What is the number one fear of every producer using The Board of Trade for the first time? No, it’s not that they will make more money than they know what to do with. It’s that they’ll end up on a margin call and potentially lose the farm. Maybe it’s not quite that dramatic, but to some, a fear of margin call can handicap them from ever wanting to come near The Board. And that’s a real shame because The Board of Trade offers many advantages to producers that they’ll never be able to utilize. Don’t get me wrong, margin calls are altogether a possibility when using futures & options because of the leverage that’s offered by these contracts. However, when properly margined on the front end and when properly monitored, margin calls can be controlled.
What is a margin call?
I feel this needs to be fleshed out real quick because some have heard the term, and fear it, but don’t really know what it is. A margin call occurs when you enter a marginable position on the board, aka buying or selling a futures contract or selling an option, and your account value falls below the required margin level. How exactly does this happen? Well, it can occur when the market moves swiftly against you, but more than likely, it happens because traders/hedgers are underfunded on the front end. Luckily, this is an easy issue to fix before it even occurs. Make sure you’re properly funded. If you view the minimum margin as the threshold for how much you need to have in your account, then yes, you’re going to end up falling below that mark more than likely. On the flip side, if you approach it by knowing that you need to put in enough funds to give the room some market to breathe, then you’ll be able to avoid falling below margin requirements barring a large move.
Let’s look at an example:
The minimum margin on a corn contract is $880. If you were going to buy a corn futures contract, and wanted to make sure you gave the market room to breathe, then you could fund with at least $2,000. This would give the market room to move over 20 cents against you before you would fall short on margin. Even if the market begins to near that 20 cent mark, you should be more than aware because your margin levels are being monitored by either you or your broker. Basically, if there is a potential for a margin call, it should be caught well beforehand and addressed so that it’s not this monster in the closet that sneaks up and rips away your money.
Using Margin in Your Crop Marketing Plan
Margin calls happen. It’s a fact of using highly leveraged markets such as futures. That leverage allows for many advantages that I outlined in a number of other articles, and if you’re not familiar with them, I recommend you read those. Fear of margin calls shouldn’t keep you from taking advantage of these tools that are available to you. Conquer your fear and take control of your marketing.