Does Your Banker Understand Hedging
For a farmer to be successful in using a hedging strategy, they must have an agricultural lender that understands and promotes hedging. Many lenders are willing to finance margin accounts for bonafide hedgers since they understand that the farmer is reducing their exposure to pricing risk. Some will also lend a larger percentage of the value of stored grain if it is hedged rather than held on an unpriced basis. Lending 90% of the hedged value of grain is a common practice. Good lenders will also help the farmer evaluate how various hedging opportunities will effect the financial condition of the farm and help determine an acceptable level of price risk.
Some agricultural lenders utilize a three-way hedging agreements between the farmer, broker and bank. In this arrangement, the brokerage house will send the margin call to the bank. The bank then automatically lends the farmer the amount needed to cover the margin requirement and the sends it directly the brokerage house. In this way, the farmer is assured that the money is available to cover the margin risk. If futures positions are liquidated, the profits are sent to the bank to be put into an interest bearing account for the farmer’s benefit. These arrangements can help reduce the stress of receiving a margin call by the farmer. The farmer will also get copies all transactions.
Before initiating any hedging strategy, check with your bank to see what type of hedging program they offer. If the answer is none, either educate the bank or possibly find a new one that understands hedging.
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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