to a harvest, spreads for an upcoming crop year reflect the market’s emotions about that year. After harvest, spreads reflect the market’s effort to move the crop appropriately for the now current crop year.
What this means for you as a merchandiser is that prior to harvest, the job is to identify and lock in opportunities that are presented by the spreads to allow you to carry out your plans for the season. After harvest, the job is to listen to what the spreads are saying and line up your plan and logistics as much as possible with that message.
It also means that if harvest is over, and the spreads are presenting a picture that you don’t like and/or that doesn’t line up with your expectations, fighting against them probably will be a very steep uphill battle.
The idea that spreads are accurate about supply/demand after harvest doesn’t mean that they can’t or won’t change, but in general, the changes tend to be in line with the environment. In other words, when the market builds a carry after harvest, it doesn’t tend to change into an inverse and vice versa.
How do you use this concept in your grain business?
Simplify. Trading spreads as a separate entity on which to make or lose money is a distraction. Integrate spreads into your physical grain trading plan. (For example, if you plan to fill bins with grain and carry it, you want a carry spread structure).
Plan. You have a year or more before harvest to work on figuring out how many bushels you’d like to carry for how long, which spreads correspond with your plan, what spread numbers you need, how seasonal patterns for those spreads tend to work, and so on.
Act. Enter open orders for the spreads you need so that you don’t miss them if they happen. Set some review/revise dates as a backstop, in case your targets aren’t filled.
Be flexible. If harvest arrives and the spreads aren’t what you hoped for, change your plans if possible. If that isn’t possible, make tough spread decisions yourself rather than have them forced on you.
Philip Luce is a grain merchandising specialist with White Commercial Corp., Stuart, FL/Kansas City, MO; 800-327-7000.