GCME RISK MANAGEMENT EDUCATION:

YOU CAN LEARN A LOT BY ASKING QUESTIONS

When we asked elevator management what percent of their 2005 new crop cash purchases were contracted when prices were $7.00 and above, the percentage they gave us was around 5 percent. That was also the case in the 1988 drought when prices soared and again in 2004 when prices soared . That means the decision making thought process used by the majority of producers in the dismal 1988 performance is the same one used in 2004-2005. If that wasn't true the results would be different. Nothing of importance has changed.

The question is, why? Finding the answers requires honest talk. One answer is, what producers were thinking in 1988 is the same as what they were thinking in 2004 and 2005. And what they were thinking was (a) prices were forecast to go higher and (b) if they priced now they would miss out on higher prices. As far as (a) goes, producers need to know up front that opinions and forecasts are more unreliable than they are reliable. As for (b) the options market provides the flexibility to participate in an up market. That fact overcomes the fear of pricing too soon.

The first effective solution is to stop thinking in unreliable biased terms, thinking someone else knows where prices are going and you don't. That seems simple enough but we found that most producers need and appreciate reminders, some more often than others, to keep them on track. The second effective solution is to learn how to develop the price flexible benefits of options into your risk management plan.

In 2004 there were numerous reports from across the mid-lands of producers who watched old crop cash prices exceed the $10.00 area only to finally give up and make cash sales back in the $5.00 range. Not helping matters, the dismal performance is widely condoned within ag circles as business as usual. Even though the performance is grossly unacceptable no change is sought and the status-quo remains.

Consequently, the errors of the past are left to be repeated again and again. There were also producers who sold in the $5.00 range before the up move, but did not participate in it because they didn't understand the flexibility benefits that options provide. There can be no doubt that the practices, common to the majority, are deeply flawed.

How flawed is it in dollars? When prices were passed up in the $10.00 range, in 2004, for sales in the $5.00 range, that is around a $25,000.00 mistake on just 5,000 bushels. For those holding 20,000 bushels, for higher prices, it became a $100,000.00 financial fiasco. That is just on old crop sales. Add the fact that the pricing opportunity above $7.00 a bushel for the 2004 new crop and the 2005 new crop was ignored by a 95% to 5% count, according to several mid-west elevators. Throughout the mid-lands, what we have is a serious risk management problem adversely effecting individual producers for the lack of price flexible knowledge and education.

Objectivity was non-existent. Numbers had no meaning. Downside risk was not a concern. There was no plan developed. There was no flexibility to benefit from higher prices after the cash commitment was made. There was no flexibility to secure option premium in a down market. The thought process learned in the GCME Risk Management Education Program was completely absent. The percent of profit over costs were ignored. This is definitely not the business plan many producers want, but it is the one they have.

Add to the above list that what producers were doing was reading the subjective hype commonly found in farm magazine outlook sections, farm radio, TV and newsletters. The hype influence effect is like looking through a shattered mirror where your vision is always unclear. If you have read this far, suddenly, "why" is no longer a mystery.

Assume that your cost of growing soybeans is $5.00 a bushel and a $6.00 price is a 20 percent return. The people who by-passed $10.00 beans in 2004, turned down 100% return over costs and also brought stress into everyday life instead of peace of mind. To put this into a business perspective, Exxon oil just reported record profits for 2005 of $36.13 billion. Exxon's profits rose 42 percent above 2004. If 42 percent is seen as windfall profits, what would you call 100% profits? What would you call 100% or even 80% or 50% profits that some producers passed up because of a flawed belief system, thinking higher prices were in the bag, and because their knowledge about price flexibility was zip? We call it what it is, an unnecessary, self-inflicted financial tragedy for the lack of education.

At our education workshops GCME producers informed me they would not be caught owning $10.00 cash soybeans. They would have made old crop sales much sooner. And, they would have participated, to a degree of their choosing in the rising market, but at a much lower defined option risk. Through GCME education our members become effective when he or she learns to do what the majority is not doing.

These are valuable insights to draw from for anyone with a desire to consistently protect and reduce their risk. It has been much more effective to participate in an unfolding market, at a known risk, than it has been not to participate and end up with the government safety net price. Changing the traditional subjective thought process to a new objective thought process is long over due. Our purpose is to support busy producers in their quest for effective change. If you have thought there has to be a better way, there is. We would not be in the risk management education business and we would not have 19 year members still with us if that wasn't true.

Producers should know the World Trade Organization members agreed in December of 2005, that all agricultural farm subsidies would be phased out by 2013. How each producer uses the time between now and then to be able to manage risk effectively, to say the least, takes on added importance.

Progress is a very good thing!

Gary Cram