Market Risk for Grain and Farm Supply Cooperatives

Phil Kenkel

Bill Fitzwater Cooperative Chair

Oklahoma State University

In the last newsletter I discussed the sources of risk for a grain and farm supply cooperative.  With the state in the grips of a historic drought, many managers may have been underwhelmed with the breaking news that weather was a major risk factor for grain cooperatives.  Some of the other risk factors include variation in the amount of fertilizer sold, price changes on fertilizer in inventory, and variation in petroleum prices.

The standard deviation of county grain yields is around 60% for most wheat producing counties. If wheat yields were normally distributed (the classic bell shaped curve) that would mean a grain cooperative has a 25% chance of receiving only 40% of their long term average.  We could expand the discussion of modeling grain yields, but it is also interesting to see how the other risks stack up.  The USDA published data on annual fertilizer use on wheat. Using that data the standard deviation in fertilizer use is roughly 14% of the mean.  That would imply a supply cooperative has a 25% chance of selling 86% of their historic average and a 5% chance of selling 72% (minus 2 standard deviations) of their average volume.

Price data can be used to estimate the risk in fertilizer and petroleum margins.  When fertilizer is $500/ton and the cooperative has a $50/ton margin there is a 25% of an actual margin of $40/ton and a 5% chance of a $30 margin,  That is another picture of the price risk from fertilizer in inventory.  In the case of petroleum, a cooperative with a $.16/gallon average margin (the national average but probably low for rural locations), There is a 25% change of a $.11 margin for a particular time period and a 5% chance of a $.06 margin.  Of course, there are similar probabilities for above average margins so the price risk in fuel may average out.

The variation in volume and margins is just one part of the risk picture for your cooperative.  Cooperatives can undertake strategies to control risks.  Risk capacity is affected by patronage, equity revolvement and many other board decisions.  The best part of fertilizer and petroleum risks is that they can take our mind off our continuing drought risk.