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.