Moving On

For the past six years, this blog has been focused almost exclusively on healthcare reform.  I still believe reforming our health care system is vitally important.  However, it’s time to expand the focus and to start thinking about other topics.

When I started my job as a Sherman County Commissioner three years ago, I was confronted with many new issues.  For example:

  1. How should the operating costs be split among the four counties who own our regional jail?
  2. Many of the inmates in the jail suffer from mental illness and/or addiction to alcohol and drugs. How can the jail provide treatment that will keep these inmates from returning to jail?
  3. What should be done to attract more residents to live in Sherman County and to promote the viability of our cities? How can we promote the building of more middle-income housing?
  4. The construction of wind farms over the last decade has dramatically increased the County’s property tax revenue. The increased revenue may last only eight more years. How should this windfall be invested so as to provide the most benefits to the county over the long-run?
  5. Studies show that children who attend a high-quality pre-kindergarten do better both academically and economically later in life. Preschools are particularly important for children who come from disadvantaged backgrounds.  How can pre-kindergarten be made available to all the children of Sherman County?

I hope to discusses these topics in future blogs.

Back in Action

Last summer, I started using the popular blogging software, WordPress, to manage my website.   I like it.  Soon after Christmas, I tried to post a blog I’d written and discovered I could no longer access my “ad-min” dashboard.  Blog entries are posted from the dashboard.  I called the company that hosts my site.  They told me that I had a “broken WorldPress log-in,” that they weren’t responsible, and that I was on my own in figuring out how to fix the problem.

If I’d had a computer savvy teenager available, she probably could have quickly figured out the cause of my problem and got me going.  I suspected my “broken log-in” had occurred during a WordPress software update.  After two weeks of hoping the problem would go away and two weeks of learning ftp and about accessing SQL databases, I finally succeeded.  It was a frustrating two weeks, but one good result is that I learned how to backup my website.  Parts of the Internet world are still too complicated.

I had no one to consult because I don’t know anyone in my area who uses WordPress.  Being the first to adopt new technology often comes with frustration.  We found this out several years ago when we installed a yield monitor on the combine and started applying fertilizer using a GPS-guided, variable rate controller.  It took several years before problems that arose started looking familiar and we began to have confidence in our ability to diagnose and fix them.

If you can see this post, I’m back in action.

 

Marketing Our Wind

While I was writing my last blog entry on wheat marketing, I started thinking back to how I marketed my other major asset—my wind rights.  Are there similarities in the way I approach the marketing of my wheat and the way I marketed my wind rights?  Before I try to answer this question, I’ll provide a little history.

In the early 2000’s, several wind agents began roaming Sherman County.  Their purpose was to convince us to sign over our wind rights, so the developer they worked for would have the right to construct wind turbines on our land.  Signing a wind lease potentially involves huge benefits and costs and ties up the land for up to 50y ears.  What surprised me then was how little advice and help landowners seemed to be seeking as they marketed their wind rights.  Wind leases were almost never a topic of conversation when we gathered for lunch at the local café.  Since I had no experience with wind leases, I paid $1,500 to a consultant to help prepare me for the negotiations and over $7,000 to have the lease reviewed by a Portland law firm.  I (and the company I was negotiating with) learned a lot from these experts about the meaning of the different clauses in the lease.

Wind leases have two features that discourage discussion.  First, before negotiations start, the wind agent insists the landowner sign a “confidentiality agreement” that allows the details in the agreement to be discussed only with attorneys and immediate family.  I’ve always worried that these “confidentiality agreements” put farmers at an unfair disadvantage.  The land agent has a team of lawyers and wind-savvy colleagues with whom he can consult.  The farmer often has difficulty finding experts to advise him during the negotiations and can quickly run up a big bill—years before seeing any significant income from the lease.  The developers are able to cut farmers off from their best source of help—discussion with neighbors who have faced similar decisions.  Second, the land agent must offer the same basic terms to everyone.  He will quickly get irate calls if word leaks out that a neighbor has been allowed a higher royalty rate.  Hence, unless a group of near-by farmers go together and negotiate as a block, an individual farmer has very limited bargaining power to change the basic terms of the lease.  The farmer’s decision boils down to whether or not to sign the wind lease offered by the developer.

I believe many of my neighbors signed wind leases without spending much money on experts or much time discussing their new opportunities with other landowners and, as I said above, this surprised me at the time.  However, on reflection their actions make sense since they were unlikely to be able to get changes in the basic terms of the lease.  I argued in the last post that spending time studying the supply and demand for wheat is unlikely to increase your ability to identify market highs.  Similarly, spending time collecting information on wind leases is unlikely to get you better terms.

I spent over $8,500 on wind experts.  Did I gain anything?  Again, there are some parallels to wheat marketing.  My initial hiring of a consultant gave me a knowledgeable person with whom to discuss whether I wanted to proceed with the negotiations.  It helped me feel more confident psychologically about acting.  Hiring a lawyer to review the lease gave me a lot more knowledge about what I was signing.  Did either of these experts improve my bottom line in the long run?  That’s a question I can’t answer.

 

Do We Need Help Marketing Our Wheat?

Will spending more time and/or money on wheat marketing make you a better marketer and increase your income?  Will hiring an advisor or subscribing to a marketing newsletter increase your bottom line?  The short answer is “Probably not in the way you’d expect.”

When I look back over the last 25 years, I realize I’ve spent hundreds of hours discussing the wheat market with other farmers at bi-weekly marketing meetings and in the coffee shop.  I’ve also spent several thousand dollars for my subscription to the White Wheat Report.  I’ve regularly sought advice from the coop staff before making sales.  I know I’ve enjoyed the social interactions, but has the additional information I learned about conditions in the world wheat markets improved my ability to identify good sales opportunities?

In 1998, the Oregon Wheat Foundation hired Steve Buccola and Yoko Fuji to test WW marketing strategies.  After lots of statistical analysis, they concluded we are wasting our time if we spend much effort on marketing.  Selling at harvest every year does about as well as more complicated strategies.  They recommended we focus on producing wheat.

This is the result that most economists—who believe in the “efficient market” theory—expected.  Farmers sell wheat based on the bids of Portland exporters.  The exporters’ bids are set by experienced grain traders who have access to much more information than any farmer.  If new information becomes available indicating prices are likely to rise or fall, exporters will act quickly to raise or lower their bids.  Prices will reflect this new information before farmers become aware of it and no simple strategy should work to forecast prices.

The only way to know the value of time spent studying wheat marketing and/or whether your advisors are providing useful recommendations is to do a test.  Compare your actual net returns over the last ten years to the returns you would have received if you had used some simple strategy—say, selling on September 15th each year or selling once a week from harvest through November.  One reason I was a fan of Larry Lev’s marketing approach was his willingness to test his strategies against selling the crop at harvest.  He was able to show that his “harvest marketing strategy” increases returns by a small amount—about 5% over two decades (see here, here, and here).  Unfortunately, the dramatic changes in the wheat market after 2007 have made Larry’s recommendations obsolete.

I doubt the time and money I’ve spent on marketing has improved my ability to forecast wheat prices or to pick the top of the market.  However, I believe I have benefited in two other ways.  First and most important, attending market meetings often motivated me to stop procrastinating and make sales.  Over the years, I’ve sold most of my wheat on Friday mornings right after a marketing meeting at which Chuck, Raleigh or Jeff outlined the reasons why prices could collapse. The most common marketing mistake is holding wheat unsold too long.  Being forced to confront the downsides helped overcome my psychological bias toward excess optimism.  Raleigh Curtis’s most important teachings were not about predicting prices.  His main interest was in psychology and teaching us to act.  He wanted us to be better decision makers.  If a good price is available any time over the next three years, he wanted us to grab it.

Second, marketing meetings helped me understand hedging and the dramatic way the long-only index funds have changed the wheat market since 2005.  During my first thirty years of farming, marketing was simple.  We sold the current crop on the cash market and had no good way to price future crops.  Base-price contracts greatly expanded our marketing options and attending the meetings helped me understand how to use these new contracts.

Finally, I recommend that you consider giving Kevin Duhling and his marketing service, KD Investors, a try.  Kevin grew up on Wapinitia Flats near Maupin and still helps operate his family’s wheat farm.  He always had a keen interest in marketing and wrote a marketing newsletter for several years before starting KD Investors.  Kevin let me read his newsletter during the last couple of years and I can testify that he is very knowledgeable about futures, hedging, options, and the WW market.  He also knows how farmers think and how to spur us into action when the time comes.  His service costs 2¢ to 8¢ per bushel (depending on the level of personal attention you want) and might be money well spent.  I doubt that Kevin can consistently forecast price movement.  If he could, he’d be living very quietly in a mansion in Lake Oswego.  However, I know he can help you in both the ways that marketing meetings helped me—by encouraging me to act and by helping me navigate the confusing world of long-only funds and base-price contract.

 

Volcker Biography

If you’re interested in a very readable economic history of the U.S. over the last fifty years, I recommend William Silber’s new biography of Paul Volcker.  Volcker is one of my heroes and was deeply involved in solving many of our economic problems — including the collapse of the Bretton-Woods fixed exchange rate system in the late 1960’s and early 1970’s and in reducing the high inflation at the end of the 1970’s.

Testing

H. Gilbert Welch is one of my health policy gurus.  I read his book Overdiagnosed: Making People Sick in the Pursuit of Health and highly recommend it.  Welch has a column today in which he advocates more testing of standard medical practices.  Too many plausible-sounding theories are accepted without being adequately tested — and then overturned a few years later.  The testing that is done is often funded by companies that stand to profit from the drug or test.  Welch mentions some of the practices that have been questioned recently.  I would add to his list almost all the advice doctors give about weight loss and obesity.

More open-minded testing of accepted theories is needed, not just in medicine, but in other area such as economics.  I’ve been amazed at how little agreement exists among top economists about the appropriate response to our financial crisis and recession.  We seem to have learned embarrassingly little in the last seventy years.

Doctors’ Dual Role

Wide agreement exists that the growth rate of U.S. medical costs must be reduced.  One approach often suggested is to introduce more private enterprise into medicine.  Hospitals and doctors should be encouraged to disclose their charges upfront, so patients can shop for the lowest cost providers.  Health insurance policies should have high deductibles (linked to a health savings account), so patients bear the financial responsibility for their care and have an incentive to look for better deals.  Employees and Medicare enrollees should be given vouchers so they can purchase health insurance better tailored to their needs and budgets.  Competition among firms in markets normally produces high quality products at reasonable prices.  Why not let the market work its magic to solve our medical cost crisis?

I support all of the above ideas.  More transparency would spotlight the unreasonably high costs of many medical procedures and the wide variation in the charges of different hospitals and doctors.  High deductible insurance would discourage unnecessary doctor visits.  As anyone who’s looked at this blog knows, I’m a supporter of vouchers.  However, as I’ll explain below, I don’t believe these changes are sufficient to rein in health care costs.

The market for health care is different from almost all other markets in a key way.  To quote from my recent OWC chairman’s column:

The way we purchase medical care differs fundamentally from the way most other goods are purchased.  Normally, when we go shopping, we start with a clear idea of what we want.  When we go to our doctor, we usually don’t know what medical care we need and our doctor’s first job is diagnosing our problem.  We learn from our doctor what treatment we should purchase.  Doctors have a unique dual role in both recommending and providing treatment.  Market competition doesn’t do its normal job of holding down costs when sellers determine the amount of services they provide.

I can illustrate this from personal experience.  When I was 60 years old, the lab work during my yearly physical showed an abnormally high PSA reading and I was referred to an urologist.  He determined I had early stage prostate cancer.  I had no symptoms and prostate cancer had never crossed my mind.  I had a $5,000 deductible health insurance policy, but I never considered the cost of treatment or shopping for doctors.  I wanted my doctor to recommend the most effective treatment and guide me through the options.  He insisted I carefully consider both surgery and radiation and I did.  However in the end, it was his knowledge and experience that I relied on.

For serious (and expensive) medical conditions, we should rely on the expertise of our doctors and follow their treatment advice.  The tests and treatments ordered by doctors  account for as much as 75% of all medical costs.  The best way to reduce these costs is to change doctors’ incentives so they recommend only what clearly has value for their patients.  Doctors, not patients, need to be better shoppers.

Interestingly, for elective procedures, when patients know the medical treatment they want and don’t need a diagnosis from a doctor, market competition works well to hold down costs.  The real cost of elective procedures such as cosmetic or laser eye surgery has been declining.

With improvements in computerized diagnostic systems and more medical information on the Internet, patients in the future may be able to diagnose more of their ailments without consulting a doctor.  I’m always amazed at how much my wife can learn if I give her a medical question and an hour to surf the Internet.  If we ever get to the point that doctors’ main role is providing treatments, medicine will become more like other products and market competition will be more effective in holding down costs.

Reining in Health Care Costs

My experience on the AFBF Deficit Task Force in 2009 was a wake up call.  I quickly became convinced our country’s biggest long-term problem is rising health care costs. When I first saw the figures, I was amazed.  Is our medical system self-destructing and we just haven’t realized it yet?  The average total cost of health care for a family of four in the U.S. is now $20,728 and these costs have been rising at more than 8% per year.  The average cost of health insurance is now $17,258 with employers on average paying $12,144 and employees paying $5,114.  Out-of-pocket costs make up the remainder.  Private companies are dropping or reducing health insurance for their employees and state governments are laying off teachers because they can’t afford the yearly increases in premiums.  The rapid increase in the predicted federal deficits after 2020 is due mainly to increasing Medicare and Medicaid costs.  We need to make big changes, but how?

I’ve written previous blogs exploring this topic here, here, here, and here.  I recently wrote an OWC chairman’s column for the OregonWheat magazine on Reining in Health Care Costs.  In my next two blog posts, I plan to explore further two points from my chairman’s column—why market forces have failed to control costs and why I’m enthusiastic about Wyden-Ryan voucher plan.

Today’s NY Times has a column that’s a good lead-in to the first up-coming blogs.

Oregon’s Death Tax Initiative

We’ll likely be voting this November on an initiative to phase out Oregon’s Estate Tax.  If the initiative passes, the “death tax” will be reduced each year until it is finally eliminated for persons dying after January 1, 2016.  Most farm organizations strongly support repeal.  This puzzles me since I believe a good argument can be made that the great majority of farmers risk paying more taxes.  Instead of repealing the estate tax, we should be concentrating our efforts on raising Oregon’s estate tax exemption to the current federal level — $5.12 million for an individual and $10.24 million for a married couple.

According to a recent USDA study, 0.5% of all farms and 4.2% of “commercial” farms pay federal estate taxes.  Most estates that include farmland are well under the exemptions and pay no tax.  However, most farmers do benefit from the “stepped-up basis” provisions of the estate tax law.  The “stepped-up basis” rule allows inherited property to be valued for tax purposes at its fair market value at the time of the death of the previous owner, i.e., its tax “basis” used in computing capital gains tax is increased to the “fair market” value at the time the assets were inherited.

Although few farmers plan to put their farms up for sale, the “stepped-up basis” still reduces taxes.  Children and grandchildren often inherit parts of the farm after they have moved away and lost interest in farming.  Family members who continue to farm usually end up buying out these non-farm heirs.  The capital gains tax paid on sales within families is much reduced by the “stepped-up basis.”

The “stepped-up basis” is easy to justify for estates that pay estate tax.  The estate tax is calculated based on the fair market value of assets at death.  Without the “stepped up basis,” capital gains taxes on subsequent sales would amount to a double tax on part of the asset’s value (the difference between fair market value at death and the price originally paid by the decedent).

If the estate tax is eliminated and the stepped-up basis continued, wealthy taxpayers who are able to hold assets until death would avoid all capital gains taxation.  This seems unfair to many and may explain why the “stepped-up basis” was eliminated when the federal estate tax briefly expired in 2010.

I’ve probably already lost you in this maze of tax law.  To summarize, if the exemption is raised to $5 million, few farmers will be subject to the estate tax.  Totally eliminating the estate tax risks losing the “stepped-up basis”—which benefits most farmers.

 

I’m Back

Last summer, my nephew visited us.  He recently established a successful website in China used by musicians and other artists to promote their works — so he’s very knowledgeable about websites and blogs.  He informed me my website badly needed an appearance upgrade and recommended a hosting switch from using iWeb hosted on the Apple’s me.com site to WordPress.  He offered to help and developed what you see here.  Making the needed changes would have been much more difficult without him and I greatly appreciate his help.

During the last year, I haven’t updated either my old or new sites.  My old site was available until Apple closed down its web hosting at the end of June.  I’ve had difficulty figuring out how to redirect my domain name “tomccoy.com” to my new site and only accomplished that yesterday.  Also, I’ve  been chairman of the the Oregon Wheat Commission during the past year and one of my responsibilities has been writing a bi-monthly “Chairman’s Column” for OregonWheat magazine.  The columns have given me plenty of opportunity to express my views about current developments in the wheat industry and even about healthcare reform.  I will post some of my columns here soon.

One of the main reasons I stopped adding blogs during the past year is the death of Raleigh Curtis.  Debates with Raleigh stimulated many of my past posts.  I miss him.  Raleigh’s successor, Jeff Kaser, is doing a great job carrying on Raleigh’s work.  However, Jeff’s style is less inflammatory and I haven’t felt the same urge to follow up our discussions at marketing meetings with new blog entries.

During the last three months, I’ve been involved with the Columbia Gorge Health Council’s efforts to reform the way Medicaid is delivered in Oregon.  We’ve been working to set up a new Coordinated Care Organization (CCO).  This may seem a strange activity for a retired wheat farmer.  However, the year I spent on the AFBF Deficit Task Force made me a passionate advocate of health care reform.  The average total cost of health care for a family of four in the U.S. is now $20,728 with median income just over $60,000.  Our health care system is self destructing due to rising costs.  I’ll have more to say about this in subsequent posts.