Tuesday, March 11, 2008

How free is free?...

A loyal reader writes:
In your blog, the premise is that you would like to take on/sign long term
contracts with Cargill for a number of reasons.

I for one have "problems" with the notion that contracting is good for
agriculture in the long run. In particular it isn't good when relative
market power differs greatly between players. And, I happen think that Ebay
for grain will happen. If it works to sell every thing from hairballs to
who knows what... why not grain?

Since I don't consider you stupid or shallow thinking, I have to ask
myself.... "what am I missing, what does John Phipps see that I don't"?

So, I thought a bit about The Birth of Plenty. Since I don't plan on
re-reading that thing and am running on memory, the parallel I draw on the
question is in the area of efficient markets.

Is contracting more or less efficient than "open" or bid derived markets?

Is contracting more like the "commons" or worse, the share you receive of
the goody is determined by "special" deals?

I guess I would argue that contracting a grain or livestock flow to an
end-user is not more efficient over time and that the risk of a biased
contract lowering the bar on the farmer share over time is very real. Thus,
it runs counter to one of the four tenets proposed in the book. That is,
what is the bigger issue, the cost of price discovery on a more frequent
(daily?) basis vs. the "honestly" that (daily?) discovery brings to the

What say you?
[The post referred to is here.]

First, let's establish what I mean by a "deeper relationship" - (I know, pretty crummy language for farmers, but the best I could come up with). I avoided the use of the word "contracting" because it has its own baggage and various forms of contracts are familiar to producers.

As I explained in my Top Producer article, "More Risk, Please", grain producers - like livestock producers before them - are struggling to balance risk with freedom. Specifically the risks of tenure (length of land rental) along with the risks of operation versus the freedom to choose as many options as possible.

I'm ready to make some trade-offs. For two reasons.

First, expanding choices actually increase anxiety and undermine our brains efforts to make us feel satisfied. There is an illusion of maximizing outcomes by "keeping all options open" when all it really does is tie up our mental processes comparing odds and outcomes. In short, I'll agree to some restraints in order to gain some other good.
Barry Schwartz is the guru who explains this best:

...we assume that more choice means better options and greater satisfaction. But beware of excessive choice: choice overload can make you question the decisions you make before you even make them, it can set you up for unrealistically high expectations, and it can make you blame yourself for any and all failures. In the long run, this can lead to decision-making paralysis. And in a culture that tells us that there is no excuse for falling short of perfection when your options are limitless, too much choice can lead to clinical depression.

(from Barry's page at Swarthmore)
Second, one answer to volatility is anchors. To make better judgments in markets like well, today, I have found a few absolutes powerfully steadying: owning as much land as possible, long history with my lender, and the reassurance my fertilizer, machinery, fuel, etc. vendors value my business and in turn don't have much worry about me auctioning them off every deal.

What might this relationship look like? Just dreaming here, but what about a "retainer" for my acres? Just like Cargill nails down 3 years of grain from the bin they help me build, how about a similar pricing cap on 1/3 of my acres each year in exchange for $X per acre? Up to the restraint of the pricing cap we would establish prices the same as always - although it can be fairly argued Cargill could lower bids as more grain is captured. But unlike the grain bin/health insurance/college fund ideas, this one works for any producer.

In fact, I could see allegiances growing to a formal affiliation: I would become a Cargill Grower, with some attendant benefits. This idea horrifies many in agriculture and flies in the face of our view of markets as an adversarial exercise, but I see no reason why it cannot be an option for those who wish to do so.

The concept is only slightly different from closed sugar beet coops, only without government subsidies involved. If farmers can band together (horizontally), why can't they forge alliances up and down the value chain as well?

This same effort seems to match what I cited in the TP article as a push by farmers to get some predictability in their rented acreage. Judging from remarks I have heard about land flowing between operators this winter, this issue will command immense attention in the months ahead. I see a direct parallel between farmers trying to ensure landowner commitment and Cargill seeking grain producer commitment.

As for market efficiency, we might look to the protracted battle over cattle contracts. I could see some loss of price discovery on any particular crop, but any contract system collapses rapidly if participants do not feel benefits are allocated fairly. Just like multiple year rental contracts, price discovery is slowed, but it surely more transparent and responsive than share rents which farmers prefer.

And I question the success of eBay Star Wars figures as easily adaptable to grain markets. I haven't noticed buyers clamoring for for such a "naked" trading system, so I wonder if they won't work to avoid participating, especially in tight supply years like this. We've already seen one response to our efforts to foist all the risk on our customers: the end of forward pricing.

All that said, I've had more than a few ideas that didn't amount to much. But I don't think waiting to see what will happen is the answer for either our land problem or our marketing problem. And as my life and words testify, I favor errors of commitment to errors of inaction.

[Thanks, Tom]

1 comment:

Anonymous said...

. I have been ciphering,(like Jethro Bodine) on this for a spell Mr. John since I read it this afternoon. See if I have the gist of the text?
Years ago I worked in the Manufactured Housing Industry. In the late 80's a few folks I worked with went into the raising of chickens. They bought land for the houses to be erected next to their own property. I won't mention the company's name but they were from Arkansas. The fellows I worked with turned in their notices and went into it whole hog. About 5-7 years later they were back working with me. I asked them what was going on? This was the answer I got. The company signed a contract for 3-5 years to raise the chickens. Built new modern rearing houses and installed the best of the best in equipment available in case of emergency and what may come. They sold the chickens back to the company for a set price with a slight increase from time to time. the houses and equipment were financed thu the company and the note payment was taken out of the profits with a bit left over for the farmer to live on. A few of them had more than 3 houses 5-8, the rest just 3.
The company didn't keep them long. All of the fellows I know had contracts for 3 years and the company didn't contract with them after the present one expired. The trouble was the term of the financing for the houses and the equipment was financed for 15-30 years. Yep, there was a lot of folks losing all they had and then some. Trouble was they couldn't contract with other company's because of the contract with the previous company.
I hope this doesnt happen with all farmers. Like a friend of mine said just before he went into this venture. "Now, I know what it must be like to sell your soul to the Devil."

Sorry about the length, chop away at your discretion.