Taming The Bulls & Bears

Children always ask the most difficult questions. A child looks up to you, sees what he or she believes is an expert, and then the questions begin: How tall is God? Why is the sky blue? Where is Sesame Street and why can’t I play there? And of course if a parent says “I don’t know”, it just creates even more questions from the curious child.

Those same unanswerable questions exist in commodity marketing as well. Every day commodity traders, elevator managers, millers, and farmers go to work, trying to find answers to all the unknown questions: How big is the crop? How far will the dollar drop? How much wheat will we export? We just survived another summer of wild weather, and have finally received an answer to the biggest question of all: How big was the crop? That question is unanswerable in the spring, but it does not mean that people don’t try. Even more alarming is that every farmer looks up to an expert and asks that unanswerable question “Where will prices be at harvest?” and we expect an accurate answer.

The experts are everywhere you look, and probably mostly concentrated in your local coffee shop. I am certain that each of you had a specific date written on your calendar for the first killing frost. It somehow related to grasshoppers, thunderstorms, lightning, blizzards or maybe even the thickness of a beaver dam, but you knew that date. You were an expert, sharing information passed on from your grandfather.

Everywhere we look, another expert appears on television to tell us about a high pressure dome that is going to cause a drought in the Western Corn Belt. We turn on a radio, and listen to another expert tell us that there will never be enough fertilizer to grow the crops to feed the world. From where do these experts come? What makes them experts? But more importantly, why do we listen to these experts?

I am a firm believer that commodity trading is a zero-sum game. For every winner, there is a loser. There has to be a buyer for every seller, and someone will be on the losing side of the trade. If you are correct fifty-one percent of the time, you are a winner. For farmers, commodity marketing is not a game we choose to play. It is a necessary business decision we have to make in order to farm. We cannot avoid commodity marketing, but we can make sure we ask the right questions, of the right experts, in order to make the right decision.

I believe this problem of unanswerable questions is the fault of farmers, and not the experts. We are the ones who keep asking the questions. We are the ones who look up to the experts and expect them to know how many soybeans China is going to import, or how big of a wheat crop Australia will harvest. We can play “Shoot the messenger”, but we are the ones who asked in the first place.

All I am asking is that we have reasonable expectations when we turn to the experts. I believe it is fair that we ask an elevator manager about cash grain trends. Have there been any additional low protein wheat bids? Is there a shortage of cash grain hitting the market? Your elevator manager sees this information every day, and can offer his or her opinion about future basis movement. Just remember it is an opinion. If we ask the local elevator manager about the size of Australia’s wheat crop, we are pushing our luck.

It is your job to think before you ask. Can the question be answered? Is this the appropriate person to ask? Will this change my marketing decisions? And if the expert claims to know the answer, be extra cautious when using the information. It is time for you to admit to yourself that you know no more than the other guy down the road. You can make better decisions by marketing your grain above your cost of production, utilizing your cash flow projections, and watching your ever changing break even prices, but there is very little insider information that farmers can utilize on their farm. If we know it, so does everyone else. We can gamble and guess, utilize the seasonal trends, and work with the carrying charges, but there are no guarantees.

One of my favorite answers of all time came from Ed Usset, grain marketing specialist at the Center for Farm Financial Management at the U of MN. Ed’s answer was so good, it made the quote of the day in the Star Tribune, an urban paper where most readers don’t even know what a wheat field looks like. Ed’s answer came in the January 2007, when commodity prices were skyrocketing. [concerning grain markets] “I don’t care what the question is, the answer is ethanol.” There was a blanket answer for the question “Why are prices going up?” and Ed summed it up in a few words.

We can become better aware of our crop marketing limitations if we just stop and ask ourselves “Is this an answerable question, or am I just getting an opinion?” Sometimes the line is blurred, but often we just ignore that line. Be more skeptical, know your limitations, and market your grain with confidence. You produce the stuff, so you are as much of an expert as the next guy.