Trading Clubs Teach Commodity Marketing

Understanding how futures and options markets can offer price risk management is essential to commodity marketing. Reaching a "good" understanding of these markets requires more than taking a workshop on the procedures-and learning by experience can be expensive. Also, too little understanding and lack of self-confidence brought on by decision making under uncertainty, increases stress and anxiety.

In the late 1980s, more than 20 agricultural marketing clubs were established in Virginia to teach farm marketing and price risk management. A weakness of the traditional marketing workshop is that "paper-trading" lacks the emotional and financial consequences of actual trading decisions. This shouldn't be underestimated. Applying knowledge and techniques acquired in a workshop is limited in real life by the fear of making mistakes and consequently losing significant amounts of money. The objectives of the Educational Futures and Option Training Club (EFOTC) are the same as marketing workshops-to teach farmers how to manage commodity price risk, but with the important addition of gaining confidence in using analytical and marketing techniques by actually trading.

Combining group decision making and a small financial commitment is a winning combination. From a practical viewpoint, the financial commitment serves several functions. Producers are more interested in the day-to-day market activity if they have even a small financial commitment.1 They follow prices and trends closer over a period of time, so market analysis becomes a habit rather than a chore. Meeting attendance is high because participants develop a sense of group responsibility and the need for their input in the trading transactions. Since participants placed the trading orders, they typically stay until they receive verification and continue discussing their market analysis.

The pool of funds enables a group of 15-30 producers to actually trade a limited number of futures and options contracts. Experience shows that when trading as a group, farmers are more inclined to take positions as a learning experience than they would on their own. Marketing clubs in Virginia that only paper- trade have been less successful in developing market analysis techniques among participants. Generally, no individual wants to be identified before peers as making a poor marketing decision, and may never even try to trade on paper. However, if the trading club makes a poor group decision, no one person is blamed.

The EFOTC is more formally organized than regular marketing clubs, since actual trading is involved, and operates under specific conditions laid out by the Commodity Futures Trading Commission (CFTC). The CFTC permits the clubs to operate as an educational trading pool provided there are no more than 50 members, no member contributes more than $300, and the trading pool operates for a defined period of time, after which all positions are closed out. An additional rule of the Virginia EFOTC by-laws is that stop-loss orders must be set to limit the financial exposure of the club and its membership to their original contribution.

Although Virginia's trading clubs are initially organized by an Extension agent, this person's continuing involvement is as an educational resource. The club chairperson, secretary, and treasurer are elected from the participating members. Since producers provide the leadership to the club, all the members learn to interact with the broker and handle the brokerage account.

Regular meetings consist of at least one new educational concept being presented, commodity working group sessions, group reports to the entire membership, and voting on club positions. The educational portion of the meeting can be provided by Extension agents or specialists, grain elevator operators, or commodity brokers. This component isn't an outlook discussion of current markets-that's the responsibility of the commodity working groups. Working groups focus on a single commodity. The club leadership and Extension facilitator ensure the membership is provided with relevant and current market information on which to base their market analysis. As the members become more practiced, they bring in their own material to include in the analysis. Producers are sometimes unaccustomed to group decisions, so the first few group sessions may require more time. Each group will designate a person to present the current outlook, its analysis, and recommended trades (including stops). After all groups have presented, the entire membership votes on all group proposals and amendments.2

The EFOTC provides producers with a unique learning opportunity to acquire skills in marketing and price risk management techniques. Experience shows that holding the clubs for two consecutive years in each location is enough for participants to develop habits of following and analyzing the markets. An additional benefit to the clubs is a leadership network is formed. As the "hurdle" of understanding futures and options markets is cleared, producers turn their attention to other forces affecting markets such as global competition and quality differentiated marketing. But this time, the Extension class is formed and ready!

Footnotes

1. Eluned Jones, "Using Real Money Teaches Marketing Really Well," Cooperative Farmer, XLVII (May-June 1991), 30-31.

2. Eluned Jones and H. Russ Perkins, III, "Organizing an Educational Futures and Options Trading Club" (Blacksburg: Virginia Cooperative Extension, 1990).