Wheat pricing has been extremely volatile in the last 2 years. This couldn’t have come at a worst time for a group of farmers looking to market their wheat based on a true cost of production. The bottom line is that commodity wheat has not treated the American farmer very well. While stable (relatively low) prices have some predictability, the truth is that yield and quality vary significantly based on Mother Nature, which can be pretty fickle to predict. (Ignore for the moment all the wisdom in the Farmer’s Almanac.) So while moisture and temperature might dictate whether a farmer has a good yield, some commodity trader a thousand or two-thousand miles away determines whether that family farmers pays down any debt this season or not! Worst scenario I learned about is the farmer who pre-sells a certain amount of wheat at a price in order to get access to the funds during the growing season and then has a yield below expectation. Now they actually “owe” wheat and guess what? The current price is double what they were paid when they set a contract! How good is your crystal ball?
The Shepherd’s Grain group is trying something different – reality-based pricing. They actually calculate their true cost of production, add a very modest profit and divide by the actual yield in bushels to get a price. Radical, I know. (Ohh and yes, they put back into the costs any subsidies they received from the government!)
Stone-Buhr is going to support these farmers – whether their price is above or below a commodity price. This might end up hurting at times but it seems to me to be the only “sustainable” relationship we can establish.
And let’s talk about commodity pricing for a minute – how is this reality just because a third-party market says so. What we learned after AIG imploded was that many dollars of the current commodity price were related to their positions in the market which was all about paper and not about wheat. When they imploded they sold sold sold their positions which drove down the price of wheat. And guess what? They weren’t alone and lots of funds started to liquidate their commodity positions to generate the cash they needed. Ugghhh. Why in the world should a family wheat farmer in the middle of nowhere Washington State be affected so significantly by a Wall Street commodity trader? OK it’s the system, I get it, but the reality is that when harvest came in 2008 the local grain elevators price for their newly harvest wheat was below their cost of production. Remember it was less then a year earlier when wheat was selling at a 30 year high! Ugghhh, want to be a farmer now?
And lastly, if there ever were questions whether there might have been some “speculation” in the wheat commodity markets, can we agree now the answer was, “of course!” (I’m talking to you Steve!)