A Wealth of Market Experience
Friday, January 1, 1999
filed under: Marketing/Risk Management
With just two seasons under his belt, Royal Reid readily admits to being a newcomer within the ranks of High Plains sunflower producers. But when it comes to the marketing realm, he draws upon a wealth of experience -experience that includes the management of country grain elevators and a decade on the floor of the Chicago Board of Trade. Reid lives at Goodland, Kan., and owns a dryland farm just across the Colorado border, southeast of Burlington. When deciding to add row crops to his wheat-fallow rotation a couple years ago, his long-term
intent was to establish half the row-crop acreage in corn and half in sunflower. That plan took a detour in 1998, however. "As we started seeding our sunflower, the deferred corn futures were going lower every day and soybean oil futures were going higher," Reid relates. "By the
time we seeded the first half [of the row-crop acreage], we knew we were going to continue with sunflower and not plant any corn this year."
It was a good decision - from a production standpoint as well as marketing. Reid has been very satisfied with sunflower yields his first two seasons, and also credits this crop with helping clean up some serious jointed goatgrass infestations on the wheat ground. He has relied on Colorado State University area agronomist Ron Meyer for a lot of crop management advice, and says Meyer has greatly aided his transition into sunflower.
Royal Reid's entry into the sunflower production arena has come on the heels of a long and successful tenure in elevator management and commodity trading. As a young man, Reid worked as a bookkeeper at an elevator in Brewster, Kan., several miles east of Goodland. After three years, he headed off to Kansas State University to study accounting. An older brother,
Warren, had already attended KSU; a younger brother, J. Austin, was there at the same time as Royal.
The Pillsbury Company offered Royal a position at the end of his senior year in 1955. But Charles Coffey, who owned the Brewster elevator, was building a new facility at Kanorado, several miles west of Goodland. He asked Reid to come back and manage the new elevator - simultaneously sweetening the pot with an offer of eventual stock ownership.
Royal worked for Coffey for several years and gradually increased his equity share in the operation (which later also encompassed elevators at Goodland and Burlington). Both of his brothers eventually entered the grain business as well. When Coffey retired, the Reid brothers
purchased the firm's assets. Royal managed the Goodland facility and also did all their grain hedging. Warren managed Brewster, J. Austin managed Kanorado, and they hired another individual to oversee the Burlington facility.
The Reid brothers' grain elevator enterprise was successful; but Royal also recalls an increasingly hectic life. By the late 1970s, he was ready for a change - and made it in dramatic fashion. The Reids had been partnering with a Salina-based milling company. "Then Archer
Daniels Midland bought those interests, so we became partners with ADM," he recounts. In 1980 Royal worked out an arrangement with ADM whereby he could take ADM stock for his stock ownership in the elevator operations. That was the year he moved to Chicago with his wife, Joan, and bought a seat on the Chicago Board of Trade for $300,000.
Reid soon found he had traded one intense lifestyle for another. "Since I had done the hedging for our elevators, I really thought I knew something about the futures market," he relates. "But when I got to Chicago, I discovered how ignorant I was. There were methods of trading
I'd never heard of. The first three years were really a learning experience. I never worked so hard in my life 'treading water' just to stay on that floor."
Initially Reid filled outside orders as well as for his own account. "But it didn't take long to discover I had to do one or the other," he says, so he settled in as a "local" trader, meaning he traded solely for his own account.
Since he had dealt with wheat and corn during his elevator career, Reid thought those commodities would be his focus at the CBT. But during his third year in Chicago, he started trading the soybean crush spread -getting on one side of the market with beans and on the other with soyoil and soy meal. "Once I got a handle on that, I traded it every day," he states.
One of the keys to his success, Reid says, was that most spread traders "want to do it in the same pit and between months, rather than between different commo-dities." By working all three pits (beans, oil and meal) as rapidly as possible, "I eliminated a lot of the competition on the floor. Most fellows are not interested in this method of trading, but it really appealed to me."
Reid says he truly enjoyed the 10 years he spent at the Chicago Board of Trade. But it also was extremely stressful. That's why most floor traders are in their 20s to 40s - considerably younger than he was during his CBT tenure.
Heart bypass surgery ended Reid's days as a floor trader. "The cardiologists said, 'If you'd never stepped on that floor, you never would have met us,' " he remarks. "It is that stressful." The stress level is illustrated by the fact that paramedics are a routine fixture on the CBT trading floor. "When I did leave the floor, I discovered it took a couple weeks to 'come back down,' " Reid recounts. "You trade in your sleep, you trade in the shower. It literally does not leave
Selling his CBT seat for $500,000 (some seats later went as high as $750,000 to $800,000, he notes), the Reids moved back to Goodland in1990. Royal began to actively manage his Colorado farm, but continued to spend the majority of his time watching and trading the stock market and commodity market. He's still very active in both, working from an office in his Goodland home.
Though some area farmers have asked Reid to do some hedging for them, he has declined. Giving an occasional talk to a local group or dispensing some informal advice is the extent of his involvement beyond his personal commodity trading. "I get completely out of the commodity
market if I know I'm going to be gone for an extended period of time," he explains. "It's just too risky to do it any other way. I can eliminate my own position, [but] it would be imprudent at times to do that if I was trading for someone else."
Was his farm and elevator background a big benefit for him during his years as a CBT floor trader? "I'd say it was an advantage. But it was a much smaller advantage than I'd anticipated," Reid now observes. "I had to learn so much more about commodity trading. And it takes so much discipline to realize that the market is always right. You have to recognize that, take a position - and not just trade on wishful thinking.
"That's what makes it so interesting and challenging," he continues. "The market, you have to admit, is always right. And you want to participate with the right moves."
After all these years of trading, when he doesn't hit the market correctly, is Royal Reid able to put wrong market decisions behind him and move on?
"Oh, yes!" he responds. "You have to be fully aware you're going to be wrong your share of the time. You don't want to just sit there and think, 'I can't be totally wrong. It will come back to my number, so I'm going to ride this out.'
"You can't be afraid to put in a stop-loss order. There are times when I'll put a stop-loss order in as close as two cents to where I got in -and decide to 'bite the bullet' and get out of my position. This method will allow me the opportunity of putting on my hedge position at a later
time at a more-attractive price.
"I never expect to get in at the very top or out at the very bottom," concludes this longtime trader, who has viewed the market from several vantage points during his career. "That's so unlikely. You just have to set parameters that are realistic.
"Any time you can discover a deferred futures price that is above the nearby futures price (which establishes the cash price), this suggests an opportunity to realize a hedge profit," Reid remarks. He provides this example:
"As of mid-December, I see that the December 1999 Chicago wheat futures price is 56 cents above the December 1998 Chicago wheat futures level. If I feel this additional 56 cents per bushel gives me my desired price, I will place my hedge position by selling the December '99 wheat futures - and then buy this futures position back when I decide to deliver this wheat from my farm storage facility."
Another aspect of the hedging process, Reid explains, is to attempt to time the hedge position so that cash basis will work in your favor. "Normally, I anticipate that the cash wheat basis will be wider in June, basis the July futures," he points out, "than in November, basis the December futures. You want to narrow basis."
- Don Lilleboe