Episode 30: How to execute cash spot grain contracts?

Rodney and Gabe walk through the challenges, and possible solutions for buyers and growers when executing a cash spot grain contract.

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Gabe: Let's talk a little bit about, Ryan, our producer keeps asking about spot bids. We should probably talk about what a spot bid is for the three people that listen that don't know or what a spot transaction is and then talk about, what are your thoughts around how to manage exposure to that pricing coming into the list?

Rodney: Cool. A spot bid is, I showed up to an elevator or some buyer, with a load of corn or beans or oats, whatever I showed up with. And at any point during that day, I showed up and said, "Hey, dump this, spot it out at the end of the day." Time passed. All kinds of time passed and by the time the end of the day comes, that buyer gets to decide what they're going to be paying that day and I receive that price from them.

Gabe: Now, hold on. The way you frame that up is the buyer just arbitrarily deciding what their price is at the end of the day, is that really what's going on? Or is there?

Rodney: It's a little arbitrary, but there is, they have to be competitive. In most cases, farmers are dealing with three to four different buyers on average that they have relationships with. If I'm a buyer and I post a bid that's super weak that day, for some reason, believe me, I'm going to get phone calls from farmers. I'll tell you, being a buyer. I actually hated spot grain more than farmers because I didn't take that approach. We never, and I'm sure nobody is dropping their bid because they got a bunch of spot grain that day. You're not going to be in this industry very long if you're doing stuff like that. The reason that I hated spot grain as a buyer was when a market dynamic made me change my bid in a significant way, which happened all the time, by the way.

Rodney: And a lot of times was a direct result of getting pounded with corn or beans. You get more spot bushels that day, the market just forces you to drop your bid because, because that's what happens. And then you end up looking like the bad guy, when really it was these market forces and you want to tell the farmer, "Man, you could've called me up that morning and locked in any price you wanted, but you didn't." The frustrating thing about spot grain. It just, it's a high trust thing for sure. But worse it just can ruin relationships, I think. I've been in that situation plenty of times.

Gabe: Well, we dealt with when I used to make markets on those OTCs, making sure that we were being as transparent as we could, but ultimately there was such a level of complexity to making markets on some of that stuff that it was, and not a lot of other players out there. You didn't have other people to look at. You couldn't go, oh, what's CHS doing on these accumulators? Back when I started because they didn't have them. And so you're sitting there going, somebody asks you for something you've never seen before or hadn't thought about until the moment they asked for it. And you're just trying to figure out, how do I be disciplined and honest about the pricing here? I share your feeling that it's one, if you're somebody who wants to behave ethically, it's super hard because you've got both sides of it.

Gabe: You're in a business, you're there to make money and you need to be fair in your pricing. The most important word there is the trust one. Somebody they basically said, "Hey, I believe that you're going to give me the fair price at the end of the day." And so then when you're left alone looking at all the information and you have to go, what's fair? And it's one of those situations where you probably did it right if everybody's a little upset with you. Your boss is a little annoyed that you didn't take as much as you could. The farmer's a little annoyed that it wasn't quite as high as they thought it would be. Everybody ends up being a little bit unhappy with you. That's probably your sweet spot.

Rodney: Yeah, I don't know if I told you this, but I always joked with my originators. I wanted them invited to weddings, not birthday parties. That was how tight I want to go with the farmers. That's fair. It's fair.

Gabe: That's a good line.

Rodney: You're paying guys, you get invited to the wedding if you're paying them a fair price. And just for specific examples, so there's a three soybean days a year that if you're a buyer, you just get buried in beans. All right. And they almost always happen on a Friday for whatever reason. Here's the way it works. You have some bid, suddenly the sun comes and everyone is in beans and you just get buried in beans. This happens three times. I think this is a proven fact. I don't know, check Wikipedia. And so, but what happens is by the end of the day, you're maxed out. You can't take any more beans. Your storage is filled. And by the way, a lot of these beans are coming across the scale as spot. All day long, these guys are saying, "Hey, spot me out. Spot me out."

Rodney: Well, as the buyer, I'm not getting that indication. The scale guy's not calling me to say, "Hey Gabe wants a spot on a 1,000 bushel." It's like it gets rolled up and I deal with it later. But what happens is those bins get filled up. Now, if you're coming into Saturday, you're going to take it on the chin for any soybeans you are forced to sell over the weekend or something like that, because literally everybody's in that same position. And you find yourself in a situation where you just have to drop the bid a bunch and your bid might not match up with your competitors because maybe they have more storage space or they're just in a different logistical situation. And you look like the bad guy and you look like you rob money. And the fix to this is just, hey, work with your buyer and make a decent decision ahead of time.

Gabe: Well, so that was my next question. How do you as a farmer take that risk off the table? And it seemed so when you say work with a buyer. Let's pretend, because realistically you're in the position where if you're already in a spot headspace, you weren't making decisions ahead of time for whatever reason, Either it's because you rounded down on everything, that's just not how you do it or whatever. If you're in the moment where your normal reaction is to say, "Go ahead and spot those." What are other things you can do or think about that?

Rodney: Yeah, cool. I think the easiest, if I want to stay with that same behavior of just letting the market give me whatever price the market gives me and ease tensions between me and my buyer, I might call the buyer up and say, "Hey, look, lock in basis on 10 loads that I'm going to bring it today and then price them out at the end of the day." What that does is I've locked in that basis contract. Now the buyers changing bids doesn't really affect me. Now the Chicago Board of Trade robs me, rather than Rodney that's sitting in the elevator. It feels a little better for everybody, I think, in those senses.

Gabe: And is there a good reason to spot at end of day? What's the advantage to that other than it's just easy?

Rodney: I think the biggest advantage, I think why most guys do it is because they don't want to be under their contract. Guys that don't understand, hey, I'm going to haul you 10,000 bushel of corn today. I only hauled 9,200. How do I deal with that under fill of 800 or whatever? I think it's a lot of that. They don't like that obligation out there. They just say, "Hey, go ahead and spot it that way I don't have to worry about it." Also, you talk a lot about how painful making a decision is in the first place.

Gabe: I do, yeah.

Rodney: They're never wrong if they're spotting grain, they're sure not wrong. And as we prove, if you make a decision you're wrong 50% of the time for sure. I guess that feels better.

Gabe: Okay. It's the kind of ease and lack of accountability, I'll say. Because it doesn't feel as much like a decision. You're just letting things happen to you. The world is what it is. But let's go back to the more, I can appreciate all of this, but if it is a matter of, I'm worried about coming in under, just don't want to deal with that. Okay. That's actually, that's a fairly rational thing to be like, yeah, that's a headache. Don't want to deal with it. Is there any reason? And I say this not having delivered a bushel in my life, is there any reason when I dump it I can't just say, "Can we just price it now as opposed to end of day?"

Rodney: Most guys will let you do it. It's just a pain in the butt kind of. Yeah, your buyer might roll his eyes, depending on what kind of facility you're in.

Gabe: They see me coming down, they're going, "God, it's Gabe. All right."

Rodney: Yeah. The other thing, a lot of times, and this is not the case everywhere, but in a lot of places, a spot contract doesn't require a signature or any kind of actual paperwork or anything like that. And pretty much anything other than that tends to require some sort of signature.

Gabe: Some sort of paperwork.

Rodney: It depends on the local kind of rules there.

Gabe: And so that's if, I guess in the middle of harvest, if I do that. It's kind of like, what are you doing? I got eight billion other things going on. If it's a Thursday in May, is pricing it right when I dump it, is that fine? Is that pretty? Is that not a vendors?

Rodney: Probably a little better depending. Actually putting in contracts and these ERP systems, so this is kind of behind the curtain, the Agrosses of the world, these accounting platforms that these buyers use, it's kind of a pain in the butt to put contracts into these things. There's just a lot of information you have to put on, which is why a lot of times I hear, "Oh, sell volume and you'll get a little better price." I'm not sure that that's true, unless you're in huge volume things, but for sure, as an originator, I would rather buy 30,000 bushel than 1,000 bushel just because it adds up. And it's same amount of work.

Gabe: Oh, I thought it was just because you were lazy.

Rodney: I'm lazy. Yeah. It's for sure lazy.

Gabe: I'm kidding.

Rodney: It's data entry. But honestly, for a guy that likes to talk to farmers and likes to help manage risk and all these things, the act of putting in a contract to me is...

Gabe: It's annoying.

Rodney: It's annoying.

Gabe: Okay. Probably not swallow that frog level.

Rodney: No, not swallow a frog, because there's a direct result from it. But it's just not, it's not fun. Like to buy grain.

Gabe: Everybody heard it from Rodney, it's not fun to do paperwork.

Rodney: There is some attachment to me working at a place like Marketplace where the farmer clicks on that contract and it becomes a contract automatically. We take away a lot of that duplicate entry, which I find attractive.

Gabe: But I'm trying to remember, there was another piece of wisdom that you gave a couple months ago, which I think it was, if you can sell the high price you should, I think.

Rodney: Always. Yeah. Yeah, man.

Gabe: That one and paperwork isn't fun.

Rodney: Yeah. And this infinite amount of bullets. I can't say it enough that as a farmer, you are long grain for the rest of your career. Which for most guys is actually the rest of their life.

Gabe: You and I talk a lot, like not just here, but at work about how do you help people move from being amateur traders, to running businesses focused on profitability and revenue and those things. As opposed to hoping the market gives you a price that you like. And so I was thinking about airlines. An airline selling seats is actually in a really similar position. They've got a set number of seats that they're going to really be able to sell and there's never a day where the airline, if they have a seat available, won't sell it. They always know what price they'll sell every single one of those seats for.

Rodney: Is it always? Could I go book a seat to Boston for October of 2022 right now you think?

Gabe: No. You're right. There is some limit there in terms of it depends on the airline, but it's six to 12 months, I think. But I guess my point being, when they have their supply, they know what's there. The analogy I think holds, if let's say you're a farmer after harvest with un-marketed grain. You should know what price you would sell every bushel for. Not that you need to do it, but when I think about what we work on, that feels like a win to me. It's not even getting people to sell things a particular way. It's getting them to really understand, I have this fixed supply, here are the prices I would sell it at.

Gabe: And obviously airlines get pretty complicated in terms of how long is it till the flight and all that kind of stuff. But I think I'm not going to try to beat the analogy to death here, but they're are similar challenges. There are constraints around time, space and storage space, not just physics. I think as we do this, for me that was clarifying, oh, again, if you're fully into that I'm running a business mindset, as opposed to the trader mindset, you should know what you would sell every bushel you've got.

Rodney: Oh man, we don't have enough time left for this conversation. Board of trade.

Gabe: I've heard of it.

Rodney: The epitome of trading grain. The place. There is a bid ask always.

Gabe: Always.

Rodney: Always a bid ask. We did an episode on rice the other day.

Gabe: Well I was going to say, except for maybe rice.

Rodney: The bid ask was as wide as a truck, but there was a bid and an ask. We assumed it was the same guy on both sides of those which happens in super thin markets. On the buyer side, so one of the things I'll tell you, the buyer, there is almost always a bid for that buyer. Most buyers, you can call them up for any slot, even October delivery of 2022, you can call your local buyer and say, "What would you be willing to pay me out there?" And I promise you, there's a bid. You might not like it. There's a bid.

Gabe: But it's a bid.

Rodney: Yeah. And he might have to call you back because he has to think about it. But I think that's the advantage that buyers have today is that they're the first to offer that bid. If you want to know where the market is, you go find the bid. Most of the reason that originators exist for buyers is the find the ask. They call it replacement. They want to know where their next purchase is to help them understand where their next sale is. Because, so when we talk about discipline, buyers, at least these guys, these, oh it's I'm going to go out on a limb and say, all buyers know their best sale or their next sale. They have that offered into somebody. Whether it's from or not, they've called their end user and said, "Hey, if you get to 10 over, I'm interested. And at least call me."

Rodney: They're super disciplined on that. They always have a bid. They always have an ask on the other side. They have originators that they're paying probably big bucks to go find out where the ask is on the farmer side. And the farmer doesn't play that game generally. I can't go to farmers and say, "Hey, what's your next sale?" We should cold call elevators here and say, "Hey, what's your sale?" That dude, whoever answered the phone is going to know the answer to that. But the farmer's just not as good at that. And I think if there's one discipline a farmer could take and it's your point is that they would know what that next sale was for each crop, for each crop year and be prepared to pull the trigger if it ever came to pass.

Gabe: Right. And I think the important point there is, it's not that it has to be where the market is right now. To your point, if you go on the Delta website and look at a flight a year out, it may be that that price isn't interesting to you at all. It's not necessarily that they want to sell it today. It's not priced to move. But they know where they're at if somebody wants it right now. And I think it holds with what you're saying, oh, you might call somebody about a 2022 bid right now. They'll give you something. You may not like it, but they'll have it.

Rodney: That's right. But they're also interested in what you would sell it for.

Gabe: Totally.

Rodney: Because that's the ask, that's their replacement. That's what they're looking for. And if the farmer's not giving them that, it's harder for them to construct their margins. It's harder for them to understand what they can make on a bushel. It's harder for them to make bids. I think one of the services buyers do for the market is just give that bid to the market.

Gabe: Totally, totally. And it's either a virtuous or destructive cycle. Where the more information there is coming in, the better the market gets. And then the more opaque it is, the wider it gets.

Rodney: That's right. Yeah. Totally agree.

Gabe: That's just economics.

Rodney: Yeah. Yeah, I don't know. I see it in real life every day. I think the farmer could have a whole lot more power if he had that ask out there for sure.