Episode 12. Live with GrainWaves: June 4th, 2020

The first live recording of the GrainWaves podcast, where the guys discuss the components of a modern grain marketing plan – and how you can successfully assemble them.

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Rodney: So, Gabe, I didn't tell you this ahead of time. I picked a place in the United States, so we're going to be at that place here. Are you ready?

Gabe: Are you going to tell me where it is? Or do I need to ask?

Rodney: No, I'm going to tell you. Harvel, Illinois. Ever been to Harvel, Illinois?

Gabe: I haven't even heard of... Wait, wait, is it H-A-V-E-R-H-I-L-L?

Rodney: H-A-R-V-E-L.

Gabe: No, I have no idea what you're talking about. All right.

Rodney: Okay. So I had not heard of it until this morning, but I picked it... I was just looking for an interesting place to think about. So Harvel, Illinois happens to be around 30 miles from one of the elevators whose basis is significantly worse than last year for corn. So I just said, "Hey, where in the world is corn basis just not very good?" And it was also interesting, it sits between St. Louis and Decatur, so it has a few different markets that affects it. Obviously, I'm prone to Illinois. Also, Ray Schalk was a catcher for the White Sox, raised in Harvel, Illinois, and he's in the Baseball Hall of Fame, inducted in 1955, a little before our time.

Gabe: Do you just have the Wikipedia page up?

Rodney: Wikipedia, yeah. I just looked it up. So that's all I know about it, but anyway, between Decatur and St. Louis. So that's where I want to kind of hone in on today.

Gabe: Okay.

Rodney: All right. What's the first thing we should be thinking about when we're looking at a marketing plan?

Gabe: So first you said where basis is way lower than last year, and then you said where basis is bad.

Rodney: You caught me.

Gabe: Yeah, I caught you.

Rodney: Actually, basis is pretty good there. Yeah, that's what's interesting. I looked back at some historical values here. So we're talking corn basis, Harvel, Illinois. I kind of filtered for the region here. Basis is a little better than average. So fall basis for corn down there tends to be about 30 under on average, and we're about 7 cents better than that, so averaging about 23 cents under for the region. However-

Gabe: Did you just do that in your head?

Rodney: No, I've got some tools here.

Gabe: Or you've got that already done.

Rodney: However, it's significantly worse than it was last year kind of throughout the whole year.

Gabe: What was it last year?

Rodney: So that's a great question. I averaged December delivery, and it averaged around 30 cents worse than it is today.

Gabe: 30 cents better.

Rodney: So last year was 30 cents better. Correct.

Gabe: Okay. So a slight premium to the market?

Rodney: Yeah.

Gabe: All right.

Rodney: Weird. That's weird, isn't it? Seems a little weird. So remember, a lot of that corn from Illinois was pulling east last year trying to fill that hole in Indiana, Ohio. There's some ethanol plants down to the east-

Gabe: True.

Rodney: There that I'm sure were pulling hard to keep that grain away from St. Louis.

Gabe: It makes sense.

Rodney: It's kind of anecdotal, but that's where we sit. So you talked to farmers lately, Gabe?

Gabe: Yes, I did. I do. In fact, I talked to a farmer in Nebraska the other day, old friend of mine. He was complaining about the farm subsidy program.

Rodney: What didn't he like about it?

Gabe: The last one that went out. So what's funny is you and I were talking a week or two ago about how the farm subsidy stuff that's come out first from the trade deal problems and then now with COVID, it's always a tough line to walk. Nobody who values hard work likes a subsidy at the same time. Pretty weird situation. So it seems reasonable that there might be some extra help out there. But one of the things that I think you and I appreciated about the programs that were coming out and that was a change that had been made probably about 10, 15 years ago on the crop insurance side already was that farmers weren't getting punished if they had done a good job doing grain marketing. So the most recent version of that assistance doesn't pay out if you set prices before January 1st or January 15th. And it's not even just prices. If you did anything to help mitigate risk. That's crazy. So this guy, he's a pretty advanced grower out there. He's on top of his game. Yeah, he was pretty frustrated.

Rodney: Yeah. So, aw man. So actually that one, it had more to do with stocks on farm, so it didn't have anything to do with price really. It was you're paid on stocks that you had on farm on January 1st. What's interesting is anybody who was really paying attention to the marketing saw that the market was inverted or at least flat and probably marketed that grain and shipped it ahead of time. Did you pick up on that?

Gabe: No, I read it as if you had set price on it before Jan 15th. That was the version-

Rodney: I gotcha. All right. Well, yeah, some nuance there, but yeah, man, I don't like anything that punishes somebody that made the right decisions or made some decisions.

Gabe: Right, which, what's the order ideally? Make the right decision, then make the wrong decision?

Rodney: Yeah, we talked about it a lot.

Gabe: No decision, yeah.

Rodney: I talk about guys being [inaudible 00:05:48] corn forever. I mean, a decision is better than no decision, I think, assuming that decision is not to buy back corn.

Gabe: Right, or buy your neighbor's corn.

Rodney: Yeah, yeah.

Gabe: So I don't think that was the direction you were hoping I would take you.

Rodney: On, it's all right.

Gabe: So let's go back to have Havril?

Rodney: Harvel, Harvel.

Gabe: Harvel. Harvel, Illinois. Okay, so basis this year about 30 cents less than last year, roughly, but better than it has been on average over the last handful of years.

Rodney: Yep, a few cents better, yeah.

Gabe: Okay. So if you were talking to farmers down there, what do you think that conversation would go like?

Rodney: So I've told you about my stockpile of pages in a notebook that is just how much does it cost you to raise an acre of corn or beans? So over and over and over, I've done this math for 15 years. What did your guy in Nebraska think about the price of corn when you were talking to him the other day?

Gabe: Right now?

Rodney: Yeah, was he excited about it?

Gabe: Excited about it? No, man, he's not excited about it.

Rodney: Why is that? Why do you think that is?

Gabe: Well, it's just in general, again, he prices a lot of stuff ahead of time. That's why he was complaining-

Rodney: Sure.

Gabe: About the subsidies and the way they're being paid out. But now he's looking at 2021, 2022, and even though they're not terrible compared to what cash prices are right now, he's still not excited about settings on those levels, but I think he's built up some good habits around pricing stuff early. So he's probably going to do some anyway and just not feel good about it.

Rodney: Yeah, right. Good. Yeah, so cost of production... I looked up a farmdoc just to see about what everybody's cost of production was. About $721 an acre on corn down there.

Gabe: So farmdoc, for everybody, is University of Illinois. They publish a ton of information on cost of production. And so you can get down to the county level from those guys, right?

Rodney: That's right. So my experience working with farmers, I would start every conversation saying, "Hey, Mr. Farmer, what's your cost of production?" And what's the answer to that? Have you been around for that?

Gabe: It's either, "I don't know," or it's generally a number way higher than you would ever think.

Rodney: So those are true. Usually it's like, "Well, it depends on yield." That's what it comes down to. It depends on a number of factors. So what I found useful over the years is if I just go to farmdoc and have that number ready with me, and he says, "I don't know," and I say, "Actually, I think it's 721," he immediately response, "No, it's 639" or whatever. So I think they have a better handle on it, maybe. But if you don't have a good handle on it, the first thing I would do is go to farmdoc, look for something that remotely fits your operation. So this is Illinois, obviously. Depending on the state you're in, all the land grant universities would have some study on this. The nice thing these is they break out each individual cost. So if a guy's looking at these... It doesn't just show you this 721. It shows you hey, we think rent is this. We think tillage is this and all the way down to seed cost and everything. You can tweak yours if you want. But man, anybody that just looks at that number, that's a good starting point.

Gabe: It's a good starting point, yeah. You can start to do some math then.

Rodney: Yep, I love my math. So also they're using 212 bushel acre for a budget.

Gabe: All right.

Rodney: So good ground there in Harvel.

Gabe: Good land there, yeah.

Rodney: Yeah, I think. So when I do the math there, I also look to see for new crop corn down there in Harvel. This is interesting. I didn't pick it for this reason, but according to Indigo's kind of math, the best bid's like 100 miles away from that farm.

Gabe: So what do you mean by best bid?

Rodney: Yeah, exactly. So what I'm doing for best bid is I'm fobbing back those values. So I'm saying let's simplify it and use Decatur and St. Louis right now. So if you're in Harvel, Illinois, your corn is going to tend to flow either to St. Louis or Decatur. You may not actually ship there. A lot of times there's some middlemen in the middle that-

Gabe: Sure.

Rodney: Provide some value that cuts you off from going there. They're going to store it, whatever that is. So if I'm a farmer in Harvel, Illinois, one thing I'm going to do is look at least two bids every night, Decatur and St. Louis, and I'm going to know what it costs me to haul to each one of those places and take their delivered bid, subtract what I think it costs to haul there and get what I would call a five value. So that's the real number that hits my farm. I've got it here. Let's see. Yeah, I'm sure we're heading to St. Louis for that. Yeah, that looks right. Yeah, we're heading to St. Louis there. But significant trucking. So I'm showing a delivered bid there of 363 cash for fall.

Gabe: Okay.

Rodney: Premium market.

Gabe: That's the cash price at the buyer?

Rodney: That's right. So keep in mind if you are a farmer... I totally understand if you're in Harvel, Illinois and you're 100 miles away from St. Louis or whatever it is, I am not asking you to haul grain to St. Louis in the middle of fall. I get upset when I have to park the truck for like three minutes to wait for the truck. I can't imagine what it costs to haul it there.

Gabe: Driving 100 miles, yeah.

Rodney: Yeah. But it's still a useful tool to help understand which direction I'm going to be looking at, especially when we're hauling out of the bin. The math is all the same. We talk about this thing a lot called the suck factor. It's not a good term for what I'm talking about, but there's some other factor for hauling grain 109 miles to St. Louis in the fall.

Gabe: Well, I know, especially if it's east St. Louis, some of those delivery destinations are rough getting to.

Rodney: Yeah, rough getting to. So if I had to send every truck 100 miles to sit in the harvest line in St. Louis, my harvest progress might be a little slower than I'm used to. Yeah, so if I was going to do something like that, I'd have to calculate in how much field loss am I getting? Freight should already be calculated at a commercial rate. It's the time, the extra time, the guy that I'm paying to sit in the  cart for four hours while he waits for my truck to get back-

Gabe: Just to come back.

Rodney: Yeah, exactly. So anyway, calculating 49 cents freight to this place fobs back to my place at 314 cash. So I would say we see this a lot. When we're doing that calculated math to these destination bids, even though 314 delivered to St. Louis is the best price, the second best price could be 312 delivered five miles away where my cost of transportation is essentially zero.

Gabe: Right.

Rodney: We see that a lot. So what do you think profitability on corn is, just based on conversations you've had for a grower right now?

Gabe: At around 315 cash. That feels like it's just above breakeven.

Rodney: So based on what we have here, 212 bushel per acre, $721 per acre, it comes to negative 55 bucks. So the guy's losing about 55 bucks today.

Gabe: And what about crop insurance payments and the other stuff?

Rodney: Yeah, so that's what I love about the complicated math with doing business in this environment. So actually December future's right at 335, literally the worst case scenario for the farmers right now.

Gabe: Farmers, right. Yeah, yeah.

Rodney: Not really, right?

Gabe: Right.

Rodney: So we shouldn't say that. It's a revenue-based program. So as it sits today, if I think I'm going to raise 212 bushel corn, and the price stays at 330, you're exactly right, no payout. Right? This is about the worst I can do. If the market were to go down, I want to understand how my crop insurance is going to work in that situation. If my yield stays the same and the market goes down, I actually am triggering an indemnity payment that's going to raise that or however you want to put it, raise the profitability.

Gabe: Sure. It's going to give some premium back on your acres, yeah.

Rodney: Exactly right, Yeah. So I talk to a lot of farmers, Gabe. Every time I do this math for them, they can't believe that. They actually think it's much worse than that. And I'm sure that you had a reason on why they think it's worse. You know how these guys think, right?

Gabe: Right. Well, so it's easy to think it's worse for a lot of reasons, one of them simply being it's a lot lower than it's been in recent history. At this point in the year, it's a lot lower than it's been. I think that's an important qualifier. And so if you give somebody a number to react to on a cost of production, it's difficult to think through that. Like you started to list out, there's a whole bunch of components in there. And so it's hard to hold that all in your head at the same time. That's why I said when I asked that, when somebody gives me an answer a lot of time, it's actually a lot higher because we tend to round up, just being a regular human. We're conservative in our decisions and our assessments on those types of things. And so when you marry what feels like... Because it is... a relatively low market price, all the assumptions... I doubt they were getting tons of discounts in terms of what their seed cost or fruit cost. They weren't seeing a lot of money come back on those input costs because this happened probably after most of those decisions were made.

Gabe: And so without sitting down and writing it down, you've got lots of reasons when you add things up back of the envelope style to get into a real bad spot real quick. I think that that's where it goes. It's hard to think about at this moment in time not seeing like a 350 number for new crop corn and feel good about it. And let's be clear, a $50 loss per acre is not something to feel good about.

Rodney: Nope.

Gabe: But hope is closer than it probably feels like. I mean, and then there's a whole another stack of things, which is when you imagine something being bad, you always imagine it being way worse. The emotional impact of that is way worse than actually living it, my favorite experiment there being I forget the actual numbers, but basically they asked people who were blind what they would pay to get their eyesight back, and they asked people who could see what they would pay to not go blind, and the people who could see would pay two to four times as much to not go blind as the people who were blind would pay to see again. So once you accept a thing that's bad, it's almost never as bad as you think. And also that puts you in a position to start building out of it. So hitting a bottom sucks, but once you hit the bottom, you know where to go then.

Rodney: And I would say I think calculating this breakeven price is super important right now. And I remember a time when guys were pretty good at it, and then $6, $7 corn happened for some amount of time, and guys got lax at it. I mean, guys literally quit doing it.

Gabe: Well, it was basically through about 2005 we saw pretty good discipline, and then it got crazy because to your point, you don't have to do the math at $7.

Rodney: That's right. Yep, yep. So you still have to pull the trigger, which was sometimes hard-

Gabe: That's a different conversation.

Rodney: Yeah. Cool. So we got that far. It turns out based on this, this is a 340 breakeven for this grower in Harvel, Illinois if he's raising 212 bushel per acre. That's 24 cents away from where we sit today. Find anything interesting about that 340 number, Gabe?

Gabe: No. I feel like I should, but I don't.

Rodney: I mean, so we've looked at this in a number of different places, and 370 futures appears to be the sweet spot for farmers. So just about anywhere you are in the country, just because basis is kind of a reflection of transportation and cash rent and all those kinds of things, 370 futures appears to be-

Gabe: Gets it done.

Rodney: The sweet spot for most guys. Yeah, right. And that'd be the case here. So rule number one, know your breakeven so we can make a real decision here. The next thing I'm always interested in... I think farmers know they should do breakevens, and they don't do it that often. The thing they don't do as well as they should I think is calculate that cost of money, cost of interest, cost of-

Gabe: Sure.

Rodney: Holding grain. So I've got a spreadsheet as normal, but what should a guy use for cost of money today?

Gabe: Well, if you're buying a house, I guess it's 2%, but-

Rodney: Yeah, if that's the alternative, right?

Gabe: Right, yeah. I would guess around five to seven.

Rodney: What if I'm bullish equities?

Gabe: What if you're bullish... Oh, okay. Rodney, let's say 12 to 15-

Rodney: Have you checked your 401K in the last month? Things changed.

Gabe: No.

Rodney: Yeah, things changed.

Gabe: No. Yeah.

Rodney: Yeah, so this is where I always struggled a little bit talking to guys is like hey, what's that cost of interest? What's it cost? And you usually get an answer somewhere between 0% and 5%. But I also am quick to point out to guys like hey, if you have a car loan out there at 9%, then really it is 9% until you pay off that car loan or some version of that. So I like to use 5% just talking to farmers, but I really like to ask them what that is and really hone in on that. That's why I'm so fun at parties.

Gabe: Yeah. Well, because it's just mean to ask somebody what their cost of money is, and they go, "Well, what if you thought the market was going up?"

Rodney: So what's interesting is most guys have a number in their head. And they say like, "I remember corn was 2 cents and beans were 3 cents." They just had that number. I don't know where that number comes from. I've never been able to replicate those values at the same time using some cost of money.

Gabe: Yeah, I'm trying to think.

Rodney: Beans are just more expensive.

Gabe: Yeah, beans are more... Well, I mean, it might anchor back to early 2000s.

Rodney: That's true, when they were a little more disciplined perhaps.

Gabe: And you could get beans down into seven bucks. I think I saw a six handle. I'm racking the back of my brain.

Rodney: Oh yeah. Oh yeah. The year that beans went to like 18 bucks there for a little bit or 16 bucks, I remember-

Gabe: You would hear stories for years afterwards, the guys who missed 18 and left beans in their bin for three years waiting to see that again. I'm convinced it was just one guy that everybody heard about, but I heard that story over and over again.

Rodney: Yeah, I'm not going to hold my breath for that I don't think, but I do remember dad, he drives a truck, and he did the math real quick and was like, "My insurance doesn't cover how much value is in these beans." Essentially, forever he had insurance for like $9 beans, and then suddenly beans were twice as much. And I remember just he had to up his insurance coverage on that.

Gabe: Insurance level.

Rodney: Sure, yeah.

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