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Episode 25: How to market rice?

Taking a break from the discussion around corn and beans, Gabe and Rodney head south to dive in to the most "political" of crops: rice. Hear from guest Sean Belmont, head of grain marketing at Indigo, for how rice farmers can work with Indigo to get past the liquidity and transparency challenges in what's primarily a cash market.

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TRANSCRIPT.
Gabe: Rodney.

Rodney: Hey, Gabe. How are you?

Gabe: I'm good. I brought Sean with me today.

Rodney: Yeah. First guest on the show. Sean, why don't you tell us a little bit by yourself?

Sean Belmont: Yeah. So thanks for having me. So my name is Sean Belmont. So live in Minnesota. Born and raised in central Minnesota. I have been with Indigo for just about three years. Prior to Indigo, spent a little more than a decade at Cargill. Excited to be with you guys.

Rodney: I got introduced to rice through Sean, really, when I came to Indigo. He said, "Hey, we've got to figure out... I need your help on the rice side of things." And it's a totally different beast, Sean. And I'd say probably I think the bulk of our listeners are from the I states. I know we have some further to the south. But if you had to summarize rice in just a short little tidbit, Sean, what's a rural crop farmer in say, Illinois, need to know about rice.

Sean Belmont: Yeah, that's a good question. So rice is different. That's what I learned from everybody as soon as I got here, because, like you, I didn't know anything about rice. Grew up in Minnesota. Other than our wild rice that you harvest with a canoe and an ore, that's a lot different than corn and beans, which we have all around my house, and family grows and all that stuff.

It's aquatic. So that's one. It's a lot smaller as far as production, crop size across the country. It's also super, super interesting, because it's the most political of all crops. Like there's a lot of countries where the majority of a person's calories comes from rice. And as far as food stability and politics and all those sorts of things, it's super interesting, because a lot of governments are really involved in production and trade, less so here in the U.S., but the ramifications from a lot of those Asian countries can be felt here.

And it's a super fun, interesting crop that really isn't, I don't think, super well understood. So it's been awesome to get to learn more about it and to work with Indigo's rice team and bringing some of the tools that we're so used to in corn and beans to rice growers.

Rodney: Yeah, that's great. I actually got the opportunity to go to Vietnam a couple of years ago, Sean, and see some rice paddies over there. Super interesting. Just far from where I come from. Is there a big difference between that experience, and if I showed up in Arkansas to a guy's farm, aside from Gabe's alligators that he likes to talk about?

Sean Belmont: Do they have alligators in Vietnam?

Rodney: Well, they sure didn't tell me there were if there were.

Sean Belmont: Yeah. So I haven't been to Asia, so I don't know, but probably. So there's a lot of the guys right in the Delta that grow beans and some corn and rice at the same time. So it probably looks, other than when the fields are flooded, pretty similar to what you're used to in Illinois.

Gabe: Rice, for me personally, has been pretty intimidating to learn. So Sean talked about the place that rice holds on the world stage with regards to food stability and food security, but also the market itself and the way it operates in the U.S. is materially different from the other row crops. So how did you get involved in the rice part of the business? Where'd you get inserted here?

Sean Belmont: In one of my earlier roles at Indigo, we had purchased a bunch of rice from growers on supply contracts. So we had a ton of rice that we effectively needed to sell, and this rice was stored a bunch of different locations across the Delta, Louisiana and Texas. And what we did is we worked to find the best outlets to sell that rice net of transportation. So it was learning a ton about the logistics in rice, the buyers, the different varieties and quality characteristics that come with it. So all things that were really new to me, not having known anything about rice, other than eating it, when I started with the company.

Gabe: Well, it was almost, especially around the quality pieces, felt more similar to cotton than it did say soybeans for me as we were working through that. Now you talked about being able to bring tools that we used other places, in other markets, to the rice market. I know one of the things that I found particularly challenging was actually executing hedges and things like that, like the rice market was tough. What have you seen, as you spent more time there, around liquidity and what you are and aren't able to do compared to the larger row crop markets.

Sean Belmont: Yeah. That's exactly right. The liquidity in rice is not great to put it, I think, generously. Like looking at my screen right now, so there's been 240 contracts of rice available right now.

Rodney: I'm literally looking at that right now. Yeah.

Sean Belmont: And what? A few hundred thousand in corn?

Rodney: Corn's 122,000. It's 11:00. So this is December, this is new crop, right? Corn. It's 11:47 central time. And it's 240 compared to 123,000. That's a liquidity issue.

Sean Belmont: Yep.

Rodney: And is that normal? That's really normal, right? So would you say this 240 is a really low number today?

Sean Belmont: I think it's a little bit lower than usual. So we have harvest really getting started full bore in the Delta. I think that there's probably guys that are just in their combines, not super into it today. Yeah. So I think the key is that, look, you can hedge corn out what? Three crop years, maybe even four? Rice it's... Like you said, it's September. The farthest out futures have traded is January. So what's that? Four months versus almost four years.

Rodney: And that's four trades?

Sean Belmont: Four contracts. Yeah. So, so for those of you familiar with oats, for example, like rice and oats fight for the bottom spot on daily volume, most days – 

Rodney: Sean, I'm also trying to... I'm not experienced enough in this to find a bid ask on that January 2020 offer]. I imagine you could drive a semi through that.

Sean Belmont: January right now isn't bad. It's 12.60 at 12.64.

Rodney: Okay. But it's still a four-cent spread on new crop month where corn is a quarter cent, right? I mean…

Sean Belmont: Yep. Yep. Yeah. So not only do growers have to worry about figuring out how to manage that component of the risk, they have to be able to get enough liquidity in the market to actually go and hedge it. And that's super challenging. And that's one of the reasons why a lot of the rice growers that we work with just haven't used that. They don't hedge.

Rodney: So what do they do?

Sean Belmont: So a lot of the rice is just cash price, so they might forward contract. So corn, beans, almost all of it's futures basis... well, obviously, as you guys know. But rice, a lot of it's cash. Certain areas in the country... Texas, Louisiana are almost exclusively cash markets. There's a handful of buyers that their bids really set the price for that local market. And if you're a grower, the access to pricing tools in the futures market really hasn't existed. It's challenging.

Gabe: So Sean, we don't talk about it much on this podcast, because it's mostly downloaded in the U.S., but I know when we start to move outside of the U.S., units can get pretty tricky. And so, Rodney and I have occasionally had to do the math on like a large ocean vessel, say. All right. We see somebody bought however many hundred thousand metric tons of corn. So trying to take that back into bushels and do all that. If I remember correctly, rice has its own sets of units, even for everything traded in house and in country. What does that look like?

Sean Belmont: So the futures market is denominated in hundred weights. In much of the Delta, when you are talking about rice prices with growers and even buyers, it's cents per bushel. When you get to Louisiana, it is dollars per barrel, which is a fun one.

Gabe: Is that like a barrel, like a old whiskey barrel or is a barrel like something much larger?

Sean Belmont: You know, I don't... It's got to be bigger than a whiskey barrel, but... I don't know. How much do you think our whiskey barrel weighs?

Gabe: A whiskey barrel full of rice?

Sean Belmont: Yeah.

Gabe: I feel like, I feel like this is so weird interview question that you read about like at Google, like, "If you filled a whiskey barrel with rice, how much would it weigh?" Well, so if I had to guess, if it was a whiskey barrel, I'd want to say about 300 pounds, but I can see Ryan frantically pulling up here how much a rice barrel weights, and it's 162. So I would probably have overpaid you for a barrel of rice. And it may very well be basically, at 162 pounds, a whiskey barrel, roughly. I know you've had the opportunity now to meet with a number of rice farmers. When you talk to those guys, what do you talk to them from the risk management side? What conversations are you able to have?

Sean Belmont: Yeah. Well, so we try to have a lot of the same early conversations that we would have with corn and soybean and wheat farmers, which is, "What does your operation look like? What are your goals? What are your risk?" And once we have an idea of things we either want to protect or prices that we want to achieve, then it's really educating them on what tools are possible that most of them haven't even heard of.

And largely because of that lack of liquidity in the futures market, they just think, "That is not a viable hedging mechanism." So we try to educate them on, "Here's what the future market is. Here's what is possible." And then, "Here are the strategies that, based on your individual situation, might make sense." And, of course, the liquidity is a concern that we have to work around, but as long as we're not doing really big quantities all at once, usually we can put together a strategy that works for them.

Rodney: So I'm not sure everybody would understand the liquidity issue, right? Like if I'm a farmer, I may not understand why liquidity is such a problem to me. So my initial thought is, "Hey, look, I can work a limit order and sell whatever I want on the board. And if there's somebody there to take the other side, then good, I'm hedged." I imagine the biggest problem is unhedging, like turning that back into cash.

Sean Belmont: So let's define liquidity. I think that's a good point, Rodney. So if I was a rice farmer, and I saw, "Hey, I could get the futures part of my price hedged off at 12.60," that might be really interesting. The challenges there is I bet there's a couple of contracts on the 12.60 bed. So I'm probably hedging off two, four, 10,000 hundred weight at best, and I'll then have to push the price further down.

And that's one of the big differences between the larger crops that we deal with, with corn, soy wheat, even cotton is I can generally hedge far more of my production at a single price, if that's what I'm looking to do. [inaudible] at a shot as opposed to having to chase something down. And so, I know when we're executing trades for our own hedging purposes, we have to pay a lot of attention to how much volume's available at the prices that are shown, because it's one, very little, most of the time.

And two, because it's so little, any activity on there is noticed. And so, if somebody comes in and starts buying it up, you could have an unintentional impact of pushing a market up, or if they're selling it, obviously, pushing it down. And that's not really.... When you're looking to hedge, you just want to be able to do it at what the market's showing. So it takes a much lighter touch than we need to use as some of the other stuff. And so, there are certainly some of the... Most anybody who's trying to use the hedging solutions there that are available, that's on their mind.

Rodney: Yeah. And if you're a corn farmer and you're selling new crop corn, and really even deferred crop corn right now, there just aren't that many corn producers that are going to hedge off so much that they really impact the market. There's enough liquidity. Farmer's not paying attention to it, because somebody's willing to buy within a quarter cent an almost infinite amount of grain as it relates to a farmer.

Sean Belmont: You can get off about a half million bushels, 18 plus months out, without much of a problem.

Rodney: Right. Exactly.

Sean Belmont: Right. And most farmers aren't looking at that trade size increment.

Rodney: That's right.

Gabe: Yeah. There's one contract on the bid in every month of rice futures right now. So that's two thousand hundred, right?

Rodney: And that's like one guy, right? Like that's a guy that has said, "I'm going to be the market today in rice." Is that guy you today, Sean, or somebody else?

Sean Belmont: It is not me today. No, I had a podcast to do.

Rodney: Is that on both sides?

Gabe: That's why it's one contract and not two.

Rodney: Yeah. One on the bid and one on the ask.

Sean Belmont: The biggest is bid ask, which is one by two. Everything else is one by one.

Rodney: All right. So tell me how you help manage this for farmers, man. That sounds like a daunting task.

Sean Belmont: Well, yeah, so I think it's education, one, right? It's like you said, we can't expect to hedge 500,000 bushels in one shot at one specific point in the day. It's incremental selling. It's helping them understand the value of a limit order and potentially working it for a little while. I think this is where Indigo's pricing desk, it comes in with their skill and being able to work orders, whether that's iceberging or different techniques that they do that the goal is to get the grower the best possible price. And really, our rice team is phenomenal. Like they come from... They're all from the industry. I think they have like 150 years of experience in rice production and working in different rice companies and mills and exporters. Those guys are world-class, and they're having some really good conversations with these growers on, "Here's what's possible and what isn't." And I think that helps a lot with making them comfortable.

Rodney: So then, when we're offsetting these hedges, are the buyers willing to take an exchange and make sure there's liquidity on the other side?

Sean Belmont: Yeah. A lot of them in the Delta are. So that's where most of our business up in the Delta is done futures basis, where at delivery, we'll exchange futures with that buyer. In Louisiana and Texas, it's all cash. So no futures exchanges down there.

Gabe: I think it's worth noting for those buyers that are comfortable with that futures basis cash situation, it's actually less risk for them, too. Neither one of us wants to get exposed to that liquidity challenge that might exist in the rice market. And so, it's a helpful tool, solution that exists for physical purchases and sales of grain. We actually use it all the time for corn, soy, wheat, too, but it's most valuable in the rice market.

Rodney: So Sean, I've stayed away from the rice business mostly because I'm lazy, and I like to get all my information digitally and I can't help but notice that there's almost zero rice bids available digitally, at least to me. What are your thoughts on why that's the case or what's going on there?

Sean Belmont: Yeah. There's certainly a lack of transparency issue in the rice industry. That's one thing that we're working on, as much as we can, to get more information and more transparency into prices and everything else in front of growers and buyers. It's hard. There's just so many fewer buyers. And there's also a competitive aspect that we've heard from buyers where, "I don't really want to show my hand by publishing a bid." So not only is it smaller volumes and oftentimes cash traded, it's also the, "We're only going to give you a real price if we have a real quantity and we're on the phone" conversation.

Rodney: Have we seen much traction with offers then, like where a farmer offers a cash price, and we can shop that around to a couple of buyers?

Sean Belmont: Yeah. Yep, yep. We have. And that's one of the things that our rice team has been doing a good job of educating growers at that that's possible, because a lot of them never knew that that existed before.

Gabe: I think when we think about... I'll pick on corn for a second. Just like corn, rice is a physically subtle futures contract. So corn, we know that's delivering effectively into a northern Illinois delivery destination. And so, that works okay with understanding logistics, according to the moves north, south, or it moves east, west, you can figure out what it takes to pull it in from the outer side, outer edges of the corn belt, back into the middle. With where rice is grown, there's not a lot of east-west logistics. So Horizontal crop movement doesn't really happen. And so, things come down into those ports, and I think the rice contract... Where's that in delivery and to, Sean?

Sean Belmont: Yeah. It's mainly along the river up in Arkansas.

Gabe: So that's the delivery destination. So figuring out what it takes to get from Texas into that Arkansas delivery destination is a much different lift than figuring out what it takes to move it from whatever, say Iowa into Chicago. So that creates some of this dislocation where when you ask, "Is it really a cash market?" Yeah, it is, because the efficiency and price discovery just isn't as clear. I think, as you would expect those logistics to evolve over time, but going to back to what Sean said at the top, the biggest consumption of rice happens, not in the U.S. And so, those ports... Rice gets used for food. It either gets used for food or food ingredient or a beverage ingredient. So rice is almost entirely for food consumption. So we're either using it as a food ingredient or as a beverage ingredient. And that's true, not just here, but around the world.

And so, it's interesting to look at it against wheat. Wheat, again, is almost entirely for food or beverage. It's either some version of human consumption. We don't use it for animal feed. We don't use it for... or we don't use much of it for animal feed. We don't use much of it for making ethanol. Same with rice.

And so, because those pulls are so strong out of the country, getting those east-west logistics down, it's tough, because it's almost never going to be worth it. Your cash price is almost always going to be almost always going to be better shooting it down river, out into Houston, out into New Orleans, into the world.

Rodney: So if I'm a farmer in a cash market, cash [inaudible] market, how do I hedge my risk or how do I manage my risk, aside from a cash sale? I mean, if that's the way to do it, then that's fine, too.

Sean Belmont: Yeah. It's hard. Right? It's really hard. A few things that they can do is... So Indigo has some production-type contracts available to growers, so that allows them to grow a specific seed, produce a specific variety of rice and know what that cash price is going to be on the other side. This could be for.... Often times, the buyer's already identified. So that could be one way is to pre-contract forward, farther than they could today, on a supply contract. Other cash market tools would be growers can set a cash price. They can get back in the market to have exposure up and down. They think that there's a huge rally, they might want to do that.

Gabe: So, Sean, you're talking about some of the tools that we brought farmers. I know one of the things you've been deep on is working with Dennis DeLaughter, who's putting together one of the Indigo managed pricing programs. That's a little bit different, just like the rice market, from a lot of the other things we're doing. For those of you that haven't seen our managed pricing programs, that's where Indigo will pair up with a market expert and where that expert gives advice and recommendations on how to price your grain and ultimately comes to a final price for your grain. In most of the crops that Indigo works on, the recommendations come in the form related to futures price risk, and that's what the advisor primarily focuses on. Dennis, given his deep experience in rice, has not only a solid set of experience on the future side, but also on the cash piece.

And so, it's pretty cool, because the managed pricing program that Dennis is going to bring to the market with Indigo actually helps set the full cash price, so not just the features component. But for those of you who are more focused on cash prices or in markets where really that's the only thing available, you're going to be able to leverage Dennis' experience in those areas to price your rice crop and set that final cash price, that full cash price for the rice, as opposed to just the futures component. So I know that's pretty exciting, and we're looking to have him in, in the next couple of weeks.

Sean, one of the other things that I think has been pretty cool is the Anheuser-Busch deal. Do you want to talk a little bit about that?

Sean Belmont: Yeah. Absolutely. So Anheuser-Busch has a large rice mill in Jonesboro, Arkansas, and we have a lot of growers in that area. And we've partnered with Anheuser-Busch to produce a large amount of what we call sustainably-grown rice. So this is rice that is verified with reduced nitrogen, reduced water usage. And these are all things that Anheuser Busch is looking for that they haven't been able to get yet, is a way to measure and quantify that this is, in fact, more sustainably grown rice. So Indigo has partnered with both Anheuser-Busch and the local growers to deliver, I think it's 1.2 million hundred weights this year, of rice that meets that criteria. And, in turn, pay those growers a premium. So what I think those growers are getting paid is something like a basis of 70 over, which in that local market... Depends on the time of year, of course... but usually around even is a typical basis. So really cool opportunity for those growers to get paid more by adopting some more sustainable practices.

Rodney: So Sean, it feels to me like Indigo's place in rice appears to be mostly around transparency and hopefully, liquidity. Am I thinking about that right?

Sean Belmont: Yeah, I think that's right. Our first core pillar is increasing grower profitability. So we think with more transparent information, more access to different selling solutions, whether that's basis opportunities or pricing tools to manage the future side, we think that helps growers there and is helping them find new markets or markets that they wouldn't have sold to before. So I agree with that.

Gabe: Even in cases where people do occasionally get better prices for themselves on either side of the purchase sale, because of the opacity of the market, liquidity is in transparency is probably going to be a net benefit to them. To your point one, there's a whole bunch of labor involved in terms of getting to that better price. Two, the difference between that and a transparent price probably isn't that big. And three, they're probably getting a better price, far less frequent than they feel like. Because the market is opaque, they don't really see what's going on.

And so, in a transparent liquid market, there's certainly going to be times where one side or the other doesn't get the price they would have gotten in a less transparent market. But, in general, they're going to be better off. And so, transparency isn't about some people getting a better price and some people getting worst price. It's about everybody getting the market price and having confidence in that and spending their time on other things.

And so, if you have a view on the market, if you think it's going to go up, great. You understand more about where it is right now. Liquidity and transparency allow you to express that opinion, that view, even easier than you could before. So that's where the focus goes, as opposed to whether or not I squeeze an extra penny or two or five out of something, because somebody else didn't know what was going on.

Sean Belmont: Yeah, that's right. And when I think about marketplace, as Sean mentioned, one of our pillars is making sure that farmers are more profitable, But also, in a marketplace, it doesn't work if both sides aren't benefiting somehow. Right? So if liquidity and transparency isn't beneficial to the buyer side of this equation, then we're probably just not going to see much traction there. I don't believe that's the case. I think it is beneficial to both sides.

Rodney: Well, Sean, amen. It's been really good having you on the show and learn a little bit more about rice. I think you've made Gabe feel more comfortable about standing in the middle of a rice field.

Gabe: I don't think that's true, but he's made me more comfortable understanding rice. Sean, thanks for joining us. It's been a pleasure. Always happy to learn more about rice. I know it's a place that I've got plenty of upside to get my arms around. Rodney, as always, pleasure to talk to you in our weekly meet up. And everyone else, thanks for tuning into the GrainWaves podcast. If you're new to the podcast, remember to subscribe, leave a five star rating and share it with your friends and family.

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