Kub's Den

Driving along Interstate 94 east of Bismarck, North Dakota, last week (in April 2024), I happened to look to my left and had to do a double take. That wasn't a field of corn stubble receding in parallel stripes off into the horizon -- it was a field of actual, standing corn. Unharvested corn, in April. In 2024, not 2020.

Why would someone leave a large field of corn unharvested all through the winter and well into the spring, when they presumably could have sent a combine over frozen ground, if they had wanted to? I thought about calling a local extension agent or sourcing my question to social media, but ultimately, the real reason doesn't matter. The mystery is better because it serves to introduce the topic of economic utility.

People do all sorts of things for reasons that don't make outward, supposedly "logical" sense. They make these choices because they derive some benefit, some utility, from them whether they consciously realize how that benefit calculation is playing into their actions or not. Maybe the cornfield's owner has been facing health problems since last fall and is getting more benefit from recovering their health than from climbing into a combine. Maybe the farmer took some lessons from how well standing corn "stored" overwinter after the wet 2019 harvest season, and decided this storage strategy was cheaper than building a bin -- a more efficient way to delay sales and capture the carry structure of the futures market. Maybe they're conducting some kind of agronomy experiment. Who knows? (If someone actually knows the answer to this mystery, please email me at analysis@elainekub.com.)

This is not to pick on anyone responsible for that one unharvested corn field along I-94, but rather an excuse to explore a wider topic. I'm sure we can all think of other examples of things that don't immediately make sense to an outside observer, or things which might from some perspective look like a "mistake." Some examples, which I thought of totally randomly, and which of course have nothing to do with my own recent life experiences, include:

--Trying to plant in that one low spot this spring because it totally seems like there's no way a person would get stuck there again this year.

--Choosing to sell calves when the market is $20 off the high and widely acknowledged to have long-term bullish supply considerations.

--Choosing NOT to lock in a price for grain in the spring or summer despite the long-term tendency of grain prices to move lower by harvest.

These are the kinds of things that, if you see your least favorite neighbor do them, you think, "Gee, that's dumb." Or perhaps you catch yourself doing them and then, after the fact, think "Gee, that was dumb."

But let's consider a different way of thinking about them. The dummy probably did them for some reason, even if the dummy was you. The dummy probably got something out of it, some benefit that could be assigned an actual economic value. For instance:

--A person might judge that the risk of getting stuck, and the associated costs of time and aggravation and embarrassment, are lower than the projected payoff of planting more acres in that low spot.

--A person might decide that getting rid of the calves now has a value for the overall logistics of the operation -- freeing up a pen and freeing up labor availability for other tasks. If that value is worth more than the equivalent of $20 per hundredweight, then the decision to sell isn't irrational at all.

--A risk-seeking person might value the chance of getting a higher price for grain later -- no matter how small that chance -- more than they value the certainty of locking in today's price.

In economics, the total value of the overall benefits from a choice is called "utility." It includes not just the raw dollars made or lost from a decision, but also the price the decision-maker would assign for all the other sources of satisfaction they get from making that decision. We may not always be conscious of the price we're putting on certainty, or comfort, or pride, or logistical efficiency, or opportunity, but our choice to pursue Alternative B for $50 instead of Alternative A for $100 reveals that there must be something else -- some source of utility -- in Alternative B for which we would be willing to pay a $50 price tag.

Adding up all the sources of satisfaction from either alternative, we reveal which alternative maximizes our own individual utility function. Take note that everyone's own individual utility function is likely to be different. The economist Paul Samuelson said "Utility" is correlated to "Desire or Want." How badly I may want the certainty of knowing a price for my grain may be different than how much you desire certainty, and how fiercely you enjoy the risk and opportunity of leaving the price unknown may be different from how I value risk. We are all making choices every day which achieve multiple goals based on multiple criteria and multiple attributes, some that have a clear price tag and some that have no price tag, at least not that we're consciously aware of.

All of this could be just a cute way of thinking about things to make ourselves feel better when we do something that looks "dumb," from a pure dollars-and-cents perspective.

But it's actually more than that. Perhaps shutting down the equipment and having a relaxed family dinner in the field at harvest is worth more overall utility, which you could actually economically calculate, than spending those extra 30 minutes harvesting on that particular day. Or perhaps, with rain in the forecast, the risk of losing those 30 minutes outweighs any other desires.

From a marketing perspective, when a commodity producer approaches the market and realizes that these utility calculations are going on -- consciously or subconsciously -- all the time, they can make decisions more confidently. What value do you put on certainty? Or opportunity? If you make a decision to sell or not sell, based on those value calculations, you can sleep better at night knowing that, hey, even if the market moved $0.50 against you, you nevertheless received some utility from either selling (certainty) or not selling (opportunity). Your overall calculation may still have been correct for you. Your utility function was maximized.

These are individual choices because each individual would put a different value on certainty or opportunity or the relaxed family dinner. Certainty might matter more to someone with a big loan payment than to someone who's already rich and can afford to roll the dice. And of course the real trouble comes when decisions must be shared among a team of people, each of whom may disagree about the different values of things like certainty or opportunity or the relaxed family dinner.

Yet simply being aware that these subconscious calculations are going on in our heads can help us recognize a marketing choice that is right for our own operation -- or wrong for our own operation -- and why.

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Comments above are for educational purposes only and are not meant as specific trade recommendations. The buying and selling of grain or grain futures or options involve substantial risk and are not suitable for everyone.

Elaine Kub, CFA is the author of "Mastering the Grain Markets: How Profits Are Really Made" and can be reached at analysis@elainekub.com or on X, formerly known as Twitter, @elainekub.

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