If J.P. Morgan Chase-- or its trader known as the London Whale--really understood its market exposure, perhaps the company wouldn't have lost $6 billion in that convoluted synthetic credit default swap deal last year. Ditto the now bankrupt VeraSun, when the ethanol giant made a fatal marketing mistake relying on accumulator contracts in 2008.
Many farmers juggling positions in futures, options, cash sales, basis contracts, HTAs and crop insurance also could benefit from software designed to give them real time snapshots of their marketing record and the size of any potential margin calls in volatile markets. Likewise, farm lenders may find more comfort financing whale-sized farm loans and hedging accounts if they can monitor growers' positions.
I don't normally review products, but AgYield, a new software package developed by the brokerage firm EHedger, does just that. It tracks gains or losses on a daily basis and allows customers to simulate trades, so both farmers and lenders can see if they're protected throughout the year. Less than six months old, AgYield has sold subscriptions for $60 to $150/month and has about 350,000 acres enrolled. It's the only product of its kind on the market now, although a crop insurance company demonstrated a similar Beta product to DTN editors a few months ago.
Rehearsing trades and crop insurance coverage before the fact helps you find holes in your marketing plans, AgYield execs said. For example, if you buy 50 futures contracts at $5.60 but corn hits $4, your margin calls will top $355,000. The online matrix outlines those obligations under any price scenario, so lenders won't have any surprises.
"Farm lenders tell us they want to fund hedging accounts, they just don't want to lend to infinity," Justin Kelly, AgYield president said. "One told us he wasn't lending $1 million for a pickup truck."
Bankers are sensitized because increasing volatility in the market means revenue from corn acres can easily swing $700 to $800/acre over a marketing year. Dodd-Frank financial rules also have potential to double or triple margin demands. All that is trickling down to the farmer level. Last summer one of my farmer friends had his pre-approved hedging line yanked, because the lender got cold feet with him hedging three years of crops, not just the one in the ground. Nobody died, but a six-figure loss can be hard on a marriage.
Texas A&M Extension Economist Mark Welch (who also teaches DTN's Master Marketing class) has seen a demonstration of AgYield. Cost may be an issue for some farmers, he said. He also needs more experience testing the product but thinks the software may have promise by reducing confusion about where a marketing plan stands.
Often farmers buy puts and then hope prices fall so they can make money, Welch said. A snapshot like this would telegraph why that's a mistake, since puts are the safety net, not your most profitable scenario. More complicated options positions or even trades like the accumulator contracts may not be automated, but could be inputted manually, so growers could more fully understand the impact of various trades, AgYield execs said.
On a single page, AgYield shows real-time profits or loss based on forward sales, HTAs and expected crop insurance coverage. Real-time budgets are fed from a University of Illinois database and any unsold grain is priced at the market, with a cash bid feed from local elevators.
A handy little reminder pops up at the bottom of the page with messages like this: Based on a 15% minimal return on investment, you'd need to sell the balance of your crop at $4.38 or higher to make your objective. "That's so you don't look back and regret missing a sale," Kelly said.
"There are a lot of complicated pieces to the puzzle in any marketing plan," Kelly said. "We try to make the complex transparent." I'm sure we'll find some bugs in this kind of software, but we'll share the feedback after a few more product tests. If you've seen similar software programs, please share your thoughts.
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