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Hoarders vs. Sellers
by John Werner

It is interesting how the culture in agriculture always leans toward owning something—whether it be land, trucks, bins, grain, combines, sheds, livestock, stock in the local ethanol plant—the tendency is toward long-term ownership in some fashion or another. That’s just the way it is, and it has worked out over the long haul. Farmland has certainly been a good long-term investment. The rest of the above list may not be as attractive. In years past when prices were low and interest costs were manageable, making mistakes of excessive ownership were not as dramatic. It’s a different ball game now. But many

“Hoarders” are still out there.

This culture of “hoarding” is apparent in the elevator business as well. Most elevator managers come from a farm background. In years past the money maker in the elevator business was long the basis: Buy grain, set spreads, wait for the basis to improve and make sales. It was easy as pie... and went right along with the cultural bias of ownership.

New Sheriff in Town

There is a new sheriff in town. It’s called a demand market. AG is IN. Commodities are sexy and in demand. China, India and other developing and third world countries are raising the caloric intake of their populations. Ethanol is consuming a large portion of the corn crop and there is a large appetite for commodity futures as an “asset class” for long term investment. Have a look at your 401K and you might find a percentage of your portfolio in soft commodities... Hoorah!

One thing that is certain is that the public is “throwing money at agriculture” and we need to put ourselves in a position to catch it. Thinking outside the box will be critical to catching these dollars. The hoarder’s ways will probably not work. The “buy and hold” passive approach to grain merchandising must give way to a proactive, selling oriented approach.

Demand markets create incredible needs for cash flow and liquidity, two dangerous enemies of the hoarder. Demand markets often include rapidly increasing price environments which typically create erosion in basis values leaving the hoarder with large margin calls and underwater positions which puts stress on the balance sheet and lender relations. Demand markets tend to reward the seller and penalize the hoarder.

The “couldn’t see it coming” defense

The transition from $2.75 corn to $6.00 corn in this last cycle has been dramatic. No one could have “seen it coming” to the extent that prices have increased. However, it is clear that the origination policies of the past do not hold up in a volatile market. Rather than buying grain at little or no margin and counting on the passage of time to create a margin, the new rule of thumb is if you can’t sell it, you shouldn’t buy it. That is, unless you can bid a super wide basis! The idea is not to return to back-to-back trading, but to have the ability to exit a position if it becomes a burden. The ability to make sales for 2009 and 2010 are very limited. The commercial buyers will get back into the market when things settle down. Until they do, be very careful. Hoarding is a dangerous practice in the current environment.

The benefits of being a “seller”

In our industry the solution to 95% of challenges that arise is having good sales on the books that are priced. Having good sales on the books allows you to have a bid when others don’t. And having sales priced provides liquidity to the extent you are short the basis in a rallying market - just the opposite of the hoarder’s plight. There are many other benefits of being a seller... Making the mental crossover from hoarder to seller is a watershed event for the average merchant. Believe it.

Making the cultural change to becoming a seller and not a hoarder

The merchants who have made the transition from “hoarder” to “seller” are far ahead of their counterparts. Those who have done a good job of getting bushels sold, creating basis balance and getting into the “Green Zone” have not been torn out of the frame by the recent liquidity crunch. They are looking forward to the future and enjoying some of the best margins they have ever seen. Becoming a seller rather than a hoarder is a large-scale change and requires serious, concentrated effort. It has been optional in the past – it is a requirement now.

John J. Werner is the president and CEO of White Commercial Corporation. He joined the company in 1981. WCC provides extensive grain merchandising education to private companies, public associations, lending institutions and several universities. John is a member of the Chicago Board of Trade and the Kansas City Board of Trade. He resides in Stuart, Florida with his wife and two children.

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