There's always reasons to break from a profitable path – like trying to meet cash flow needs, betting on the come, or becoming overwhelmed with the complexity of transactions. But there are simple, straightforward solutions, like a disciplined marketing plan, to bring consistent value to your operation. Plus: Rodney explains why machine learning and AI scientists are some of his favorite people to work with when figuring out an average basis price.
Rodney: When I think about profitability versus cashflow needs, and I look at just the general size of sales people make. So, I talk a lot about profitability and putting a plan in place and saying, hey, I'm going to sell in increments when I make money or whatever.
And it's interesting, the sales on the way up when it's profitable, those ones that are, I would say, easier sales, less stress. I put a plan in place and said, hey, I can make 200 bucks an acre here. I'm going to lock in a little bit. Those tend to be 5% sales. Because I'm optimistic. Like, hey, I'm going to sell a little bit at a $100. I'm going to sell a little bit at $150 and so on.
Gabe: Everything's coming up Rodney.
Rodney: Everything's coming up. Those cashflow sales are like 10, 20, 30% sales all the time. I have waited, I have dug my heels in the sand as long as I possibly can. And now I'm going to puke grain. And that's just disappointing. That's the kind of stuff that, man, I just try at my core to help guys avoid if at all possible.
Gabe: Yeah. It is the crux of, I think, a lot of decisions that get made under stress. And a lot of times they don't even become decisions, to your point. You've dug in, you've made your decision over and over and over again to do nothing. And now you don't get to decide anymore. Because you have to have the cash. And yeah. That was a good answer for it, but it's very much on my mind as we work through what else we are bringing to market.
Rodney: Yeah. And that's where the basis contract ... That's why the farmer is suddenly such a huge fan or such a huge user, I shouldn't say fan, a user of basis contracts.
Gabe: Did you see the article in Reuters about farm profitability?
Gabe: So they, I mean, it's unclear, so this is a, I would say, so I'll read you the headline. Farmers planting mountain of US corn as prices collapse.
Rodney: That's not a …
Gabe: That's not great. So this is not a story that I would go look for, but there's somebody on our team who does make sure that we're going and are looking for the negative stories. But it pulls ... It doesn't seem to have broad data on what farm profitability is. But they pull a couple of farmers and basically right now they're planting around breakeven prices. So it's going to cost you a little over 600 bucks to put the corn in the ground. And yielding 200 bushels an acre. Or sorry, and they yield around 190 bushels an acre. So not even breakeven, at a loss to start.
Rodney: Yeah, betting on the comp. I mean, if you're planting corn on soil today, you're betting on the comp, lesser extent on soybeans. But still, there's no guarantee, which is why we stress risk management. And being proactive about all that kind of stuff.
Rodney: I think it was before we hit the record button, you were talking about an individual that was talking to you about different programs, different revenue opportunities for farmers. And I think a lot about where I fall short in the world. I probably spend too much time there. And so I talk to farmers all the time about profitability and locking in profit. But even those profitability calculations we do, don't often include crop insurance and direct payments. And you mentioned a couple of other programs –
Gabe: Pheasants Forever!
Rodney: Yeah. Yeah. I bet they didn't do too much digging into the other ways those farmers are generating income. We don't think about that so much.
Gabe: No. No. There's absolutely nothing else there. And then, I mean, and that's the thing, you do see people hustle under times of stress and find other ways to bring in value.
Gabe: There was one other thing from my conversation, so I was talking to just one Iowa farmer late last week, and we were talking about just kind of complexity of transactions. And I'm kind of changing the subject here a little bit. But I know one of the things we struggle with when trying to help people figure out how to do what it is they're trying to do is keep those solutions simple and straight forward. And so he was talking about some folks that he knew that did some fairly complicated stuff. And he was, I think, a little, I don't know what the right word is, he was just kind of like, he's like, it feels like a lot more than he needed to do to get whatever it was done that they were trying to do.
And the point there was people often confuse complexity for value. And so you see that a lot. I always joke with my wife that, if I ever find myself unemployed and can't find anybody to hire me, I'm just going to move out to Nebraska and sell my services as a pricing guy. And just trade a whole bunch, but just try to hit the average. And so it'll look like I'm doing all kinds of crazy stuff, but I'll just do it to hit the average price. I feel like I'll do all right.
Rodney: Yeah. Yeah. And I would say, I live in that complexity world, I would rather tell that farmer, hey, these are the three specific things that you're doing. These are how all three of these things would react. And that's where it lives in my head. So to me, that was three different things that I would show to a farmer and allow him to choose, or mix and match whatever he wants to do.
But I also think a lot about how you talk about too many options is a bad thing too. So I think the reason I live in complexity is, like I said before, I live in the same communities as these guys. And I want to make sure that they fully understand what they're getting into. And they understand how that price is ultimately comprised.
But as I was putting this together for you, I think, man, your way is way more simple. Still comes to the same price in the end. And probably gets the guy off the edge faster.
Gabe: Yeah. I think what's important to note is there's a huge qualifier, when you say you're putting together a package, is we're putting together a package of things that won't get the farmer in trouble. So the more problematic potentially the outcomes are, the thing that I'm going to talk to you about, the more I have to lean into explaining all that stuff. So it's a package, but it's a package of some fairly simple things. And it's just basically creating a really small portfolio where they can go and take on a couple of different ... help smooth out risk in some really straightforward ways.
Gabe: But I think that's an important qualifier. The more complex a solution, so if a farmer comes to me and has a set of risks that are complex to address, sometimes that happens, and when we go through that, that conversation may get deep. It may get complicated. But it's about finding the right balance. So when you have comfort about, like you said, I know what this is going to look like, and it's not a problem. That's really straightforward. And yeah, we should package that up.
Gabe: We're always, I think, on the quest of figuring out how to simplify what it is that we're trying to do. That being said, sometimes it is complicated. And that's okay.
There's the general rule, when I used to teach option school to farmers, and they would ask all kinds of ... People were throwing ideas at them all the time. And I would say, look, if you can't explain to somebody else what it is you've gotten into in about five minutes, you probably shouldn't do it.
Rodney: I agree.
Gabe: I think that's a pretty good litmus test in terms of, are you doing something you should. Obviously, there's always exceptions to that kind of stuff. But by and large, I think if you can explain it to somebody else, you know what you're doing?
Rodney: Yeah. So you talk about simplicity. So, I'm an options guy. I would say guys that work with me generally have more complicated marketing plans than guys that don't. That's general.
I got a buddy up in Canada who is a grain originator as well. And he makes fun of me all day long. He's like, "Man, you make it too hard. It's too complicated what you're doing for these guys." So his strategy, which I love, is he takes the guy's average sales last year and just says, "Do better." Literally just do better. So your average sale last year was $3.88 for corn. So just sell $3.90 and you put two cents in your pocket and you're a hero.
Gabe: That's how I know you were talking to a Canadian because that's how they say it. Put it in your pocket. That is what they say.
Rodney: That is, you know what, that is, yeah. Yeah. And to that, I would say, for a guy that can be that disciplined, marketing is simple if you can be disciplined. Because you don't have to get fancy to try to pull out every edge there is. If you look at your marketing plan, as simple as just do better than you did last year, I would encourage people to do that. If you can do that. On my experience is, we just dig our feet in and wait and hope that there's a better opportunity. And it doesn't work out.
Gabe: Right. I think one of the biggest, almost, tragedies in terms of how this huge amount of data that exists now about agriculture has been presented is there's so much information and there's not a ton of analysis. And I think you and I are actually part of that problem, because if you give me a bunch of data, I have tools to go look at that, I've learned how to do that. But most people don't. And they don't have the time.
And so, that simplicity thing, there's the, I forget who wrote the letter, but it was like, oh, I'm sorry, this letter is so long, I didn't have time to write a short one. But being able to cut things down to the crux of whatever the point is, the actionable insight, the key question, is a place where I think overall ag hasn't been served well.
Gabe: And so when I talk about the cashflow stuff or some of these other things, all those are really symptomatic of how do we convert this, futures prices, you can get futures prices back 30 years now. But what good is that without anything else? Not really. You need to be able to start to layer stuff on top of it. And so I think that's ...
So I really like your friend in Canada's approach. Because it's like, there's a ton of information, I'm just going to give you this piece, and do better. They gave them, they did analysis on top of data that was available, but that farmer probably didn't do. And gave them a really clear, actionable suggestion that is a reasonable thing to do.
Did you make money last year? Yeah. Cool. Can you do two cents better? Because then you'll make a little more money. Oh yeah, cool. And whether it's two or five or one or whatever-
Rodney: Twenty, whatever.
Rodney: Which makes it super simple. All we have to do is figure out how to tell the farmer what a good price for his crop is. That's all we have to do.
Gabe: See, when you say it like that, man, I get anxious. Because when we talk about ... well, that's what's so hard, is I don't know what a good price is for every guy.
Rodney: Why not? Why don't we know this? That should be easier, it's just math.
Gabe: Just math.
Rodney: A good math or a good price.
Gabe: You're a good math.
Rodney: A good math equals a good price in this case. So what's a good price? A good price, it should just be math. Why isn't it? Why isn't it just math?
Gabe: Well, because the market could go higher, Rodney.
Rodney: Yeah. That's true.
Gabe: That's it every time. That's the only reason you don't sell, because the market could go higher. Regardless of how good your math is. How good a math you have. I'm only going to talk a little bit like that from now on, by the way.
Rodney: Yeah. So I love ... We get the chance to interact with data scientists and artificial intelligence guys, which are just some of my favorite guys to hang out with. So I talk to them a lot about price. So help me understand what a good price is. And there's a number of different ways you can look at it.
So based on the settle, if you ranked all those settles from highest to lowest, and we were in the 88th percentile, let's do a 100 days. 12 days would have been above the current day. And 88 would have been below, that's percentile.
So what's interesting about these data scientists though, when you talk about it, is they stop at, this is the 88th percentile. They don't say, that's good or that's bad or that's ... it just is. Which is so different than how I think about it or the farmer thinks about it.
Gabe: Right. And by the way, the 88th percentile feels amazing.
Rodney: It feels great. But the problem ... So here's where it gets really complicated. All right, 88th percentile of the last 100 days is fine. That's a thing. But what about the 88th percentile of the last five years? We will be, if I showed somebody ... Well, let's go 10 years, let's go back to 2012. If I showed somebody the percentile of today's price versus 2012, he would not ...
Gabe: He would be taking a long walk off a short pier.
Rodney: Yeah. Nobody ... So say ... I'm literally making this up. So don't trade based on what I'm saying here. But that number might be like the 15th percentile. It might be the 85% of the days are above today's price. That certainly doesn't mean a guy shouldn't sell here. Which is where I get like, God, just tell me what number to show the farmer to help them make a decision.
Gabe: Well, so let's break that down a little bit more. So you said, okay, let's pretend whatever today's price is for whatever market we're looking at versus the last 10 years. So about 3000, or not really, about 2,500 trading days. So today is at or below, or it's below 85% of prices, in our example that we're just making up. So the reaction to that-
Rodney: Yep, have to get out a calculator for this, but I did. Yeah. All right.
Gabe: So my reaction to that, the intuitive reaction is, oh, well, then I'm not going to sell.
Gabe: I'm just saying, because we're below, we're not even below average. We're below almost everything. And so I think there's two really important things. One, it's still the 15th percentile, so it could get worse. And we're looking backwards. And so how relevant is today's price to the price in 2012? I don't know. I shouldn't say, I don't know. I would argue, not particularly relevant.
Gabe: But then the other thing is, at what point should you pull the trigger? How does that inform when you make the sale? Because I'll tell you if we were at the 85th percentile, the other side of that, so better than 85% of the prices, I would say to somebody you should absolutely sell today because we're better than 85% of the prices you could have ever gotten.
Gabe: Why aren't you pulling the trigger? So, I don't think that's fair, to say, oh, well, the 50th percentile doesn't mean, don't sell, and the 85th percentile, does. But maybe it does, I'm not fully well thought out on that. But I think to your point, it does speak to why it's super hard, especially right in this moment, to pull the trigger. But it could, the Debbie Downer is, it can always get worse. There's ... We got 15% more prices to go, and then we could make new lows.
Rodney: Yeah. And at the risk of making up another stat, let's take a time machine back to July 31st of 2012. If I was talking to you that day, it might've been $5 corn. And I just said, we're in the 100th percentile. This is the best price corn has ever been in 10 years. And in the end, that price would have been $3 below the highest tick in the market.
Gabe: Yeah. That would have been 2007, that that would have happened I think.
Rodney: No. Well, '12 was when we went to $8-
Gabe: We went over it.
Rodney: Because of the drought. 8.30-
Gabe: There was a drought in 2012?
Rodney: I think. I've heard of it. I don't know. 2007?
Gabe: 2007 was when we ran up, I think 2012 we came in because '10 ... I don't know, we're going too deep on prices. But I think '10 and '11 built to higher prices coming into '12. And then-
Rodney: Yeah. Right.
Gabe: But yes, like that's, well, and that was, so if we go back to just generically back when those highs were first getting set. So it was 2007 I think when we traded up to 7.97, 7.97 in a quarter, or three quarters, something like that, in the Ds, that was the high, it was just below, but did you –
Rodney: That's right. I just try and block this out of my mind. Yeah, I remember now. Yeah.
Gabe: And so I remember the conversations that I was having with guys when we were at seven, and this was still pretty early in my career, and I couldn't understand why nobody was selling. And it was exactly that, because every day we were making a new high. And so people weren't excited about the price they were at. They were worried about missing a continued rally and everybody else getting it. Because if I was the sucker that sold at seven and we went to nine, I feel horrible. It's so hard to make that decision in that moment.
Rodney: Yeah. And I've lived through it, man. So I think it was probably '07, guys sold $3 corn, thinking it was the greatest thing in the world. And by the time they hauled that $3 corn, corn was worth $4. Cash rents were creeping up. I remember it was like, man, we're in this different world. And it was like, that's okay, hey, relax, everybody's better, just sell some $4 corn. And they're like, you know what, you're right, we should sell some $4 corn.
Rodney: And then when they delivered that corn, it was $5. And it was like, that was a terrible feeling. And for some reason, it doesn't feel like that on the way down. It does not feel ... $4 doesn't feel ... If I sell $5 corn and corn goes at $4, that feels way different financially than if I sell $4 corn and corn goes to $5. The dollar difference is not the same.
Gabe: Well, so on a percentage basis, I think that's real. Four to five, is a 25% increase. Five to four is a 20% decrease. But also-
Rodney: You're always right. Yeah, okay.
Gabe: Can you talk to the rest of my family real quick. That would be super helpful if you just let them know.
Rodney: Yeah, just let them in.
Gabe: But then the other piece is the loss aversion. So, when I sell at five and it goes to four, I feel like I made a dollar. When I sell at five and it goes to six, I feel like not only did I feel like I lost a dollar, the emotional impact puts multiples on there. Anywhere from two to four bucks. It's two to four X, depending on the exact situation. But it absolutely hurts more.
Gabe: And that's why ... And I know I've seen you do this. When you get into those conversations and you, actually, you just talked through it now. It's like, yeah, get over that, sell more here now. Your actual portfolio is way more valuable than that one thing that hurts, that you're going to get caught up on.
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