Hamilton County, Iowa, landlord John Hinrichsen played the on-line Commodity Challenge game, but it didn't change how he markets his crops. (Amy Mayer/Harvest Public Media)
Farmers love to comment on the inherent risks of their job (hello, weather!). But they can manage some risks more than most do. Even though crop prices can feel out of their control, farmers don’t have to be passive players in the marketplace around them.
You might think after growing and harvesting crops farmers just sell them for whatever the price is when they bring them to market. That’s an option, certainly, but it leaves farmers at the mercy of global economics and local prices on harvest day. Farmers can use market tools to mitigate some risk. But it’s not necessarily quick (or easy) to learn how.
This winter, I tried my hand at it virtually, by participating in an online simulation, the Iowa Commodity Challenge. Let’s just say I won’t be quitting my public radio job any time soon.
Chad Hart, an Iowa State University extension economist, says futures markets have been around for hundreds of years and some Midwest farmers have been using the grain futures market, for example, to manage the risk of fluctuating crop prices for decades. But many more who might benefit are intimidated, leery or skeptical. Or they’ve been burned once and that’s enough, as happened to Leah Maass.
“Here’s an opportunity to look at real market moves,” Hart said of the game. “We’re looking at real futures market prices. We’re trading contracts like we would in real life. But it’s not costing anything.”
That’s because in the game, every player is given thousands of bushels of virtual grain to play with.
After watching some online tutorials, I quickly grasped some important basics: storing grain has its expenses, so just hanging onto harvested bushels and waiting for a “better” price had obvious risk; the best strategy would be to set a goal price and move toward that goal. But to calculate a goal price, a farmer would use production costs, debt and other real figures to determine the minimum needed to break even. I had no numbers to work with.
What I had was 75,000 fictitious bushels of corn and 25,000 of soybeans. I plunged in, eager to learn.
“There are two audiences,” said Ed Kordick of the Iowa Farm Bureau, “those that just play with it and the ones that really take it seriously and are almost afraid to take an action (even) in a simulation.”
I was not afraid. Unfortunately, early on I made a pretty costly blunder.
“You sold 50,000 bushel of about 70,000 bushel of corn that you had (left),” Kordick noticed when he reviewed my moves with me midway through the game. “So to me, that sounds like a big amount of bushels and I like to spread apart sales.”
He was being kind. He might have said, “What were you thinking?”
I confessed that I’d confused bushels with contracts. I intended to make a move with 10 bushels but instead it was 10 contracts, at 5,000 bushels each. Big oops.
In the end, I did pretty poorly. My average sale price for corn was $3.95 per bushel, while game leaders got $4.59. For soybeans, it wasn’t much better. I got $12.81 while the leaders got $13.79—nearly a dollar a bushel more!
Another way to look at it is this: the game’s leader ended the marketing season, after selling all of the virtual bushels, with $689,125. I ended with $616,590. That means starting with the same amount of grain and working within exactly the same parameters, I could have made$72,534 more than I did. That’s not pocket change.
A question I can’t answer is, how much would I have ended up with if I’d just sold my grain on a fixed schedule in the cash market? I might have done better. The game’s leader almost certainly would have done worse.
But now I can look back and see what I might do differently next time. And that’s really the point.
“Once we can get (farmers) to learn those concepts, then they can utilize them, and they can set it up like, `OK, this is what I would have done on my farm this year,’” Hart said. “And they see how it works. And maybe next year they go and do it.”
Kordick says online tools like the Commodity Challenge are likely the future of teaching grain marketing to farmers. It seems safe to say he and his colleagues won’t put themselves out of a job any time soon.