Commodity Futures Trading Commission
Twenty-Fourth Meeting of the
CFTC Agricultural Advisory Committee

Joseph Dial
Chairman

Wednesday, October 29, 1997
1:04 p.m.

1155 Twenty-First Street, N.W.
Room 1000
Washington, D.C.

C O N T E N T S

ITEM PAGE

1. Welcoming Remarks

2. "How do agricultural producers feel about risk management?"
Moderator: Patricia Klintberg
Steve Oman, American Farm Bureau Federation
Gary Hellerich, American Soybean Association
Jim Miller, National Wheat Growers Association
Paul Hitch, National Cattlemen's Beef Association
Discussion

3. "How do agricultural producers feel about risk management?" continued
Moderator: Sally Schuff
Discussion

4. Private & public sector points of view:
"What will it take to motivate more producers to prudently manage their price and yield risks?"
Moderator: Roger Bernard
Dave Miller, American Farm Bureau Federation
Stu Ellis, Illinois Farm Bureau
Mark Lange, National Cotton Council
Ken Stokes, Texas A&M University
Paul Christ, Land O'Lakes, Inc.
Discussion

5. Report on USDA's Risk Management Education Summit: Craig Witt, U.S. Department of Agriculture, Risk Management Agency 151

6. Status of FutureCom Proposal for a new electronic exchange: John Lawton, Division of Trading and Markets and Fred Linse, Division of Economic Analysis

7. Flex Options: Jorge Dorhliac, Coffee, Sugar and Cocoa Exchange and Paul Petersen, Chicago Mercantile Exchange

8. Serial Options: Dave Lehman, Chicago Board of Trade

9. Status report on potential lifting of the ban on Agricultural Trade Options: Paul Architzel, Division of Economic Analysis

10. Status of proposed changes to the CBOT Corn and Soybean Futures Contracts delivery terms/Status of delivery terms issues for the CBOT Wheat Futures
Contract: Paul Architzel, Division of Economic Analysis

P R O C E E D I N G S

CHAIRMAN DIAL: I'd like to call the 24th meeting of the CFTC Agricultural Advisory Committee together and welcome you all here and thank you for your attendance and those of you who are members of the committee for your participation in today's agenda. A couple of housekeeping items: please speak into the microphone whenever you make your remarks. There is a little button on the front of it that you need to press, and on my right hand side, you all may have to share the mikes, because we had one go out awhile ago when we did the test run. So, don't hesitate to scoot it up and down the table if you will, please.

Let me recognize the commissioners who are here: Commissioner John Tull; John, thank you very much for being here; Commissioner David Spears; Hi, Dave; thanks for being here. Is Commissioner Holum here yet? And Chairperson Born has gone over to the Hill for a House Ag Subcommittee hearing, but she hopes to be here before we adjourn and make a few remarks before you later this afternoon.

Let's follow our customary practice and go around the table. Let's start with Steve Oman in front of me, and then, we'll move to Gary Hellerich, and we'll go around that way. Please turn on your mikes and speak into the mike.

MR. OMAN: Steve Oman, representing American Farm Bureau Federation.

CHAIRMAN DIAL: And then, after you use the mike, then, you'll need to turn it off unless somebody is going to use it.

MR. HELLERICH: Gary Hellerich, representing the American Soybean Association.

MS. KLINTBERG: Patricia Klintberg; I'm the Washington editor of Farm Journal magazine.

MR. JIM MILLER: Jim Miller with the National Association of Wheat Growers.

MR. HITCH: Paul Hitch; I'm representing the National Cattlemen's Beef Association.

MR. HACKETT: Scott Hackett, representing Millers National Federation.

MR. WHITE: Robert White, representing the National Grange.

MR. GANGWISH: Rod Gangwish, representing the National Corn Growers.

MR. SANFORD: Jimmy Sanford, representing the National Cotton Council.

MS. METZ: Kathryn Metz, representing American Cotton Shippers.

MR. AMSTUTZ: Dan Amstutz, representing North American Export Grain Association.

MR. ROEGNIK: Bill Roegnik, National Broiler Council.

MR. ELLINGHUYSEN: Richard Ellinghuysen, representing National Farmers Organization.

MR. BLANCHFIELD: John Blanchfield, American Bankers Association.

MR. KUBECKA: Bill Kubecka with National Grin Sorghum Producers Association.

MR. DODDS: Bill Dodds, representing the National Grain and Feed Association.

MR. NELSON: Chuck Nelson, representing the National Grain Trade Council.

CHAIRMAN DIAL: Well, thank you, ladies and gentlemen, very much.

Let me mention one other item. The strategic plan of CFTC's that has already been presented to the House Ag Subcommittee, it's an ongoing process, and the initial effort will be updated, and we certainly would appreciate the input of the Agricultural Advisory Committee.

On another note, for those who are interested, there are some copies--unfortunately not enough to hand out to everyone in the room--but there are some copies of a report on the analysis of the location and amount of deliveries on the New York Cotton Exchange Number Two Cotton Futures Contract. This report covers the past 27 years. Kathryn Metz, with the American Cotton Shippers Association, has those available, and I would encourage you to get a copy of it. It's got a lot of very useful information in it.

We will go into our first item on the agenda, the topic of how do agricultural producers feel about risk management. I want to thank Patricia Klintberg for agreeing to serve as moderator of this panel and also the producers that are on the panel for their willingness to talk about this particular subject. I shared over lunch with those of us who were able to get together for lunch that the primary motivation for this particular panel discussion and the one that will follow and the one after that is the fact that I am convinced that for all of our collective efforts to provide risk management education to producers, that unless we have a better understanding of how they actually feel about risk management education, the attitudinal barriers that they might have, that we will find ourselves in a situation similar to that of any organization that has a product or service that they want to make available to a potential customer but does absolutely nothing to advise that potential customer of the benefits that they can derive from taking advantage of using that product or that service.

We, once again, collectively, that is, the Government and the private sector, have an outstanding product that we are offering to America's farmers, and we need to explain to them how they can benefit economically and otherwise by using risk management education, but in order to do that effectively, we need to understand what the barriers are for the individual farmer, and that's why we have asked our panelists to talk about their own experiences and those of their neighbors and members of their organizations.

So, Trish, it's all yours.

MS. KLINTBERG: Okay; thank you.

Just so that all know a little bit about what I know about this subject, I've been writing about crop insurance and crop revenue coverage; in particular, the newest kid on the block in terms of risk management tools that farmers can buy, and it's proved to be fairly popular in the states where it's been offered. I think there was something like 180,000 policies sold last year. Some people thought it would be too expensive, that farmers wouldn't want to spend that kind of money over and above what they already spent for MPCI. But where farmers have been most successful with it, they have already been the sort of businessmen that uses the market, and if it's used in conjunction with a marketing plan, it tends to pay off, be worth the money for farmers; at least, that is what I have heard.

Every person's operation is different, and that's one of the problems with national farm programs in the past: how do you create a program for everyone that can take into account the differences in everything from topography to rainfall? And the answer is that you can't, but with an insurance policy that can be tailored to an operation in individual fields and that kind of thing, your chances of protecting yourself are just that much greater, I think.

Today, what we are going to do is I am going to ask Steve Oman to begin. He is from Ohio, and I think it would be useful if you could tell us what sort of operation you have, what kind of risk management you engage in, and we'll take it from there.

MR. OMAN: Okay; I guess I'll lead off not knowing what we're getting into here, but a little bit about our own operation: we have about a 24-acre cash grain operation, just a family operation, wife, son and myself. Some of the tools we've used in the past, and the one that probably sticks out is the crop insurance program. We've been involved in it for the last 3 years. Unfortunately or fortunately or however you want to look it, we collected the last 2 years of it. This year, we're back to at least a normal crop in our area.

Part of the reason or some of the things that I see happening why farmers don't participate in some of the risk management tools is one is it goes back to an education. A lot of the tools out there, they sound good. When the farmer sits down and starts looking at the bottom line, when he writes the check, then, he questions, you know, why did I do this? And I think there, again, that's going to have to come back to an education process.

Some of the problems that caused this in the crop insurance thing, and I've seen this right now in our own operation, coming off of two bad years, every time you have a bad year, you're penalized the next year. What you can guarantee yourself is lowered. And I've raised the questions with agents, and I said something to Ken one time down here about it. It ought to be a situation where just because you have a wreck one year, and a lot of times, you will collect crop insurance maybe one out of five, one out of seven years, that one year, even though they only lower you by a percentage, and you have a couple of them in a row, then, they keep dropping the back year; you eventually get a yield that the producer is going to look at and say, you know, I might as well bail out for a couple of years and gamble that our yields will go back up; then, we'll reinsure again.

The cost of programs; we go back, if you've got a--you know, they can be written off as a cost of doing business. There again, it's an education process. You have a lot of bankers, you could end up having a $50,000 or a $75,000 hedge account, and all at once, that banker, when you could have sold $3.50 corn, and you're locked in at $2,80, $2.90 corn, $3 corn, you know, the question is why did you do it? So, it's always that hindsight is 20/20.

The other thing that I see that producers do, they don't know their costs of production. In defense of that, costs of production can vary. They don't know how much they produce until the end of the year, and, therefore, I mean, in our area, you can easily have a 50 bushel to the acre difference in yield, and that does tremendous things to your cost of production.

I don't know how much you want me to say before we turn it over. I think you're going to have a dialogue after awhile or--

MS. KLINTBERG: Yes; and then, we'll also take questions. But on the question of yields, it is a problem as I understand it, especially for some growers in North Dakota in particular, who have had year after year of poor crops. The other thing that can happen is you slip into this nonstandard classification, which causes your premiums to go sky high and essentially forces you out of the program.

But it seems to me that even with a lower yield that can be insured, if you have, say, if it amounts to 60 percent of your yield that if you can use the market to lock in a profit that you may be better of doing that than not doing it. Do you use--do you forward contract and that kind of thing?

MR. OMAN: Well, I guess when I look at crop insurance, other than this year, and we're participating in the revenue insurance program, I guess--and maybe it's back, but I always look at crop insurance as guaranteeing a yield. And to do that in the past, you guaranteed a certain price that you bought in the elective when you went into the program.

The thing in our part of the country that concerns us, if you go to the 75 percent level, your premium costs, the subsidy from the Government is a lot less, and you really look at that bottom line when you go to 75. So, most producers and most agents will recommend you the 65 percent. And, there again, when you do that, I mean, you sit back, and, you know, depending on where your corn yields or soybean yields, at a point, I mean, history is going to tell you you're participating in a program for the risk/reward is not there.

MS. KLINTBERG: If you look at crop insurance that guarantees yield, I mean, that is the old way of looking at it; certainly still applicable. If you look at CRC as a way to guarantee yields and price, it's kind of a whole different ball game. I spoke to a producer today who was able to, with a basis contract, insure that when she priced her corn, the basis would not have widened so far in the area that it would, you know, she would lose from that end. She was also able to lock in transportation with the local elevator as part of the contract for him to handle the corn.

And so, she said basically what I did was eliminate the basis risk and the transportation risk. She said when you know these shortages with railroads and railroad cars and so on is an ongoing problem, you must manage that, and I understand that I can sound like I know what I'm talking about, but I'm not doing it; so, tell me what I'm--if I'm wrong.

MR. OMAN: Well, when you just start to get into the--you're getting into another aspect of risk management, which is your marketing side of it. I didn't touch on it that much, but a lot of that basis deals will come back to an individual's own storage facilities, and, you know, we all know what happens to basis at harvest time normally. I mean, you'll get them odd years. But I guess trying to anticipate a basis move in a demand-driven market can really throw a producer off base, because there aren't that many years--I didn't go back and look, but I would question how many years are really demand-driven bull markets. I mean, we went through one, I think, in 1995, and, you know, when the hedge to arrive situation happened to hit. And there's another situation that I happened to come from an area that really got burned from hedge to arrive, and it has really soured farmers and producers from doing a lot of cash forward anything just because of that situation, and a lot of that was developed by I'm going to say an educational process.

You take elevators; they have people, I call them grain originators, who are on the phone every day trying to get farmers to do this, and a lot of these people, you know, probably don't have the education to be doing what they're doing to convince a farmer that he should be doing this. Then, when the farmer does this, then, in May or June or July and something goes wrong, why, you know, he's still got the X number of bushels done at a certain price, and he sits there and scratches his head, well, why did I get into this? So, I think that's a lot of the problem.

MS. KLINTBERG: Yes; and, I mean, as I understand it, the problem with hedge to arrive is nobody expected the market to go up, and that is the--we're kind of in an age where we have a new mindset, where there is no Government program; there is no target price; there is the payment; that's supposed to end in 2002, and we seem to be in a period where demand is going to remain fairly steady. We'll see.

Gary, would you like to tell us about yourself? Gary's from Nebraska, soybean farmer.

MR. HELLERICH: Okay; thank you.

Yes, I'm from Valparaiso, Nebraska. I have about 2,000 acres in my operation. We are, as a result of the 1996 farm bill, we are primarily now a soybean-feed grain operation. Prior to that time, I always had about 300 or 400 acres of winter wheat in my production mix, but because of this change, we have now moved to a feed grain-soybean rotation.

As to answer your question as to why people do not utilize risk management tools to the extent that perhaps some other people do, in visiting with people who live around me and then also some who serve on Nebraska Soybean Association board, I find a number of reasons, and if you would, I could go through those. One of them is diversity of operation. A number of people feel because of their diversification, they don't need to carry as great of a risk management portfolio that somebody who is specializing in one particular product.

Another reason that I found was predictability or reliability of production; in other words, in some areas where Nebraska is typically short of rainfall or moisture, they have been able to supplement this with irrigation, and with that comes a reduced risk of yield fluctuation as compared to the dry lands situation.

A number of people feel that the risk/reward relationship heavily favors the insurance companies. You know, they feel that, hey, the insurance companies aren't in this thing to lose any money. And another reason is there is an effort to hit a balance between income or profit and expenses, insurance being another form of an expense. And then, a couple of times, individuals related to me that they did not trust the brokers, the commodity traders; there just wasn't a great deal of trust being established between themselves and these people who work within the commodity trade.

Some people just flat out don't like to pay premiums. They feel that is a waste of money. And I think one of the things that you mentioned was particular multiperil or CRC coverage. If you do file a claim, basically, you've shot yourself in the foot, because that enters into your average, your APH average, and your yield levels go down. And, as Steve mentioned that, and it's a big factor out there. You know, you turn in a claim and, you know--we just came through a severe snowstorm in Nebraska this past weekend, and I think you will find that there will be a number of individuals who have had damage to their homes and their cars from falling tree limbs and power lines and so forth, but I don't they're going to see a significant reduction in their coverage or a significant increase in their premiums. But here on the agricultural side, on the CRC or multiperil, we experience these types of things.

Another thing has been, as I mentioned, we are in a transition period now from a different crop mix, and particularly in some areas where they haven't grown a particular crop before that is now coming in, they are faced with what they call T yields on these average production history things. The T yields are typically real low, and, you know, you have to start someplace, but you don't have to start at such a low yield level. And, so, therefore, they just stay out of the program.

And like I say that one of the biggest things that producers in my area are now concerned about is, number one, we have the loss of revenue that is going to be forthcoming here before too long. What are we going to do enterprise-wise to replace that lost revenue? What are we going to be going into? What are we going to do to generate those additional dollars that are being lost by the lapse, by the expiration of the current farm program?

So, that gives you some idea of what I found out in the country.

MS. KLINTBERG: I just wanted to say one thing: in talking to bankers, they recommend CRC, some of those I've talked to, to their clients but find it particularly useful for people with irrigated ground, because, I mean, obviously, you are not going to have to worry about drought but wind damage, which has been a big problem; your premiums tend to be lower, because your yields are going to be good. You've got the protection; you've got the water. So, that's sort of an interesting twist, and it seems to me that diversification would be an asset always if you're going to have any sort of crop insurance policy.

If you are in a T yield situation with a new crop, there are things like group insurance that's county wide which basically, everybody chips in probably not a very large amount, because the whole county has to lose something before you get any sort of payment. So, you, as an individual, if you had losses, you might not even get a payment, but in a disaster situation, it's not a bad deal for the money.

And we have Jim Miller here from the Wheat Growers, who is going to talk to us about what he's heard in the country from his members.

MR. JIM MILLER: Thank you, Trish, and Chairman Dial, thank you for holding these panels and for your leadership in this important area. It's certainly something that is going to be worthy of discussion for a long time in the future, I'm afraid, but it is important that we address it.

I am now on the staff with the National Association of Wheat Growers here in Washington, but up until a couple of years ago, I was an active farmer in Washington State and still have a diversified small grain and poults operation out there. So, I've had a little bit of experience with crop insurance and other risk management tools.

And I guess, given the topic, I think really for the purposes of this group, we're talking primarily about production and price risk management, which really are only one set of factors, I think, when we talk about total farm income, risk management or lifestyle risk management, however else we might want to phrase it, because obviously, there are a lot of other risks out there that farmers are facing on a day-to-day basis besides production and price risks.

But to limit it to those, I did do a very scientific survey. I called about a dozen people around the country in order to get their opinions about this, so, this is the gospel, I guess, according to wheat growers. Actually, the first comment that I got about risk management, actually from people who had an understanding of what it probably should be was that it was unnecessary. They are basically individuals who are in a low cost of production area. They have very low risk, both production risk and, in some cases, very low price risk, because they do a lot of contracting directly to consumers close by, or, they are in an area where transportation isn't a major factor.

Most of them have low debt, and, not surprisingly, a great number of those folks are also very close to retirement, and their interests are less in terms of actually operating the farm as they are in providing some semblance of income for their future. But that is a group of farmers out there who really don't need these tools. They are able to manage with the resource base that they have.

I guess the second group, I would categorize as being confused or fearful or ill-informed, and I won't use all of the language that they expressed to me when I talked to them about crop insurance and the futures market, but to reiterate some of the comments earlier, in many cases, they're not even sure what risk management is. Unfortunately, I'm afraid, those are the folks who are going to find out what risk management should have been when it's too late, but, as was indicated, when a person looks at a risk management program, whatever that might entail in terms of crop insurance or use of a marketing plan that may include both cash sales and uses of futures and options, hindsight, if you're at all successful as a farmer, tends to make those programs look pretty poor, because you spend the money up front, and in the end, you haven't collected anything.

The only scenario that's worse is you spend the money up front, and you actually do collect, because what you collect usually isn't anywhere comparable to what you would have produced and gotten through the marketplace.

I think another characteristic of those people, though, because they are somewhat confused, they also tend to have, I think, a limited amount of discipline in terms of following through on the decisions that they've made or the decisions that they know they should make, and even with some of the bankers I've talked about who are encouraging farmers to implement marketing plans, it's very easy to draft a marketing plan. It's very easy on paper to see how it works, and it's very difficult for farmers to pull the trigger and actually make it operational.

In terms of being ill informed, there are a tremendous number of farmers out there whom I think have a very poor understanding and, in some cases, no understanding of insurance or marketing concepts. They basically have been on the land, producing crops and selling crops into the cash market after harvest and really have not spent any time exploring what other alternatives might be available to them.

And then, of course, all of us in this room have heard the story around the coffee shop about the guy that lost his farm, divorced his wife and had to auction off his two youngest children to make a margin call, and, unfortunately, those kinds of stories do sell out in the country. People are very fearful, especially of the futures market. And while we might say, you know, if you had done things correctly, you are really at very little risk; you don't have that much exposed; you can even find ways, through the use of options, to know exactly what your exposure level is. I don't think farmers at this point are really buying that argument in terms of the use of futures.

And then, you come into the issue where those markets, obviously, are only controlled by the big traders and not really developed for use by farmers. Again, whether it's true or not, I think that is a very pervasive opinion of the futures market out in the country, and as was mentioned, really, it's just another outlay; it's another expense, and we're not really seeing a return on that investment.

Another comment or complaint is really about the inappropriateness of some of the education tools as we now want to categorize them, really more or less out in the country in the past, at least, utilizing these things has been a sales opportunity for crop insurance salesmen, crop insurance agents, for brokers and traders. And, for the most part, while those people do have a lot of knowledge about particularly their own product but even a lot of knowledge about how their product can and should be used to the benefit of the producer, first and foremost in their mind and, I think, in the end, first and foremost in the mind of their audience is that they are out there selling their own product, and I think we have to move very quickly beyond that position, where the folks that do have the knowledge are trying to sell their product to the exclusion of someone else's product, and I think everyone in this room can play a part in that.

Another complaint about that sales program is it's very rare that you'll go into a meeting with anyone from the industry who is selling their product that they are fully going to disclose what the limitations of their product are or what else the producer might need to do in order to ensure that he is truly getting full value out of that product that he's being sold.

MS. KLINTBERG: May I say something?

MR. JIM MILLER: Sure.

MS. KLINTBERG: Don't crop insurance agents have to be able to talk to producers about all of the different products that are Federally subsidized?

MR. ACKERMAN: Crop insurance agents do have to be able to talk about all of the different products that are subsidized under the Federal Crop Insurance program, not necessarily, though, about futures, options, other types of things.

MS. KLINTBERG: But I meant just the various types of insurance, because they are all basically selling about four different things.

MR. JIM MILLER: They can sell a lot of things, but if you're out selling something, and one product is something that you know more about, or there is an advantage to you personally, I can venture where you're going to place the emphasis, and whether we want to admit it or not, certainly, there are people who have a preference of one product over another, and that's where they're going to concentrate. And, to a certain extent, I think that's only human nature. You're not going to get purely unbiased views from anyone who is, in fact, selling a product or making their living by doing that. We just have to recognize that that is, in fact, a fact of life, I guess.

MS. KLINTBERG: Well, farmers don't have to buy it, either.

MR. JIM MILLER: Farmers do not have to buy it, and, unfortunately, many of them aren't, and again, that's what I believe is one of the limitations to getting these risk management programs more widely dispersed around the country, more widely used is because they're somewhat timid about buying from a salesman, so to speak.

And a concept that has already been brought up is that the products are costly, and those costs are paid up front. I talked a little bit about NCS, but I guess the comment that I've heard, even from people who are very aggressive in developing risk management strategies are that they are still getting inadequate products for the amount of money that they're paying. Some of that is due to the fact that you're just not able to cover the full value or the full yield that you would expect, and in many cases, you can't even do that if you are using a combination of products. In many cases, these products do not work for specialty crops or even field crops such as wheat that might have certain special characteristics, and an example in wheat is durum. Sure, you can go out and insure; you can get CRC in the Northern Plains. It's based on hard red spring wheat price, but durum is a somewhat different product, and you're not able to cover the full value.

In effect, some people are saying there really is no reward built within the system, primarily the crop insurance system, for those who are good managers, even though the crop insurance system is moving to more of a revenue-based system with products such as CRC. And then, with farmers, you always run into the timing of when you need to make these decisions, some of it real, some of it perceived, but it becomes a damn good excuse. I was a winter wheat producer. We would start harvest in August, usually move directly from harvest into fall planting and finish up about the 10th of October, 10 days after the final sales closing date for winter wheat in the Pacific Northwest. That became a very good excuse for not even considering Federal crop insurance, because I was too busy to look at it.

But I think probably in the end, the comments and what criticisms there are, I think, just indicate that there really is a need out there for the industry broadly speaking to develop new products, to develop new techniques and to take a very hard look at what the future of agriculture is going to be with a number of the changes, both in terms of public policy as well as the changes that I think we are going to see in terms of the implementation of new technology and new demands from the consumer and find out how risk management strategies can affect those crops and those producers rather than trying to develop things today that were maybe good for crops that we're raising and conditions under which we're raising those crops 10 years ago without paying heed to what is likely to happen in the future with biotechnology and other changes.

Thank you.

MS. KLINTBERG: And now, we are going to hear from Paul Hitch, who is a cattleman who has also had some experience with snow recently, and, you know, cattle, obviously, are different. There is insurance for livestock but usually just if they die. As we talked about earlier this week, there is no way to recover losses that may occur in performance and quality of the animal that's really been stressed by weather or something else.

MR. HITCH: Right; ready for me?

MS. KLINTBERG: Yes.

MR. HITCH: Paul Hitch, president of Hitch Enterprises, representing NCBA, but we're cattle feeders mostly; have recently got into pork production. We also have irrigated farming and a combination cow/calf stocker operation on the ranch. Seventy-five percent of what I tell you today will be true; 25 percent will be false. It's up to you to sort out the true from the false. I believe everything I am saying is true, however, I'm sure that time will prove me to be somewhat wrong in that regard.

I don't spend a lot of time worrying about risk management, frankly, on our farming operation, although occasionally, I will go short wheat or corn based on our estimated production on our farming operation. But as a risk manager, I'm a meat guy. I'm a cattle feeder and a pig producer, and we're seriously reassessing our own risk management ideology, because we paid a great deal of attention in our cattle feeding to our break-evens in trying to go short the futures market somewhat above the break-evens. It's been a program with modest success, and I've got to admit I'm the father of the damn thing, so, I've got to love it even though it hasn't been tremendously helpful.

On the other hand, I did some risk management in pork production. I had no idea what my break-even was. It worked out really well. I said the price is high; let's sell it and see if it won't go down, and sure enough, it did. It makes me wonder whether knowing your break-even is a really useful item in entering into a risk management situation. Most of our--we also have death loss insurance, so, we've got fewer cattle to manage the risk on now than we did just a week ago, because a considerable number of the damn things died in the feed yard in the blizzard over this weekend.

I was too lazy to call anybody, but I looked back on my own foibles and failures in risk management, and I think probably I've covered all of my bases. In the list of reasons I'm going to give you why people don't engage in risk management. The number one I put down is laziness. I mean--

MS. KLINTBERG: I think you're right.

MR. HITCH: You know, it's hard work to think, and it requires thinking to develop a strategy to enter into the futures market, and most people don't want to go to that effort. Item number two is confusion. I said see laziness.

[Laughter.]

MR. HITCH: Item number three was the horror stories you mentioned, Jim. I said see confusion, which, in turn, refers you to laziness. All of these become subsets, but they're real. I mean, it's hard work to hedge. Item four is don't need to, either because they're financially solid enough to withstand the ups and downs in the market, or they think they are, or they don't perceive there being a big enough risk of a big enough down in the market to cause them financial distress.

Number five, this particularly applies to pork producers, those that I've talked to. Since I'm a new kid on the block, I brought a cattle feeder's mentality to pork production. I just couldn't stand it. The price was so damn high I said we've got to hedge; we've just got to. But the track record for the major pork producers, from what I understand, has been that they don't pay any attention to risk management, and they bet that their volume of production and efficiencies of production are going to be significantly below the average production cost of everybody else in the market and that they're going to make money most of the time, and they're willing to ride through the troughs because they don't want to give up the big profits on the up side, and they think the profit will be greater with no involvement in the futures market over a 5 or 8 or 10 year period than it will be if they manage the risk by guaranteeing themselves a more modest profit. And they feel they've got deep enough pockets to ride through the troughs, and they're big, and they're successful. So, I'm not going to argue with their approach to things, but I'm a cattle feeder, so, I bring a different attitude towards it.

I'd like to bring up one last thing that I think is relation important, and it hasn't been touched on by anybody else here. I was just humped up waiting for somebody else to steal my point, and nobody did. And that is that nobody really wants to take a lot of responsibility on. It's a psychological issue. It's not a money issue at all. If the market goes down, and I lose a lot of money, it's because the damn market was what caused me to lose money.

Now, then, you have a subset under the market. You can say those guys in Chicago on the Board of Trade or the Mercantile Exchange or the big companies or the funds; I mean, you've got a whole list of people out there you can blame for your misfortune. It's those people out there that caused me to lose money. You get involved in risk management; you make a bad decision; it costs you a bunch of money; you don't have anybody to blame but yourself, and you really don't want to do that.

You really don't want to say I'm the guy that caused me to come to this sorry state of affairs, and you've got to face that: when you make decisions in the market, and you're wrong, you've got nobody to blame but yourself, because you're the one who did it. Now, you can always subscribe to newsletters and blame the advisors, because they advised you to do this. I mean, they're convenient scapegoats in that regard, but people don't want to take responsibility for the bad things that happen to them, and if the market causes the bad things to happen, you've got somebody else to blame it on.

And I guess I had one final thought: cattle feeders, at any rate, are kind of crap shooters. They're traders, and it's kind of like if you followed a risk/reward analysis, you would never buy a ticket in a lottery, because the reward is not worth the known financial payout. But to a certain extent, feeding cattle without any risk management program is kind of like buying a ticket in the lottery. You could make that $150 a head profit, but you'll never do it if you have a risk management program in place, or at least I won't, because I'll have it hedged long before it gets there. And you give up the chance that this is going to be the one that otherwise, I would have hit out of the park for a home run, and all I'm going to get out is a dippy little single. And some people just don't want to give up the opportunity to make that spectacular play.

And that's the end of my speech.

MS. KLINTBERG: Thank you. I'd like to ask you, as a cattle feeder, do you see any need for insurance when you have tried to buy corn ahead, and then, say if there is a disaster, prices go up?

MR. HITCH: What kind of insurance? I mean--

MS. KLINTBERG: Well, there is talk of this--

MR. HITCH: We'll go, like, buy the board, you know.

MS. KLINTBERG: Yes.

MR. HITCH: That sort of thing. Our futures trading on corn, I do a little bit of it on our farming, but most of it is keyed to our corn acquisition for cattle feeding.

MS. KLINTBERG: And have you ever gotten really burned by--

MR. HITCH: Bad yields?

MS. KLINTBERG: Well, yes.

MR. HITCH: Yes.

[Laughter.]

MR. HITCH: Not--I mean, what we try to do--the way we try to finesse that at the feed lot is to try to convince the farmer that selling to us--don't sell us your whole crop. You know, you think you're going to raise 100,000 bushels of corn; contract 65,000 bushels of it to us; take 35,000 to town to the elevator. Then, if you only raise 65,000, we get it all, but at least you can cover your contract.

Now, you know, you can't force the farmer to do that kind of adjustment on his cropping program, and obviously, we've gotten burned a few times in the past when yields came in below expectations, although as a rule, you know, it doesn't wipe out the area, you know; as a rule, it's a farmer got hailed on and had a terrible crop, but the guy down the road had better than he expected or had at least enough more that you can let him bring more to you to make up for the guy who didn't bring you as much.

And we have the right to sue the farmers if they don't bring us everything they're supposed to, and we don't do that. You know, clearly, we don't do it if he got hailed on; now, if he just took it to town--well, we don't sue him then, either. We just don't buy his corn next year.

MS. KLINTBERG: Well, I saw both what you said as a comment that people are reluctant to make that, you know, that a lot of producers who are not interested in risk management may think that all they have to do is produce and put the grain on the ground, and that's it and sell at harvest time; or, as Art Barnaby said once, that he talked to--he's--does everyone know Art Barnaby? He's a Kansas State economist who helped develop CRC--said that a wheat grower said to him, well, that he only really felt good when he saw his grain in storage, and Art's like, you know, what's wrong with 354? You know, you sell the crop and got the money that you could put in a CD somewhere and get interest instead of having to pay the costs of storage and keeping the grain in condition. I don't know.

Do any of you have any questions for the panelists?

Yes, Ken?

MR. ACKERMAN: I'd like to make an observation, if I may. I'm Ken Ackerman, administrator of the Risk Management Agency. We're the crop insurance people. This is a very interesting panel. It is obviously very important for us, speaking for the Risk Management Agency as tool providers, as insurance providers, to listen to our customers, and a lot of the concerns you're raising, particular problems with our policies are things that we need to be very alert to and try to fix.

There is one impression, though, that I hope people don't walk away with. The fact of the matter is that despite all of these reasons why people might not insure or not use risk management, very large numbers do, and very quickly growing numbers do. And this is borne out by sheer statistics. In 1993, just a few years ago, we only insured in the crop insurance program about 80 million acres. Today, we insure over 200 million acres. It's very quick growth that's happened in a very short period of time.

We're also seeing growing numbers of farmers every year not simply settle for the low catastrophic level of insurance, but more and more are buying higher buy-up levels; more and more are using CRC and the different revenue tools. The point about farmers not wanting to take responsibility or the reasons that Paul is mentioning about why many don't, the fact is that growing numbers are prepared to take responsibility and are doing the homework. There are a lot of reasons for that. A lot of it is the environment that exists today with Federal programs being shrunken in the past few years.

One thing that was very striking to me this past year, we had two very dramatic loss situations over the past 8 or 10 months that were very different. We saw last spring the very severe flooding in the Dakotas and Minnesota. That was a very sad situation. It created quite a bit of destruction besides crop loss. But the farmers in the Dakotas who were subject to those terrible floods last spring, in that area, over 90 percent of them had crop insurance, and the large majority of those who did have crop insurance had it at the buy-up level.

And as a result, even though that was not an easy period for anyone, especially those farmers whose land was underwater, and many of them could not plant at all, they did at least have that security in place. By contrast, during the summer, there was a very bad drought in the Mid-Atlantic states, in Maryland, Pennsylvania, Virginia, New York, and in that part of the country, the crop insurance participation level was quite a bit lower. It was about 40 to 50 percent. And as a result, many farmers who could have gotten a small payment under CAT coverage or buy-up coverage, found that there was really no Government program that was available that could step in, and it created a very difficult situation.

I believe it was Jim who mentioned that many farmers feel they don't have a need for crop insurance tools. Unfortunately, in many cases, they don't find out until it's too late.

MS. KLINTBERG: Yes; that's true.

MR. JIM MILLER: Can I make one comment?

MS. KLINTBERG: Yes, go ahead.

MR. JIM MILLER: Ken, I don't question at all what you're saying about the numbers increasing, and I would expect that they are going to continue to increase just because of the necessity of people to do something, and some of that necessity isn't necessity that the farmer feels himself; some of it is necessity that some of John's people are imposing upon farmers. But nonetheless, I would venture a guess that if you asked most of those farmers if the coverage they paid for was adequate to protect them, a large number of them would say no, it's still inadequate; I had to protect something, but it's still not adequate for my operation.

MS. KLINTBERG: We can take two more questions, but I think the sentiment you just expressed goes to a mentality that sees insurance as something you buy so that you get a payment, and it doesn't work that way.

Gary?

MR. HELLERICH: I would have to object to that. I don't think there is any producer out there that buys insurance with the idea he's going to collect. I know that's kind of a general idea out there, but hey, look: we're all businessmen. You know, you buy insurance, and you collect; you've got a disaster on your hands.

MS. KLINTBERG: I stand corrected.

Go ahead.

MR. DODDS: I would just make a further observation on the use of risk management. I represent the National Grain and Feed Association here. I would say about 3,000 customers represent about 80 percent of our volume. I would guess that 80 percent of those customers sell everything before it's harvested, and it's basis; it's flat price; it's hedge to arrive, and I would guess about 50 percent of those use some kind of an insurance package for crop insurance.

MS. KLINTBERG: Well, that's an interesting statistic, because I would just say about my own experience, I'm not a farmer; I don't have a farm background. But one of the most illuminating things that I've done in terms of trying to understand what it's like to be a producer was to attend a risk management sort of seminar given by crop insurance people and sit through a day of marketing and imagining that you have a 100-acre corn base, and you go through all of the purchases of inputs; you go through the marketing. Of course, they had people helping you do this, because believe me, I think it's rocket science. It is. It's very difficult.

And the illuminating part was at the end, after you had spent all of this money; you had chosen what sort of coverage you were going to have or not, you had to pick your yield out of a hat, and then, you knew, you know, what your bottom line actually was.

With that, I will close. Thank you all very much.

CHAIRMAN DIAL: Thank you, Trish and panel. We appreciate that very much.

We'll move now to our second panel. It's going to be chaired by Sally Schuff, the editor of AgriPlus, and the panelists will introduce themselves once they get seated. Obviously, the panelists on the second panel represent different commodities, but they're going to deal with the same basic question, and that is how do agricultural producers feel about risk management?

MS. SCHUFF: Hi; I'm Sally Schuff. I work for Farm Progress Companies here in Washington. I'm one of the two editors in the Washington bureau that cover Washington news for our 37 publications nationwide. We have recently been acquired, having been owned by CapCities/ABC and the Disney Company. Our company was acquired in September by an Australian company that is a very large agricultural publishing and broadcasting company in Australia. So, we are now combining their publications in the Southeastern United States with ours to have a total of 37, typically state, farm publications nationwide.

We also publish Farm Futures magazine, which is our magazine for top producers who are involved in management and marketing issues on a daily basis. And some of the information that I use today will be from some surveys that Farm Futures has done, and I am going to quickly, rather than asking the panelists to introduce themselves, I've got some introductions here. I am going to quickly make introductions.

I'll start with one big question. We had some conversations on the telephone last week with each of the panelists. I had some very interesting conversations and some things that I think will be quite revealing that certainly were almost counterintuitive to me, and I think they will be interesting. I want to certainly thank Commissioner Joe Dial for this forum this afternoon. I think he has been a great leader for the agricultural community in risk management, and I think we all have much to thank him for in raising the visibility and the awareness of risk management issues as we go into this new post-farm bill era of what will surely bring us exciting ups and downs but nonetheless, ups and downs with price volatility.

Price volatility certainly couldn't be more in the news this week. It's probably a nice thing that we're at CFTC instead of SEC today. It's certainly a timely topic, and our risk management problems may look kind of pale compared to some of theirs today.

So, with that, let me get on with the panel discussion. Rich Ellinghuysen--Richard Ellinghuysen, having asked him which he prefers to be called, is here on my left, and he has a great deal of exposure to farmers' views on risk management from his work in the National Farmers Organization in Iowa. He has some really quite intriguing views on how farmers will respond in the post-farm bill era to change and how different sectors, commodity sectors, will adapt.

Richard's experience comes from the ground up. After beginning his career on his dairy and livestock and grain farm in Winona, Minnesota, he joined NFO in 1987 as a risk management specialist. He worked in that department and became its director while it changed its focus from cash sales focus to diversified futures marketing. The department now focuses on brands and brand management concepts. Since 1996, Richard has been director of program development for NFO.

As well as serving on this committee, he serves on the Ag Technical Advisory Committee by joint appointment of the U.S. Trade Representative and U.S. Secretary Dan Glickman. In 1994, he was recognized as an outstanding young Iowan by the Iowa Jaycees, and he is active in his church, serving as a trustee and a Bible study teacher.

Jimmy Sanford is in the middle there. I'm just going to do these in the order that they are in my hand here. Jimmy represents the National Cotton Council on this committee as the chairman of the board of Home Place Farms, Incorporated of Prattville, Alabama. His wife, Dot, is the president of the family's farming business, which includes several affiliated businesses, including Home Place Computing and Home Place Capital and several other business entities.

Jimmy's concern about risk management in agriculture goes back to 1971, when he chose to do his master's thesis on the topic marketing cotton cooperatively in Alabama utilizing an automated data processing system. He chairs the Government and Industry Research Committee for the National Cotton Council as well as the council's leadership development committee. He has served in numerous industry and civic organizations and on task forces, still finds time to serve as a deacon of the First Baptist Church of Prattville.

Bob White, down at the end, is from Ohio. He is with the National Grange and is representing them on this committee. He says he has got a nearly perfect risk management program. He has lived on the family's farm northwest of Columbus since he was 3 years old. In that life and time on that farm, he says he has never had a total crop failure, at least one that could not be corrected the following year. It must rain in Ohio, unlike some of the Western states where I am from.

He raises corn, soybeans and wheat, some oats, and he lambs a flock of 60 ewes. His farm has 600 acres of row crops. His father still lends a hand, but for the most part, Bob handles farming by himself. His wife works off the farm, and Bob has not encouraged any of the couple's six children to return to farming.

In a minute, I am going to ask him for his views on risk management versus riskier management.

Bill Kubecka, second to my left here, represents the National Grain Sorghum Producers Association. Although he is the past national president of the association, today, he will air his own views rather than those of the association. Bill and his wife Maxine are both veterinarians in Palacias, Texas. Bill's wife runs the veterinary clinic; Bill runs the family's farming business with his sons Mark and Wade. Kubecka Farms includes 6,000 acres of rice, cotton and sorghum production. He also manages Kubecka Dryers, which he owns with his father.

Bill has a built-in risk management program similar to Bob's. He lives in the coastal bend area of Texas south of Houston, where rainfall quote is not a problem unless there's too much. He has very little yield risk. He has fairly stable production, not necessarily good, he says, but stable. He has some opinions on how tax and trade issues play into risk management. He is active on the Texas Grain Sorghum Board and is involved in its trade issues with Mexico and Canada. He is a member of the First United Methodist Church of Palacias and serves as vice-president of the administrative board.

Rod Gangwish, one of my fellow Nebraskans down there, if there is an issue in Congress that affects corn growers, you're as apt to find Rod up at Longworth or Russell as you are on his home farm in the Platte Valley of Nebraska. He is the past president of the National Corn Growers Association, and he has one of those risk management systems that Gary mentioned earlier. He's got irrigation, which is quite uncommon not to have in Nebraska, and he has all sorts of other weather risks besides dry weather. He was one of those who had to dig out of the same blizzard to get here today.

Rod and his wife Jane have raised corn, soybeans and alfalfa for 24 years as part of a 1,500 acre farming operation near Shelton. He is currently vice-president of the board of the Nebraska Agricultural Leadership Council, and he is past president of the American Baptist Churches in Nebraska.

In addition to serving on this committee, he is a member of the Agricultural Advisory Committee of the Chicago Board of Trade. Today, he will be speaking on behalf of himself rather than expressing the views of the corn growers.

With those introductions, let me, in visiting with these people on the phone last week and this week, one of the interesting questions that continued to come up throughout the conversations was on the issue of price volatility. Somehow, I, at least, had the misconception that price volatility was a really, really bad thing. That was not the impression of many of the producers, and I would like to put--the one question I would like to ask each producer to answer--we'll just start here with Richard and go on down--what does price volatility mean to a producer? Is it good? Or is it bad? And what effect does it have on the operations that you're familiar with?

MR. ELLINGHUYSEN: Yes.

[Laughter.]

MR. ELLINGHUYSEN: It's both. Price volatility has advantages and disadvantages, because the markets are going to react higher than averages as well as lower than averages, and producers, as they look at risk management in my experience, and there is a combination of those people out there, some that like volatility. I mean, it's much the same way: some people like roller coasters, and some people don't. For some, it's terrifying; for others, it's an exhilarating experience. And a lot of folks like the volatile markets, because they know they are going to be above average at times, and they can capitalize on that. Others are terrified of it. They would prefer a slower, gentler ride. They would rather avoid it at all.

And from that, there are individuals who are in both camps that are good risk managers. Some manage their risk to protect against the volatility they are uncomfortable with; some of them manage it to grab hold of opportunity that they see coming. Others put their head in the sand and try and hide from all of it. I mean, some will just ride the wild ride and live and die by it and enjoy it; others, out of fear, will just hide from it. So, there is really a combination of opinions out there among people. There is no one size fits all.

MS. SCHUFF: Thank you.

MR. KUBECKA: Okay; from my perspective, of course, I am speaking of my own experiences today. I visited with a few people, fellow producers around, but again, we're in a very fairly stable production area. The only problem is that it is not that profitable. Our profit margins are very thin, and I guess the way I've--what this--how it affects my operation is I enjoy the opportunity for the volatility, for the price to go up, and we've done things to capitalize on that such as having our own storage; of course, also being able to take advantage of forward price contracting and, of course, I guess the best thing is having my wife work as well.

MS. SCHUFF: There's an honest man.

Jimmy?

MR. SANFORD: I'm going to give you a political answer. I would like to see volatility as long as we have equilibrium of prices within an industry. Now, that sounds somewhat of an oxymoron, but we, in the cotton industry, compete not only with each other nationally, but we compete with other global producers. And to top that off, we compete with man-made fibers or raw industrial product fiber.

So, we need volatility to try to capture the profit that we need to make to remain in business, but we need these prices to be volatile within a range of stability or equilibrium. So, I would be opposed to $2 per pound cotton, but I would certainly accept $1 per pound cotton.

MS. SCHUFF: Thank you, Ron.

MR. GANGWISH: Volatility is my friend. One of the first things that I did in the winter of 1975 after I started farming in 1974 was start going to some Pro Farmer seminars, Roger, and a gentleman by the name of Jim Gill told me at a Pro Farmer seminar that one-third of the crops or the production is sold in the bottom--now, I can't say it. One-third of the production is sold in the top--I did write it down. Two-thirds is sold in the bottom one-third, and one-third is sold in the top two-thirds. I really made a good impression here, didn't I?

[Laughter.]

MR. GANGWISH: So, the first thing I did when I got home was I got my old historic charts out and looked at those historic charts, and I determined what the price swings were in the previous 5 years, and that's something that always stuck with me, because I think at that time, the smallest swing in prices in 1975 was 95 cents in the corn market, and I thought wow, that's something. And so, one of the things I do is try to determine what is for next year, when I market next year's crop, what is that range, and whenever we get into what I think is the top third, I start selling.

And, you know, we use all of the things that I guess maybe you can use or have used in the past, don't necessarily every year. We use crop insurance, CRC. I do that because it lays off my risk, and I can't afford not to do it. But as Sally said, we're irrigated, and I have perils like wind, 100 mile an hour winds that I've had 2 out of the last 5 years or hail--not drought, but those are the kinds of things that we use in our farming operation. But I like volatility. I don't always make the right decision; I want you to know that, too.

MR. WHITE: I don't like it; I love it.

[Laughter.]

MR. WHITE: I don't understand why a producer will know his costs, and when there is a good profit there to sell at, he doesn't sell. Without volatility, I have a very difficult time making money. With volatility and the knowledge of your costs and projected yield, you will make money consistently. Why do you want to try for the home run and win one out of seven years or one out of five years? This is a business we're in, and I think that has something to do with the risk management program that you're about to initiate. The simple explanation that farming is a business, not a gamble, we all know what gambling is, because we're farmers, and with price volatility, we have the opportunity to take the gamble out of that, and I don't want to see the Government back in the farm program. It doesn't take a rocket scientist to realize what's happened the last few years with the market being stable, not an opportunity for me to market at a price that I can make a good living, and I think that's one of the methods that the risk management people want to send out there is teach them the tool that is necessary and will fit into their operation, stabilize their income. Let's get this idea out of our head of going for the gold like HTAs and get to the business of farming, and there are ways to make money with a volatile market. I'm tickled to death, and I don't want the Government back in agriculture.

MS. SCHUFF: With that, I'm going to go to some questions from the interviews on the telephone with each of the producers, and I'm going to just stay with Bob right now and ask him: he brought up the T word, which is the trust word, the problem that so many people have and also the problem of risk versus riskier management. When does risk management become a whole new set of risks all of its own?

Bob, are you--

MR. WHITE: I'm ready.

MS. SCHUFF: Okay; go for it.

MR. WHITE: Last winter, I decided that Bob, maybe you need a little education. So, there was a course offered over at the Lima branch of Ohio State University taught by an economist by the name of Dr. Dean Baldwin. It was Ag Economics 625, and I thought, well, that's something I can do this winter rather than work in the corn rows or in the fence rows, and maybe I'll learn something. And it was well worth my time.

And I want to tell you what I feel about the opportunities of risk management after I had completed that course and sat down and thought about it. Lo and behold, Dr. Baldwin has a theory that at certain times of the year with certain crops, you can hedge, and 75 to 80 percent of the time, if you do it then, you can make a profit. Another professor down at Ohio State University says if you sell at harvest every year, I have statistical data that shows that that's the thing to do.

And along with that, Ohio State University is running a study of all of the prognosticators and guessers and people who want to sell you the opportunity to market your grain, and there are hardly any of them who are right.

[Laughter.]

MR. WHITE: And I said to myself, well, I think I'm just as smart as they are. And, so, you say to a farmer with a risk program we're going to teach you how to manage your risk. Well, nobody else has the direct shot to it. Nobody else can tell you how to do it. It's a proven fact to me that that's the case.

And then, we have these opportunities. One of them happened to my neighbor about 3 weeks ago. The local elevator, the lady called many farmers in our area and said you've got to sell your beans; they're going to $5.80, and they were $6.06, and she got a bunch of them. She got a bunch of them. And I was selling at $6.60 to $6.80, and one of the fellows that I know, and the youngest farmer in our area is 27 years old, $6.06. How do you suppose he feels about that elevator and their risk management program for him? You know, I doubt if he is too enthused about listening to something they might have.

Also, during the winter, they put on a seminar three evenings, and I went to that, and it was very good. I was taking the college course and going to the evenings, but the interest was phenomenal, 12 farmers. Twelve farmers advertised in the paper, the whole county, 12 farmers. And after 3 days, and I have to say the presentations were very good, they gave a test out with 25 questions. I felt pretty good. I missed one. It was on a synthetic put, and if I had thought about it, I would have got it. Ag teacher got 22, and the rest of them scored 9 to 14. They flunked the test. Now, how do you suppose those farmers felt when they left about marketing their grain? You know, I don't think that they felt like they had learned a thing; certainly not much confidence in marketing.

So, those things concerned me, that we're going to have a program on risk, but what are we risking? What are we risking? Maybe we should have a program on management and risk, how do we manage agriculture?

A little bit about my operation: 600 acres; that's not much. But here's something else that enters into my mind: we in agriculture want to plant or we concentrate in one or two things: corn, beans or maybe hogs or cattle or something. That's risky. Hasn't been too many years ago when I read the Government said diversity is the way to go. Well, I've stuck with that. I've raised corn, beans, wheat, hay, and I work all summer. I don't go out in the spring and plant and go to the house; in fall, go and harvest. I'm busy all summer. I even plant some oats.

And so, I've diversified my risks. I have a flock of sheep. I have some opportunities with the weather. If one crop doesn't hit, I've never had a failure on every crop. If it's a little dry, I get clover seed. Price clover seed now. So, I have diversity. And along the way, I'm selling when it's at a profit. I'm managing my risk by diversity, and I am selling at a profit.

And I want to tell you something else that Dr. Baldwin said, and I would think that we would wake up, and I'm sure it's happening. Dr. Baldwin said the yields have peaked in the United States, and I want to tell you something. Now, you're not going to believe this, but I can take you and show you. My fertilization program, and I'm not in the greatest soil in the world, by a long ways, but my fertilization program is this: 200 pounds of fertilizer in a row for corn and 50 units of nitrogen, and I have raised 170 bushel corn, but I'm plowing down clover, and my soil is loose. You can stick your foot in it clear up to your ankle.

I think farmers and the Government in this country have ruined a lot of soil, and my soil tests, and I can show them to you, that's what it calls for. I put 250 to 300 pounds of fertilizer on my wheat, and that's the total in a 4-year rotation, and that isn't possible. The university says it isn't. But Dad and I's been doing it for 40-some years, and it works, and it's hard to explain, and you can't tell people that, but it works for me, and I'm going to stick with it. I'm going to stick with it.

So, that's what I call hand-managing my risk.

MS. SCHUFF: Thanks, Bob.

Those are some important insights, and I think he raises a very good point and one that some of the previous panelists have raised, too, is the issue of trust: who are you going to trust when you start talking about taking advice on risk management? And more important, who are you going to blame? I kind of like Paul's explanation of why people don't like risk management; they want to be able to blame somebody else. That's good. I think it is probably not all that far off, actually.

To follow up on that, on the question of who are you going to trust, I want to address a question to Jimmy Sanford, because he's here representing the National Cotton Council. They have certainly taken a big leadership role in risk management education from their association. If you haven't seen--I think most of you all in the room have seen their risk management network, database, a marketing database. It's really quite a gee whiz risk management tool. That's something they should be really proud of.

But will associations--and really, I'd like to address this, since all of you are here representing an association, what role is the appropriate role for the grower associations? How much responsibility and how much blame are you willing to accept, Jimmy?

MR. SANFORD: Thanks, Sally. Dr. Mark Lange will be on the next panel, and he will be able to give you further insight as to some of the thinking that is among our members of the National Cotton Council. We feel like, going back to what Paul Hitch said, we think that members should have a personal responsibility in making their decisions concerning risk management. Therefore, the National Cotton Council, which is somewhat unique in the fact that it is composed of seven industry segments, from the producer through the textile mills, has developed a risk management Internet system which is really an intelligent system, and it brings together, as was demonstrated at our last meeting, a worth of information to all segments of the industry. It does not tell the individual members as to when to buy or sell, does it, Mark? You wouldn't dare do that, would you, since we have both buyers and sellers that will be using this model.

But it does bring a worth of information, and I think it's an appropriate role, Sally, for associations to play. It provides many different models within it, subsets within it that members can do what ifs; it brings together models that help them analyze the crop mix as far as the different regions of the country, what percent should be in cotton; what percent should be in others.

Someone asked, well, why do you look at other crops? Well, many of our members are diversified producers; so, we bring in different crop models, enterprise budgets, so that our members can decide what mix should be there and play these what-if questions.

We have a big role, I think, Sally, in providing an assemblage of intelligence for our members, and I think that's the appropriate role for industry organizations to play, and we plan to continue to enhance the model that has begun. It's just an initial step, but it would be much more involved than what it is today. I'll be glad to elaborate further.

MS. SCHUFF: Okay; thank you.

Let me just go down the table started here with Richard and ask the others what role they think is appropriate for their association, if they think that it will be, in terms of their own membership, if they feel that they will be putting their membership at an advantage or a disadvantage by becoming involved with risk management. I know that NFO has been involved in risk management for years and marketing both.

Go ahead, Richard.

MR. ELLINGHUYSEN: I think very clearly that associations have an important role to play, at least informationally or educationally and depending upon their level of involvement with their members and their real mission can have a greater or a lesser impact on what they're doing. For ourselves, being involved in marketing, we feel it's very important. I've been involved in risk management for some time, and I've personally been involved for some time, so, it's very important to me.

I believe that we definitely have a role in helping our producers as we see this shift in the farm bill and as we see the volatility that is most likely going to occur and we enter into a broader global market and have those impacts, I think we can position our membership and our people well above the averages if we work with them and help them learn how to use these tools.

MS. SCHUFF: Bill?

MR. KUBECKA: The National Grain Sorghum has taken an active role in educating our membership. We have just gotten started on this. Of course, we are relatively young. Yes, we have been around for some time, but we have really had some growth here, because sorghum has had, if you look over the last 10 years, has lost lots of ground and a lot of acreage and tried to look at the reasoning for this loss. Part of it was due to the farm program, which I think that in the 1995-1996 farm bill, we got corrected, but risk management is a big issue for us, and we have taken an active role in it.

We are not far enough along that I can tell you what our results will be, but it is important for us.

MS. SCHUFF: Rod?

MR. GANGWISH: I think in terms of education and information in the traditional forms of risk management, those kinds of things are better left to magazines, to people who put on seminars and what have you. In terms of some information that farmers possess like how many acres are we going to plant; like what do you think the yield is on July 1, on August 1, on October 1, some of those kinds of things that are collected by other groups, and I don't know if this is feasible; this is just a personal viewpoint, and I guess, that we have kicked around different times.

The state of the art that we have in communication today would offer an organization or a group of organizations the opportunity to put together some information like that that is really producer information. Other groups do it, too, but it seems to me that that would be something that could be valuable in the days to come, particularly valuable in crops that are not just corn, white corn, say, or waxy corn or high oil corn or the different varieties of soybeans or specific kinds of crops that are not just generic commodities.

So, I guess that's an interesting thought that I think deserves some research.

MS. SCHUFF: Thank you.

Bob?

MR. WHITE: Well, there's an old saying that says that you can lead a horse to water, but you can't make him drink, and I think that the first problem is getting him to the trough and with some situation that he has some trust in that something is going to be presented that's worthwhile. And I think that's going to be the hardest job is getting him to the trough, and I am not sure that organizations are the best, but there are a lot that people trust in. Extension services in some area are trustworthy. I think you probably, if I was advising how to do this, you are going to have to diversify that and the area. In which you wish to proceed, you're going to have to go into that area and look and say in this area, what do farmers and who do farmers trust?

And that is the way we will have to proceed, because I think you could run a full page and put down there at the bottom that the Government wants you, and you could put them all in the back of a pickup in three chairs, because they just won't come. I think you're going to have to really start out with some trusting thing. We've been burned too many times, and I think we have to have something or someone that we feel is there to help.

MS. SCHUFF: Thank you.

One of the topics that has been mentioned here today and was mentioned in the phone calls was the role of forward contracts, the future of ag trade options as risk management tools. I'd like to ask Bill to give his views, particularly, on the role of forward contracting. Bob has already explained that in his view, that, number one, you must know your costs of production; number two, see an opportunity.

Yes, go ahead, Bill.

MR. KUBECKA: Well, I think you've covered part of it. My personal experience has been is knowing the cost of production. I know this sounds so simple, but in our area, there are a lot of people who don't know that, and, of course, then, seizing the opportunity when that price goes up. And we talk about volatility. When it's up, and you know your cost of production, and you're in a fairly stable production area, as I am, well, then, it's a no-brainer to go ahead and contract.

So, it's worked very well for us, and we do it in all of our crops, I mean, rice and cotton and sorghum, it's all the same. When a price is there, we're going to get it.

MS. SCHUFF: So, you would say that many producers that you're familiar with would have a high level of trust in forward contracts, perhaps more than some of the other tools and techniques.

MR. KUBECKA: Yes, in our area especially. Now, I know talking with the people out west, where it's more questionable as far as their moisture and all, they have a much harder time of doing this with any confidence, because I know in the Panhandle and basically the High Plains, they have been in 5 years of drought, and I've heard those guys complain and all about crop insurance and even production, and if you don't have production, you can't sell. You don't do a forward cash contract. So, you know, it's different in different areas.

But in our area--and I think that's something that we have to be made aware of, that there are differences, and it's going to be difficult to have a national program. I think we're going to have to have a program that fits the area.

MS. SCHUFF: Okay; so, the one size fits all.

I think Bob had a comment on the forward contracts, and then, I wanted to ask Rod to, when he mentioned the specialty corn crops, to be thinking about where contracting fits in on specialty corn crops and perhaps on the ag trade options question.

Go ahead, Bob.

MR. WHITE: One thing about forward contracting: when I say that I forward contract, that doesn't mean that that is the only thing that you can do or that is available. There are other things. But the way I look at the other things, that's a separate entity. In other words, I'm running a farming business here. The forward contracts in my farm business is this entity. If I wish to do something over here, whether to protect or enhance some something that I see coming, that's a separate entity. I think of that as separate. That's like I'm a market player. I'm a farmer over here; I'm a market player over here. Don't get the two mixed up, and don't put something over here you can't afford.

They're separate, and I think that's something that in a hedge to arrive, farmers hedged more than they possibly could, and they did not think this is the farm, and this is the HTA, and we really got into a mess, and they should have separated those things, and they shouldn't have done more than they could afford to manage over here.

MS. SCHUFF: So, you're saying don't get your speculative account mixed up with your hedge account.

MR. WHITE: Right; farming's one thing, but don't speculate to pay farm bills. If you're speculating, it's a separate entity and should be thought of as a separate entity and should be financed as a separate entity.

MS. SCHUFF: Thank you; I think that's an important point and one that is often a little blurry.

Rod, when you talk about specialty corns, what type of risk management tools? Where do your contracts play? What is your view on the ag trade options contracts?

MR. GANGWISH: I've raised specialty corn in the past and specifically white corn, and we've got some high oil corn. But when I was raising white corn, we had a company that was willing to pay a premium and willing to offer a contract for the white corn, and I was happy to oblige them to raise it, because I knew what my price would be, and if I knew what my price would be, then, I could assume the other risks I needed to assume.

They did that for about 3 years and then all of a sudden decided, well, we're not going to pay you, you know, 40 cents over; we're going to go down to 30, and then, they went down to 25; and then, they didn't even want to offer a contract. And, so, when they started doing that, I quit raising white corn. It was not hard for me to figure that out. Some guys continue to raise, and we all know what happens with specialty crops sometimes.

So, I don't raise a specialty crop unless I have a contract for it, because if I know what my price is, then, I can define the rest of my risks, and I can accept those. I'm not willing to put it in the bin for 2 to 3 years to wait for the price to come back up.

With regard to trade options, and I haven't had a chance to read their press release in detail that I found on the front table that's dated today, so, I can't say exactly what I was going to say, because some of that's been taken care of. But I really believe that we probably--if we're talking about spending money to educate people, I really believe that probably--and this is my personal view--that probably, it's not a very wise expenditure of money to spend a lot of time teaching farmers about options or teaching them about forward contracts, because the farmers that I know are an independent lot, and the ones that are in business today are studying what's going on; they know about futures; they know about options; they know about forward price contracts to the extent that they want to know, and when you've got a situation out there, and I heard the statistic out there that the average age of the farmer today is 58 years old.

Well, if a guy who's 58 to 68 hasn't used those alternatives that are out there, I rather suspect you are not going to be able to persuade him to do it. Now, the farmer who is 24 to 34 learned about those things in college, and most farmers today who are 24 to 34 graduated from college, the university somewhere along the line, and if they didn't, they're probably entering into a farming operation with a father who does know about those kinds of things, because that's just how things are in the country today.

And we're talking about the 20 percent of the farmers out there who raise 80 percent of the production, by the way.

And, so, I said that to say this, that I really believe that the best risk management alternatives that will come to farmers in the days ahead in the future have yet to be developed, and they will be developed from, in part, for sure, from the things that we know today, from, you know, they'll be a combination of the futures market, of the options market, of crop insurance, of something else that has yet to be put on paper, and they probably, at least I think, will have a good chance of being some sort of a trade option.

And I look forward to that, because I think that--I think that there is an opportunity there. I think that free enterprise and I think that the free enterprise system will develop those alternatives, and the people who have the bean counters in the back room will send them back and come forth with the product that will do what farmers need, and it will be simple; it will be farmer-friendly, and it will be something that will be accepted, not by everybody, maybe not by anybody more than today uses the futures and options market or takes crop insurance or takes CRC or any of the other things that are available out there, but it will be something that picks up a section of the farming business that isn't there today, and agriculture is changing in a big way and really fast nowadays.

MS. SCHUFF: I want to ask Bill to follow up a little bit; in fact, I wanted to ask Bill and Rod to sort of play off against each other on this question. When I talked with Bill on the phone, he said because of the fact that they have very stable yields in their area, because margins are slim, they don't see crop insurance as an important risk management tool. I heard Rod say today that CRC, you know, underpins his marketing program.

Let me ask Bill to start, and if the two of you could kind of air those two concepts, it would be good.

MR. KUBECKA: Okay; the reason that crop insurance does not fit into our situation is basically the cost of it. Again, with small margins and guaranteed additional expense, with a guaranteed yield--and I shouldn't say guaranteed but a fairly stable yield, it just doesn't pencil out for us to have that extra expense.

Now, I know this is not the same in all areas, but for our area, that's just the way it happens. We also say the same thing about options and all. Once you buy an option, that's a guaranteed cost. Of course, we have managed our risk in our area, and I think the big challenge here for us as a group here is to, as Rod is pointing out, is to take that segment that's not doing anything. I think as you've heard, most of us here today are doing things. The challenge is to take what we're not doing and get it to the rest of the people or to those producers who need it.

MR. GANGWISH: I agree, Bill. I mentioned that I use Federal crop insurance; we do on our farm, and we use CRC. I use Federal crop insurance, and I also add to that Companion II coverage for hail. I take Federal crop insurance for, I think, as I mentioned earlier, for hail and for wind and for any other peril that might happen. I am not particularly concerned with drought, because if I can't irrigate my crop to get to the point that I am raising 65 percent of my guaranteed yield, then, I've got to hire some new irrigators. So, I'm not worried about drought.

But I take crop insurance not because I like what the premium buys, not because I'm particularly satisfied with the coverage that I get, but I take it because in a 10-minute hail storm, I can be wiped out, and I know what my premium is, and it's a cost of doing business for me. It's a risk that I'm not willing to take. I don't know what the risk of being hailed out on, conceivably, maybe 50 to 75 percent of my acres would be. I'm sure the hail insurance companies know that. But however low that might be, it's not a risk that I'm willing to take.

So, for me, it's a cost of doing business, and I don't even think about it. I just know that when it comes time to go to bed, I can go to sleep, and when the storm warning comes, I don't worry about it.

MS. SCHUFF: That's one of the better reasons for doing what you do.

MR. GANGWISH: I don't know if that was all your question but--

MS. SCHUFF: Yes, that's it essentially.

Let me ask you, since you do buy CRC insurance, the fact that you have the replacement costs of bushels, do you feel more confident in your marketing program? You know, that's what we are supposed to believe, that this makes people more confident about going forward with a marketing plan. Do you agree with that?

MR. GANGWISH: Yes, I do. Actually, I bought CRC for two reasons, maybe three. One of them, you will laugh at and shake your head when I tell you this probably, but one of the reasons I bought it is that I sat in front of members of Congress at a hearing and said we want this, and so, it wouldn't be--

[Laughter.]

MS. SCHUFF: So, you had to own up to that, huh?

MR. GANGWISH: --a good idea for me not to buy it.

MS. SCHUFF: They checked.

MR. GANGWISH: The second reason that I buy it is that I go to my computer and make a little spreadsheet, and I put on that my SCIC underlying insurance; I put on it what CRC does for me and what the price is that CRC brings me up to, and then, I say how many dollars per bushel for my break-even is this? How much do I think I'm going to raise? What's my net revenue, gross revenue? And then, I look at the market, and then, I look at what might happen if I get hailed out or if I don't get hailed out, and then, I make my decision on how much Companion II to buy.

And so, I'm insured for my 10-year average yield at a specified price, and that's how I determine what my insurance coverage is going to be, and I don't know if that's right; I don't know if it's wrong. It seems like I spend a lot of money for insurance, but I know that next spring, when I go in to talk to my banker, whether it hails or not, I'll be able to get financed, and it's not just that I'm worried about getting financed; it's an overall management plan of where I've got my money invested and the kind of return that I want and the amount of those assets that I'm willing to risk.

MS. SCHUFF: So, you're addressing not only the price and yield risk but the banker risk.

MR. GANGWISH: Well, we have to come back and farm next year.

MS. SCHUFF: Rod just mentioned something that Jimmy and I talked about on the phone when he said that he didn't know if his decision was right or wrong or where it fit, and Jimmy and I talked about that some the other night, the problem of not being too sure where you are compared to your peer group. Jimmy, could you explain that particular risk, how you see that, some of the records, and the farm management records associations provide that service, but by and large, there are an awful lot of people that really are in a situation where they are unable to compare to each other.

MR. SANFORD: Yes; that's, I guess, the primary exception are the farm analysis associations that are dotted throughout the country, most of them organized by the extension service. We also try to position ourselves in the top quartile of both yield and price, and discovering how your peer group is doing is very difficult, as you alluded to.

If we had more reliable information on price data, the discovery of price when it comes to a producer level, and obviously, on a yield data, you would be able to better position yourself personally when it comes to risk management. There is a transition going on that many of you have already alluded to in agriculture in America, and I agree with Rod about education. It's going to be difficult to get many people to the table to be educated concerning risk management.

We're going through--I'm a fourth generation family farmer like so many farmers are. We had relatives in our family who did not make the transition when we went from the draft mule to the tractor. That will be the case in this transition. There will be producers who will not be able to make that transition. And that peer group, Sally, will continue to move upward. The marginal group will continue to fall to the wayside, and as much as we hate to see that from a humanistic standpoint, that is the nature of the beast.

MS. SCHUFF: Bill?

MR. KUBECKA: Sally, I'd like to make a comment on this. I know you and I discussed the same question, and my only concern of what Jimmy says, and I'm sure not going to deny him, I know my comments were that I wish I had some of this information to compare myself against, but sometimes, that in itself leads people to not really take care of their own business. They're worried about someone else, what someone else is doing, and again, I'm talking about in my locale, what I've experienced. People worry about what other people are doing rather than worrying about what they're doing themselves. They don't know their own costs; they don't execute a plan, because Joe Blow down here says, well, I've got this. Well, hey, I want to do as well as he did. Well, maybe you're at two different levels of production costs, and therefore, I would just warn that we have to be very cautious of comparisons, because they can be very destructive.

MS. SCHUFF: Thank you.

I've got a question here for Richard. We had talked about risk management, and while we're talking about some of the structural problems with perhaps the new risk environment leading to greater consolidation or the loss of some of the marginal farmers, Richard and I had talked about how some of the risk management climate will affect different commodity sectors differently. Richard comes from a strong livestock and dairy background, and I'd like to ask him to address how his views on how they will be affected in this climate.

MR. ELLINGHUYSEN: Well, I guess I see some significant differences in the different commodity areas, and a lot of that has been driven by the level of involvement that the Government has or has not had. The livestock production side, and my familiarity is primarily Midwest, upper Midwest, fed cattle and butcher hogs, and I see, you know, very little Government involvement in the pricing, and I also see a fair amount of astuteness there in terms of the use of futures, a shift towards some contract production to manage risk and so on. In fact, it would be my opinion, somewhat biased, I suppose, because I lean to livestock but that they're fairly astute as a production sector as opposed to what I am saying, what I have seen and experienced, some of with grain, where there is a production sector that has had a lot of support price involvement, not to say that there aren't some very astute farmers there who are unsophisticated, because they are. They have--just to understand the Government programs takes a whole level of sophistication that I haven't adapted to.

But I think a lot of those folks in grain are going to be looking, as they have already with revenue assurance things, at the new tools and aggressively moving toward them. But I think that probably the level of risk and its management of it by and large is already being managed by a lot of the livestock folks. I think that it's less so with grain, and it's going to need to become more so.

And dairy is something that we have not talked about much here at all. I think dairy has probably the biggest learning curve to go through in regard to managing price risk, I'm talking about, because they have a significant long-term relationship with the Government in regard to Federal: milk marketing orders, the BFP establishment, MW Series and so forth. And now, that is all changing, and they have not had tools.

Unless they were doing some price-type protection and so forth on their inputs, they have not had futures-related tools to price milk on up until almost 1996. December 1995, there was one futures exchange and in 1996 another that offered the fluid milk futures, and those were modestly useful. This past year, the BFP futures contract was introduced, and I think that's going to be much more useful, because it does marry on a casital basis to the USDA's BFP number, which forms the basis of most milk that's priced in the country throughout all of the Federal milk marketing orders.

But those folks, by and large, have the biggest learning curve to come through. So, I think as we look at different segments of the commodities and the production sectors, there are different levels of expertise in each simply by virtue of what they have had in the past, and I think that is going to drive us as we look at education or offering products to look at these very distinctly.

And inside each of these areas, of course, there are significant differences again, and dairy, again, has, as I view it, more of a traditionalist type farm approach. That's changing now, becoming larger, but there have been more of the diversified, the smaller type entities, and I think that they probably have more at risk, if you will; they are an older group. They have more equity built up and are least likely to look at managing their risk, because they prefer not to.

So, I think that there are significant differences in the full areas.

MS. SCHUFF: It's time for us to wrap up this panel. I think that what we've heard this afternoon certainly reinforces in all of our minds that the challenge facing the risk management education development is substantial; that--I like the way that the price volatility issue has so many positives as wel