Farmers are being slowly trained to alter some long-standing patterns of behavior. For many of us, we are now at least used to - if not comfortable with - buying inputs almost a year ahead, and at the same time, waiting (and waiting and waiting...) to sell. Had we done more of both the last two years, the financial rewards would have been not just handsome, but gorgeous.
Driving the purchasing change is the fertilizer industry, especially at the retail level. While many producers grumble at suspected gouging, what the market will bear is ascertained at the top, not at the dealer position. And those guys know they have right where they want us.
This creates a much changed retail marketplace for producers who, up to now, have incurred some price risk as they purchase their fertilizer product. Price could rise if they had not priced their tons or it could fall after they had committed to a price. Most producers are accustomed to this kind of risk and routinely accept it.
But going forward producers will face the added risk of product or supply availability. With retailers unable to afford financing large inventories of un-priced fertilizer there is no assurance that enough product will be available when demand is high. If producers do not place an order and price the product well in advance, it may not be available when they need it.
An additional change in trade practices has evolved during the past 12 months at the wholesale level. Unlimited fertilizer supplies are no longer being offered to retailers from all manufacturers on a continuous basis. Defined quantities or ‘blocks’ of product are being offered on an intermittent basis to retailers. In many cases these quantities are less than the retailer would prefer to purchase or could sell promptly.
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This means that the retailer may no longer be able to offer a price for fertilizer product to all customers on a daily basis. Sales can be made only to the extent product has been made available for the retailer to purchase. While that quantity may be adequate to promptly fill some customer orders, it may be inadequate to meet all customer demand at the time. [More]
At the same time our marketing has been rudely made impotent by breathtaking volatility. In response, I have seen a common decision by many producers this summer: find a soothsayer. Our assumption is we are simply intellectually incapable of selling in current market conditions. Meanwhile there is a genius out there who can see clearly into the mists and deliver us mucho profit for a trivial fee.
The first assumption may be true in a way. We may be short right now on the skills we need in these new market conditions, but I suspect these are more emotional than mental. As for the last assumption - a guru can save us - color me skeptical. In fact, there is growing evidence, that the markets are acting the way they are because traders are acting more like farmers.
Much of what’s happening is a function of what economists call “herding.” In conditions of uncertainty, humans, like other animals, herd together for protection. In unstable markets, this leads to trend-following: buy when others buy, sell when they sell. Many studies have found that mutual-fund managers herd, for a couple of important reasons. First, herding offers money managers the reassurance that their performance, whether good or bad, won’t diverge too much from the norm. It also gives them a chance to piggyback on the knowledge of their competitors. That’s why, when a stock starts to rise, traders often assume that there must be a good reason, and therefore buy in order not to miss the party. This can create a feedback loop: as more people buy the stock, the more certain others become that there must be a good reason to do so (even if they don’t know what that is). And these feedback loops have been accentuated by the spread of quantitative-trading strategies that explicitly aim at riding the herd effect. These strategies can magnify trends instead of countering them. The result is that an individual stock can move up or down ten per cent on a day with no real news.
Uncertainty also stimulates big moves because traders react to it in an unusual way. Work done by Daniel Ellsberg in the early sixties suggests that, faced with ambiguity, most people try to minimize possible losses. But there’s considerable evidence that many traders, by contrast, deal with ambiguity by trying to maximize potential gains—thus the familiar dictum that volatility creates opportunities. In part, this is because it’s the job of traders to trade. But it’s also because market professionals appear to be chronically overconfident. A 2005 study of traders and investment bankers at two large banks, for instance, found that they significantly overestimated their knowledge of finance and the accuracy of their predictions. A 2002 survey of experienced foreign-exchange traders found, similarly, that they were far more sure of their market forecasts than performance justified. Overconfidence matters, because it can encourage excess trading. A study of individual investors by the economists Markus Glaser and Martin Weber, for instance, found that investors who thought more highly of their ability also traded more. What’s worse, the effect seems to be magnified in times of uncertainty. The business-school professors Itzhak Ben-David and John Doukas, in a study based on twenty years of trading by institutional investors, found that when there’s a profusion of “ambiguous information” about stocks investors trade more frequently, not less. And they do so even though, on average, they end up losing on their trades. [More]
My opinion is there is no cheap, effective substitute for direct hands-on market participation. In fact, I think rather than farming it out, the returns for self-directed marketing may be higher than ever. Moreover, once we lost the connection between what we do in the field and what happens in the bank account, I think both efforts suffer.
Finally, as we outsource different tasks to hired guns, we run the risk of simply being a general contractor. In addition, we are incurring risks we cannot actively oversee, simply becuase they originate off-farm.
We can adapt. We always do. Even to today's markets.