Oct

3

Had J.R.R. Tolkien applied his talents to Middle America instead of Middle Earth, the result would have been akin to Satan's Bushel, Garet Garrett's 1923 novel, available as a 212 page pdf. Literally beautiful in its language, yet deadly accurate in its particulars, the work is a mystic's perspective on farming and speculation, on death and eternal love. It is worth reading for both its prose and its surprisingly relevant take on markets.

Adam Robinson adds:

FarmingFor those who want to read an uproariously entertaining book on the economics of becoming a farmer, I can't recommend The Farming Game, by Bryan Jones, highly enough.

Imagine Mark Twain giving advice to a city slicker (Green Acres is the place to be) who dreamed of becoming a farmer, and you'll have an idea of the book's appeal. Acute economic sensibility combined with trenchant wisdom.

There are only two copies of this overlooked classic left in stock at Amazon before they reorder (owing to slow sales, alas). You'll thank me later, and I can promise that if you start reading it over a weekend, you won't stop.

David Lamb interjects:

In the book "Satan's Bushel" is found a snippet on page 123 about
the dreaded financial life of a wheat farmer. Here is the quote:

The farmer was one who paid.The farmer certainly paid.
Everyone who touched him made him pay. What he sold he sold on the
buyer's terms. What he bought he bought on the seller's terms. One in
that situation was bound to be exploited.

In essence, the farmer takes the brunt end of the financial side of
the wheat business. My grandfather farmed wheat. He was always
complaining about everyone taking advantage of him; how he never got a
good enough price; how the prices of equipment are too high, etc. I
grew up thinking two things about this industry: One, I wanted no part
of it and, two that farmers were always poor and there was no way
around that.Then a few years later in life I came across the futures
markets wherein I found out about hedging. I am perplexed why more
farmers don't utilize the futures markets to hedge and, therefore,
protect themselves more. I am very naive and ignorant in this field but
I have included some numbers from the Census of Agriculture data that I
would like to understand. The latest year of available data is 2002.

Number of wheat farms: 169,528 Total number of acres: 45,519,976 Total number of bushels: 1,577,005,140

If one CBOT wheat contract is 5,000 bushels then the total number of
possible short contracts given the number of bushels yielded is
315,401.The average weekly COT data, on the short commercial side, for
the whole of 2002 was 59,996 short contracts. If these were held by
farmers, which I think we can assume so, then the number of bushels
being hedged is roughly 300,000,000, or 19%.If this 19% number is even
remotely close, why aren't more farmers using the futures markets?

Alex Ceresian attempts a reply:

Keep in mind that hedging with futures only protects the farmer from a small portion of the risks the farmer faces.

Futures protect against "price risk", the risk from fluctuations in the market price of wheat.

The farmer also faces "quantity risk", that is uncertainty about the
amount of wheat he will be able to produce. You plant X bushels of corn
but because of umpteen different reasons (mistakes on your part, bad
weather in your local area, pests) you only manage to produce Y<X
bushels. Futures don't help with this risk (and you cannot insure either).

Even worse, the two risks interact and complicate things. If you don't
know how many bushels you are going to produce, how many contracts
should you sell (for price hedging purposes) on the CBOT?


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