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Pool Contracts
April 15, 2004

Do Price Later Contracts and Pool Agreements Affect the Navy Market?
These marketing methods also expose producers to hidden risks

For the past couple of years the dry bean industry has seen a steady increase in the number of new marketing tools for the bean grower, such as Price Later Contracts and Pools. Initially, these marketing tools were intended to add stability to the marketplace by keeping the flow of beans to the marketplace steady. Ideally, this would make for a more stable, well-organized supply/demand scenario. Unfortunately, this has not been the outcome. As a matter of fact, quite the opposite is occurring.

In analyzing the pros and cons of these marketing tools, we must begin with the most basic principle of supply/demand economics. What makes the bean market move? Very simply, demand must be greater than available supply for the market to rise, and conversely, available supply must be greater than demand for the market to fall. With this basic principle in mind, lets examine the merits of the Price Later Contracts and Pools.

If, as a grower, it is your desire that the market appreciate, then as a group you must restrict available supply. When demand catches up with and eventually surpasses available supply, you will begin to see the market move up. At this point, it is important to gradually feed the market so as not to create an over supply. Is that what happens with the Pools and Price Later Contracts? Absolutely not! Actually, the exact opposite happens.

When a grower signs up for the Pool or Price Later Contracts, he at that point, passes title of his beans to the warehouse for a partial payment or a promise to pay later. Even though the grower technically has not sold the beans, by putting the beans on a Price Later Contract versus an official warehouse receipt, the warehouse has the legal right to ship the beans before the grower has sold them. By allowing this to happen, the grower has just eliminated the most vital ingredient for making a market rise &DEMAND!

When a grower allows a warehouse or canner to ship his beans without paying for them, he is in effect eliminating demand. Consumers are eating beans that the grower hasnt yet sold. This demand cannot be retrieved. If we continue to lend beans to the market, thereby eliminating the need to purchase beans, the demand may well never surpass supply. Consequently, the market will never appreciate and most likely will always be flat or failing.

You may say to yourself, My small amount of beans cant have much of an impact, but dont be so sure. For instance, the navy bean market is very small in comparison to the market of other commodities. On the demand side, as few as 10 canners control a very large percentage of the navy bean market share. On the supply side, five companies control approximately 70% of the Michigan supply of navy beans. Therefore, how each individual grower markets his beans does have an effect on this small market.

If a bean grower wants to participate in a more orderly marketing program, he can accomplish this on his own by selling 1/12th of his crop at the posted board price on the 15th day of each month. Do not settle for partial payment or any other gimmick. The most important message is: DO NOT TRANSFER TITLE OF YOUR PRODUCT UNTIL YOU ARE FULLY PAID.

One very important point relating to the Price Later/Pool Contracts, is the risk that they pose to participants. Perhaps the most important comment to be made regarding this point is that when a grower transfers title to a warehouse or canner without being paid in full, he or she  becomes an unsecured creditor. In other words, if a grower has signed onto a Price Later Contract or Pool Agreement, and the company that has issued the Agreement files for protection under the bankruptcy laws or is proven to be insolvent, the grower, unlike those holding negotiable warehouse receipts, is unprotected and very likely would not receive full payment for his crop.
If, after weighing the pros and cons surrounding Price Later and Pool Agreements, growers feel that they want to participate, they must have confidence in the company they are going to do business with.

In summary, lets ask ourselves why we grow dry beans. Most people say they grow beans because they are one of the last truly supply/demand price driven commodities. Because our industry is so small in comparison to other commodities, we always have an opportunity for rapid price movement if a dramatic change in supply, demand or emotion occurs. If, as a grower you like that, you should demand a warehouse receipt and immediate payment in full when you decide to sell. On the other hand, if you want to transfer title without being paid, expect a very flat pricing pattern. The pricing range will be very narrow and it will be unlikely that prices will ever get very high because you have eliminated the demand.

Please note: Contracts with price later and pool agreements have certain risk involved and there are differences between companies that provide them. These contracts have been with us since the beginning, and for many classes. The following articles are not intended to imply that you shouldn't get involved in contracting. But, the influence these contracts and pools may have on bean markets, especially today's  navy market, is showing a potential trend that we need to be aware of.



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Northarvest Bean Growers Association | 50072 East Lake Seven Road | Frazee, MN 56544
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