Soy Roy: Understanding Black Swans
A friend who is a teacher of agricultural economics at the University of Nebraska in Lincoln uses the term black swan in his marketing classes. Most farmers have not used this term, which describes a specific move in the markets. It fits in with some of my marketing theories I use to illustrate events that take place in the grain markets. In a broader sense, it can be used for economic theories as a figure of speech to describe how or why certain things happen the way they do.
The terms dead-cat bounce and drop date are similar figures of speech. I use them to illustrate grain market price moves for which there appears to be no logical reason for the action at various times of the year.
The term black swan originated in Europe. It was used to describe an event thought to be so extreme that the public assumed it would never happen. Examples include the terrorist attack on September 11, 2001, Hurricane Katrina in New Orleans, and the Midwest drought in the 1970s. For each of these events, it was assumed by the public that they could not happen and in each case the effects were dramatic and difficult to deal with. That was especially true for grain farmers with no irrigation.
Last week, my area experienced a black swan event. On Friday afternoon, a storm went through here with winds in excess of 100 mph. The damage was only confined to a small area, but everything in its path was destroyed. The storm was not a perfect black swan event because there had been a similar storm on August 2, 1970. The circumstances that day were similar with winds in excess of 100 mph. Nonetheless, I consider last week’s storm to be a black swan because the damage was so complete and expensive to both crops and buildings in the damaged areas.
My word to the wise is to consider anything to be possible even it appears not to be. Damage on my farm was minimal. However, I will continue to carry an adequate level of insurance on crops and buildings to avoid being the victim of a black swan. Knowing the appropriate level for adequate risk management is the tough part.