A24-Lancaster Farming, Saturday, November 30, 2002
Bowles Addresses Risk Management At Seminar
(Continued from Page A 1)
“allow someone else to take on
your risk,” he said.
In addition to hedging, Bowles
discussed futures contracts. A
contract, he reminded those pres
ent, is legally binding.
A long futures contract gives
the right and obligation to take
delivery of a specified quantity of
a specified commodity at a speci
fied time (buying). Likewise, a
short futures contract gives the
right, and obligation, to make de
livery of the predetermined quan
tity of commodity at a certain
time (selling).
Although a contract is legally
binding, to eliminate a short (sell
ing) position, “buy it back, it’s
easy to get out of,” he said. A
long (buying) position can also be
sold back.
The local price is established
with the Chicago futures price
and the local basis. The local
basis is the difference between
the local cash price and the futur
es price. The basis is a measure of
local, as compared to Chicago,
supply and demand.
However, “don’t get hung up
on terminology,” he said, “under
stand what it is that you want to
d 0... a broker will help you
through it,” he said.
Hedging, he said, is a tempo
rary substitute for a transaction
to be made later in the physical
market (as in taking today’s price
for delivery in April.)
Two markets that can be
hedged in are the futures and
cash markets they are a buyer
willing to buy a producer’s cattle
for delivery in April.
“If you produce or own a com
modity, you are risk when the
price goes down. Hedging (selling
futures) eliminates that risk.
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Looking forward, reaching higher
“If you have an instrument
that takes advantage of when a
price goes down, it’s a hedge,” he
said. By selling futures, the posi
tion gains value when prices de
cline.
According to Bowles, hedging
protects profits, which is “the
good scenerio,” he said. “Can
you protect profits as big as you
would like? No profits are
never as big as we’d like. That’s
why we don’t take a respectable
profit in the first place.”
Holding out for larger profits is
the first emotion, said Bowles.
After the market peaks and be
gins to move back down, there is
the high hopes emotion, when
“they (investors) think they
should have taken the earlier
price and they hope it will go
back up,” he said. The third emo
tion is fear. “So often where we
sell is at the bottom, because
those emotions have taken over.
“Be satisfied with a good
price,” he said. Producers must
balance the possibility of lost op
portunity with longevity.
Do your homework, advised
Bowles. Know what the buyer
wants and know the cost of pro
duction. On top of production
costs, “add something for your
self to come up with a target
price. When you find that, sell.”
Hedging limits losses, besides
allowing a price determination
prior to the making or taking de
livery of a physical commodity.
With this knowledge, a producer
can buy cattle either aggressively
or with reserve, based on profits
predicted by future prices. Hedg
ing also satisfies lenders and re
moves market uncertainty, said
Bowles.
He also addressed margins, a
performance bond. “Basically it
says, T am going to uphold my
You'll feel the difference.
end of the bargain,’” he said. It is
a cash deposit that is required of
both the buyer and the seller.
Although a margin call is an
amount of capital required if ac
count equity falls below mainte
nance level (which means a check
needs to be sent to the broker), a
margin call occurs only when fu
tures, not the cash market, is
moving against the farmer.
This means the cash market is
going in the right direction and
the farmer’s net worth is going
up.
Options on futures are “put”
and “call,” which protect in a
down or up market. The options
create a minimum or maximum
price for commodities, which al
lows for the producer to take ad
vantage of the upside of the mar
ket and provide an average
Ya. Dairy Bowl Quiz Team
Takes National Championship
(Continued from Page A 1)
“The four of us had been on
teams before. We knew each
other on a personal level,” said
Sarah Clemons. “I wish I had
made the time to study more.”
The 17-year old young woman,
who with her brother Josh has al
ways been home-schooled, said
that going to nationals was a
dream come true and something
she has always wanted. She said
the experience was very satisfy
ing.
Josh, IS, is already pursuing a
dairy farmer career with determi-
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minimum price. With options,
“don’t do anything unless you
can fully understand what it can
do for you, what it can’t do for
you, and what it might do to
you,” he said.
Bowles also spoke about com
modity brokers. Make sure they
do not trade on their own ac
count, which creates a conflict of
interest, he said.
Steve Van Lannen, vice presi
dent of producer relations, Pack
erland Packing, Green Bay, Wis.,
spoke to the group briefly to ex
plain the packer’s forward-con
tracting options. They contract
high-energy Holsteins, Angus,
and crossbred cattle. Producers
can find futures and options
prices on www.agweb.com,
www.farms.com, and
www.vdacs.state.va.us.
nation and owns one dairy cow
and several heifers.
Their parents, Tim and Julie
Clemons, also have a younger
son, Caleb, aged 4.
In thcThase B team collabo
ration questions, Sarah Clemons
was responsible for giving the an
swers because she was the team
captain.
When the judges were asking
for three answers, the team came
up with six, then it was decision
making time. Clemons had to se
lect the three she thought the
judges wanted. She had the confi
dence that her teammates would
Jonah Bowles, ag risk
management coordinator,
Virginia Farm Bureau Fed
eration, explained tools
such as hedging and futur
es at a recent workshop.
stand by her if the answers she
presented happened to be incor
rect.
“The only stress was coming
from the competition and the
writing, not the team,” she said.
Otherwise, Phase A was the
written test and Phase C was a
toss-up round of 20 questions,
followed by the Phase C bonus
questions. The latter also involv
ed team collaboration.
The coaches who assisted Win
ston were 4-H volunteer leaders
Patty Leonard from Fauquier
County and Julie Clemons from
Madison County.
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