Saturday, July 4, 2015

Farmers are from Earth,
brokers are from Pluto

October 1998

One tiresome theme of this latest “new” age of agriculture is that farmers just have to get better at using the Board of Trade to market. Even more amusing is the idea that government handouts can be replaced in some manner by manipulations of a commodity trading account.

Think about this concept for a second.  Farm payments required that you sign your name and have a body temperature of around 98°.  Receiving the same compensation from commodity trading requires you outsmart someone who is likewise trying to get your money. It was difficult to lose money in the ASCS welfare game, although many of us suspected that others were somehow milking this cow more efficiently that we were. 

Now we are confronted with a new “future”. We have to deal with its essential unknowability. Marketing is, at its core, a problem of prediction. Using whatever information we can muster, we estimate what tomorrow will bring and place considerable bets - which we can lose! Compounding this risk is the unfamiliarity of most producers with direct commodity trading. Bottom line: the new system requires enormous effort that up to now we have largely avoided.

For my entire career, this problem has been addressed by the “education” route, and in all fairness, there is a huge knowledge void to be addressed. But after the courses are completed, and the workbook examples calculated, the actual plunge into commodity trading introduces a new factor into the problem that, in my opinion, causes more difficulty than all other influences: the broker.

It could be that producers have little direct market participation because of cultural, not business, obstacles. All I seem to have in common with any broker I’ve met was a species. We don’t talk the same, we don’t think alike, we operate at different speeds, and we share few social conventions. Nor are brokers and traders chosen for communication skills with the farm public - no easy task for anyone. My own experience is that I have not made trades simply because I didn’t want to deal with my broker. This is my problem, but he is the one who lost a commission.

For example, brokers live mayfly lives, compressing their real existence into the trading hours.  Every one of those minutes is important and must be employed to advantage.  As a result, speech is terse, impatience ever-present, and jargon commonplace.  Contrast this to a farm customer who normally has a ten-minute conversation warm-up period before addressing the business at hand; who is cramming a whole dozen or so trades into an entire year; who speaks producer-talk of bushels and rain rather than resistance points and margins.

The result of this interplanetary dialogue is enduring misunderstanding. This feeds outlandish rumors and stereotyping on both sides. Consider the “prairienoia” that surges through the farm community during low prices. Even well-informed leaders fall back onto tedious conspiracy theories concerning “them” at the CBOT and other exchanges. [My opinion is that traders are congenitally incapable of plotting together. Self-interest is not just a facet of their personalities, it is their personalities.]

The injection of a third party into my marketing scheme also provides a convenient scapegoat when things go wrong. When the blame shifts to the broker, my learning process stops. And sometimes brokers earn this blame.

Furthermore, I regard “open outcry” as 90% theater and 10% commerce. At the very least, I find no compelling argument that this quaint, labor-intensive tourist attraction provides any benefits that technology could not duplicate. As a farmer, I can empathize with this loss of a cherished way of life. Been there, done that. But what has not occurred to Chicago is that many of us trust computers to transact our business more than guys we don’t know. 

For producers and exchanges to do more and better business together requires dragging the pits out of the pits. Linking traders and the public with a common (computer) interface could bridge this cultural gap, widening the field of prospective customers for producers to transfer risk to and brokers to service.  Many regulatory issues, such as dual trading, become less troublesome. Brokerage house computers can control customer trading limits and other financial ground rules the same way VISA does. This is not rocket finance. In fact, the cost savings of direct account access and trading might actually make some business sense. The easier access could help compete for new liquidity from untapped sources, like Internet stock brokerages have. 

This possibility may be coming as soon as 1999. Member trading companies will have the technology to provide transparent real-time trading for their own customers. When I can log on when I want, manage my account, and execute trades, - just like stocks and mutual funds - I can guarantee I will become more active in the market. And I won’t have to learn Plutonian.

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