Tuesday, March 11, 2008

What happened to my only arrow?...

I checked in my marketing quiver today for a suitable device to slay my sales problems, and lo - I saw nothing there. To be sure I had eliminated most of the sophisticated weaponry - futures hedges, options, etc. - and settled on one gimmick I understand: forward sales.

No more.

My #1 customer, Cargill, now only gives bids out to next month (Apr 08). To be fair, they had held firm until last Friday, but my understanding is most producers have made their last forward sale for a while. (I don't count next month as "forward"). My rep told me Cargill is proceeding with their usual haste to release information to farmers about what they can expect. Her understanding was the lawyers are looking it over as we speak. That reassured me it would be forthcoming perhaps in my lifetime.

One irony is next month I will finally be able to administer my contracts on-line at their site. Only I just won't be able to contract any grain sales. (Another thought just occurred to me, can grain buyers - like feedlots, etc. - contract forward purchases? Or is it just the supplier side?)

Of course, you may point out, you can sell on the board, buy a put, do a basis contract (which doesn't look like much of a way to capitalize on great prices in 09). I see them as introducing their own risks, something forward sales diminished for me. I also know my history with those strategies. Besides as the option narrow for producers the remaining choices could become very expensive.

Loss of cash forward sales is going to ripple through all kinds of hybrid marketing plans. Capturing the carry, for example. Using crop insurance to support locking in early profits. Timing sales to match cash flow. Your list may be longer, those are just what I could think of.

It could be that the grain industry is squeezing farmers to activate their considerable political clout to resolve the issues in the pits that have put buyers at enormous financial disadvantage. It's like shutting the government down over a budget bill. As long as it was just big grain companies suffering, most producers didn't car much. I'll bet they do now.

Let me get this straight. I am going to deliver with muted good humor the last 41,000 bushels of my 2005 3-year forward contract for a whopping price of $2.59 - just like I promised I would do if they gave me a "free" grain bin. I understood the risk (although I severely miscalculated the odds of a rise in prices). And I'm standing tough behind my promise.

Grain merchandisers have taken on an enormous load of risk - not to mention millions in margin calls - in this market. I suppose every organization has a tipping point. And one tactfully unspoken but significant risk is the forward contracts they hold could be the focus of producer shenanigans come delivery time - especially those far below the market at the time. Like my $9 fall 08 beans, come to think of it. (You have to admire my persistence, if nothing else)

But when (I hope) the futures market is restored to working order so risk can be effectively marketed, and Cargill and similar originators begin offering forward sales again, I hope they remember first those who kept their promises. In fact, perhaps if farmers had to qualify for forward sales, that day might come sooner.

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