Episode 13: What kind of plan do you want?

A farmer calls Rodney to talk through a complicated question: If I'm long corn the rest of my life, how should I be marketing it?

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TRANSCRIPT.

Rodney: Hey, I don't know if you're a big fan of the movie The Notebook.

Gabe: The Notebook?

Rodney: You ever seen the movie, The Notebook? It's a big one.

Gabe: So I know what you're talking about. I can 100% confirm that I have not seen it though.
Rodney: You've never seen The Notebook.

Gabe: I've never seen The Notebook. So, I've never seen it, but if I remember the trailer correctly, it's about a husband and wife. One of them is dying and they're reading to the other one from some notebook about when they were first dating. So the movie goes back and forth between when they were younger, I guess, during most of their life, and then the time where they're reading together.

Rodney: Yep.

Gabe: I hear it's a real tearjerker.

Rodney: So if you ever got nothing going on on a Saturday, just turn it to TBS and it's always on.

Gabe: It's always on?

Rodney: Like every Saturday it's on. So this weekend-

Gabe: I thought that was The Waterboy, but it's The Notebook.

Rodney: Yeah, I mean, it depends. So Waterboy is maybe at 2:00, this is at 4:00 or vice versa.

Gabe: Okay.

Rodney: Always on. One of my wife's favorite movies of all times. And if it's on, she watches it. You're right. You nailed the plot. This is what you might be more familiar with. There's a great scene where he's trying to make her decide between him and the rich fiance. And he's like in her face and he says, "What do you want? What do you want?" And the best part is, she says, "It's not that simple." The reason that's top of mind for me today is, I had a farmer reach out to me this weekend. He calls me up. He says, "Hey, I listen to your podcast." So he had actually stumbled across our podcast and listened to it, which is awesome.

And he happened to listen to the one that was, "You're long corn for the rest of your life." It was funny. He said, "It was like you were talking to me." That's what he said. Which I know a few farmers, and he's not the only farmer in the position that he described to me. Do you want to guess what position he's in or do you want me to tell you what position he's in?
Gabe: So if he's not alone, I would guess he's sold almost nothing and is trying to figure out how to fix that.

Rodney: Yeah. How about old crop?

Gabe: Oh, I'm sure he hasn't sold most of that either.

Rodney: Yeah, so basis contracts, right?

Gabe: He's got basis contracts?

Rodney: Yeah.

Gabe: Okay.

Rodney: He took advantage of basis. Basis was good. So he's long old crop corn, essentially, on futures.

Gabe: Not only is he long forever in the future, he's long from the past.

Rodney: Yeah.

Gabe: Yeah, that sounds right.

Rodney: And we're laughing about it. It's not a great situation. It's also not unique to him. Right? Almost every grower we interact with is in a similar situation. He says, "Hey, would you have some time to talk through some options?" So essentially he's getting killed on margins. He sold cash. So rather than doing a basis contract, he sold cash and bought July futures in his brokerage account. We could talk about that a little bit, the additional pain. Hey, one, you're in kind of a losing position, but two, you have to continue to write checks to fund that position. Right?

Gabe: Yeah.

Rodney: So even if he is bullish corn, meaning he thinks corn is going to go up, which is why he would have that position, he has to reaffirm that position every time he gets a margin call.

Gabe: Yeah.

Rodney: And so, I didn't ask him, but I think it's pretty safe to assume that when he reached out to me on Saturday, he had just checked his voicemail and got a message from his broker saying, "Hey, you owe us some more money."

Gabe: Yeah.

Rodney: Which caused him to rethink that position. So, the approach I take when talking to farmers is, I try to minimize the emotions as much as I can. And we talk a lot about that. But I also try to think about the real risk. So his risk on this one position is, if the market continues to fall, he's going to continue to lose money. And he's going to have to pay money to continue to lose that money. So it's through margin. He's not out that money, it holds this position open. And he doesn't want to do that anymore. He wanted that pain to go away. He could do that by offsetting that position and being out of that position, but tell me about the pain he would feel if then the next day the market rallied.

Gabe: Well, that's the classic anytime anybody sells today, they want it to go down tomorrow. And this is the problem with being long forever, right? Because we focus on that recent transaction as opposed to really looking at the portfolio and the farm P&L. I mean, that's exactly it. It's every decision we make, we feel pain from. When it's just things that are happening to us, we don't feel the emotional piece as much. So when I think about this guy having to make margin calls every couple of days, that's painful, but also he's probably past the decision that he made to get long. And in fact, I think in general, farmers don't look at being long as a decision. That's your status quo, so it's hard to think about it that way.

Gabe: I don't know that I've ever met anybody who by default looks at it from that position. So I suspect he's not really having, again, a lot of emotional trauma from being long, but he is obviously having to recognize the impact it's having on his bottom line every day. So to get to your question is, so what's the emotional impact of selling and it suddenly then going up, I mean, it's going to be multiples of pain versus what it would have been on the margin call on the side down. And so I imagine it's making it very difficult for him to actually just get out of it, even though that's what he's saying to you that he wants to do.

Rodney: On that Long Corn for the Rest of Your Life podcast, I mentioned that the guy that bought futures and was upset that he had lost $2,500 bucks over the weekend, or over that night and was upset about that, so this particular gentleman kept referring to the fact that he's lost 50 or 60 cents in this long futures position. I didn't remind him that he had also lost it on next year's crop, and the crop after that, and the crop after that. I was careful not to do that. But yeah, it's just how they think about it. It's interesting.

Rodney: So anyway, I don't know if you know, Gabe, I'm a spreadsheet guy. I'm actually looking at the spreadsheet that I built while I was on the call with him. It helps me make sense of running scenarios. And these corn, when we were talking, was 334 futures. All right? This guy had 85% crop insurance coverage, futures guarantee of 388. So, right now it's safe to assume he's going to raise an average crop. There's no reason to think it's going to be much better or much worse. So his insurance guarantee on an average crop is 85% of 388. Want to take a guess at what that is?

Gabe: Man, you're making me do math in my head. I would guess it's about 330.

Rodney: 330. So he is in a situation, timestamped yesterday at 7:00 PM when we had the conversation, where he's at essentially his wits' end for pain associated with this position. And he is almost penny for penny, if the market goes down, he's going to start recouping money. So his crop insurance is that at the money put right now on his December corn.

Gabe: So if we were on a... I feel like a early 2000's TV show, this is when I do the needle scratch and be like, "Hold on."

Rodney: Yeah.

Gabe: I understand looking at it that way, and I agree with that. But there's a guy I used to work with a lot out of Nebraska who always used to bring up, they get that far, but then they don't pull the trigger. So, your actual crop insurance payout driven by fall average, and so you get in this position where you're like, "Great." Maybe you get a payout. Okay. But if the market keeps going down and you haven't sold, I guess at least you have the payout. But he always used to reinforce, the struggle was actually still pulling the trigger. Even if you get a crop insurance payout, you still have to sell it. So I just throw that out there as a thing. And so I'm curious if that came up at all when you got to that point?

Rodney: Yeah, so I 100% agree. He was really bearish. He was at his wits' end. He's like, "Man, things are bad. I'm bearish." But you could tell he didn't want to sell any corn, because as bearish as he was, he didn't like the price. So anyway, we come to find out, "Hey, actually your crop insurance is providing you a put." How about PLC payments? You up to date on PLC payments, Gabe?

Gabe: I am not up to date on PLC payments.

Rodney: Yeah. So I would say I'm not fully up to date on them, but I understand that the threshold is lik 370 futures, is the benchmark. And I'm not sure exactly how that is paid out, but I know that as we go down that payment gets better. Right?

Gabe: Okay.

Rodney: It goes up to the tune of penny for penny. All right?

Gabe: Mm-hmm.

Rodney: So here's where we came out, because I know risk profiles. This guy is in a position where his crop insurance is paying penny for penny from where we sit right now. His PLC payment is paying penny for penny from where we sit right now. His COVID package is paying penny for penny from where we sit right now. And God forbid, I did ask him about an LDP payment. In his county it happens to be 225, which feels like a long ways away today, but remember, that's a cash number. It's not forever away. So, if we get corn down in the 250 range, so he's going to be capped on some of these programs, for sure, he is at a 400%, you would say, positive delta for every penny the market goes down.

Gabe: Okay. So all that again. So I believe most of those programs generate their payouts regardless of where you actually sell. Is that right?

Rodney: 100% correct, yeah.

Gabe: Okay. So, now what's interesting is you've set up a story where you've basically told somebody, "You're way better off if the market goes down for a while." Which it sounds like he believes it's going to go down, so he was probably super welcoming to that message. And then complementary to that though, is this piece around pulling a trigger, getting a sale done. Okay. So now, Okay. All right, I got my head around it. So he's getting paid four-to-one as the market goes down. Yeah.

Rodney: Yeah.

Gabe: Okay.

Rodney: So all that being said, guess what he wants?

Gabe: A call?

Rodney: No. Well, no, no. Actually, we did talk a little bit about the calls. What he wants is for the market to go up. Right?

Gabe: Mm-hmm.

Rodney: So he wants the market to go up. And the discussion was, "Hey man, really, if corn could get to 370 or so," actually I think 360 was his number, he thought, "that would be really good for my operation." 360 pays the bills. This guy is a straight up guy. He would rather have the money come from actual cash grain sales than the government, like most farmers, I think. So he was saying, "Hey, give me some 370 corn and I'll do this all day long." Which, by the way, if the market rallies to 370, he would be making significantly less actual revenue than if the market would drop a few cents here. But what we were able to do was price up a strategy using an accumulator style contract where we did exactly what you're saying. Let's go ahead and lock in some price, which is in this case 370. Met the farmer's needs, liked the target. And if the market goes down, we make significantly more money. So we've got some foot protection there.

The funny thing about that conversation was, I literally said to the guy, "Hey, you know where I live." And he laughed and said, "Yeah, yeah." And I said, "I'm very comfortable getting really aggressive with an accumulator type contract in this scenario, because my personal bias is 370 is going to be hard to get to. I want to price as much as that as we can." And I said, "The problem with these contracts is, if in November if we're above 370, it's going to double on you." So we're getting aggressive. If it doubles, we're more aggressive. We all said we're happy at 370. And I said, "Look, I know you're not going to be happy with me if corn is at 420 in October or November." And he says, "No, I want that. That is what I want. Again, I'll have another 75% of my crop to price," and all that stuff. But really leveraged that conversation around, what do you want? Back to that internet mean that you're going to get in your email inbox this afternoon.

Gabe: So you got to be careful of what you're comparing it to. So in a world where it goes down and I haven't sold, I might be making four-to-one on that, but I'm also still losing because I haven't sold. So even if you think that's going to happen, you should probably sell right now.

Rodney: 100%.

Gabe: And then to your point, when you look at it on a portfolio basis and that I'm long for the rest of my life, there's short term pain that you'd take, but yeah, how is that impacting next year's crop and the year after? I do appreciate that sentiment. I mean, I think when we talked about LDP the first time on the podcast, we talked about occasionally you'd find a guy kind of rooting for it to go…

Rodney: Yeah.

Gabe: I assume if we get to that point, it's like gallows humor. If we're looking at 220 cash prices... oh, God. And so, I get it. But the other thing being, I mean like most people, farmers prefer to get paid for the work that they're doing, not as a handout. It's complicated. It is, because it's like... I don't know. So you've given him a very cold, "Okay, this pays four-to-one in a down market," and so he knows that there's value to him in terms of feeling like I got paid for what I did, and I wasn't successful because the government handed me a big check. That's a really complicated thing to value, and obviously that's different for everybody. And so, I'll feel really good about ourselves when we figure out how to tell somebody what that's worth to them.

Gabe: But I think that that's probably one of the messiest parts about the conversation in this moment, is understanding like you said, what do you want to happen? What actually are you shooting for? What would make you feel best? And it's some combination around feeling good about the work you did and feeling you earned a return, but also that that return is big enough that it covers the bills. Because feeling good about the work that I do and feeling like I got paid for it, is a luxury in the case where that covers what I need covered. It's a fairly complex pricing curve.

Rodney: Yeah. Fairly complex. I've simplified it into the porridge is too hot, too cold, or just right, where essentially these corn below 330 is a terrible price, but probably profitable. It probably gets a guy to where he needs... The further down the better. So 330 is about as bad as it gets, I would say. And then every penny below 330 gets better.

Gabe: Starts to come back.

Rodney: Yeah, starts to come back. Especially at three-to-one or four-to-one, or whatever it is. That gets better quickly. Although, the guy's not really thrilled about where he got that money, so it comes with some caveat to it. You get up in the 370, 380, 390, $4 bucks, assuming we have a crop and that's why we got there, that feels much better. That makes guys, "Hey, glad I didn't sell. Glad I have long corn for the rest of my life. I like that." Really there's this sweet spot. What's the opposite of a sweet spot? From 330 to 3600 or so that is really the worst case scenario for the farmer, in my opinion, from a pricing standpoint. What is the opposite of a sweet spot?

Gabe: Sour spot? I don't know.

Rodney: I don't know. I guess, I don't know. My kids love sour, so probably not.

Gabe: So what's he going to do?

Rodney: So he's thinking about it. But I like to go back to that portfolio approach. So my, call it a recommendation, I said, "Hey, if it was my crop, this is what I would do. I don't have the protection on the old crop, so I feel like it’s worth exiting that pain and calling it a day. We did talk about buying some September calls relatively cheap. The advantage to that is if you can stomach another 15 cents of downside, you can buy that call and just cash out of it. You’re not getting margin calls anymore. I really view the price of a call that you pay, part of that is mental health.

Gabe: It’s blood pressure medicine.

Rodney: So I’m not the only one who thinks about it that way for sure. You know, soybeans for this individual producer were actually pretty profitable for next year. Not printing money kind of stuff, but still pretty good. So my recommendation was to get a couple bushels sold so that we’re not forced into a bad position. Really my plan was to get really aggressive to this accumulator that got us above that sour spot to a place we were really comfortable with, with the caveat being that if corn goes to 420 you don’t come burn my house down.

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