Kub's Den

Put Your Own Risk Tolerance to the Test When Deciding to Sell or Store Grain

Elaine Kub
By  Elaine Kub , Contributing Analyst
What words come to mind first when you think of "risk" -- Loss? Uncertainty? Opportunity? Thrill? (Illustration by Elaine Kub)

"Suppose a relative left you an inheritance of $100,000, stipulating in the will that you invest ALL the money in ONE of the following choices. Which one would you select?

a) A savings account or money market mutual fund.

b) A mutual fund that owns stocks and bonds.

c) A portfolio of 15 common stocks.

d) Commodities like gold, silver, and oil."

I'm imagining most DTN readers are wondering why there's no choice for "Farmland" or "Paying down an operating note." But that's an excerpt from a risk tolerance assessment designed for the average retail investor to help their investment advisers figure out how conservatively or aggressively to allocate their 401Ks and IRAs among stocks and bonds. It's meant to elicit someone's underlying attitudes about risk and their willingness to face loss during the pursuit of gains.

That makes the quiz very relevant to grain marketers this fall, when risk-averse grain owners are tempted to sell the stuff and lock in historically high prices, while risk-seeking grain owners are tempted to leave the prices unset and pay for storage over the next several months, as discussed in a previous Kub's Den column "Paying for Corn Storage: Are You Feeling Lucky?" (https://www.dtnpf.com/…) and Todd's Take "Counting on Corn's Seasonal Influence Isn't Profitable Every Year" (https://www.dtnpf.com/…).

But which one are you? Risk-seeking or risk-averse? If you're like me, you can think of examples when you've bravely stuck your neck out in the market, seeking risk, either successfully or unsuccessfully. And you can also think of times when you conscientiously played it safe and hedged away risks. There is a whole spectrum from risk-loving adventurers to risk-avoiding worriers, and it's hard to know where to benchmark one's own attitudes without a broader frame of reference.

Original research by John E. Grable at Kansas State University and So-hyun Joo at Texas Tech University back in the late 1990s plotted individual investors along that spectrum, helping to frame above-average or below-average risk tolerance. Then that work was developed by Dr. Grable and Dr. Ruth Lytton at Virginia Tech into a quiz format, with questions like:

"When you think of the word 'risk,' which of the following words comes to mind first?

a) Loss.

b) Uncertainty.

c) Opportunity.

d) Thrill."

"You are on a TV game show and can choose one of the following. Which would you take?"

a) $1,000 in cash.

b) A 50% chance at winning $5,000.

c) A 25% chance at winning $10,000.

d) A 5% chance at winning $100,000."

"In addition to whatever you own, you have been given $2,000. You are now asked to choose between:

a) A sure loss of $500.

b) A 50% chance to lose $1,000 and a 50% chance to lose nothing."

"You have just finished saving for a "once-in-a-lifetime" vacation. Three weeks before you plan to leave, you lose your job. You would:

a) Cancel the vacation.

b) Take a much more modest vacation.

c) Go as scheduled, reasoning that you need the time to prepare for a job search.

d) Extend your vacation because this might be your last chance to go first class."

The full assessment has 13 questions and gives you a Risk Tolerance Score between 0 and 50, but already you can tell that if you're answering all a's, you have a low tolerance for risk. Simply knowing that about yourself may help you frame investment opportunities and grain marketing opportunities in a way that will make you more comfortable, no matter what happens in the future. A really disciplined hedging strategy for someone with a low personal risk tolerance, for instance, may or may not get you the absolute top price of the year, but at least you can rest easy knowing you didn't expose your business to risks that were contrary to your innate risk tolerance.

On the other hand, if you were answering all d's, you have a high tolerance for risk. From a grain marketing perspective, maybe you'll choose to leave prices unhedged, and happily gamble $5.50 corn-selling opportunities, and at least you'll know the gamble was consistent with your general approach to life. And sometimes, it might really work out well for you, after blowing all your savings on a first-class plane ticket to Tahiti, and then winning $100,000 from a 5/100 pachinko board, then coming home to find a new job offer just waiting for you. These things do happen to some people. Sometimes.

Most of us, of course, will fall somewhere in the middle, where it's harder to know if our risk tolerance is above- or below-average. To gauge your own risk tolerance, the full Grable-Lytton questionnaire, hosted by the University of Missouri's College of Agriculture, Food and Natural Resources, can be taken at: https://pfp.missouri.edu/….

At the end of the assessment, the curators are careful to clarify that the risk tolerance score isn't meant to be regarded as investment advice. "You may not rely on the material contained herein."

And it would be hard to interpret any specific advice from this exercise, anyway. So, you've got a relatively high or relatively low risk tolerance -- so what? This one piece of information isn't enough on its own to tell you much, but it may help to formulate goals or expectations.

Keep in mind that risk tolerance (the willingness to bear risk) must also be considered alongside risk capacity (the ability to bear risk). Even if two people have the same innate love of risk, a gambler with $1 million in his pocket can better afford to lose $20 at a roulette table than someone who's living paycheck-to-paycheck. Similarly, a farming operation with higher solvency and higher liquidity ratios can better afford to pass up profitable selling opportunities without upsetting their bankers quite as much.

One last thing -- Go back to that first question about the $100,000 inheritance and note that, of all the choices offered, putting all your exposure into volatile commodities was the riskiest choice.

Elaine Kub is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at masteringthegrainmarkets@gmail.com or on Twitter @elainekub.

Elaine Kub