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Need more price discovery, less supply discovery

by Richard Oswald

(June 26, 2002 -- CropChoice guest commentary) -- Price discovery is the process whereby supply combined with demand leads us to a logical value for our grain and livestock. Supply and demand was once a product of free enterprise, and price discovery made farmer producers tingle with the anticipation of market action. Today it seems our government and others are more into supply discovery.

Determining the adequacy of supply through the publication of artificially high inventories, rather than discovery through the marketplace, has short-circuited free market principles.

For years, USDA has attempted to place numbers where numbers didn't yet exist by anticipating acreages and yields of program crops while planters sit idle in snow covered machine sheds. They guess pig numbers before pigs are born and beef tonnage while calves still graze pastures outside feedlots. The futures trade uses these non-statistics to their advantage by accepting or rejecting reports that sometimes seem to mean little five minutes into post release trading. I can understand and even respect the fickle futures trade for their lack of predictability. Futures seldom seem to make sense. I have concluded that they are not supposed to. It's all part of price discovery. As crazy and sometimes crooked as futures markets seem, they make more sense than USDA reports that are constantly adjusted, outdated, and discredited almost before they are made public.

Promoters of predictability are working to remedy that situation.

My phone rings on average once per week with survey takers who want to know what I grow and when. My mailbox contains post cards and letters from suppliers willing to give me a coffee cup, gloves, or ball cap in return for intimate details of what I do and when I do it. For $10 and a chance to win a Caribbean vacation I am invited to fill out a four-page questionnaire that takes less than 45 minutes to complete. Do I make the decisions? How many acres do I farm? Do I use futures? What inputs do I use? Why? How much? What did I pay?

My favorite seed dealer advised me the other day that his company has plans to provide all its outlets with field mapping software. Farm Service Agency photos or satellite images will be used to identify individual fields of customers. In the spring, the dealer will scan the tags of each lot of seed purchased by individual patrons. Those facts will be combined with field information of what is planted where. The goal is to combine seed and field data in order to identify fields and crops specifically. Buyers of our production could have access to those planting records.

FSA records our yields through our loan deficiency payment claims. They keep track of planted acreages by requiring every producer to certify program crops and even pasture. They ask if soybeans are rowed or drilled. They make note of the type of grain that is planted. They question whether fields are no-till or conventional.

With all this supply discovery, price discovery is getting pretty dull.

Lately I've heard grain and livestock production compared to every other industry in the United States that uses JIT (just in time) inventory control. The powers that be declare that the corn surplus is irrelevant. Be it 1.5, 1.2 or 1 billion bushels, it is more than adequate to keep prices in the basement. That's because of the JIT-capable grain transportation system in this country. Even as I write, Brazilians, with American help, are working and investing to create a comparable system that will be JIT-ready. Part of that plan includes panamax cargoes bound for our own southeastern coast. Presumably, soymeal and maybe even corn payloads would arrive just in time for U.S. chickens and hogs.

There's just one hitch with this scenario. Promoters need to know what's being planned, planted, hatched, farrowed and calved by we producers. Just In Time relies on being able to book early purchases to guarantee timely delivery. Indoctrinated producers swarm to sell a year or more ahead in order to capture the best prices. Those bookings allow packers and end users additional leverage in the market as cash strapped producers run out of time and make forced sales. Early sales take the edge off demand and aid the JIT concept. The remaining unsold inventory then becomes dead weight on the marketplace. If producers balk at revealing their intentions regarding future production and marketing, JIT is SOL.

We can re-establish price discovery, but growers need to be good poker players and learn to hold the cards close to their chest. Only suckers tip their hand.

About the author: Richard Oswald farms near Rockport, Missouri