Risk management with world markets

 US farmers have dealt with risk management issues similar to this year's many times over, including 1980 and 1988 droughts where prices soared to 2x original prices in just a few short months.  In 1993 flooding and drought also caused major problems, and 2003 had a late season drought that hurt soybean production, sending prices soaring higher.  
  The American farmer has experience in dealing with these issues, although that doesn't always mean success in selling at the best prices of the year, or even staying out of all hedging problems (even selling within 20% of the top (a momentous achievement) still means significant margin calls will be experienced.
  But  recently I met with Ukrainian farmers from the Crimea who talked about the greatest problems they face in their Brave New world of Agricultural production.  Remember, these farmers have come from a 2010 drought that cost them about 25% of a normal crop, only producing about 75% of normal production in 2010.  In 2011, it is a completely different story with production as high as 100 bu/acre for intensively farmed winter wheat, with 50 bu/acre common in what was a record large production year.  Even USDA in its last report is recognizing the huge production coming out of that region, once again raising production forecasts in August for Russia, Ukraine and Kazakhstan (that will likely see further hikes in future reports).  
  Their greatest complaint was their inability to protect themselves from the yield fluctuations common in this region - an issue fresh on the minds of Ukrainian farmers from the 2010 and 2011 contrasts in seasons.  There is no crop insurance here, and farmers are extremely jealous of how nice American farmers have it when they hear about our crop insurance programs.  To be paid $250-$350/acre for it being too wet to plant in 25% of ND lands this years is unbelievable!!!  
  Comments including "if only we had that type of protection," and "What a way to protect against production risk" are common.  They yearn for that type of protection, and realize how important it would be to compete on the world market for grain exports as they currently are.  It is kind of humbling to think we in the US have developed that good of a system, and how much we need to continue it.  
  Second, the Ukraine farmer complains of grain companies that buy their grain at harvest (as they have little storage facilities on-farm) at hugely discounted prices, only to see that price rise sharply following harvest.  Sales of wheat at $180/MT (about $4.50/bushel) was common at harvest this year, and wheat prices on the CBOT are trading around $7. The basis at harvest drops like ours used to when farmers had no storage, and grain buyers knew it.  Grain buyers simply buy the grain, hedge it on the board, and wait 3 months until the demand for grain comes and basis improves $1
or more to make a nice profit on ownership of grain at harvest.  So in the first instance, the Ukraine farmer needs to learn how to work basis to his advantage by knowing what futures prices are trading, calculating a basis, and comparing it to a normal basis.  Then they must sell only when basis is good, not give the grain away at harvest to the savvy trader who knows how to hedge and work the basis.  
 The Ukraine farmer has no idea how to read a futures market set of price quotes.  Currently, we are trading 2012, 2013, and 2014 wheat and corn at unprecedented levels ($6 and higher corn and $8 and higher wheat), or price levels that the Ukraine farmer has never had the opportunity to sell for before.  The next question when discovering how high these prices are is, "How can I sell it?"
  This is perhaps the second and third lessons needed for the Ukraine farmer - How to read futures prices to discover what futures traders think prices will be in the future, and how to hedge it when the price is favorable.  These are great questions facing the Crimean, Ukrainian farmer today, perhaps his biggest obstacle to growing grain successfully for the world market.  
  Isn't it amazing how similar our problems are???  

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