1988 Taught Us a Lot About Grain Marketing and The Banking Business
When I was young and dumb, I believed what “by the book hedging” manuals stated. I worked three years to get four hedge lines of credit established for four clients… THREE years! I have never attempted to get a client a hedge line of credit ever since 1988. Here is why…
After I left the stock and futures brokerage business in March 1984, I worked full time developing my grain marketing consulting business. My sole source of income was direct payment from farmers for my advice about education and marketing grain. I concentrated on two projects to show farmers how to make more profit through better marketing.
I searched for grain merchandisers who wanted to increase their market share by providing additional marketing tools that farmers needed to increase their grain income. Secondly, I would educate forward thinking farmers and their lenders about the benefits of hedging grain in their own futures account and the need for a hedge line of credit for that account.
I quickly found that privately owned grain houses were much more receptive to offering additional marketing tools than the coops. If you think about it, that makes sense. Employees don’t want to make waves. Business owners are much more likely to adapt and change to make more money. No one knows that better than a farmer.
Convincing farmers and bankers to open a hedge account with a hedge line of credit is difficult and time consuming. About the time I would get a bank’s ag lender trained, he would get promoted to the car loan department or the credit card promotion section. Three to four months later, his replacement would be hired and we would start all over. By the spring of 1988, after three years of work, of my 26 clients, I had four farmers with hedge accounts (futures trading accounts in their name with a brokerage firm) and a hedge line of credit of $2 a bushel on corn and $5 a bushel on beans secured with the clients’ banks. We were ready to rock & roll in the late winter of 1988!
Note that the security for these hedge lines of credit was not the grain expected to be hedged, but the tangible assets of land, machinery, grain in the bin, livestock in the barn, and cash in the bank. That is standard operating procedure in the banking industry for all hedge accounts, including your grain elevator and processor. That is a time bomb that will explode someday, but for another discussion.
In mid-July 1987, it was looking like the corn crop was going to make a new record yield by 10 to 15 bushels per acre. The ’87 crop by the middle of July was looking like 130 plus easy.
The last substantial rain of 1987 was on the 15th of July. That beautiful corn crop simply died as the ears did not fully fill out and the kernels were light. None-the-less, it was a record yield and the first time the US average corn yield reached 120 bushels; 120.52 bushels per acre is what the USDA said it yielded in its final production report for that crop. Corn harvest was well underway by the last week in August with a plume of black dust following every combine.
The following winter was drier than normal and pretty mild. Spring temperatures came early and there was a corn planter rolling in Champaign County, Ohio on the 30th of March. Autie Howard, one of my Central Ohio clients (Madison County where the Farm Science Review is held) called me on April 24th and said he was all done planting corn and beans.
In this area, we had three showers of 1 to 4 tenths of an inch of rain in April and May. By the first of June, temperatures were reaching 100+ degrees. The incredibly unusual thing was the low humidity. It was the longest stretch of low humidity I have seen in Ohio.
The corn that was planted before April 6th tasseled and died. The corn planted after April 6th went dormant just as the tassels were expected to emerge. The corn plant knew it did not have enough soil moisture to tassel and fill an ear.
Isn’t that amazing?
By the late June, the corn planted after the 6th of April was 3 to 4 feet tall and looked like giant pineapples across the field.
Corn futures had bottomed out at $1.51 in 1987 and were only $1.85 at the beginning of 1988. The early planting dates kept a lid on corn prices in the spring. On June 1st, December corn had “rallied” all the way to $2.40, which was the highest price of corn futures in two years. Farmers were itchin’ to sell corn. I was talking day and night to discourage them from selling anything.
December corn settled at $2.78 on Friday, June 10th. I was in downtown Findlay in Northwest Ohio the next day. I was walking down the sidewalk and I looked up at the bank’s time and temperature sign and it said 108 degrees at 1:32 PM. I remember being surprised it was that hot, but that was because the humidity was so low. Of course, low humidity is deadly for corn that time of year with no soil moisture.
In those days, the CBOT traded from 9:30 AM Central Time to 1:15 PM. On Wednesday, June 15th, December corn opened and locked up the 10 cent trading limit (no trading at limit-up because there were no sellers). December corn was $2.99¾. The price of corn was now within a dollar of the all time high trade for futures.
My four clients with hedge accounts had more than $2 a bushel hedge line of credit for corn. Since they did not have to worry about delivering contracted corn. They could sell their corn in the hedge account where physical delivery was not required. Tall four farmers were rather anxious to lock-in a price for corn not seen for four years. Since the weather forecast was the same as it had been for two months and the funds were not yet heavily long, I talked my clients into waiting until the next Friday to sell December corn, which they all did at prices ranging from $3.18 to $3.26. That Friday afternoon, the four different banks wired the initial margin money to my clients’ brokerage accounts just as the banks had agreed to do. It was a beautiful thing to see four years of work come together as it was expected.
On Monday, June 20, corn opened limit-up and locked solid at $3.40½. Those four banks wired a total of $36,000 to the customers’ brokerage accounts to meet the maintenance margin call.
Corn traded on Tuesday, but still settled up 10 cents at $3.50 ½. Once again, those four banks wired a total of $36,000 to Harris Trust in Chicago to meet the maintenance margin call.
On Wednesday, December corn settled at $3.55 ¾, up 5 ¾ cents. The clients’ four banks wired $20,700 to meet the maintenance margin call.
On Thursday, December corn settled at $3.51. That afternoon, the brokerage firms wired back to the four banks the excess in their accounts, a sum of $17,100 all together.
On Friday, June 24, December corn settled at $3.52 ¾, up 1¾, and the four banks wired a total of $6,300 to the brokerage accounts.
There was no change in the weather or the forecast over the weekend. Thus, on Monday, December corn opened 10 cents higher and locked at $3.62¾. Another $36,000 was wired to Chicago the afternoon of the 27th of June.
On Tuesday, June 28, the CBOT expanded the daily trading limit to 15 cents. December corn opened at $3.68, up 5¼ and, of course, a new contract high.
All the trading at the CBOT in 1988 was done by open bid and offer by about 4,500 people on the floor. There were large TV screens mounted all around the floor with the channel set to Chicago’s WGN. At precisely 12:30 PM every day, WGN’s weather guy, Tom Skilling, would give a 3 minute summary of the weather forecast update. All farm families in America fell silent at the noon meal when the weather forecast came on the radio, so also did the 4500 traders at the CBOT when Tom Skillings spoke. Tom said there was a chance of rain in the coming week and corn went limit down and locked at $3.47¾. Fifteen cents on 360,000 bushels were added to the four hedge account of my clients and that excess money was wired by Harris Trust back to the four clients’ banks, a sum of $54,000.
Corn was down another 15 cents the next day and another $54,000 was wired back to the four Ohio banks.
Thursday brought a reduced chance of rain. Corn settled up 12¼ and the four Ohio banks wired $44,100 to the Harris Trust account of the brokerage firms.
Friday morning, July 1st, all chance and hope of rain was removed from the forecast. Tom Skillings pretty much said the same thing at 12:30 PM Chicago time. Corn locked limit-up at $3.55½ with the 4th of July Holiday on Monday and no rain in sight. Nobody, except the bankers, thought about the $36,000 margin call because the money transfers had been automatic daily for two weeks.
All eyes were on fields of corn which looked like pineapples in 100+ degree low humidity heat.
Tuesday’s trading limit was automatically going to be 15 cents because corn closed limit up on Friday. And that meant another $54,000 was going to be wired Tuesday afternoon. Quite honestly, there was no fundamental (supply and demand) reason to think corn would have a down day anytime the first two weeks of July.
My two young sons, Rob and Dan, and I helped Bob Henry (who was a friend but not a client of mine) and his two adult sons bale a thousand plus bales of straw on Monday, July Fourth. Adjacent to the wheat field, was a corn in one of Bob’s better fields. As we were taking a break, of course, we talked about the weather and what the corn would yield.
Bob asked me what I thought that corn across the fence would make. I told him since that corn had gone dormant for a reason and since I thought we would get good rains before August (law of averages), I told him I thought that field would make 40 to 45 bushels.
Bob reached across the corner of the wagon and grabbed the water jug from one of his sons. He turned to me and said, “I would take that yield right now if anybody could guarantee it. I don’t think a combine will be able to find a kernel of corn in that field this fall.”
That was pretty much the opinion of everyone who knew anything about corn from Central Pennsylvania to the Rocky Mountains.
Every 4th of July Fireworks event was called-off in Ohio because of the fear of fire. It was dry!
Tuesday, July 5th, 1988, a day that will live in infamy. The morning weather forecast was even hotter than had been expected on Friday. Just 42 minutes before the CBOT was going to open, one of my hedge line of credit account farmers called to say his bank did not meet the margin call on Friday afternoon and his broker said his short corn position would be liquidated on the opening “at the market”. That meant his December corn position short (sold) at $3.20 would be bought at the best available price on the opening to liquidate (offset, cancel out) his $3.20 short position.
There was no doubt that purchase price was going to be at or near 15 cents higher that Friday’s settlement. That would mean my client, who had lost 15 cents per bushel in the hedge account on Friday was going to lose another 15 cents on the opening with no opportunity to make that 25 cents back when prices declined because he would be out of the market.
My client explained his futures broker called the bank and the ag lender said his boss told him Friday to not make any more margin calls because there was not going to be any corn to harvest in the fall. Therefore, this hedge account was no longer a hedge account; it was a speculative account and the bank would not finance speculative trading accounts. The farmer had already called his ag lender and was told the same. Case closed!
My farmer client was on his own, thrown to wolves of the futures market by his own bank which was fully secured with hard assets. Even if there was no corn to harvest that fall, the bank credit line was fully secured.
There was not time to argue, plead and beg with the bank. I was sure their mind was closed. That is the bankers are. The ag lender’s boss had no idea how a hedge worked and I could not teach him in twenty minutes on the phone. His mind was closed. I told my client that what I was about to tell him would save him fifty to hundred thousand dollars, so listen carefully and follow my instructions to the letter:
1) Forget the bank.
2) Forget the hedge account.
3) Personally go to the elevator and place an order to sell on a HTA the same number of bushels that he had hedged in his futures account.
4) If the elevator will not do a HTA, do a forward contract.
5) Tell the grain merchant to place the order with his broker while he (my client) was standing right there before the CBOT opened.
6) Stay at the elevator until the order is filled (executed) and reported back to your grain merchant. Get a signed contract before you leave.
7) If the grain merchant refuses to do it, call me from the elevator.
My client agreed and off he went in his trusty pick-up. Remember, no cell phones in 1988.
Within minutes, my three other clients with hedge lines of credit at the other three different banks called me with the same news. I gave them all the same instructions, word for word. I looked at the clock. The CBOT would open in 23 minutes.
If things went according to plan, the four brokerage firms were going to be buying a total of 360,000 bushels of December corn at-the-market on the opening and four different elevators were going to be selling a total of 360,000 bushels of December corn at-the-market on the opening.
I prayed that none of those four farmers called me before the CBOT opened.
I developed a sense of respect for what General Eisenhower must have felt after he gave the “GO” order for the D-Day invasion on the evening of 5 June 1944. The waiting was agonizing.
I was so relieved none of those farmers called me back! Ten minutes after the CBOT opened, still no phone calls. Words cannot express my relief. My body shook like a leaf for several minutes. I really needed some Jack Daniels, but I did not have any…
December corn opened at $3.65, up 9½ cents. It shot to $3.70, a half cent from limit-up. That was the high for the day, the week, the month and the year. It was also the highest trade for the
previous five years and the high for the next seven and half years.
Those banks forced those four farmers to buy 360,000 bushels of corn on the high day for twelve and half years!
December corn closed that day, 5 July 1988, at $3.57½ with a low of $3.41! Seven days later, December corn traded to $3.09.
On the afternoon of July 18th, here in West Central Ohio, we got 3 inches of rain in two hours. The cracks in the field were still an inch to an inch and half wide the next day. But the rains continued and by the end of August, all across the Corn Belt rainfall totals for that 45 day period were from 8 to 20 inches!
Do not misunderstand me here. I had no idea that that a 12½ year high was going to be made on July 5th, 1988. But what I did know, one does not change the market plan in time of stress!
The Joe Kennedy story about why he sold all his stocks just before the Stock Market Crash of 1929 and preserved the Kennedy family wealth was exactly what happened to the corn market on July 5th, 1988. Corn ran-out of buyers that very day. There was no fundamental reason for corn to go down. The whole world expected a corn harvest of less than 20% of normal and that would only be from irrigated land. For every person who thought the corn would be worth harvesting on July 5th, I am sure there were a hundred thousand who would have disagreed.
The nation’s “pineapple” corn came back to life, pollinated and the national average corn yield was 84.6 bushels per acre.
December corn traded down to $2.52 on November 29th, 1988, just 12 cents higher than it was on the first day of June…
Oh, that field of Bob Henry’s corn he said he would lock-in a yield 40 to 45 bushels on the Fourth of July if he could…
It made 121 bushels to the acre.