Beware of the “Texas Hedge”
Some of you may be wondering, in this rising wheat market “Why not place a long hedge or purchase a call option?”, while also holding unpriced grain either in the field or in the grain bin.
These thoughts are often motivated by our beliefs of where commodity markets are headed. Currently, this could be due to market uncertainty stemming from COVID-19. The strategy of placing a long hedge or purchasing a call option while owning unpriced grain is commonly known as a “Texas Hedge”. The Texas Hedge exposes farmers to more price risk, price risk that may not be worth the financial pain if things don’t work out.