The Short Answer: Ethics

"When you are young, ethics is what happens after you get caught.  But when you get older, ethics is what passes for forethought to make sure you don't have to get caught."

As I read this article entitled "The Fairway Test" in the September issue of the Rotarian, its relevance to the topics I discuss in this blog was very apparent.  Author Jack Hitt recounts the time he and his siblings were caught hiding the peas in dinner napkins.  His father caught on and their sister, as the mastermind of the plan, was forced to eat five servings.  They eventually came to realize that had they suggested a vegetable other than peas their father would have compromised.

Most of us can probably remember trying to hide the peas at dinner.  Much work has been done to improve the quality of the peas that we eat in this country, but the negative image no doubt holds.  I'll bet every day I think about something Pete Klaiber, marketing director of the Pea & Lentil Council, said last year in a class.  As I mentioned in the first post to this blog, the industry is now competing on quality.  Surely that is not only a response to global market mechanics, but also due to the realization that they must confront their image problem directly.  Trying to compete with third world countries in the bulk pea market is probably a loser, but changing a long-held perception about your product can't be easy either.

Competing on quality necessarily leads to a shift in how you interact with your customers.  In a need-based market, the buyer-beware ethic is more commonplace.  There is no expectation of reasonableness, honesty, or compromise.  Proponents of the need-based marketing outlook are correct to point out that in the marketplace, trade is always need-based.  

There are two reasons that the need-based outlook doesn't completely hold sway.  First, smaller competitors, or those at some other disadvantage must bring something else to the table.  A senior partner at a big New York law firm is probably not any better than one in Kansas City.  That won't counter the perception held by corporate executives that a New York lawyer is better.  Often times they are willing to pay a premium for that perception.  So how does the Kansas City lawyer compete?  Sometimes luck, sometimes a corporate counsel is a friend from college.  Or they can focus very heavily on their relationship with their client, never take anything for granted, and work every day to renew their client's trust in them.  

For five years I had the pleasure of working for one of the best lawyers around at relationship marketing.  As a proponent of the need-based strategy, it took me a while to come around.  Eventually I realized that it wasn't just a strategy this Kansas City lawyer employed to compete with New York lawyers.  It's not just his living, it's what he does for most of his waking hours.  He chooses the personal relationship marketing strategy because that is how he wants to do business.  There are companies here in Moscow, Idaho that employ the same strategy.  It would probably be easier to just move, but they choose the "hard way" because they choose a different way to live.

Pete Klaiber and the Pea & Lentil Council have identified an essential reality that will eventually pervade the U.S. agricultural industry.  It is exemplified in a Newsweek article  about why China will never be the world economic superpower.  The article describes a number of instances where China's need-based strategy has alienated countries like Angola and South Africa.  It is no coincidence that Angola, with its rich oil reserves, is embracing U.S. efforts to rebuild the long war-torn country.  

What the Newsweek article says in essence is that the U.S. economic position in the world is not just about resource domination.  It's about culture and dare I say... ethics.  The Pea & Lentil Council and the rest of the U.S. agricultural sector will succeed because when you compete on quality, you make a promise that is not required in the need-based paradigm.  A promise is not a contract, it's a bond of trust between people who have expectations of one another.

The Pea & Lentil Council's marketing strategy is largely focused internationally, but it may be the local foods initiative that leads this ethical revolution (with all due respect to Pete).  Some very important American companies are thriving by taking a stand for quality and sustainability.  Chipotle's slogan is "Food With Integrity".  Watch this Nightline segment as founder Steve Ells explains his philosophy.

Jack Hitt finishes his Rotarian article with some advice from his brother to a reader who inquires about playing golf with a friend who likes to take do-overs.  "I wouldn't do business with him," his brother said.  He then recounted something Ben Hogan said about  the game:

... golf is a game of recovery.  It's about what you're going to do when you get into trouble.  It's about shooting out of the woods or a sand trap. 

Hitt adds, "If one cheats over the very essence of the game, what does that say about your friend?"

A game of recovery.  So ethics is about not just not getting caught, it's about demonstrating to yourself that you can recover.  It's also about demonstrating to those around you that you welcome the challenge, when the chips are down you won't take the easy way out.

So when a client is really looking at trouble, do you think they call the New York lawyer, who relies on superficial marketing characteristics, or the Kansas City lawyer, who he or she knows will respond the same way that they live?  Take a deep breath, relax, and punch it back into the fairway, walk straight to your ball and be ready to make the next shot when you get there.

In international agricultural trade or local food production, it's about gaining and keeping the trust of your customers.  That's the point for Steve Ells, and I predict it will be for most agricultural trade groups in the future, not just the Pea & Lentil Council.

This ethical, personal relationship strategy is not something we employ just to compete, it's a way of life.  Let the re-set begin.

On Speculation

In last week's issue of The Economist, Sir Richard Branson and others wrote to the Letters section with their take on speculation in commodities markets.  They rebut two main points from the original article.  Here is the second, most salient point:

... the article shares the common misconception that futures prices cannot affect spot prices because speculators do not take delivery of physical commodities, and therefore do not "hoard" in the traditional sense.  The reality, however, is that spot prices of many consumable commodities, including oil, and corn, are set by long-term contracts that are based on futures prices, allowing the tail to wag the dog.

Essentially what they are saying is that disinterested parties who only care about a price distort the market.  The Economist article Branson, et al. are responding to suggests that those who "hoard" commodities are the ones who affect the price and should therefore be held to account for any problems that occur within that market.

Hoarding is a component of the producer's ability to impact supply in order to achieve a better price, but this is essentially a longer-term position than speculation.  So is taking land out of production, which is what an influential group of potato producers did last year.  Speculators are doing no such thing.  They have no place whatsoever in the supply chain.  They are not "investing" in farmers or processors.  With globalization, food demand is going to remain relatively strong, and parties who are part of the supply chain will continue to find usefulness in commodities markets.  Speculator involvement in this market is absolutely unnecessary.  Branson summarizes it best:

There is strong evidence that speculation exacerbated the last oil and food bubble.  Speculation will fuel the next one too, unless meaningful speculative position limits are established.

Commoditization and futures contracts are meant to allow farmers to reduce risk.  Reduced risk and a long-term outlook encourage better, more environmentally friendly practices, development of alternative food markets, economically stable communities.  That's not what is happening here.  Let us hope change is not forced upon us by what Branson alludes to.

Commodity Supply "Scares"

This week a new fallacy showed up in the commodities markets.  Having taken their profits by creating a wheat supply shortage "scare" from thin air, hedge funds and brokerages houses decided to jump to coffee, driving the futures price to near a 13-year high.  Somehow they have convinced the folks at Marketwatch and a number of other mainstream publications that the "perception" of a supply problem is the exact same thing as an actual supply problem.  Actually, in principle their logic is good, since we're talking about the futures price, which can only be estimated and therefore perceptions are reasonably taken into account.  The problem is that futures prices for two, three, or even six months down the road are not going up.

This is a transparent policy of pumping commodities for short term gain in a flight to safety.  If there was real fear of an actual worldwide commodity shortage, which some have predicted will cause food riots, wouldn't savvy investors like those who run hedge funds have long positions in March wheat contracts, for example?  I guess we'll never know, because today they took their coffee profits, a week or so after taking their wheat profits, as noted in a previous post.

Meanwhile, some brilliant analysis over at Marketwatch suggests that the recent wheat supply scare-that-wasn't should cause thinking folks to realize "just how fragile the global grain market really is."  This article is a true classic and you should take the time to read all of it.  One of the main reasons cited for "fragility" in the global grain markets: weather.  Of course, weather is always in play in pricing commodities futures, and it was cited as one of the main reasons for the run-up in coffee futures.  But here they are grasping at straws.

After writing last week that the hedge funds drove up the futures price based on nothing but their need for a safe haven, Marketwatch has trotted out a straw man.  Even though there wasn't a supply problem, the futures price rose, and there was "fear"... and so that means the market is fragile... so next time there is "fear", or weather "issues"... the price might rise again... because the market it fragile.  So much for supply and demand.  This is  fantasyland.  Feel free to play, but only if somebody gives you free tokens.

Here's the bottom line.  There is no wheat shortage.  The very same article that rationalizes a market response to pretend supply shortages notes that the USDA claims U.S. ending stocks are "three times larger than a few years ago."  The U.S. has more than enough wheat to cover what was not that big of a shortage caused by the Russian drought.

You will be paying higher prices for coffee very soon.  How will it feel when you see an article breathlessly reporting that Brazil's harvest was just dandy, despite all the "fear"?

Egg Recall

I had intended to write something much different today, but I'm in the Quiet Bar waiting for the Rotary meeting to start since the Jeep was just towed away for service.

The director of Food, Inc. was on CNN to talk about the egg recall/salmonella scare.  He took the opportunity to pump local food production, which is the major theme of his film.  This could be opportunism, or the film could just be prophetic.  I think the director of the film would say it was a matter of time.  Follow the link to watch the trailer.

Getting Local in Illinois

One of the themes of this blog is local food production.  This is not necessarily a philosophical position, but rather a recognition that commoditization of agriculture and long-chain distribution practices go hand-in-hand, and that both are vulnerable to niche market insurgencies.  As economic sanity is restored, a large percentage of the population will demand that their food be locally produced to a much greater extent.  People may not be willing to pay $75.00 for a toy truck made in America, but many more will pay a 25% premium for locally produced food.  This is not all about dollars and cents, it's about a re-setting of priorities.


Local food production is a pretty hot topic, but few people actually believe that this movement could impact the current food distribution paradigm to any significant degree.  An organization called FamilyFarmed.org has been involved in the movement in the Midwest.  Recently it produced a report which estimates that in Illinois many corporate consumers would spend up to $23 million annually on locally produced fruits and vegetables.  Those corporate entities include Whole Foods and Chipotle.


From an article about the report in Medill Reports:

In the past, “commodity pricing of fruits and vegetables made it very difficult [to compete] with warm weather farmers,” said Slama. But the picture has changed. “Transportation costs being what they are, consumer and trade buyers all want local food, which is opening up the market, particularly in Illinois,” he said. That means opportunity for family farms to connect with the wholesale market, according to the report.

Realistically, local food distribution, including traditional commodities, is unlikely to impact the market to a very large extent anytime soon (unless fuel energy interests are able to keep current prices stable or push them higher).  However, this report gives some credence to the belief that more small farmers will be able to make a living in the future by marketing their products locally.  Eventually the movement could provide a growing number of traditional commodity farmers better wholesale market exposure, and the freedom to leave Wall Street to its own devices.


Read the full report here.

Buckwheat News

I chose to conduct field research on buckwheat in part because of its potential in the marketplace.  The following news items support the view that food items containing buckwheat will be commonplace in the next decade or so, and that there will be a viable market for buckwheat as a cash crop.

Here is a report on a study where jet-dried buckwheat flour was effectively used to replace fat in cakes, not completely but to a significant extent.

A New York Times blog hi-lighted the expanded use of buckwheat by top chefs.

The Wall Street Journal profiles a famous New York City restaurant serving fresh buckwheat soba noodles daily.  The owner grows the buckwheat on his farm.

This study showed buckwheat and quinoa provide the best nutrition among gluten free options.  The study also highlights troubling problems with foods typically classified as "gluten free".  It indicates that using "alternative grains" like buckwheat is a better option.

Pravda predicts food riots due to the grain shortage resulting from the Russian drought.  Now where have we seen this before?  Buckwheat prices are up 35%.  Guess whose buckwheat-dry pea market price comparison in their study is going to favor buckwheat this year?

Let the Stampede Begin

With the recent significant increase in wheat futures prices, does anybody doubt that we'll see a lot more wheat in the fields next year?  Who knows, that may be a good strategy, if you follow the logic that gambling is good for income generation because a small fraction of players win at the craps table.

According to this Bloomberg Businessweek article, market sentiment is that the rally is overheated, which is why futures are down for the third straight day.  The article cites analysts who claim that global stocks are just fine despite the Russian export ban, and that the supply situation is nothing like in 2008.  Take a look at the historic price for wheat, which peaked that year.

(Courtesy indexmundi.com)

The story line here is that in 2008 there was worry that world stocks were so low that food riots would break out in third world countries.  Simple supply and demand, right?  Wrong.  Here is a chart of world wheat production for the past twenty years (Data courtesy USDA-ERS):

True, U.S. production was down a bit in 2006, but world production was not off enough to cause that kind of peak in the futures price.  Overall world production has risen about as much as world population over the last twenty years.  At some point what we refer to as a commodities futures "market" stopped behaving anything close to rationally.  I suspect it's when this happened, again from the Bloomberg article:

Speculators including hedge funds raised their net-long positions, or bets wheat prices will rise, in futures and options by 5.3 percent in the week ended Aug. 3, the smallest increase since they turned bullish last month, U.S. Commodity Futures Trading Commission data on Aug. 6 show.

How many farmers will double over this year's wheat crop, or plant wheat instead of a planned rotation crop in response to last month's perception of shortages?  Let's hope not many.  Next spring those same funds that went long on what we are supposedly just realizing was a non-technical run-up, will short the futures all the way down.  The game is up, only the house is left at the table.

Food Stamp Use Hits Record

The Food Stamp program is administered by the USDA.  It is probably no surprise that use has increased dramatically as unemployment stays high over an extended period.

USDA Secretary Tom Vilsack recently spoke to NPR's Michelle Martin about a wide range of issues, including the department's local farming initiative.  

The two programs should go hand-in-hand.  If the premise that long-chain food distribution is more costly and inefficient than it should be, would that not also be the case with respect to the Food Stamp program?  Perhaps as the local food distribution movement gains traction it will become obvious that to work best, all programs that deal with food security within U.S. borders should be integrated into the local food distribution paradigm.  It is appropriate for the Federal government to deal with food security issues on a global scale, but they should do everything possible to get local with every aspect of food distribution in this country.