I’m always vexed by prairie farmers’ resistance to hedging.
Don’t get me wrong. I know lots of farmers hedge lots of grain, cattle, hogs, etc.
But lots don’t.
At all.
Which then makes them vulnerable to price meltdowns which happen all too regularly. (Nouriel Roubini’s Crisis Economics of a couple of years ago does a good job of showing how market crises are actually the norm, not the exception, of the past couple of centuries. Download the audiobook and listen to it in your truck or tractor if you’re at all interested in finance.)
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Monday morning I was writing a column for this week’s paper (out today) which pondered the plight of many hog producers right now, and I was bewailing the preventable losses that were occurring because people were unhedged, underhedged or had a broken hedge of some sort. The basic point of the piece was that some pretty simple hedging strategies of locking in future feed and hog prices would have given most farmers a great deal of protection against the current profit meltdown, but far too few farmers are hedging at all or are hedged enough.
As I said in the piece, I’ve got great sympathy for anyone with a broken hedge, like a reneged-upon-by-buyer weanling contract, or people who are underhedged by having some production hedged but still having significant amounts exposed, or those who have diversified farms and had some sort of grain production problem that prevents them balancing livestock losses with grain gains.
But for the people who didn’t hedge at all, with any cash contracts, futures and options positions, whatever, I’ve got sympathy for the human situation but frustration for the business situation.
This made me wonder why prairie farmers in particular are so leery of hedging. It’s something I’ve wondered about for years. A number of Canadian risk management professionals have pointed out to me over the years that American farmers hedge far more than Canadian farmers. Very common down there. Until a few years ago it was uncommon for most farmers to do any hedging at all up here.
Why the difference, and why the resistance?
It’s certainly not greed, stupidity, recklessness or lack of concern by the farmers who aren’t hedging. There have been so many crises in farm income in recent decades that anyone guilty of those sins has almost certainly been driven out of the business by now. And it’s not a lack of evidence that the market can collapse suddenly and beyond any reasonable expectations. Hogs, grain, cattle have all had their disasters.
So why are only a bare majority of producers doing any significant hedging at all (a guessed-at proportion that two separate risk management professionals gave me), and why are the ones doing it still so antsy about hedging?
What comes immediately to my mind is an interview I did with a Saskatchewan hog farmer in late 1998, as the market melted down, and he was grappling with crippling losses that he thought would probably push his out of the business. I asked – and this was an awkward question, but asking those is the job of a reporter – if he had hedged any of his production with futures or forward contract sales.
He looked appalled at the idea, and said something like: “That’d be speculation.”
And I think that’s it: an attitude that financial risk management is a murky, mysterious, suspect and sleazily speculative thing and that good, honest, productive farmers shouldn’t be engaged with it. They don’t see it as a serious, responsible, insurance-like thing but a “playing of the market” thing that a decent human being doesn’t get involved with.
This certainly isn’t an attitude restricted to farming. All we hear these days is denunciations of Wall Street bankers, British bankers, hedge fund operators and the “vampire squid” – Goldman Sachs. Here’s a beautifully written manifestation of the attitude about the last example and phrase of the preceding sentence: (Goldman Sachs is) “a great vampire squid wrapped around the face of humanity, relentless jamming its blood funnel into anything that smells like money”
German and French politicians and bureaucrats are busily trying to find ways to strangle London’s financial industry and lots of American lawmakers would like to hamstring their banks and finance industry (if they didn’t contribute so damned much money to their campaigns.) It’s speculation and financial machinations that have caused all our problems, is the common theology these days. (My personal view is that financial organizations merely facilitate our ability to do the stupid stuff we really want to do, such as buy expensive homes we can’t afford, so they’re just functionaries of our flaws and not the cause.)
Some people don’t see hedging and risk management as sensible and sober, but instead as suspect and sleazy. And not to be played with.
So you get what we’ve got today: a situation of massive losses that were at least partially preventable.
Attitudes are changing. Or perhaps those with the anti-hedging outlook have simply been driven from the business. But farmers are hedging more. A major hog risk management organization told me in the late-2000s that only about 20 percent of producers had been hedged going into the 08-09 meltdown, so most took a beating. But by this year, more than 50 percent are hedging at least some of their production, so that’s a big improvement.
But lots more improvement needs to be made, and farmers need to stop thinking every financial tool they’re offered is a vampire squid looking to suck away all of their blood. The real blood is the red ink that’s flowing in many farmers’ financials.
(Vampire squid image is from Wikipedia)
