Ep. 14 – Discussion of Commodity Marketing & Risk Management Research Topics with Joe Janzen, University of Illinois

[00:01] Intro/Outro
Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence presenting conversations and Analysis about Risk and Risk Management for food and agriculture supply chain decision makers from farmers to consumers and everyone in between. This is Relevant Risk.

[00:19] John Anderson
This is John Anderson with Fryar Center for Price Risk Management at the University of Arkansas. Here with another Relevant Risk podcast. And joining me today, Andy Mackenzie, as usual. Andy, how are you doing today?

[00:29] Andy McKenzie
I’m feeling good, John. Feeling good? It’s Friday. I’m happy.

[00:32] John Anderson
Good. And so Andy and I are very excited today because we have a very special guest. So this is a special episode of Relevant Risk. We have Dr. Joe Janzen, professor at the University of Illinois in the Agricultural Economics Department there. Joe, we’re really happy to have you here with us on campus.

[00:49] Joe Janzen
Yeah, really great to be here. It’s been a great visit and kind of good to build connections across regions and across universities.

[00:56] John Anderson
Absolutely. And a lot of overlap between our universities actually in terms of research interests. You know, in the in the field of agricultural economics and specifically in price risk management and commodity market behavior. You know, Illinois really is the big leagues. I think everybody in the profession feels that way. So we’re really excited to have you here and build connections with our programs.

[01:16] Joe Janzen
Well, thank you very much.

[01:18] John Anderson
So, Joe, why don’t you start by giving us just give us a brief introduction to yourself and your background.

[01:22] Joe Janzen
So… going way back, I grew up on a green oilseed farm up in Canada. My dad, my brother still farm up there just outside the city of Winnipeg. I did my Ph.D. at UC Davis, and now… I spent some time as a faculty member at Montana State and Kansas State University. Now, in the last two years, I’ve been at the University of Illinois, where I contribute to the FarmDoc Project, which is our main outreach mechanism for getting information to Corn Belt agriculture, about markets, about policy, about farm management topics. So the FarmDoc… really happy to contribute to the FarmDoc platform.

[02:00] John Anderson
So glad you mentioned FarmDoc. We wanted to be sure to try to get a plug in for you for FarmDoc, that’s been a really good source of high-level information for a long time. And, and I like what you said. I mean, FarmDoc, they cover marketing topics, they cover farm management topics, they cover policy topics. So it really is kind of across the board. And I know you’ve got you and Scott Irwin and your commodity price risk management team there does a great job. Gary Schnittke does a lot of farm management policy stuff. Jonathan Coppess contributes a lot of policy work. So fairly comprehensive source of information.

[02:34] Joe Janzen
Yeah, FarmDoc is really a team. We have maybe ten or 12 sort of main contributors and then I mean, we really focus on, you know, identifying sort of what, what needs are there, what information needs to get out there into the world. Kind of bringing it all together under that banner. Kind of, you know, serve the needs of U.S. agriculture.

[02:54] John Anderson
Yeah, well, you’re a little light on cotton and rice, but for Midwest stuff…

[02:58] Joe Janzen
We can’t do it all. So I will say, you know, in Illinois especially, you know, we don’t do everything, but we do …the things that we do, we try and do really well. So we grow you know, we grow corn and soybeans really well. And at the FarmDoc Project, I think we try and get, you know, the information …we’ve just tried to keep the quality bar really high.

[03:17] John Anderson
Yeah very, very well put. And, and again, I think the things you cover, you do cover very well. And I know you get a lot of you get a lot of pick up from ag media and I know folks in the policy world really pay attention to FarmDoc because it’s a good objective source of information. But you know, before we get into your current work, I know you’re really active guy with a great research program. I want to kind of force you to go back a little bit to your Ph.D. work because you really — and I told you this the other day at your seminar — you really worked with a couple of my favorite people in terms in the research world, Colin Carter and Aaron Smith. So I would like to ask you a little bit about, you know, what did you work on with them when you were doing your training?

[04:00] Joe Janzen
Yeah. So at that time, this was kind of coming out of the 2008 commodity price boom.

[04:06] John Anderson
Right.

[04:07] Joe Janzen
And a lot of worries at that time about sort of financial speculation that sort of, you know, these markets had changed and there was a whole set of new players in these markets. And are… is the volatility that we’re seeing really a function of the composition of traders in that market? So Aaron and I had a couple of papers my, my dissertation work and some other work where we tried to look at, you know, can we identify the effect of this financial speculation? That was… the key characteristic being that it’s like a big flow of money that comes in across many markets. Does it sort of start to tie them all together? And we found that, you know, our markets– I mean, while that’s not sort of something that we should disregard entirely–like our markets do have, you know, unique supply and demand fundamentals. So we looked in my dissertation, especially at the cotton market. So I have done a little bit of work on cotton.

[05:00] John Anderson
Yes. I remember that. I’ve seen that work.

[05:03] Joe Janzen
But I mean, that was a huge concern because especially in ‘08, you had a situation where cotton prices rallied quite a bit. I mean, maybe not a…

[05:11] John Anderson
Really sudden spike. It wasn’t just a rally, it was a really sudden spike that got a lot of attention.

[05:16] Joe Janzen
That’s right. And it had a big effect on, sort of, the merchant sector in cotton. You had a bunch of firms that went out of business right after that.

[05:25] John Anderson
So that market’s moving against a lot of people’s positions really rapidly and really dramatically. And they can’t cover the margin calls that come from that. So a little context there, but really important…a really important episode.

[05:38] Joe Janzen
It was a really important episode, but we found that, you know, that that incident was not that because of, you know, these big financial firms moving into that market. I mean, that that didn’t happen over that sort of time span. There were really sort of specific things happening in the cotton market that yeah, got everyone really hot and bothered for a pretty short window of time, but had some big impacts but was not, you know, driven by big banks or someone coming into the market, sort of like taking the market away from where it would have been otherwise if they hadn’t been.

[06:13] John Anderson
Right. Really important work because there were there were a lot of very serious questions around that episode. And again, I know you, as part of that and Aaron Smith, that was a significant contribution, I think, to our understanding of not just that episode, but that those markets in general that are coming out of a really volatile time. I think people now have kind of forgotten how volatile that period of time was and how many questions did come up like are things really working right? Is this is this real or is this noise?

[06:40] Joe Janzen
Well, you know, I think, like, we’ve kind of been I mean, this has been a bit of an education in the last 15 years about market volatility. And you know, now when we see kind of, you know, a 30 cent move in beans in a day, like people kind of don’t bat an eyelash. We’re like, if that happened 15 years ago, people would be kind of freaking out

[07:01] John Anderson
That’s exactly right. That’s exactly right. You know, I’ve said this in Extension meetings before. I think, you know, it used to be that if you saw the corn market move $0.05, $0.08, $0.10, you could turn on the television and know exactly why it had happened, because it would be… something big, would be going on that moves that much more like, you know, I don’t know.

[07:21] Joe Janzen
It’s Tuesday.

[07:22] John Anderson
It’s Tuesday. Exactly. It is very different. Very different environment. I want to let Andy jump in here and give you a chance to talk about I guess I’m getting old enough now. I like talking about old stuff, but Andy’s a lot more current than I am. Let Andy kind of lead us into some discussion about some of your newer work, maybe.

[07:38] Andy McKenzie
Yeah, no, I’d love to do that. And so, you know, one topic which is near and dear to my heart in terms of farmer marketing. I always advocate, try to lock in prices when they’re good at good levels. So one question is, is there a seasonality in prices so that maybe you can lock in maybe during the summer and get those high prices? I know you’ve done some work on that, if you’d like to speak to that.

[08:03] Joe Janzen
Yes, this was last spring. But thinking about, you know, in that spring/summer period when, you know, farmers have a crop in the ground, should we be sort of thinking about how that grain should be marketed? The answer is definitely yes. And we sort of look for what we call a weather risk premium in the market that, you know, if we knew we were going to have an average crop, there might be a price. But maybe the market kind of shades its guess about where prices are going to end up because we’re worried that there is that sort of possibility of a big weather event, big drought, the Derecho that we saw move through Iowa back in 2021, things like that … or 2020, excuse me. So all of those things kind of, the market kind of maybe shades its guess about where prices might end up because there’s the possibility of this big spike in prices if something bad happens. And we find that there’s a modest but, you know, significant risk premium built into built into prices. And farmers should really seriously consider making sure that they’ve got some sales made prior to harvest for that exact reason — that that there is seasonality and there’s an advantage to taking advantage to take advantage of that seasonal pattern.

[09:15] John Anderson
Is that specific to particular commodities? Or have you kind of looked at that across the board in terms of commodities.

[09:19] Joe Janzen
We  look at it in in corn and soybeans specifically where I mean, that seasonal pattern is, you know, you have production kind of concentrated in the Corn Belt and like wheat — wheat’s a complicated beast where you’ve got the seasonality in that markets a little different because you have wheat coming to market over a long period of time. In corn and soybeans that premium is there. It’s bigger in corn is what we found over the last 20 years. There’s a bigger seasonal premium in the corn market, but it’s there. The thing about it, though, and the caveat to put in there is that you will not always end up better off making those, you know, plant — those growing season sales. There are years where something does happen and prices do rally into harvest and we get much higher prices later than earlier in the marketing period. So it’s something…it’s a long game that you have to play as a as a grain marketer.

 
[10:17] John Anderson
So over time, on average, it’s a sensible strategy, but it’s not a sure thing.

[10:22] Joe Janzen
Exactly.

[10:23] John Anderson
Shocking that there’s not a sure thing in agricultural marketing.

[10:26] Andy McKenzie
Indeed. And then again, like we’ve already talked about this in past episodes, John, if you’re forward contracting, you do still have to be aware of the potential for non-production risk as well. And so how aggressive you are depends partly on what you think your weather conditions are going to be in your area, I guess.

[10:44] Joe Janzen
Right. And so the thing about that is. Right, that’s a decision that you get to make over time so that you don’t have to sort of decide it all in May that like I’m going to take advantage of this. There is still a seasonal premium that persists into June and July. So it’s something that a grower can play out in time and.

[11:03] John Anderson
You can scale into it.

[11:04] Joe Janzen
Increment it. Yeah, do it incrementally.

[11:08] Andy McKenzie
Well, that makes sense, Joe, and I appreciate you adding some academic background to that issue. I know it’s one which frequently crops up. So another thing I wanted to ask you about. Again, this has to do with prices. We’ve obviously seen very large price spikes over the last year, but also on inputs as well. And so, you know, you’re thinking about margins. What does that mean? Are margins still good. And in terms of, you know, government support payments, which are historically triggered on price and revenue, should we be looking at trying to support farmers on their input production costs or even on margin directly? Or what’s your thoughts on that?

[11:52] Joe Janzen
I think this is yeah, this is going to be a big topic of conversation leading into the next farm bill. And it’s already a topic of conversation. I think the…there are difficulties there that don’t exist in a government program that tries to make payments based on long run price level. So margins are more complicated. Margins are more volatile, margins differ more across regions than prices do. And so there’s a whole host of policy design challenges that are associated with trying to make a program that would protect farmers long run margin levels. I should note we do have under federal crop insurance margin protection programs that kind of are based on, you know, declines in margin that might occur over sort of the crop insurance time horizon, which is typically, you know, planting to harvest. So those kinds of…there are risk management tools that exist for those kinds of risks. I think around the farm bill, we’re going to be thinking about sort of, you know, if margins fell over a longer period of time than, you know, the six months from planting to harvest. Are those the kinds of risks that the Federal Farm Bill safety net should be designed around? And I think I would be…my take, at least at this point, is we should be pretty cautious about thinking that we can develop a well-targeted margin program that suits the needs of the diverse set of producers that we have. You know, that we grow a lot of different crops in the United States. We produce them under very different production systems, and they each all have their own idiosyncrasies. Designing one program to kind of encompass and target payments at at all of those risks is really difficult.

 
[13:38] John Anderson
Yeah, that’s a that’s a really good point when you talk about Title one programs. The … I think a lot of times we — it’s easy to lose sight of how difficult it is to make a program that is effective and generalizable across the entire country.  Because you can’t take a Title one program and say, you know what, this is not going to work in the Pacific Northwest, but it’s okay for everybody else. So we’re going to do it. It’s not an option. It has to work for everybody, at least at some level.

[14:08] Joe Janzen
That’s right. I mean, and that’s what the farm bill I mean, that’s the nice thing about the farm bill process for all its warts.  It is a negotiation between, you know, it kind of has to encompass everyone. Everyone kind of has to get on the same page and agree.

[14:21] John Anderson
And you’re right, and agreeing on, well, agreeing on the components of a margin calculation are very difficult when you talk about a national, kind of a national scope, you know, what do you count? Where do you get the prices for those inputs? Lots of things are different. Particularly, you think about a crop like soybeans that is grown really widely and in really different production systems. That’s a, that’s a tall order.

[14:44] Joe Janzen
Yeah. And then you sort of start to build in like differences across crops. So things like, you know, if you look at USDA cost of production data for cotton, you include things like ginning costs.  And for rice, you include drying costs. And so do you sort of say, well, do that…should those count or is that, is it is it fair to include those when other crops don’t have those cost components? Even something as simple — you have some crops that have very high fixed costs and lower like variable costs like fertilizer and seed, are smaller for some crops than others. So should we, you know, which costs count? I think that’s going to be, if we — if this is the road that we go down in terms of the next round of farm policy, those are kind of issues that we’re going to encounter. And that’s going to be at the crux of the of the argument.

[15:31] John Anderson
But there certainly is a lot of interest in it, and I think there will be a lot of work that’s done on, you know, can we can we square that circle and come up with a margin product? And, you know, the dairy industry probably kind of broke the seal on that. They’ve been dealing with margin products for quite a while, including in their in their farm bill component.

[15:52] Joe Janzen
Yeah. So the thing … and we’ve looked into that a little bit, I mean the one thing about the dairy margin program is really all based on prices. So the program is roughly speaking — very, very quick detail: price of milk, less the price of a feed and you don’t sort of account for those production differences because they aren’t as big in terms of like, you know, one dairy cow doesn’t need very, very different feeding requirements in one part of the country versus another.

[16:20] John Anderson
The differences really relate to the scale of the operations more than at the micro level.

[16:23] Joe Janzen
And that I think we can’t account for that. We can scale our programs to different farm sizes. We’ve been dealing with that for some time. The one thing we’ll say on the crop side is prices for these inputs might not vary that much, or price for inputs and outputs might not vary that much across regions. But the production systems are different enough that the actual like cost level, the actual margins, say on a per acre basis do vary quite a bit. And that’s going to be, again, something that we have to contend with going forward.

[16:54] John Anderson
It always makes me nervous when we take policy ideas from dairy. Dairy policy is very idiosyncratic ffor those of you aren’t familiar with dairy policy, it’s very complicated.

[17:08] Joe Janzen
Yeah, I wouldn’t say … yeah. Again, as someone who’s not a dairy economist, I feel like I, I very much want to stay in my land and not kind of like try and go too far down that, that, that dairy road.

[17:21] John Anderson
So I like … one of the things you said I want to pick up on because you talked about or at least alluded to this distinction between the purpose of crop insurance programs and farm bill programs. And, you know, this is not a conversation I’ve heard happen a lot lately, but it was a fairly common conversation or has been a fairly common conversation in past years that, you know, crop insurance is designed and intended to deal with within year risk, within year variability in price or output. Title one programs are really intended to be long term protection, a long term safety net over multiple years where you get into these sort of, you know, long term secular trends that keep prices depressed over a longer period of time. So you’ve got for example, a fixed loan rate that that accounts for the fact that over multiple years we might have a problem. And I think that’s something that will come up as we as we get to the next farm bill. But back to the crop insurance side and this within year protection on these margin products, what kind of pick up are you seeing in the Midwest for those products? And maybe that’s a better question for your colleague, Nick Paulson, but you’re the one who’s here, so I’m going to ask you anyway.

[18:34] Joe Janzen
Yeah. I mean, my sense is that the crop insurance program is I mean, some form of crop insurance is widely adopted across, you know, the vast majority of producers. I don’t know what the specific you know, the specific number is in terms of I mean.

[18:49] John Anderson
The margin products?

[18:50] Joe Janzen
On margin products? No, no, no, not on margin sort of on crop insurance generally. But the margin products, I mean, the uptake is less probably in part, and I don’t have a really good sense of this, but probably in part because I mean, producers do have means of kind of locking in input prices up front. I mean, there’s other, there are other risk management types of strategies for input prices. And I mean, until maybe the last couple of years, you could argue we hadn’t seen, sort of, tremendous volatility in input prices. And now we’re seeing that. So we’ll have to sort of … it’s maybe wait and see and to see sort of like did this most recent — especially say fertilizer price volatility, which is that certainly the big one — did that drives people to reconsider those programs? And that might not be something that happens right away. It might sort of play out over this year and the next in that and the one after.

[19:48] John Anderson
Right. That’s a great point. And I think that is something we should probably keep on our radar as a as a researchable question once we have a little more experience. That’s a really good, good insight.

[19:58] Andy McKenzie
Yeah. Let me jump in as well then and switch gears a little bit here, because another research area that you’ve done a lot on is grain storage. And again, this is something that I have a lot of interest in research wise. And my friends at White Commercial — Jason Wheeler, Roger Gattis — they do the Elevator’s Cut podcast, and I know that you’re a fan, so I wanted to give them a shout out.

[20:21] Joe Janzen
Yeah, absolutely. Those guys are awesome. I really enjoy the work that they put out.

[20:24] Andy McKenzie
And so, you know, I know some of the work you’ve done is just tracking what has happened to grain storage over time and what’s the, what’s the component between on farm versus commercial storage. And that sort of gets to this idea as well of disintermediation. Is there a sort of trend towards taking the middleman out of the picture? I know that, you know, companies like Tyson Foods have tried to increase their direct farmer marketing programs and buying direct from farmers. And so what I’m getting at — and I’m sure Jason and Roger will be interested to hear what you think on this — is there still a role for the country grain elevator and the middle, guys?

[21:06] Joe Janzen
So, I mean, the short answer is yes. And the long answer, maybe back up a second and just sort of think about what has happened to grain storage capacity in the U.S. It… in the last 20 years at least, it’s moved nearly bushel for bushel with grain production. So if we produce 100 million more bushels, we need roughly 100 million more bushels of storage capacity.

[21:30] John Anderson
So when you’re talking about storage capacity here, you’re talking about on and off farm together.

[21:34] Joe Janzen
Talking about those together. And what we have seen actually is a you know, a little bit more of that increase has come from off farm storage, a little bit less from on farm, though, that, you know, depending on where in the country you are, that might you know, that might differ. I mean, farmers have certainly built more on farm storage capacity to account in large part for the increases in production that we’ve seen. We do see just you know, we see trends in yields. Corn and soybean yields are trending up over time. So we’re building more storage to account for that — both on and off farm. So that would point to at least like — off farm storage capacity growing kind of points to the idea that the grain industry certainly sees a role for themselves going forward. They’re building infrastructure and making investments. And that, you know, sort of on farm storage isn’t growing faster also suggests that farmers see a need for grain storage infrastructure, but they’re not going to do all of it themselves. So I think there’s certainly a role, a role for both. But yeah, the country elevator is certainly not dead yet. And then we look at, we’ve also looked at sort of actual farmer… we’re starting to look at actual farm storage behavior. So that’s a line of research that I have initiated in the last year or two. Something I’m really kind of excited about is sort of understanding how are farmers actually making storage decisions, how are they using this storage infrastructure that we’ve been talking about? And we do see, you know, that farmers are pretty responsive to market incentives. There’s a you know, when farmers’ storage costs go up, they store less. So not just sort of they’re responsive to market prices, but also they’re responsive to all of the incentives that exist for storage. And that they might, farmers might not have the lowest cost storage. It may be more efficient for other firms to provide those storage services. And that’s where the country elevator comes in.

[23:39] Andy McKenzie
Sure. And I’m probably going to do podcast at some point with Jason and Roger to let them speak more to this issue. But I know that certainly there are certain things and benefits that the country grain elevator brings, whether that be customer service or greater opportunities on forward contracting. There’s various reasons, I think, behind why there is definitely a role. But I think your research is very interesting, though. Yes. Joe, thank thanks for talking about that.

 
[24:07] John Anderson
Now, Joe, I know you work a lot with other colleagues there in Illinois and Illinois has the Office for Futures and Options Research. Any insight on what they’re working on now? Because Andy and I are trying to steal some research ideas.

[24:22] Joe Janzen
Oh, gosh. I don’t know. I don’t want to get in trouble with my colleagues back, back in Champaign. But yeah, so we’ve had a long standing, you know, a long standing line of research in our department going back to people like Tom Hieronymus, Ray Leuthold and Phil Garcia. So a, you know, a long tradition of doing research.

[24:42] John Anderson
All very eminent names in our field.

[24:44] Joe Janzen
Very eminent names that people yeah, people out there in in the regular world might not be totally familiar with. But, you know, we have a new crop of sort of leading researchers in this area. What’s what so I think we’re always sort of looking at how do we develop new and better risk management tools and looking at sort of like the factors that drive the success of a of a futures contract. So some work right now with a colleague of mine and a student from Japan looking at the failure of the rice futures market in Japan and sort of trying to understand what are you know, what factors are important. And sort of the two things we’re kind of hitting on are both sort of hedging effectiveness in the relationship with the cash market, but also sort of regulatory uncertainty. And one thing that featured in the in the case of Japanese rice futures that — I don’t want to go too far down that road — was the idea that the regulator in that market sort of never gave sort of long run indications that this market would, you know, exist and be sort of a licensed and regulated futures market going out a long way into the future. And that made it difficult to think that, you know, people in the in the rice industry there would want to use this as a risk management tool if they didn’t think it would exist. You know.

[26:05] John Anderson
We definitely need to talk about that.  Rice futures are certainly something that in Arkansas we spent a lot of time thinking about and, you know, not just in our domestic market, but globally. So, glad to hear that you guys are digging into that. We love to see capacity being developed on anything that that that serves the rice market.

[26:26] Joe Janzen
Very good.

[26:27] John Anderson
All right. Anything else you want to share about your upcoming research agenda or what’s going on at the University of Illinois, generally?

[26:34] Joe Janzen
I think, you know, the big thing is always like connecting, you know, connecting research to output that really kind of serves sort of an audience outside of academia. And that’s the primary tool that we use for that as FarmDoc. So I kind of encourage anyone to go check out FarmDoc Daily and see  — the big thing that we do there is we try to every weekday put out a new piece of original analysis. So every business day there’s something new on that website that I think, you know, I’m pretty proud of most of most all of the stuff I’ve put up there. And I think my colleagues are as well.

[27:08] John Anderson
Yeah, absolutely. And that’s very much in the in the best traditions of the land grant model, which I know Illinois takes very seriously as we do here. Joe, we really appreciate you being here. It’s been great hosting you here at Arkansas. I hope you enjoyed your visit and we very much look forward to having you back.

[27:26] Joe Janzen
Yeah, absolutely. Thank you so much.

[27:28] John Anderson
All right. This is John Anderson with Andy Mackenzie with the Relevant Risk podcast. Thanks for joining us.

 
[27:35] Intro/Outro
Thanks for listening to the Relevant Risk Podcast, a production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas System. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville and research and extension activities through the University of Arkansas System Division of Agriculture. Visit fryar-risk-center.uada.edu for more information. Thanks for listening.