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False Consensus Part 2

Jim own a Hog farm. He produces 1,000 hogs per month to take to market, so he runs a fair-sized hog operation.Jim grows corn and soybeans for feed. He grinds his own beans into meal, and has silos for storage of both the corn and the beans.

In years where the crop of the best quality, Jim stores as much of his crop as possible. If the crop is of lesser quality, he sells his crop in the open market.

Jim regularly attends the local grange meeting, where all the farmers in the area assemble to listen to various speeches and educational talks about current conditions affecting the various crops and animals grown in the area.

One year there was very little rain in Jim's part of the country. It seemed obvious that there would be a poor crop in both corn and beans. The fields in Jim's area were very dry. Jim irrigates his crops with sprinkler system, as do other farmers in the area.However, the farmers depend on rain in due season to complement the sprinkler systems.

Looking out over his fields, Jim was quite concerned. He wondered if there would be much of a crop at all. At the next grange meeting, he spoke with many other farmers, and they all expressed the same concern. The consensus of opinion was that even if it started raining, the crops would be very small, if indeed there was enough to warrant the expense of a harvest.

Being somewhat of a trader, Jim decided to go heavily long on both corn and beans. He purchased twice as many contracts as normal as a hedge for what he imagined would be a crop failure. Other farmers in the area did the same thing.

However, instead of prices rising because of the drought conditions, prices for corn and beans both fell. It seems that what the farmers in Jim's area failed to take into consideration was that corn and bean farms in other states were receiving ample rain to the extent that they were having bumper crops.

Jim and his fellow farmers failed to look beyond their own fields to see what was happening in other corn and bean growing areas. The sad part was that they lost on their trades and their crops. They traded on their consensus opinion, rather than on the realities of the market.



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Tuesday, 23 July 2024

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