Inventory repos: Credit lines are the limiting factor for a lot of elevators this year. Some managers have hesitated to use innovative financing such as inventory repo's, where a financial entity buys inventory in-store, takes over the short hedges, and pays for the grain against warehouse receipts. These transactions include a buy-back clause for the elevator to regain ownership at a defined time at a defined basis. Most years conventional hedgers don't need additional financing and most borrowers hesitate to risk their relationship with their lenders. But this is the year where these new tools aren't only OK; they may be essential for some firms' survival.
Bear-spreads: CH would suggest that when futures carries are narrow, keep short hedges in nearby futures and sell inventory when returns don't cover costs. But in extreme markets, outside factors may limit your choices. Buyers may back away, for example. To protect against falling basis in rising futures, consider also bear-spreading futures; buying the deferred and selling the nearby month, if the carry isn't already wide. If basis falls hard, eventually the futures spread should weaken and the gains help offset basis loss.
Underhedging your cash position: This is common in financial markets, uncommon in agriculture. This earns some revenue on your unhedged bushels in bull markets to help offset interest costs, contract risk, basis slippage or other costs. In bear markets your loss on unhedged bushels is mostly offset by the interest you earn from withdrawing and putting to use the open trade equity on your short hedges. The challenge is to quantify how much to underhedge without taking on more risk than you offset, and the percentage isn't static. A 3% underhedge, for example, on 100 bushels would earn $1.50 on a 50¢ rally on the 3 bushels. The interest cost on the 97 hedged bushels at 7% would be $3.40 for 12 months. On the downside, the 3% underhedge loses $1.50, offset by the interest on excess margin funds of approximately $3.40 (assuming 12 months at 7%).
Or you can hedge your position 100%, perhaps to satisfy loan covenants, but pay a small fee to someone else to provide protection that eliminates the interest cost or earnings on your hedges. This is a lot easier than managing the percentages yourself.
Options: You can use options instead of futures to hedge price risk, but understand the risk profile and the net costs. Being long puts + short out of the money calls, lessens your margin requirements if futures rise, and provide market gains to help offset a falling basis, contract defaults or other risks of bull markets. Your protection against lower prices has a 'deductible' and some initial cost. But where a credit line is limited, options can be an important tool.
Another strategy is to maintain conventional short hedges and buy some deep out of the money call options for a small cost. A $1 rise in futures might add 15¢ to the time-value of each deep out-of-the-money call with a 15% delta factor, for $750 of revenue per 5,000 bushels. This assumes the rally occurs well before expiration. The calls aren't meant to capture a rally cent for cent but to earn some money, at a low cost, to help offset risks. (These values are just for illustration; option analytic programs can forecast actual outcomes based on strike prices, premiums, and days to expiration.)
These are just a few of many nonconventional approaches that can expand your ability to manage the unusual risks of our new markets. Perhaps one or more will be a comfortable enough fit for you to add to your old standbys.