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Comment by bryanlarsen | Hacker News Reader

Wheat prices were up because of the Ukraine war so farmers planted more wheat and less corn. But wheat prices have already returned to pre-war levels, and this report will depress them even further.

OTOH, fertilizer prices at the time of planting were crazy high.

Expenses up, revenue down. Farmers are going to be in a world of hurt this year.

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If farming worked like this comment presumes, the simple fact that growing things takes time would be a road to financial ruin and nobody could feasibly earn a living doing it. Since there exist both farmers and food, one can conclude that this isn't how things work.

Instead, rather than planting today and selling "here's X bushels of wheat I've harvested" months in the future and hoping for the best, farmers sell futures (that is: "in <growing time> months, I shall deliver X bushels of wheat") for most of their expected yield.

Lo' and behold, here's what the futures prices looked like around planting time [1: look at YTD]: high due to demand from those that had expected to have Ukrainian wheat to buy after the harvest, and then back down when that price signal resulted in sufficient wheat being planted to satisfy demand and thus an increased supply of farmers writing futures on it.

[1] https://www.nasdaq.com/market-activity/commodities/zw

To be fair, there are a lot of ag goods that don't have futures markets

All hail the mighty Onion.

https://en.m.wikipedia.org/wiki/Onion_Futures_Act

Obligatory https://astralcodexten.substack.com/p/the-onion-knight

Edit: damnit, it's subscriber only; here's an excerpt

   My cryopod popped open, 
   revealing a man in a silver 
   jumpsuit. "Welcome to the 
   future! Here's your onion."

   [...]


   The brain's first strike had 
   decimated the human populace. A 
   few survivors, remembering the 
   AI's blind spot, had made it to 
   the onion capital of the world 
   - Vidalia, Georgia. There a 
   biohacker had used the last 
   working CRISPR systems to 
   create a strain of colossal 
   onions, hundreds of feet in 
   diameter. The remnants of 
   humanity huddled inside their 
   onion domes, ignored by the 
   triumphant machines.


   The next steps required the 
   ability to move freely, outside 
   the domes. In the dying years 
   of the human economy, people 
   had experimented with 
   tokenization of regulated 
   products. Casinos had tried to 
   argue that their customers 
   weren't gambling with money, 
   they were merely gambling with 
   tokens that could be trivially 
   exchanged for money. 
   Decentralized financial markets 
   insisted that sure, you had to 
   have a license to trade stocks, 
   but they were just trading 
   tokens that could be trivially 
   exchanged for stocks. The 
   government hadn't bought it: 
   any token representing an 
   object is legally equivalent to 
   the object. So the huddled 
   remnants of humanity set out 
   turning people into a token 
   representing onions.

And motion picture box office receipts. Fascinating.

Planet Money had an episode about that recently. https://www.npr.org/sections/money/2015/10/14/448718171/epis...

Futures were invented so farmers could sell at known prices before committing to production.

That’s why you hedge though. Quite a lot of exposure should already be handled well before we get to this point in the season. Ag commodities can be brutal and few people know that more personally than farmers.

I think a lot of people have zero idea that farmers sell futures when prices are high to lock in the value of their goods.

But not American onion farmers.

Onions are effectively a monopoly, the company that packages them contracts the growers before the season so while there isn't a futures market to trade there is the same. (I don't know how effective the monopoly is, could be a number of different companies that compete, but farmers don't plant onions without a contract, and even if they did there is no market if you don't have a contract so the crop is worthless.

Potatoes don't have a future market, and they are still planted. Though I believe even then big names like McDonald's contract all their potatoes in advance.

That's a monopsony, which is the opposite of a monopoly.

Monopoly is one seller, many buyers.

Monopsony is many sellers, one buyer.

I never heard that term before, but I'll stand corrected

It’s not about high or low to lock in profits, they sell futures well in advance to eliminate uncertainty and hedge their naturally positive position. The speculator buying the future takes on that risk.

What about when crops fail or fall short, what do farmers do?

There's an extensive selection of insurance policies.

A selection of on set of policies by one provider in Saskatchewan (granted, not the US) can be found at https://www.scic.ca/crop-insurance/program-overview/multi-pe...

Generally you hedge only about 70% of the expected crop, and then place insurance on that 70%. In a bad year you break even, and you get all the excess in a good year.. also the hedging is not all at once. Farmers are already selling contracts for their 2023 corn crop, but typically only 10% right now. They will contract more and more out over time has harvest grows closer. You have a good idea what you harvest for your 2022 crop by now, so you can contract closer to 100% if you can find a buyer.

Modern libertarianism in a nutshell:

I have the right to maximize my short-term gains, but if the consequences catch up to me, I will demand subsidies and bailouts from the same society I totally don't participate in.

No, government payments and the ridiculously generous crop insurance will "insure" they won't. You ready have to be a poor operator in this day and age to go broke farming.

My farmer buddy (who was an ag banker also and is now a real estate agent) is constantly getting checks from the govt "for some reason." His mom is getting a random payment because she's a single female (widow) so qualifies for some random program. The government programs are really crazy and no one really seems to care anymore. In the 80s, 90s even 2000s the ag bill was always a big deal.

Now it's maybe just peanuts compared to the rest of the budget. Who knows, but American farmers do quite well these days.

I used to get annoyed at this, but as I learned more I realized: Food is not optional - if we need to waste money to make sure we have food during the bad years, then it's worth it.

Is it not the case that wheat requires less chemical inputs than competing crops like corn? I would have expected farmers to see what was happening in Ukraine early on and nope out of input-heavy crops?

You get a lot less yield though. There are very few farmers who would make more switching from corn to wheat if corn is an option. Farmers grow wheat where corn isn't an option for some climate reason. Sure your inputs are less for wheat, but a good corn farmer will still make a lot more money on corn than wheat in most cases.

My understanding is that there are subsidies and government purchase programs that cover these situations. Is my understanding correct?

There is a government insurance program, but the general consensus is it breaks even.

There are also conservation programs where the government takes a multi year contract on marginal land, but you will earn more money farming the land in most cases, unless it is a swamp or something.

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