Good theology, perhaps...  

But questionable behavioral economics. That's my read on Dan Murphy's reaction to Cardinal Tim Dolan's suggestion that Catholics adopt the practice of "Meatless Fridays".

One of the most prominent—some would say most influential—prelates, Cardinal Timothy Dolan of the New York City diocese, even attached himself to the losing ticket by giving the benediction at the Republican National Convention after Mitt Romney accepted his party’s nomination. Earlier this year, Dolan garnered applause when he introduced a group of Republican politicians, including Rep. Paul Ryan, at a special Mass he celebrated—despite the fact that many other bishops have been openly critical of Ryan’s proposed federal budget, calling it “immoral” because of cuts to food and other programs that serve the poor.
Now, however, Cardinal Dolan has a bigger idea, one that I believe ought to be seriously considered: He wants Catholics to change in their devotional habits and give up meat on Fridays all year ’round.
Of course, that was the law for practicing Catholics during the 1960s, and any kid who grew up back then can attest to the endless Friday fish fries that accompanied childhood.

...

Personally, I think it’s a great idea. And here’s why.
Giving up meat by itself doesn’t make one any holier or more devout, and even if Catholics took Cardinal Dolan’s initiative seriously, it’s a voluntary plan. Nobody’s going to be held accountable if a burger or a pepperoni pizza makes a Friday appearance on the dinner table, and given the compliance rate of Catholics with the church’s proscription against using birth control, it’s doubtful that many people would offer anything other than lip service to a call to ban Friday meat-eating.
But here’s why such a recommendation is valuable: You don’t sacrifice something that has minimal value, dietary or otherwise. Nobody would propose giving up carrots or graham crackers or even pasta, despite those products’ popularity. They’re peripheral, unimportant individually to our nutritional well-being.
Making it “mandatory” to give up meat on Fridays restores beef, pork and poultry to their rightful place as the centerpiece of our daily fare. Catholics pray to be provided their daily bread, but we all know that animal foods are more important, nutritionally and culturally, to our collective diets. [More]

I always reach back to Abraham and Isaac when the term "sacrifice" is used. I agree with Dan that true sacrifices must hurt, or they have no meaning. It is not a sacrifice to give from your surplus or to vote for policies that give to those in need. It is when you do without, at cost to your own well-being that you begin to understand why sacrifice required the best, the first, the dearest to have any beneficial effect.

That said, this cannot be good marketing news on the whole for a protein industry looking at flagging consumption and growing criticisms about the health and economics of meat-eating. Adding a day when the devout learn to adapt to meatless, and I would suspect cheaper, meals can only grease the slide toward leaving meat out on other days.

Perhaps becoming a special occasion dietary item is higher status. But it doesn't look like a sales booster to me.

The collateral losses...  

It's likely most of us just snickered when the now-infamous trading blunder by JP Morgan was revealed. But since then, a little more thought and information adds to the curious nature of what is now our financial system.

To begin with there is question of scale.  While farmers are arguing about a new farm bill that will cost (ostensibly) about $18B per year for farmers, it should be measured by this supposedly huge mistake.

The number that you have not heard is the cost of the legislation, which is $995 billion over the course of the next 10 years, for the mandatory elements of the Farm Bill. 
1.    $772 billion or 78% is for domestic nutrition assistance programs, primarily the Supplemental Nutrition Assistance Program (SNAP).
2.    $223 billion, is divided among various agriculture-related programs,
    a.    Crop insurance ($90 billion, or 9%),
    b.    Farm commodity price and income supports ($63 billion or 6%),
    c.    Conservation ($65 billion, or 7%).
    d.    1% of the baseline is for international trade ($3 billion)
    e.    Horticulture programs ($1 billion).
[More]

Of course, the shallow-loss provision is an unexploded budget bomb that could balloon those numbers should prices drop drastically. 

But note that we are fighting over a few billion per year and JPM just bungled away $2b is a matter of hours.


But the big jolt is, it's peanuts for JPM.

Over at Seeking Alpha, Gene Kirsch tried to put Hedgegate into a broader context. "JPMorgan losses are reported to be actually $800 million in Q2 with the potential for legal and other losses up to $4.2 billion over a longer period of time, possibly exceeding one year," he wrote. "The banking unit of JPMorgan Chase alone made $12.4 billion last year. The holding company has over $2.26 trillion in assets and is the largest U.S. bank and 8th largest in the world. The holding company made $29.9 billion in operating income and just over $20 billion in net income for 2011. So, this initial loss of $800M represents approximately 4% of its total net profit for all of 2011, less than 2.7% of its operating income."
The firm, in other words, can manage it. Though as Brad DeLong was quick to point out, tallying the direct losses misses the episode's larger impact on the firm's value. "The revelation that JPMC did not have control over its derivatives book--even though accompanied by promises of multiple firings and deep reforms--destroyed 1/7 of JPMCs franchise value." Turns out the market doesn't much like it when what's reputed to be the safest bank on Wall Street turns out to be incompetent.
Jared Bernstein draws out the larger lesson nicely, and so I'll quote him at some length. "The fundamental truth here is the one known since Adam (Smith, that is) and amplified by the great financial economist Hy Minsky: humans underprice risk. Their proclivity to do so increases as the business cycle progresses and confidence takes over (remember, JP’s bet was unwound by the fact that the economy wasn’t as strong as they thought). The advent of a global derivatives market with notional trades in the trillions greatly amplifies the risks."
"The fact that humans like Jamie Dimon—he who presided over JP’s self-proclaimed 'fortress balance sheet'—he who inveighed against financial reform as imposing unnecessary oversight on such skilled risk managers as he and his staff—fall prey to this fundamental truth only underscores the lesson of this episode in financial hubris."
"And that is this: financial markets are inherently unstable. They will neither self-correct nor self-regulate. Their instability poses a threat to markets and economies and people across the globe. Therefore, they need to be regulated. That’s not to say that anyone knows the best way to do this yet in order to balance the necessity of oversight with the dynamics of the markets. We don’t know where to set the speed limits. It must be an iterative process. But we do know they need to be set, and JP’s loss should be taken as a warning that our tendency is to set them too low." [More]

Our world is now one where all the behemoths are not governments when it comes to economic clout.
It also indicates to me that this sector is not so much about "allocating capital efficiently"anymore. It's about finding things to bet on. Or deriving them from thin air.

The bottom line for me: the more distance I can put between me and Wall Street the stronger my future finances. Participating directly in derivative markets (options) is a sucker's game, and will be subject to lightning raids when JPM-like entities decide to swoop in for whatever reason using the latest quantitative strategy.

Marketing partnerships (contracts) with our grain merchandising industry (coops, ADM, etc.) at the least throws them under the finance bus before my farm is hit. Thinking I can play with these guys, regardless of my preparation, smarts or adviser is a bad idea. They operate on another level where I am defenseless.






 

The Phipps Grain Bin Rally...  

Oh yeah, I'm officially taking credit for this corn rally. The Argentines arranged their drought just to have one last cheap shot at me.

As I have mentioned before (at least in speeches) I have built two of the world's most expensive free grain bins under the Cargill Grain Bin Program. This year I thought I was home free.  My target price was $6.34 on the first trading close in February. If Mar corn closes below that, my 41,000 bushels no longer have to be delivered.

Once - just one - I thought I was going to win one. (This is third and final year of the contract) If we coulda just stayed below the trigger AND THEN HAD A BIG RALLY, I could have matched a friend of mine whose bin experience was just that: his trigger was a half-cent higher than the close, and he went on to sell the contents for zillions. He mentions it often...

So as we motor to $7 please wave to me in the rearview mirror.

[Just in case you are new or confused, this is all very tongue-in-cheek. I would never have built the bins without the program, they have already paid for themselves, and railing at higher markets because you voluntarily sold earlier is nonsense.]

It just doesn't feel like a win.

If only NASS could issue a report between now and then...

One more reason...  

Why I would have died a flaming death in corporate America: marketing campaigns. I try to imagine having a meeting with these people.

Below are some highlights. Warning: We are about to enter the strange arena of marketing, where fictional worlds are conjured up out of whole cloth for the sole purpose of moving goods.
From what I can tell, the intention expressed here is to brush up the image of Hillshire Farm and roll out two new premium brands: "Smith & Smith Fine Meats" and "Flat Iron Ranch." The campaign is "foundational," the one slide declares, "and demonstrates how the new, purposeful Sara Lee will manifest: Modern. Authentic. Simple."

Seriously, if you can't sense a wind change in the meat industry from this, what will it take? It looks to me you're going to have to be able to fake "sustainability" and "humane production" at the very least.

 

Fictive learning strikes again...  

Upset because you didn't sell the rest of your corn three weeks ago? This is your brain on volatile markets:

Montague, et. al. immediately discovered a strong neural signal that drove many of the investment decisions. The signal was fictive learning. Take, for example, this situation. A player has decided to wager 10 percent of her total portfolio in the market, which is a rather small bet. Then, she watches as the market rises dramatically in value. At this point, the investor experiences a surge of regret, which is a side-effect of fictive learning. (We are thinking about how much richer we would be if only we’d invested more in the market.) This negative feeling is preceded by a swell of activity in the ventral caudate, a small area in the center of the cortex. Instead of enjoying our earnings, we are fixated on the profits we missed, which leads us to do something different the next time around. As a result investors in the experiment naturally adapted their investments to the ebb and flow of the market. When markets were booming, as in the Nasdaq bubble of the late 1990s, people perpetually increased their investments. In fact, many of Montague’s subjects eventually put all of their money into the rising market. They had become convinced that the bubble wasn’t a bubble. This boom would be different.
And then, just like that, the bubble burst. The Dow sinks, the Nasdaq collapses, the Nikkei implodes. At this point investors race to dump any assets that are declining in value, as their brain realizes that it made some very expensive mistakes. Our investing decisions are still being driven by regret, but now that feeling is telling us to sell. That’s when we get a financial panic.
In the last year, Montague has expanded on these provocative results. He’s shown, for instance, that heavy smokers are less vulnerable to fictive learning. This is probably because they’ve learned, over time, to ignore those regretful thoughts telling them to quit smoking. (Although they lament their nicotine addiction — they know it’s killing them — they keep on lighting up.) The upshot is that their ability to not learn from fictional scenarios might also make them more resistant to the allure of bubbles. The lesson, I guess, is that it might be good to have a stock broker with a debilitating addiction.
Montague has also begun exploring the power of social comparison, or what he calls the “country club effect,” on the formation of financial bubbles. “This is what happens when you’re sitting around with your friends at the country club, and they’re all talking about how much money they’re making in the market,” Montague told me. “That casual conversation is going to change the way you think about investing.” In a series of ongoing experiments, Montague has studied what happens when people compete against each other in an investment game. While the subjects are making decisions about the stock market, Montague monitors their brain activity in two different fMRI machines. The first thing Montague discovered is that making more money than someone else is extremely pleasurable. When subjects “win” the investment game, Montague observes a large increase in activity in the striatum, a brain area typically associated with the processing of pleasurable rewards. (Montague refers to this as “cocaine brain,” as the striatum is also associated with the euphoric high of illicit drugs.) Unfortunately, this same urge to outperform others can also lead people to take reckless risks.
More recently, a team of Italian neuroscientists led by Nicola Canessa and Matteo Motterlini have shown that regret is also contagious, so that “observing the regretful outcomes of another’s choices reactivates the regret network.” (In other words, we internalize the errors of others. Or, as Motterlini wrote in an e-mail, “We simply live their emotions like these were our own.”) Furthermore, this empathy impacts our own decisions: The “risk-aptitude” of investors is significantly shaped by how well the risky decisions of a stranger turned out. If you bet the farm on some tech IPO and did well, then I might, too.
There are two important takeaways to this research. The first is that neuroscience might soon be able to help make macroeconomic diagnoses, allowing us to better distinguish between booms and bubbles. For instance, one could have subjects “play” the current gold market in a scanner, if only to see how their brain activity compares to that of people playing previous market bubbles.
The second is that speculative bubbles are rooted in a very adaptive learning mechanism, which is probably why they’re so hard to prevent. The only way to keep us from bidding up LinkedIn stock and tulips is to keep us from learning through counterfactuals. Of course, that means we’d be cut off from a crucial means of self-improvement, a way of benefiting from mistakes we didn’t actually make. In other words, the reason we sometimes make such stupid investment decisions is because we’re so damn smart. [More worth reading]

I still don't think our markets are "bubbling", but the more I read about my lyin' brain, the less sure I am about my reasons.

I think the availability bias is also making me think this will be another relatively poor crop, for us and the US, simply because our recent trend is downward as too much water has plagued us consistently since 2007. None of these are sound reasons or bases for prediction.

Speaking of which, I just finished a thoroughly enjoyable, albeit discouraging book:

[More]

Like Philip Tetlock's monumental work the evidence and logic is very persuasive, but Gardener sheds more light on why and how our brains deal with uncertainty (badly) and how we massage our own thinking to relieve the stress uncertainty brings us.

Passive marketing is looking better and better all the time.

September excitement...

After my post about falling global crop yields, a friend in PA sent this note:

After church I was approached by the grain buyer for a large mill in the area and said he raised his basis to +.90 cents for August and September and was unable to buy one bushel of corn. I talked to a dairy vet in the area about 10 days ago and his comment is that there will be dairy farms that will be without corn in August and September because they do not know where it is coming from and are making no plans till they are out to look for corn. Another large end user, (feedmill) with 300+ tons per hour capacity is entertaining the idea they will have to pay $12.00 a bushel to get corn sometime before new crop corn becomes available.
[Note: this morning he updated the basis as $1.20 over]

This is the slow motion train wreck I see happening due to lackluster yields last year in the ECB, and our subsequent slow start this year - especially IN and OH.  Sometime in July (perhaps sooner with a cool summer) it could become obvious despite "ample" carryover, it is badly mislocated and livestock operations on the East Coast will be up the Chesapeake without a paddle.

This is undoubtedly a major item of discussion at Cargill, etc.  My expectation is for early delivery of new-crop to be enticed by free drying schemes, lucrative basis, toasters, whatever.  That's why we're shifting to more short season corn for the last 40%. 

I believe the phrase is "giant sucking sound". 

Sentences that catch your attention...

Stuff like this article talking about natural gas futures.

“The first two weeks of January, you’re going to see the market turn around from December cold,” said Dave Melita, president and chief meteorologist of Melita Weather Associates in Durango, Colorado. “The snow cover will be melting fast. It will be 20 degrees above average on some days.”
Temperatures in Chicago will dip to a low of 19 degrees Fahrenheit (7 Celsius) on Jan. 1, 2 degrees above normal and 14 degrees higher than a year earlier, according to AccuWeather Inc. in State College, Pennsylvania. New York will fall to 38 degrees, 10 above average. About 52 percent of U.S. households use natural gas for heat.
Natural gas for January delivery advanced 11.8 cents, or 2.9 percent, to $4.23 per million British thermal units at 12:29 p.m. on the New York Mercantile Exchange. The contract expires today. Gas for February delivery rose 13 cents to $4.285. Heating demand drove gas prices above $6 last January.
‘Blowtorch Hot’
Higher-than-average temperatures will persist throughout the Midwest and eastern U.S., with potential in February for “blowtorch hot” weather compared with seasonal norms, Melita said.
The Energy Department reported last week that inventories declined by 184 billion cubic feet in the week ended Dec. 17 to 3.368 trillion cubic feet. Stockpiles reached a record 3.84 trillion the week ended Nov. 5.
Gas stockpiles will total 1.833 trillion cubic feet at the end of the winter heating season in March, about 171 billion cubic feet higher than at the end of March 2010, the Energy Department said Dec. 7 in its Short-Term Energy Outlook.
U.S. natural gas production may reach a record high of 62.09 billion cubic feet a day this year, the department said.
“It’s a pretty bearish picture weather wise, and we’re really not seeing a decline in production,” said Hamza Khan, an analyst with the Schork Group Inc., a consulting company in Villanova, Pennsylvania.[More] [My bold]

I tend to take these comments with some gravity as these guys are betting real margin money on NG which is very sensitive to weather.

And speaking of margin calls, I'm guessing more than a few grain merchandisers are looking at a similar working capital Money Pit they barely escaped two years ago. I've heard far-forward contracts are already being curtailed and also that few grain buyers really took serious steps to off-load their margin risk with swaps or similar financial devices.

Which means a bullish surprise in the January report - like lower final production and/or relentless demand - could close up the shops again except for nearby delivery.

And I don't doubt more than few farmers are shuffling cash to cover positions taken earlier.

Another fiasco in the grain marketing system would not engender warm feelings of confidence in our system, IMHO.

Market plan first, crop plan second...

The fallout from growers' love affair with n-stacked corn continues around the globe.  No matter how much we like them, it's customers who count in the end.  And this is what "the end" can look like.

Favorable weather and genetically modified seeds have given South African corn farmers their biggest harvest since 1982. If only it could be sold.

Dilapidated rail lines and a surging currency are trapping a record corn surplus within the country’s borders. The buildup may force growers out of business and cut jobs in agriculture, the biggest employer in a nation where one in four is without work. And it has caused the benchmark corn price in Johannesburg to slump 19 percent in dollar terms this year, while its U.S. equivalent has risen by 34 percent.

“They can’t get it out because of the rand, because of infrastructure, because some countries don’t want it,” Henk van de Graaf, assistant general manager of the Pretoria-based TLU SA farmers union, said in an interview. “It impacts the economics of the little farming towns who live off the farmers. Businesses in the towns close down, there is a real snowball effect.”

Competition authorities are considering a request by Grain SA, the Bothaville-based growers’ organization, to allow it to hold the surplus off the domestic market to support prices. The government has tried, and failed, to find buyers in China, Egypt and Tunisia, Tina Joemat-Pettersson, the country’s agriculture minister, told lawmakers in Cape Town on Nov. 9.

The country reaped 12.82 million metric tons of corn this year, the government’s Crop Estimates Committee said today in its final crop assessment. That could result in a 4.5 million ton surplus, according to Joemat-Pettersson, triple last season’s exports. At current prices that could be worth at least $818 million.

Bumper Harvests

South African farmers have compounded their difficulties by using genetically modified seeds, disliked across much of Africa, while at the same time allocating three-fifths of their crop to the white variety of the grain, popular on the continent but not in Europe or Asia. This year’s surplus comes after large harvests in 2009 and 2008.

Shipments have been further hindered by bumper harvests in southern African countries, where South Africa has traditionally trucked excess grain. While corn has been exported to South Korea, Kuwait, Spain and Japan, an inability to transport significant amounts of grain to ports has thwarted previous efforts to develop new markets.

“It’s been an absolute disaster,” said John Gordon, who retired last year as chairman of the South African Cereal and Oil Seed Traders Association, from Johannesburg. “It’s the rail system that’s the problem. Grain is not profitable for them.”[More]

So, let's review: Verify your market first, and if you can't easily export, plant stuff you can sell locally.

Actually, I have some neighbors who are putting SmartBoxes on their planter and using their last three years of results (in our admittedly atypical growing seasons) as justification to plant all conventional corn. While I expect seed companies to squeeze our choices by offering fewer and older conventional varieties compared to stacked seed, the burden of proof of trait value has become heavier for many of us.

Many of us remember SA as a significant corn export competitor back in the day. Blunders like this could prompt them to reconsider building ethanol plants. Of course, sitting on enormous gold deposits which make your currency really strong, doesn't help either. Yet another surprising version of the Resource Curse.

Not the end of the world...

What if China does slow down their economy?  Jerry Gulke accurately points out how important China is to grain prices right now.

With no signs indicating a curb in China’s corn demand, there’s going to be reasons to take the market higher. But with weak economic news coming from that country this week, it shows exactly how much control they have over corn and soybean prices, says Jerry Gulke, president of the Gulke Group.
They are the big customer for major U.S. crops.
"China has been the driving force in our soybean economy," Gulke says. "They can make us or break us and that’s not good. I’d much rather see five or six China’s, so if one had a hiccup, we wouldn’t have a problem."
It was likely a small hiccup we saw this week as corn closed about 13 cents lower and soybeans closed almost 70 cents down for the week, on negative news about China’s economy. The Chinese government’s announcement last week that it intended to raise interest rates in order to curb inflation was the driving factor taking prices lower then. This week that rumor was confirmed this week as rates increased ½%.  [More]

Other than an increasing reluctance to check the markets now, how should this news be affecting my decision-making?

I would suggest some other standard to compare to other than the top of the market. The last few days I've been churning out new roadmaps for our farm and the transition to Aaron. I probably need to do this more often, or better yet to get him to check it more often because I've been meaning to be more punctual for the last few decades with little visible result.  But so many LARGE market influences such as funds, climate, and China now active in grain markets facing serious demand growth, losses and gains like we've had in the last few weeks could lead to some serious over-emoting.

I also think a little historical perspective might help our brains, as well. (This is favorite trick for old guys - "I remember back when this happened before blah, blah, blah...)  In this case there are some parallels to Japan that seem appropriate.

 I think the Japanese story has important implications for our analysis of China.  If China indeed experiences a rapid slowdown in GDP growth, the impact on the rest of the world may be far less than we expect.  The real key is the evolution of the Chinese trade surplus.  If it contracts, it will provide an expansionary boost to the rest of the world, not a contractionary one.
Of course that doesn’t mean that the world will grow quickly.  My expectation is that global demand growth over the next several years is likely to be anemic with or without China.  But it does man that a slowdown in Chinese growth might not be the disaster for the world that many believe.
Also a rapid slowdown in Chinese growth does not mean a social or political disaster domestically  It depends on how serious China is about rebalancing its economy.  If policymakers are willing to force up interest rates and wages, most of the adjustment pain will be borne by SOEs and the state sector, not by the household sector.  In that case we might see a slowdown in Chinese consumption growth, but one not nearly as severe as the slowdown in Chinese GDP growth.  Since the Chinese, like everyone else, probably measures their well-being in terms of purchasing power per capita, rather than GDP per capita, a sharp slowdown might not be nearly as painful as we assume.  [More - well worth reading]

Finally, it is good to remember it is now official that we can't predict squat about the global - or the American - economy.  Everybody does, of course, and some will seem to be right occasionally simply by random chance, but otherwise surprise will be the constant factor.

So we're fixing on accomplishing specific goals and letting others try to maximize selling price. If we can continue to solidify our land base, deploy all family assets as fully as possible, enhance our personal satisfaction with our lives, and get me into a new wood shop (and Jan into a new greenhouse) over the next 2-3 years, we're going to call it a win, regardless of whether China takes beans to $25 or not.

We've been financialized...

Just before I left the TV station on Friday morning after taping USFR, the producer asked what I thought Al should ask the market dudes when the roundtable was taped that afternoon.  (We tape in separate sessions for complicated reasons).  At that time the CBOT had just opened on Friday.

My answer, "Why are corn prices so strong in the face of bearish fundamentals?"

And of course, Friday happened.

Here's one explanation.

The disconnect between the Baltic Dry and commodity prices is unusual. So too is the way that commodity prices have been moving in sync with each other in recent years. A  recent paper by economists Ke Tang at Renmin University in China and Wei Xiong at Princeton University documents how commodity prices have become increasingly correlated with one another and with stock prices.
The reason, the economists argue, is that commodities have become increasingly “financialized” by the creation of exchange-traded funds that allow investors to easily trade in and out of them. So when investors get worried by things like what’s going on in Europe, commodity prices can fall sharply even though actual demand for commodities may be running higher. [More]

Of course, we have been noticing this for a few years now, but this trend has deepened and extended to a durable phenomenon.  It's complicating traditional timing schemes like moving averages, I have noticed. Often the sales "signals" last a few minutes at the open, or are wildly superseded shortly after being lost.

My own rudimentary efforts are increasing centered on trigger prices I can live with and forward sales. Also passive marketing to shoot for the average. Selling inventory in hand can become harder to execute in widely fluctuating daily markets. At least, I can look back to proof I freeze more often than I should.

Nor will the effort to fully comprehend all the forces at work and develop a grand theory of prices be a good investment of time, I think. These days weird stuff just happens, and we often can't decipher why post mortem, let alone real time.

Life's too short to become a slave to tick-by-tick randomness.

Free DP?  No thanks...

I have always considered free delayed (DP) pricing programs to be a masterstroke of psychological grain buying by offering an irresistible answer to a usually minor problem: move your grain out of your bins, get that job and risk out of the way and we'll hold it for free!

It is very popular in my area, even though we all know it can depress the bids, because the merchandisers already have the grain, making the need to bid up for grain when needed less urgent. Still, you get to have your grain and move it too - what could go wrong?

But the larger reason is the farmer (seller) becomes an unsecured creditor.  Not really a problem, perhaps for the multi-national buyers many of us deal with, of course.

Unless...

Quick refresher: A derivative end-user is someone -- usually a company -- who uses a derivative hedge against real risks. United Airlines hedging against a sudden spike in the price of oil, for instance. And these folks have been working very, very hard to exempt themselves from the regulations around derivatives.
But reading this piece from the perspective of a derivative end-user is a reminder of at least two reasons to be very careful with those exemptions. First, a lot of large corporations use derivatives to juice profits through, well, trading derivatives. They're not hedging risks so much as running an internal hedge fund. Cargill, for instance, is known for doing this. And if they suddenly have free rein over the unregulated derivatives market, their hedge fund business will get bigger, and riskier. That's not an incentive we necessarily want in the system. It's one thing to have to bail out an investment bank that got into risky trading. It's a whole other level of absurdity to bail out a hamburger producer. [More]

I about fell over when reading about possible derivatives regulations and came across this mention of my #1 customer. I'm sure these folks assume they have this trading under strict control, but that's pretty much what all the trading desks thought right before the excrement hit the revolving blade. I think the temptation to try fancy quantative tricks is irresistible, once you are tossing large numbers of options around routinely.

I'm not suggesting Cargill should or shouldn't be dabbling in these arcane arts, but since we now know virtually nobody in the industry or academia truly understands these markets, I think the prudent choice is to assume no market participant is "too big to fail". Or more to Ezra's point above, whether a "hamburger" producer would get the same backup from the US Treasury as a financial giant.

My customers can trade what and where they like, but not with my money. Plenty of other farmers will lend them grain/money. But for my farm, free DP may be even riskier than I thought.

Thursday fallout, Cont'd...


More analysis of the strange day on the NYSE prompts this interesting idea for mitigating future problems: no market orders.

But there are other ideas to keeping computerized markets in check. Lawrence E. Harris, a finance professor at the University of Southern California, said regulators should simply require all sellers to specify a minimum price below which they do not want to complete the sale of their shares. Market orders, placed at the best available price, can be too risky in the fast-moving age of electronic trading.

On Thursday, some sellers placed orders that were not fulfilled until prices had plunged as low as a penny a share. If sellers had placed “limit orders” instead, those transactions would not have happened, Professor Harris said.

“Electronic exchanges in most other countries only accept limit orders,” said Professor Harris, a former S.E.C. chief economist. “Without any mechanisms to stop the market, we just had stocks falling through the ice.”

But Rafi Reguer, a spokesman for the electronic exchange Direct Edge, said retail investors liked market orders because limit orders could be rejected, forcing the seller to try again, in some cases at a lower price.

“Sometimes what people value is the certainty of execution,” Mr. Reguer said.

Experts also note that the value of limit orders can be subverted if investors routinely set unrealistically low limits, to avoid the inconvenience of having their orders rejected. [More]

I find it hard to believe there won't be some tinkering with the trading systems which will spill over to our world.

Maybe only a few dozen...

If you have ever paused to wonder when looking down the breakfast cereal of cracker aisle in the supermarket if such extravagance of choice is economically efficient, you may have sensed a future trend. Maybe we're going to have our choices narrowed somewhat.

Wal-Mart is not the only one doing this, according to Dibadj. He says leading drug store chains, including CVS and Walgreens, grocers such as Kroger (KR, Fortune 500), and Wal-Mart's rival discounter, Target (TGT, Fortune 500), are also looking to simplify their store shelves.
In good economic times, product variety is a must for retailers. But in down times, when shoppers aren't buying much, variety can be a burden.
"Wal-Mart's a little fed up," said Lora Cecera, retail expert and partner at strategy consulting firm Altimeter Group. "I think the feeling is that as these companies keep extending their [product] lines, it's only causing confusion for shoppers and not really driving them to buy more products."
As a consumer, she asked, "Do I really need to decide between 15 different types of toothpaste when I go to a store?"
Dawn Willoughby, vice president-general manager of Glad brand for the Clorox Co. (CLX, Fortune 500), agreed.
"On an industry level, we've been talking about simplifying product assortment for a long time," said Willoughby. "If you walk into a Wal-Mart or another large retail chain, there are so many products on shelves that it does make it harder to shop."

 [More]

I think in part this could be a response to a buying public more starkly defined by income. As income inequality increases, Wal-Mart especially has fewer takers for slightly higher-end products.  And as the article points out, more (and essentially identical) choices make shopping harder.

So, a little bit of Psychology, to fuzz up your day, specifically the psychology of choice and of happiness. Two gentlemen, Barry Schwartz and Dan Gilbert, have made these topics more accessible via their TED talks last year. To summarize and synthesize the two: The more choice we have, the less happy we are. When we do get choices, we don’t use them well, and when we make mistakes, we rationalize them to ourselves, but still we worry that we didn’t do the right thing. [More]

Wal-Mart may think it is rationalizing shelf space and profits, but what it could be doing is helping customers enjoy their experience in the store by eliminating a subtle source of stress.  Happier customers spend more.

Another reason I'm selling too much...

2010 crop.  It could be too many of us are postponing the joy of profitability because of an intrinsic brain bias.

We’re trying to do a cost-benefit analysis of the time lost versus the pleasure or money to be gained, but we’re not accurate in our estimates of “resource slack,” as it is termed by Gal Zauberman and John G. Lynch. These behavioral economists found that when people were asked to anticipate how much extra money and time they would have in the future, they realistically assumed that money would be tight, but they expected free time to magically materialize.
Hence you’re more likely to agree to a commitment next year, like giving a speech, that you would turn down if asked to find time for it in the next month. This produces what researchers call the “Yes ... Damn!” effect: when the speech comes due next year, you bitterly discover you’re still as busy as ever.
Dr. Shu and Dr. Gneezy demonstrated another effect of this fallacy by giving people gift certificates good for movie tickets and French pastries. Some got certificates that expired within two to three weeks; others got certificates good for six to eight weeks.
The people who received the long-term certificates were more confident than the others that they would redeem the gifts — a logical enough assumption, given all the extra time they had. But they just kept putting it off, and ultimately they were more likely to let the gift go unredeemed than the people who had received the short-term certificates.
Once you start procrastinating pleasure, it can become a self-perpetuating process if you fixate on some imagined nirvana. The longer you wait to open that prize bottle of wine, the more special the occasion has to be.

If you’re determined to get the absolute maximum out of those frequent flier miles, you can end up wasting them, as Dr. Shu found in an experiment offering people a chance to use discount coupons in the course of buying a series of plane tickets. Once the subjects were told that they might have a chance at a free flight worth $1,000, they scorned lesser awards and hung on to their coupons so long that in the end they had to use them for much cheaper flights. [More]

I wonder if the atmosphere of economic struggle also compounds our error in calculating the benefit of enjoying today. It certainly seems sorta foolish to be cashing in miles or not hoarding gift cards.  In fact, this could be good news for retailers who have a lot of gift cards yet to be redeemed.

Gift card redemption rates have been discouraging this weekend, she said. They averaged 10 percent, based on a sampling of malls, she said. In good years, those rates are anywhere from 30 to 40 percent. That confirms that gift card sales were just "lukewarm," she said. [More]

While gift cards skew holiday sales numbers, they also represent potential profits as the longer they are held, the less likely that they will be redeemed.  From an issuer's perspective, an expired or lost gift card is about as good as it gets.

It makes you wonder what the utilization rate for seed freebies is. 

Dodging a regulatory bullet...

I think this is good news at my level.

The measure requires the Commodity Futures Trading Commission to curb excessive speculation by restricting trading volumes on oil and currency futures. It also requires broker- dealers including Goldman Sachs Group Inc. and “major swaps participants” like Fannie Mae to use regulated clearinghouses to process standard derivatives contracts that are normally accepted for clearing and deemed mandatory by regulators.
Some derivatives transactions would also be forced onto so- called swap execution facilities. Hedge funds, airlines and other corporate end-users that don’t pose a risk to the broader financial system won exclusions from the bill’s clearing, trading and collateral requirements.
Delta, Cargill
End users are mainly corporations that rely on derivatives to mange their so-called operational risks, such as protecting against swings in interest rates or fuel prices. Delta Air Lines Inc., agriculture company Cargill Inc. and farm equipment maker Deere & Co. successfully lobbied against some amendments that would have scaled back exclusions.

“Manufacturers of all sizes use customized OTC derivatives to manage the cost of borrowing or other risks operating their businesses,” Dorothy Coleman, vice president of tax and economic policy at the National Association of Manufacturers, said in a statement. “These important risk management tools help keep manufacturers operations going, invest in new technologies, build new plants and retain and expand workforces.” [More]

It's hardly surprising that punitive legislative and regulatory measures are pouring out of Washington after the recent shabby performance of too much of our financial industry.  This measure could have been a lot more burdensome without those exclusions.

And the result would have been obvious in our grain bids and input prices.

I just might make it...

By "I", I mean "we", of course.  Even though I'll be flitting to Cargill meetings this week, our harvest might be done by the breakfast I'm speaking at for the Marketing Rally.

As you can guess, there is plenty of room for late-comers, so if you're done or getting close, restart your marketing for 2009 and 2010 (yup - I'm selling corn and beans both now).

Click here to register, and good luck this week.

Not only Christmas...

Is coming.  The traditional Fall Farmer Meeting Season is about to commence - ready or not!  As you can see from my calendar at left the other left, I may not be around for closure on this harvest.

As I struggle to concentrate on the financial outcome for this year and the prognosis for 2010, I have realized one thing: I am not thinking very clearly.  I think I have pre-PHSD (Post Harvest Stress Disorder).

I am NOT equating my mental issues to veterans coping with PTSD or making a lame comparison.  For several years, however, I have noted a pronounced change in my mental processes after harvest - and this harvest is one for the books.

One thing that seems to help me is re-establishing my bearings by conferring with other producers and experts. So despite the obvious difficulties, I am glad to be a part of the FJ Marketing Rally.

I would enjoy the chance to visit with you there.  This could become the premier marketing meeting of the season, and the first one could be the pattern.  Do the calculation and if you can see making it, it could be another reward for enduring 2009.

Besides - and you didn't hear it from me - the talk about a free-for-all Jello-wrestling tournament  between the market analysts may not be that far off.

[It will take some time getting that image out of your mind, won't it?]

Like the truth...

It's out there.  The crop, I mean.  One clear message from the 3 Cargill ProPricing meetings I have attended so far, as well as other speech locations, is grudging admission of huge yields.

There are some small caveats: white mold north of about I-80 and 10-15 days maturity delays.  But I was probably the only person in the very well-attended meetings to whinge about yield prospects.

Help for your marketing...

And mine.  I will be working with the folks at Cargill in upcoming weeks with their Cargill Connection meetings.  And, no - I'm not giving marketing advice, other than some personal experiences and insights  - many of which I've shared here - about how my brain is sometimes the enemy of my wallet.  I will be moderating and trying to insure everyone has a chance to develop a better relationship with folks who buy a lotta grain.

I'm happy to be a part of these meetings for several reasons.  First, Cargill is my best customer, and I have had very good results working with them for decades.  Second, I will get the chance to visit with producers all over the Corn Belt.  Finally, after being in a dozen or so presentations, perhaps some of the advice might sink in and my marketing improve slightly.

At any rate, I'd love to hear what happening on your farm, so check out the dates/locations below, and call your Cargill rep.  As we move into an uncertain future, you may be surprised what tools to are available to help manage risk and reduce stress in your marketing.

Full information here.

Why we keep trying to go...

"Back to basics".   We think that tactic is the answer to too many problems.  Only "basics" is another word for habits. Under stress, habit beats logic.

When the scientists studied a region of the rats' brains called the dorsal striatum, they also found striking differences between the two groups. In stressed rats, neurons in the dorsomedial striatum, an area associated with goal-directed behavior (for example, pressing a lever to get a specific treat), had shrunk, making fewer connections to other cells. Meanwhile neurons in the dorsolateral striatum, an area that controls habits (such as pressing the same lever regardless of outcome), had grown and formed more branches. The researchers conclude in tomorrow's issue of Science that chronic stress rewires brain areas involved in the switch between goal-directed and habitual actions. Rui Costa, an NIH neuroscientist and co-author of the study, says that "those changes in the brain bias your behavior tremendously for a while after the stress."

The study provides an animal equivalent to "a frequent, maladaptive feature of human behavior during stress: We fall into doing the same thing ... instead of trying something new," says Robert Sapolsky, a neuroscientist at the Stanford School of Medicine in Palo Alto, California. John Morrison, a neuroscientist at Mount Sinai School of Medicine in New York City, says that the study is significant because it highlights how stress acts differently on specific brain circuits. "And we need to understand that specificity" to help design treatments for stress disorders, he says. [More]

This would explain my marketing skills.