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Try This Perspective


Bull markets are a source of joy or heartache, depending on the approach taken to price grain and your current position in the market. It is joy for the farmer with unpriced grain in storage and nothing priced for 2011 or beyond. It can be heartache for the proactive marketer who stepped up to the plate and swung early and often at pricing opportunities that today look cheap.

That heartache can turn into some serious anxiety, if you used futures contracts to price grain. I’ll call it margin anxiety, and farmers who use futures contracts to hedge see this anxiety on a brokerage statement with large red numbers. Those losses on the futures side of the transaction are a daily reminder that you were too early and too cheap with some of your pricing decisions.

Any good psychiatrist would see the need to talk about your anxiety. So let’s talk.

Let’s start the discussion by putting some numbers around the issue with the example of farmer Tillman. He has 1,000 acres in Iowa, evenly split between corn and soybean production. Last year he produced 90,000 bu. of corn and 23,000 bu. of soybeans, and he expects to produce more this year (2010 yields were less than stellar). Farmer Tillman takes a proactive approach to marketing and futures contracts are his preferred form of pricing.

As a result of his pricing decisions on 2010 and 2011 crop, he has a margin account that reminds him that he was $200,000 too early in his pricing decisions. Margin anxiety!

The numbers look (and feel) bad. It’s time for some perspective.

Concerning the modest size of the Tillman operation: At current price levels, his 1,000-acre farm has the potential to generate over $800,000 in gross revenues in 2011. Prices were not as good in 2010 (and he sold out too early), but the farm still easily exceeded $500,000 in gross revenues. And let’s not forget 2012 – Tillman may not have done anything yet but it ought to be on his radar. Despite lower quotes for 2012 vs. 2011, the Tillman farm would generate over $700,000 in gross revenues at current price levels.

Assuming normal yields, this modest operation could generate more than $2 million in revenues in a three-year period. Does this help put a $200,000 “loss” on a brokerage statement in perspective?

In fact, let’s assume that the bull market has even more room to run. What if every corn and soybean futures contract quoted today runs another $2/bu. higher? Tillman will need to post another $250,000 in margin. “Say it ain’t so!” is the reaction of someone focused on the brokerage statement. Now look at the whole picture – cash and futures positions. While a $2 rise in futures prices demanded another $250,000 in margin money, Tillman’s expected gross revenues from the 2011 and 2012 crops increased by $450,000.

The current bull market looks a lot like 2008. Three years ago, the run-up in prices caught the industry off-guard and generated serious margin anxiety among lenders. It is quite amazing to see the lack of anxiety among lenders this time around. The year 2008 was a teachable moment, and lenders are prepared. They say, “Show me a legitimate marketing plan and hedging strategy, and we will help our customers meet their margin needs.”

Margin anxiety strikes those focused on one side – the futures side – of a hedging transaction. The cash side of the transaction is just as important. If you want less anxiety, train yourself to see the whole picture in pricing.

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