Kub’s Den – Hay Bales: High Priced Time Capsules

Originally published on 6/28/23 by DTN at Hay Bales: High-Priced Time Capsules (dtnpf.com)

If I were a poet, I would write a poem about hay. It would convey how profoundly memories can be affected by scents, and the way dried prairie grass can be a magical form of time travel. Even in the middle of a February blizzard, when the cattle’s water tank is frozen and your face is whipped raw by the wind and everything seems miserable, the sunshine and honey aroma of a late-June morning can still hit you from inside a dry hay bale, cracked open and delivered straight to your nostrils and your brain. Time and memory are preserved like a bouquet of dried yellow blossoms inside the previous summer’s hay.

In some senses, all dried or preserved food has this quality — pickles, jerky, beans. They’re all little time capsules from the moment when the food was fresh, to the moment in the future when they are consumed, however far in the future that may be. But there is something about the palpable contrast of the outdoor environments in which we create and use hay — baling hay on a hot summer day versus feeding hay to livestock in a rotten winter storm — that make it that much more powerful.

Not only powerful, but also expensive these days. On a recent trip to Colorado, I saw small square alfalfa bales priced at $10 per bale in the field (and presumably much higher than that delivered or purchased at retail). Assuming 65 pounds per bale, that puts the alfalfa over $300 per ton. In today’s world, where the price of nearly everything — but especially labor — has rocketed higher with inflation, this shouldn’t be too surprising.

It’s also born out in official data from USDA’s Agricultural Marketing Service across a range of states — Nebraska and Kansas have alfalfa trades and asking prices ranging from $230 to $300 per ton. Missouri’s hay harvest is seen at about 70% complete and, with large pockets of extreme drought across the state, mixed grass rounds of good quality are running $150-$200 per ton, or 60% higher than last June’s range of $80-$140 per ton.

All across the nation, hay supply seems to be lighter than hay demand after drought has limited grass yield and condition. There’s a widespread area where long-term drought is ongoing, specifically a cloud stretching north and south and east from Omaha. But there are also dominant hay-producing areas farther west that may have received enough rain recently to relieve drought, but which were quite dry earlier in the grass-growing season (i.e., Texas and Oklahoma or Montana and the rest of the Mountain West).

The most recent weekly Crop Progress report shows only 44% of the nation’s pasture and range in good or excellent condition, and 24% in poor or very poor condition. Now, that doesn’t seem so bad compared to last year’s 43% poor or very poor at this time in the season. However, when you consider that a lack of happy grass affects not only the availability of hay that’s been cut and baled, but also the underlying yearlong demand for hay when grazing supplies are short, we can see why hay prices have been climbing and why both buyers and sellers are fierce negotiators this summer. In Texas, 43% of pasture and range is still poor or very poor. In Illinois, it’s 46%. And in Michigan, a full 68% of pasture and range is classified in those grim categories.

A chart of hay prices over a photo of large round hay bales

A long-term series of hay prices isn’t well-tested every week and may seem volatile due to trades of varying quality and terms. (Chart by Elaine Kub)

To be sure, the overall condition ratings have been improving compared to last year and especially after recent rains. But hay prices can be sticky once traders get a number in their head, like $200 per ton for prairie hay in large rounds. There’s no perfect long-term series of hay prices to show exactly how the market shifts from week to week, because it’s not a perfectly standardized commodity with the same interchangeable substance being tested every week. In any given location, there may be varying quality from one trade to the next, or varying delivery terms. However, plain, good-quality prairie/meadow grass baled into large rounds in Nebraska are about as standard and well-tested as the hay market gets, and the psychological benchmark for these bales seems to have risen from $100 per ton in 2021, to $150 per ton at the start of 2022, to $200 per ton once the dry conditions and willingness of the market became clear.

There is no price to put on memory, especially happy memories, and no price to put on perfect June days. But in a world of scarce supply and ever-inflating markets, there is definitely a price to put on hay.


Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA 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

The multiple problems with multi-year cycles

Perhaps, sitting in a bar one evening, a friend told you that corn yields tend to be great during years that end in “6.” Or perhaps you’ve heard of the 18-year cycle in the stock markets? Or the 60-year cycle in wheat prices? Or the 14 3/4-year cycle in soybean prices, which only holds true if the previous year’s price ended with an even number?

Okay, I made that last one up. But that’s alright — other people baselessly fabricated all those other examples, too, and they all have the same statistical significance (zero).

I hadn’t heard of the 60-year cycle in wheat prices until a gentleman told me about it after a recent market presentation. He has many more years of experience in the wheat market than I do, and I’m always willing to learn new things, so I promised I would look into it. More on that later.

All these multi-year cycles are interesting bits of folklore, and they’re kind of neat to think about. If thinking about them and analyzing the underlying economic reasoning behind them helps market participants better understand the world around us, then that’s great. But if blindly believing them motivates farmers to make or postpone marketing decisions based on unsound science, then that’s bad. That’s why I’m going to try to bust the myth of the multi-year cycle as clearly as I can.

In this universe, many phenomena tend to occur frequently near their averages and less frequently at unusual values, measurements or strengths. This is often shown with the bell-curve chart of the normal distribution. But even if a phenomenon isn’t “normally” distributed, if that thing happens a large enough number of times, it will still always tend toward some average value. That’s the Central Limit Theorem, roughly speaking. It is powerful because it allows us to calculate whether a particular event is truly unusual, like someone who’s 6 feet 7 inches tall. Is that just part of the randomness of the universe? All heights will vary somewhat from person to person.

Therefore, among an entire universe of values, taking just one sample — or just a few samples — is extremely unhelpful when it comes to predicting future values. The Chicago Board of Trade was established in 1848 to exchange cash grain, but a standardized record of corn, wheat and soybean futures prices only exists since 1959. That means there are only six samples of an annual corn price from “a year ending in six,” and six samples is way too few to be confident that whatever trend our human brain might think it sees is anything more than just random statistical noise.

I was slightly more willing to believe in a statistically provable multi-year pattern in wheat, however, because I remember seeing an amazing chart of wheat prices from 1750 through 1960, collected by Hugh Ulrich. I updated that data through 2018, and that made 268 years of information — which is a lot! It’s only four samples of any 60-year period, however, once again, it’s difficult to prove there is anything significant beyond randomness in any purported 60-year cycle in wheat prices.

Furthermore, even the 268 years of data was problematic. Some of it was from England in the 18th century, quoted in English cents per bushel. Some of it was CBOT futures quoted in U.S. cents per bushel. More importantly, the structural economic reality of wheat itself has drastically changed between 1750 and today. The number of man-hours that go into a bushel of wheat, the proportion of a farm family’s income that comes from a single bushel, the proportion of an urban consumer’s budget that goes into a single bushel — none of this is apples-to-apples from one economic timeframe to the next. This is called time-period bias in statistical sampling. Even comparing U.S. stock prices from the inflation-plagued 1970s compared to the easy-money 2010s is problematic.
Let’s actually try to test a multi-year cycle. Say we look at the so-called “decennial pattern” in the stock market, which colloquially claims that years which end in “0” tend to have poor performance, and years which end in “5” have “by far the best” performance. We can gather 90 years of stock market returns since 1928. Maybe 90 years sounds like a lot, but it’s only nine sets of 10, or nine samples from years that end in “5.”

Let’s say the average of all 90 annual returns is only 11.4%, but we calculate the average of annual returns from years ending in “5” at 14.6%. Woohoo! Sounds like those years ending in “5” really are winners — notably including 1995’s 37.6% return. However, if we conduct a two-tailed test for statistical significance using the student’s t-distribution, which mathematically considers the standard deviation of all those returns and the small number of samples, and then compares them against what can occur by mere happenstance, the difference between the all-year average returns, and the years-ending-in-5 average returns is proven to be nothing but statistical noise.

However, if we were magically able to use 300 years of stock market data, and therefore had 30 samples to draw from (30 is widely considered to be the minimum statistically useful number of samples), we could calculate a somewhat larger critical value for this statistical test. And then say there’s maybe 80% confidence that the difference between the two sets of returns might actually be significant (and a 20% chance they’re not). There still wouldn’t be any fundamental explanation for why the final digit of a calendar year should affect equity performance.

Anyway, look and see that stock returns in 2015 were only 1.38% — the worst annual performance since 2008. Anyone who actually invested money based on this hokey idea of a decade-long market pattern would have been sorely disappointed.

To all the believers in multi-year patterns or cycles: please continue to tell me about them! I love hearing about these fables, and I collect them like other people collect pretty seashells. But please don’t sell your grain (or not sell your grain) based on someone else’s flimsy idea that has only ever been sampled four times in history.

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

© Copyright 2018 DTN/The Progressive Farmer. All rights reserved.

Let the Bitcoin folks have their fun — Grain markets could put blockchain to better use

Originally published at https://www.dtnpf.com/agriculture/web/ag/news/article/2017/11/08/grain-markets-benefit-blockchain

Soon it will be as easy for a large pension fund to trade bitcoin as it is to trade corn. The CME group announced last week it would open a market for trading bitcoin futures by the end of this year. It has already been possible, since October, to trade bitcoin options through a central clearinghouse called LedgerX. But once an exchange with the size and reputation of CME Group gets involved, then a bitcoin — a unit of nothingness, representing no physical goods, no single nation’s faith and credit, nothing but the willingness of its users to operate its platform — could seem as “real” to certain investors as any kernel of corn or bushel of soybeans.

Bitcoin headlines are fun to watch, but they usually don’t mean much to grain market participants. Through 2014 and 2015, the price of a single bitcoin fluctuated anywhere from $200 to several hundred dollars. Since the start of 2017, however, when the bitcoin chart burst through $1,000 for the first time, the price has skyrocketed. A bitcoin bought for less than $1,000 in January would have been worth $2,500 in June, then $5,000 in October, then $6,500 on Nov. 1, then over $7,000 once the CME announcement was made. To many people (myself included), that sounds an awful lot like a bubble. But that’s fine. Let the bitcoin speculators enjoy the excitement while it lasts.

For grain market participants, the most fascinating thing about bitcoin shouldn’t be the wild prices or the breathless headlines. Rather, it’s the technology behind bitcoin that should pique our interest. It could revolutionize the way grain transactions take place.

“Blockchain” has become an investment buzzword, due to the abundance of new cryptocurrencies (new competitors to bitcoin) making initial coin offerings to speculators who hope to get in on the ground floor of the next bitcoin phenomenon. All these “coins” or “currencies” are based on blockchain technology, but it has come to my attention during several recent conversations — even with friends who own bitcoins! — that a lot of people don’t really know what a blockchain is.

So forget about bitcoin. Wipe any thoughts of Beanie Baby bubbles out of your mind. Concentrate just on the idea of a blockchain, and you’ll discover something very powerful.

A blockchain is nothing more than a shared digital ledger. All the individual nodes in any blockchain’s platform (all the computers of all the people who are participating in that platform) share and repeat one same database, which lists all the transactions that have taken place on that platform. Any time a bitcoin is passed from one user to another, that transaction is listed on the ledger, and the blockchain gets a little bit longer. New transactions can always be added to the ledger, but the existing shared data on the blockchain can never be tampered with or modified, because so many versions of it exist on other computers. That’s how the system keeps track of who owns how much value in the system; i.e. how many “coins” are in any one user’s “wallet.” The original appeal of using bitcoin may have been its anonymous nature (it was popular for online drug deals, for instance), but now even very sophisticated banks have recognized the appeal of recording trades in this permanent, immutable, blockchain style.

Doesn’t that seem like a nice idea for grain trades, too? A blockchain simply transfers value from one party to another. That value can be expressed in bitcoins or in “ether” (another token on another blockchain platform) or in any currency, but ultimately, once the trade is entered on the ledger, a commodity’s seller knows he has been paid, and the currency is sitting there in a digital wallet, and the commodity’s buyer knows that he now owns title to those goods. Trading this way can effectively remove the need to conduct due diligence on buyers — either the currency is there, or it’s not.

The first-ever successful settlement of a physical grain trade from a farmer to a buyer, recorded on a blockchain, was completed last December, so this is happening. It’s new, and it’s rapidly growing, but it is happening. That first-ever blockchain wheat trade was done in Australia through a company called AgriDigital, whose software platform is built on the Ethereum blockchain network. (So, for anyone nervous about bitcoin, they don’t use bitcoins!)

Acknowledging that agriculture is probably “the least-digitized industry in the world,” AgriDigital’s co-founder and CEO Emma Weston sees great promise for using blockchain to manage ag commodity trades. During an interview on the Ag News Daily podcast, she explained three main problems that AgriDigital’s blockchain-based platform can address:

1 — Sellers need better payment security. With a blockchain-recorded transaction, farmers and other grain sellers can immediately see that currency has been transferred (no need to wait 30 days for a check).

2 — Buyers need better access to the supply chain. Farmers may be reluctant to sell grain to any buyers who aren’t the largest, most well-funded companies. But by using secure blockchain transactions, an end user of any size can confidently originate grain.

3 — End users want more data from the supply chain. As Weston put it in her Aussie accent, consumers are looking for “paddock-to-plate” transparency, and with all the data available from transactions on the blockchain’s ledger, such transparency could finally be available.

It doesn’t matter whether the actual grain trade — the person-to-person agreement of price and terms — was done over the phone, or in person, or through a broker or on an online trading platform. AgriDigital’s use of blockchain technology focuses purely on the transactional parts of fulfilling the terms of any grain trade. Weston clarifies this role: “In some ways, you could call that the unsexy part of agriculture — the contracts, the receivables and deliverables information, the payments, the invoices — all of the transactional bedrock that actually moves a commodity. And not just the physical movement, but also the data movement of that commodity through a supply chain.”

That clarification makes the coming digital revolution a lot less scary. We may find it fascinating to watch the bitcoin chart skyrocket; we may ponder when will be the best time to short those CME-traded bitcoin futures; but we probably don’t really want that style of excitement in our grain trades. Security is much more important to most grain traders, I would guess, than excitement. As it turns out, security may be just what that underlying blockchain technology can deliver.

To listen to Emma Weston’s interview on the Ag News Daily podcast, visit http://www.agnewsdaily.com/podcasts/june-29-2017-elaine-kub-and-blockchain-technology

© Copyright 2017 DTN/The Progressive Farmer. All rights reserved.