Fear of Futures Destroyed in One Day Life Long Family Business
Like my dad, Dave was a teenager during the Depression of the 1930’s and was a soldier in WW II. He came home and got married like 16 million other American military men did in 1946. Dave and his lovely bride, Eileen, started a grind and mix feed mill in Maryland on the DelMarVa Peninsula. DelMarVa is the name given to that piece of land on the east side of Chesapeake Bay. It consists of all of the state of Delaware, some of Maryland and some of Virginia, thus its name DelMarVa.
Poultry became big business on DelMarVa during WW II because the huge demand for meat to feed the military folks and the factory-working folks simply could not be met with pork and beef. Broilers are ready for slaughter in a matter of weeks whereas hogs took more than year to breed and raise to market weight; worse yet, cattle took three to four years.
The DelMarVa Peninsula contains one of the largest contiguous masses of highly productive farmland on the East Coast and farmland on the East Coast is not plentiful, but the need for food is “plentiful”.
As 16 million families expanded with the Baby Boom generation, America, via the Marshall Plan, was rebuilding Japan, Korea and most of Europe. The US economy was booming and so was the demand for poultry. Dave and Eileen, like most folks on DelMarVa, were very conservative and hard working. They were more like the folks in the South’s Bible Belt than their fellow citizens of in-land Maryland and Virginia.
Their feed mill prospered. It was truly a “Mom and Pop” enterprise as so many businesses were in those days before lawyers, insurance and government agencies dictated every business decision. Every year, Dave and Eileen needed more and more corn to meet their customers’ demand. More corn storage was added every few years through the ‘50’s, 60’s, and 70’s. Eventually, Dave and Eileen had more than a million bushels of corn storage. They bought most of their annual corn needs in the fall during harvest when the basis was the weakest and sold it as feed throughout the year on the firm basis. Each year, they had a more bushels of corn on storage. Each year they had to borrow a bit more money to buy that corn.
Life was good, really, really good. They were making money through hard, honest work providing top quality feed for the friends and neighbors. Their son-in-law, who owned a farm in Fayette County, Ohio, told me Dave totally rejected the concept of hedging his grain inventory to protect his investment in corn. The son-in-law said Dave would get very tense at even the suggestion he should hedge his corn. “Future markets were the devil’s play pen to break the souls of mankind”, is what Dave thought about the futures market.
How do you argue with a man who has enjoyed a great grain business success for 35 years without using futures? Each year, Dave bought more corn than the year before. He went from 12,000 bushels in 1946 to more than a million bushels in 1978.
World events changed dramatically while Dave and Eileen were building their business. In 1972, President Richard Nixon opened up the vast Communist Chinese markets to American grain. A few months later, the Soviet Union was anxious to have access to American grain to expand the amount of meat in its people’s diets. One out of every five years in the Soviet Union was a crop failure and a high percentage of breeding livestock would have to be liquidated due to a lack of feed. The Soviets were not about to let their Chinese Comrades buy all the excess fruits of America’s farmers. The Soviets wanted a piece of the pie and they got into the American grain business in May 1972. Nixon was foreign relations genius to get the two biggest Communist countries bidding against each other for American corn and wheat.
By 1974, grain prices were on the rise. There was a lot of science data predicting the world was going to have a serious food shortage within ten years. The Soviet Union was in a race with China to become the world’s second largest economy. American grain exports were exploding.
By 1979, the Soviet Union was American’s largest corn buyer. Despite the value of the US dollar going straight-up all through 1979, the US exported 2,433 million bushels of corn, which was more corn than had ever been exported. Annual US corn exports before 1972 averaged about 600 million bushels! That 1979 corn export record stood for 26 years!
Meanwhile, back at the feed mill in DelMarVa, Dave and Eileen were paying, with the positive basis, well over $4.00 a bushel in the fall of 1979 to get their million plus bushels of storage filled. December corn futures were flirting with $4.00, a level never exceeded.
Just before midnight Christmas Eve in 1979, the Soviet Union’s 40th Army invaded Afghanistan to prop-up the fledging communist regime.
Condemnation from around the world befell the Soviet Union, but, nobody did anything. US President Jimmy Carter thought it was terrible that no one did anything to punish the Soviet Union, so on January 4th 1980, Carter unexpectedly announced a grain embargo against the Soviet Union, our biggest corn buyer! Just as suddenly, $4 corn became $3 corn and drifted lower from there.
Ten days, later, Dave and Eileen were out of business. Mom and Pop feed mills cannot take a million dollar hit in one week. If they had just hedged their corn inventory, the dollar plus a bushel lost in the cash market would have been offset by a dollar plus a bushel gain in the futures account.
When the price of corn (or any grain) is below the cost of production, there is not much need to have price protection on physical grain, but when the price gets way above the cost of production, the down-side risk is huge and the resulting potential financial loss needs to be managed.
Remember that the next time beans get to $13+ and corn gets to $5+ and wheat gets to $6+ and your grain bins are full.