Episode 19: How will the derecho impact basis?

Rodney discusses the impact of the recent derecho on his family farm in Dwight, Illinois. Then, Gabe and Rodney shake their heads at a recent article claiming corn basis could go — wait for it — to $4.

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TRANSCRIPT

Rodney: We had a crazy storm roll through the Midwest. Iowa, Illinois, definitely hit Dwight, and Indiana yesterday. Just yesterday, we had this storm roll through. If you're on Twitter right now, you would see that every corn field in America is completely flat. So, we would see that volatility probably change between yesterday and today. One, did you see that?

Gabe: You know, I think it's worth noting, that story has caught enough that one of our board members who I don't think lives in the US, actually sent me an email saying, "Hey, did you see this?" So yeah, it's a massive deal. And that prompted me to look, and I can tell you it did not change. The volatility did not change. So what that tells me, is the market doesn't believe this will materially impact the supply. So it still thinks that market range is 30 cents up or down. So it might be that you flip from bearish to bullish, or something like that, but the overall risk in the market is still the same.

Rodney: Yeah, that's interesting. That's exactly what I was looking for. Now, that's from a global standpoint, right? So if you're a farmer and you woke up... Actually, it was weird. The storm rolled through at like four o'clock in the afternoon for most people, so you could just... Normally, you wake up to damage. [Crosstalk 00:01:50] to watch the damage happen through your window and then go see it. But if you looked out the window and, hey, my crop is flat, obviously I don't care what the market thinks. I have my own set of realities to deal with.

Gabe: Right. You've got a big problem.

Rodney: Yeah, right. Interesting.

Gabe: How did Connor Farms fare?

Rodney: We fared pretty well. So the corn, I understand, we didn't do a ton of scouting, but we didn't see widespread damage where anything was laid over. We had three trees on the farm that we're getting ready to cut down. As a family, we're trying to line up how we're all going to go out and cut these huge trees down and have a cookout or something, that's what we do. Those trees survived, to the derecho winds or whatever they're called. Very fine trees apparently, God forbid they fell over.

Gabe: You were hoping to have one or two less trees to cut down?

Rodney: I was hoping that [crosstalk 00:02:49].

Gabe: I don't think that's the way it works.

Rodney: No we did alright, Dwight was a disaster as far as trees. But I didn't see much as far as damage to any... A little stuff here and there.

Gabe: I'm just going to call out, one of the dangers that happens here is, it's worth noting. Obviously pictures of a flattened cornfield get way more attention than what you just said, that things look mostly okay. I know the Atlas team can actually see corn knocked down, and so we're going to get pictures of that, I assume, in the next 24, 48 hours. So we'll have an idea on acres there. So there's no doubt that there's a lot of bad out there, but I think it's overrepresented. And I think part of that is, that's why we see the market not really being concerned about it. I don't have futures up in front of me, but I know when I was looking earlier today, we were basically up one to 2 cents in corn.

Rodney: Yeah, we didn't have much of a change there. Yeah, I think that's fair. But I'll tell you, what is interesting to me is the amount of empty grain bins that are out in the country. I think that's probably a wider spread story.

Gabe: The grain bins, yeah.

Rodney: Empty grain bins that were damaged, I think that could be a story. So, we're talking, I think Atlas's numbers have us at a 3 billion bushel carry out right now, on corn. So, we've been talking, there is a storage problem in the first place for this crop. And I essentially, I don't want any bin blown down, to try to deal with harvest spaces. So, that's the one thing I'd be looking at for this from a nationwide level.

Gabe: So, where would that show up then? So if suddenly you knocked out, whatever, 20% of storage in the belt of the storm, blew through. What would be the impact that you would expect to see?

Rodney: Yeah, I immediately go to fall basis, fall basis probably widens, so the demand for space is much wider. Then I would, I would think you'd see carries pick up in the market. So probably partly in the cash side, from the fall basis getting lower, but you'd probably see that on the future side as well, like July futures coming up, versus December, to reward farmers for finding that space.

Gabe: So, and I know we're often, we see the overall market, especially on the basis side at about a day delay, two day delay when we're doing those analyses. I assume you haven't seen any real movement yet in that stuff.

Rodney: No, we haven't seen it. And actually, so I am right next to an insurance agent next door here. And the ladies from the insurance agency, we all watched the storm together here, and they came out and they're like, "Oh man, tomorrow's going to be a disaster," everybody's going to be calling, it's going to be their busiest day. To which I said, "Oh man, tomorrow's easy street for me," because all these farmers, they just go right to work. Head down, cleaning up the yard. The amount of farm equipment that...

Gabe: Showed up.

Rodney: Showed up in Dwight yesterday, was insane. These guys were like... The first thing farmers do is put the community back together, the last thing they're worried about today is pricing grain, essentially. And that carries all the way through to the grain elevator. So we didn't see a ton of movement here yet today. But I would say pressure on the weaker side, for basis. I do want to talk, I know this is a hot topic, and I can't remember if it was Monday, I think it was last week, right? Barron's article released August 6th, saying, "Hey, we think this price of corn could go to $4," so in other words, corn prices could easily reach $4 a bushel, or about 24% higher than recent prices of around $3.22. Man, I bet that article got pushed all over the ag sector. How excited were farmers reading that article?

Gabe: Absolutely. 

Rodney: And so, maybe they're predictive, because we were joking about that article, in not a fun way. Both you and I were a little upset that this article made national news, right?

Gabe: Yeah. It feels like, so we read through it, that's a big claim to make, that they think the market's going to go to four bucks. If it's not an informed piece of advice, I think we felt like it was almost negligent in behavior. And the reason, I know I felt this way and I think this is why you feel that way, is because we know everybody who is a farmer and works with farmers, wants a bullish story. That's the story we want. That's super exciting.

Gabe: And so, if they're right, that's great, and that's a story I want to hear. And that's the whole confirmation bias problem. When that's what you want to have happen, when things like this come out, they just feed into it, and you have to work all the harder at being neutral. And to your point, because this is one that claims a number that's, I'm going to call it good news versus what we're currently staring at, it's much more fun to pay attention to. Thinking about the fact that the market could go, if we say the current vol says there's a range of 30 cents up or down, we're talking about three bucks at harvest. If markets follow normal trends, which is to go lower going into the harvest. And so, that's not fun, that's super painful. And so, when things like this come out, we worry that it stalls somebody from making a decision that they would have made otherwise. That's ultimately what...

Rodney: Yeah. So, we just did all that math around what the market, so the whole market in general thinks that we probably end up somewhere between $3 and $3.60 for December futures. So these guys came out and literally printed in the article, they think we'll be at $3.80 futures plus or minus 20 cents. So the market's range is $3 to $3.60, their range is $3.60 to $4. Every farm in the world is saying, "Man, I like these guys."

Gabe: "These guys are great."

Rodney: "They're way more fun than anybody else." I don't know. How does a farmer ignore that? I don't want to say ignore it, because if it's right, it's right.

Gabe: Look, so you've hit this point multiple times and I think it's really important. That implied volatility is a two thirds chance, that's what the market's saying. It doesn't mean it can't go to four, it doesn't mean it can't go to $2.50 either. You've made the point a couple of times, that this implied volatility and backing into how much the market's going to move, is a probability. The market thinks it was about two thirds of chance of happening. So we could see higher or lower than that range, but it's much lower probability. Your question was should farmers pay attention to articles like this? So the academic in me says yes.

Rodney: That's annoying.

Gabe: Because you want all the data, and we don't know enough about how they came up with their analysis to actually discount it, other than it just seems anomalous today. But the other thing I'll tell you, is we spend a lot of time also talking about trying to make decisions based on profitability, not making decisions as a trader. And I was actually talking to an old friend and a mentor of mine, and he was pushing back on this. He was saying, "If it costs me a hundred dollars an acre to raise my crop, and it costs you $150 an acre to raise your crop, isn't the best price for both of us the same?" And I said, "Yeah, if you're a trader, Jeff."

Gabe: And so, he's right. If you're going to operate from that trading space, you have to take in all of this data. So that's why you need it. If you're operating though, from a... And so, he's right a hundred percent, but he also saw that when you turn the conversation to profitability, you're making decisions like you're running a business, as opposed to like you're trading. An example I like to pick on, I don't know if I've used this here, is an airline. An airline never doesn't put up seats for sale. The airline never goes, "I'm not going to sell you that seat, because I think I can get more for it tomorrow," that never happens. They figure out what they need for the seats, and they absolutely have a plan about when they think they'll get what, and that thing. But they'll never not sell a seat to somebody. They always know what they'll sell the seat for.

Gabe: And I think that's the shift we're looking to drive, with our farmer customers, is as opposed to deciding whether or not you'll even sell a seat, is knowing for every field, for every acre, what would you sell that crop for? And the reason you would come up with that is not because you had a view on what the futures market would do, but because you knew how it would impact your profitability.

Rodney: That's right. And when we talk about profitability, I 100% agree and my head's been there a lot lately, what does profitability really matter when it comes to choosing the price? But I think both of us are using profitability more as a nudge, right? I don't care what the market's going to do, I can make a profit if I sell here. That's a lot harder to do when corn is $3.30, probably below break even, and you're like, "What am I going to do?" Then you freeze, so it's like antifreeze stuff.

Gabe: I think they call that antifreeze, Rodney. I mean, I've never fixed a Corvette.

Rodney: That's right. No antifreeze in Corvette, by the way.

Gabe: Really?

Rodney: Air cooled.

Gabe: Air cooled, okay.

Rodney: Well Gabe, I think that's all the time we have for today. So, thanks everyone for tuning into the GrainWaves Podcast, where Gabe and I bring real time analysis of grain market decisions directly to you. If you're new to the podcast, remember to subscribe, leave us a five star rating, and share with your friends and family.

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