Kub's Den


By Elaine Kub
DTN Contributing Analyst

Let's say you've been asked to teach 500 farmers, in groups of 50, how to be better grain marketers and get higher prices for their corn. What would your presentations include? Futures and options strategies? The importance of pre-harvest hedging during the new-crop market's spring highs?

Now let's say your audience of farmers has no access to hedging, via options, futures, or even forward grain contracts with their local buyers. Their only local buyers are rather underhanded small-scale traders who've never heard of a forward contract, nor would they trust a farmer to deliver on such a contract, nor could they be trusted to pay the agreed-upon price. There's no local price history to even analyze seasonal highs throughout the year. So, what are you left teaching?

I'll tell you. The only marketing strategies available to many of the world's farmers are: 1) Attempting good storage that keeps weevils and rats out of their 100-kg bags of grain; and 2) Planning to stagger sales in multiple increments throughout the year, averaging prices higher than the harvest lows. Also, without available lending or crop insurance, it's extremely important to budget one's costs of production and consider the profitability of the market prices.

While I was in Uganda this month on a USAID-funded Farmer-to-Farmer project administered by Catholic Relief Services, I pared my usual grain market presentation down to those three topics, but I had even more constraints -- no PowerPoint slides, no electricity, and frequent rain showers sending me and my flipchart and my audience scurrying for the nearest empty mosque or church or school.

Shake your head, sure, but also take this as an invitation to do an intellectual exercise for your own farming operation. Think of some hypothetical constraints that could happen to you. What if you had to farm without certain key personnel? What if your main road washed out or was otherwise impassable? What if your best grain buyer goes out of business? What if a certain chemical becomes unavailable? What's Plan B? Determining that answer can build resiliency on your farm.

The following is a conversation I had with a woman during the Q&A portion of a recent presentation.

Me: "And that's why I encourage you to store the grain and sell it maybe three or four months after harvest."

Farmer: "Last season I had a great yield -- 12 bags from my 1 acre -- and I would have been profitable except that weevils ate the grain."

Me: "Your local farmers' cooperative can sell you better bags, with triple layers to keep out the weevils."

Farmer: "Okay, but the rats eat the bags."

Me: "Keep your warehouse clean all year and fumigate to keep out the rats."

Farmer: "Okay, but the grain still went bad in the bags."

Me: "Was it dry?"

Farmer: "No I didn't have a tarp to dry the grain in the sun."

Me: "Well, buy a tarp. It's really important to store the grain dry."

Farmer: "I know, but I can't afford to buy a tarp."

Me: "Um, okay, can you borrow some money to buy a tarp, maybe from your Village Savings Loan Association?"

Farmer: "No, we don't have a VSLA in my village."

Me: "Um, okay, maybe this Rural Producers Organization here today could start a village savings club?"

Farmer: "Yeah, but still, what if I borrow the money but then the crop fails because of drought and I can't pay back the money?"

Me: "Um, I don't suppose you can buy crop insurance around here?"

Farmer: "Nope."

Throughout many millennia of human existence, farming has been a terrible, perilous, unpleasant occupation done only by peasants. The weather risk alone, to say nothing of the dirt and heat and hard work, made it unattractive. Anyone with a shred of education or ambition or opportunity left their family farm and never looked back. (Except for the crazy ones, cursed with some kind of romantic attachment to the land or the profession.)

In 2016, people with a sense of justice may wish that good, hard-working farmers everywhere shouldn't have to face lives of poverty and anxiety due to market price risk.

Even for today's very small-scale farmers using relatively ancient technologies, grain market price risk should be the one easy problem to solve. Putting a known price on unharvested grain isn't a radical concept. Ancient Egyptian farmers fed a great civilization *only because* they could pre-arrange a profitable price from urban grain buyers, then confidently buy inputs and expend labor. Formal forward grain contracts have been around since 15th century feudal Japan. But both of those civilizations succeeded in hedging their farmers' price risk only because those farmers could put their trust in a critical degree of societal order.

When we think of North American farming compared to subsistence farming in Africa, maybe we feel grateful for our air-conditioned tractor cabs and effective chemical herbicides. But I have learned our real blessing is our confidence in a society that functions properly, our confidence that our business counterparts will provide what we need and do what they say.

The elevator says it will be open from 8 a.m. to 5 p.m.? Then we can rely on it to receive its first truck at roughly 8 a.m., give or take, and to shut down its leg at 5 p.m. or thereabouts. A salesperson says this chemical will kill that category of weed? Then indeed those weeds will die, generally speaking. Need to drive a grain truck from Point A to Point B? Probably, the roads between A and B will be open and driveable-ish. A piece of equipment breaks? Buy the thingamajig to fix it. Don't have money to buy the thingamajig? Borrow the money. Crop fails and you can't pay back your loan with grain proceeds? Collect on crop insurance. In the very worst case, if a counterparty reneges on a contract, there are lawyers and judges who can sort it out.

So, yes, we are lucky, and not just in the usual ways that come to mind. They say Americans should thank a farmer three times a day for the meals they eat. I say American farmers should thank their bankers, their crop insurance folks, the ag economists and senators and lobbyists and farm organizations that designed legislation supportive to food security, plus the centuries' worth of businesspeople who built corporations and credit systems that operate efficiently, plus all the people who keep the U.S. judicial system ticking along, plus anyone who designs or builds or maintains passable roads and other infrastructure, plus ... anyone who's involved in any pursuit that perpetuates our modern, trustworthy, societal order. They are the reason we have come to confidently hope, that if in April we lock in a $3.50 price for our October corn, we will truly get that price at the appointed time.

Happy planting/hedging season!

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at elaine@masteringthegrainmarkets.com or on Twitter @elainekub.