Cargill Does Not Make Mistakes
Roger Scheiderer has been a client of mine for 36 years. He farms near Plain City, Ohio just northwest of Columbus. In 1986, he got into the milk hauling business, which migrated into the hopper-bottom over-the-road transport business about 20 years ago.
Roger is everybody’s friend and easy to talk to. Consequently, many members of the area’s prominent Mennonite population stop in to discuss everything and often ask Roger for advice about more “worldly” things.
On an early September afternoon in 1999 or so, Roger called me. The conversation went like this:
“Joshua stopped in here to ask me a question about marketing his beans. I told him you were the guy to talk to, so I am going to hand the phone to Joshua.”
Joshua explained that he was going to harvest 40,000+ bushels of soybeans in the next few weeks. He recalled Roger Scheiderer had told him months ago there was a way he could deliver his beans, get most of his money, and still benefit if the price of soybeans went higher. Was that true?
I said yes, that was a “basis contract.” I explained that the final cash price paid for soybeans was the futures price plus or minus the basis.
I told him to think of the futures price as the world price for beans based upon the world supply-and-demand. Also, think of the basis as the local price for soybeans reflecting the local supply-and-demand compared to the world supply-and-demand.
If a community produced more beans than the community needed, those extra beans needed to be transported out of the community into the world marketplace. That transportation had a cost, and that cost came off the price of the beans, which resulted in the local price being below the futures (world) price. That price difference resulted in what was called a “negative basis.” An area with a negative bean basis is “a bean surplus area.”
On the other hand, if a community used more beans than the community produced, it needed to attract beans from the world marketplace into the local community, and that transportation cost money. Therefore, the price of soybeans within the community would be above the world price, and that resulted in what was a called “positive basis.” An area with a positive bean basis is “a bean deficit area.”
Regardless of the basis, one way to receive money for the beans and still have an opportunity to benefit from price appreciation was to deliver the beans. At that time, he could cash out the beans for full value and buy futures. That would tie up 5% of the bean income, or he could leave 30% of the value of the beans at the elevator and have the elevator buy futures for him. Such a transaction was called a “basis contract.” He could pick the day he wanted to lock in the futures price. At that time the elevator would pay him the 30% he had left at the elevator plus or minus whatever the futures market change had been from the date the basis contract was established and when the futures price was fixed on his order.
Joshua said he would not trade futures, so he would do a basis contract. He asked if I would help him set it up with Cargill. I said sure. But I told him that if the price of beans went down more than 30% after he received his 70% cash advance, he would owe Cargill money. He said that made sense and was no problem.
“Where do you want to deliver the beans?”
Joshua said, “Sidney Cargill.”
I got Cargill’s merchandiser on the phone and explained Joshua and I were calling to establish a basis contract for October delivery of 40,000 bushels of soybeans. The basis was 40 under the November, which meant the basis contract would have to be priced or rolled to a deferred futures month by the next-to-last business day of October. I confirmed that Cargill would advance 70% of the value of the beans as of the day the beans were delivered. Cargill’s merchandiser said he would send a contract to Joshua to sign and return. The deal was done.
I told Joshua to be sure to read the all the fine print on the contract and double check that it stated 40 under the November, which would probably be stated as -40X.
A week later, Roger called me and said Joshua wanted to talk to me again. Joshua said he got the basis contract, and it said the basis was +40X, not -40X.
Holy cow! The difference between 40 over and 40 under is 80 cents on 40,000 bushels. That is $32,000! In 1999, that was real money! That was a year’s wages at a local factory for a 40-hour week!
I said he had two choices: Call Cargill, and tell them they made a mistake. They will send a corrected copy or sign the contract, then return it and wait for them to contact him to tell him they made a mistake. If Cargill did not catch the mistake before they wrote the check, they would most certainly catch the mistake when they did write the check. In any case, I told Joshua not to think for one minute he would be paid 40 over the November for the beans. I sensed the choice of to call or not to call Cargill was a big stress for him.
Four days later, Joshua called me to say he could not sleep at night. He was going to call Cargill and tell them they made a mistake. I said, “OK. It does not matter, Joshua. They were never going to pay you 40 over the November anyway.”
Ten minutes later, Joshua called me back. His voice sounded as if he was on an LSD trip.
He explained to me he told the merchandiser about the mistake on the contract, stating 40 over instead or 40 under.
The merchandiser told Joshua in a very arrogant tone of voice, “Cargill does not make mistakes!”
Joshua went on the explain the merchandiser was highly insulted by Joshua’s insinuation that the contract should be 40 under instead of 40 over the November. After all, he was just a farmer, and he needed to stick to growing soybeans and leave the marketing to Cargill.
Joshua did not know whether to be happy or pissed-off. I assured him he would never see that $32,000.
But I was wrong; he was paid 40 over the November. As a grain market advisor, that was my most flagrant 100% wrong prediction ever.
Somewhere in the vicinity of Plain City, Ohio, to this day, there is a Mennonite farmer thinking every day he will spend eternity in Hell because he received $32,000 from Cargill that he did not deserve.
No, Ladies and Gentlemen, Cargill does not make mistakes, and don’t you forget it!