Margin call in volatile markets

first_imgShare Facebook Twitter Google + LinkedIn Pinterest By Jon Scheve, Superior Feed Ingredients, LLCEveryone I spoke with this week wants to know how high the corn market will go.The problem is that the market needs to know how many acres won’t get planted and a better idea about what the July/August weather will be like.Corn may have hit it’s high this week, or prices may go up several more dollars. No one knows, because last week’s 58% planting progress has NEVER been seen this late in the year. The country has never planted less than 90% of the intended acres from the March USDA intentions report.This uncertainty has sparked the market rally and started rationing demand. This is also encouraging farmers to plant well beyond prevent plant dates and squeeze production from every possible acre.Three weeks ago, there was widespread fear $4 would never come for 2019 corn. It seemed $4.50 December corn was out of the reach for farmers for another year. But here we are, 90 cents off the lows and wondering where the top will be. The dreaded margin call and why I don’t fear itSome of my trade targets hit during this rally. These sales will make me short futures, and if the rally continues, I’ll face margin call. That may sound scary to some, but there is a lot of unwarranted fear and misconceptions about margin calls. Margin call misconceptionsI’ve heard some in the industry say they would never short the market because if the market rallies significantly, the seller would face unlimited margin call. They say farmers can’t protect themselves against these types of situations, and that they’ll go broke placing these types of trades.That could occur if a farmer is chasing a speculative position trade, and it would be why I would not place trades that require me to chase a market rally. I’m fine limiting my upside potential on some of my production in exchange for guaranteed prices at targets I set before a rally. Do you ever trade out of your positions if the market moves against you?I have said many times before, when I place a trade, I’m comfortable with all outcomes. If I’m not comfortable with an outcome, then I don’t place the trade. I hope I’m forced to sell some of my grain at prices I thought would have been profitable during the winter. I don’t need to worry if the market goes higher, because I always have more of my crop to sell at some point. Aren’t you afraid of margin call if the market rallies?Margin call makes a lot of farmers wince and keeps many from selling options or making forward sales using futures.Sadly, these farmers, don’t realize they are removing an important marketing tool out of their grain marketing tool box. Eliminating margin call is like telling a baseball player to not swing at anything IN the strike zone. A player may do alright swinging at questionable pitches, but they increase their odds to miss and striking out. Just as it sounds silly to tell a baseball player to not swing at strikes, it sounds silly to me to tell farmers not to hedge their grain using futures or selling calls because they don’t want to pay margin call.The chance the market would rally 90 cents in the last 15 days was an EXTREME long shot. While maybe a handful of people bet it would happen and put positions on to take advantage of it, most of the time this would have been a losing bet. There is a lot of risk betting on something that’s never happened before. As a farmer my job is to reduce my risk and plan for normal, but I do leave myself some room for the market to move higher by not selling everything I produce at one time. Why should farmers and their bankers not fear margin call?As a true hedger, I don’t like calling it a “margin call,” because that term is most often associated with speculators. A speculator making a margin call is in a bad financial situation because a trade has gone against them. I’m not a speculator because I have the underlying commodity to cover any sale I’m making. That’s why hedgers look at grain marketing and risk management decisions differently than speculators. For true hedgers, making a “margin call” is more accurately just making a finance decision. It’s not a bad thing. Let me explain. Margin calls for hedgers are typically a net neutral (Neither a gain or loss)When using the futures market to hedge or sell grain, it doesn’t really matter if I have to make a margin call. Following is an example:Let’s say in May, December futures are $4 per bushel, so I sell some corn because that seems like a good value. Then in June there is a weather scare and December corn rallies to $6 per bushel. Margin call means I need the difference between what I have my grain sold for in futures ($4), and the new higher CBOT futures price ($6). So, in this example I would need to make a $2 per bushel margin call to my futures trading account.This part frightens farmers, because that can be a lot of money. But there is no reason to be worried, because I’m not losing that money. Why?Let’s assume I will harvest my grain in October and take it to the elevator. For simplicity, let’s also assume the price in October is still the same as it was in June at $6. (Note: the actual price in October would not really matter because the final outcome will be the same at any price level). So, I sell my grain for $6 per bushel cash to the elevator and they hand me a check for $6 per bushel. At the same time, I sell to the elevator, I buy futures back in my hedge account for $6 per bushel. This buy back keeps me net neutral on my hedged position that I had already sold in May when I picked a price for my grain of $4.(Note: Basis values can change slightly during the summer from what an end user is bidding for harvest delivery. But overall, they are usually about the same. If you’re in an area with -30 basis now, it’s likely it will still be around -30 at the beginning of harvest.) Keeping my position net neutralThe important part of this example was when I sold the corn for a cash contract, and then immediately bought back the same number of bushels in my hedge account. If I hadn’t done this, I would have become a speculator. To remain a hedger, I must keep my position net neutral when I have a futures position and sell for cash, even if I think futures can move up or down. Not doing so crosses the line from being a hedger to a speculator instantly. Where does the $2 difference go?When I combine my hedge account and the check for the physical grain from the elevator, I lose $2 per bushel in my futures account. But I still sold the corn for $6 per bushel cash. This is where I net out $4 per bushel between the hedge account, and my original sale.This is also when I get back all of my margin call money ($2). The check from the physical grain ($6) less my original sale ($4). That premium offsets the loss in the hedge account and fully pays down the margin call amount in the account.Most farmers don’t have a lot of cash on hand. Farmers hedging grain need to work with their bankers ahead of time. When I work with farmers, I work with their bankers first to make sure the banker understands the long-term plan and help set up a path for margin calls as a part of a hedging position. This is a low risk loan for bankers, so they are usually extremely supportive. Many bankers will set up what is called a hedging line that is related, but separate from the operating note.In the above example I sold futures in May and delivered at harvest (5 months later). If the rally didn’t start until June, it would mean a $2 per bushel loan for 5 months (June to October). With a typical interest rate of 6% on a hedging or operating loan, this means only 5 cents per bushel interest for the margin call for those 5 months (math = $2/bu. x 6% interest / 12 months for a monthly rate x 5 months).Bankers must constantly update their clients balance sheets to recognize that the asset growing in the field or that is in the bin is now worth much more than before. As margin call goes up so does the value of grain on the balance sheet penny for penny. This is also why banks don’t mind margin call because the farmer has an asset that increases with the margin call. Banks should be supportive of farmers making margin call for hedging purposes. So why would I do this?If corn rallies due to a major weather pattern, you can’t take advantage of increasing basis levels and other premium opportunities unless you use futures contracts or Hedge To Arrive contracts (HTAs). For instance, in 2012 (a drought year), I received 50 cents per bushel more for my corn from basis increase using futures than farmers who sold corn for a flat price to an end user the same day as me and took the cash price quoted on presells before harvest. Why not use an HTA and let someone else make my margin call?There are several reasons:Benefit 1 – HTA costs are about the same or worse than doing it myselfHTA costs vary by end users, but they range from 0-8 cents with most in the 3- to 5-cent range. In the above trade example, I would have 5 cents of interest and 1 cent in commissions to my broker for the trade. However, elevator charges to handle an HTA are comparable. And that’s assuming a huge $2/bu. margin call, which are rare. With a 50-cent margin call, I would only have 1.25 cents of interest ($.50 x 6% / 12 months x 5 months = about 1.25 cents) and be ahead of HTA costs. In the long run over several years I’m going to be more profitable doing my own hedging. Benefit 2 – I’m not locked into any one end userDoing my own hedging allows me to select the end user paying the most at harvest and certainly any time after. Often end users will have 10- to 20-cent basis pushes when they have localized production issues. However, these “bumps” are not available to those locked into an HTA or have grain stored at the end user’s facility. I want to be able to take advantage of this premium in the market.Plus, I can’t guarantee where the best bid will be in 3 to 6 months, so I don’t want to lock my grain up with an end user now. Last year farmers shipping corn in late November directly from their fields because of the wet weather were getting much better basis opportunities with different end user than was available earlier in the summer for harvest delivery.I’ve seen farmers switch destinations at harvest based upon long lines at their preferred end user or elevator. Some have told me they feel taking 1 to 2 cents less in basis price to keep the combine running is a better use of their assets and time. I’ve seen farmers who think they will take certain fields of production to certain end users only to have problems at harvest with the quality of the grain in that field and need to change destinations for that grain.The market is always changing, so having complete control over my own bushels allows me to take advantage of every available opportunity. Having a futures positions on makes this process very easy. Benefit 3 – It’s easier to get out of sales if I’m short on productionIf I am unable to produce corn (ex. due to weather), it’s easier to get out of sales by moving them forward with futures to the next year. Plus, in most years I can usually capture a market carry profit doing this.If I have to ask an end user to be let out of contracts, for cash trades or HTAs, there will probably be a cost penalty. Even if the end user offers to move the sales to the following year for free, that could be a huge loss, because I would miss out on all of the market carry profits available from one year to the next.Last year there was a 40-cent premium to move sales from ’18 to ’19. In the last 30 years, only 3 years didn’t eventually have carry in the corn market (95/96, 11/12, and 12/13). Even in those years end users wouldn’t likely move the sales forward at the same price, and would have charged the spread difference between the crop years anyway.Right now, there is a 30-cent inverse from Dec ’19 to Dec ’20, so it will cost producers 30 cents to move any sales forward to next year on crops they might not produce regardless if one was using cash sales, HTA’s or hedging their own position with futures. Benefit 4 – Risk with end usersIn 2012, when the market rallied above $7, some elevators refused to place more HTAs, and a few elevators made farmers with HTAs set basis near their lowest/widest value. These elevators were scrambling because they didn’t secure large enough lines of credit from their banks and were forced to liquidate their position.I don’t want my profits reduced because of someone else’s failure to plan ahead. I want to be in control of my money, my bushels, and my profits. This is also why I have conversations with my bank before margin calls begin so that everyone is on the same page and what happened to these elevators doesn’t happen to me. Myth – Making a margin call is badMany farmers and bankers may be shocked by this, but making a margin call can be a GOOD thing. Here’s why….Typically, I don’t price all of my corn at one time, and I doubt most farmers do either. I usually hold some back for potential market rallies. As described above, I have to pay margin call on all of my priced or sold grain with every rally. But this means the corn I haven’t priced or sold yet is now worth more. ALL future unsold grain is now worth more. Since I plan to farm well into the future, I have more corn to sell, maybe not this year, but next year I will. Margin call means corn I haven’t priced or sold is worth more. I embrace it. I understand that the math makes sense, but I’m still too scared of the margin call.Many of the farmers I have worked with expressed reservations and fear the first year they cut several $20,000 margin call checks during the months of June and July (despite knowing they will eventually get it ALL back). It can be a lot of money. However, once they saw that not only did they get the money back later, but they also had more opportunity at improved basis levels than their neighbor, who didn’t use futures, they were happy with their decision.If I feared margin calls it would keep me from using the biggest marketing tool there is to hedge my grain and take advantage of market opportunities. Savvy farmers understand it and use the tools that are available to increase profits and minimize risk. The most important thing I have seen to guarantee success is to make sure that a farmer is working with a bank that fully understands margin call. As long as the bank understands what will happen if corn goes up $2 per bushel or more and there are plans in place for both parties to be successful and reduce risk, there shouldn’t be any problems and everyone will be more profitable in the end. Please email with any questions or to learn more. Jon grew up raising corn and soybeans on a farm near Beatrice, NE. Upon graduation from The University of Nebraska in Lincoln, he became a grain merchandiser and has been trading corn, soybeans and other grains for the last 18 years, building relationships with end-users in the process. After successfully marketing his father’s grain and getting his MBA, 10 years ago he started helping farmer clients market their grain based upon his principals of farmer education, reducing risk, understanding storage potential and using basis strategy to maximize individual farm operation profits. A big believer in farmer education of futures trading, Jon writes a weekly commentary to farmers interested in learning more and growing their farm operations.Trading of futures, options, swaps and other derivatives is risky and is not suitable for all persons. All of these investment products are leveraged, and you can lose more than your initial deposit. Each investment product is offered only to and from jurisdictions where solicitation and sale are lawful, and in accordance with applicable laws and regulations in such jurisdiction. The information provided here should not be relied upon as a substitute for independent research before making your investment decisions. Superior Feed Ingredients, LLC is merely providing this information for your general information and the information does not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision. The contents of this communication and any attachments are for informational purposes only and under no circumstances should they be construed as an offer to buy or sell, or a solicitation to buy or sell any future, option, swap or other derivative. The sources for the information and any opinions in this communication are believed to be reliable, but Superior Feed Ingredients, LLC does not warrant or guarantee the accuracy of such information or opinions. Superior Feed Ingredients, LLC and its principals and employees may take positions different from any positions described in this communication. Past results are not necessarily indicative of future results.last_img read more

If You Think Learning Is Difficult

first_imgMost salespeople never read a single book on sales. Most business people don’t read books on business either, with the exception of enlightened leaders who are future-oriented and recognize the great power in reading. Over 33 percent of people never read a book again after completing high school.Worse, neither salespeople nor businesspeople take courses that help them to develop personally and professionally. A lot of people attend webinars, but that’s usually a narrowly-focused answer to a question or two, not a real development plan.Information is not power. It’s potential power. As the rate of knowledge increases, we are all being left woefully behind. There may not be a way to keep pace, but you must try not to let the gap grow so big as to make you irrelevant. Then, you must do something with what you learn.Learning is the key to growth. New knowledge can create new opportunities. What could you learn now that would enable you to create a better outcome in some area of your life? What could you learn that would allow you take your career to the next level—or maybe even start a new one?Learning is the key to a greater vision. It’s impossible to understate the value of vision. Until you learn what is possible, your vision will always be too small. New insights and new possibilities translate to new ideas, and even new businesses. Knowledge enables a bigger vision.Learning is the key to strategy. The difficult work in sales or in business is strategy. Strategy requires that you think, that you consider scenarios, that you explore different possibilities. But potential strategies and scenarios will evade you if you aren’t taking in new knowledge and making new connections.The price of not learning is high. Very high. Very, very, very high.The failure to learn will cause you to stagnate, doing what you’ve always done, and getting the same old results you’ve always gotten.Refusing to spend time learning cuts you off from a greater vision. How can you see when you keep your eyes, ears, and mind closed to new ideas, new discoveries, and new knowledge?Effective strategies require context. The strategist has to look outside to discover what is known, what is new, and what is relevant. They need to understand the current environment in which they compete, as well as how their competitors are responding.Learning takes time. It takes effort and energy. Some forms of learning require money, and in some cases, a lot of money. It sounds difficult.If you believe that learning is difficult, contrast that with how difficult is to succeed in a world where changes are faster, more frequently, and more disruptive.last_img read more

Urban local bodies polls underway in Rajasthan

first_imgPolling to elect about 2,100 ward councillors is underway in all 49 municipal bodies across Rajasthan on Saturday. According to that state election department, the polling started at 7 a.m. and will continue till 5 p.m. The election has been peaceful so far, an official of the department said. A total of 7,944 candidates are in the fray in 49 civic bodies of the State. The election department said that a total of 33.69 lakh voters, including 17.05 lakh men and 16.01 lakh women, will exercise their franchise on Saturday. Counting of votes will be done on November 19. Election for chairman and deputy chairman of local bodies will be held on November 26 and 27 respectively.last_img read more

4th ODI: SA beat India by 48 runs (D/L method)

first_imgSouth Africa beat India by 48 runs (D/L method) in the rain-reduced fourth ODI at St George’s Park in Port Elizabeth on Friday.Virat Kohli on way to his unbeaten 87. APIndia were batting 137/6 in the 31st over with Virat Kohli and Harbhajan Singh at the crease when rain halted play.The game resumed only to end within minutes as rain again stopped play – this time for ever as India score read 142 for 6 in 32.5 overs. Virat Kohli (87) and Harbhajan Singh (3) remained unbeaten.Earlier, the duo got busy chipping away from the 266-run target even as the South Africa pacers were busy tightening the noose around India.First South Africa pacer Lonwabo Tsotsobe, who has been in good from throughout the series struck early to claim both openers Rohit Sharma and Pathiv Patel. India were 32/2 post Pathiv’s dismissal.New man Yuvraj Singh had only stayed in the middle for twenty minutes before offie Johan Botha scalped him.He followed the unwritten rule – if you don’t understand which way the ball is turning just sweep it. But the sweep proved costly, the timing was entirely wrong and the ball took the aerial route only to come down at skipper Graeme Smith’s throat. He fell for 12 and India to 49/3.South Africa’s Jean-Paul Duminy en route to his unbeaten 71 against India. APThen Suresh Raina and Virat Kohli formed a 64-run partnership for the fourth wicket before Raina fell to left-arm spinner Robin Peterson on 20. India were 112/4 at the stage.Skipper Mahendra Singh Dhoni (2) dropped by for a visit before Peterson thought he looked better on the benches. And India slumped to 123/5.advertisementIn came Yusuf Pathan, famous for his heavy heaves, and up went India’s hopes only to crash land with a big thud.A fatal edge off paceman Morne Morkel and Pathan was walking back on 2 with India score reading a poor 128/6.Finally Virat Kohli and Harbhajan Singh decided to do the unthinkable before rain and Messrs Duckworth and Lewis dampened their spirits.Earlier, the hosts treated their Indian visitors to some fine stitching exercise with Jean-Paul Duminy and Johan Botha showcasing their craftsmanship with the bat.India bowlers were left awestruck as the duo put 70 runs on board for the sixth wicket. The end result was a fine 265/7 in 50 overs.India didn’t fall far behind. They too displayed their wares. In fact the South Africa total could have stretched on had India not used the scissors at the right time.Four quick wickets and South Africa were reeling on 118/5. The figure in the runs column could have been even lesser had opener Hashim Amla not posted 64 before being run out.Yuvraj Singh, who finished with three wickets in the bag, started the snipping job with Morne van Wyk’s dismissal on 15. Wyk departed edging an away moving ball to Virat Kohli in the slips.At the stage the hosts were batting on 106 – not a bad figure considering that they had lost just one wicket (Graeme Smith) before.South Africa opener Hashim Amla en route to his 64. APAmidst all this cutting and snipping, Amla decided to display his running skills. But he was too greedy and paid heavily for it, falling short on the second run and South Africa fell to 111/3. Still his 64 proved to the central piece in South Africa’s design.AB de Villiers showed how good he is at marching. He marched back on 3 with Yuvraj claiming his wicket and the Protea score was 115/4.Young Faf du Plessis knew he was good at running and he has proved it before with a half-ton in the last ODI. But today he ran out of steam and got out run out on 1. By now the hosts had slumped to 118/5.But Duminy with his unbeaten on 71 and Botha, who scored 44 before being sent back by Yuvraj, turned out to be their team lifeguards. Duminy earned a Man-of-the-Match award for his efforts.With this win, South Africa have levelled the series 2-2 against India. The two now meet on Sunday for the final ODI in Centurion.last_img read more

Expect major changes in PH men’s team for SEA Games

first_img“There will be a special care because the SEA Games will be held in the country, but the dynamics have been put in place and we are on track based on our development program,” added Cayco.Currently, the national women’s pool includes Alyssa Valdez, Mika Reyes, Jaja Santiago, Dindin Manabat, Jasmine Nabor, Risa Sato, Mylene Paat, Aiza Pontillas, Maika Ortiz, Cha Cruz, Jia Morado, Denden Lazaro, Jem Galanza, Aby Maraño, Grethcel Soltones, Melissa Gohing, Dawn Macandili, Kim Fajardo, Majoy Baron and Kim Kianna Dy.Sports Related Videospowered by AdSparcRead Next SEA Games: Biñan football stadium stands out in preparedness, completion TS Kammuri to enter PAR possibly a day after SEA Games opening SEA Games hosting troubles anger Duterte New year, new hair, new Phoenix deal for Matthew Wright Private companies step in to help SEA Games hosting Although Cayco didn’t confirm it, the men’s team is expected to overhaul the coaching staff and the roster after the team placed fifth in the 2017 SEA Games in Kuala Lumpur.“In the women’s team, we will have small fine-tuning, but we will have more work on men’s team,” Cayco told the Inquirer.FEATURED STORIESSPORTSPrivate companies step in to help SEA Games hostingSPORTSUrgent reply from Philippine ‍football chiefSPORTSSEA Games: Biñan football stadium stands out in preparedness, completionThe women’s team is hoping to at least medal in the biennial meet for the first time since taking the bronze in the 2005 Philippine edition.Now ranked 117th in the world, the country ruled the women’s side of SEA Games volleyball from 1977 to 1993. LATEST STORIES SEA Games: Biñan football stadium stands out in preparedness, completion Don’t miss out on the latest news and information. Volleyball officials are set to make big changes in the men’s national team but very little in the women’s squad, according to a top honcho Friday.Larong Volleyball sa Pilipinas, Inc. president Peter Cayco convened the LVPI board and team officials to map out the plan for this year’s international tournaments, including the Southeast Asian Games, which the country is hosting in December.ADVERTISEMENT Hotel management clarifies SEAG footballers’ kikiam breakfast issue Is Luis Manzano planning to propose to Jessy Mendiola? PH underwater hockey team aims to make waves in SEA Games PLAY LIST 02:42PH underwater hockey team aims to make waves in SEA Games01:44Philippines marks anniversary of massacre with calls for justice01:19Fire erupts in Barangay Tatalon in Quezon City01:07Trump talks impeachment while meeting NCAA athletes02:49World-class track facilities installed at NCC for SEA Games02:11Trump awards medals to Jon Voight, Alison Krauss MOST READ LOOK: Joyce Pring goes public with engagement to Juancho Triviño View commentslast_img read more