How did raising cows turn into trading complex financial derivatives?
How could Robert and Fred — who produce so much more milk than their dad — end up making less money? There are a number of reasons, some obvious, others less so. Milk went from a local industry to a national one, and then it became international. The technological advances that made the Fulpers more productive also helped every other dairy farm too, which led to ever more intense competition. But perhaps most of all, in the last decade, dairy products and cow feed became globally traded commodities. Consequently, modern farmers have effectively been forced to become fast-paced financial derivatives traders.
This has prompted a significant and drastic change. For most of the 20th century, dairy farming was a pretty stable business. Cows provide milk throughout the year, so farmers didn’t worry too much about big seasonal swings. Also, at base, dairy-farming economics are simple: when the cost of corn and soybeans (which feed the cows) are low and milk prices are high, dairy farmers can make a comfortable living. And for decades, the U.S. government enforced stable prices for feed and for milk, which meant steady, predictable income, shaken only by disease or bad weather. “You could project your income within 5 to 10 percent without trying too hard,” says Alan Zepp, a dairy-farm risk manager in Pennsylvania.
But by the early aughts, to accommodate global trade rules and diminishing political support for agricultural subsidies, the government allowed milk prices to follow market demand. People in other parts of the world — notably China and India — also became richer and began demanding more meat and dairy products. Animal feed, especially corn and soybeans, became globally traded commodities with all the impossible-to-predict price swings of oil or copper. Today Robert can predict his profit or loss next month with all the certainty that you or I can predict the stock market or gas prices. During my visit, Robert said that his success this year will be determined by, among other things, China’s unpredictable economic growth, the price of gas (influenced, of course, by events in Iran and Syria) and the weather in New Zealand (a major milk exporter), where a drought can send prices skyrocketing.