



A farm is not always long grain, in its mental accounting. A cliche in gain marketing is to to proclaim that “the farm is always long grain.” It is wise to view a farm or business in entirety when making decisions. I can agree that the farm is in it for the long haul but crops come once per year and there is a business cycle to attend to.

(Note the definition of terms at the bottom of the essay. Bold font indicates term is defined or source is noted.)

I have helped farms roll physical contracts into inverse markets and/or invoiced farms for cancellations because of crop peril. Sitting kneecap to kneecap with farmers I often sense that the farm isn’t always long grain. In practice it seems the farm views grain in individual crop years not in entirety.

I aim to discuss how mental accounting of crop years impacts grain marketing and how to tie the short-term and long-term view of the farm together through the Crop Stack (Grain Marketing Stack).

Mental Accounting

If one has a certain balance he likes at the bottom of his checking account to feel comfortable then he has a mental account. Perhaps his comfortable balance is $1,000. If the balance dips to $953 and he feels a little anxious then he just dipped $47 into his mental checking account.

A thirty-five year old farmer may grow crops until he is seventy-five. Its easy to say that in that forty year farm career will produce a mountain of bushels when looking at that time frame. But debt service, input costs, machinery upgrades and cost of living checks need to be written frequently or at least annually. Because of this business cycle, businesses/farms/humans view their crop in separate mental accounts. If you don’t believe me, slip into your nearest coffee shop and ask an old boy what years were the wettest in his farming career. He will rattle off ‘62, ‘74, ‘85, ‘97, or something similar. He will have a good mental accounting of each crop year.

When we view a farm career in entirety we envision surplus bushels. When we frame a crop year individually we sense scarcity. How can we balance surplus and scarcity to make good business decisions? Perhaps my Crop Stack I created will help?

Crop Stack (Grain Marketing Stack)

“Negotiations over a shrinking pie are especially difficult… People tend to be easygoing when they bargain over an expanding pie.” I about fell out of my chair when I read that from Daniel Kahneman.

When I started negotiating grain contracts I was so surprised how difficult the negotiations were. This line from Kahneman made so much sense because we were negotiating over a perceived shrinking pie, i.e. an individual crop. Knowing this doesn’t make my job easier it simply helps me put myself in the other guys shoes on the other end of the negotiation.

As I pondered this concept of a shrinking pie I wanted to come up with a way to show it visually. I’m a fan of data visualization because the nature of grain marketing is intangible so visuals help communicate concepts better.

these are not recommendations on percent sold and price levels. The information for educational purposes only

Its common to use a circle or portfolio to demonstrate a crop year and crop sales. A portfolio works great but does not satisfy my attempt to demonstrate the reality of a shrinking pie. A visual of a grain portfolio is a great way to demonstrate diversity in making grain sales. I started using a triangle to represent a farm’s individual crop and then layering in sales as they stacked throughout the year. I found the farm responded well to this.

The first sale of the crop year was at the bottom of the triangle and as the farm kept making sales we stacked on top of the previous sale. I call this incremental selling, stacking. That is why I call it the Crop Stack. It also demonstrates that each sale gets more difficult because its perceived that the pie is shrinking and there is less of the crop left as each sale is made. So the stakes get higher as each sale is made. This may explain one reason why grain marketing is so difficult? To combat this scarcity bias one can remember the farm is in it for the long haul. Below is a visual.

The reality is the individual crop will be viewed as a shrinking pie as consecutive sales get made. One can line three Crop Stacks together and start filling in sales or firm offers as needed for profitability, logistics and cash flow for each crop year.

Aim to remember the long view of the farm but understand the business cycle forces a farm to maximize each crop year.

The farm is long grain for the long haul but not in it’s mental crop year.

-cjw

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Cullen Wilson is a grain originator and leads a team of originators at Dakota Plains Ag Center, LLC in Yankton, SD. You may contact him at cullenjwilson@yahoo.com . Follow him on twitter @cullenjwilson

Disclaimer

This newsletter expresses the views of the author as of the date indicated and such views are subject to change without notice. The author has no duty or obligation to update the information contained herein. The newsletter is being made available for educational purposes only and should not be used for any other purpose.

Copyright © 2019 Cullen J. Wilson. All Rights Reserved. Information provided is general in nature and is provided without guarantee as to results. The information is not intended to be, and should not be construed as, trading, financial, insurance, legal, or tax advice. The author, its subsidiaries, and affiliates disclaim any liability arising out of your use of, or reliance on, the information.

Your situation is fact dependent and you should seek appropriate advice.

Terms and Sources

long: to own or purchase or hold or possess a commodity or asset

Investopedia’s definition: A long position—also known as simply long—is the buying of a stock, commodity, or currency with the expectation that it will rise in value. Holding a long position is a bullish view.

Mental accounting: Mental accounting is a behavioral economics concept introduced in 1999 by Richard Thaler, a Nobel Prize-winning economist. Mental accounting is the tendency people have to separate their personal assets into different categories based on subjective criteria and (inadvertently) illogical reasoning. Source https://www.investopedia.com/terms/m/mentalaccounting.asp

Inverse: when the nearby price is higher than a deferred price in the same underlying commodity or asset

Daniel Kahneman: most influential person in modern economic theory. He challenge the classical view in economics that humans make rational decisions when making economic decisions. He proposed that humans are irrational and use rules-of-thumb or biases to guide their decision making.

https://www.amazon.com/Thinking-Fast-Slow-Daniel-Kahneman/dp/0374533555/ref=sr_1_4?crid=1EYYVR91G9S7V&keywords=thinking+fast+and+slow+by+daniel+kahneman&qid=1563989958&s=gateway&sprefix=thinki%2Caps%2C179&sr=8-4

quote used in essay is from page 304 from Daniel Kahneman’s book Thinking Fast and Slow. 2011. Faraar, Straus and Giroux. New York, New York.



Stacking: selling your crop incrementally through the crop year as way of diversifying sales and balancing crop risk and production risk

Crop Stack (Grain Marketing Stack): a concept or way to visualize stacking crop sales and the reality of the difficulty making sales due the mental accounting of a shrinking pie