Volitility in markets... how to cope?

[TOM4CWB]

Dear Charlie,

I see this on VERASUN... and growers in the 'designated area' that have depended on the CWB have experienced many of the same losses as Corn growers in the US.

SOLUTION?

As long as volitility is the factor driving the markets... then we need contracts to deal with our produce, that sell cash and trade the volitlity seperately... so we don't colapse the system we need to sell our produce!

ETF's?

How can this be done better than we are doing it now?

Here is the VERASUN article:

"Farmers Fighting Back after VeraSun Cancels Corn Contracts
"Farmers are fearing the worst after ethanol giant VeraSun files for bankruptcy and informs corn producers their contracts are null and void," according to KEYC Television in Mankato, Minn. "News 12's Carly Aplin tells us how those farmers are taking action. Mark Kuhn says, 'We're all in this together.' Over a hundred Iowa and Minnesota corn producers met to decide how they would respond to VeraSun execs after being informed their contracts would not be honored. Bob Swedberg says, 'I've got a family, I've got kids in college, I've got daughter in law school... I made business decisions based on sales that I make.' Bob Swedberg is contracted to sell 120,000 bushels of grain at various prices ranging from as low as $4 to over $7... none of which are as low as the current market price of around 3.20. Bob Swedberg says, 'It's going to cost me $200,000, the loss that I'll incur from this deal. 'Farmers who entered into contracts with VeraSun received letters earlier this week stating the ethanol giant could not afford to uphold their contracts. The news comes after VeraSun filed for Chapter 11 bankruptcy protection earlier this month and decided against opening the newly constructed plant in Janesville. Mark Kuhn says, 'It doesn't build trust between producer and the VeraSun company.' The contracted farmers were told they could sell their grain elsewhere, but the price for a bushel of corn would be substantially lower than the price originally contracted with VeraSun."

[agstar77]

Old Adage " When something appears to be too good to be true , it probably is". Ethanol is another bubble, too fast , not enough planning, too many oportunistic capitalists. If you look at ADM, they are doing a more diversified and methodical approach to bio-fuel.

[charliep]

By ETF, do you mean exchange traded funds? Just curious how these would work for agricultural commodities?

Will note in my newsletter search this am that verasum was quoted as bragging about the money they made on their futures trading activities. There have been cases in the past where companies have harvested (maybe you have a better term) profits from the futures market to look after poor management in other parts of their business only to leave themselves exposed on the price risk side.

[Burbert]

Another fraud occurring in Amerika, BORING, SNORING. This is so common place in the market today, why even write about it. Think they'll get away with it, you bet and others are watching to see what happens. At the same time, others are squirming and wiggling to get of of contracts that were signed. Easy declare that you are broke. Start a new company under another name, back in business. Lack of confidence, in the marketplace, you bet, with GOOD REASON!!!

[charliep]

Interesting comment is that 99.9 % of grain and oilseed sales occur without any problems. The system works today whether you like it or not Burbert.

What is needed however is ideas that manage risk during the 0.1 % of the time that things go wrong. I note I drive to work everyday safely. Someday I will have an accident, however (my be my fault or someone elses). I drive carefully and defensively to reduce the risk. I wear a seat belt. I have car insurance. I do the right things within my control to minimize the likelihood it will happen and reduce the negative impact if it does happen.

[bucket]

Tell me someone - how is this different than signing a contract and only allowing 60% acceptance. Either way your grain is worth less than you thought. The board supporters will say the cwb guarantees the payments not the contract. But in my way of thinking verasun and the cwb are doing the exact same thing.

[TOM4CWB]

Bucket... I agree... the CWB can't do what they say they can do... so they are trying to do what the Pools did in 1930-33. Will it work just as well as it did then?

Probably.

WHO here actually thinks the volitlity is over... and life will return to normal... with basic fundementals driving the markets?

Wouldn't the history books say that this is VERY unlikely?

WHAT structures have changed... to stop the volitlity trade that is now driving all our markets?

Every trader I hear... is making money (paying their daily bills) off the volitlity... NOT off market fundementals. SO why will this STOP anytime soon?

SO my question stands... who has a serious solution to trade the volitility... and manage that risk?

ANYONE can tell we have plenty of commodities... if we all cut back 20% on consumption... there is a huge buffer... of stocks...

WHAT have I missed here?

If the economies grew for 25 years... why not retract for 5 years... will consumption economics always rule?

THINK outside the BOX.

[wmoebis]

For ME;
I would rather have my bins 40% full of $8.00 WHT than empty of $5.00 WHT

[Burbert]

So tell me Charliep, where do you find the stats on completed contracts in Ag, or for that matter outside of Ag., 99.9% are completed effectively. WOW, were you once in used car sales? Guess the unfortunate farmers dealing with Verasun are in the .1% who are just plain unlucky. Having said that, they should simply abandon their fight and continue signing Ag contracts. WORD OF CAUTION watch the mouse printing on the bottom and the back of those docs.....

[charliep]

Burbert - Actually I am going to throw the challenge back. Name a company business failure in Canada that cost farmers money on unfulfilled contracts and put a tonnage to it? what could have been done to prevent this or protect farmers from the financial consequences?

[TOM4CWB]

Charlie,

Interesting thought:

"Name a company business failure in Canada"... there have been some... in the 'special crops' industry... but as you say it has been a very low amount by %. If growers didn't deliver... even if it was contracted... there was no obligation under Canadian law to fill the contract at a lower value... growers are first in line under the Canada Grain Act... even before banks other secured creditors.


Once growers don't settle/cash cheques beyond the 90 days of delivery... that is where problems with losses have generally mounted.

Isn't this interesting...

"LAW OF THE LAND
July 24, 2003
Grain Dealer and Bonding Company go to Court
Anders Bruun LLB
Grain dealers are required under The Canada Grain Act to post a bond or other
security with The Canadian Grain Commission to ensure that their obligations to
producers will be satisfied. This system has worked fairly well in recent years to ensure
that farmers do not suffer a loss if the grain dealer that they have been dealing with goes
out of business leaving them unpaid.
However, a judgment recently issued by the Court of Queen’s Bench for
Saskatchewan shows that the matter does not end when farmers have been paid the
money owing to them from the proceeds of a bond. The case before the Court in
Saskatchewan involves Naber Seed & Grain Co. Ltd. Here the bonding company,
London Guarantee Insurance Company, is suing Naber Seed, several related companies
and a number of individuals for the $1,000,000.00 which London Guarantee was obliged
to pay to the Canadian Grain Commission when Naber Seed failed to honour obligations
to producers.
In 1997 London Guarantee issued a bond in favour of the Canadian Grain
Commission with a value of $100,000.00 on behalf of Naber Seed. In October of 2000,
the amount of the bond was increased to $400,000.00 and effective October 31, 2001, the
bond was increased to $1,000,000.00.
It appears that the original $100,000.00 bond was supported by an Indemnity
Agreement signed by Naber Seed, the related companies and the individuals. LondonGuarantee alleges that Naber Seed and the related companies and individuals are obliged
under this Indemnity Agreement to reimburse it for the money which London Guarantee
paid to the Canadian Grain Commission. However several endorsements increasing the
amount of the bond, first to $400,000.00 and then to $1,000,000.00 were signed by only
one of the individuals and one of the companies, Naber Seed & Grain Co. Ltd. None of
the other persons being sued signed the endorsements to increase the amount of the bond.
From here on it gets more complicated. It appears that the Indemnity Agreement
contained a clause which allowed London Guarantee to make changes to the terms of the
bond without giving notice to the persons providing the indemnity. It would probably
come as an enormous surprise to most people to hear that an obligation which they
assumed to be a $100,000.00 obligation had turned into a $1,000,000.00 obligation.
To complicate matters further, the individuals did not read the Indemnity
Agreement which they signed. They said that they were given only the signature page of
the document for their signature; which they provided. They did not ask for or obtain any
explanation with respect to the Indemnity Agreement, nor did they obtain independent
legal advice. The one individual who did have the entire document stated that he did not
understand it, but did not seek any additional clarification of its meaning because,
apparently, a representative of London Guarantee had told him that the Indemnity
Agreement was like an insurance policy.
London Guarantee argued that because the individuals did not pay careful
attention to the contents and meaning of the document they had been careless and for that
reason should not be excused from their obligations. The individuals in turn argued that
whether or not they were careless was irrelevant because London Guarantee hadmisrepresented the document to them as being like an insurance policy which has no
personal liability attached to it.
These arguments and counter-arguments came forward in a preliminary hearing
intended to determine whether this matter should go to a full trial. London Guarantee had
argued that a full trial was not necessary and that they should be given a Judgment in
their favour for the $1,000,000.00 plus interest and costs. Naber Seed and Grain Co., the
related companies and the individuals had argued that a trial was essential so that the
defenses which they wish to raise could be put forward properly. Following the hearing
the trial judge ordered that a trial be held as the dispute could only be properly
adjudicated upon with a trial.
This case highlights the risks that are being assumed by individuals and
companies who are required to post bonds for the purpose of carrying on their business.
More generally, the case highlights the risks of signing documents without reading or
understanding them.
This article is for general information purposes only and should not be taken as
legal advice on any specific subject."

VERY INTERESTING WHAT GOOGLE BRINGS UP!