Posted by: usset001 | April 4, 2012

A response to my Corn & Soybean Digest column on hedging; “Hedging is more than Risk Management”

I received a very thoughtful response to my column published in the March issue of Corn & Soybean Digest. It is titled “Hedging is more than Risk Management.” In this column I discussed some timeless hedging concepts developed by the late, great Holbrook Working. Here is the note from a Nebraska commodity broker and my response (he appears to be a very thoughtful broker).

Comments: After reading your article, I would like to commend you on teaching your students more than how to trade futures or to beat the market. Most people that I start working with (especially those that have taken a marketing course) have learned nothing more than how to trade. Most of them have never given much thought to how a grain merchandiser or end-user manages their positions. Also, most of them have not given any thought to what position they actually have and if they are reducing risk, taking on risk, or shifting risk. I was shocked a couple of years ago when at a meeting of a farmer-owned ethanol plant, and everybody on the board thought being long physical corn and unpriced ethanol was practicing risk management, and if they shorted the corn board to neutralize their physical corn position they were somehow taking on risk because they had short futures positions and ethanol plants were not suppose to be short on the corn board only long.  They were buying 20 million bu. of corn and no one on the board had ever been taught how large end-users and multi-national grain companies have handled their positions for the last 100 years. Needless to say, they learned a valuable lesson at the end of 2008.     

I find teaching my customers basis, carry, freight spreads and arbitrage has been much more financially rewarding to them than trying to guess what the market will do next week or next year. Most of them are taught that the real money is in selling the top of the market. With today’s market ranges it is easy to forget about the opportunities to return on storage, but the large multi-national grain companies have done this and stood the test of time – just as most of Holbrook Workings writings have – so once again I commend you for teaching some of what I consider the most important and most undervalued tools in farmer marketing.

My response: Thank you for your kind comments.

Several years ago I had an interesting talk with one of my students. This student was a business major, but he chose to come over to the “ag” campus to take my course on futures and options. I asked this student, “Why are you here? The business school offers several courses that deal with “derivatives” – so why come here?” He said, “In the business school, they teach us how to hedge (the math, optimal hedge ratios, estimating volatility, etc.) – you explain why we hedge.”

Futures and options lend themselves to a lot of “how to” discussions and not enough about “why.”


  1. Excellent thoughts all the way around. If anyone is interested in reading Working’s original articles, a complete hyperlinked bibliography can be found here at my website:

    I also highly recommend the classic textbook by Tom Hieronymus on agricultural commodity markets. You can find a digitized copy (free!) also on my website: Still in my view the best book ever written on commodity markets.

    My 2 cents.

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