- Commodity advisor since 1976 and introducing broker with R.J. O'Brien.
- Author of the weekly commodity newsletter, "The Al Kluis Report," and also the "Your Profit" column in Successful Farming magazine.
- Expert columnist for 13 years for Corn and Soybean Digest, which featured his "Marketing Strategies" column weekly.
- Has published two books on commodities trading. His co-author on the first book, Loren Kruse, is the now-retired Editor-in-Chief of Successful Farming magazine.
- Frequently quoted in major publications including the Wall Street Journal, and a frequent market analyst for the Linder Farm Radio News Network.
- Former executive director of the Minnesota Soybean Association before entering the markets full-time. Alan's family still owns a farm in southwest Minnesota and Al enjoys helping with fieldwork when the markets allow.
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Agriculture Commodity Trading - Hedging and Risk Mitigation
- Many people are not aware of their risks until they start losing money.
It can be amazing, really, how some very large companies buy food stuff, process it, and resell it, but quarter-by-quarter and year-by-year they seem rather oblivious to some of the underlying risks they face. Sometimes they feel they can offset that by being the most efficient operator on the block, but that’s getting harder and harder to do as margins get squeezed.
They need to be aware that low commodity prices can make profitability in food manufacturing much easier. But in the longer term the pendulum will swing the other way and they should be looking at locking in inputs during down cycles to protect themselves from sudden and damaging swings to the high side. The same strategies also can be used to improve pricing stability in any market.
When you’re in an atmosphere in which margins have gotten a lot tighter and the companies you’re selling to have become more demanding, the margins can slip from being slightly positive to slightly negative. And that can be very sudden. At the end of the quarter, or the end of the year, you find yourself asking: “What happened?” Companies may not be watching buying of their inputs carefully enough or they may have someone who is not qualified making the pricing decisions.
- Long-term, strategic planning is inadequate for many companies.
- Commodities markets have short-term price swings and they have longer-term cycles. They also have long-term trends that can affect supplies and prices. Many companies, however, plan by looking backward at past performance. In agricultural products, that doesn't tend to work. Those that look forward often limit that outlook to one year or, at most, two years. They are not looking out at what’s happening in the marketplace in terms of the dynamic between the U.S. and the rest of the world.
Brazil, for instance, has become the world's largest producer of soybeans. This has had, and will continue to have, a long-term impact on supplies and exports, which are big drivers for domestic supplies and prices. An ability to identify and understand such trends is an important part of being prepared for risk mitigation over the long haul.
- Business continuity and succession planning often are lacking.
- Even a great long-term strategic and risk mitigation plan can fail when plans don't include backup training and succession. Most often, you see this problem when a business has grown from a mom-and-pop type operation into a much larger organization. The founder may intuitively know when to buy or sell or lay out risk, but he has not adequately documented the strategies or trained others.
It has happened that someone is killed in a car accident and other partners in the firm don't even know where the checkbook is. Of course, it's not usually that bad, but there is a lot of information about contracts, leases and other dealings that needs to be integrated with purchasing, selling and hedging strategies.
- Producers rely too much on unofficial advisers and brokers.
Relying on any individual for continuing guidance on purchasing and hedging decisions can create the risk of losing that capability if the person were to move on. Brokers, for instance, may retire, take a new position, move away and so on. The problem is the next person may not do as good a job.
Unofficial advisers, in particular, often are people like a family member, a trusted brother-in-law, somebody who works at a local firm that you buy your grain from. You may like that person on a personal level, but he isn't really doing a good job. In a small community or in a small industry it’s pretty hard to replace someone without losing a friend or creating some animosity.
A stronger strategy is to build institutional knowledge within your firm. That may require working with someone to develop your skills and understanding and to help develop a plan for what to do and how to do it for managing risk, but also ensuring that you can build continuity for your firm in analyzing and acting on data you can collect.
- To protect their own interests, lenders will force businesses to lock in prices at the wrong time.
Sometimes businesses go from being pretty solid, operating profitably, and then the next year the margins go down and they have a break-even or small profit or small loss. At this point, the bank is thinking: “Oh, this is OK, they still have a lot of equity.” Then, the third year things kind of really go bad, and the bank looks at it and says: “Geez, if the trend continues they’re not even going to be able to pay us back.” Then, right at about the worst time, before the industry turns profitable, they go in and force them to price a lot of products and lock in very minimal margins right before they could have seen things turn around.
For processors, grain elevators, farmers and others anytime you start getting to a point at which the bank is telling you what to do usually what you’re doing is not right. Part of the strategy here is to keep looking ahead. If you’re making good operating profits, then, are you reducing debt, are you putting in some smart investments, or are you pulling it all out in dividends? Businesses that have succeeded over time recognize and use this cyclical nature of agribusiness to their advantage to survive lean times.