MORGAN, Minn. – Kent Beadle is the director of Risk Consulting Services for CHS Hedging. He gave a recent interview at Farmfest to share how and why farmers can benefit from working with a hedge manager.
Q: Tell me about CHS Hedging.
A: CHS Hedging offers brokerage accounts so farmers can hedge their crops or livestock. We are 100 percent owners of the Russell Consulting Group.
Q: How does the service work for farmers?
A: We go out to the farm, and we do an analysis of a farmer’s balance sheet, income statement, cashflows, and we put together a comprehensive marketing plan designed to provide the gross dollars per acre or the gross dollars per head of livestock required to provide an appropriate return on assets and equity.
Q: The last few years have been difficult for many farmers. Some farmers have improved their net worth, although not as much as they were able to do five years ago. How are you helping farmers?
A: Well, the markets have been very difficult, driven by an oversupply of grain and the loss of some export markets due to trade issues.
We’re telling farmers to have some patience. We have supply issues that are coming on due to the extraordinary wet spring. Production is going to be down this year, and marketing opportunities are going to present themselves over the next three to six months.
Q: There are times when farmers use volatility to their advantage. We’ve just come through a time when prices were a little better. Throughout June and July 2019, cash prices for corn were over $4 per bushel. In April and May 2018, cash prices for soybeans were $9.50 in this part of Minnesota.
A: We always find the marketplace doesn’t care and all of a sudden, it cares. We had a very large rally when corn went up about a dollar. We have since given quite a bit back.
I think the marketplace has gotten complacent about some of the production issues that are out there.
Q: Okay. So we’ve got issues with this crop. How does hedging help?
A: Hedging is a substitute transaction in the futures market. It allows you to lock in a price that at the time might be more advantageous and is likely more advantageous than the price that you will get at harvest.
With a disciplined hedging program, you sell and hedge grain on rallies, often occurring because of weather-related production concerns.
The other thing hedging can do is allow the grower to separate the decision around basis and futures.
Q: You’d want to lock in the best futures contract price you can get, and then lock in the basis at a time like this when it is narrow, correct?
A: Part of our service is to teach and get people used to separating out those two components. We sell futures when we need to sell futures, and we sell basis – which equate to selling cash grain – at the time the basis is good.
I oftentimes sell cash grain at some of the worst flat prices of the year because sometimes that can be the best basis levels of the year.
If we priced the futures at a different time, and we use a futures account to accomplish that, you can do much better for your client.
Q: When farmers open a futures account, do they have to pay margin calls?
A: If you have a brokerage account and trade on the futures market, you will have margin calls. CHS does offer a product – it’s called CHS Hedge Line in our CHS Capital Division in conjunction with CHS Hedging.
We’ll take applications from growers to essentially fund or loan money to pay those margin calls – for farmers that have an adequate credit rating.
Q: We’ve all heard of someone who lost everything betting on the market. Can you promise 100 percent that when using this strategy, a person will not end up going bankrupt or turning their finances upside down?
A: We can’t guarantee 100 percent that won’t happen to someone, but we have a long track record that shows a lot of growers have been able to take our advice and grow their operation and grow the bottom line of their balance sheet.
Nothing we do can necessarily prevent a bankruptcy based on certain other factors, but what we do with marketing we do professionally and successfully and we have a track record to back that up.
Q: When I was younger, I couldn’t imagine successfully using futures, but now as I get more experience, I can see how this works.
A: Farmers need to use the markets to manage risk, to reduce risk.
But you can use futures markets to take on risk. You can open a brokerage account and you can do all sorts of additional things that would not reduce your risk but increase your risk. You’d either make more money or you could lose more money.
Many farmers have opened up brokerage accounts with the intention to hedge, and sometimes you’ll get a farmer who decides that he likes speculatively-trading more than he likes hedging.
Hedging can be boring. You make money in your futures account when you’re losing money on your cash grain. When cash grain is getting more valuable, you’re losing money in the futures market.
If you speculate on the futures market, it can be a detriment. We help farmers learn to hedge using the futures market, and we try to help people do it correctly.
Q: Thank you so much for this information and your time.
A: You’re welcome.