When the Market Gets Volatile, Get Disciplined

Wild markets stir up emotions in even the most seasoned of grain merchandisers. When margin calls are coming fast and frequently, and there are multiple chances per day to feel wrong about some decision and then right and then wrong again, it can be hard to maintain the discipline that is vital to long-term success.

Here are some things that always need keeping an eye on, but especially in a volatile market.

Maintain hedging discipline. Basis trading assumes that transactions are hedged in a timely manner. When futures prices are making big swings, poor routines can cause basis purchases and sales to have dramatically different values than you intended. Be sure that your hedging routines are simple, clear, and well-communicated to your team.

Hedge in the appropriate crop year. Volatile markets usually involve futures inversions, especially from old crop to new. This means that new crop prices are trading at a discount to old, and when that happens, there is a temptation to hedge new crop purchases at the higher old crop futures value and wait for the spread to adjust itself. There is no guarantee that the spread will adjust itself, and this introduces a massive amount of risk that has done a lot of damage to both growers and grain businesses over the years.  There is no business justification for this practice, and it should be avoided with no exceptions.

Don't try to trade your way out of a problem. Things happen in wild markets. You buy grain outside of market hours, something gets hedged in the wrong month, too few or too many contracts get hedged - there are a lot of ways to get out of position. When this happens, the best action is to correct the problem as soon as it is known.  Anything else is a distraction and opens the door to emotion-based decisions that often make a bad situation worse.

Keep long futures in the nearby and short futures in the deferred. This is an oversimplification, but a useful one that over time will be safer and produce better outcomes than the other way around.