Episode 24: Tips for Missouri Bean Farmers (September 2020)

Farming soybeans in Missouri? Gabe and Rodney have market insights to help know if you should sell into the current rally. 

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TRANSCRIPT.

Rodney: I found Missouri in general has some things going on.

Gabe: Whew, I like Missouri.

Rodney: What's your favorite part of Missouri? I thought you might say that.

Gabe: Over the years, I've gone I'm pretty sure everywhere in North America where we grow corn and probably soybeans too. Missouri is one of my favorite places to go for one specific reason, 10 that is...

Rodney: Can't wait.

Gabe: That is Dexter, Missouri home of Dexter BBQ.

Rodney: Okay.

Gabe: I think we talked on a recent episode about how, if you were to look at me, you may not realize that I work out every day. One of the things I know to do really well, is eat. So I've eaten ribs intentionally across all those places that I've been to.

Rodney: Nice.

Gabe: Dexter BBQ, by far for me, has the best dry rub rib in the country. Hands down.

Rodney: You're a dry rub guy.

Gabe: Yeah, I do I love-

Rodney: You said the best dry rub ribs in the country. Does that also make them the best ribs in the country, that happened to be dry rub, or is that like a qualification?

Gabe: When you're a connoisseur like me Rodney, you wouldn't, I suppose say, "Oh, this is the best wine." You'd probably say, "This is the best red wine, or the best white wine." So for me, the dry rub experience is a distinct experience from a non dry rub or a wet rub, I guess we'd say, "A sauced rib."

Rodney: That's reasonable.

Gabe: My wife makes amazing sauced ribs. We use a... I'm going to hate myself for not remembering the name of it. We use a barbecue sauce actually, out of Iowa, for that that a buddy of mine that lives in Algona, sends over occasionally.

Gabe: I just want to welcome everybody to GrainWaves, the barbecue podcast.

Rodney: Yeah, we got sidetracked. I looked up Dexter BBQ, Gabe, since you're a fan. What's your favorite location? It looks like there’s a few of them.

Gabe: I've been in many of them, I've been to Dexter, Cape Girardeau. There's a couple further South than that too, when I go to the Memphis area. As soon as I get, kind of outside of Memphis, that's my North Star, is whatever the closest Dexter BBQ is in the direction we're going.

Rodney: Good to see. I'll dive into Cape Girardeau here if you'll-

Gabe: Yeah.

Rodney: Do that with me. So farmer in Cape Girardeau, I don't think he's seeing a ton of surprises right now. St. Louis market is his market for beans. I think they're probably pretty used to that. We've talked a lot about [Carey 00:03:09] last time when we dove into Ohio. Bean markets got a little bit of Carey, but really from October to January, we're picking up 11 cents. Think a guy can carry beans for 11 cents?

Gabe: Boy, I feel like it's got to be, kind of on the cusp, right? Beans are a bigger pain to keep in the bin and all that kind of stuff.

Rodney: Yeah. Green shrink too, green shrink's a fun little-

Gabe: Green shrink. You love teaching me about green shrink.

Rodney: Green shrink's my favorite man. You know why I like green shrink? It's cause of the math involved in it, right? It's a little fuzzy if you identify that math, it reaps benefits.

Rodney: I looked back at Atlas here just to see how the bean yields have been going around in this area. We're actually down in the last week, not really surprising, there's kind of a drought rolling through the Midwest. I don't know if you caught wind of that at all?

Gabe: I heard a little bit about that. Started out West, right? That's where some of those fires kicked up from and then the weathers, the patterns are just held.

Rodney: Yeah, that's exactly right. It looks like Missouri... I just pulled up the latest drought monitor and it looks like Eastern, Missouri is a little insulated from that, but it's definitely getting close. They've had some heat and some dry, I think the whole Midwest could use a rain, but what's interesting is we've also had the soybean rally here in the last little bit, right? We've seen soybeans in the last week, have rallied to the tune of... I'm doing some quick math. 45 cents, or more?

Gabe: Yeah, it feels like it might be headed to 10, given that momentum.

Rodney: Yeah, and what's cool about a rally here, this really looks like a demand driven rally more than a supply driven rally, which means basis is hell. Right? So while futures are screaming, we're used to seeing basis fall apart. But we're not seeing that today.

Gabe: Let's talk about when you say, "Basis falls apart", what that means. In general, when we see futures markets start to run up, we see basis weakened because the farmer's getting an overall better cash price and the buyer sees that as an opportunity to potentially capture a little more on the other side. Everybody's taking a little bit. Farmer's getting a little bit higher cash price, buyer's getting a little bit more on a basis side, hopefully everybody's a winner.

Rodney: That's right.

Gabe: So that's the normal thing that we expect to see, and that's true in Eastern, Missouri as it is in central Nebraska, as it is anywhere else.

Rodney: That's right, always tends to be the case. Good news is the farmer's benefiting, kind of twice here, right? One, future price going higher, two, basis isn't weakening, it's staying pretty firm. The problem is, I'm looking at our Atlas yield data, I'm seeing over that last week, we actually dropped the yield, I'm talking soybeans particular, we've dropped the soybean yield two bushel per acre for a farmer sitting there. So the crop, it's having some problems. It's still a good yield here, I'm looking at 50.3 as our average for Missouri right now. So still a reasonable yield, but off a little bit from what it was a week ago.

Rodney: I'm a farmer, Gabe, I'm watching the market rally and I'm watching my beans deteriorate. How do I think about that? What's the way to think about?

Gabe: I think there's a couple things on my mind in that scenario. One is, we're going up, it's going to be hard for me to, it's hard to sell into a rally.

Rodney: God, it's hard. Yeah.

Gabe: It's super hard to pull the trigger, cause if it keeps going up, you just feel like a shmuck cause you were the guy that did it.

Gabe: We've talked about lots of different ways to be able to set that price and then still participate, so set a cash price, buy some call, a minimum price exposure, potentially, there's a couple other things as well. If I'm seeing basis stay steady or stronger, I may just want to lock in that piece of my contract at this point. A little bit of nerves around seeing the overall yield come off, obviously if I'm looking at my field and it's fine, I would probably start to get more aggressive at this point in the year, depending on how much I've marketed. It's pretty intuitive to take more risk off the table. The more confident you are in your actual production. I don't think anybody would find that a crazy set of thoughts, and we certainly see any number of farmers use those heuristics to make some decisions.

Rodney: When you say, "Confident in your production", you mean, "Confident that you'll have a good production?", or, "Confident in the actual production?" Cause, I think that's important.

Gabe: Yeah, I think "confidence in the actual production".

Rodney: Whatever it is, right?

Gabe: We talk a lot about the conservatism that's used when we're making grain marketing decisions. I would love to think that everybody will magically walk away and do the fine math on what their production is going to be, and what their cost of production is, and all those things. But it's also super appropriate to, the earlier you are in the year, be more conservative about those expectations. But as that crop comes along, you should be refining and getting more and more accurate.

Gabe: That also tells you, "How marketed are you really?" If you conservatively marketed 20%, and you're coming in on trend, you might only be 10% or 15 or something. So making sure that you're, kind of, truing up based on where you wanted to be. Great opportunity to do it in around the market. Get where you want to be now, and if you still feel the need to have some exposure on that stuff, there's two really important things to keep in mind. So like we said, attach maybe a call option to a price screen contract. The other thing to keep in mind is you probably have a whole bunch of beans that aren't priced. You've got all that exposure too. So really trying to look at it as a portfolio, it's not so much that you're missing out, it's that you've reduced your risk but you've still got exposure there.

Rodney: The farmers I deal with aren't the best at reevaluating how big their crop is. Around me, nobody raises less than 200 bushel, kind of. Guys are used to, 220, even 260, sometimes tends to be the trend. But when I ask a guy, "Hey, what are you plugging for yield for this?" It's 200 from April 1st to, essentially September 15th, until we get in the field and get a yield check. We're lucky at Indigo, we do have this Atlas yield data that kind of tells us, from the sky, what we think this is in real time-

Gabe: I want to go on the Rodney Connor time machine.

Rodney: All right, love it.

Gabe: You, me and HG Wells, going to August 1st, Dexter BBQ, we're looking at, with our binoculars, some soybean fields. What am I seeing and how much is on the table right now?

Rodney: On August 1st, I'm seeing, I feel like there's 48 bushel of beans out in the field per acre, and the price is around 850 cash, this is cash price-

Gabe: Cash price.

Rodney: So, that gives me a gross revenue of $408 per acre.

Gabe: Okay, so if I sold grain for harvest delivery and I'm out of Cape Girardeau, I'm expecting about 408 bucks per acre?

Rodney: That's right.

Gabe: Top line revenue, okay.

Rodney: Yep.

Rodney: Two weeks later, roughly, I've seen the yield actually improve quite a bit. For whatever reason, the Atlas yield data, we get real time insights into how that crop is progressing and we saw essentially four bushel yield improvement over that amount of time.

Gabe: Okay, so yield looks almost 10%. We went from August 1st to August 15th, in the time machine, and we're seeing yield look about 10% better than it was.

Rodney: That's right.

Gabe: Happy about that.

Rodney: Happy about that. Our futures rally of around 25 cents.

Gabe: The market has now given me this rare gift, of both a yield increase and a cash price increase.

Rodney: Very rare, yup.

Rodney: 52 times 875, comes to $455 an acre.

Gabe: So my total revenue went up by about 10%. About 47 bucks from August 1st, per acre, to August 15th, roughly. That is revenue though, we're not bringing in cost of production for this, but the fact is it bumped up about 10% because we were able to overlay both the yield increase and the market increase.

Rodney: That's right. On August 15th, I can look back at my records, I think I had zero text messages from farmers on the excitement of a 25% futures rally in soybeans. It was actually like...

Gabe: 25 cents.

Rodney: 25 cent rally. Actually, most guys then were saying, "Man, it's about time. It's about time we got 25 cents on this thing." Since then, we've seen an additional 45 cent futures rally, but at least in Cape Girardeau, our Atlas yield data is saying, "Hey, actually the yield has decreased a couple of bushel back down to about 50 bushel."

Rodney: Netting... You're good at math, you want to do it in your head or you want me to tell you? We're now at 50 times 920.

Gabe: Yeah, I'm not going to do that in my head.

Rodney: All right, so $460 per acre. A 45 cent futures rally led to an additional $5 per acre, gross revenue for these farmers.

Gabe: An additional 45 cent rally led to an additional $5 per acre revenue.

Rodney: That's right.

Gabe: Got it.

Rodney: That's because yield kind of came down and was going against me. I want to be clear, during that same amount of time, my phone has been blowing up about the soybean rally. Guys are excited, printing money.

Gabe: So, nobody called you about the almost $50 an acre improvement-

Rodney: Not one.

Gabe: But they're all talking about the $5 improvement.

Rodney: That's right.

Gabe: I think there's a couple of reasons for that. One, I think it's hard to know between August 1st, August 15th and August 31st that your yield went up by four bushels and down by two on your beans. That's got to be almost impossible to figure out.

Rodney: That's right.

Gabe: Secondly, the other side of that is, the market price is easier to see that we rallied 25 and 45. 45 is a lot bigger than 25. All together, it's hokey pokey time.

Gabe: I also think it's worth calling out, the [UFI 00:13:44] does all this research on farm profitability and the number one impact on profitability isn't yield, it is price. Appropriately, I think people are anchored there, but also at the end of the day, it does come down to, like you said, making sure you're accounting for yield moves and cash price moves.

Rodney: To that, I'd say, we're lucky at Indigo, we have these real time insights. So we can see this at a daily pace if we want. I think customers have access to this at more like a weekly pace where they can see how that is. I think it more clarifies, if you take this back to corn, this same thing is happening in corn, and I think corn is actually a crop where guys can do a lot better job at this. If I really sit down with a guy and say, even later in the season, if I sit down with him on June 1st and say, "Hey, what's this crop potential right now?" He can give me a number and then if I really sit down with him on August 1st and ask him again, he would give me a different number. He has a sense of what this crop is doing.

Rodney: I think my challenge to farmers is, help yourself out and try to have that at some more regular pace. Whether it's weekly or monthly, or whatever, and really recalibrate what is the actual price for my corn today. Which is not so much on price, it's more about top line revenue. That's what I'm trying to look at.

Gabe: Well, it's not the price of your corn, it's the revenue for the acre.

Rodney: That's right.

Gabe: That's where you're changing the view, and that's ultimately what matters.

Rodney: That's right, that's dollars.

Rodney: Well Gabe, you got me thinking about barbecue today, so I think I'm going to cut this short and go grab some. Thanks to everyone for tuning into the GrainWaves podcast, where Gabe and I bring real time analysis of grain marketing decisions directly to you. If you're new to the podcast, remember to subscribe, leave a 5 star rating and share with your friends and family.

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