# Hedging



## jdeere (Feb 14, 2013)

Hello all I am new to the forum. Not sure if this in the right place,but if not feel free to move it or contact me and I will move it.
I was wondering if anyone has any experience with hedging. I have tried it in the past but have had mixed results. I am also wondering why the commissions are so high ($35-$70a trade) if I have my own stratgies. With the way things are now I think it could be a good idea to look into it again. Well guys and gals let me know what you think.


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## Nitram (Apr 2, 2011)

Hedging?


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## rjmoses (Apr 4, 2010)

When you ask about hedging, do you mean selling you crop and buying the futures contract at the CBOT/CME?

Hedging is a way for producers to lock in a selling price, and therefore, lock in a profit, on a crop such as corn.

Let's say you plan on producing 10,000 bu. of corn, i.e., 2 contracts, this year. For the sake of example, let's say your cost of production is $4 and you want to net at least $1/bu. You would try to sell 2 contracts (5,000 bu each) at the CBOT for delivery in December, 2013 (Contract symbol CZ3) at $5/bu or more.

You are now locked in at $5/bu sales price regardless of market moves between now and December, 2013. If the price goes down, you come out ahead because you locked in the selling price. But if the price goes up, you lose the extra profitability. And that's the price of security!

Remember - you must make delivery of 10K bushels come December or buy the contracts back at the current market price.

This is a hedging tutorial 101 and I hope this helps you understand it a little better. It's not really for the small producer and certainly not for the faint of heart!

The contract costs you mention sound like their from a retail broker. If you're serious about hedging, there are discount brokers available such as Lind-Waldock and Ira Epstein.

Hope this helps.

Ralph


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## swmnhay (Jun 13, 2008)

rjmoses said:


> Let's say you plan on producing 10,000 bu. of corn, i.e., 2 contracts, this year. For the sake of example, let's say your cost of production is $4 and you want to net at least $1/bu. You would try to sell 2 contracts (5,000 bu each) at the CBOT for delivery in December, 2013 (Contract symbol CZ3) at $5/bu or more.
> 
> You are now locked in at $5/bu sales price regardless of market moves between now and December, 2013. If the price goes down, you come out ahead because you locked in the selling price. But if the price goes up, you lose the extra profitability. And that's the price of security!


Just to add to it.

You have to remember there is a BASIS also.The difference in your local price and CBOT.The basis fuctuates threw the year and is normaly widest at harvest(negative)So it doesn't gaurentee you $5 nessisarily.Basis can go positive after harvest when there is more demand.

BASIS = difference in local cash and CBOT

Also you could have margin calls if price goes up over $5.Say we have another drought and corn goes to $8 you would have to ante up $3 a bu.


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## jdeere (Feb 14, 2013)

Hey, Thanks for the replys everyone. I understanding hedging I have done it in the past. I was just wondering what experience you all have with it. I farm around 1200 acres (75% corn 25%) and have about 800 head of black Baldys on west farm. In the past I have worked with Waterstreet Soultions, and RJO both had what seemed to me to be high commission rates($35-$70rt). Waterstreet was a money pit they wanted to offer me all kinds of things I already had..estate planing crop ins. ect. I have also worked with my local Co-op, but futures are not their speciality, and it shows. As far as Lind-Wadlock a guy up the road worked with them, and when MF Global went under they went with them along with all of his Money. I have never contacted Ira Epstien, but plan on doing that today. I also have been talking to a fella out of Chicago from Olympus Futures he seems to be very knowlwdge, and his cost seems to be reasonable. What do you guys think is a fair price to pay for this type of assitance. It just seems to me that these guys over-value their time.


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## rjmoses (Apr 4, 2010)

RJ Obrien, Rosenthal Collins and Ira Epstein are all highly reputable firms.

Lind-Waldock got caught up in the MF Global mess after Barry Lind sold out to Refco which was then was acquired by EDF Man and finally spun off as MF Global. 
Mark Sachs, president of Lind, was highly reputable. (Barry Lind was killed in an auto accident just a few weeks ago.)

My understanding is that the MFG trustee stated a couple of months ago that everyone will be getting their money back.

I am not familiar with Olympus or Waterstreet.

Futures firms used to make their money by investing excess customer funds in T-bills, T-bonds and the overnight money market. But since interest rates have tanked, I'm thinking they had to raise commissions to make any income.

Ralph


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## jdeere (Feb 14, 2013)

Again thanks for the replies guys. I spoke with Ira Epstein today they too seem a bit over priced at $35-$50rt. It is good to hear that Rosenthall Collins Group is reputable; as Olympus Futures has a relationship with them. I am leaning towards Olympus the guy I have been talking over there (Daniel) has a real good understanding of the ag markets as he grew up on a family farm. His rates are about half of what the other guys want $20rt. He also said that they are going to be introducing a ag related news letter coming up here soon that I will get too. If anyone else has any advice please post.


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## swmnhay (Jun 13, 2008)

I trade at a local broker.It costs more but at least I can walk into his office.Not talk to some guy in Chicago I've never met.A guy can be trusting these guys with alot of $ so I just feel a little better trading locally.

I hear ya on the cost of trades and have thought of looking into a discount broker,but haven't yet.


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## jdeere (Feb 14, 2013)

I use to think the same way that at least I can walk into his office, but when I was with a local guy I was paying $70rt. That was adding up to atleast a few thousand a year in cost. I figure If I can get the same service for half of that it should be a no brainer. I can take the rest and put it back into the farm (seed, equipment maintenance, bales of hay for the cattle ect.) I think I have decided to go with Olympus; they said that they offer full service for discount prices, and the guy I have been talking to over there (Dan Wright) seems to really know the markets and farming.


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## swmnhay (Jun 13, 2008)

You better check them out!!!!!!!!

_http://www.fbi.gov/chicago/press-releases/2012/two-chicago-area-defendants-charged-with-commodities-fraud-in-separate-federal-criminal-cases_


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## jdeere (Feb 14, 2013)

Thanks for the reply. I had no idea!!! i am going to look into this right away.


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## jdeere (Feb 14, 2013)

I contacted the company, and spoke to them about it. They were upfront about it. They explained the whole thing to me. It was just an isolated incident, and the firm has since fired the scumbag. I am also going to get a platform where I can see what is going in my account in real time(probably what that account holder should have been doing. I mean who would take someone elses word about what is happening with their money?). They also explained that my funds are held at Rosenthal Colling Group in a seg. funds account. I am satisfied that they have moved past this, and will be opening my account there. I will let you all know how it works out.


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