3 M L & C said:
In my experience these types of things always make them money and usually don't help you. I have used a place before to help market not necessarily a risk management thing but I think they kind of go together. What happens is even on a 5 year stretch you will end up with the same money minus their fees. They will keep you out of the low and they will sell a guy on this. But they generally keep you down off the high as well. The one place I was looking into using to help market my grain wanted you to sell 2.5-3 times what you raised in a year. So that entails lots of buy back puts calls and fees on their end. Take it for what it's worth but all the guys selling price protection or marketing advice are all driving new vehicles and wearing fancy clothes and it's not because they know the market that much better than everyone else it's because of their fees.
I would say if you want to try something and you feel the price is where you like sell on superior or something like that.
I wouldn't place too much weight on what a person drives or wears. Pretty easy to "look the part". The proof is in the pudding.
I agree that you've got to pay attention to the fees and what they end up costing. That will vary depending on the strategy. However, when you compare a $35-40 fee per turn on an option, and consider the asset value you are protecting, it's a drop in the bucket. Less than a penny per bushel on grain, and less than 1/10th of a penny per pound on feeder cattle. Compare that to the commission you pay everyone else you do business with...feed guy, sale barn, equipment dealership, etc. Worth the cost, in my opinion. Now, if you're swapping positions constantly, it might add up. But even then, you're not going to be doing that unless there is profit to be taken, which dang well better cover the cost of doing business and then some.
You might be right about things averaging out over the long run, but again it depends on the strategy. If the guy doesn't set you up to take any advantage of a rally, it's probably time to find a new broker. It's not about knowing what the market will do, but being in a position to take advantage of it, or be protected from it when it moves. IMO that is what a good risk management person provides.
I think some of it has to do with one's appetite for risk. The good years are great, but the bad years are harder to deal with. Having some "fire insurance" in place for the bad years is something of value to those with slim margins or payments to make. In this kind of a market environment, I have to assume lenders want to see some kind of risk management for operators trying to pay for land or cattle. I don't have notes on either right now, but my lender still asks what I'm doing in that regard. Seems like they'd rather see consistent profit than riding out the lows and trying to pick the highs.
All that said, forward contracting or selling on Superior is certainly a way to manage price risk. And it's easier to understand. It took me quite a while to wrap my head around futures and options. It made no sense whatsoever the first time I learned about them.