Stirling Moss, a famous racing driver of the 1950s, once said that the male of the human species will admit to not being good at just about anything except being a good driver or a good lover.
If we are talking about some of the grain farmer subspecies, we might add a third skill, that being a good marketer. But just what is a “good” marketer anyway?
Defining “good” will become even more important with the impending changes to the wheat board. It’s not just a joke to say that among the many implications is that farmers, and the rest of the industry, won’t have the wheat board to blame anymore. Not getting enough cars at the local elevator? Wheat board’s fault. Can’t grow high-yielding varieties? Wheat board.
Price too low? Wheat board. “The average price is not good enough,” or so we’ve often heard in this debate.
But after next Aug. 1, farmers as a group will still receive an average price. That means half will sell for less than average, but they can’t blame it on the wheat board.
Perhaps the overall average price will be higher because the board monopoly has ended, so everyone will be better off. However, that implies that the price of Canadian wheat and barley will rise because there will be several companies bidding on a sale to an overseas customer, rather than one as is the case now. Presumably that won’t happen, so if there is to be higher overall revenue, it will have to come from higher efficiencies and therefore reduced costs in the system. Since the grain companies are also looking to capture some of those efficiencies and add them to their bottom line, it means that farmers will have to be on their toes.
Now that the board is losing its monopoly, it seems that some of those who advocated the change are pointing that out, and doing a bit of butt covering while they are at it. The Alberta Government, which for decades has been saying that farmers would be better off by doing their own marketing, now seems a bit more cautious.
In a recent release, an Alberta Government risk-management analyst warned that “producers choose not to use pooling strategies in order to capture higher pricing opportunities may also be exposed to greater downside risks.”
Suggesting that farmers consider futures and options, the release says, “The potential benefits from these more volatile markets can be measured using simulation and traditional option pricing theories that calculate the actual probability of achieving higher target prices resulting from increased volatility.”
We’re not just sure what that means, but if it means farmers can increase their returns by using futures, it’s not correct.
There are several misconceptions about futures, such as the often-heard phrase, “Listen to what the futures market is telling you.” If the futures market is functioning properly, it tells you precisely nothing. Futures markets were invented specifically because it is impossible to tell the future. Grain merchants needed to protect themselves against changes in price between the time they bought grain from farmers and the time they delivered it to a customer. Futures markets determine today’s price for delivery in the future, not the future price.
Another misconception is that farmers can “hedge” using futures. Perhaps it’s just terminology, but that’s wrong too. A “hedge” is as described above — an offsetting cash/futures sale by a grain merchant who makes two transactions — buying the grain from the farmer, and selling it to a customer.
Farmers only make one transaction — the sale. Unlike grain merchants, farmers are always long, and therefore they are always speculating. They use futures to lock in a price at a different time than they physically deliver the grain, which may well be a good idea, such as to lock in a profit. But that’s only buying peace of mind, or buying insurance to keep the banker happy. It’s speculating that today’s price is better than a future price, but if the futures market is functioning properly, there’s a 50-50 chance of the price being higher or lower when it’s time to deliver.
If a farmer follows a consistent sales pattern — every month, every quarter, whatever, but consistently over a few years, his or her price will end up exactly the same as any other strategy. If using futures is part of that consistent strategy, say by locking in a price for part of the crop before it’s harvested, then the price will actually be slightly lower by the amount of the commission fees.
Futures have their place, and part of being a good marketer is using them directly or indirectly to lock in a profit.
If there are farmers who can do consistently better by using futures, then more power to them. They should forget about all that expense and worry of planting a crop and simply trade futures instead.