Marketing without the CWB

[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).

[chaffmeister]

FWIW - Steve was making a point about basis contracts and GPO's; I made the point about 90-day storage tickets.

Traditional basis contracts do not weigh on the market as you suggest. The market has not "captured the commodity" through these contracts. But maybe we're talking about two different things (which is what I suggested to Steve earlier). When I talk about a traditional basis contract I am talking about a contract where the grain has NOT been delivered into an elevator - and in fact, it MUST be priced before it is delivered to the elevator. If you and Steve are talking about a another kind of basis contract where a basis is agreed to, the grain is delivered AND IS PRICED SOMETIME LATER(after delivery), then that would be totally different. That contract would be the same as the 90-day storage ticket in terms of how the market can exploit it. ANY PROCESS, CONTRACT OR AGREEMENT WHERE GRAIN IS DELIVERED INTO THE SYSTEM WITHOUT A FINAL PRICE ATTACHED SHOULD BE AVOIDED AT ALL COSTS.

So, are we talking about two substantially different basis contracts?

[melvill]

kernel, I don't agree with you on the basis contract issue but I do agree with what you said when you said that 90-day "storage tickets" weigh on the market.

When a grainco or crusher takes in product on a 90-day ticket (most are now at 60 days) it hedges its upside price risk by buying futures for that product. Of course, that 60-day storage is most often used by producers as a way to deliver a product but still participate in or wait for any cash market rallies.

Usually in the fall during harvest, a significant amount of product, especially canola, is delivered into the system and put on these "storage tickets". While the seed is "in storage" its value can change by the basis changing or by the futures changing.

Interestingly enough, grainco staff tell me over and over again that most producers price out these "storage" tickets on the second or last day before they expire.

When a producer prices the grain, that triggers a significant amount of selling of that futures as the graincos sell their bought futures about 60 or 90 days after harvest. That selling is bound to move the market down.

In addition, basis levels later in the fall tend to be wider (weaker) than earlier when much of the seed was put in "storage".

The producer with a "storage ticket" is hit with a double whammy - declining futures and widening basis. I only advise my producers to use "storage tickets" either when they're critically shortage of storage or they've got a little bit of tough product that the buyer is willing to blend. Otherwise don't touch 'em!

[chaffmeister]

Lee:
You've added some good stuff to this point. The one thing I would say to clarify is that the grain companies are long futures against sales they made (not to hedge the unpriced 90-day contract). They just don't lift that hedge until the grain is priced.

[chaffmeister]

I agree with the 90 or 60 day storage ticket and would suggest that a low or "0" basis contract offered for say November furture delivery, If enought tonne is sign in on this contract it tends to weigh on the market.

For example I have watched both 90 day and low basis price in the fall, locked in on November price. Tend to lower prices untill all of contracts are captured. You can bet that the dec. 10 price is normally a lot higher trying to capture commodity after the Harvest fools market.

That why I lump 90 day or 60 day contracts in with the Basis contract because even though the commodity is not delivered it has been captured and must be delivered by a certain time in the future.

[chaffmeister]

Steve did you notice how we drew out the boys who make their living teaching or broking in the commodity to defend a system that was invented for buyers not sellers of a commodity.

Now for their system to work properly for the producer their should be a astock exchange for price of inputs at the farm level. Not a take it of leave it price that we have now for in and output.

My theory is if more farmers would ask for a price on their commodity (ex. GPO) instead of taking one like they do now it would tend to move prices higher or stead them.

But then their would be less teachers or brokers needed. Go ahead boys and defend your speculating and brokering jobs.

Sorry about that, I do learn alot from you boys on what not to do. But there is times you are not thinking like a producer when it comes to marketing.

[Steve]

Melvill & Chaffmeister.

Thanks for your comments.

My comments were made in general context related to personal experience and not pointed at any individual on this thread and not meant to be belligerent.

I know it’s not possible to forecast future grain prices and always be right, but if I pay for advice I expect value added and it better be more accurate than a weather forecast.

Today’s farmers can get free reports, by telephone, radios, TV news, computers – internet, access to local grain buyers price list, grain carryovers, world grain prices, grain and weather conditions worldwide at no extra cost. Most farmers are capable of analyzing the results and use marketing strategies to stay in business.

Farmers don’t have the time or need to sit at the marketing table everyday as suggested by some advisors and are successful in marketing their grain using the marketing system I suggested earlier on.

Chaffmeister-- You are wrong to put hired labour help in the same category as management, (adviser) and I best not say anymore.

Chaffmeister – you seem to be a little confused on the basis issue in our discussions so I will try and clarify my comments.

Basis are applied to every grain marketing transaction and it can be disclosed or included (it is simply the cost of handling and marketing).
I call a basis contract a bribe by the grain buyer, so the producer will commit to deliver grain in that month (at o basis that means he will handle and market your grain at a loss to him and no cost to you) “BS” do you really believe he can stay in business if he keeps operating at a loss. ( basis are hidden)

1GPO’s marketing (basis included in the asking price) no need to mention basis (price advantage for the producer).

2Basis contract locked in (grain stays un-priced until you order to sell) and the basis are applied to day price at time of sell order, grain delivered after sold (price advantage grain buyer)


390 or 60 day storage contract –un-priced grain (basis will be included in the offered day price) no control on basis, no need to mention (price advantage grain buyer) I don’t like to use.

4Sell to offered future price (basis included in price.) no need to mention basis (producer’s choice to sell-- day price)

That should be as clear as mud in the eye.