Futures Market: Paranoia and Opportunity Lost

What Paranoia of Futures Can Do to Your Grain Marketing Program


In 1981, there were no cell phones and no internet. There were no DTN FM radio quote screens, either. The only source of up-to-the-minute market news was the farm radio, your grain elevator or a commodity broker with teletype wire news service receivers. The CBOT trade hours were 9:30 AM to 1:15 PM Central Time.


The names have been changed to protect the guilty...


Greg grew an average of 100,000 bushels of corn every year, and in the early 1980’s that was a lot of corn. He fed cattle and hogs, grew soybeans and wheat. He loved to haul manure. It was “money in the soil bank,” he used to say.


Greg realized how important marketing was, and he knew he needed a lot of improvement. Farm economics had turned decidedly terrible in 1980 (thank you, in large part, Jimmy Carter), and it would take more than a decade to recover. Greg came into our Heinold Commodity Futures brokerage in Grove City, Ohio, before Thanksgiving, 1981. He asked if he could sit and watch “what was going on.” There was “clacker board” from the floor to the ceiling on the far wall with quotes updating every second, with a “clack” for every trade price change at the CBOT and Mercantile Exchanges.


Greg was a big man, and I do not mean overly fat. He was big, the kind of guy you would not want to cross. He sat there quietly, transfixed on the clacker board for several hours that first day in the office. After the markets closed and the “peanut gallery” had cleared out, Greg began to tell me about his operation and that he needed improve his marketing. It pained him greatly to say he needed to learn to hedge his crops. It was as if he had to sacrifice his first-born son to save the life of his other three children.


I asked him, “Why do you think you must hedge in the futures? Obviously, you are afraid of futures.”


Greg said, “Roger, I have been farming on my own for 26 years. I have not had to borrow operating money to plant my crops or feed my livestock… not once in those 26 years. But all that has changed. The past three years have hurt me bad. I always thought farmers who had to borrow operating money were losers. And now, I have to borrow operating money and I don’t like it... not even a little bit. I need to get my ducks in a row, and one of those ducks is to hedge my crops when the time is right.”


Greg was a man on mission; that was for dead sure.


He came into the office at least once a week that winter. He asked everyone questions about futures. After the trading was over, he would glean as much information from the brokers as his brain-housing group could absorb. It became obvious he was scared to death of futures trading. I could see the possibility of Greg suffering a stroke or heart attack if he ever traded futures.


Greg had a self-imposed deadline of February 1 to open his hedge account. He opened his hedge account after the close the last day of January, 1982. He wrote a check for $20,000 to deposit into his hedge account. I told him I did not think he should hedge all of his corn; do some forward contracts. I was more concerned about his health than his money, but I did not tell him that.


Greg said in a tone of voice one does not contradict, “I am NOT going to hedge all my corn. I am going to take it slow and easy. I am going to be careful. I am counting on YOU to make sure I do it right. I don’t ever want to receive a margin call. That is why I deposited so much money in my account. I can’t handle a margin call.”


I suggested my associate broker, John Bass, would do him a very good job. Greg shot that down in heartbeat. He did not want any rookies handling his account. I rather sheepishly told him John had been working this business for more than three years. Laser beams from Greg’s steel-gray eyes nearly blinded me. That was the end of that topic!



Greg and I went over the plan. He was going to grow the best corn crop in Ohio. When either one of us thought it was time to hedge corn, we would get in contact with each other. I knew he would never call me. He was too scared.


Without a doubt, Greg understood futures and hedging better than anyone I have ever known with no trading experience.


I called Greg’s wife before noon on “the day” (February 17) and asked her to have Greg call me when he came in for lunch. He did.


I was glad December corn was 4 cents higher when Greg called than it was when I called his wife.


I told him why today was the “the day.” I explained why I thought so and why I might be wrong. After a long pause, Greg said, “OK. Let’s do it. Place an order to sell 1,000 bushels of December corn at the market.”


I was dumfounded!


I said, “Greg do you expect to harvest 100,000 bushels of corn this year?”


“If hail does not get me like it did last year, I will easily have more than that!”


“Greg, are you going to contract corn at the elevator?”


“No”.


“Why not?”


“I have never sold corn before it was in the bin. A thousand bushels sold is enough.”


“Greg, the whole idea of your setting up this hedge account was to improve your marketing. The price right now is higher than you have sold corn for the past four years! You lost money growing corn each of the last four years because you waited until the corn was in the bin to start pricing it - when you and every other corn farmer in America had corn piled all over the place. We talked many times that this opportunity to lock in a very profitable price would only be available a day or two this whole year. You borrowed money to buy all those crop inputs to grow 100,000 bushels of corn. Why did you do that? Because you were confident you could grow 100,000 bushels of corn. You have $20,000 in your hedge account. The margin on 1,000 bushels is 80 bucks. For the love of God, Greg, price enough corn to make a difference in your life!”


Greg calmly reminded me, “Roger, I told you I was going into this hedging slow. A thousand bushels is enough.”


I said, “Greg, slow would be 30,000 bushels! That will leave you butt-naked on more than 70,000 bushels!


“Sell 1,000 bushels at-the-market. No more.”


I did as he said. Corn settled a penny below his selling price. Greg had $20,010 in his hedge account.


Corn opened down five cents the next morning. I called Greg’s wife and asked her to call me when he came in for lunch. He did not call me. Corn settled down 9 cents that day. Greg had $20,100 in his hedge account. He had 99,000 bushels worth $9,900 less than it was 28 hours ago.


Greg called the next day at noon. I was dreading this call. His voice was quivering when he told me his wife told him I wanted him to call me yesterday, but he was too scared. He used the word “scared.” He confessed he had not turned on the radio since he told me to sell a thousand bushels of corn and he had not called the elevator to find out what corn was doing. I did not want to tell this big man how bad the situation was, and I could see it was going to get a lot worse. This man had counted on me to turn around his marketing program, and I had failed. Greg took a deep breath and asked, “How bad am I doing?”


I said, “Greg, corn prices are going down the toilet. You are losing money hand-over-fist.”


Greg was barely able to speak. “I thought I sold corn. I thought I would make money if the price went down. You did say the price was going in the toilet, didn’t you? Doesn’t that mean the price is going down?”


“Well, hell yes, Greg. The hedge is making money, but you are losing your ass on the other 99,000 bushels of corn you did not hedge.”


“You mean the hedge is making money? I actually made some money?”


I looked up at the clacker board. “Greg, corn is down 19 cents from where you sold it. You are making $190 on the hedge, but you have lost almost $20,000 on the 99,000 bushels you did not price! $20,000 dollars, Greg!”

Greg excitedly asked, “You mean I made $190? Really!? I made $190?”


“Yes.”


Greg yelled, “Hey Doris! We made $190 on the hedge! Can you believe it?”


Greg came back to the phone and said to me, “Roger, that is great news. Thank YOU!”


“But Greg, you have lost $20,000 in the last 48 hours on the unpriced corn...”


He cut me off, “Oh, hell, Roger! Don’t worry about that! I am making money in the futures market!”


Greg was like a fighter pilot fixated on the enemy plane in flames he was chasing to the ground, realizing too late he did not have enough altitude to pull up before plowing into the ground. That is called “target fixation,” and it is deadly.


Greg was so fixated on his fear of his hedge account losing money, he could not see anything other than that lousy 1,000 bushels of corn in his hedge account. His whole corn crop was falling to below breakeven.


While Greg thought he had made a major change for the good in his grain marketing program, all he did was waste a heck of a lot of time and nervous energy.


If your grain marketing is not resulting in an average selling price in the top fourth of the year’s price range, it needs work. To average in the top 25% price range, you have to make drastic changes. You have to do things you have never done before. You must expand your comfort zone. You need a coach to guide you, to educate you how the markets work and to push you to take action when you know it needs to be done.


If the cost to grow a bushel of corn is $3.70 and you have been selling corn at an average price of $3.80, you are making money. But if you could sell just ten cents higher, only ten cents, you have doubled your profit! If you can get $4.00, you have tripled your profit! Just 20 cents more per bushel and you can triple your profit and triple your funds for lifestyle improvement!


That is like going from $15 per hour at the shop to $45 per hour!


Triple your net income and vastly improve your life! Get educated, and do things you have never done before. Keep your eye and mind on the big picture. Do not get fixated on one aspect of your production program or your marketing program. Your family is counting on you!


Greg rode 99,000 bushels into the ground at $2.15 as harvest pressure peaked in mid-October. His 1,000 bushels were hedged at $3.01; on October 25, his 99,000 bushels were worth $2.14 plus or minus the basis. But for Greg, the most important thing that year was he made 87 cents on a 1,000 bushel-hedge.


He told me that was hardest $870 he ever made…


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