U.S. to Teach Farmers How to Play Futures Markets

Thousands of U.S. farmers will be offered classes in futures and options trading this year in a government experiment to see if profits on the commodities markets can reduce farm subsidies.

Congress ordered the test project for 40 counties as part of a farm bill in an effort to find an alternative to expensive price supports.

“Many people are frustrated with the high cost of the current program, farmers included,” said Rep. Lane Evans (D-Ill.), a member of the House Agriculture Committee.

Hedge Against Risk

“We need to have some sort of mechanism to help farmers,” he said. “But I think it has to fundamentally change. If it does, it will be good for the taxpayers, better for family-sized farmers and a better system, generally, for our whole country.”

A provision of the farm bill requires the Agricultural Stabilization and Conservation Service to try to teach farmers how to use the markets to hedge against risk and boost their income. The agency is to report back to Congress on the results by December, 1988.

The goal is to reduce the amount farmers receive in federal support by whatever they make through commodities trading, in effect transferring part of their subsidy from the government to the private sector, service spokesman Ray Waggoner said.

“It could be the forerunner of a fancy new program or it could flop,” Waggoner said. “We don’t know and won’t until it’s tested.”

Farmers will be invited to take classes explaining how to buy and sell their commodities--wheat, feed grains, soybeans and cotton--and will receive counseling as they make pre-harvest contracts to ensure a set price for the crops.

Dabbled for Years

“If market prices go up, you benefit because you lost on the futures but gained on your crop,” Waggoner said. “If market prices go down, you make money on your contract.”

Farmers have dabbled in commodities trading for years, but the business is complex and the practice is far from widespread among producers, said Larry Walker, director of analysis for the agricultural service in Washington.

“All farmers would be better off if they knew how to trade on the futures and options markets,” Walker said. “Over time, they can make more money if they understand it.

“But all of this I preface by saying you better know what you’re doing, and don’t try to get fancy unless you want to lose your shirt.”

To ease concerns about losses and encourage participation, he said farmers enrolled in the pilot program will be guaranteed a net return equal to the local loan rate for their crops.

22 States to Participate

Details remain sketchy, but he said Agriculture Secretary Richard E. Lyng is expected to announce final guidelines for the program by March 15.

An advisory committee selected 40 counties in 22 states for participation, basing its recommendations in large part on requests from farmers.

“It wasn’t hard to pick 40,” Walker said. “It was hard to decide which of the 3,000 counties were not included.”

One of the requests came from Gary Whittaker, who raises corn, soybeans and hogs on the farm his family has owned for 100 years near Toulon in northern Illinois.

“I’ve hedged some on the futures market, but the options I have trouble with. That’s why I’d like to do this and learn more,” Whittaker said.

“If you’re very acquainted with farming, you know it’s just like going to Las Vegas: I throw my money out every spring and hope something comes up,” he said. “Hopefully, we can cut down our risk a little bit by doing this.”

Illinois, Iowa and Texas each ended up with four counties in the project, while California, Indiana, Kansas, Michigan, Minnesota, Mississippi, Missouri, Nebraska and Ohio have two each.

Arizona, Georgia, Idaho, Louisiana, Montana, North Dakota, Oklahoma, South Dakota, Virginia and Wisconsin each have one.