Last week I started a series of articles outlining some of the fencing mistakes I've seen over the years. By definition, a hedge is a market position in one market that is offset by an opposite position in another market. What often starts out as a market risk reduction program turns into a highly valued position.
In 1988, he had four farmer clients with credit coverage. The range of annual futures prices is lower. The farmers, their bankers, and I agreed that the bank would pay up to $4 in beans and $1.50 in corn to recover margins.
The agreement was that four different banks would transfer the money from the customer's line of credit directly to the customer's account, and the brokerage house would transfer the excess money from the bank.
The 1988 drought began in mid-July 1987. Otti called me on April 24, 1988 and told me he had finished planting corn and beans. Temperatures in mid-May usually range from the mid to 90s. During the first week of June, we saw temperatures of over 100 degrees becoming common. In In contrast to the drought of 2012, humidity is very low and absorbs moisture from the soil and all life.
Corn prices were below average (about $2.25) after the 1983 drought.
On June 17, December corn was trading above $3.25. The farmer posted a profit of $1 per bushel, which was a tremendous gain for the period.
Since there is no delivery requirement in the futures contract, the four growers hedge the largest percentage of the common crop: about half a million bushels. In If no bush grows in 1988, in 1989. Margin funds are transferred daily. At the end of June, the cornfields look like pineapples and enter a period of dormancy.
In 1988, July 4 was a three-day holiday. July is the month of harvesting corn either harvested or failed in the corn belt. It was corn harvest season and it was not raining. Every American farmer will take home a guaranteed 45 bushels of corn. At that time, CBOT began trading at 09:30 Chicago time.
As farmers and I discovered on the morning of July 5, the four banks did not ask for additional funds the previous business day, July 1. When corn futures are about to open sharply and the bank doesn't move the money as agreed on Friday, the broker will destroy all short corn positions in the open position, as margin calls are unfulfilled and unavailable. .
This is one of the things that is printed when opening a futures account. This is an important step in protecting the financial integrity of the futures market.
Anticipating an event moves the market more than confirming an event. This occurred in 1988. The multi-year high was reached on July 5 at $3.70, although crop failure was not confirmed until August 10. All these fences have been repaired (cleaned, cleaned) in a day no more than eight years. None of the work lines of credit have used more than 30% of the approved credit limit.
Why are banks closed? “We borrowed money to cover corn and beans. No corn or beans in this dry season. Therefore, these hedging positions are speculative in nature and we do not invest in speculative future markets. »
Surprisingly, the four banks reached a conclusion on the same day, apparently far from each other. Market peaks or troughs are reliable indicators and features when people change their trading plans under a lot of emotional stress.
Late this fall, December corn fell to $2.48, down from its July 5 high of $1.22. This means the farmer loses 45 cents on the fence and sells corn for less than $2.20. Total destruction with a low yield of 88 bushels per acre, 70% of the normal yield.
Fortunately, these farmers met their closing prices because, hindered by high inflation between 1983 and 1996, their grain traders sold all of their HTA contracts. That day, July 5, 1988, I never liked the grain merchant.
More information about this series:
Strength of the cage
Wright is a grain marketing consultant based in Ohio. Call him at (937) 605-1061 or [email protected]. For more information, visit www.wrightonthemarket.com.
Anyone associated with Wright in the market is a grain or futures broker. All the information presented has been studied and believed to be reliable and accurate, but nothing in this business is 100%.
The author's opinion does not necessarily represent Farm Futures or Farm Progress.