Dont hold your breath

Last Tuesday night’s twitter forum (#Agchatoz) focussed on Agricultural representation. In any one’s language this is a contentious and potentially polarising issue. Views held by farmers on agricultural representation range from supporting compulsory union style representation, all the way to “why do we even need it”, and every view in between!

For a long time now there have been questions raised about the effectiveness of farmer representation. After all, declining terms of trade, shrinking farmer numbers and the sheer difficulty of making a profit are some of the issues we face every day and have faced for a very long time. On the social media medium of twitter, this has been a regular discussion point amongst many in the production agriculture field. It constantly meets a passionate defence of the representational model from both elected representatives and employees of most farmer representational organisations.

Recently, this defence has been brought into question following a report presented by former NFF directors David Trebeck and David Crombie. Almost as suddenly as the release of this report, the rhetoric from the National Farmer Federation (NFF) and New South Wales Farmers (NSW Farmers) changed. From a position of impassioned defence of the current representational model to one of admitting ‘the model is broken’. Stunningly, in my opinion, this switch in position has missed the attention of the main stream agricultural media, whose focus has been on the review and not what prompted the review and why there was an abrupt change of position by the farmer representative organisations.

On Twitter, one of the most ardent and persistent critics of the current Agricultural representational model has been @Tim_Whiffler. Recently “Tim” embarked on an eight hour session of tough questioning of the NFF. I and others occasionally joined in to what could only be described as one of the most intense Twitter debates I, and others, have ever seen. Tim really knows his stuff. He was forthright and blunt, without being rude. From that debate it seems results have flowed. The Australian Farm Institute has conducted a survey of farmers and farmer representation has become the focus of a study. There has been a change of NFF President and the new President, Queenslander Brent Finlay has admitted the model is broken. NSW Farmers President, Fiona Simpson is also admitting to a broken representational model.

Throughout the eight hour session of questioning and debate, there was nothing but resistance thrown at Tim. However, behind the scenes it appears Tim received private correspondence from the NFF inviting him to talk further. This didn’t seem to make sense. The model was fine and there was no admission of fault with the model from the NFF. However, it was very obvious to those of us who witnessed and even took part in that debate that @Tim_Whiffler knew his stuff and had an exceptional grasp on the economic history of agriculture in Australia. It can only be assumed Tim’s influence has led the NFF, and its new board, to accept that it was now public knowledge that the farmer representational model is broken.

When Tuesday night’s #agchatoz started, Tim was involved from the start. Having had a private invitation from the NFF to talk and having witnessed the public admissions of a broken model, he had been feeling fairly vindicated and perhaps was looking forward to discussing future options for farmer representation. Unfortunately this ‘vindication’ has not moved him beyond earning him “troll” status in the eyes of some regular users of Twitter. This quote from an @agchatoz co-founder (and host on the evening) highlights the labelling Tim received last Tuesday…

‘Thanks Corey & he was trolling, there is a difference between criticism (constructive or not) and being a troll’.

That labelling is incredibly unfair. More so when numerous farming organisational staff were vigorously defending the organisation’s that pays their wages. One would expect nothing less. Unfortunately for the staff only one NFF director could make it onto the discussion.

The defence from some of the farming organisational staff was very robust. Heavens, some people may even call it troll like behaviour! Unfortunately, this was acceptable to the majority on #agchatoz last week.  As one well known rural twitter peep put it, ’so as a community it seems time to shush the noisy, unhelpful minority #schoolyardbullies’.

I would invite readers to read through the transcript of the #ahchatoz session and see just how robust it was.

As an individual, Tim has rocked the boat and created a mood for change. While others are stating Tim used troll like behaviour, the NFF were desperate to make contact and hear his ideas, because, after all, they could not rebut his arguments. At the very same time there’s agreement (in some quarters) that both sides of the debate bordered on troll like behaviour, but there is not the will to name and shame these people. This exposes the double standards in the agricultural community. Majority norms are acceptable, even if they are failing, but anyone who dares to speak out against the norms is labelled. From what has been made public, David Trebeck and David Crombie have highlighted a need for radical change. Even the Director of the Australian Farm Institute, Mick Keogh, has said the Australian farmer representational model is broken. Are they labelled as “trolls” and silenced? According to @Tim_Whiffler, the NFF unfollowed him the very next day. It seems the messenger has been shot.

There are many people out there who owe @Tim_Whiffler an apology.

Don’t hold your breath.

Whose interests are we serving by ensuring supply chain profitability?

As a farmer we sit in the weakest position in a supply chain. The standing joke is farmers buy retail, sell wholesale and pay freight both ways. Sitting in a position of little power we are price takers. This point seems to be lost on the National Farmers Federation. Agricultures peak representative body believe it’s their role to ensure the supply chain is profitable, as well as farmers.

Provided there is profit, while we farmers supply primary products to keep the supply chain churning the supply chain will continue to operate. If there’s not profit for supply chain participants then a signal of “don’t produce” will be sent to the market. Agricultures role is not to ensure there is profitability in the supply chain. Farmers should not lose sight of the fact that our role is to heed market signals. If we’re profitable then produce, should we choose. If we’re not profitable then don’t produce, should we choose. Production is not compulsory, and either is producing tomorrow what we produced yesterday.

Farmers lament the car industry and the generous subsidies paid to the three Australian car manufacturers. Subsidies have dulled the market signal. Production lines have continued to roll, but, not for much longer for one. No subsidy has made the supply chain Ford operates in viable and management has decided to end it.

If the NFF is so determined we should have a profitable supply chain then the first fact they should be armed with is cost of production data for every farm product. If there’s no ability for the supply chain to provide break even returns there’s no point in the supply chain operating. Conversely, if the supply chain is able to provide a profitable return for primary production there is no obligation on the supply chain to pay anymore than the market determines. It is a symbiotic relationship, but the power rests with one segment of the supply chain.

The wheat supply chain is a good case study. South Australia and the east coast make up approximately 55% of Australia’s wheat exports. These supply chains are dominated by two regional monopolies. Soon they are to be dominated by two internationally owned supply chains.

Archer Daniels Midlands (ADM) and Glencore are two of the big five wheat traders of the world. They will potentially own almost all the entire storage and handling supply chains in SA and the east coast. They will potentially have ownership of the ports. They could have direct access to the end users. Post farm gate they could have control of approximately 11mmt of Australian wheat. World wheat prices are set in liquid markets such as Chicago and Paris. Buyers and users of the monopolised storage and handling supply chain will have to pay the cost. These costs will be deducted to realise the farm gate returns.

Ensuring profitability in these supply chains is more easily said than done. Farm profitability will only be determined by several factors; price, yield, costs. Costs are beyond the control of a farmer. The only control a farmer has is to use their inputs in the most efficient way. Price can be managed, but not controlled. Yield is also beyond a farmers control but we can manage several aspects of the production system.

Apart from lobbying multinational companies to request farmers are receiving profitable returns there is little that can be done. The only signal an Australian farmer can send to the supply chain is reduced supply, ultimately below the level of demand.

On the logic of the National Farmers Federation Australian wheat farmers would produce the maximum amount possible to ensure critical mass and increased supply chain profitability. The only segment facing risk is the production phase.

There are other supply chains that would make interesting case studies also, the Victorian milk supply chain for instance and the power of a grower co-operative.

Whose interests are we serving by ensuring supply chain profitability?

Price protection?

As an Australian grain producer I have always had the attitude I’m hard done by, my price has never been good enough and I want $5 more than the market was paying. Heck, my wheat is special….it’s mine!

The reality is my wheat isn’t special; my neighbours can replace mine.

I now accept my lot in life. The price is the price and the penny has dropped, when the price is in a range I am profitable it’s a sell, and when it’s not I have to develop a strategy to achieve a profitable price. Simple hey!

Today’s farmer is armed with a range of products to price their physical grain. These include over the counter (OTC) products such as swaps (or futures) and options, or physical sales. Buying an option gives the owner the right, but not the obligation to exercise their option. Owning a put option is the right but not the obligation to put the grain into the market at the strike price and a call option the right to call for the grain at the strike price. It is akin to an insurance policy.

In a country such as Australia there is always production risk so pricing more than one produces is always a concern. The most essential element to pricing grain (as a seller or buyer) is knowing at what price you are profitable. Once established you can develop a pricing strategy.

In the last two decades (1988-2007) yields have flat lined in Victoria at approximately 1.7t/ha for wheat and barley (combined). In the same period the standard deviation of yield has risen from 0.4t/ha (88-97) to 0.72t/ha (98-07). For a state that’s production is in equilibrium for supply and demand this represents opportunity or risk. For a grain grower in eastern SA this offers opportunity to supply a short market. For a dairy farmer in Victoria this is an increased risk.

Today there are several ways (other than pricing physical) to create a price for grain. Swaps or futures pricing gives a flat price and leaves the owner of the position liable for daily margin calls. In the case of an OTC product the final margin call is the only position that incurs a cost, but the cost of this is rolled into the products cost to client.

For futures and options positions offered via Chicago Board of Trade brokers charge a flat fee, half on the opening of the position and half on the closing of the position. For futures, margin calls are covered daily and sufficient funds must be kept in a trading account to cover positions. There is an opportunity cost on these funds.

Options are purchased at a flat charge and there is also an opportunity cost on this money.

To demonstrate the practicality of an options trade I will use data from the CBOT Dec 13 flat pricing to
estimate a Dec 13 call options position. Call options are used by consumers of grain to protect against upside price risk.

The Dec 13 futures contract price bottomed at 680c in Dec 2011. It peaked at 910c in Nov 2012. January to May 2012 it bounced around in a range of 700-740c, generally between 700 and 720c.

The cost of an at the money call option is around 74c/bu. Contract size is a standard 5000 bushels (136 metric tonnes).

Let’s use the following assumptions to demonstrate what could have been an actual trade. Of course, hind sight is a wonderful thing.


Strike price of call: 700c

Exercise price of call: 840c (the July peak)

Cost of call option: $3700 (74c/bu)

Total consumption is 1500t and two thirds will be hedged (8 contracts)

No brokerage fees will be added to the cost, or opportunity cost for the funds

Basis remains constant – $0.00 and all quotes are in USD


Initial cost: 8 contracts (40 000bu) at $3700 (74c/bu) = $29 600.00 The call option owner now has the right to call 8 wheat contracts at the strike price of 700c/bu (US$257.20/t).

In July 2012 we get lucky and exercise our option, in this case we call our right for the seller of the option to provide us with 8 flat priced futures contracts at 840c/bu. We then go to the market and sell them at this price.

Return: sell 8 contracts at 840c/bu ($308.64). Our return is a margin of 140c/bu, less our initial cost of 74c/bu.  Selling 40 000bu at 66c (profit) results in a nett gain of $26 400.00 or $24.20t

Whatever happened to the price of grain, in the physical market, we now have $26 400 extra to purchase our required tonnage.

If the CBOT price had dropped by 40c ($14.70) to 660c the only cost would have been the initial cost. But the cost of the overall grain parcel (1500t) would have reduced by $22 046.00, an overall cost of $7554.00. The break even reduction in futures pricing, for this scenario, would have been ~647c/bu.

Basis will never remain constant and there will be brokerage fees. Basis is currently plus $20. A rising basis makes an options trade riskier and Australian grain more expensive relative to US grain. FX fluctuations also add another parameter to the equation.

This exercise demonstrates that if ones cost of production is known there are ways of pricing grain for sale, or purchase, without taking on the risk of a physical position. For a consumer the call options cost could be seen as the opportunity cost (for a year) of a storage system invested into an insurance policy to cap their grain price. You may not need the insurance every year.

Nothing in this blog is a recommendation, it is a scenario using hind sight.