As I write, my wife and I are four days into potty training our two-year-old daughter. When I say we, I mean my wife is doing the vast majority of the work and I try to be semi-helpful when I’m home.
To help with the process, my wife put together a basket full of little 50-cent prizes to reward our daughter when she successfully goes on the potty. One of these prizes is Play-Doh, which my daughter loves. The only issue is when she’s done playing with Play-Doh, it’s shredded into 600 colorful pieces that are scattered around the house. It’s the reason we enacted a Play-Doh ban in our house after Christmas.
We put a pause on the Play-Doh ban for potty training. If the helps our daughter successfully get out of diapers, picking up Play-Doh is a trade that we would gladly make.
Fast forward to Day 4 and our daughter has picked up how to use the potty pretty quickly. It is to the point that she has earned each and every cup of Play-Doh out of the prize pack (the only prize she wanted to pick, of course). Our living room has the colorful evidence to prove it.
We are thrilled she has taken to potty training as well as she has, but a part of us is now regretting the decision to include Play-Doh as a prize. Even though our potty-training goal is progressing well, we can’t help but have a feeling she would have been successful without the Play-Doh incentive – an element that added to the parental cost of this enterprise.
Putting a fine point on puts
This story has a point. I tell the story because it reminds me a bit of grain marketing – specifically the act of buying put options.
Any farmer who has ever purchased a put option likely can relate to this:
- You’re worried about downside price risk in corn. You buy a put option to manage that risk.
- The next day, the price of corn goes up. Same thing the next day, and the next day.
- Fast forward a few weeks or months. The put option expires worthless, and you feel like you wasted money on protection you didn’t need.
It’s the hindsight fallacy: Knowing what we know in the present and critiquing our past decision on what we learn later.
- If the market was going to rally anyway, why did we waste money on buying puts? If our daughter was going to potty train easily, why did we let her have Play-Doh?
The answer is you bought those puts because you were at a profitable price level, and you wanted to protect that profit. The fact that the market rallied and made you even more profitable is objectively a good thing. Because it’s not what you expected, it can feel like you made the wrong decision.
The smart money is on managing risk
As a broker and farmer who experiences both sides of it, this is one of the biggest hurdles in marketing that I see. Somebody uses the hindsight fallacy to beat themselves up over a decision that was wise, but didn’t play out like they expected. If they let that feeling carry over into the future it can lead to poorly managing risk out of fear of losing more money.
I think put options can play an enormous role in our 2025 marketing plans, but only if we can shake off the times past when we felt burnt by them.
As we sit here in the second week of June, we are in the most volatile time of the marketing calendar. I can make a case for December corn to reach $5 (if it stops raining) or fall down to $4 (if it keeps raining) over the next two months.
I fully understand and agree that farm margins are tight right now, and there’s not much room in the budget to spend on put options that ultimately might feel like a waste. But the ability to lock in a floor price that protects against the potential $4 move while still having the ability to profit on the potential $5 move is solid risk management (especially in a year like this with so much weather uncertainty).
I know the painful feeling that comes with buying puts that expire worthless. But I also know that it pales in comparison to the painful feeling of watching prices plummet when you have no protection in place to protect your bottom line.
Makes picking up Play-Doh feel like a small price to pay.
If you feel under-protected with your 2025 marketing, give me a call at 815-691-2672 and we can build a plan to do it as efficiently as possible. Otherwise, please feel free to call anyone with AgMarket.Net at 844-4AG-MRKT.
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