October 2010 Newsletter

By Karl Kupers on October 03, 2010

I was all set to do a long article on the symmetry between the autumnal equinox and the Shepherd’s Grain pricing model. That was before I googled the story and science about the autumnal and vernal equinox’s. The idea that we get exactly 12 hours of sunlight and 12 hours of dark during that time is not quite true. It seemed to be such a connection in that everyone on earth was treated the same on that day and with the cost of production pricing model there could also be a point in time where both the buyer and seller were treated the same. I was searching for this because otherwise my job is to make both the buyer and seller a little bit mad all the time.

The pricing model we follow is unique to commodities. Setting a price based on a true and transparent cost of production is simply foreign to anyone involved in production and processing of commodities within the United States. There are many reasons this has been true since bartering went away and I will not spend alot of time understanding why. The basis of this conversation is to provide a better understanding of the pricing model we chose for Shepherd’s Grain now 9 years ago.

The simple explanation is to be economically sustainable you must cover your cost of production and the commodity market today simply does not have much if at all a sense of what that is nor does it impact the orderly marketing of the commodity. Producers are compelled to be a price taker if they do not have a direct market to purchase their commodity. The vast majority of commodities are bought and sold via the exchange of prices dictated by the futures market for the corresponding product. Because being a farmer is a long term commitment you never really want to know your “real” cost of production because of those years that the price never reaches a pinnacle to cover them. Your quality of life value is what you base your decisions on during those years and when the commodity price exceeds your cost of production you do your best to fully utilize the short lived phenomenum. So in those early days of analyzing our dream we decided that if we did not cover our cost of production we could not call ourselves sustainable.

The commodity market, at least for wheat, did not have too much variability before 2000 except for 1975. That stability has eroded today and for the last few years we have seen some pretty large swings in the daily price for wheat. I always draw a line that has some pretty high peaks and some pretty deep troughs and then explain the following. Every farmer has and thinks they can sell their wheat at the top of every peak, and every baker has and thinks they can buy their flour at the bottom of the trough. Someone is going to lose in this scenario. Shepherd’s Grain draws a straight line (hence the symmetry with the equator and equal day and night) through the peaks and valleys noting that we won’t buy wheat from the farmers at the top of the peaks and we wont see our flour priced at the floor of every trough. We try to create a line that being true and transparent both parties can understand that it is a long term investment whether you sell wheat or buy flour. Sometime during our long relationship one will be happier than the other but by staying true to the concept neither is a loser. Especially, if I may say, rarely do the wheat farmer or the flour buyer make that perfect decision and find themselves at the top of the peak or the bottom of the valley.

Shepherd’s Grain set their new prices late last spring and they were announced by the mill in August to be effective on September 15th. There are generally contracts between the mill and the distribution network that may gap across that date but at some point in time you should see the new prices reflective through your distributor. The wheat market since late June have risen by as much as 60% to 80% depending on type of wheat. Most of our flour lines are below commodity flour prices today and the outlook seems fairly strong for this to be the case for some time. This is in part because we have done our cost of production, added a reasonable rate of return and that price is good for the next 6 months. A straight line in the midst of a commodity market showing some pretty high peaks at this time and coming from some pretty deep valleys in June of this year. A line with some understanding of how it came about, with some sanity of knowing where it will still be 6 months from now, and a line you can invest on for the long term.

This line is also where both the producer and the buyer are either a little bit unhappy with me or a little bit happy with me. Somewhat like the autumnal equinox we just passed through as the sun was trying to provide equal day and night length for everyone but if only for a brief moment in time does that happen and for the most part someone is getting more of one or the other. I guess if that is the best the Sun can do we should be ok with trying to make both the buyer and the producer happy some of the time. Evidently, all of the time is not possible but we never stop trying.

Contact your distributor to see when the new Shepherd’s Grain prices will be coming your way. Have a great fall holiday season as you are just entering your “harvest” as our producers are just finishing theirs.