Tactics to Turn Volatility into Opportunity with Dan Basse and Ryan Turner

Volatility just isn't going away — a theme that was emphasized at the 2023 Feeding Quality Forum. Boots on the ground host Miranda Reiman caught up with FQF speakers Dan Basse with Ag Resource Co. for a great market overview and Ryan Turner with StoneX group for tactics on how to shift volatility into opportunity.

Find more coverage from the Feeding Quality Forum in the Angus Beef Bulletin and ABB EXTRA. Make sure you're subscribed! Sign up here to the print Angus Beef Bulletin and the digital Angus Beef Bulletin EXTRA.

Have questions or comments?  We'd love to hear from you! Contact our team at abbeditorial@angus.org. 

Find more information to make Angus work for you in the Angus Beef Bulletin and ABB EXTRA. Make sure you're subscribed! Sign up here to the print Angus Beef Bulletin and the digital Angus Beef Bulletin EXTRA. Have questions or comments? We'd love to hear from you! Contact our team at abbeditorial@angus.org.

Transcript

Kasey Brown:

Hello and welcome to Angus At Work. I'm your host, Kasey Brown. Well, if there's one word we have heard more of than any other in the past several years, it would be volatility. It just doesn't seem to go away. Well, we're going to hear it again today, but we're also going to talk about tools to turn that volatility into an opportunity. We're trying something a bit new today with a few segments from interviews done by my co-host Miranda Reiman at the Feeding Quality Forum in August. She was able to talk with Dan Basse from Ag Resource Company about the current state of the markets, and then with Ryan Turner with the StoneX Group about how you can manage volatility with risk management options. So let's dig in.

Miranda Reiman:

Dan, I've gotten the pleasure of listening to you at Feeding Quality Forums for probably the last 15 years. Last year you told us a lot about volatility. You told us a lot about markets, setting your margin, all of those things. What's different this year?

Dan Basse:

Well, the volatility has gotten even more enhanced. We're seeing more volatility but we're also seeing geopolitical events taking over the headlines of ag markets. So whether it's the war in Russia with Ukraine, whether it's our friends in China, in terms of political angst between the two parties, these are things that weren't available last year but really have come to the four this year.

Miranda Reiman:

When I heard you talk about the war on things, you're not just talking about actual wars though. Tell me about inflation and some of those other-

Dan Basse:

No. It's a lot of things going on, and so as we think about agricultural markets, we have the war that Russia is inflicting on Ukraine and how that's important to that part of the world ingrained. World Central banks, including US Central Bank is actually at war with inflation. Inflation globally is at levels we've not seen going back to 1979. So they're actively raising rates to get inflationary pressures down. It's a blunt instrument that they're using but they're trying to hit demand.

Then we also have things like mother nature. She's at war with global crop production. We've already had more heat and dryness this year in a global perspective than we've seen looking backwards to the early 1970s. So those three wars are really combined. What we hope that doesn't break out into war would be something between United States and China or something geopolitical that we can't say, but black swans are flying everywhere.

Miranda Reiman:

Let's unpack those backwards then. You talked a lot about how from 1942 on that, every time that we had a surge in demand for crops we also had a surge in production. How has that been changing as of late?

Dan Basse:

Well, lately what we've seen is that global crop yields have plateaued, and so we were puzzled by that for quite a long time because normally we think farmers are the best in what they do in the world. They treat crops like their firstborn, they give them enough fertilizer, chemical, everything that needs to happen. Yeah, there's a little bit of mother nature, but overall, we have seen global crop yields rising almost every year since World War II.

Then in the last six years, they plateaued and we step back, said, "What's going on here?" Well, what we found out is that there's twice as many droughts. There's twice as many weather problems in terms of extreme heat, which has been very evident in the last year, and that has really started to impact global grain yields. So heat more than anything is one of the biggest villains that we're concerned about, and it doesn't look like it's changing. So we hope anyway that this is temporary but the data still leans that this is a trend that may now persist for the next 10 years.

Miranda Reiman:

And we can't overcome this climate shortage because the land availability.

Dan Basse:

So in the United States within the last year, we've reached something that's new in our shop called peak farmland. There's about a 240 million acres, give or take a few million acres and we really don't have additionality in acres. We stole 25 million acres from hay and CRP in the last decade. That's now done. US acres are at their lowest level since 1907. So if I look at land availability, excluding CRP and hay, were pretty much maxed out at 270 million acres, and that's something that will be with us that we foresee going forward. So a new concept, much like Europe was 25 years ago, peak farmland in the United States

Miranda Reiman:

And demand on those crop grains is also increasing at record grades.

Dan Basse:

The world is increasing its global grain consumption by about 1.8% or 1.9%. So it's elevating it as of course the world grows and we get more people and better demographics. Also, biofuels has become something that's been more important because of climate change and politicians that want to utilize green fuels both here and in Europe. So both combined is giving us, even though we can produce record large global grain crops, world consumption is bigger than that record, which puts us in a stock declining position, not only last year but for last five years.

Miranda Reiman:

So if you're at cattle feed are looking to price feed, what sense do you make out of any of this?

Dan Basse:

Well, the sense I would say is that the old ranges in corn and soybeans are gone, at least for now. And you need to think about corn, cheap under $5 a bushel, expensive probably over $8.50, but it's going to be within that range unless we have a dramatic climate event. In the case of soybean meal, it may be a little different because we're going to see extra soybean acreage, but it'll take a couple years. But ultimately soybean meal may fall cheaper than corn. And I say that just because of the renewable diesel and amount of crush that will be ongoing and the inability for the United States to export a lot of that meal overseas.

Miranda Reiman:

Going back to the actual geopolitical kind of things that's impacting us right now, but where would it really get to where you'd call it like a crisis?

Dan Basse:

Well, right now we're all engaged in this battle against Russia and Ukraine. Of course, that's front and center to all of us. Whether or not that battle spreads to what I would call NATO members will be key in years ahead. If Putin is able to control Ukraine, I don't think he's probably going to stop there. I think he may look at other countries nearby. The other crisis, of course, is between the United States and China where political wills on both sides are reaching new lows. And if you're in China, it's about bashing America. If you're in the United States, it's about bashing China.

What I want to remind everyone in agriculture is China is still our biggest trading partner, and so it would be a bad day for the American farmer if somehow trade with China was either diminished or curtailed. China's anxious to do or continue the Phase One agreement negotiated by the Trump administration. It's just that the Biden administration doesn't want to hold out that olive leaf. So as we sit here today, you worry about how much China will buy from the United States because if they have a chance to buy it elsewhere, they will just because made in the USA label is not something that's favored in China at the moment.

Miranda Reiman:

That's 72%, was that what you said that they import 72% of their food. Do you see that changing?

Dan Basse:

We don't. China has an imitable land mass that won't be increasing and so the Chinese will always be beholden to importing large amounts of food and energy, which is why we don't think they're going to be attacking Taiwan anytime soon. But again, if China can source that from Brazil or can source it from our friends in Russia or Australia, they probably will to avoid the United States. Thankfully, those countries don't have big supplies of beef just yet. But something we're watching very carefully as we get into the years ahead.

Miranda Reiman:

So we've talked about grain supplies, we've talked about the geopolitical things, probably less when I want to hit on is beef demand. We see record high prices to consumers. Somebody at the very end here had a great question about how long can they stand that?

Dan Basse:

Yeah. We really don't know. Somewhere along the road there will be this recession, we don't know how deep it will be. And then the question will be, will consumers trade down from protein, maybe do a carbohydrate? There may be a little of that happening now but beef demand is rock solid. We're not seeing that changing. A disposable income is still rising. So today, in fact, the availability and demand for prime beef is record large. So we see spreads telling us that that demand is going to stay around for some period of time. If we get into that recession, we're going to have to check our pulse again on beef demand.

But today with poultry beef, pork and beef prices near or at record, there's been no consumer backlash against high prices. One of the reasons being is their wages, wages keep rising, particularly at the lower end of the market. They're going up and that's helping at least for to now buffer against any proteins demand cuts.

Miranda Reiman:

I appreciate that as a bright spot or some good news and what otherwise seems maybe a little bit alarming to our audience. Is there anything else that you have that's good news or that we ought to share that you told the audience today?

Dan Basse:

Well, I do believe that we're in a commodity super cycle, and by that I'm saying, demand for raw materials is going to stay very strong. We think that depending upon the administration, the discussion and going about carbon will help the US farmer. But I think we as American farmers will also engage in different policies such as cover crops or oil seed crops like camelina or maybe it's something we plant in fall and harvest in spring. Because with this renewable diesel industry, there's going to be a tremendous demand pull for vegetable oils and this is something that is assured as we can look forward to the next three to five years. That's a big disruptor that should keep American agriculture quite profitable.

Miranda Reiman:

Miranda Reiman back here for the Angus At Work podcast and today we're speaking with Ryan Turner who just gave a presentation at the Feeding Quality Forum here in Kansas City. Ryan, why don't you just give us a recap of what you all talked about today?

Ryan Turner:

Yeah, sure. Well first all, thank you all for having me. It was exciting presentation. The group is huge. There's like 200 plus people here, a great event. I covered some of the new trends, some of the things we're seeing in risk management. So Mr. Basse gave an outlook on the market and there's a lot of volatility in the marketplace today, but you've still got to manage that market volatility.

Miranda Reiman:

I think a lot of us would think of risk management as something that's set for the year. I know Kara Lee asked this question, how often should you be looking at what's newer or available in risk management?

Ryan Turner:

Yeah, she did. And I think honestly the way the markets are today, you almost have to reevaluate daily. It's almost a fluid situation. When I started 20 plus years ago, it wasn't so much, you could set your plan for the next three to six months, just go with it, let it come off. Today, you really have to be looking at your total position every day. That doesn't mean you're trading every day. That doesn't mean you are doing some crazy off the wall strategy every day, but you better reevaluating and looking at your risk every day. And if something needs to be done, then you do it.

Miranda Reiman:

Talk to me about what is new in the area of risk management, What's come online in the last few years?

Ryan Turner:

So I think the biggest change in the trend in risk management in the last probably two to five years has been a gravitation towards more structured, customized products or what we would call over the counter products. These are tools that are more customizable than the traditional exchange trader products. Traditional exchange trader products are still far and away the most used, probably still the most liquid, most available to the marketplace. But the trend is towards doing things that are more customizable.

If you're a cattle feeder today and you place cattle today that come out in let's say mid-September. Well, you've got to use October futures or you've got to use October options that expire on a very set structured timeframe. With the OTC marketplace, you could maybe structure hedges that settle on the exact week that you anticipate marketing your cattle. Well, that gives you an advantage or gives you more flexibility in your risk management.

The way we look at it, there's really four platforms of risk management. The physical marketplace, futures and options are the exchange traded over the counter, swap dealers, and then insurance products. And that was the other one I was going to talk about as being new. But those four platforms, you need to have access to all four of them. Is one any better than the other? No. Are there times of the year, are there certain marketing opportunities where one is better than the other? Absolutely. And you want to be able to use the one that's best at that time. And if you're only using one, you're going to miss opportunities in some of the other platforms of risk management.

The other new one that we're seeing is the use of LRP or the government subsidized or federally reinsured insurance products. We're seeing an adoption of those widespread across both cattle and hog producers.

Miranda Reiman:

Talk to me a little bit about the mechanics of those when you say LRP.

Ryan Turner:

So LRP is an acronym for livestock risk protection that is a government insurance product or, they officially call it a federally reinsured product. Basically it's insurance on the price of cattle that's available on both live cattle and feeder cattle that is partially subsidized by the USDA.

Miranda Reiman:

It's the crop insurance of the livestock world.

Ryan Turner:

For lack of a better term, absolutely, yeah. And at first, we didn't see great adoption. The products were really restricted to size. You couldn't do very many head. So it eliminated some of the larger producers feedlots in particular. Starting with 2023, they've actually made some adjustments to the size that you can put into that program. I think this year it's going to be up. For live cattle, it's 25,000 head. You can do up to I think 12,000 head per policy.

So they're relatively expensive, but so are put options in this marketplace and a lot of people don't want to use options or insurance because they have to pay for it. Well, in a market like we're in today that can literally move multiple standard deviations at a time, spending a little bit of money on insurance or a put option or some type of risk management to give yourself some flexibility, at the end may not be very expensive.

Miranda Reiman:

So if you've looked at LRP before with these changes, is it time to maybe even look at that again? If it didn't fit you before, might it fit your program now?

Ryan Turner:

Yeah. So like I said, I think the expansion of the program is making it more inclusive or more accessible for larger producers, ie. commercial cattle feeders. The program was designed I think in its beginnings specifically for small to mid-size producers, cow calf operators, 25, 50, 75 head of cattle that maybe didn't have access to futures and options and OTC swaps and those kinds of things. Just didn't have the wherewithal to do it, but the product is reasonable enough and a good enough platform for risk management that you had larger producers wanting to use it. So the government made the adjustment to allow them to use it.

Miranda Reiman:

Let's dial into those over the counter swaps a little bit because as I admitted to you, I got into your presentation late and I came in and you were talking about swapping live cattle against trim or something of that nature. I mean, you had me scratching in my head a little bit.

Ryan Turner:

So you can get as complex as you want. That's the one thing about over the counter market being bilateral. So just between two parties. You can really get as creative and as exotic as you want. You can be very basic or you can get very creative. The one that you in particular are mentioning is we have cattle producers that from time to time will sell beef trimming, swap. Beef trimmings are the byproduct of the slaughter process that go into hamburgers. So we'll at times have people in the livestock business that own cattle use those as hedging tools against their cattle. That's probably one of the more exotic structures that we see people use, but they absolutely can work.

Miranda Reiman:

So who dreams up what they should be selling against or who, I mean, does a producer come to you with an idea? Do you guys have a standard set of here's all the products we offer?

Ryan Turner:

Yeah. So as a registered swap dealer, StoneX has a standard listing of products that we offer. Everything has to go through a structured onboarding, new product process. All the swap dealer products are reported to the swap data repository, which is part of the regulatory process through the US government. So it is less of the wild, wild west than it used to be, say five, 10 years ago. But with that said, every product that's on the product listing was asked for by a customer. So if a customer has something that they want to hedge that they can't today, bring it to us. The worst thing that could happen is that we don't have an outlet for it. The best thing that could happen is that we design a new product and a new tool for a new customer.

Miranda Reiman:

So I'm a words person more than a market person. This might be a question just for me, maybe everybody else knows the answer to this, but usually on the opposite end of how trades work, you have somebody on the opposite end. So who's on the opposite end of the swaps we're talking about here?

Ryan Turner:

So in any marketplace, you're right, there's buyers and sellers. The main participants in the beef swaps in particular are livestock producers, retail, restaurant, grocery, so the food service type space, speculative market makers. In every commodity market, there's a speculative market maker that's standing in there just taking risk and producers. So that's really the market participants. Now in the broader OTC space, the market participants are endless.

Miranda Reiman:

Which is exciting because then you've got a lot of people backing or willing to withstand that risk for you.

Ryan Turner:

And these same people are participating in futures and options on the exchange traded products. They're participating in virtually all of the platforms. And that's what I go back to, like we talked about at the very beginning. If you're managing risk, you really need to have access to all of the tools available.

Miranda Reiman:

This is all really great information that you've given us here today. Is there anything else that you think producers need to know as they consider risk management or specifically customizing their risk management?

Ryan Turner:

The volatility is not going away anytime soon. And I think as we go forward, if anything, you may see more volatility in the marketplace. And I'll go back to one of my very first slides, volatility is absolutely risk but it's also opportunity. So use that volatility to your advantage when the market presents you that opportunity. Be ready to take advantage of it and again, to have access to all of the tools available to make that happen.

Miranda Reiman:

So rather than being fearful of it, feel a little bit empowered.

Ryan Turner:

Embrace it. It's opportunity.

Miranda Reiman:

Thank you so much. We appreciate you taking the time to visit with us.

Ryan Turner:

Thank you.

Kasey Brown:

Listeners, to get more information to help make Angus work for you, check out the resources to our print, Angus Beef Bulletin and digital Angus Beef Bulletin EXTRA in our show notes. You'll be seeing more coverage from the Feeding Quality Forum coming up in both publications, so make sure you're subscribed. And we want to hear from you! Let us know your ideas and comments at abbeditorial@angus.org. We'd sure appreciate it if you would rate this podcast, tell us what you learned and what was helpful, and share this episode with any other profit-minded cattlemen. For Angus At Work, this is Kasey Brown and thanks for listening.