Revised marketing system.

[Steve]

This is the way I see it.

The commodities and futures market is very complex also misunderstood by most people including the farmer. Some of the reasons are:

1.We have a verity of people in the commodity market place and all try to use it too their advantage.
2. Farmers and grain companies, use it to sell their grain into the future months to secure an asking price for their grain.
3. Speculators buy and sell and are only concerned about making money, they don’t care whom they hurt in the process.
4. Speculators work by buying and selling, futures, puts, calls options and it can be cash or commodities. [it is confusing at this point but is irrelevent because to what I am leading too]
The easy way to understand this is that these speculators are betting against each other, that the price of the product is going up or down and the person that is right makes money and the other loses. Sure looks like a casino to me.
5. There are large banks, money managers and brokerage firms involved in the commodity market that can move the market in their favor by using weather, artificial shortages and surplus on related rumors.
6 These large corporations can totally distort the price of grain by trading large volumes and they are using some poor suckers money to do it. [Investors that trust their broker may have one with a good radar screen.]
7. Can you believe that some farmers think they can compete in this chaotic jungle?
8. There is risk management to control this. [ I wouldn’t touch this one with a ten foot pole] but you could be lucky and outguess the variables.


Now this is just an example and it is approx. It would cost you $20.00 per tonne up front for the transaction to buy a $340.00/t May canola put option and you must active it on or before the third week of the previous month. [ April. ] Therefore the change has to be in your favor by $20.00 a tonne to brake even also these rates could go much higher or lower.
The way I see it, if the change is in your favor active it and collect before expiry date or throw your contract away if it doesn’t hit your target price.
Puts go down and calls go up I think but I am sure someone will correct me if I am wrong.

The reason I put this example in because most of the time the explanation is plus this minus that equals that and no specific values to use and calculate percent of loss or profit.

The no value presentation looks better if you are trying to promote this concept on risk management, but it starts to look ugly when you use real values and the amount of money you pay up front.
I don’t think that the average farmer needs this additional gamble or stress to market the way some people are suggesting.

There is no way we can kick the big guys out of the commodities marketing circle so lets try and beat them at there own game.

This is one way I think a farmer can market and not saying is the only way to get a reasonable return:

Lets use GRAIN PRICING ORDERS system to sell your grain and this is done at your local grain elevator at no cost.

This is the way it works you sell in lots throughout the year.

1. Example you want to sell a 100 tonnes of canola in the month of December for $360.00/t and it doesn’t matter what the future price is for that month. The grain company will place that order on the market free of charge and if some one buys it at that price you must deliver in that month and will receive your asking price.

Now if the price is too high and nobody buys before the expiry date then you can just through that contract away and put the same grain on to some other month and change the asking price if you wish.

Keep in mind that if some one offered you that price it becomes a valid contract.
or
2. You can in any given month sell on the futures the amount of your choice at the price that is offered and lock it in. Also I suggest sell in lots.

3 I don’t like to buy a bases contract, because that means you have un-priced grain on the market and the speculators will set a price for you, especially if you leave it to the last day. Also this contract is between you and the elevator company that wants to handle your grain. I have seen cases that the bases are lower in your selling month than you paid earlier. [ gamble????]

4. Now this marketing system gives you cash flow for the season.

5. A contract is a gentlemen agreement between two parties backed up by law so that the same can’t abuse each other.

6. A contract can be altered or cancelled in writing if agreed too by both parties signed and witnessed.

7. I know the above system works because I used it myself at UGG.


Safeway can buy a can of beans and sell the same for one percent profit then use the same money to follow the same procedure many times over in the same year and at the end show a good return on their investment.

We can work with Safeway by putting other priced product on the futures market and that way we both know the price of it.

Comments needed

[Steve]

Correction
We can work with Safeway by putting our priced pruduct on the futures market

[TOM4CWB]

Steve,

Risk and reward are two determinations that are critical to market price on the production side.

Now I can do a deffered delivery contract on half my normal long term production (2002) with no options cost because, chances are very good that I will produce at least this amount.

The top half of my production is where my real realised risk is the most dangerous.

However once the grain is in the bin, buying puts is purely a speculation move, as the product is in the bin, and hopefully we have storage risk close to nothing.(I hope this to be true, but...)

On the 2002 production, 50% can be normally hedged, however if reserve moisture in subsoil is depleted then maybe 30% is a more reasonable number if the farm is somewhat spread out and not all in one block.

I believe this portion of next years crop is what we should be concentrating on marketing now, as options are extremely expensive for the fall of 2002 futures.

Now a cost of production can be figured out, and those target prices on crops that can contribute to a profitable farm could be hedged ( only to a comfortable level that the production risk allows).

Is this the type of system you are talking about?

[Steve]

Tom4cwb

You are right on the money with your comments, and the last statement I fully agree with because I was going to explain how to hedge the 2002 crop. The reason I quit last night was because my typing finger was getting lost on the keyboard. Thanks for your help Tom.

[chaffmeister]

What you are suggesting Steve is not a new marketing system. I have been involved in teaching grain marketing and risk management for most of my career and for years have suggested the same approach as you are here. Also, I agree with you, Steve – the futures market is misunderstood by most farmers. I have found that the ones that “support” futures markets tend to understand them and know what they can do for them and have been successful at exploiting them. The ones that don’t support futures markets tend to have a less than complete understanding of them and, because they didn’t understand what they were doing, perhaps lost money and are now quite sour on them. Education regarding markets is key to success in them - just like anything else. A little information is a dangerous thing.

I have always suggested that directly trading futures and options (through a broker) is probably not in most farmers' best interests. Letting grain companies and other buyers use them to provide farmers with marketing choices/products is an excellent approach. (I believe that is what you are suggesting as well, Steve.)

There are many differences between a commodity market and a casino - the main one is that a casino has no economic function or reason for existing other than to allow people to risk money with poor odds of winning - just for the fun (?) of it - and for the profit of the casino itself. Futures markets exist to allow those with real risks in economic activities (like farming, manufacturing or banking) to reduce their costs by reducing risk. There are many other differences but this is the main one and the most relevant for this discussion.

Rather than vilify the speculator, I choose to acknowledge that without him, the likes of UGG and others could not offer pricing tools and forward contracts.

Why do we always need to try to "beat them at their own game"? Or "outsmart the market"? Why do we think that farmers need to “compete in this chaotic jungle” or “could be lucky and outguess the variables”? This is not a competition to see who can extract the most money out of the system. I think TOM4CWB has the right approach - focus on what the marketplace (cash/futures/options) can do for your own operation in terms of providing a better return. Who cares what the variables are that, when all combined, allows UGG and others to offer a price – spot or forward – that works for you in your business/marketing plan for your farm operation.

You can be sure that all the others involved in the process of taking your wheat, barley and canola and making it into bread, beer, and cooking oil, don’t care that they didn’t buy their raw materials at the bottom. What they care about is – are they making money and can they compete with the others in their business. Period. Farmers need to take asimilar approach to their business.

Why is it, after farmers choose to sell canola at $7.75 because they can make a decent return on it, that they then get upset when the market is bidding $8.00 two months later? I can’t tell you the number of times I have heard farmers say “I’ll sell when the market gets to $7.50”, only to change that to $7.75 when the market is paying $7.50. And when the market gets to $7.75, they say “if it’s worth $7.75 now, that must mean it’ll be $8.00 soon”. And when the market turns lower and these guys scramble to sell at $7.25, they get all rangy and blame the market. Steve, your pricing scheme is perfectly suited to avoid this. You offer at a price and when that price gets hit, you have a sale.

[Steve]

Chaffmeister

I like your comments and views and thanks.

The reason I compared casinos with the commodity market [futures, puts and call options ] is to point out that the risk outweighs the gain. The same seigniorial would apply too both, in the casino play one line on a slot machine and you wouldn’t lose your money so fast, and don’t gamble with all your crop, just part of it because it is possible to lose it. Both of these concepts could be promoted if you are not using your own money, because it really works part of the time. The farmer can’t afford that maybe stuff. I am sure your reply is you need risk management and my answer is don’t gamble if its not necessary. In today’s fast lane nothing is predicable. Take a quick look at the stock market, blue chip stock falling like a rock in water and a company like BreX classed as blue chip stock, but was phonier than a four dollar bill.

This is a true story; Man against monkey as a stockbroker.

The monkey made his decision and picked a blue chip stock by pointing his finger to it on a list. The respectable stockbroker did research on companies and calculated all possibilities, then recommended a stock buy. The monkey was the winner in the first year, but in the long term the stockbroker gained more.

Now analyze this money making strategy was it luck or good management in the first year. We have to remember the farmer grows one crop a year therefore takes the one year approach.

One could say BS we are smarter than monkeys??????????

Your statement: I choose to acknowledge that without the speculator UGG and others could not offer pricing tools and forward contracts.

There are two sides to this marketing approach and I for one am not totally against the speculator, because I also dabble in the stock market. I would like to suggest to an average person not to try and make a living by doing so.

You are right about saying we would lose some options in marketing if there were no speculators, but on the other hand do we really need them?

We could use the GRAIN PRICING ORDER system as I discussed before for all our grain marketing. This is the same system Safeway market’s their product by putting it on the shelves and the real customer buys and I would say it works will. We could use the internet for posting our grain and oil seeds sales.

I know there are too many farmers that wouldn’t change to make this idea work, but it will be something to discuss in the cold winter months.

I can live with the present commodity marketing system providing the unnecessary gambling part is not used, because the odds are against you in the long run.

I realize that my proposed marketing is not new but just pointed out the options that are available, because most of the marketing experts push the gambling side to hard and call it risk management.

Comments .

[ianben]

Manageing the risk?
I see how the markets do manage the risk for everyone, buyer and seller but a cost to both sides.
The risk is the thing where I think the market due to its efficiency and rapid reponse to the hint or perception of a change reacts more and more.
More volitility, more risk, higher charges.
Self perpetuating; nice work no wonder you see no need for change
No wonder some farmers price change daily when the market changes by the hour.
Steves plan is sound I agree.
I just wish to take it a little further and introduce a computer and the internet.
I would like all our produce to be entered and priced on one site by the individual, his co-op or grain trader.
Prices could then be compared a real supply revealed.
Individuals could price in an assending mode using canola example above 1000 tons to sell
500 ton $340 100 ton $350 100ton $360 etc.
Demand would be determined by stocks left in the bin.
Individual is still free to produce or not but now has a real choice and a true feedback.
We have a used car site at www. autotrader.co.uk
I see the make replaced by the commodity the model by the grade even variety could specified.
Forward sell if you want. Buyers could post wanted adds.The opertunities are endless.
Can you not see the advantages to both buyer and seller?
We must have reduced everyones risk.
With a little more tweacking it could even allocate railcars!!!!
Ten years ago our Tesco/your Safeway showed us round.
The barcode re-ordered from the ware- house through the till automatically The goods where then picked in the ware house into crates and loaded onto the truck so that when they arrived at the shop the crates were packed to match the shelves in the islses.
Gaps where due to theft. So pilfering was reduced and no doubt insurance premiums.
Would it work for us???

Regards Ian

[Steve]

Ian good comments, but it looks like one can poke holes into anybody’s theory on marketing including our own.

The idea of posting our grain sales and want adds on the internet doesn’t necessarily eliminate our problems.

The unscrupulous computer hackers could easily disrupt marketing for days at the time.

We need our local grain handler because most farmers are to small and wouldn’t be able to deliver direct to the buyer or processing plants.

The grain companies are at the present posting our canola sales on the commodity exchange [computer internet ] if we use the GRAIN PRICING ORDER system.

The buyer or speculator looks at it on the computer and buys or places his offer to buy at his price. This also gives the farmer an opportunity to sell if he can live with that price. This would be equivalent to what we are suggesting.

I don’t know if the transaction fee would be smaller if the farmers would organize their own system because we are competing globally.

This brings us back to that middleman, the commodity marketing exchange or something similar.

There are a lot of farmers worldwide and I think someone has to help us with sell and buy transactions. We can call him the middleman, broker or whatever but it will still cost that fee.

[ianben]

I dont object to paying some one to market my grain like you I try to see the other guys problems and find a system which leaves us all a profit.
I think my main gripe with the present system is the way the market reacts to realitivly small changes with large price swings.Then charges both buyer and seller to manage this risk.
At the same time destroying any confidence we as producers might have for storing excess production and stabliseing the price for the buyer.
I suggested a banking system like money in the other thread but I do realise first you need confidence that the tonne you bank will be worth the same or simillar when you withdraw it.
It works with money, other systems work for other products. I see no real difference between most agricultural products and these others.
I have no idea how to get from where we are today to something new.
But there is a better system out there.
We dont need to invent it just change the way we market.
A stable price is the first requirement and the futures market is not going to give us that!!!

Regards Ian

[TOM4CWB]

Ian,

We have marketed straw at a stable price for over 10 years, although our product has improved and cost of production increased.

Now, a stable price is good, but a stable supply is just as important to the consumer.

Supply will still rule, the trick is for the supplier not to ask for more on years of low supply, and the consumer not to ask for a lower price on years of high supply.

It is really really tempting to both supplier and consumer to ask for more when supply works in their favour, and it takes real self-dicipline to maintain an equalibrium, but with trust and hard work it can be done!

Now, truthfully, what prices would you offer a long term supply, no matter what, no matter how much more your neighbours got than you?

Some hog producers are working in these types of marketing arrangements, could they work for wheat?

If they could, should not the CWB be the best facilitator to put a marketing program together like this?

If I can have this with non-board specialty Canola and straw, why can't the CWB pull a program together like this?

Why hasn't the CWB worked on this?

[TOM4CWB]

There are long term supply agreements that the CWb enters into. I note Japan as an example.

The guaranteed availability of supply is part of what allows premiums to be extracted over other markets.

These higher values are pooled together and improve the return to all farmers who participate in the annual pool.

So the risk of not having the right grade for the year, or of not being one of the 'selected' suppliers to a premium market and being left with lower priced markets is minimized. All farmers enjoy this risk management tool.

The CWB acts as the sole supplier and has the ability to engage in supply agreements at a high level, or direct to a mill.

Tom

[TOM4CWB]

thalpenny,

If what the CWB seems to do in these long term contracts locks farmers into on average a loss, how do any of us benefit from them?

If we were required to pool specialty canola returns, and returns on our long term product contracts, why would we even grow these specialty products?

Is not lowering all of us to the lowest common denominator destructive to the industry you attempt to serve?

The CWB refusal to understand risk, reward and profit issues, just simply stating pooling makes it fair for everyone just doesn't cut it when the CWB locks us many times into prices below the cost of production, without even telling us!

When we must borrow and invest huge sums to grow the products you market, why cannot the CWB extract benefits for us like other grain marketers do, like production contracts that specify acerage but not volume, and prices that average the highs and lows of the markets over the longer term, say 5 years at an amount the gives a reasonable return on our risk and investment?