Ep. 20 Jason Wheeler of White Commercial Corporation Talks about Basis Trading

[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.

[00:22] John Anderson
Hey, this is John Anderson, director of the Fryar Price Risk Management Center for Excellence, here with another Relevant Risk podcast. And joining me today as as always, or at least almost always, Andy Mackenzie, co-director of the center. Andy, how are you today?

[00:36] Andy McKenzie
I’m doing good, John. Very good.

[00:38] John Anderson
And we’ve got a very special guest today. This is like one of those very special after school specials where you learn valuable lessons from important people. We’ve got an alum of our department here, Jason Wheeler. Jason, how are you?

[00:53] Jason Wheeler
Yes sir, I’m great. Thanks for having me. Yes, Class of 2005.

[00:58] John Anderson

2005. Wow, you’re getting old.

[01:01] Jason Wheeler
Yeah, they used to be not that far away. Now it’s pretty far away.

[01:05] John Anderson
Yeah, time flies. Well, Andy has been really excited about this because Andy is our resident guru on basis trading and futures markets and has trained generations now of people out in the field doing this, and Jason, you’re one of those, one of Andy’s proteges out there in the world doing great things. And so, we’ve been really excited to have you and kind of talk about what you do, how you use risk management principles and tools, and the application of these things in the marketplace.

[01:41] John Anderson
So, Andy, I’ll let you take over and for old times’ sake, give Jason a good grilling here.

[01:46] Andy McKenzie
Sure. That sounds good. You know, I just I want to sort of like make the point that you do your own podcast, too, right? The Elevator’s Cut. And we actually only have half of the team here today. Roger is not here today, just Jason, but they’re both alums of our program and they both help us out on teaching our online basis trading class too.

[02:07] Andy McKenzie
And they are both employees of a company called White Commercial. So maybe you could just elaborate and give us a little bit more detail on, like John said, what you all do for White Commercial and what’s your relationship with the university.

[02:19] Jason Wheeler
Sure. Well, that’s a loaded question. There’s lots to that. But White Commercial has had a long-standing, before my time, relationship with the university for a generation before me, I should say. And yeah, so I was one of Dr. McKenzie’s early-ish classes and White Commercial, what we do is we help grain elevators. Those are our customers.

[02:45] Jason Wheeler
So, we work in the commercial grain space, I guess you would say, and we help them with their merchandising and all that goes into that so basis and spreads, which is stuff that, you know, I learned in Dr. McKenzie’s class. That’s what we do, we help grain elevator folks across the country do that sort of thing. And along with that comes the accounting for it, because the grain industry has a unique mark-to-market accounting thing they have to do.

[03:14] Jason Wheeler
So that’s something we help with. We help on the financing side because it takes a lot to finance margin calls and all that sort of thing. But we’re big into training. That’s probably what we’re known for in the industry is, is our training on merchandising. And so, I’ve been doing that since ‘05. I got the job right out of here because of the connection White Commercial has with the university.

[03:41] Jason Wheeler
And I’ve been there ever since. And so, we work with about 275-ish grain companies across North America. I say North America because we’ve got a good swath of Canada now, Southern Canada. Those guys, I’m learning I’ve still never been to Canada, but I’m learning about Canada and some of the things they say, and hockey, and you know, poutine, which seems not right to me.

[04:08] Jason Wheeler

But Roger’s a big fan of it. Most people are. But, you know, it’s just not my you know.

[04:13] John Anderson
Listen, gravy works on everything.

 
[04:14] Jason Wheeler
And that’s what they say. But anyways, yeah, so I’m learning about that whole deal. But yeah, so that’s our thing is we help folks with the day-to-day stuff and then of course the education behind it and the training. So, I get a good bit of that in too, and so that’s really our product is, is that I guess consulting and management of a grain operation on the business side, merchandising, accounting, financing, that sort of stuff. 

[04:45] Jason Wheeler
And how we charge for it though is we are futures brokers, so we handle their futures transactions. So, Mr. White started the company back in the seventies and his idea was, well, they got to spend, they got it to trade basis. You have to have a futures broker and you have to pay somebody commissions to do that. So, he said, why don’t I just take that money they’re going to have to spend anyways.

[05:10] Jason Wheeler
But I’ll provide, instead of technical charts of guessing where the futures might go, which nobody really knows, and that’s, you know, beside the point. But anyways, that’s what a lot of them like to do. It’s more nuanced than that but anyways they get into technical stuff that we don’t really do and so that’s how we charge for our services, we’re futures brokers so that’s how we generate revenue.

[05:36] Jason Wheeler
So, it’s a good model that ties people to you for a long time. So, we’ve got customers that have been customers for longer than I’ve been alive. So, which is as we established for a long time.

[05:47] Andy McKenzie
And here you are now giving back in helping the university by teaching our students because you teach your online basis trading class, which really gets the nuts and bolts of how grain industry hedges and manages risk. And one thing I want to promote as well is the Art of Grain Merchandising book, which all our students buy when they take these classes that they take here.

[06:07] Andy McKenzie
That is the Bible of the grain industry. Am I right, Jason? I mean, pretty much all of the grain companies will throw that book at their new hires and say, learn this. So, we’ve got the edge, I think, because we’re already training our students, you know, with that book and doing the basis trading the way that White Commercial preached.

[06:26] Andy McKenzie
So given that, I want to get into a few topics and just talk a little bit more detail about basis trading and all that good stuff. So maybe the first thing to do is to say to you, Jason, what is basis trading for those of us who don’t know what actually is it?

[06:45] Jason Wheeler
Alright, basis trading. Well, it is, so if you’re taking notes, you’re following along with your notebook, we’re going to buy low, and sell high is what we do in basis trading. So, I usually like to give that one away for free, but you know here we are. 

[07:03] John Anderson
But that is a million-dollar tip right there Jason.

[07:05] Jason Wheeler
Hey, it’s served a lot of people well over the years, not everybody knows about it but now you do, so basis-wise, you buy low basis, sell high basis. And that is different from price. And that’s where a lot of folks can get, you know, down the wrong path at times. You can kind of blur the two together, but basis trading is what a commercial grain elevator does, in my view of it right, a sort of grain elevator does. So, a grain elevator has to remove price risk from their operation, in my opinion.

[07:47] Jason Wheeler
So, if you buy grain from a farmer and you’re going to hold it for a while until you know the chickens need it or the cows got to eat or the ethanol plant needs to eat or whatever, you got to hold it for a while the prices can do a lot of things. So, if I buy grain from a farmer at a price, I can do one of three things.

[08:12] Jason Wheeler
I can hope the price goes up before I sell it. Eh, sometimes it does, sometimes it doesn’t. And when it doesn’t, it can really not and go the wrong way. And so sometimes people do that, and those people don’t stay in business very long because you may be right sometimes, but when you’re wrong, you’re going to be really wrong and it about wipes you out.

[08:33] Jason Wheeler
So that’s one way to do it, speculating on price. Two, you can immediately sell it, right? I bought it for 422, I can sell it FOB my elevator. So, take the freight out and I can sell it for 432. I can make $0.10 or whatever and just sell it immediately. So, I get rid of that risk constantly.

[08:57] Jason Wheeler
And that is a way I think, a good instinct to have is I’ve bought this. If I don’t sell it quick, I could be in trouble. This is a lot of risk; I’m going to sell it quick. And that’s got what we call back-to-back trading. I just sell it. Basis trading is the same sort of principle, that good instinct of selling it quick except not selling it to a physical buyer but selling futures.

[09:25] Jason Wheeler
And so, it hedges that price risk. And so, when you do that, it does hedge that price risk. But the other thing it does at the same time is locks in a basis. And then that basis is what you can trade and make money. That is a predictable thing because of the seasonality of our business. It gets low at harvest time; it recovers usually after that and then it follows the spreads is what we like to say.

[09:49] Jason Wheeler
That’s an easy, nebulous thing we like to say, but it does. So, if there’s carry in the market basis tends to climb with that carry, if there’s inversus basis tends to drop with that inverses and things like that. So, the elevator is a constant student of that basis. And what makes it move? When does it move in your market?

[10:13] Jason Wheeler
And it’s a local phenomenon. So you don’t have to know what the weather is in Argentina or you know what the latest, you know, thing is in Ukraine or whatever to trade your local areas basis, you need to know the four buyers you talk to, what’s going on with them and are they running out or not and that sort of thing.

[10:36] Jason Wheeler
So, it’s knowable things that has to do with your market and that’s what causes basis to move, so.

[10:42] Andy McKenzie
You know, I think that’s a good explanation. And one thing that I want to try to do in my career is try to show people or educate people on how, dependent on what business you’re in, what is the risk you actually face. And I think a key thing that a lot of people and, you know, not just your average person, but academics too, like us, John, I don’t think they fully understand the basis trading concept at the grain industry level.

[11:08] Andy McKenzie
So, they’re still focused on price and price risk. But really from the elevators point of view, it’s an automatic hedge. You buy 50,000 bushels of cash grain, you sell 50,000 bushels in the futures market and totally offset it. You’re not trying to time the market. You’re not trying to say, okay, I’m going to wait for futures to go up.

[11:27] Andy McKenzie
Now I’m going to sell because I’ll sell at a higher level. None of that. It’s an automatic transaction. So, you know, if you don’t understand that a lot of people do research and they sort of look at things like Commitment of Traders Reports and they look at what the net position is, whether you’re long or short as a group and the commitment, a trailer shows, well, what I to you as a group of speculators, are you net long or short?

[11:50] Andy McKenzie
What about the commercials? Well, commercials must know what’s going on in the market. They know what prices are going. So, if their net long, they’re saying prices are going to go up. If its net short, prices are going to go down. But if you follow what I just said and it’s an automatic hedge, they’re making no forecasts on what price is doing at all.

[12:09] Andy McKenzie
But on the Commitment of Traders Report, it might show that they’re net short. All that means is farmers have been selling a lot of grain to elevators, who are now offsetting their position and going short in the market. So, it has nothing to do in terms of what they think prices are going to do. So that’s just one example where people could misconceive what’s happening research wise by not understanding how these markets actually work.

 
[12:32] Andy McKenzie
So, I just wanted to make that sort of point. But one thing else that we wanted to talk about was there’s a relationship right, between farmers and elevators. And you know, is it a win-win, this relationship? I mean what do you think Jason, and you know from your experiences, how do you feel the farmers market, the grain, are they doing it correctly, are their problems, other issues? What’s your perspective on it?

[13:02] Jason Wheeler
Are they doing it correctly? You know, everybody’s got their own, their own philosophies. But I think no one ever feels that they’re good at it. Right. I don’t think like from a farmer standpoint, unless I sell every bushel I have at the height of the market this year. No. All right. I didn’t. But unfortunately, that’s how a lot look at it.

[13:23] Jason Wheeler
But that’s really not the way to look at it necessarily. But  you said the elevator farmer relationship. It’s tough. And you talked about the commitment to trade. You said a lot there that was really good. But the idea that okay, because the commercials have a bunch of short futures, like you were saying, that just means the farmer sold.

[13:45] Jason Wheeler
So, it’s really a comment on the farmers thinking that, you know, the prices are good enough to sell really. And one thing we had talked about is from the grain elevator standpoint, if I could have it any way I wanted as a grain elevator, I would have it so that my farmers sold the top of the market the highest take of the market.

[14:09] Jason Wheeler
They sold that every year, every bit of it. That doesn’t make any sense. Farmers think the elevators are trying to buy it as cheap as they can. And this goes back to like the basis versus price thing. So, if I’m an elevator, like you’re saying, like the whole foundation of basis trading is I don’t want price risk.

[14:30] Jason Wheeler
I have no idea what the price is going to do, I just don’t. And some people think they do, but no one really does, right? So, I just want to get rid of the price risk. So I’m always, if a farmer sells it to me, I’m selling the futures, right? I’m buying the grain, I’m selling the future. And I sell the grain, I buy the futures.

[14:48] Jason Wheeler
It’s not, the only comment that I’m making with that with those transactions are that I have no idea what the price is going to do. I have to get rid of this price risk. So, the futures market is a is a tool for the elevator to just get rid of the risk of that price on their business.

 
[15:03] Jason Wheeler
Now they accept basis risk instead. So, the risk, where I’m in the risk center, the Fryar Risk, what’s it called? The full name?

[15:13] John Anderson
The Fryar Price Risk Managment Center of Excellence.

[15:16] Jason Wheeler
I knew excellence is in there. And so that’s, here you go. So I’m here in in this Price Risk Center of Excellence. Is that right?

[15:25] John Anderson
That’s 90% right.

[15:26] Jason Wheeler
Okay. All right. Hey, 90%. And that’s pretty good, you know.

[15:30] John Anderson
That gets you an A in any class here. 

[15:31] Jason Wheeler
There you go. So, getting rid of risk is what they’re trying to do. But a type of risk, they’re accepting other risk. Like there’s always risk in everything you do, it’s always like people are like, oh yeah, it’s safety first, you know, it’s always that’s the first. We’ve got to be safe first. And I get that, and I agree with it.

[15:51] Jason Wheeler
We got to keep people safe. That’s good. But I mean, we’re not getting rid of all our safety risk, right? There’s still a risk or else we wouldn’t drive to places; we could get hit on the way here or whatever you know. You can’t eliminate all risks completely. So, in the grain business it’s no different. You can’t get rid of basis risk unless you’re doing the back-to-back trading.

[16:14] Jason Wheeler
But in that case, I would even argue you’re introducing all sorts of other risks, logistic risks, that you can’t move it fast enough. I mean, there’s always risk that we’re trying to get at. But anyways, what was the question I got sidetracked there.

[16:29] Andy McKenzie
Well, I’m thinking, you know, in terms of your relationship with the farmers, you know, is it a win-win relationship? And you’re sort of basically saying it can be right because if farmers are selling at high prices, what sort of basis are you guys typically buying at?

[16:43] Jason Wheeler
Right. Right. So, yeah, and there are, the examples in year 2012 and 2008 when prices get really high, a lot of times basis got really low at least, you know, new crop stuff and everything. And guys were selling some of their highest prices they’ve ever sold cash wise. But it was also the lowest basis that the elevator had ever bought before.

[17:04] Andy McKenzie
Why would that be low basis during those times?

[17:08] Jason Wheeler
Well, a lot of reasons. One is because it’s very expensive, right. So, if I’m an end user buyer and I’m feeding chickens, for instance, and corn is $8, man, that’s tough to make that work. So, I want to back that off as much as I can. And the other thing is farmers want to sell the full out of $8 corn.

 
[17:41] Jason Wheeler
So, they’re selling and selling and selling. If I’m a chicken buyer, I’m trying to buy it as cheap as I can, and everybody wants to sell? Eh. Lower, lower, lower, lower my basis. The basis is a signal to the market of how bad I need or want grain. So, at times of really low prices and farmers don’t want to sell, then chickens still have to eat.

[18:05] Jason Wheeler
It doesn’t matter that the prices are down right now, chickens gotta eat so we’re going to raise our basis. So, say corn’s three and a half dollars and farmers don’t want to sell that number, it’s too low. All right, well, what do you want? If you ask a farmer, it’s three and a half dollars, and you ask a farmer what they want, what do they want? Five dollars? You know, they want like a dollar and a half more. What does a basis trader want? Well, it’s 30 over right now, if I could sell 50 over, I’d sell it. So that’s $0.20, I can do that. I can raise my basis $0.20. I mean it’s essentially raising my spot price, $0.20.

[18:44] Jason Wheeler
But that gets it done. So, the basis traders feed the market when prices are low, farmers don’t want to sell, for whatever reason these basis guys can step in the gap and fill that need with higher basis corn, but cheap corn or beans or whatever we’re talking about. Wheat, rice, they can step in and fill that.

[19:04] Jason Wheeler
So that the times that, you know, the market ebbs and flows and farmers do want to sell, don’t want to sell, the basis trader can kind of fill that and what when a lot of people don’t understand about it, and I don’t fault them for it because there aren’t really other businesses like this like it wouldn’t work like this if we’re selling like, you know, couches or something like this is like everybody along the way has to take a little more, you know?

[19:34] Jason Wheeler
And so, people think, well, if I vertically integrate and I own everything in the way along the way, then I can just take smaller margins out of each thing and get me to the end. And like a lot of buyers will say, well, if I can buy direct from the farmer, that’s going to save me money because then I don’t have to pay for this elevator you know, for them, for their business to make money along the way.

 
[19:56] Jason Wheeler
But going back to what you’re talking about, the win-win thing is if you’re doing the elevator thing right, you don’t care about the price. So, you can buy like what we’re talking about here. You can buy it for $8, sell it for $3 and make money.

[20:17] Jason Wheeler
And if you’re vertically integrated thinking, I’m going to buy this straight from the farmer, well, farmer don’t want to sell when it’s three bucks. Now it’s eight bucks, he wants to sell everything. I don’t want to buy anything. You know this guy in the middle that doesn’t care what the price is, just says, hey, push the basis a nickel or a dime for me.

[20:32] Jason Wheeler
Holy smoke. So, he can grease the skids.

 
[20:35] Andy McKenzie
So, it’s an important middleman role then basically. 

[20:36] Jason Wheeler
Yeah, he greases because he’s trading that basis piece and not the price. Here we go. You know, and all of a sudden Burger King’s got a ten piece chicken nugget for $0.99. It’s a beautiful thing you know? 

[20:50] Andy McKenzie
You know we talk a lot about basis and you know John and I have talked about basis a lot in our podcasts, and it does impact the farmer too, basis. But I mean, from a marketing standpoint, I know you feel that maybe sometimes farmers focus a little too much on basis and they should be looking to sell their crop when the price is high and not get too caught up on what the basis is doing. Maybe you could elaborate on that a little bit, why you think that?

[21:17] Jason Wheeler
I do think that you’re right, but no, it’s true. So, you have those periods where wheat, for instance, back in ‘08, how you know, at that time it’s a different time we’re in now. But at that time, three, three and a half bucks a bushel for wheat was decent and four bucks was a pretty good price for a bushel of wheat.

[21:39] Jason Wheeler
This is, you know, pre ‘08, now I know everything changed of course, it’s always changing. But anyways, four bucks is a pretty decent price for wheat. And then it went to five bucks and that was really good price and six bucks. Holy smoke. Well, and maybe you guys had targets in that everybody thought was crazy for $7 wheat, we never have $7.

[22:01] Jason Wheeler
We had it and then we had $12 wheat. It went all the way to 12 bucks. But what happened was basis went to $3 under. So, we got $12 wheat, futures. And, you know, I’m speaking in generalities, but somebody is going to be like, oh, well, the high was this, okay $12 wheat $3 basis, but so it’s $9 for wheat when normally if we could sell four as an average, we’re doing pretty good.

[22:32] Jason Wheeler
Now we got nine. Ooh, that’s pretty good. So, I don’t know what it is, it’s human instincts. I don’t know. I don’t like to; I’m not railing on farmers or anything. This is what humans do is like, all right, that’s good. But who’s making money off of me now, right? And so, they’ll say, all right, yeah, I can get $9.

[22:53] Jason Wheeler
But what’s this basis is $3 under. Are you kidding me?  I’ve never sold that bad a basis. And then they call our congressman.

[23:01] John Anderson
That was a hugely controversial deal. 

 
[23:03] Jason Wheeler
Yeah. Then they call the congressman. The congressman says the CFTC, what the heck are you guys doing to regulate this? And then the CFTC goes to the CME group and they say, what the heck are you doing? You got these politicians breathing down my neck. You guys get this thing together, shouldn’t it converge or something? I learned that Dr. Mackenzie’s class one time and then there you go.

 
[23:23] Jason Wheeler
And now to see him, like I don’t, you know, it’ll happen eventually. But so they’re doing all sorts of stuff with storage rates. And anyway, but it’s all back to the farmer is like $9 wheat, yeah that’s good but it should be $12 wheat you know, because dadgum it, these guys here are taking $3.

[23:47] Jason Wheeler
Well, if I’m a grain elevator, you know why I’m paying $3 under is because the best I can sell is $2.90 under. You know, it’s not me. It’s funny you talked about we have our podcast. The Elevator’s Cut, Roger and I. It was based on a thing in the news one day is they did like a local news.

 
[24:12] Jason Wheeler
It was out in Wichita, it was on wheat. And they said, you know, they were explaining it. And the farmers like this guy is like the head of the Wheat Association and something, I don’t know, he had some title that was great. And they’re walking through a milo field and the reporter has no idea this isn’t wheat that he’s walking through.

[24:29] Jason Wheeler
But he’s just like, this sounds good. I’m, you know, having a good time and so pants are getting all dusty red, but hey, here we go. We got this farmer, and he says, the elevator’s taking all his money. And so, it says last year the basis was 40 under at harvest. And this year it’s two and a half dollars under whatever it was.

[24:50] Jason Wheeler
And basis or the elevator’s cut, they defined it as that. 

[24:57] John Anderson
You get it all, like you get the whole thing.

[24:59] Jason Wheeler
Yeah. The elevator they just get that. And so I was like, that’s crazy. But I always, I want to ask those guys, what do they think happens when the basis is overs? Because that happens to over basis, like cash is over the future.

[25:13] Jason Wheeler
Are we just losing all this money, what is happening but anyways I digress. But, that’s the thing is the guys that just said, hey, you know what, $9 is really good I’m going to sell that. They, you know, that’s fine. They just made good money. But the other guys are like, somebody is making out here.

[25:36] Jason Wheeler
I’m not going to sell this; I’m going to call my congressman. And that’s what you call congressmen about apparently. I never knew, but now I know.

[25:44] John Anderson
I wondered what they were for?

[25:45] Jason Wheeler
Yeah, I don’t know. I still try and figure out what you call a senator about, but one day I’ll figure it out.

[25:51] Andy McKenzie
So, for the last three years now, we’ve had these things called inverted markets. Can you explain what those are and how that impacts your business?

[26:01] Jason Wheeler
I can, yeah. I’m sorry I go off all these tangents, thanks for bringing me back here. All right. So inverted markets. That is when, classic definition is the deferred months are trading at a lower price than the nearby months. So, the market, if it was reverse, it would call those carries when the market’s paying you to carry this in inverted markets, which is what we’re seeing across pretty much everything, is the market is penalizing you to carry it. 

[26:31] Jason Wheeler
Man it is penalizing you hard, too. Now, I mean, guys are paying 8% on their operating lines and prices are really high. And we’re figuring ten, twelve cents of cost per month just in interest to carry a bushel of beans. So, it’s pretty crazy. And then, you know, you try to recoup that interest cost through the carries in the market.

[26:55] Jason Wheeler
Well, it’s negative carries or inverses. So it’s a it’s a thing. So from the elevator standpoint is this is the third year in a row it’s happened with inverses starting early in the season and everyone’s learned by now some the hard way that you just can’t you can’t fight them. You have to sell your grain as fast as you can.

[27:21] Jason Wheeler
And there’s logistic constraints to doing that fast enough. And lucky enough this year, what’s changed is farmers have made good money. The prices have been high enough that a lot of them are holding and waiting for price to go up, which is not an unreasonable idea because we’re you know, USDA predicts it’s kind of a tight supply situation, right.

 
[27:50] Jason Wheeler
So they’re holding their grain and waiting for price to go up. And for the elevator, that means there’s not as many farmers in line logistically to try to get grain sold into processor markets or export markets, what have you. So that’s been, elevators have been more able to actually perform on that stuff. But, you know, in general, some elevators are just really big and they can ship a million bushels a month and they take in 10 million bushels.

[28:22] Jason Wheeler
So I can sell it as fast as I want, but I’m still going to have it, you know, even through the inverses. So you got to manage that and you got to make sure, I guess, your ducks are in a row and you’re not taking any spread risk on your merchandising position. That’s what we’re going over with the students today in the class was checking your position and make sure your futures are where they’re supposed to be and you’re getting paid basis wise accordingly as best you can.

[28:54] Jason Wheeler
It’s tight. But going back to what you said earlier, from an elevator standpoint, I want to have everything sold. And when I’m selling grain, I’m buying futures. So I’m trying to get I don’t want to have many short futures. Now, that’s not a comment on where I think the prices are going. I don’t, just because I don’t want to have short futures doesn’t mean I think the prices are going down.

[29:16] Jason Wheeler
It means the basis situation is I got to get rid of this because it’s costing me way too much money and the carries are not there to pay me for it. And the basis following the spreads, I don’t anticipate basis to get any better than it is now. So, I’m just trying to sell it as fast as I can so my futures position will look not as short as maybe it will. 

[29:42] Jason Wheeler
Traditionally this time of year an elevator would have more bigger short positions on their futures than they do this year.

[29:50] Andy McKenzie
And that makes total sense. And I mean, I think one of the important things and this is what we try to do here at the university by teaching basis trading gives students the knowledge that when they get out there and maybe take jobs in the grain industry, they understand the concepts of what basis trading is, because in effect, right Jason, grain moves based on basis. You know, grain is traded on basis, not on price. So once you got past the farm level, everything has to do with basis and that’s a huge employer of people. If you’re in agriculture and you want to be in the grain industry, you’ve got to understand how that all works.

[30:28] Jason Wheeler
Mhm. That’s absolutely true. And it makes grain, basis moves grain from where it is to where it isn’t. And that’s how buyers signal, and I tell you what, years like this and we’re already seeing it, it goes in directions you wouldn’t think it would go. Like typically, you know, I live over in Kansas City, just south of Kansas City.

[30:51] Jason Wheeler
And if you go south of I-70, you know, in that area, you got corn, corn’s going south. That’s just what it’s going to do. It’s going to the giant corn sucking hole in the earth that is northwest Arkansas chicken market and southwest Missouri and all that. So it’s going there. They just need so much corn so that it just makes sense and everything.

 
[31:13] Jason Wheeler
And the other thing is if you get there’s a lot of little things about every market right, but like in eastern Arkansas, if you got beans, there’s pretty much no processing for beans. They’re going down the river. That’s what’s going to happen in eastern Arkansas. Beans are going down the river. You get to northern Illinois, I mean, yeah, beans go down the river, too, but there’s a lot of processing and stuff.

[31:38] Jason Wheeler
So they’re going to go to processor markets and all that. So it depends on where you are,  where that sort of thing goes. But I see all that, it’s all traditionally, but in years like this where everything’s tight big inversus, grains moving, big commercial companies take I say big risks. They think they’re removing risk at times.

[32:02] Jason Wheeler
I think they’ll try to outsmart things and sometimes they can from a basis standpoint, say, you know what, things are going to get really crazy. Like right now all the poultry markets are bought up, you say inversus we’re going to run out. Right. They’re thinking ahead. They’ve seen this three years in a row. They’re like, I’m sick of paying $4 over for corn in August.

[32:22] Jason Wheeler
I’m buying it and I’ve got it contract and I’ve got it. And so, a lot of this stuff happens, but the other thing that happens in years like this is corn comes up the river, grain comes up the river, which is wild. You don’t think it could happen. It is happening right now as we speak. Corn is being unloaded down and around Fort Smith to come up here off the river.

[32:46] Jason Wheeler
That never happens, never happens. But it’s happening because normally they get fed by the rail markets out of Illinois and everything and all this stuff. But like I said, all these elevators have kind of started figuring out we got to move stuff, we got to move stuff. We can’t have big piles of corn everywhere. And Illinois had a huge crop this year as compared to the rest of the country.

[33:12] Jason Wheeler
And they are getting it flat out moved like, well, it’s March and so we’ve got a lot of months left till harvest gets here. And those guys are like, we’re going to be we’re going to be about, about empty of, of corn pretty soon. So, I don’t know where everybody’s going to get it from. But anyway, I don’t know. It’s what makes it fun every year.

[33:33] Jason Wheeler
But yeah. And basis is the thing that’s moving it. All these big companies, that’s what they trade. You know, there’s a lot of cross-country trading entities and they are ttrade markets against each other. You know, sorry if I’m going down a path here, but these reseller things, they’ll say, all right, they’re all over there nationwide or international, and they’ll say, all right, normally, you know, the Springdale market is, you know, $0.40 over the Kansas City market.

[34:06] Jason Wheeler
And right now it’s $0.80 over. So they’re trading that. They’re saying, all right, I’m going to sell that market and buy this market and wait till it comes back to $0.40 and then I’ll unwind it. So, they’re doing all this stuff because a lot of times elevators are like, you know, such and such as buying corn for 64 over into, you know, Kansas City’s processor.

[34:28] Jason Wheeler
How were they able to, they’re not buying this to lose money. How are they able to sell that? But it hasn’t been close to that. How are they doing this? Well, they’re just unwinding the sale. You’re probably right, you know, but they’re unwinding. So, all this stuff’s going on and it’s the market at large. You know, the whole invisible hand of the market or whatever moving stuff around. You guys are the economists.

[34:52] Jason Wheeler
But it’s cool to see in practice.

[34:56] Andy McKenzie
It’s funny because yeah, I mean that’s that’s what’s happening. But Adam Smith always thought about things in terms of price, but the grain industry’s that little different with the basis there as well. It’s the invisible hand basis.

[35:07] Jason Wheeler
Yeah.

[35:09] Andy McKenzie
Did you have any thoughts, John, or anything you want to ask?

[35:12] John Anderson
Well, I think it’s an interesting conversation and the role that elevators, that kind of arbitrage role of moving product across space and time is what we’re talking about here and how basis directs that that arbitrage across space and time. But I like what you said earlier about risks, Jason. Risk is there. Right. Risk is inherent in this process and, you know, it occurs to me any time I hear somebody say that it’s always worth pointing out because I do think we have this mentality now, let’s squeeze all the risk out.

[35:48] John Anderson
But risk implies opportunity. Risk implies the chance to make a profit. And so this idea that elevators are trading price risk for basis risk, eliminating price risk, and they’re accepting basis risk. And the reason they accept basis risk is because that’s where their opportunity for profit is. So, I guess to Andy’s point about elevators and the role they play in terms of what they’re doing you know, are they primarily concerned?

[36:20] John Anderson
And when you advise elevators, you are primarily concerned about helping them kind of make a living off that basis risk or make a living off the service that they provide or make a living off the arbitrage opportunities that they identify. Or is it all of the above? What are they really focused on in terms of that value proposition?

[36:39] John Anderson
Is it exploit basis risk for profit? Is it provide a service to farmers and get paid for that? Is it arbitrage when opportunities come up and trade between markets? Does that question make sense?

[36:50] Jason Wheeler
Yeah, it does. And they do a lot of that I’d say the most is providing service because just purely economically speaking in a free-market capitalist you know or Adam Smith whatever, did he used to teach here? Anyways, I don’t know him.

[37:13] John Anderson
He’s on our advisory board.

[37:14] Jason Wheeler
I gotcha. Okay, that’s high class.

[37:17] John Anderson
Nothing but the best.

[37:19] Jason Wheeler
So to get a return, you have to help somebody, another thing Mr. White said. He said if you want to get what you want, you got to help enough people get what they want and you’ll get what you want. You know, it’s you got to help people. And so the grain business is a service.

[37:39] Jason Wheeler
You have to provide value. Now, the way you get paid for that value is with basis. That’s my economic argument is you get paid for it through basis. Now you get people to do the business with you so you can trade the basis by providing value. And the value the elevator provides is one of the biggest ones I think is being there at harvest time being fast.

[38:06] Jason Wheeler
Because sometimes, I mean, harvest comes, and you got rain in the forecast, or you got whatever and we need to go. And if I got to haul it 40 more miles each way and wait in two-hour long lines, I’m not getting this harvest done in time. If I can take it two miles down the road, dump quick, get back to the field.

[38:27] Jason Wheeler
I can roll. So there’s a big value to that. And so you as an elevator, you have to provide that. So you can’t be having your junky facility that takes, you know, an hour to unload and all of a sudden I got lines all the way through town. You got to take care of your facility, keep it up to date.

[38:44] Jason Wheeler
You got to have enough space to handle the harvest in the area, that makes sense. And you have to do that and you have to  treat your farmers well. You got to do all that. And that’s where when the farmer says, why aren’t you 20 under your 40 under, I could go ten more miles and get 20 more cents why wouldn’t I just do that?

[39:12] Jason Wheeler
Well, the elevators sell into the same market and the elevator has to be worth it. You have to be worth that. And I’m allowing you to get done get back to field. Maybe I’ve got a bigger dryer set up so maybe I can dry your corn down quicker than they can. And I’ll, I’ll even I’ll take your corn when it’s wet and they won’t, you know, stuff like that.

[39:35] Jason Wheeler
There’s all sorts of things the elevator provides that should be a service to the farmer ultimately. And then outside of harvest, that service in my mind kind of switches, never switches away from the farmer, but more focus is put on servicing your buyer customer, making sure, hey, farmers aren’t selling. Nobody wants to haul because it’s, you know, December 26th and nobody wants to haul.

[40:03] Jason Wheeler
But I know your chickens still have to eat. You know, whatever. I’ll take care of you.  So then it’s service oriented for that, for that buyer.

[40:13] John Anderson
Being able to do things like blend to quality specs and provide the testing of quality and things of that nature. That’s a real service on the other end. I like that answer, Jason, because I think a lot of times we think about production and marketing as two separate things, kind of two independent spheres of operation and they’re really not

[40:34] John Anderson
Marketing and production in the ag world really do come together. And you just gave a good example of how marketing and production decisions are really intertwined and the elevator is a part of that, a part of that connection. And that’s an important thing to think about because I think in the classroom and really even like in extension programs, I’ve been out and talked about marketing a lot and it’s easy for that to become sort of distinct from the production operation.

[41:03] John Anderson
But how you produce affects how you can market and what’s going on in your marketing channel has impacts on production. Like you said, if I’m three days longer into harvest because of some bottleneck in the marketing system, there are situations where that becomes a real loss, maybe even a catastrophic loss. So that connection is important.

[41:23] Jason Wheeler
Yeah, yeah. You get into the thick of harvest and things are really rolling, you hate to say it but really, it almost doesn’t matter what your basis is or, you know, and we’re not nit picking. It was like we went to lunch today at the Union. I mean, you can see there’s a line with 47 people in it and there’s one with no line, like, I’m going to go to one with no line.

[41:45] Jason Wheeler
I don’t even know what the food is. It doesn’t matter. Just give me the one with no line. I don’t know. You know, it can be that way at harvest for sure. So it’s being there because I will say some of the elevators that do the best, make the most money across our experience, is the ones who do the best job of owning bushels at harvest time.

[42:11] Jason Wheeler
You know, it’s not rocket surgery out here. 

[42:17] Andy McKenzie
That’s when basis is lowest, right?

[42:18] Jason Wheeler
Yeah, that’s when the basis is lowest. So we’re buying low basis. And does that mean the farmers are just coming in and say sell as soon as I cross the scale? Sometimes, that works for them. But a lot of times it’s because they’ve done a lot of work ahead of time, pre harvest helping guys say, hey, prices are good for new crop and here’s you know cost of production is being what they are for the county averages that the extension service gave us and all this stuff you know it’s a pretty profitable time. Why don’t we go ahead and get some sold and by the time harvest gets here, they’ve got a big book of already sold bushels.

[42:49] Jason Wheeler
And what happens is farmers get to sell their price when it’s good and basis that the elevator’s buying a low basis. Both things can happen and often do happen at the same time. So that and you talked about a win-win that is the win-win. So, if I’m an elevator and that’s my focus, which it should be, I honestly that’s the number one indicator of success at a grain elevator is okay, harvest is over.

[43:17] Jason Wheeler
You have X amount of bushels in your bins. What percentage of it do you own? Whoever has the highest percent makes the most money. And people say, oh, farmers in my area, they just don’t do that. Maybe true. But I will say we have guys in northern Illinois that buy if they’re having a bad year, they own like 94% of what’s in their elevators when they come out.

[43:47] Jason Wheeler
And then there’s guys 15 miles from them that have 10% bought. And they will tell you farmers don’t sell ahead around here. I’m like, okay, well, maybe not, but 15 miles down the road, you know what I mean? And it doesn’t happen because overnight they said, well, we’re just going to do this right. Those guys buy 95% of what comes in because they’ve been working on it for years.

[44:11] Jason Wheeler
They used to be 10%, but it’s over 30 years. They’ve gotten guys to the point where they’re forward looking and selling ahead. Because as a farmer, you can, you know, marketing’s hard enough if you if you wait till after harvest to sell your grain, it costs you money. There’s no way around it. You’re either paying fees or you’re paying interest because you don’t have it sold.

[44:37] Jason Wheeler
So if you can sell it ahead of time, you don’t have those things working against you and guys are always for it. But what if price goes up? Well, are you going to farm next year? You know, in my opinion, like May, June, July is a typical rally. Nobody knows really what prices are going to do. But on average, that’s when we see good, good rallies.

[44:59] Andy McKenzie
You be glad to know, Jason, I’ve done research recently which shows exactly those times you’re just talking about. That’s typically when you get the highest prices. So if you can book those as a farmer at that time, that’s good. Now I’m not saying every year, but on average.

[45:14] Jason Wheeler
Right. And so if you’re doing that for new crop, it’s just I always say change the goalposts, right? If we say like that most farmers think I have, I grow my crop, harvest it, and then I have until I harvest next crop to sell it. Oh, man, why are we doing that? Let’s say when I harvest my crop, that’s the end and I’m in it. Whatever I haven’t sold, I sell it all the way until I get to there and whatever I haven’t sold, let’s sell it. Then if the price rallies, I’m selling next year’s crop that rallies for next year’s crop. And that way I’m never paying all these marketing fees and interest costs and all this extra stuff to make your, you know, the marketing profitability numbers work.

[45:59] Jason Wheeler
It’s, you know, you’re bringing a lot of baggage into it. It’s my thing. And so that’s why I say perfect world, I think the farmer does way better doing that, selling ahead, making sure it’s all sold by the time harvest gets here. And the elevator, I said before, obviously is able to buy that lower basis. So yes, I think it can be a win-win.

[46:21] Jason Wheeler
I know you asked me that early on, but I finally got there.

[46:25] John Anderson
Good, good summary.

[46:28] Andy McKenzie
Well, I don’t know, John. I mean, we could talk all day to Jason and I’m sure we’re going to persuade him to come back and hopefully we’ll have his other better half join us as well, Roger.

[46:39] Jason Wheeler
Yeah, he’s better. 

[46:40] Andy McKenzie

 I’m sure Roger will appreciate that comment.

[46:41] John Anderson
We’ll get the whole team together next time.

[46:45] Andy McKenzie
But thank you so much for coming in and thanks for your continued relationship and helping our students. We really appreciate it.

[46:51] John Anderson
And having you guys involved is a huge addition to our program. And we hope you get something out of the deal, too, but it’s certainly beneficial for us and thank you for joining us on our podcast. This is Relevant Risk. I’m John Anderson.

 
[47:08] 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.