Let me draw you an analogy.
You’re are a private or corporal in an army. Your sergeant marches you out to a hill, where the intelligence guys summarize the enemy’s strength, what direction they’ll attack from and what weapons they’ll use.
Your sergeant advises you to pick out a position based on this information and dig in. You pick the best spot you can.
The attack begins with small arms fire — there’s no real threat as long as you keep your head down. Then, ominously, you hear the big guns firing. The barrage begins hitting the ground in front of you. You consider moving, but decide to hold your position. As the barrage creeps closer you realize if you don’t move to the rear you have a good chance of getting killed.
You can’t remember hearing anything about artillery in the intelligence briefing. That would have been useful information in establishing your initial position. But it’s too late now. There’s nowhere to go.
Finally, you abandon your position for one to the rear. This continues as you take position after position, until you’re forced to surrender.
The analogy? You’re a farmer. You’ve faced adversity and overcome. You’ve listened to analysts and marketing gurus explain what they thought the markets would do and you’ve taken a position. You decide you won’t surrender, as you think the market — like the enemy — can be beaten back.
As your position begins to weaken you decide to hang on, hoping the barrage will pass. As your position becomes tenuous you give in and lower your position but never fast enough. Then you surrender. The bins are full, the fuel bill unpaid, input bills still outstanding and land payments due.
Your position, like our soldier friend’s foxhole, was $7.50 for wheat. You had sold a few loads at that price to empty a few bins before harvest, but you didn’t sell more because most of your wheat sold between $8 and $8.50 last year.
You were offered $7.35 off the combine, but you were still safe. Then the barrage hit. Through the summer months, no one was predicting the above average yield that would be harvested.
When discussions on canola yields hit predictions of 40 bushels per acre analysts said, “That can’t happen. That would be more than a 10 per cent increase in yield. Impossible.”
Because we became entrenched in our positions we lost opportunities not only for better pricing but for any deliveries at all in some cases. But, it must be the railroads’ fault, always is.
- More from the Grainews website: U.S. grains: Wheat falls on supply outlook
Lessons to learn
There are two lessons to learn. First, because of the high yield, there was chance for profit even at the lower prices. Here’s how that works. There are two ways to calculate profits: production cost and per acre cost.
You planned for a 40 bushel crop, with costs of $240 per acre or $6 per bushel. A 25 per cent return on your $240 per acre investment would require you to achieve a price of $7.50 which you had calculated as your position. You would gross $300 per acre (that is, 40 x $7.50).
But when your yield turned into 60 bushels per acre, that reduced your unit cost to $4 per bushel, with no extra costs. If you’re still looking for a 25 per cent return on investment you could have made it at $5 per bushel, and still grossed $300 per acre. There were opportunities to sell at $6.50 and down but because you were focused or entrenched in your price the opportunity was missed.
It is not always the price that matters, but your return on production costs.
The second lesson was taught to me by my uncle Fritz, one of the sharpest men I have ever met. The lesson was simple. “Kim,” he said, “you’ll never learn anything when your mouth is open.”
I’m not sure I appreciated the short lesson but my dad reinforced it on a number of occasions with a quick knock on the noggin when my mouth remained open.
This should be a lesson for analysts who considered an increase of 10 per cent in canola yield to be ridiculous, when the actual production increase turned out to be 34 per cent. They never considered the information from the eyes on the ground who were saying from the end of July that this would be a huge crop. When they should have been listening they were talking. Mouth open, no learning.
In another story I will tell you about my Dad’s lesson on smoking in the fort I had built in straw bale stack. Not for the faint of heart.