Fantasyland 2

[ianben]

Hi Everyone,
We seem to have got back to supply and demand and our differing views on how it affects markets
Tom you seem to think low prices reduce production
I question this as that Brazillian report and my personnal experiance proove otherwise. When prices are low we try to produce more to maintain our standard of living.
Tom you think low prices increace comsumtion
I question this as I dont believe they ever get right back to the end user.
The middle men just say " Thank-you very much suckers"

Tom you are right about the way we should treat customers though. They are king, but what they want, what I want when I am a customer, is a guanteed supply at a fair and stable price as near fixed as possible. You aren't happy with OPEC are you. Why would our customers be any different?
The present system is giving to much swing for whatever reason.

Chas. I am glad that at least you want to change things, unfortuneatly I dont think your idea is workable in practice.
The way to remove the speculator is to remove the volatility. Let him gamble with someone elses livelyhoods solicitors or realtors perhaps. Hows that for fantacy!!!

The only thing which really affects the market as you rightly say Tom is weather.

Now I feel guilty if I wish for plague or locusts on the prairies as I've got to quite like you guys.
Those Brazillian guys seemed decent too.

So my idea won't work because we can't trust one another. Not even to set a bottomline price?
A price so low none of us would be happy there.
Somewhere just above SUCKER!!!!

Regards Ian

Hey Lee
I might enjoy that! but Tom get my vote for master marketer!!

[TOM4CWB]

Ian,

You are too kind,

A little story is worthy of telling here!

I have a friend in the industry side that told me his life experence.

He worked for a multi-national in Brazil!

Soybeans and corn his specialty!

Was down there 3 or 4 years and the last year I believe he made over $60 million for the company.

Guess what they did to him?

They moved him to the UK, right away!!!!

Pride comes before the fall, and the big guys know it!

If we are to be "master marketers" or master farmers we must be humble, always willing to listen, and willing to adapt and change faster than anyone else!

[charliep]

A couple of questions to contribute to the discussion.

1) What is a fair price for agricultural commodities?

2) If price is determined in a different way than the current one, how would it be done?

3) Would this price allow some farm families to go broke while others make major profits/buy up their neighbors who run higher cost operations? Would this situation be different than today?

4) How much of higher prices would get eaten up in higher land values/rental rates?

Thoughts.

Charlie P.

[TOM4CWB]

Charlie,

Costs will always be different for all farms.

This is because;

1. Risk is different on every farm. At Killam this year we have had 2X the rainfall we have had at Ardrossan.

2. Capitalization is different on every farm. Some people operate new machinery, and can make it pay by insuring that maximum quality is achieved every year, while others minimize equipment and spend more time repairing their equipment.

Some people have expensive land with high productivity, some just expensive land, because they paid too much!!!

3. Management ability to put the whole package together is the third key. Diversity of crops grown, location of the farm, ability to integrate others talents and skills into this this operation all have a great affect on this unending challenge,

RISK. A factor that can be controlled by intuition, good planning, wisdom, experence, and a bit of luck!

When the whole package is done a cost of production can be figured out after production and marketing is finished, but this must be planned in advance because a farm without targets is like a ship without a rudder!

So what is the answer to your questions Charlie?

Are farmers willing to "wisely change"?

This will answer the survival question, and obviously, "wisely change" is a largely a matter of opinion until after the fact!

Hindsight is always 20 20!

[ianben]

Hi Charlie
Real good questions. The one about a fair price has my mine in overdrive.
Too late tonight 00;48 Thurs here. Need some sleep.
Regards Ian.

[ianben]

A fair price?
A price?
Why do farmers find this so difficult?
Why do we not fix prices?
Everyone else seems to have managed to fix a price for their goods or services.
Everything we buy has a price, at least sugested by the seller. You may haggle but at least it gives an indication of what they consider a fair price.
Fair?
Who says it needs to be fair?
Other people who fix prices don't seem to have this ethic.
Are dentist prices fair?
A friend of ours recently had a crown and two fillings, she was in his chair for 1hr;15 mins. He charged £500-$1200
A price she was prepareed to pay for good teeth to eat her CHEAP food.

Price does not necessarly have to be link to costs.
This is where I think farmers get it wrong.
Price should be linked to what people are prepared to pay.
My way to fix the price tomorrow would be to look at the highs and lows over the last ten years. Take the average add 10% and thats your price.

We have actually done this for two customers in our hay and straw business. At their request I must add.

Their problem was if they increased their livery fees because of higher fodder prices some people always left for another yard. Even though they may be paying the same price there or have less facilities.
We have been delivering hay and straw at the same price for the last 5 yrs and the customer is happy.
He has a lower turnover of clients. Except when he had to increase prices due to the introduction of the minimum wage!!

It is a natual reaction when prices rise. I did the same with fert this year. Changed after ten years of good service and quality. A MISTAKE!!! but I could only see the massive price rise forgot all about that service and quality.
I will go back but don't tell him that.

Allowing our prices to be set by the buyer and fluctuate wildly is also a mistake

As to what the future would be if we could at least operate within a narrow price band.
Who can tell?
I think at least some familly farms could survive,it would depend on how well they understood the new system.
You have got to keep your customer supplied. You have got to keep your bins full and probablly buy some more.
You have to supply the quality the buyer requests all the time.You may not not sell all you could produce but can you keep your bins full at a lower cost than your neighbour.

All the other people with "fair prices" seem to have found a way to survive. I would hope we could survive like accountants or dentists, realtors or even marketing advisors.
Having "fair prices" seems to work for them.

Regards Ian

[TOM4CWB]

Ian and Charlie,

Like Ian, our farm has a contract on straw, that returns a reasonable return on investment every year.

Now, with a really dry year in the works, do we try to extract money out of our buyer?

We have not, because when there is a year of large supply, this end user respects us enough not to drop our price either.

This comes right back the the golden principal, do unto others as you would have them do to you, in the same situation.

This marketing of our straw has being going on for almost 20 years now, and we have done business every year.

Some might say, it is too small a market to mean much.

Last year it was close to 15% of the GROSS revenue of our farm!!!!

This is why personal relationships in marketing, honest, blunt, truthful, straight talk communications are first to making this relationship a good working one.

In some ways our farm capital requirements are much higher than our neighbours because of this marketing arrangement, but most farmers can't believe we are "blessed" with such a good market.

Hard work and honesty are the 2 most important atributes to making any farm work well!!!

So in basic principal Ian and Chas, I can't disagree with the base of what you have been "trying" to get across.

Now if I have put in a stop to sell a good chunk of our Canola at $7.30 for off the combine delivery, am I undercutting the market?

When the CWB sells my wheat, does the CWB understand and honestly know what the "fair price" is for my farm????

I know that they have never answered these requests when I have wanted to know what these price targets are.

So thalpenny, again to the CWB, what is a "fair price" for my Crystal CPS Red wheat when on average I grow well over 12.5% protein?

When I grew 16% CWES wheat (the CWB wouldn't pay for its protein value) and the US market wanted to pay, what it was worth, only because of this intrinsic protein value, why did the CWB take my truck and charge me with breaking the monopoly?

I guess I am guilty only of trying to be frugal and knowing the value of my product!!!

In the 1950's and 1960's the CWB let sales like mine happen without a buy-back. When farmers did their homework, they got their no cost export licenses.

Now they are so smart they try to control the universe.

Too bad now they didn't have to be responsible for their actions!!!

I forgot, sorry, they will be responsible the good Book says!!!!

I think I read somewhere, the FEAR of GOD is the BEGINNING of all WISDOM !!!!

[charliep]

I will forward the two toughest questions I have been asked over the past year.

1) Are todays prices normal or abnormal? If prices are normal, what next?

2) If I/you were given the magic ward to set prices at what would be considered a fair level (actual $/bu or whatever), what would this price be for the different commodities be?

[TOM4CWB]

Charlie,

Sold Canola at over $7/bu and 48lb feed barley at over $2.40/bu today for off the combine delivery.

CWB 13.5 CWRS #1 at over $4.80 was my hedged fall 2001 price.

These are "normal" 5 year average prices I would say!

Now, the question is how many farmers had the marketing skills to be equipped to actually exercise and carry a marketing plan through to acheive these "normal" prices?

Does a farm have enough management skill resourses to handle the risk these hedging strategies require to achieve these "normal" prices?

In the end marketing is a state of mind, and as much work is needed in this management side of the farm, as with the production side!

If farmers don't do the work, they can't expect the benefits that arise from doing the work!

I have never found life to be a free ride, and the CWB makes me mad, because they say I can have my cake and eat it too with them doing my marketing for me.

They are not being honest when they say this!!!!!!

You can't get something for nothing!!!

[ianben]

Hi Tom
You really are the master!!
You have been using the new system for 20yrs!!!with your straw contract.
Hay and straw have been a magor part of our income the last couple of years too.
I find the regular income makes things so much easier. You can actually have a planned replacement policy for machinery and stick to it. I bet my local dealer is glad about that! How many will be there when the prices recover under the supply demand system.

Yes Tom you appear to have done well under the old system too!!!

It is a lottery though and your broker must also do quite well out of you.

You may have acheived your 5yr average this time, but what have been your highs and lows and why did you need to go there.

We damaged ourselves and our comunities in the lows and upset our customers in the highs.

In the last seven years my feed wheat high has been £140 and the low £60.

What has caused this massive swing?

Chas must be right on this one speculation in our livelyhoods!!!

No wonder I cannot find a wheat buyer willing to do the same deal as with straw. I have plenty out there who would be happy to fix their costs but the risk is to great if their competitors benifit from the lows.

The only deal on offer is a premium over market.
So we both loose out.

Charlie and Lee.

I would be interested on your views on a "fair price" and the gap between the highs and lows.

Is a fair price what a person is prepared to pay?

How then does this relate to the highs and lows?

A cheeky question but an answer might be helpful!

How does a marketing advisor know what to charge for his services?

Regards Ian

[cowman]

A fair price is one where everyone can make some money. Unfortunately that seldom happens. So when one guy isn't making any money he either quits or finds a cheaper way to stay in business.Barley at two fifty is too cheap! But go up very much over three bucks and you will see primary meat producers either seek cheaper feeds or start to downsize. It might not happen tommorrow but it will happen. Many farmers are at the point where they can exit the industry if there is not money in it. Don't forget your main customer...the domestic beef and pig farmer.

[ianben]

Hi cowman
Your fair barley price would be $2.70/80, then I guess from your imput.

What have been your highs and lows in the last ten years, if you don't mind me asking?
Would $2.70/80 be the average price?
Have you ever considered a fixed price deal for barley like Tom and I have with straw?

Would you like to fix your barley price at $2.70/80?

Sorry for all the questions but I think your answers could be very interesting.

Charlie

A comment on options, better here in fantacyland, as your advice above I am sure is sound in todays world.

I liked your relating it to auto insurance as the cost of auto insurance varies as to what and where you drive.

The same is true for options I believe.
The more volatile the market the more the option premium.

Just who does benefit from volatile markets?

Could it be the guys Toms friend works for who made $60 million in a year from corn and soya?
I bet he didn't have much to do with growing it!!!
Probablly got moved to UK because he didn't make $100 million.

Those high profits and premiums could be ours, the farmers, if we could control the volatillity in the market!

Regards Ian

[charliep]

Ian

With apologies for a cheeky answer to your question, my response is the same as the realtor told me the last time I sold a house - a price is what a willing buyer and seller agree to. The price is relevant only until the next buyer and seller who make an agreement on price for a similar house at which time this is the price. The main issue on price is that is is publically available so other buyers and sellers can see it and use it in their decisions.

Consultants in the private sector charge on a per acre basis normally for a complete marketing/financial management servive. Costs for this product are normally in the $2000 to $10,000/farm basis (type of service varying with the fee). Lee and I work for government - still free service as opposed to Europe/the UK where my understanding is that government has basically backed right out/is not providing extension services.

Charlie P.

[TOM4CWB]

Ian,

He didn't get moved to the UK because he made too little, but too much!!

If one person is responsible for $80mil in profits, then if that person lost $60mil the following year, the average person would say that they still did OK.

But the bottom line is that really, they did loose $60mil, and the company already had this profit integrated into its system. They knew this expectation existed, how impossible and unrealistic it is to trade markets profitably all the time, so this person was relieved of his duties!!!

When a new person took over the Brazilian operation, they had no expectation at all that they could loose any money!!

When I trade options and futures, being right is usually followed by being wrong twice!!

The management teams who watch farmers are clear to point out that 80% of farmers who trade futures accounts are nothing more than wild eyed speculators, or GAMBLERS....


Now how do we relate this back to the farm!

In every options transaction I make, I try to squeeze a small profit out of it, because in the past I just used it like Charlie said like auto insurance.

There are ways however to get the premiums back, but it takes time, hard mental work, and paying attention to business!!!

And I must resist the temtation to speculate, instead to only reduce risk by making the trade.

If I increase my farms risk by trading my futures account or by buying options more than I reduce overall risk, then this was a speculative gamble, not the work of a "master marketer"!!

Does this make any sense?

[cowman]

Ian:
Of course I'd like to get a fixed cost like 2.80. I've bought barley a lot cheaper and a lot more expensive over the last ten years but I suppose the average would be around the 2.50 mark. The thing is you have to realize the grain guy has to make a buck too and if he isn't getting a decent return then he's not going to raise any barley and suddenly there is a shortage and the price goes up. I've always bought barley from my cousin and I don't try to beat him down on the price but try to give him a little more because if I don't he might be tempted to grow something else. Barley grows very well in my area and should be the major crop but due to poor prices we are seeing a lot more wheat, canola and export timothy! Especially timothy! I don't know what price barley should be at to make it profitable but I can sure see it's not enough right now.
The thing about barley is it is mostly used right here for the feeding industry and it adds more money to the local economy.Usually this cuts out all the parasites like the CWB, railroads, elevaters, dock workers etc. If it gets froze, or hailed out, or is too weedy it goes into the pit without a huge loss. I do believe in a free and open market but we can't have one sector take a serious beating again and again or we'll all lose.