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Rodney: Gabe, I don't know if you're paying attention, but a big report coming up on Tuesday.
Gabe: I can stop you right there.
Gabe: I'm not paying attention.
Rodney: All right. Yeah. So some hubbub in the zoom hallways at Indigo, big report coming up on Tuesday, I think. And that's what all the farmers are talking about. What should we do? And what do you think they should do ahead of this report?
Gabe: Sell some grain.
Rodney: Sell some grain.
Gabe: I wish I had a smarter answer than that. Well here, I'll hit you with some interesting data, which is, obviously, we run a flat book, so we hedge all of our positions. And not only that, we worry about margin calls and stuff like that. So we do a bunch of activity to make sure we limit our exposure there. But I was looking at the market and obviously been watching these corn drop over the last couple of days and hit new contract loads today. And do you know the last time we were below 330 at this time of year?
Rodney:No. Last year? I'm going to say last year.
Gabe: No. 2006.
Rodney: Oh, really?
Gabe: In 2006, harvest price ended up around four bucks, but that year was the first time that we were above four at harvest in decades, I think, if I remember correctly. So it was another weird year for just completely different reasons. We weren't quite into the crazy adrenaline kick that ended up as the great recession.
Rodney: Yeah. So if you just recently looked at this, so 2006, would we have been shocked that we were below 330? Did it feel really low at the time?
Gabe: So I didn't go look at years previous, but if I reached back into my brain about what would 2003 Gabe feel about 330 in 2006? I'd feel pretty good.
Rodney: I would think, right?
Gabe: I don't know 2004 or five, where those, but we were starting to creep up that way. But I mean, I remember back in those years, if you sold $4, you felt amazing. That was a huge sale back then.
Rodney: Yeah. So one thing that I've always found interesting about these reports is, I've always used these reports to kind of get farmers off center. I've used them as an excuse to talk to the grower about having some sort of market bias, because it just feels like this thing that you should have a bias in front of. But it strikes me as so weird to just suddenly have a bias four times a year, assuming there's four. So four big reports, end of March, June, January, and probably another one that's not coming to me right now.
Gabe: What was the first one you said? End of March?
Rodney: Planting. Planting intentions.
Gabe: Planting intentions. So it is weird to have a bias because of that. But I think if you look at any number of other things and put it kind of in a procrastination framework, it's not really that you're waiting to have a bias by then, it's that those major reports throughout the year are known catalysts of driving market change. On any other day, the probability that you're going to have a large market move is really low. And so relative to any other day that isn't a report day, report days have a much higher probability on a relative basis of driving market. So I don't so much look at it as like, oh, now I have an opinion. If there's a reason to take an action if you have an opinion. And so you better get an idea of what your opinion is. We talk a lot about doing nothing is a decision. It doesn't really feel like it. I think some of that starts to go away when you come up on a report. It's harder to sit back because you know there's, again, a higher than normal chance something's going to happen.
Rodney: And that feels like risk, suddenly? Is that the deal?
Gabe: Yeah. Well, I mean, it is. The report is riskier. Those days, literally those days, those moments, are riskier than any other moment. If you were to look at every five minute period in the entire trading year and say, what five minute period has the highest probability of having a big market move? It's going to be the five minutes after a report comes out.
Rodney: So as I think about risk ... I'm always interested in your take on this stuff. So risk is just movement. Right?
Rodney: So upside risk, downside risk, it's all the same.
Gabe: That's right.
Rodney: So just volatility is risk?
Gabe: There we go. Yeah. That's fair. So when I say risk, I am talking about volatility. Because whatever your view is, there's probably an action to take to manage your risk.
Rodney: Yeah. So on the volatility side, we tend to see option premiums go up as you get closer to reports?
Rodney: Yeah. So you know what's always frustrated me about that is, so this report is June 30th or whatever it is. And when you watch volatility, you can watch option prices kind of creep up as you get into the June report. And guys, you can feel them getting more nervous as we get closer to the report. So then suddenly, the day before the report, they're like, "Hey, we should buy some puts ahead of this report because I'm nervous." And what's interesting about that is, all things the same, if nothing would have happened. That put would have been at least a little bit cheaper 30 days ago than it is the day before that report, which is when guys like to buy them.
Gabe: There's a good chance, yeah. So as an option trader who just trades volatility and not really direction, that's absolutely a trade you can do. Get long volatility, ride it up ahead of a report, and then get out of it just before the report.
Rodney: Is that a trade you've done in the past?
Gabe: It depends. I mean, the short answer to that is absolutely. Generally, we didn't trade around reports like that per se, but we would put on positions to manage our portfolio with that in mind, understanding the timing on when we were putting on positions. The challenge you run into, the offset to what you're talking about though, is you can buy an option 30, 60, 90 days ahead of the report, and if nothing's happening over that period of time, you're giving up a bunch of time value. So it's always a tough game. Every day you wait is time you're not paying for. But then when you get closer to the report, the fall premium goes up. So it's a delicate balance.
Rodney: Yeah, I got you.
Gabe: It's not always a good trade. Ideally, you are paying enough attention and catch it when it's lower than it should be, a little bit lower than it should be, and don't get too greedy on the way up.
Rodney: And then does that volatility feel like seasonal futures feel to a farmer? You tend to see it go up during those times of the year.
Gabe: Yeah. So if we take reports out of the equation, the implied volatility in the market closely aligns with that seasonal price timing. So when we start to see, like we are right now, effectively, weather premium getting sucked out of the market, you start to see volatilities drop as well. Because again, volatility is a function of risk. When the price falls, in general, the price is falling because the market's getting comfortable with the supply picture.
Rodney: Yeah. Less risk.
Gabe: So I think this year it's a combination of, the crop looks amazing, generally, when I talk to folks around. But it's still a little early to pull that weather premium out. We're back to a COVID story, where we've got Texas actually going the other way, shutting back down, and a number of other states starting, unfortunately, to have to dial things back. And so we're going to see that same story where animal protein consumption goes down, feed gets sucked in, people aren't going to be traveling as much, crude oil usage goes down. So it brings down corn. Beans fall a little bit.
Rodney: So what we need is daily USDA reports to help farmers manage their risk.
Gabe: Why not every minute?
Rodney: Or we could just do an average daily price.
Gabe: Yeah. So those reports, like you said, they're helpful forcing functions because they are higher probability moments of risk. But generally speaking, I mean, if you take an averaging approach, you're fine.
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