Pain and pleasure: what schools you?

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Published: July 16, 2013

Pain and pleasure: what schools you?

How do you learn best, from pain or pleasure?

Most folks like pleasure, but learn nothing from it. Most folks learn from pain.

That makes me wonder what farmers and ag-based business have learned in terms of hedging and risk management over the past 10 years.

Here’s what I would guess, based on talking to grain and livestock farmers, as well as to commercial grain and meat users:

1) Hog and cattle producers have learned a lot in the past ten years. A lot. Like, a whole bunch.

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2) End users of crops and meat have learned lots.

3) Crop farmers haven’t learned too much, and have probably forgotten some of the lessons of the past.

Different learning responses to pain and pleasure are behind these differences, which I assume to exist.

Hog farmers have been particularly damaged by the volatility in both meat and crop prices, getting slaughtered on the unpredictable loss-inducing spreads of the past few years. Some have learned from that pain to hedge very carefully, ensuring that they are generally able to lock-in profitable spreads. Others have been made extinct by their failure to adequately hedge since 2006, so whether or not they have learned anything doesn’t matter. Evolution of the industry has eliminated them. What remains are well-hedged hog farmers, whether that is created by being a big mixed farm, such as a Hutterite colony, or a basic crops and pigs farm, or a hog-specific farm that uses lots of pricing tools to ensure that the cash flow is going to be predictable and likely profitable.

Commercial grain and meat users have also learned to take price exposure extremely seriously. On Friday I met with grain buyers from Colombia and Dubai and they told me that hedging exposure to volatility of the main commodities they purchase and process is key to their financial stability.

Alexandra Asmar Lopez, a commodity purchaser with Colombia’s leading food company, told me that the 2007-2008 crop price spike and collapse taught her company a lot about the need to hedge, and that meant that the 2012 Midwest drought spike didn’t hurt her company much.

“It didn’t affect us too much because we had a strategy and we had coverage and we were hedging,” said Lopez.

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“We had 60 percent of our needs priced.”

That wasn’t true in 2007-2008, but the pain from that experience forced the company to learn some hard lessons – and adapt. The result: a more stable company.

“It helps us to keep the volatility a little bit outside of our cost and our results.”

What have grain farmers learned in the last five years? Not as many lessons, I’ll bet.

Sure, there’s been wild volatility, but often in the right way for a grain guy. Prices have shot through the roof a couple of times and often careful hedging hasn’t brought better results. What lesson does that teach?

Some farmers, especially the young ones, seem to be getting comfortable with the notion of a high-crop-prices-forever outlook, so they’re comfortable with both debt and a general lack of hedging. Some middle-aged farmers are probably beginning to forget the lessons they learned in the mid-1980s to mid-2000s. And the old ones are still being cautious, but getting ready to retire and probably gradually selling some high-priced land as they ease out and grow their last few crops of high-priced grains, oilseeds and pulses.

Grain farming has radically professionalized in the past 20 years and many farmers now hire marketing managers and have relationships with grain companies that do their hedging for them. But I wonder how well most grain farmers have protected their income stream in this era when you don’t need to do much on the price side to ensure you make a lot of money growing crops.

There’s been a lot of pleasure in growing crops since the mid-2000s, but have any lessons been learned?

 

 

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