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Are farmers not able to use financial instruments to hedge their costs? Simply borrowing money with no hedge seems VERY scary to me. I guess that's just the gam

by cheez 8y ago

Are farmers not able to use financial instruments to hedge their costs? Simply borrowing money with no hedge seems VERY scary to me. I guess that's just the game?

NTDF9 8y ago
I'm not aware of these instruments. What are some examples of hedges to farm borrowing so I can look them up?
- icahnvalyou 8y ago
  All the commodities mentioned in the article have had active futures markets for decades. A farmer will typically sell contracts to deliver their crop as a hedge against the price moving against them during the season. https://en.wikipedia.org/wiki/Futures_contract https://en.wikipedia.org/wiki/Futures_contract
- protomyth 8y ago
  Go to any of the major player's sites and they have programs for farmers such as https://www.cargillag.com/ https://www.cargillag.com/ - ProPricing is there marketing name https://www.cargillpropricing.com/ https://www.cargillpropricing.com/ You can do it yourself if you learn hedging. Iowa State has https://www.extension.iastate.edu/agdm/crops/html/a2-60.html https://www.extension.iastate.edu/agdm/crops/html/a2-60.html and University of Missouri https://extension2.missouri.edu/g602 https://extension2.missouri.edu/g602
- village-idiot 8y ago
  Most farmers and their direct consumers will buy/sell a portion of their harvest in advance in the form of commodity grain futures. This protects the farmer from dropping prices and their consumer from rising prices. It's one of the reasons why prices don't shift around a ton from winter to summer anymore. You can also hedge risk against changes in production cost by using instruments that track the difference between raw grains and their immediate products (e.g. Soybean Crush). But that's not really a game the farmer might play. These systems have their limits, and are really there to protect all parties against sudden shifts caused by external events like drought and international trade. When the trend is long and smooth in one direction there's very little the farmer can do to fix their situation via purely financial means. No baker is going to pre-purchase their wheat at old prices when the market price has been slowly declining for a decade.
- lbotos 8y ago
  If you want to read more, "The Futures" was solid intro to the "how" it started: https://www.amazon.com/Futures-Speculator-Origins-Biggest-Markets/dp/0465018432 https://www.amazon.com/Futures-Speculator-Origins-Biggest-Ma... (no affiliate link)
dmckeon 8y ago
Those raising corn and (soy)beans are at one end of the grain commodities market, and can hedge against the crops they have raised and stored for future delivery. This is why TV and radio stations in the breadbasket states air daily crop price reports around sunrise.
jackcosgrove 8y ago
Interestingly enough the futures contract was invented by agricultural commodities traders to hedge against inclement weather. But consider that many farmers only have a high school education, and are managing operations with millions in assets/debt, hundreds of thousands in revenue per year, and razor thin margins. A lot can go wrong. Many understand the benefits and dangers of financing, but many don't.
- lbotos 8y ago
  Is this still true? My understanding is that "Modern Farm Science" is a big thing in Midwestern US colleges.
  - jackcosgrove 8y ago
    The BLS lists a typical education for a farmer as a high school diploma. https://www.bls.gov/ooh/management/mobile/farmers-ranchers-and-other-agricultural-managers.htm https://www.bls.gov/ooh/management/mobile/farmers-ranchers-a... It's not that farmers are particularly uneducated as a class of people. It's that they run complex businesses relative to their formal education. A minority of people finish college, but only a small number of high school graduates are farmers. Most who become farmers learn the job by growing up on a farm.
lbarrett 8y ago
I think they can easily hedge prices (via futures), but hedging production is much harder (because your weather & production might be different from others around, and with insurance the incentives can get bad; see moral hazard). I worked for a company that tried to insure farmers so they'd be profitable even in bad years, but the reduction in profit on good years (i.e. cost of insurance) was too much to sell well.

by cheez 8y ago

Are farmers not able to use financial instruments to hedge their costs? Simply borrowing money with no hedge seems VERY scary to me. I guess that's just the game?

NTDF9 8y ago

I'm not aware of these instruments. What are some examples of hedges to farm borrowing so I can look them up?

icahnvalyou 8y ago
All the commodities mentioned in the article have had active futures markets for decades. A farmer will typically sell contracts to deliver their crop as a hedge against the price moving against them during the season. https://en.wikipedia.org/wiki/Futures_contract https://en.wikipedia.org/wiki/Futures_contract
protomyth 8y ago
Go to any of the major player's sites and they have programs for farmers such as https://www.cargillag.com/ https://www.cargillag.com/ - ProPricing is there marketing name https://www.cargillpropricing.com/ https://www.cargillpropricing.com/ You can do it yourself if you learn hedging. Iowa State has https://www.extension.iastate.edu/agdm/crops/html/a2-60.html https://www.extension.iastate.edu/agdm/crops/html/a2-60.html and University of Missouri https://extension2.missouri.edu/g602 https://extension2.missouri.edu/g602
village-idiot 8y ago
Most farmers and their direct consumers will buy/sell a portion of their harvest in advance in the form of commodity grain futures. This protects the farmer from dropping prices and their consumer from rising prices. It's one of the reasons why prices don't shift around a ton from winter to summer anymore. You can also hedge risk against changes in production cost by using instruments that track the difference between raw grains and their immediate products (e.g. Soybean Crush). But that's not really a game the farmer might play. These systems have their limits, and are really there to protect all parties against sudden shifts caused by external events like drought and international trade. When the trend is long and smooth in one direction there's very little the farmer can do to fix their situation via purely financial means. No baker is going to pre-purchase their wheat at old prices when the market price has been slowly declining for a decade.
lbotos 8y ago
If you want to read more, "The Futures" was solid intro to the "how" it started: https://www.amazon.com/Futures-Speculator-Origins-Biggest-Markets/dp/0465018432 https://www.amazon.com/Futures-Speculator-Origins-Biggest-Ma... (no affiliate link)

dmckeon 8y ago

Those raising corn and (soy)beans are at one end of the grain commodities market, and can hedge against the crops they have raised and stored for future delivery. This is why TV and radio stations in the breadbasket states air daily crop price reports around sunrise.

jackcosgrove 8y ago

Interestingly enough the futures contract was invented by agricultural commodities traders to hedge against inclement weather. But consider that many farmers only have a high school education, and are managing operations with millions in assets/debt, hundreds of thousands in revenue per year, and razor thin margins. A lot can go wrong. Many understand the benefits and dangers of financing, but many don't.

lbotos 8y ago
Is this still true? My understanding is that "Modern Farm Science" is a big thing in Midwestern US colleges.
- jackcosgrove 8y ago
  The BLS lists a typical education for a farmer as a high school diploma. https://www.bls.gov/ooh/management/mobile/farmers-ranchers-and-other-agricultural-managers.htm https://www.bls.gov/ooh/management/mobile/farmers-ranchers-a... It's not that farmers are particularly uneducated as a class of people. It's that they run complex businesses relative to their formal education. A minority of people finish college, but only a small number of high school graduates are farmers. Most who become farmers learn the job by growing up on a farm.

lbarrett 8y ago

I think they can easily hedge prices (via futures), but hedging production is much harder (because your weather & production might be different from others around, and with insurance the incentives can get bad; see moral hazard). I worked for a company that tried to insure farmers so they'd be profitable even in bad years, but the reduction in profit on good years (i.e. cost of insurance) was too much to sell well.