Ep. 26 Perspectives on Farmer Marketing

[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.

[00:20] Andy McKenzie
Hi, this is Andy McKenzie. I’m the Associate Director of the Fryar Price Risk Management Center of Excellence, and this is another episode of the Relevant Risk podcast. Today I’ve got two guests from the company called White Commercial, Jason Wheeler and Roger Gattis, so I’m going to hand it over first to Jason and give a brief introduction of who he is and what he’s all about.

[00:42] Andy McKenzie
And then we’ll go to Roger.

[00:44] Jason Wheeler
Boy, that’s a big question, who I am and what I’m all about. But I am Jason Wheeler. I graduated from University of Arkansas, took Dr. McKenzie’s courses on grain merchandising and price risk management and all that stuff. I graduated in ’05 from the university and I’ve been with White Commercial ever since. And we are a company that deals with grain elevators and that’s our customer base and we help them trade basis and spreads is kind of where we live and all that stuff.

[01:18] Jason Wheeler
And we are futures brokers. So that’s our background. And so I’ve been doing that for eighteen years now and that’s it. Roger, what do you got?

[01:28] Roger Gattis
My name is Roger Gattis. I also work with White Commercial. I also graduated from the University of Arkansas. I also took Dr. McKenzie’s classes back in the day, although I’m a bit dated. I graduated in ‘03. And what Jason forgot to mention was that we’re both from Arkansas as well. So we’ve gone full circle here. And so, as Jason said, I don’t have a lot to add to that other than what we do on a day to day basis is talk with grain companies around the continent, essentially because we have Canadian customers as well and discuss their merchandising with them.

[02:02] Roger Gattis
You know, what they’re looking at, what they should be looking at, not really use the word strategy, but we talk about ideas on how to make their business better.

[02:12] Andy McKenzie
Yeah, that makes sense. I mean, I think what I’d like to talk today about I’m going to call is farmer marketing 1 on 1. So I know you guys have already said your clients are country grain elevators. But having said that, those guys have to deal with farmers right? So I guess you have some perspective on how that all works and how farmers should be marketing grain.

[02:32] Andy McKenzie
So, for me as an academic, I only get to interact with students. I don’t really get to talk to farmers or anything. So, I’m going to lean on you guys to give me the sort of applied price risk management. How does farmer marketing really work? So, what I’d like to go with, to begin with, is if we broke out the marketing window between like pre-harvest and post-harvest, what’s let’s start with pre-harvest marketing.

[02:59] Andy McKenzie
What do you think farmers should be trying to think of, say, early in the spring before harvest in terms of their marketing decisions? And I’ll throw that open to both you guys.

[03:11] Jason Wheeler
All right. I should say in our introductions, I forgot we do host our own podcast too, and Dr. Mackenzie’s been on our podcast. So this is a…

[03:19] Andy McKenzie
This is a return of the compliment. Right?

[03:21] Jason Wheeler
That’s right. This is, you know, the podcast world, a teeny tiny listenership. That’s kind of where we live. But I’m sure it’s better with the academic world. But anyways, The Elevator’s Cut is our podcast, I will say that. So, on the on the farm marketing stuff, I say the simplest way to put it is how I would do it if I was farming is I would just sell the highest price of the year.

[03:47] Jason Wheeler
So I looked into it and I think most people come out best that way.

[03:52] Roger Gattis
I would agree. No one would argue with that.

[03:53] Jason Wheeler
Yeah, but anyways, the seasonality of it right, is, is an interesting thing in my view. Like it’s easier for me. Roger didn’t say, but he used to work at elevator and deal with farmers. He was a co-op manager. He, he’s done the whole thing so he can price work better on all this stuff than I can. But I will say the, the mentality a farmer of I’ve got to I’ve got to wait to sell it until I have it harvested.

[04:27] Jason Wheeler
Is something that’s difficult to overcome, wouldn’t you say?

[04:30] Roger Gattis
Absolutely. I think the piece of the puzzle that’s not talked about a lot out there on the farm marketing side is when you sell and when you deliver don’t need to be the same time. And you know, as this talk about seasonality and seasonality, pre-harvest is hey we get rallies in the summertime because peak uncertainty right the crops in the ground, but do we have a drought or are we going to burn up?

[04:57] Roger Gattis
Do we get flooded? All these things so markets get peak uncertainty? Well, that’s the time the farmer should be acting. You know, in my simple mind, the farmer’s goal should be to turn grain into cash as soon as possible. The soonest time you can do that, I think, is once it comes out of the combine and into a truck, into a pit somewhere.

[05:18] Roger Gattis
So, if you could pair up, this is when we deliver. I get paid the best price I can. Well, more likely it’s not going to be selling the day you dump it, it’s going to be selling ahead of time. So, our thrust when we do farm marketing meetings for our customers is to get them to be proactive, have a plan, because if not, if we have a rally and there’s no plan in place, guess what?

[05:38] Roger Gattis
No action takes place. It just ride it up. And unfortunately, a lot of times they’ll ride it right back down and nothing happens. So taking advantage of opportunities that don’t cost anything, marketing pre harvest is free. There’s no cost involved. If you wait to market grain till after harvest, even if it’s stuck in a farm bin that you had paid for for 20 years, there’s a cost involved with that grain sitting there unpriced.

[06:00] Andy McKenzie
Well, that makes sense. But so let me ask you this question. If seasonality plays into this and you know, you get the best prices, like you said, in the summer, in any particular year, though, how do you gauge as to whether it’s really a good price or not? You get a sort of compare it against something, right, to know whether you should pull the trigger.

[06:20] Andy McKenzie
So how does that all work?

[06:22] Jason Wheeler
Yeah, well, it’s like any business, right? You want to. We’re simpletons, right? From Arkansas, I went to Arkansas public schools as all I can be. You know what I mean? So in my view, farming is you take a whole bunch of money and you put it in the ground for a season and then you harvest out a bunch of grain and you turn that back into money and what you want is that second pile of money to be bigger than the first pile of money that’s in its most simplest form.

[06:51] Jason Wheeler
That’s what we’re doing as a grain farmer is to try to create a problem. Now, how do you do that? So your question, of course, is what are we creating? What’s a good price? What’s all that? Well, what’s your costs, what’s your yields, all that stuff. I mean, it’s real basic math, right? Revenues minus costs is profit.

[07:09] Jason Wheeler
And and it’s difficult for for a lot of guys to to boil it down to that because you know, in the end but if it was a little bit higher, that’d be a little bit a little bit better. Right. So it’s it’s about it’s about, I guess, thinking through the…

[07:31] Roger Gattis
As you were saying, Dr. McKenzie, what is what’s a good price? How do you know? And really, I think the I think the only way and for sure the best way for a producer to look at this is profit per acre. You can have a goal of $50 an acre or $100 an acre net net profit per acre that you can carry with you from season to season.

[07:51] Roger Gattis
And when a price hits, that allows you to make that with that year’s cost and what you expect that year’s yields to be, then you take action. That’s the constant every year is your profit per acre goal. That doesn’t change in your planning stage anyway. You know, obviously the price may not get to where it needs to be for you to get that profit or your yields may be down.

[08:12] Roger Gattis
But a lot of times what we’ll see is guys will end up yielding more than they expected over long haul. I mean, that trend line yields, look at it. It goes up over time. And guess what? You don’t have to have as high of a cash price when you have big yields to net the same profit per acre.

[08:31] Roger Gattis
So I think that’s what guys should be looking at. And that’s the hard part. No one can tell you that someone, your agronomist can tell you what your cost per acre are. And you know, you can look at your APH from the insurance company on what your yields are. No one can tell you what your profit per acre goal is as a producer.

[08:47] Roger Gattis
You have to come up with that, if not by yourself, then within a small group of people that’s concerned with your business.

[08:55] Andy McKenzie
Yeah, that makes sense. So let’s just say that you’ve figured out, you know, you want $100 per acre or something like that. That’s your target. Prices roll up and allow you to get that profit level. What’s the actual mechanism that you do with, say, an elevator to actually get that money? In other words, what contracts do you do or how do you do it?

[09:19] Roger Gattis
I would just call Jason.

[09:22] Jason Wheeler
Yeah, well, the main mechanism we use from the elevator side is we use target contracts as what we call them are open orders, open future orders, because what we’re talking about is just, you know, like Roger said, once, you know, your profit goal, well, now it’s just math, right? We know what it cost. We have all our cost per acre, say it’s $800 an acre to grow an acre of corn.

[09:44] Jason Wheeler
Well, I need revenue of $900 an acre to make $100 an acre. You know, or so. If I want 200, then it’s 1000. And then from there we can say, all right, with our APH, our average yield or what, you know, depending on what part of the year where we have it pegged at, where we think our yields are going to be, this is the price we need to make that happen.

[10:04] Jason Wheeler
So it’s just a math problem and a pretty simple one. So so you get that price and then you can go to the elevator and you can say, you know, to back to your question, hey, if I can if I can sell my corn for 522 this year, that’ll hit my profit goal. Okay, So you put in a contract with the elevator to sell your corn for 522 if it gets there.

[10:26] Jason Wheeler
And that day it may be 487, you know, so they’ll just put in order to sell futures at whatever level makes a 522 cash price happen. So for instance, if I’m the elevator and my farm was 522 and my new crop basis is 30 under, I’m paying $0.30 under the futures for December futures. So I put in a check my math here, but I’d put in a target contract to sell futures at 552 and that would allow me to buy it from him at 522.

[10:58] Jason Wheeler
Now I get my goal as an elevator to buy 30 under basis because that’s how I make my money is basis. Farmer gets his goal. How he makes his profit is selling 522 to cash corn and he’s got that locked up. So that mechanism is a like Roger saying that’s a that’s a free mechanism. Nobody charges for target contracts, best I can tell.

[11:20] Jason Wheeler
And so guys will put that in and now it’s great for the elevator to use that early in the season. Once. If a farmer can give a hard price like that, we can put that in and then maybe it hits, maybe it doesn’t. But from then on, the the elevator can follow up with a farmer. Help him on on that.

[11:41] Jason Wheeler
So say it’s hey now we’re down like 407 right now and it’s been a few months and things aren’t looking as good. Do we want to adjust that or maybe at this point it’s getting we planted maybe sus pollinating a little so it looks like we may have our best crop ever. Well, now maybe we need to redo that math formula.

[12:00] Jason Wheeler
Maybe 522 makes it at our normal yield of 180 bushels, but we’re probably looking at 240 bushels this year. We don’t need 522 anymore, you know, what do we need? And maybe we can adjust from there.

[12:11] Andy McKenzie
So you have to keep revising. So I mean, one question I’ve got though, on the I mean, that sounds definitely logical, but from the farmers point of view, I mean, should he sell all his expected production and at that price or I mean, isn’t he then going to have a problem if he doesn’t make the bushels at harvest?

[12:30] Andy McKenzie
So how does that all look?

[12:32] Roger Gattis
He doesn’t need to sell 100%, but he does need to sell a meaningful amount. And what I mean by that is, the temptation is early in the season, say around planting time. The farmer puts in a target order and a few months later it hits that target order was for say, 5% of expected production does nothing else until harvest.

[12:52] Roger Gattis
Well, he started out good, but that was not a meaningful amount. Now what we would tend to talk to folks about is everybody’s got a different comfort level. But I think ideally the producer would want to sell enough ahead of time going into harvest to either cover what he’s got to take to the elevator any way that he may not have space for on the farm or enough to cover his costs.

[13:16] Roger Gattis
So, you know, I have a story where I talked to a farmer one time when I was at the elevator and I said, you know, you’re going to have good yields this year. Price is really good. You could sell right now below your insurance guarantee amount and pay all of your costs. And if corn goes to a dollar a bushel, you’re covered.

[13:33] Roger Gattis
And I said, what do you think about that? And he looks at me and he says, do you really think corn’s going to a dollar bushel? And I’m like, no, that’s beside the point. You know, it’s just one of those deals where, you know, if you could cover costs ahead of time, then great. If you want to gamble in the last bit, go for it.

[13:47] Roger Gattis
But let’s try to get costs covered if we can, if it’s for sure within your insurance guarantee of bushels per acre.

[13:54] Andy McKenzie
So you were talking about insurance. I mean, do you think that’s a key thing that farmers should do then as well?

[13:59] Jason Wheeler
That’s that’s huge. And going back to Roger’s thing there is if you ever this doesn’t happen that often, but it has happened where you can sell at whatever today’s price is and cover all, you’re just selling up to your insurance level and cover all your costs for your entire farm. So say you’ve got 75% revenue insurance for your for your farm or whatever.

[14:24] Jason Wheeler
So if I can sell if I can sell 75% of my expected production and cover 100% of my costs, man, I’m doing that. Because if you’ve sold ahead and you go back to your if what if I don’t make it though, right. I sold this one. A lot of elevators, especially if there’s a crop production issue, a lot of them will work with you either rolling contracts or you’re trying to figure something else out.

[14:51] Jason Wheeler
But if you just have to straight, cancel it too, that’s what insurance is for. The insurance is going to pay you out. Essentially, the money works out so that you can buy out of that contract if you need to. Sometimes you may not produce and the price ends up lower and it’s fine, but so you’re protected.

[15:11] Jason Wheeler
But the great thing is you can cover all your costs and not get above that insurance level. Holy smoke. That means anything I make above 75% of my average production is absolute is straight profit even if I sell, you know, like you said, for a dollar a bushel, it’s all, all money. So that’s a perfect set. It doesn’t happen that often.

[15:33] Roger Gattis
But because the prices don’t always hit what they need to. So you have to roll down to plan B and sometimes that’s plan C and D.

[15:40] Jason Wheeler
But as far as how much you sell, I would I would be comfortable and be able to feel aggressive to sell. If this is a price per bushel I know is profitable for me, I’m I would be comfortable to sell all the way up to my insurance level for that point. So it’s funny the math, you know, we do the math.

[16:01] Jason Wheeler
It’s a simple formula, right? If I sell it for 522, I make $100 a bushel. Well, that’s for 522 as an average over all your production. And we’re only selling this much ahead of time. What do you do? So there when it when the prices get real high and you want to lock in more, there’s other ways to do that.

[16:19] Jason Wheeler
And I think we’re going to talk about other types of contracts as we go here. But there’s ways to do it. But it gets a little more, I don’t know, expensive and complex maybe.

[16:30] Andy McKenzie
Yeah. I mean, and talk about other contracts and that just quickly bridge on to the so we sort of talked about targets in in effect targets become forward contracts. How about like something like average pricing contract. I mean that seems logical, right, that you sort of getting a certain price every week, every month in the pre harvest window.

[16:50] Andy McKenzie
I mean, what do you guys think of that type of contract?

[16:53] Roger Gattis
I think there are great they’re great for people who are indecisive. And what I mean by that is what we’ve been talking to so far as targets, a lot of times someone won’t have one target order for 75% of their production. They’ll have a target order at one level for 10% and another target another 10%. They’ll just stair step it up.

[17:10] Roger Gattis
In effect, it would result in an averaging contract. But the folks that don’t want to do it or can’t do it or know themselves well enough that they won’t be disciplined with it. They can just commit from the get go X amount of bushels to an average or program and then say for corn, say between the end of May and the 15th of July, every week will be sold, you know, one however many weeks that is worth of grain.

[17:35] Roger Gattis
And then at the end of the period they have an average price. So that’s that’s a almost like a set it and forget it marketing alternative and it’s it really helps if for no other reason I’ll see guys use that as a way to at least get something done or at least get something started or committed when they do their marketing.

[17:54] Roger Gattis
And let’s face it, once the first bushel gets priced and sold for new crop, the other ones are a whole lot easier to deal with. It’s that getting that first one done, that can tend to be the the hurdle.

[18:04] Andy McKenzie
Okay that makes sense.

[18:05] Jason Wheeler
I would say on the average price, as far as the quality of the contract, our friend Tracy Hinkle, I say that’s it’s well named it’s an average contract it’s it’s not a great I think the perfect the perfect scenario is you’re selling your grain because you like the price and you know you’re going to make money at that price.

[18:27] Jason Wheeler
However, so you would think the majority of grain would be sold that way. But however, it is such a small minority of grain that gets sold that way. The majority of grain gets sold because I need money. You got a bill come due. You know, I need $42,000. Sell me however many beans it takes to give me $42,000. They don’t care what the price is, what the basis is.

[18:47] Jason Wheeler
They’re just I got this bill due next week and boom, it’s it’s done. And that’s how the majority of grain gets sold. Or for some logistic reason or for money. I think overwhelming majority of grain gets sold that way. So ideally, if we can think ahead, plan for a price that we like and sell that price we like, and I think everyone comes out better.

[19:10] Jason Wheeler
So all these alternatives are like, how do we get to a place where we’re doing that? And so the averaging price contract is okay to get some book on. And guys usually said at a time where traditionally that season we see some rallies, which I get it and that’s good. But at the end what price are we getting I, I don’t know.

[19:29] Jason Wheeler
It may be good, it may be bad, it may make money. It may not. It’s like, you know, I need money and I get to sell. It’s similar to that. Right. It’s not selling because this price is good. And so ideally all of our bushels will be sold because this price works and it makes more money. And unfortunately, averaging price doesn’t really do that.

[19:51] Roger Gattis
Right. Well, as you’ll see or as you’ll hear us talk, it’s kind of a hierarchy of contracts. So, we’re starting out at the at the top of the pyramid here, the least amount done, but usually the best alternatives. And as you go through the growing season to harvest after harvest, most years, you can’t say never always in this business, but most years you’ll see those the contracts you’re able to do or presented with because some are gone.

[20:17] Roger Gattis
At one point and you got to go to, you know, here’s what I can do now. You’ll see more and more grains like that. And what Jason said, it’s in all of my time in an elevator, 12, 12 seasons at different elevators. I never had a conversation with a farmer after harvest that had grain unpriced in our bins come in and say, well, today’s price looks pretty profitable.

[20:36] Roger Gattis
Let’s sell it. It was always what Jason said it was paying a bill. Always, without a doubt. There was no talk of profitability afterwards because it didn’t matter. I got to have money.

[20:46] Andy McKenzie
That makes sense. That makes sense. So I’m thinking still again, though, like when you try to set your targets, right? I mean, you can think of in terms of profit per acre, but, you know, you don’t want to set an unrealistic levels too, right? So, I mean, one thing I’m going to ask you guys and I so listen to your podcast a lot, so I know your opinions on this, but is there any value to sort of information, whether it’s coming from USDA, from these newswire sources, anything that you think farmers should use other than just purely looking at price when they’re trying to set their target contracts? Any thoughts on that?

[21:24] Roger Gattis
I think the local market I think what’s important for the farmer is to know what say, you know, progenitors of information and make up what part of this cash price. So overwhelmingly the bulk of a cash price at any elevated United States is going to be made up by the futures market, which is a global macro look at the market.

[21:48] Roger Gattis
So when you have things like WASDE reports come out or planet acre reports and things like that, those can definitely be times and those should be bookmarked as times to take action. And I’ll reference our friend Tracy Hinkle who works with this again when he had farmers come in the elevator that, you know, the morning before report and I say what do you think it’s going to do?

[22:05] Roger Gattis
And he’d say, I don’t know, but what are you going to do if can you stand it if the price goes down or and how are you going to take advantage of it as the price goes up, which is perfect, you know, turning it back on that. And so the smallest part of of the cash price is going to be the basis which is going to be locally defined or at least regionally defined.

[22:26] Roger Gattis
So those two things sometimes move together. A lot of times they move in opposite directions. As a producer, I would urge them not to get too hung up on this stuff, but you can definitely see seasonality in both markets and see and the best way to get that information is visit who you deal with. They’ll have records of what things happened.

[22:49] Roger Gattis
And I know there’s always this, you know, potential for head butting between the buyer and the seller. Some say it’s an innate aspect of the marketplace. And to some degree it is. But you can’t up and move your farm somewhere and elevator guy can’t up and move his elevator somewhere. You’re stuck together. You’ve got to make the best of this relationship.

[23:07] Roger Gattis
So I think most of the people I’ve seen or we deal with are good operators in that sense. You know, people want to try to make it a go in their area. So I don’t think anybody’s going to try to take advantage of anybody on purpose, and least they’re not going to do it for more than a season or so.

[23:21] Roger Gattis
And then, you know, you’ve ruined that relationship. So I would say that’s the information you need is it’s interesting. You’ll see how market reaction to say was the report because everybody looks at it corresponds with the time of season. We’re talking about guys setting their prices, which is usually between planting and pollination for corn and planting and pod sets for beans.

[23:44] Roger Gattis
That’s when the most volatile USDA reports tend to come out.

[23:48] Jason Wheeler
Yeah, I agree that if you think of a marketing year, maybe starting in January when I’m thinking about what am I going to plant, you know, what acres are going to what, and maybe there’s not a lot of variation on your farm, but maybe there is. And you’re thinking through that. A lot of people are. That’s the time we can be the most aggressive, right?

[24:09] Jason Wheeler
We’ve got the most time between now and harvest. There’s lots of time for anything to happen. But as a year goes on, year planning, additions, intentions comes out, planning actually happens. Different waste reports like, like you’re saying, you know, expect a production and all that stuff when those reports are coming out. What you want to do is make sure you have targets in early and you can be aggressive with those.

[24:31] Jason Wheeler
And then as the season gets later, it’s like, well, what’s reasonable, what’s not? But definitely I’d say with the reports, I definitely want to have targets in before those start hitting because wild stuff happens on those days and we’ve all seen it right? Report hits market goes up the limit for 10 minutes and by the end of the day it’s down the limit like that’s happened before.

[24:54] Jason Wheeler
And so if I had a target in boom, I got I got something sold. And maybe by the end of the day, it’s 60, $0.70 above the market for all I know. So there can be some wild stuff happen. So, so being in the way of up for target. But I think the most important information is overlooked.

[25:10] Jason Wheeler
Everybody wants all the information of what’s going to happen. This and I go to these conferences, which we love conferences, and you listen to economists and everything and they’re like, you know, you really need to ultimately you need to watch this, you know, whatever just jobs number. And if it dips below 4.7 and you know, the humidity outside gets above 12 and I don’t whatever, it’s insane.

[25:35] Jason Wheeler
And they’re like then look for this to maybe happen. But if it doesn’t, it’s because this other number probably did this. And then you need to look it’s like, what are we doing here? Right? You can chase a lot of that stuff, but the most important thing is the numbers that we put into that formula we were talking about what’s my average yield and how many acres am I going to plant and how much money I’m about to borrow.

[25:57] Jason Wheeler
That sort of stuff is so important. You’re your individual information that is the most stuff to track and not everybody does. That’s the crazy thing. So many people don’t know their costs and but they’re still trying to figure out where exactly they’re going to peg the yield in Brazil, you know, and I’m like, dude, what’s your cost per acre?

[26:17] Jason Wheeler
You know.

[26:17] Roger Gattis
I’d say anecdotally just talking, you know, we work with, you know, a few hundred grain companies across the continent and talking to those people and, you know, as a as a way to whether they’re farmers doing and what are their farmers known information. You’re absolutely right. We figured there’s probably 15% or less of producers, at least in the United States, that can tell you within a few dollars per acre what their cost per acre.

[26:40] Roger Gattis
There’s not a thing to shame anybody about, but that’s just what we’re dealing with. And if you don’t have that basic information, it’s really hard to make a decision off this other stuff. Ultimately, the information that matters is information you can take action on, can’t take action on Brazil port strikes or China putting corn on runways or whatever they do over there.

[26:58] Roger Gattis
You know, all these things are interesting, but they don’t I think they force more decisions to be made by the producer rather than less. And humans hate making decisions. So let’s try to minimize those.

[27:10] Andy McKenzie
It sort of stymies decisions, right? It makes people procrastinate. I can see that for sure. I mean, in defense of Information as an economist and, you know, part of the Fryar Center, it’s part of our job to disseminate information to some extent. I think what information can be useful at any point in time is maybe if you’re looking at stocks to use numbers or something like that, just to gauge where potentially the price ranges may be over a crop year.

[27:36] Andy McKenzie
So not to try to pick a point where you need to get in or anything, but just be aware of historically with those numbers, what are the sort of ranges we’re looking at and that might help a little bit on making targets is what I would argue.

[27:50] Jason Wheeler
But that’s if that’s true, right? Most of them we’re looking at this and it’s projecting what the stocks will be by the end of whatever. And yeah, the closer we get, the better we know, I guess. But really like is it right? You know.

[28:03] Roger Gattis
Perception is reality.

[28:04] Jason Wheeler
Yeah, I guess. But like, like what’s the range possibility this year they’re projecting 5.5% carryover. That’s really small for corn. So we got a high range, but six months from now that might be 11.2. And that’s not very, you know, bullish for prices. And so, so what is it I don’t know that I get that hung up on it, but because all the people that they only like that number when it’s bullish.

[28:31] Jason Wheeler
Right. Like everything right. We only like it when it’s bullish but if it’s not lose USDA over this, make them up. You know I never I’d never talk to a person getting information and if they came on my property I’d do this. And I’m like, okay, so anyways, nobody trusts them, but unless they’re bullish and then they’re like, These guys don’t even get it how bad it is.

[28:54] Andy McKenzie
Well, let’s turn a corner here and talk about a few more contracts, right? So, you know, I guess you’ve talked about basis in your all businesses trading basis. Should farmers even care about basis when they’re looking at marketing? I mean, I guess if they get something like a hedge to arrive or a basis contract, theoretically they do need to.

[29:17] Andy McKenzie
Right. But I mean, what’s your overall opinion on farmers or do they focus too much on basis? What do you think?

[29:26] Roger Gattis
In several instances, yes. And what this usually comes off as attested by my time with the elevator, is when you try to shift the conversation away from basis. And then the thought is, well, you’re hiding something from me, you’re not being transparent or this, that or the other.

[29:42] Jason Wheeler
It’s the elevator’s cut.

[29:43] Roger Gattis
It’s the elevator’s cut. And so, you know, then you’re playing defense as opposed to being able to explain something. But the basis makes up a part of it. I would say basis is more of an important factor for someone who has bin space and has grain and have bin space is why elevators trade it. You know, it’s how to maximize return to your bin space.

[30:04] Roger Gattis
So on farm grain sure you know that makes sense to a degree but what we see overwhelmingly in the years where we have high cash prices, take the wheat market back in ‘22 after the Ukraine invasion, we went through the roof. You know how many farmers, at least in soft wheat country in the eastern U.S. would not book $10 wheat picked up out of their field because the basis was $2 under or more.

[30:32] Roger Gattis
And since that basis was $2 under and it should be only $0.60 under, it was $10 picked up out of the field. This is a customer of ours in Georgia. This is the exact story. They wouldn’t sell it, was so mad the basis was low and like you’re missing the forest and the trees, so we’ll see that happen. Guys will get focused on one part of the cash price instead of the overall cash price to the detriment of the other.

[30:54] Roger Gattis
It happens on the future side too.

[30:56] Jason Wheeler
Right. And what price cash rate did he end up selling?

[30:59] Roger Gattis
Probably still stored and cash prices is ike five bucks now.

[31:02] Jason Wheeler
Yeah. Yeah. That’s the thing is if you get too hung up on it you miss out on I’d say the highest cash prices we’ve ever seen are always right up against always is a tough thing to say, but a lot of times it’s the lowest basis you’ve ever seen, you know, oh wait and all that stuff.

[31:22] Jason Wheeler
When we’ve seen these huge rallies where, you know, the price doubles, triples of a commodity in that time basis gets real low because there’s a whole lot of uncertainty. But if you can get over it enough to sell at the best cash price you’ve ever sold in your life by $2, you know, it can work out okay.

[31:44] Jason Wheeler
But you got to you got to get by that. And you got to understand, people are just so paranoid. I think that anybody might make money in the world and they’re like these elevators that they’re going to make two bucks off me. It’s $2 under. Well, you know why they’re bidding that? Because they can sell it for a dollar 80 over or a dollar 80 under and have and have trucking in it and everything.

[32:04] Jason Wheeler
You know, they’re just selling for what they can. Well, somebody else up the line and it’s going to make money is like yeah I mean yeah people make money. That’s how they stay in business. But it’s not it’s not a…

[32:17] Roger Gattis
Zero sum game.

[32:17] Jason Wheeler
Yeah, it’s not an obscene thing where somebody is just reaching into your pocket where you should be in 12 bucks right now and you’re only getting ten. It’s, that’s just not how it works.

[32:26] Andy McKenzie
I mean, honestly, I think one of the benefits of education on risk management is to make farmers aware of how elevators actually operate and how they make money, because it’s making things transparent. Right? At least they understand then why the elevator does what he does. And I’m thinking this is a nice segue into other contracts.

[32:46] Andy McKenzie
Let’s just say we’ve trucked around a harvest and now we’re in the post-harvest window. We’ve got a choice what to do at this point. You know, I’m thinking price later contracts. Well, we know in recent times what’s happened on the price of price later contracts or the fees, I should say. What about storage? You know, minimum price contracts.

[33:08] Andy McKenzie
I’m going to ask you just give a brief rundown on those three that I’ve just mentioned, pros and cons from a farmer point of view. Let’s just say he’s at harvest. He thinks there’s a chance prices are going to go up. What should he do?

[33:21] Roger Gattis
You want to take it?

[33:22] Jason Wheeler
I got it. He should sell all of his grain.

[33:24] Roger Gattis
That’s what I was going to say.

[33:27] Jason Wheeler
And I think that So but going back to, you know, hey, just sell the highest price of the year, right? If prices go up later and I already sold, I missed it. Well, no, you didn’t. You’re going to there’s next year’s crop, right? That’s for next year’s bushels. A lot of times what I say. But get the cash.

[33:45] Jason Wheeler
We got 8% interest. Guys are going to I mean 2024 guys getting crop loans are they’re going to be guys paying 10% for crop. What are we doing? You know, it’s if you look at how much it costs, just in interest to not get that money right now. I mean, for beans, it’s ten, $0.12 a bushel per month.

[34:08] Jason Wheeler
And so it’s like, how much do you think the marketing or I think, you know, $0.50. Well, how long is it going to take? I don’t know, five, six months? Well, you didn’t do anything. And, you know, so this is my thought.

[34:18] Roger Gattis
It’s got to come down to, you know, trying to take emotion out of the opinion that price is going to go through the roof after harvest and focus in on costs and what you get for those costs, because there is a cost involved in what is a minimum price contract, which is essentially the producer sells the bushels and stays in the in the futures market through a certain amount of time, is usually backed up by a call option.

[34:44] Roger Gattis
You know, in my opinion, that’s the next best option because or alternative because you’ve got a minimum price, you can’t take less than I paid you for it to the farmer. That’s it. You’ve got it. If the market rallies, you can’t participate in it. Below that, you roll down to price later in storage, which the only difference between those two is price laters.

[35:05] Roger Gattis
The buyer has title of the grain and can move it storage it can’t. And essentially from the producer standpoint, he’s paying the elevator to rent space. He has no downside protection. He has no way to stop cost, costs go up every month. And now the market has to go up that much more every month for you to get above your break even if you’re below it.

[35:28] Roger Gattis
So you got to look at it in terms of what the cost really is, is and it’s not just the cost of doing the storage or cost of the minimum price contract. Like Jason said, it’s the interest costs you’re incurring by not paying down debt or having that money tied up. You can’t use it for something else. So those things kind of come in and we really, you know, it’s very regional.

[35:50] Roger Gattis
What parts of the world allow storage and DP and things like that. But generally, in the South you don’t see a lot of storage. I think a lot of it has to do with pest control. But you do see some price later, especially on the river and your guys will do that. But I think it needs to be looked at in terms of, well, where do we at now?

[36:10] Roger Gattis
If you did sell everything today, what’s your average cash price? Are you profitable still? If yes, you should probably sell and be done with it. Focus on next year. If it’s not okay now, let’s go to the next best alternative.

[36:23] Andy McKenzie
Now, that makes a lot of sense. Well, you know, I think we’re coming to our time here. I think we’ve done pretty good. You know, we could talk about farmer marketing forever, right? And at some point we may go on and do more. But I think for today, I think we’re coming to a good stopping point here.

[36:40] Andy McKenzie
So thanks very much to Roger. Thanks very much to Jason. Really appreciate your time. And we will now cut off from the Relevant Risk Podcast for today. Thank you.

[36:51] 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.

[37:17] Intro/Outro
Visit Fryar-Risk-Center.uada.edu for more information. Thanks for listening.