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| 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.
ND
19 comments:
Hope he doesn't come a cropper.
Cue a tsunami of corny jokes ...
Clarkson's Farm is more informative.
The grain also has to be checked and priced for its quality and use (ie animal feed or human consumption) at harvest. This isn't known until the day.
You amaize me.
I'll get my coat.
ND, are you suggesting a way of separating the chaff from the wheat? I can barley believe it! At least you seem to have spelt everything correctly, you're usually more oatless than myself in that regard, perhaps you now hops on the spellcheck...
*cough*
As Kev says, it's bit more complex from what I know. Maybe there are insurance mechanisms? So say they expect 50% human consumable, and it turns out to be 10%, the insurance pays out to cover the 40%
Clarkson's Farm is of course reality TV, and having very briefly partaken in a US reality show, I'm well aware they're almost as scripted as a regular show, but it is pretty informative.
We'll hit the complexities in Part 2 of the cereal ...
My father had a favourite story of the ability of the farmer always to find something to grumble about. He told this story:
Dad: "Well, Bob, tattie prices are high this year."
Bob admits to it.
Dad: "And we're lucky here, good weather and a fine big harvest."
Bob admits to it.
"Aye" says Bob, "but it's gey sair on the grun".
"why don't BBC editors intervene...?"
Because they themselves don't have a clue? It's just a thought.
"why doesn't Henson avail himself of the forward market for the cereal he's investing in?"
Because a farmer doesn't know how much crop is going to come out of the ground, or get harvested, or what state it'll be in when it is. If you sell crop forward that you don't have you are in effect writing a naked option, your crop could end up a complete failure, or fail to meet the specification of the contract and you'd have to go out and buy crop at the current market price to fulfil the contract you signed. Farmers have to deal with the weather, and pests and diseases, which are fundamentally unpredictable. Its not as simple as 'Here are my costs of production, here is how much output I'll get, sell forward X tonnes @ Y price, guaranteed profit'.
The other issue that farmers have is that if you sell grain forward at a good price, and the market moves in your favour in the meantime, when the time comes for movement of the crop its amazing how many lorry loads of grain get rejected by the end user for not meeting the spec of the contract. It happens so often its not a joke any more. Sell grain and the price moves against you (ie the market price rises) your loads sail through, because of course the alternative for the user is buying expensive grain in the spot market. But when the boot is on the other foot they have every incentive to lie and cheat and refuse to buy the expensive grain because they can buy cheaper in the spot market. The chicanery that takes place in the grain market would shame a black market bookmaker.
So farmers have cottoned on that this is a heads we lose tails you win scenario. So they tend to largely sell at spot prices, or only forward a few months once the grain is in the store. That way they end up getting paid for it. If they try and play the forward market it usually ends up that the grain buyer oligopoly will take them to the cleaners.
Thanks Sobers.
"the grain buyer oligopoly will take them to the cleaners"
Isn't that the sort of thing a competent government should be acting against? I suppose that's the problem.
I must say I've voted Tory ever since 1998 when the scales fell from my eyes, but this lot are at Blair levels. Brexit, like it or not, was above all a vote against mass immigration. So Boris rewards his voters with 1.1 million visas, and Rishi ups him with 1.4 million. I'm seeing Africans in small English market towns.
I remember when if you couldn't find staff, you had three choices - offer more pay, pack up trading, or find a more efficient way of using your people.
Now you just ask the Government and they hand out another 10,000 visas. And they call it 'capitalism'.
That whining sound is Adam Smith doing 13,000 rpm.
Came for the business analysis, stayed for the ceral puns!
He he. US carnivores don't eat grains (and try to eat grass fed cattle as well). One food item that has not suffered the general inflation that has hit food of late is MEAT.
Smug ;->
"US carnivores don't eat grains"
I think you'll find they do, just one step removed. 97% of US beef cattle are finished on beef lots, where they are fed grains to fatten them up before slaughter.
https://little-creek-lamb-beef-ranch-goods.myshopify.com/blogs/ranch-blog/food-for-thought-are-cattle-born-on-feedlots#:~:text=Around%2097%25%20of%20cattle%20are,%22%20(fattened)%20before%20slaughter.
" One food item that has not suffered the general inflation that has hit food of late is MEAT."
That is true, I've been buying Sainsburys Taste the Difference Outdoor reared gammon joints for years now and the price of them has not shifted one jot.
Sobers.
It makes me laugh how they stipulate the quality of grain for human consumption only for all the goodness to be stripped out of it in food processing.
White bread for example. Total trash.
I guess Lilith would say give it ALL to the animals and we eat the animals.
OT but I see this
https://www.theguardian.com/business/2023/mar/23/uk-power-firms-market-energy-prices
and I wonder why, when they are obviously taking the mick, HMG is so against windfall taxes? It's not as if they've been acting responsibly, they're gaming the system.
"The practice, which does not break existing market rules, involves generators warning the electricity system operator that they are turning their power plants off at times of peak demand and subsequently offering to keep them running in exchange for a “balancing” payment. In some cases, the electricity system operator, which is owned by National Grid, has been left with little option other than to make payments of significantly above the market price to keep power plants from turning off and avoid the risk of winter blackouts."
Windfall taxes don't break the rules either. Couldn't see Labour voting against them.
My wife's family and their immediate circle are farmers in Southern Alberta, Canada. They're all canny, well educated and successful.
They also talk the same kind of trash to outsiders. They do that because it convinces ignorant urbanites, especially ignorant urbanite media, politicos and voters that farmers are indispensable and need plenty of government subsidies.
iOpener
You need to watch Clarkson's Farm if you haven't already.
It's a fly on the wall of a lay person being taken through a farming apprenticeship.
I would NOT go into farming now !!!
Tray again
Sobers, we buy our beef from local farms, indeed, know one of the farmers from way back.
Our beef is grass fed
OK?
As said, the futures market and hedging is only useful to the 10,000 acre+ farmer. Things have moved on from the old rice paddy days.
Locally the apple crop looks pretty poor, still, we get them from Poland now. We have a few large scale polytunnel farmers here growing fruit and lettuce in fair quantity with EU labour. You can while away your time trundling behind a tractor and veg trailer on its way to the packhouse and M&S/Waitrose etc pickup.
The smaller fields have lain idle for many years, a few being bought by Travellers. The smaller fields are left over from our 18th century hop and apple farming but are no longer of any use to a commercial farmer. All higgledy piggledy in shape and access method. Only any good for housing and they are generally too small a site to interest the 300+ matchbox builders.
A local chap runs beef cattle but a nearby field is kept for silage only - it would cost about £20K+ to fence the field. Silage and apple trees don't tend to escape and annoy.
Flying into Gatwick last week you can see the truth of the artist's view of nature - 'badly lit and too much green'.
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