|Hansen & partner: disingenuous whinge
Adam Henson is one of their primary reporters, and evidently a genuine (and seemingly prosperous) farmer to boot. So a couple of episodes ago, he's discussing with his "business partner" the generic farmers' problem of money, that vital perennial crop. Here's what the two of them say (20:12 mins in):
"The trouble with grain is, it's a world commodity price ... we don't determine the price at all ... Geo-political factors like the war in Ukraine ... Fertilizer costs ... Volatility ... A change in market price can cost us thousands ... It's pretty scary, really. We've spent all the money, we've got a reasonable crop here ... when we decide what to grow, we're gambling on what each crop will be worth come harvest time ..."
Oo-err, missus, sounds really scary. Volatility! War in Ukraine! Changes in global market price!! You'd never guess that this has been the farmers' oldest problem for millennia - and, equally, has been solved for a very long time indeed.
For those unfamiliar with the basic principles of hedging and financial derivatives: whenever a player takes a fixed-price forward position (here a farmer, investing in seed etc at fixed cost today, but effectively playing in the forward cereal market against delivery at harvest time) in a market where prices are liable to change, that player is exposed to potential adverse movements in price. They are of course simultaneously exposed to the upside of potentially favourable price movements; but it's the downside risk that mostly concerns us (and, seemingly, Henson) here.
Is this exposure necessary? Not for a very long time, since the ages-old development of forward markets: why doesn't Henson avail himself of the forward market for the cereal he's investing in? In other words, forward-sell all (or at least a large part of) his crop at the very same time he buys his seed? Putting matters simply (we'll note some complexities later), one generally assumes that at the time of his making the fateful decision, there must be a positive margin available to him, i.e. between his fixed costs and the forward value of the crop - else why is he even considering it? So, courtesy of forward prices, that margin is there to be locked in, eliminating first-order Price Risk. Now, his risk profile is mostly that of the operational risks associated with weather, blight etc - the very stuff of farming, even for a player bewildered by the financial markets.
Does Hansen not know this? I think he must. So why does he bleat in such a dumb fashion? More to the point (since farmers always whinge & we all know this), why don't BBC editors intervene, & make him say something more comprehensive & honest?
Later in the week we'll take a look at some of the very real practical complexities around our simplified account above - which might have made for a genuinely interesting & informative Countryside piece. But for now, let's notice how Hansen and his mate signed off.
"as a fairly large farm, we can afford to take some gambles ... "
And there we have it - the pair are gamblers! - which is the proper term for anyone with a forward-price exposure and the ability to hedge, but who doesn't in fact avail himself of the hedge. Next time: how some of these issues play out in the Real World.