Marketing without the CWB

[Steve]

Chaffmeister

Your statement “ what about GPO’s –did you ever get a pricing on a GPO that was lower than the street price by the time you delivered”.

Well of course I have, there is no way on earth you can sell grain and receive the top price of the year. I think you are trying to tell me the same thing happened in my basis contract, but it is not, because I can cancel the GPO with no cost and sell to the higher street price offered by another grain buyer. That is if my GPO wasn’t picked up yet, but if it was then I received my target price and I am happy.

I had one or two deferred 90 day pricing contracts and never again, because it is good for the grain buyers and not so good for the producer, as you pointed out.

I always lock in the basis on a basis contract “ that’s what a basis contract is all about,” but the grain stays un-priced until you sell.

If I lock in a futures price for my grain on a month of my choice, I will received the agreed price on delivery, and I don’t care about the basis, because the grain buyers already applied the basis to their offered price.

[bmj182]

Using a basis contract doesn't mean
that your grain has to sell unpriced,
simply sell futures for your delivery
date, and your price is set! Basis
risk can be very significant, this
alows you some flexibility, if the
futures price starts going against you
buy back your position and then
reprice at the level you want.

[Steve]

Using a simple marketing system will help you stay farming. Sell grain at the price that is needed to stay in business, and don’t buy it back just to gamble.

[TOM4CWB]

Steve!

You are absolutely right!

No one ever went broke making a profit!

As the old saying goes... the hogs get slaughtered!

[bmj182]

Buying back isn't gambling. If you
like paying margin calls by all means
let your contract ride. There seems
to be quite a lot of different notions
as to what the futures market actually
does, and doesn't do, the effects of
basis etc. Agricultural Marketing
Management is a good CD series
that will get you started, available
from AIMS.

[TOM4CWB]

BMJ;

There is a fine line between speculating and risk management.

In a marketing course I took, over 80% of farmers end up speculating... and this dramatically increases the chances of actually loosing money from futures transactions.

We must be absolutely sure that we ARE risk mitigating through our futures transactions... if we create risk... especially potential unfunded liabilities... SPECULATION is the result.

BE Careful is all I am saying.

[bmj182]

I was just commenting that a lot of
the information presented above
was not really acurate, there seems
to be some misconceptions about
basis, GPO's, the futures market in
general. Buying back your position
is not speculating, if the market is
going against you, those margin
calls really hurt if you don't! Anyway,
one thing I was wondering, please
comment on what your ideas are
concerning post CWB Canada ie: do
you think a lot more grain companies
will be created, increasing the
competition for our grain? Do you
think the pulse industry is a good
indicator of what would happen if the
CWB disappeared?

[parsley]

bmj182,

Interesting questions! One thing I'd like to mention... The CWB has a profound effect upon corporations doing business in Canada because all elevators, mills, etc. are designated as "works for the general advantage of Canada".

If I was a corporation, I would not build structures that are not movable because my property rights to my assets would be overuled with the existing legislation.

Louis Dreyfus, for example, can dismantle and export their assets overnight. It has been farmers that have traditionally sunk money into concrete and wood assets.

One of the things I think would change if the CWB Act was scrapped and property rights were re-enforced in our constitution, would be that corporations
would recognize a friendlier climate for investment. Right now, are we nearing the same investment climate as Cuba has.

Parsley

[chaffmeister]

bmj:

Discussing a topic as complex as grain merchandising over the internet by typing into a little box is difficult - the biggest problem is not being able to really be clear about what what you are saying!

Now, let's talk about buying back your position and whether it's speculating or not. If you entered a futures position as a hedge, and you subsequently remove it, you are now "unhedged". Unhedged is the same as "unprotected". And many consider being unprotected as speculating.

When I traded for a major company, it was very clear - ANY flat price exposure was considered a spec position. So if I was long 10,000 tonnes of feed barley without an offsetting futures position, my spec position was "long 10,000 tonnes".

I have taught and advised clients on trading (cash, futures, options) for many years. When I talk to farmers about hedging, I always make it clear that anytime a farmer has grain in the bin without a futures hedge, he is speculating (he is at risk that the price of the grain can go against him).

But when a guy has grain still growing in the field, it is never really clear whether he has MORE or LESS risk with a futures position. Lifting a futures hedge of your canola in the field may in fact reduce your risk if it appears you may be experiencing production problems and the market is generally bullish. (Lifting a hedge this summer would have been a wise decision indeed!)

The most important thing in risk management is to really understand what you are doing and know what the implications are - the devil's in the details. And as you said, there are a lot of misconceptions floating around about futures, hedging, basis, etc.

[bmj182]

I guess when I'm talking about
buying back my contract, I'm thinking
in the context of a rising market
where it makes no sense to hold
your position(margin calls) yes once
the hedge is lifted you regain your
risk, but you could then sell futures at
a higher level, gaining a higher price.
This does take some effort, you have
to know what you are doing and have
a good relationship with your broker,
you also have to watch the market
continually. My original post was
meant to deal with the comments
about basis contracts (that the grain
would be unpriced, it seems to me
that some of the farmers here were
using a basis contract exclusively to
price their grain) and how you could
fix a price, and what to do if the
futures price started going up.

[chaffmeister]

bmj:

Hedging and speculating are not black and white when it comes to farmers trading futures to protect what they are doing in the field. Many years ago I met a corn farmer in Iowa. He told me how his corn hedging was going that summer. He first sold Dec corn at $2.96(I really don't remember the prices, but play along with me anyway - the story doesn't change). The market dropped to about $2.83 and he bought in his short. Later the market rallied to 3.05 where he sold Dec corn futures again. This time the market dropped to $2.89 where he bought it back in. And so on. I think he was bragging more than anything. But the big question is, was he hedging or speculating?

In my view he was indeed hedging. He was never long corn futures, always short and always short an amount less than what he was producing.

When you are trying to protect what is going on the field, it pays to avoid the "black or white" ideas of hedging. As things change in the market and in your field, the size of your hedge maybe should change. Even go to zero (or even). It's a grey thing - not black and white. Problem is that lots of farmers lose sight of what they are meant to be doing in futures and start doing things for the wrong reasons. I think that's what Tom was talking about when he said 80% of farmers begin hedging but end up speculating. And Tom's right - there is indeed a fine line between hedging and speculating. I guess that's what I'm trying to say here as well.

[Steve]

Brokers and advisers have to eat crow when their predictions are wrong in the commodity market place, and the farmers lose money or go broke.

Try it as a farmer and not as a grain buyer, or using dad’s money (debt free) and you will see marketing in a different prospective.

Why grow grain and gamble with Mother Nature if you can make more money by buying back, selling, changing your position and %#*&^%# in the commodity marketing system.

Yes I did attend marketing seminars and l think understood most of the suggested marketing systems.

But in the real farming world most farmers sell to local feedlots, oil crushing plants, local grain buyers using GPO’s, basis contracts and offered futures prices.

So we don’t really need the CWB or brokers

[melvill]

Alright, Steve. Now you're treadin' on my turf and I'm tell yu tu get outta town! (You know, somehow a person just can't sound very tough through a key board.)

Two points. I advise my farmer clients to pay very little attention to commodity brokers' recommendations for when to buy or sell. That point came to me from two different brokers in two different companies. They told me that a broker's job is to execute futures and options trades, not give advice.
A broker's outlook on the market can change several times in a day because they are bombarded with changing information before, during and after trading hours.

Yes, advisors aren't always successful in accessing market outlook. No one is 100% bang on. (Of course the most successful ones are the ones that sit in on the sessions at Coffee Row University and only make forecasts after the fact.) However, my experience is that, for many, maybe even most farms, any market advice is of significant value because away too few farm managers get little or no market information. In my mind, market info means current price info, market analysis (why are prices changing or why not), market outlook (forecasts) and strategies.

Have a look at some of the articles at http://www.agric.gov.ab.ca/newsletters/market_clippings/index.html , particularly "Are You a Good Farm Marketer".

Okay, Steve, I'm ready. Grin.

[chaffmeister]

Steve:

1.If you are dealing with a broker or advisor who is giving you predictions, I suggest you make a change.

2.Your comments about trading as a farmer, not as a grain buyer “or using dad’s money” have a truculent ring to them. I don’t think anyone was trying to offend you. Bmj, Tom and I were all doing exactly as you suggest – looking at risk management from a farmer’s perspective. Sorry if you were offended.

3.You ask “Why grow grain and gamble with Mother Nature if you can make more money by buying back, selling, changing your position and %#*&^%# in the commodity marketing system?” Why indeed!? If money is what motivates you, I can suggest a lot of other occupations that can pay more than farming with a lot fewer headaches and less risk. You obviously don’t agree with the strategies used by others and seem content with GPO’s. That’s fine. But it doesn’t mean that the other strategies are wrong.

4.I agree that farmer’s don’t need the CWB or brokers. Any support hired by a business should bring value to that business or provide something needed that the business (or individual) can’t or won’t do itself (himself) – that includes accountants, hired hands that shovel grain, drive trucks or clean-out pens as well as consultants or advisors. The only time you should use a broker or advisor is if they bring value to your operations. (Although the CWB argues that it gets a premium over what you would get with an open market, it has never proven it.)

5.I am not a broker. I work with clients throughout North America (and beyond) in a variety of capacities, mostly relating to risk management. I don’t work with farmers although I have in the past. If I did I would take the same position with them as I do with our large corporate clients – if you can’t make much more than our fees by using our information, data, analysis, advise, etc, then we aren’t adding value and you should drop us. That being said, we still have the same clients as we did many years ago – so we must be adding value to what they do.

6.I work in the real world too. Farmers are no different that other businesses selling their wares. There are many different ways to do it – find the one that works for you and stick with it. Sounds like you have.

[chaffmeister]

Most of you expert grain marketers are missing the point that Steve has been trying to tell you on Basis Contracts and 90 day storage tickets.

If enought farmers are in to these two type of contracts it weights on the the market stablising it or pushes the market down. Because the market has captured the commodity and all that is left is poor price. Now if most farmers would use a GPO ( Grain Pricing Order) and ask for a price, it has a better chance of pushing the market up becauses grain handlers need guarantee stocks.

The CWB is a good example of 90 day storage or a basis contract. They know and everyone else knows they have the commodity and just the price is left to give to the poor producer (average or worst price).