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Senior Contributor

Re: Floor Talk October 10

Yes, there was a short time window when it did not make sense to hedge because we were in a bull market for corn. If you've read what I have written I have made it very clear that the only time a producer should hedge a crop is when you're in a secular bear market and a critical time approaches when a decent bounce in price occurs and when the risk of where the market could go to the upside is substantially lower than the risk of where it could go once the bear trend continues. 

 

That's what a good adviser provides, that kind of information. How do you know they are a good adviser ? Ask then for a year or more of their past recommendations, and then follow them for six months forward. If they have proven themselves in the past, they probably have a very good and durable system for figuring out where prices will go in the future.

 

We are in a perfect example of this right now. Corn has been in a bear market for five years, it made a major top in May followed by a pretty decent bounce, Now is the time to start selling into that bounce, because the maximum upside potential of the bounce is maybe as high as $4.05, but the downside max is somewhere around $2.87. On top of that the fundamentals favor lower prices due to the size of the corn crop. So to increase one's income, start selling now and sell a bit more all the way up to the $4 area if we get that high. Eventually the bear trend resumes and you've placed a good portion of your corn above the market. 

 

In the 2006-2012 period, there were few times where it made sense to hedge, because the trend was continually up. That's when you tell your adviser thank you very much but I don't need you now. 

 

I do not advocate using hedges when markets are rising, But when they are falling, especially for the last several years when they were falling a lot, hedging made sense, It makes even more sense now because the price of corn is so close to the cost of production that you're no longer looking at profit margin compression but actual operational losses. That's when hedge programs not only make you money, they save your business.

 

I don't think what I am suggesting is all that radical an idea., The largest banks do this all the time when they underwrite bonds for national governments as well as companies. They sell bond futures in advance of the underwriting so as to hedge the interest rate their customer has to pay on the issuance. Same concept, different market. They use those hedges far more in rising rate environments than in falling rate environments because its when rates rise that the issuer is at most risk.

 

If you ever took a mortgage and got your rate locked in months prior to closing, that's how the bank did it. They used a financial futures contract or an interest rate swap to lock in that rate, and passed that rate lock on to you. These are financial derivatives, and there's trillions of dollars of them in place to help the financial industry manage risk and maximize their incomes. Its amazing that only the large farm groups do the same in the commodities markets.

 

I think you would be wise to embrace these hedging programs as your larger competitors have done. It makes sense and can improve your profitability when profit margins are shrinking. I have no dog in this hunt, as I am not a broker or dealer. I am not forcing anyone to do it, just suggesting. If no one likes the idea fine, but there's no reason why people here have been disrespectful to me for making a suggestion that can help their business. 

 

Anyway, that's a further clarification of what I have been writing, I hope its clearer to you now. 

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Senior Contributor

Re: Floor Talk October 10

You're a funny guy gio, at least I get some laughs when I talk with you.

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Veteran Advisor

Re: Floor Talk October 10

We talk?
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Senior Contributor

Re: Floor Talk October 10

Converse. 

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Honored Advisor

Re: Floor Talk October 10

I can't believe that I wasted time reading this entire thread.  This is just a rinse and repeat of someone who claims to know it all and talks down to everyone he/she speaks to.

I have read enough of the gloom and doom posts about these markets in the last year or two.  No need to read anymore.

Most of us that post on here have enough farming experience to put anyone who claims to know it all to shame.  Somehow, I think we will survive in these low market times.   

BTW, the markets are very complacent over our food supply and have been for quite some time.  The prices have been held down, much lower than they needed to go.  Just as they rose to levels not needed when grain was in shorter supply.  That's what paper grain trading gets you.  

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Senior Contributor

Re: Floor Talk October 10

If you think I am talking down to you its only because you won't admit that you don't understand the economics of your business. It seems to be a common problem in your industry which is why 40% of your colleagues have to take American taxpayer handouts to the tune of $20 billion a  year just to stay in business. I don't claim to know it all - I can't farm anywhere near as successfully as you do, and you cannot manage capital as successfully as I. If anyone thinks they know it all its you and people who share your ill-fated opinions, because you have one foot on a banana peel and the other in the grave and you don't even know it. Is there any industry in America that has the same bankruptcy rate as the small farm ?

 

Your profits have been compressing now for five years, and the only reason you have survived is because that compression has not yet reached a critical stage where profits turn to losses. But based on the testimony of your fellow farmers, your costs of production only go up, and now the prices you receive for your products has fallen almost to the point of that cost. If those lines cross, you are dead. And the only ways to avoid that terrible fate you refuse to accept, blaming paper trading and relying on misguided hope as your only strategy to avoid a certain doom.

 

The reason your crop prices keep falling is because you think that increasing the volume of your production will make up for the falling unit price you receive for that production. A first year economics student who knows nothing about running a business can spot the fallacy of that practice. You have only two options : increase your capitalization so that you can employ economies of scale in your work like the huge farming companies do, or increase your revenue streams by using the financial engineering tools and accepting the advice of people who know how to deploy them. A one dollar drop in the price of corn from where we are today, which would bring corn back to its long run average price for the 1986-2006 period, will devastate most of the corn farmers in America, only have their carcasses picked clean in bankruptcy court by the well capitalized big farming firms. The farms will continue to produce, but you won't own that production. You can either learn to understand the fate that lies before you and act now to protect yourself, or prepare to leave your farmhouse. I don't know when it will happen, but its going to happen and based on the macro-economic issues of the overall economy, it will happen sooner rather than later. 

 

Will you be ready when it happens or will you still be thinking you will survive, making the same mistakes and believing the same myths that the owners of all other failed businesses subscribed to before they were buried ? You've been warned, the ball is in your court, only you can make the decision to save yourself. Good luck, you're probably going to need it.

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