Sell Cash Grain and Buy Futures: Right Attitude
The opportunity for farmers to sell cash grain and buy futures when they still expect futures to rally has been rarely used because they are generally scared of the futures much more so than the IRS.
The year of 1982 was a very good crop production year for the Corn Belt. It was the first time the US corn crop topped 8 billion bushels. For a variety of reasons, most of which were economic problems, soybean futures fell to the $5.30 area after the soybean crop was made. The bean market had been as high $14 ten years earlier and mostly in the $6 to $8 area the previous nine years. Cash prices were as low as $4.40 in the fall of 1982. With the Prime Interest Rate near 20% and land prices crashing, gloom, despair and agony prevailed across the farming industry.
That fall, I was a branch manager of the Columbus, Ohio Heinold Commodity & Stock Brokerage office, located in the southwest suburb of Grove City on the eastern edge of the Corn Belt. With bean prices lower than they had been in ten years, I was spending every available hour contacting my clients and prospective clients to strongly recommend they buy soybean futures. I had absolutely no luck. Not a single farmer would buy bean futures even though all of them had already sold beans to generate the much-needed cash. You old timers know how ugly the economics were and you young guys have no idea what ugly is. The most common reason farmers stated they would not buy bean futures was “I have no money” or “beans will never go up”.
The spring of 1983 brought a La Nina episode and drought to the Corn Belt. Bean prices steadily climbed throughout the growing season and into the early fall. By the middle of September, “everyone” knew bean prices were going to the moon. In those days, the Quarterly Stocks on All Positions Report (the inventory) was issued at 2 PM Central Time on the 20th of September and, on that report, adjustments, if any, were made on the previous year’s production. At 1:15 PM on the 20th, November beans settled limit up (30 cents) at $9.38, a new contract high.
At 2 PM, the USDA reported the 1982 crop was 63 million bushels less than reported the previous January and the bean stocks were shocking much lower than expected. No one was expecting such a drastic cut; in fact, no one was expecting any reduction in the 1982 soybean crop at all. That old crop bullish news was like throwing gasoline on blazing fire. At the brokerage office, we worked late into the evening to share the news with our clients and discuss their individual situations. There was no internet, no cell phones, no pagers, no email; the only means of communication were telephone land lines and postal service. Yes, Folks, life was tough in those days.
The next morning, I arrived at the office three hours before the CBOT would open. I was surprised to see three farmers sitting on my doorstep. None of them were clients, but all three of them had been on my “prospect list” for two years. All three of them “had no money” the previous autumn to buy soybean futures.
I was shocked to see all three of them had bank drafts for amounts ranging from $5,000 to $10,000 payable to Heinold Commodities! All three wanted to open a futures trading account and buy November beans on the opening, which was most certainly going to be locked limit-up at $9.68 (“locked” means no trading as everyone wants to buy and no one wants to sell at the limit up price). For two hours I talked to them about the danger of buying futures that day. After my animated factual presentation, I pleaded with them not to buy futures because all three of them had not priced their 1983 beans yet and they were looking to double or triple their market risk by buying two or three times more beans than they grew in a normal year.
Finally, in exasperation, I said I would let them buy bean futures only if they contracted their 1983 crop at the elevator on the opening. Two of them left to go to the competing futures office, but Ken agreed to do just that. I had Ken call his grain elevator from our office and listened as he argued with the merchandiser, who was telling him he was crazy to be selling beans today. It took Ken every bit of ten minutes to get the merchandiser to agree to place the order to sell 10,000 bushels of beans “at the market on the opening”. We opened the trading account and placed Ken’s order to buy 10,000 bushels of beans on the opening “at the market” (best available price). So, his elevator placed an order to sell 10,000 bushels of November beans to hedge Ken’s cash sale of soybeans and I placed an order to buy 10,000 bushels of November beans “at the market” for Ken’s trading account. After those two transactions were done, Ken’s market risk would be the same as if he had done nothing.
Beans opened locked limit-up. We waited ten minutes, but no buy orders from our office were filled, pretty much as I expected because there were precious few or no “sell” orders. Ken’s grain merchandiser may have been the only sell order at the CBOT bean pit that morning!
Two minutes later, the open radio “squawk” box reported Ken’s order was filled. I told Ken the news and said, “I don’t like it. I don’t understand how or why it could have possibly been filled”. Ken was perplexed by my statement, but before he could ask “Why?”, soybeans went from limit-up 30 cents to limit-down 30 cents just as fast as the clacker board could click, which was pretty fast, about 20 seconds.
We all (four brokers and thirty-some farmers) sat or stood there and watched in dis-belief. Someone said the Soviets must have launched nuclear missiles. John Bass, a broker, turned on the radio for news. No missile launches, no earth quakes, President Reagan was alive and well.
Beans bounced between limit down and unchanged the rest of the day. Ken went home at noon. November beans settled that day down about 23 cents. And it was all down-hill from there.
Every few days to a week, I would call Ken’s phone and ask his sweet-sounding wife to tell Ken to send more margin money as each penny the bean price declined, Ken lost $100. Each time I asked for money, Ken sent the money. I was wondering how long he would keep sending money. When beans hit $8, a couple months later, I called Ken’s wife and told her husband needed to send more money. I was always surprised she never complained or groaned. An hour later, Ken called me and said to liquidate the position “as best I could” and send him whatever money was left. I sold-out his long (buy) 10,000 beans at about $8.26. He had lost about $1.40 a bushel… that amounted to $14,000! I was just sick…
Eight months later, I was at the WRFD Farm Radio booth at the Farm Science Review, which is the Ohio three-day farm show held the third week in September. Ken walked in. I saw him before he saw me and I considered hiding. I was too late. He had come to the booth only to see me. I was shocked that he greeted me so warmly. We chit-chatted for about twenty minutes about nothing important. All the while, I was trying to figure out how to ask him about how he adjusted to the disastrous loss of $14,000 the previous autumn.
I finally managed to ask him that very question. Ken immediately smiled from ear to ear as he started to explain: “Roger, losing that $14,000 in the futures market was the best thing to ever happen to me in all the years I have been farming. I ended-up netting a little more than $8.00 cash on those beans. Roger, I would have never gotten 8 bucks for my beans if I had not bought futures and sold the cash at the same time. I would have put them in the bin and did nothing as the price declined to less than $6 in August when I would have sold them to empty the bin before this year’s (1984) harvest. Roger, I never sold beans for more than $6 in all my life! I have been married 21 years and never took my wife and kids on a vacation until this summer. We went out west for two weeks and saw things we only dreamed about seeing. I had great year, Roger!”
In all the years before and since 1983, nearly every other farmer who ever sold cash grain and bought futures and lost money was angry he lost money in the futures, was angry with their broker, the CBOT and never traded futures again. But if they lose the same amount in the bin plus storage cost, well, shucks, that is just farming.
So, the question you must ask yourself now, “If I sell cash grain this month and buy futures and lose money in the futures, will I be angry? Will my spouse divorce me? Will I be angry at my futures broker? Will I be telling everyone the futures market is a scam run by crooks and thieves? Or will I remember I sold cash grain to get money to reduce debt and pay bills while still maintaining the opportunity for price gain because I thought the price would go up?”
Margin calls are a reminder that you were wrong. Basis contracts will lose 30% before your merchandiser calls you to say you are losing money. Your grain in the bin will never tell you that prices are going down instead of up. But all farmers will pay attention every day to their futures position and they will be better marketers because of it.