Episode 3: Long your crop the rest of your life

Deciding to grow corn, beans, wheat, or any other crop means you’re not just taking a position for one season – but for the rest of your time as a farmer. Rodney Connor and Gabe Sheets-Poling explore how keeping this in mind ultimately lowers your risk and keeps you in the right headspace to make pricing decisions. 

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Rodney: One of my favorite things to do to start off a conversation with growers, anytime I get to do a slide presentation, I start off with my first slide always says, "You are long your crop for the rest of your life." It always dries up the room. Everybody's like, "Oh, who's this guy? I don't like this guy." But it's super relevant, I think, to remind ... any chance I get to remind a producer that he's long his crop literally for the rest of his life or until he's done farming is worth throwing out to those guys, I think. 

I think I'm using one of your tricks when I'm doing that, is I'm making them make a decision. Am I doing something right by saying, "Hey, now that we've all acknowledged that you are actually long and not just farming," is that like a behavioral trick that I'm using on these guys?

Gabe: Yeah. Yes. I wouldn't call it a behavioral trick. You are a little sneaky. But a lot of this stuff is really about trying to, again, move humans along to better understand what are the risks and price them appropriately. So yeah, I think being explicit about this is your actual position. Because we've talked about how if I don't make a decision, an explicit decision, I actually don't feel risk as strongly.

And so when you frame it up as you’re long forever, it's one piece of the puzzle in helping people understand like, "Oh, I am actually long in the market. I don't start flat." And so what's actually happening when somebody does a hedge, they do a forward price, they've actually taken risk off the table. They've gone to a flat position. I used to joke we're all horrible equity traders. I don't know what ... because look at all the stocks that went up today. I didn't buy any of those.

Rodney: No. Yeah, me either.

Gabe: Look how horrible I am at trading. Right?

Rodney: Yeah.

Gabe: Yeah. It's all on your frame of reference. So yeah, I think that's a great step. Do you do anything ever to quantify the size of that risk?

Rodney: So not in a large group. It's hard to do. I did one time have a grower. Let's see. He had done like a long futures position. Yeah, that was it. He had initiated a long futures position on a cash grain contract. We call it a price pivot. So he went ahead and initiated a price pivot on 10,000 bushels of his production.

And that night, the market went down like 15 cents. So the next day, he calls me up and he's like, "Man, Rodney, I lost 1500 bucks overnight. While we were sleeping, I lost 1500 bucks." And I laughed at him. I go, "Oh, man. You lost way more than that. Your long corn for 60 years, right? You lost millions of dollars overnight." It's just a funny joke.

I just like to frame it that way because I truly believe when a farmer calls me up, the question always from a farmer when he's calling me is, "Should I sell today?" And that answer for me is, "Yes." And it's not because I'm a salesperson that's trying to buy grain. It's because I truly believe that your risk – that your long crop for the rest of your life. So the most prudent thing you can do to manage that risk is to sell whatever minuscule increment you're asking me about selling today, right?

Gabe: Mm-hmm.

Rodney: So my default is, "Yes, you should sell." And then I'm going to talk about profitability and thinking ahead about, "Hey, maybe it's reasonable to just sell every day," which I think is also a super reasonable way to price grain. Or we could try to be a little better at it and say, "Hey, when are there opportunities that the market presents that I should look for to actually make money when I sell?" Because that's a different question. If he's asking me, "Would I make money if I sell today," that is a fundamentally different question then, "Should I sell today?" Which I do believe, always, yes. You should sell it today. If you think you should sell, you should sell.

Gabe: If you've gone to the trouble of having the thought, you might as well follow through.

Rodney: Yeah. Yeah, eliminate risk.

Gabe: And it's funny that came up when we were doing some internal training. We were talking about all those conversations. And I said, "So in what scenarios would you tell somebody no." Right?

Rodney: Yeah.

Gabe: And the conclusion is largely the same. Obviously it's relevant to how much have you marketed for that crop year and all those types of things. There are other risks to consider around production. But overall, I agree. Over and over and over again, what we see is people under marketed, right?

Rodney: Yeah.

Gabe: Even people who think they've sold 100%, they sold 100% of what they did when they round everything down to calculate what they thought they'd grow.

Rodney: Exactly. Yeah. Acres. "Oh, I don't farm 1138 acres. I farm around a 1,000 acres."

Gabe: Around 1,000.

Rodney:  And I don't raise 214 bushel corn. I raised 200 bushel corn. And do the math out and it's like, "Hey, I'm 75% sold." "Oh, really? You just raised 240 bushel corn." "Yeah, I'm 50% sold." Math. It's just math.

Gabe: It's just math. It's just math. So, yeah. I guess as we're looking at these things and thinking about that it makes sense to sell in general, I know on average we're still, I think, below break evens right now. Right? On these 2020 prices?

Rodney: Yeah. So it's funny, I've been doing a lot of looking at profitability here for corn and soybeans. Right now we're essentially everywhere below break even. That wasn't the case 30 days ago. That seems like that's changed in the last 30 days. Anybody who took the time to calculate out their break even cost to production, really dive into those numbers, I would suspect we hit some targets here in the last ... right before the coronavirus became a big thing, that were profitable.

So we're not far from that today. I'm listening on the radio. Guys are saying, "Hey, we think this coronavirus is going to cost the producer 50 bucks an acre, 80 bucks an acre on average." I'd say I tend to agree. We've actually seen most of that in the last 10 days here in.

Gabe: Didn't take long.

Rodney: It didn't take long. Yeah. I think it beat the radio. But we're coming into what tends to be a time where you see some historical volatility. We're seeing volatility increase. That is just as likely to send grain higher as it is to send grain lower. And I think with the right processes in place, a guy might have an opportunity to grab some profitable sales here.

Gabe: So then what would you suggest? If I'm looking today and I go, "Okay, these levels aren't attractive to me." What do I do to make sure that I'm lined up so that when they are profitable I'm taking some action?

Rodney: Yeah. So my biggest thing is it just comes down to the math. So what is the math of profitability? The math of profitability is how much can I sell for, how much am I going to raise, and how much did it cost me to produce the crop? So here we sit at the end of March, so our seed is still in the bag. I haven't planted it yet. Future basis, when I look at the cash price, future basis is likely faded a little bit. Because most of those buyers are going to want to get paid interest for their hedges or whatever. So that basis is on the wider side.

So I'm going to say, "Hey, I think historically basis for the delivery period that I'm looking for is X." So let's say 20 under, whatever. And I'm going to calculate that to a cash price. So I'm looking at ... I'll use beans because I talk about corn all the time. So 874, November '20 futures minus a 20 cent basis. That means, "Hey, I'm 854 cash, right?"

Gabe: Mm-hmm.

Rodney: That's my price. Let's not forget about trucking, Gab. Everybody forgets about trucking. Everybody forgets about trucking.

Gabe: Do I have to pay for when I have my own truck?

Rodney: It turns out you do.

Gabe: Oh, okay.

Rodney: Yeah. It's funny how many guys don't have to pay for trucking and trucking is free because they own their own trucks and then constantly complain about diesel prices. I don't know how those two things are related. So, yeah. So let's take a little bit off for trucking and just say, "Hey, I need eight ... Or the price of grain is 840." Even if the actual price for grain is 850 delivered. So those are two different things.

And then you start looking at production. So farmers are super conservative when they talk about the production side of things. What's so funny is sitting across the farmers who ... I don't know if you know this. Farmers are the best farmers. When you're at a guy's table ... Do you know this? They're the best. Yeah. They're the best farmer in that county.

Gabe: Yeah, I know.

Rodney: Appropriate, right?

Gabe: Appropriate.

Rodney: They're good. Yeah, they're good at what they do. But when then I say, "Hey, what do you think you're going to raise for soybeans this year?" "Oh, I'd say 45 bushel." "Oh, that's interesting because the five-year county average is 65 bushel. You were just the best farmer of the county and now suddenly you're raising two-thirds of the best."

So I think it is relevant to really try to hone in on an actual number. So I'm not ... if you think it's 65, use 65. Don't use 70 because you're just clouding your judgment. I'm taking too long to explain this. But I'm interested in what you think around: what does it do to your brain when you estimate these numbers.

So what happens with most of these guys is they say, "Oh, I just walked you through delivery." Which is future's minus basis minus freight. Most guys would say, "Beans are about 850." But they know there's a little fudge factor in there. Okay? And then on yield, I want them to say, "Hey, I raised 65 bushel." Which could be, "I fertilized for 65 bushel."

There is a target that they're trying to hit. But if they just say, "Let's be safe and do 55," but they know there's a fudge factor. And then there's going to be a fudge factor in the cost of production, assuming we carry this all the way through. What does it do to making a decision when you have 12 different inputs that are all really fuzzy?

Gabe: Well, yeah. So what it actually lets you do is ignore all the inputs. So when you're looking at a data set like the one that you've built, I've got 12 different inputs. I've rounded on all of them and I know that I did that. Some part of my brain knows that I did that. When I get to the end, the calculation doesn't matter. And most of the time when you see that, somebody will then go tell you, after all that rounding, "Oh, I need $10 bushel bean to break even," right?

Rodney: Yeah. That's exactly what happens every time.

Gabe: So I construct this scenario. If you think about it, again, the default is to do nothing. What I've done by being conservative and all the rounding down or taking safety in a bunch of numbers is I created a scenario that basically says, "Well, don't bother to do anything until we're at 10." Which is really just, "Don't bother to do anything today."

And it's nobody ... I shouldn't say nobody. Few people I think recognize that that's part of what they're doing. Your brain works really hard to keep your stress level low. And so doing nothing generally is a low stress level. And so it'll do all kinds of things that you don't realize to help you keep that low stress level. And I think this is largely just one of them.

Because at the end of the day, that calculation isn't useful for anything. Because even when I get to 10 bucks, I know that all the data I threw in there wasn't actually worth it. And the other thing that's at play is loss aversion. The only reason somebody doesn't sell today is because they're worried about the market going higher. They'll give you 8 billion reasons not to sell today, but they all boil down to that one. Right?

Rodney: Yeah.

Gabe: Because at the end of the day, if I sold and the market went down and whatever thing happens and I can't fulfill that contract, maybe there's some cancellation fees. But that's not really a showstopper there. The only concern is the market goes higher. And so using all those conservative estimates, they're also a part of what I do to make sure that I don't feel the pain of over-marketing if I do sell in the market goes up.

And so that's really why those safeties are in place, intentional or otherwise. We do that conservative math because I may be, like you said, targeting 65 bushels. But the last thing I want to do is feel the pain of targeting 65, only growing 40, and having marketed like I was going to grow 65 and suddenly Rodney's coming and asking for a check. That's not fun for anybody.

And so I understand it and respect it because that is super painful. And that can be real painful. And that's why all these different companies have all kinds of different things out there that help you take the risk out of market, really exchange unlimited risk with the market going up and down and give you all kinds of ways to start to price things or price things at a floor and half upside.

That's what those are all built around, is trying to help us get out of the way of ourselves to setting some prices, taking risk off the market. And the way we do that is provide choices that allow us to do things like set floors but still participate if the market goes higher.

Rodney: Yeah, that's interesting. Yeah. That fuzzy math drives me crazy, as you know. We talked about this. But I think I would rather do razor sharp input prices that were my best guess. So those 12 inputs, not input prices. I'm saying 12 data points that tell me what my break even is on a crop. I would rather be razor sharp and wrong on every single one of them.

Rodney: But to the best of my knowledge, as sharp as I could be, get a number and then be conservative on that number if I wanted. To say, "Hey, I know I'm making money on 890 beans. But I'm sure not going to sell below $9." For two reasons. One, because nine is a nice round number that's much more attractive than 890. And, two, because I've got that little factor figured in. Is that the right way to think about it?

Gabe: It is. I am having difficulty thinking about it. Because when you started with, "I would rather," I thought you were going to say something like, "I would rather live in a giant kangaroos pouch than have a baby kangaroo live in my pocket." So I had trouble moving on after that. But I agree with you. Having information that's as close to right as I can get it ... and it's never going to be perfect.

Rodney: Never right.

Gabe: And that's a balance. We think about balancing, it's really easy to make up a bunch of numbers loosely and just use that because they help move you along and that's better than nothing. But to your point, ideally we use the best information we have. Not even optimistic but let's go off fact. If my yields been going up 2% every year and I did 200 bushels last year, yeah, we should do 204 this year. Yeah. It's not that hard.

Rodney: Yeah. And what we're really talking about here is modeling rather than – 

Gabe: That's it.

Rodney: Yeah. Because it also strikes me ... the yield thing. I feel like anytime I talk to a guy about yield, that is the one that he can really skirt me on. Because it's easy. I think you talked about how guys don't like making decisions. So that is the point. I can say this is the price. And I can say, "This is your inputs," we can argue about what those inputs were, but what we can say that's what it is. We know it. There's a checkbook that says what those inputs cost.

But the second you say yield, that's the one that that guy can wiggle right out of your arms. Just wiggle out and say, "Boy, it's hard to say." But I've always felt like ... today, when that seed's still in the bag, we're going to raise 55 bushel beans. We're just going to raise 55 bushel beans. And if we get them all planted on May 1st, we're probably going to raise 60 bushel beans. So it's reasonable for me to take that 55, bump it up to 60 for the decisions that I'm making at that point. Right?

Gabe: Yeah.

Rodney: And then, like last year, 4th of July, when we hadn't planted any beans yet or 1st of July when we hadn't plenty of beans yet, that number to me was 30. Which is appropriate. That's fine. We ended up outperforming that. But that was a reasonable model for what we were going to achieve back then.

Gabe: Yeah. I'm thinking back to last year ... we don't have time for this now, but I think next time we talk, you should tell the story about how you sat down with your dad to do the math on prevent plant. And what happened after that. Because it's the same kind of stuff. And then the other part that I continually think about is it's really easy to sit in the chairs that we're in and say this is how to do it. When you're making the decisions, that's where the emotions come in.

And so, I believe the things we're talking about are the right things. But I can't emphasize enough how hard it is to do that on your own as the decision maker. And so finding people that you trust, whoever they are, to help validate your ideas and provide a place where you can have discussions and questions and think through things is really helpful. And it helps to share that pain a little bit, whether it's with your spouse, or brother, family, whatever. So I think that's another important thing to keep in mind.
Rodney: Thanks for listening to the GrainWaves  podcast. If you'd like to learn more about how Indigo can help your farm be more profitable, you can find us here.

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