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I have followed this discussion with a great deal of interest. My exposure
to farming is limited to a couple of summers on a ranch/farm in my youth. I
am sure that all of the worries expressed are real and have been there for
years. With the use of options I am sure you can reduce the risk and lock in
price. At $7.00 wheat you could buy puts and if the market dropped you would
make money. If it rose your insurance would expire but your crop would be
worth more. If your long range weather forecast seemed to indicate that your
crop could suffer sever damage, you could buy some calls. If the damage
occurred, the calls would go up in value. If no damage occurred you could
sell the calls at a small loss or maybe even at a profit if the volatility
increased due to the scare. It is much easier to hedge when you use the
product and lock in a price for wheat, corn or beans and therefor know what
your end product will cost. You can then establish a price that will allow
a profit. Thank you for the insight. Ira.
Keith Gilland wrote:
> I have been reading the comments on beans and decided I had to respond.
> It seems that nobody has any idea of how a farm operates. This is not
> too surprising as everyone knows that food comes from the grocery store.
>
> You ask why do we plant beans if we can't make a profit. We basically
> have a choice in the midwest to plant wheat, corn, or soybeans. Our
> choice is to decide how many acres of each to plant based on cost to
> plant, crop rotation, and price outlook. I do not plant wheat because
> our soil and climate favors corn and beans. There is basically no
> choice to plant or not to plant. It has to be planted or you are
> broke. We have fixed costs that have to be paid such as land,
> machinery, and taxes. Most of us also have the bad habit of eating and
> also like to heat our houses and wear clothes. NO PLANT = NO INCOME or
> hope of any. If we plant we have a chance of making money but if we
> don't, we are broke. Simple as that. A lot of us will make money with a
> little luck in order to get a good crop, some prudent (and lucky)
> marketing, and most important, our foreign competitors and also our
> friends and neighbors have a poor crop. Kind of like futures trading,
> someone has to pay the bill.
> You question our government payments. We do also. A new program was
> developed a couple years ago and no one knew how it would work until
> prices crashed. (for your information, farm programs are called food
> security programs by the government, basically meaning plenty of cheap
> food) We have what is called a marketing loan which means there is no
> floor under prices. They will keep going down to market clearing prices
> wherever they are. Our government needs large ag exports as they are
> the only hope of balancing our trade deficit. They said we will sell
> below our competitors price. Guess what. Our competitors lowered their
> price too and also devalued their currency to boot. Most countries try
> to support farm income in some way and most of them much higher than
> us. The price supports in Europe are ridiculous but coming down. They
> have large supports to guarantee food supplies as they have gone hungry
> because of poor crops and wars. Something we in our bountiful country
> have never endured and hopefully never will have to. The government
> costs of this farm program are going to be very large because of the way
> it was set up to promote cheaper exports. They had no idea it would get
> this cheap. Please don't blame the farmer for this expense. We are not
> getting rich off it and in fact losing much money on it.
> Now to answer the complaint of farmers not hedging. Many of us do
> hedge. It is not as easy as you might think. First we have to have a
> profitable price. This is crop size divided by expense. Then we have
> to balance that against the size of crop we anticipate harvesting. This
> is much more difficult than the academians who have never tried it would
> like you to believe. If the weather is favorable you should have sold
> more earlier before the price went down. If the weather is not and you
> have a short crop and you sold too much you are in great trouble. You
> don't have enough crop to cover your hedge and also your production cost
> is much higher with less bushels to spread it across. Try selling corn
> at 2.50 planning on 150 bushels and ending up with 25 bushels and
> futures at 4.00. You are broke. Even if you have a good crop and the
> price goes up to 4.00 (1996) in many cases the banks shut off funding
> for margin calls at the top. You are screwed by doing what the
> "experts" including brokers, bankers, and politicians say you should to
> be prudent and efficient farmers. Funny thing they are mysteriously
> quiet for a while afterwards. If you can tell me what kind of weather I
> will have, I can tell you what kind of yield I will have. If I know the
> yield of my corn and beans this fall I could do an excellent job of
> hedging. Therefore if anyone out there, especially the person who
> TEACHES at universities as he knows everything about risk insurance, can
> tell me what my growing season will be like I will do an excellent job
> of selling my crop. Without knowing yield, hedging is not much
> different than speculating. The only difference is you can only sell
> the crop once. If you are wrong you are very wrong. How would you like
> to have the opportunity to make one trade each year and have live with
> it for two to twelve months, right or wrong. How good of an analyst are
> you?
> Things will get better again out here as they always have. If I didn't
> think that I would have quit years ago. That is why I will plant corn
> and beans this spring and next. I will not buy any machinery (don't buy
> John Deere stock) and will cut expenses where I can without giving up
> efficiency. The main thing is to make enough money in the good years
> and keep it to carry through the bad. Farming is cyclical and always
> has been. Unfortunately many farmers have had poor crops through no
> fault of their own. I had 160 acres of beans and 200 acres of corn
> completely hailed out last year. Sure cut down expense of combining.
> Some of these farmers are bankrupt and out of business because of this.
> This has nothing to do with being efficient or hedging but just luck.
> If anyone wants more specifics on our get rich quick food security
> program I will try to answer your questions, but please don't complain
> about something you know nothing about unless of course you just got
> done eating, then you don't have to think about food.
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