Protect your margins without speculating: It's possible!

Are stock market transactions, futures contracts and hedging transactions risky? Not really, says Réjean Prince, an agro-economist at Quebec's Ministry of Agriculture, Fisheries and Food in Saint-Hyacinthe.

What if the real risk was not using these income security tools and leaving your products' competitive prices unprotected?

The words "stock market" often make people feel uneasy, such as when we hear that a farmer is speculating and playing the stock market. However, futures contracts that are bought and sold in stock markets (Chicago Mercantile Exchange) can be effective tools for people who sell pork, steer, beef calves or grains. Self-directed risk management is not specific to agricultural products though: companies that make large investments may want to secure an interest rate, and companies that export may want to set a fixed exchange rate.

In the past few years, Réjean has been actively working to make farmers aware of the dangers of speculation and the advantages of hedging as part of a marketing strategy. "Margin protection is the future!" the economist says. "Farmers will no longer be passively subjected to prices; they can play a more active role when the market helps cover production costs."

How it works

Farmers can benefit from the natural price fluctuations in the market as a result of supply and demand. "For a farmer, the first step is not linked to the stock markets and futures contracts--it's just knowing their production costs. That's the basis they'll use to build their strategy," Réjean says.

Therefore, it's important to draw up a list of costs in a spreadsheet and to update the future market prices as often as possible. This production cost will be the floor price. In addition, we'll estimate that the company won't lose money, so it's profitable at least (net margin).

Caution

According to Réjean, the main danger is getting caught up in the financial gain. "You're not speculating if you're using futures contracts in line with a principal trading philosophy," says Réjean, who advises caution because when you level out valleys, you'll also level out peaks.

For example, the consideration for a farmer who produces and sells corn is protection with a contract of a minimal quantity of 5,000 bushels (127 tonnes). Depending on the changes in the price of corn on the local or global market, the farmer can decide, with help from their securities dealer, to repurchase or sell the contract. Setting an objective in advance helps you remain rational and avoid having to forecast, speculate and gamble. "We start speculating when we try to make money and beat the market," the agro-economist says.

Get support and get informed

Purchase, sale, repurchase, base, options, put/call, short/long...If there is training on stock market transactions and their jargon, participants shouldn't be left to their own devices after. They benefit by getting support from experts in the field. However, agronomists that specialize in hedging transactions are rare. That's why Réjean is setting up training sessions for new advisors.

In addition, discussion groups made up of farmers and stakeholders meet every week on online platforms to explore the possibilities, and keep up-to-date on market knowledge and the many factors (e.g., global stocks, sowing forecast and commercial policies) that make the markets so volatile--for better or for worse.