Sunday, May 04, 2008

Self-Defeating Complexity

I was reading today about farmers who consider themselves to be in dire straits because they can't hedge the price of their crops by buying futures. The modern farmer has grown accustomed to "insuring" the value of his crops by buying futures. The problem is that speculators have bid futures contracts up so high that mere mortals such as farmers can't afford them.

My grandfather, who spent his life running a corn-hog farm, would have heard this kvetching and said, "What the Sam Hill is this hooey?" First, he would have found it "unrealistic" (My euphemism. He would have said "nuts.") to expect some sort of guaranteed price. Second, he knew that, as the growing season went on, more cash grain buyers would come out of the woodwork to buy grain to fill those futures contracts. Finally, if the price didn't come around, he would feed the corn to the hogs and sell the hogs (frankly the best hedge there is).

Of course, there were certain bits of wisdom he practiced that supported these positions. He didn't leverage himself to the hilt and beyond in the belief that his grain prices were "insured." He kept good relations with the people who bought his grain and livestock. And he actually had livestock, namely Hampshire hogs, that he could feed corn to (and that provided a significant amount of "byproduct" that he used for fertilizer, thereby avoiding the cost of synthetic, petroleum-based fertilizer). In other words he kept things simple in ways that kept his costs down and his options open. Ways that modern farmers apparently can't be bothered with, and so they now find themselves caught in their own webs.

A cautionary tale for all businesspeople: Keep It Simple (not so complex it's), Stupid.

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