WEBVTT - How Chinese Buying Is Causing a Boom in Agricultural Commodities 0:00:11.360 --> 0:00:15.040 Hello, and welcome to another episode of the All Thoughts Podcast. 0:00:15.160 --> 0:00:19.119 I'm Tracy Allaway and I'm Joe. Wasn't all so, Joe? Uh? 0:00:19.239 --> 0:00:21.880 I know there's been a lot going on this year. 0:00:22.400 --> 0:00:25.000 You know, we obviously have a new US president, we 0:00:25.040 --> 0:00:29.080 had the game stop saga in markets. But I think 0:00:29.080 --> 0:00:33.560 we can all agree that the big news of has 0:00:33.600 --> 0:00:38.320 been that China's new live hog futures started trading. Yeah. 0:00:38.360 --> 0:00:40.279 I mean that's obviously what I was going to say 0:00:40.320 --> 0:00:42.720 as well. I mean that's how you know, that's sort 0:00:42.720 --> 0:00:45.320 of the big thing that everyone is talking about so 0:00:45.360 --> 0:00:48.600 far this year. Yeah, okay, so clearly we are joking, 0:00:49.040 --> 0:00:52.400 but I will say these new futures contracts were something 0:00:52.440 --> 0:00:56.160 like twenty years in the making. Um, so they took 0:00:56.160 --> 0:00:58.800 a really long time to get here. One of the 0:00:58.840 --> 0:01:04.080 reasons that so interested in starting futures contracts for pork 0:01:04.200 --> 0:01:08.280 is because they've basically had their pigs supply absolutely decimated 0:01:08.400 --> 0:01:11.720 in recent years by African swine fever. So the whole 0:01:11.720 --> 0:01:14.480 idea is that the futures contract will come in, it 0:01:14.520 --> 0:01:18.000 will allow some standardization of pigs, and it will allow 0:01:18.080 --> 0:01:20.800 farmers to hedge and things like that, and they'll be 0:01:20.840 --> 0:01:27.000 able to rebuild their pork supply m standardization of pigs. 0:01:27.200 --> 0:01:32.520 I'm a, I'm I'm very intrigued by this. Yes, okay, 0:01:32.560 --> 0:01:35.520 welcome to agricultural all thoughts. Um, So, we're gonna be 0:01:35.560 --> 0:01:38.840 talking about the pig futures contract, but we're gonna be 0:01:38.920 --> 0:01:42.040 talking about food price inflation more generally, because of course 0:01:42.200 --> 0:01:47.200 we've seen pork prices in China absolutely surge recently. It's 0:01:47.200 --> 0:01:50.640 starting to come down now, but but globally, as you know, Joe, 0:01:50.880 --> 0:01:54.520 there's been a massive rise in food prices. Yeah. And 0:01:54.560 --> 0:01:56.880 I would say if I were to actually from an 0:01:56.880 --> 0:02:00.040 eco standpoint, if I were to say what is the 0:02:00.040 --> 0:02:03.880 biggest story in or in the economy right now, it 0:02:03.920 --> 0:02:08.959 would be all of the different bottlenecks price increases we're 0:02:08.960 --> 0:02:12.880 seeing at the producers side. We've talked about it with shipping, 0:02:12.919 --> 0:02:16.640 and we've talked about it with semiconductors, where we've talked 0:02:16.639 --> 0:02:20.280 about it with Jeff Curry, with industrial commodities, and of 0:02:20.320 --> 0:02:23.240 course we're also seeing it in agriculture commodities. You know, 0:02:23.240 --> 0:02:24.720 if you look at the last year in the US 0:02:24.760 --> 0:02:27.880 soy futures up from nine hundred, I guess it's for 0:02:28.000 --> 0:02:32.520 futures contract for bushel dred corner is up by a lot, 0:02:32.600 --> 0:02:34.480 Hogs are up by a lot, cattle is up by 0:02:34.520 --> 0:02:37.640 a lot. So there's almost you know, all these different 0:02:37.680 --> 0:02:42.520 categories we're seeing this upward price pressure issues relating to 0:02:42.880 --> 0:02:46.320 of course, uh, supply chain disruption still doing with COVID, 0:02:46.800 --> 0:02:51.120 massive recovery and demand around the world, particularly in China, 0:02:51.160 --> 0:02:53.480 but elsewhere where. And now as of the time that 0:02:53.520 --> 0:02:55.320 we're recording this, and I think we're going to talk 0:02:55.360 --> 0:02:59.000 about it too. Uh, the extraordinary scenes that we're seeing 0:02:59.000 --> 0:03:02.079 out of Texas and the freeze which is really disrupting 0:03:02.639 --> 0:03:06.919 the economy of the entire central part of the United States. Yeah, 0:03:06.960 --> 0:03:11.320 a perfect storm of factors coming together to increased food prices. 0:03:11.800 --> 0:03:14.000 Storm might not be the right phrase there, but it is. 0:03:14.560 --> 0:03:18.160 I mean, you are starting to see actual impacts of this. 0:03:18.280 --> 0:03:22.640 So here in Hong Kong, McDonald's isn't offering hash Browns 0:03:22.680 --> 0:03:26.480 and its breakfast anymore. So you know, things are very serious. 0:03:26.880 --> 0:03:29.919 More seriously, we've seen some countries starting to talk about 0:03:29.960 --> 0:03:33.200 putting a price caps on food prices. I think Russia 0:03:33.280 --> 0:03:35.600 is already doing it. The UAE was talking about doing 0:03:35.600 --> 0:03:39.080 it as well, So it is beginning to affect people's lives, 0:03:39.080 --> 0:03:42.480 and it is causing problems for some governments. So we're 0:03:42.480 --> 0:03:46.120 going to dive into the whole issue of food price 0:03:46.120 --> 0:03:50.240 inflation as well as the new Dallian hog futures contract. 0:03:50.320 --> 0:03:54.040 By popular request, we're gonna be speaking to Scott Irwin. 0:03:54.240 --> 0:03:58.800 He's an agricultural economist at the University of Illinois. Scott, 0:03:58.880 --> 0:04:03.520 Welcome to the show. I'm glad to be here. So, Scott, 0:04:03.520 --> 0:04:08.680 in addition to being an agricultural economist, you're also an 0:04:08.920 --> 0:04:13.720 actual farmer from Iowa. Is that correct? Well, it's probably 0:04:13.760 --> 0:04:19.240 technically speaking. Um, I don't actually get much tractor driving 0:04:19.320 --> 0:04:25.200 and physical participation, but I it's an interesting situation. I 0:04:25.279 --> 0:04:28.520 from the landlord side of my family's farm out in Iowa. 0:04:28.680 --> 0:04:31.680 My eighty five year old mother and I provide the 0:04:31.720 --> 0:04:34.360 management and do all the marketing of the crops. So 0:04:34.680 --> 0:04:36.640 I lived through the ups and downs of the grain 0:04:36.760 --> 0:04:41.160 markets like everybody else. Plus I get to try to 0:04:41.760 --> 0:04:44.560 work the markets with my card playing eighty five year 0:04:44.560 --> 0:04:49.800 old mother. That sounds that sounds extremely satisfying and fun. 0:04:50.279 --> 0:04:53.200 You know right now, you know sort of mentioned this 0:04:53.400 --> 0:04:58.960 rally that we're seeing. It's pretty intent across various soft commodities, 0:04:59.000 --> 0:05:01.479 agriculture commodity. Why do you give us the sort of 0:05:01.560 --> 0:05:06.159 basic big picture of what's going on, what's driving this 0:05:06.320 --> 0:05:13.000 bid China perfect? Is that as six existent as you Yeah, 0:05:13.640 --> 0:05:17.640 it's not the only factor, of course, but in the 0:05:17.680 --> 0:05:21.159 egg markets, that's the number one driving force. We've seen 0:05:21.200 --> 0:05:28.520 a just a explosion in grain exports to China basically 0:05:28.520 --> 0:05:33.599 started about last July and has shown little signs of 0:05:33.680 --> 0:05:38.039 cooling off. Some of that related to their Phase one 0:05:38.080 --> 0:05:42.960 trade agreement that was negotiated in the previous Trump administration. 0:05:43.760 --> 0:05:47.479 Some of it also related to rebuilding of the hug 0:05:47.560 --> 0:05:51.159 herd because of the African swine fever, and then some 0:05:51.320 --> 0:05:55.279 of it is also related to just their desire to 0:05:55.320 --> 0:05:58.240 rebuild some of their reserve stocks as well. But that's 0:05:58.279 --> 0:06:01.640 the number one fact. So one thing I always wondered about. 0:06:02.240 --> 0:06:05.600 You see these headlines that China is building up it's 0:06:05.839 --> 0:06:08.880 grain reserves, and I don't know, I can I can 0:06:08.920 --> 0:06:11.440 kind of see why countries would do that, but I 0:06:11.760 --> 0:06:16.360 always wonder how useful those reserves are over the long 0:06:16.480 --> 0:06:18.800 term and how they actually use them. Can you give 0:06:18.880 --> 0:06:22.160 us a sort of like potted summary of what building 0:06:22.200 --> 0:06:28.159 up preserves actually means. Well. It's classic example of something 0:06:28.200 --> 0:06:31.919 that sounds good in theory and rarely works well in practice. 0:06:32.600 --> 0:06:36.800 We have many decades of experience with different kinds of 0:06:36.839 --> 0:06:42.640 reserve schemes here in the US UM they've tried it metals, grains, 0:06:42.800 --> 0:06:46.640 and all sorts of commodities, soft commodities over the years. 0:06:47.240 --> 0:06:51.560 So they're called buffer stock ski seames. And the problem is, 0:06:51.720 --> 0:06:53.320 you know, the idea is that you build it up. 0:06:53.520 --> 0:06:55.040 You know, it's kind of the seven fat years in 0:06:55.080 --> 0:06:59.760 the seven lean years biblical example put in practice, and 0:07:00.279 --> 0:07:02.720 so that all sounds good in theory, but it all 0:07:02.800 --> 0:07:08.600 becomes very political, and governments have a tendency to not 0:07:08.839 --> 0:07:11.880 want to release the buffer stocks when they really ought 0:07:11.920 --> 0:07:15.880 to to uh you know, maybe calm markets down, because 0:07:15.880 --> 0:07:18.520 then farmers are mad because you're driving the price down. 0:07:19.160 --> 0:07:22.040 And so it's just it's a deeply political and it 0:07:22.320 --> 0:07:27.600 rarely works as well as it sounds in theory. So 0:07:28.440 --> 0:07:30.920 why did they do it and when do they do it? 0:07:31.040 --> 0:07:33.800 So if these if this is a scheme or this 0:07:33.920 --> 0:07:37.559 idea of building up huge reserves is not even really 0:07:37.600 --> 0:07:41.800 particularly sound and doesn't working well in practice, as maybe 0:07:41.800 --> 0:07:45.400 they think what why do they occasionally do this? Because 0:07:45.440 --> 0:07:47.120 I think I was just looking at a chart. I 0:07:47.120 --> 0:07:49.520 think like in eleven, didn't they like buy a crazy 0:07:49.520 --> 0:07:55.160 amount of cotton, sending the cotton prices soaring? What catalyzes 0:07:55.200 --> 0:07:58.440 them at one moment or another to say, Okay, we're 0:07:58.440 --> 0:07:59.920 really just going to go out in the market and 0:08:00.080 --> 0:08:06.400 buy fear. It's just driven. You'll see that those kinds 0:08:06.440 --> 0:08:11.720 of big build ups and reserves typically follow price spikes. 0:08:13.520 --> 0:08:17.400 I think of the US Strategic Petroleum Reserve. When is 0:08:17.440 --> 0:08:21.560 their intense pressure to build that up started in oh six, 0:08:21.600 --> 0:08:24.360 oh seven o eight when crude oil prices were spiking, 0:08:25.440 --> 0:08:30.080 And that's the typical pattern. And you know, the other 0:08:30.120 --> 0:08:33.920 thing is is with China, they have huge stocks, which 0:08:33.920 --> 0:08:38.200 I'm not even sure that the Chinese government really knows 0:08:38.400 --> 0:08:42.720 the size of their stocks of basic commodities. We know 0:08:42.960 --> 0:08:47.040 that their statistics are way off. I mean the U 0:08:47.160 --> 0:08:50.240 s d A and other international organizations try to track these, 0:08:50.240 --> 0:08:53.439 and grains will occasionally just go through these massive revisions. 0:08:53.440 --> 0:08:57.480 You wake up and China has you know, a hundred 0:08:57.480 --> 0:09:00.360 million less tons of feet grains on hand then you 0:09:00.520 --> 0:09:03.440 thought they did yesterday based on the official statistics. So 0:09:04.120 --> 0:09:07.160 On top of I think the difficulty of making those 0:09:07.200 --> 0:09:09.960 work really well in practice in China, you have the 0:09:10.200 --> 0:09:13.439 extra problem of trying to figure out what the real 0:09:13.520 --> 0:09:17.080 number is. So one thing I've always wondered, you know, 0:09:17.160 --> 0:09:20.840 when we talk about food prices being at a six 0:09:20.920 --> 0:09:27.200 year high, do farmers actually benefit from that? Well, I 0:09:27.200 --> 0:09:31.760 think when you uh see something like that headline of 0:09:32.080 --> 0:09:34.760 food prices at a six year high, we have to 0:09:34.760 --> 0:09:40.040 be really careful because that's reflecting various indices of the 0:09:40.080 --> 0:09:44.600 cost of what I call farm level prices. So it's 0:09:44.640 --> 0:09:47.400 like the price of corn and soybeans in central Illinois 0:09:47.520 --> 0:09:50.800 that farmers here can sell their corn and soybeans for, 0:09:51.640 --> 0:09:54.880 or hogs or or anything. At the farm level. There's 0:09:54.880 --> 0:09:58.800 a vast difference between that price and the price you 0:09:58.840 --> 0:10:03.080 pay in your local growth try store. And a rough 0:10:03.160 --> 0:10:08.720 rule of thumb is that about only of what you 0:10:08.760 --> 0:10:13.040 come home with from the grocery store that's food, is 0:10:13.080 --> 0:10:17.160 represented by the farm level share of the cost. So 0:10:17.320 --> 0:10:20.480 you can have a six year high in the raw 0:10:21.160 --> 0:10:25.599 price of most foods and it doesn't budge the grocery 0:10:25.720 --> 0:10:28.280 or retail level price all that much. Now, that's not 0:10:28.320 --> 0:10:32.040 strictly true for all Uh. Commodities, things like milk, meat, 0:10:32.080 --> 0:10:37.920 and eggs are most directly related to the price at 0:10:37.960 --> 0:10:41.880 the farm level because they're obviously very perishable and consumed 0:10:41.960 --> 0:10:44.760 close to the raw form. The more processing you have, 0:10:45.320 --> 0:10:50.439 the more that that distance from retail price or grocery 0:10:50.440 --> 0:10:53.600 store price to the farm price gets. And I'm going 0:10:53.679 --> 0:11:00.559 to ask another very remedial question about commodity economic and 0:11:00.760 --> 0:11:03.440 into this, which is that when people talk about the 0:11:03.480 --> 0:11:07.199 existence of the futures market, and I quoted some soy 0:11:07.320 --> 0:11:11.720 futures and con future prices in the intro, it's like 0:11:11.840 --> 0:11:14.960 they're like, well, the farmer has to hedge their production 0:11:15.040 --> 0:11:16.400 because they don't know what the weather is going to 0:11:16.480 --> 0:11:19.400 be like, and the buyer wants to hedge, etcetera because 0:11:19.400 --> 0:11:22.199 they don't know this, and that's why the future market 0:11:22.240 --> 0:11:25.880 exists and so on. Does the futures market actually work 0:11:26.080 --> 0:11:31.080 as such in practice such that farmers who are out 0:11:31.120 --> 0:11:34.040 there on the land and some level or another use 0:11:34.120 --> 0:11:39.679 it to actually um manage risks. Great question. That's the 0:11:39.720 --> 0:11:45.240 classic textbook example that everyone uh from the exchanges on 0:11:46.240 --> 0:11:51.560 used to motivate futures markets and white people hedge, and 0:11:51.880 --> 0:11:56.199 it actually isn't a very good picture of how those 0:11:56.240 --> 0:12:00.160 markets actually work. Most producers here in the US, been 0:12:00.160 --> 0:12:04.040 the most sophisticated ones, don't use the futures markets directly 0:12:04.320 --> 0:12:08.680 themselves very much. They do it indirectly through something called 0:12:08.720 --> 0:12:11.800 forward contracting with the books, say their local grain elevator. 0:12:12.880 --> 0:12:18.559 But even then they might maybe at most um sell 0:12:18.760 --> 0:12:27.160 forward of their production. So the vast majority of the 0:12:27.200 --> 0:12:30.360 trading volume on what we would call the commercial or 0:12:30.400 --> 0:12:33.120 hedging side is actually done by what I like to 0:12:33.160 --> 0:12:36.680 call grain merchants. These are the big and the small 0:12:36.720 --> 0:12:42.719 companies that are involved in the basic transformation of a 0:12:42.880 --> 0:12:47.839 commodity in time, form, and space. Those are the people 0:12:48.080 --> 0:12:52.719 that really use the futures markets. That's that's the core community. 0:12:53.200 --> 0:12:55.040 So this is something that I actually wanted to ask 0:12:55.080 --> 0:12:57.439 you about, which is we have all these different futures 0:12:57.480 --> 0:13:00.880 contracts out there. So you know, the CM famously had 0:13:00.920 --> 0:13:03.880 its physically delivered contract for live hogs and then that 0:13:03.920 --> 0:13:09.120 got converted into cash settlement. What actually makes a successful 0:13:09.440 --> 0:13:14.040 futures contract and how do you judge success? Well, you 0:13:14.080 --> 0:13:16.560 can look at it the way an economist looks at it, 0:13:16.600 --> 0:13:21.480 but the simplest way to look at it from exchange 0:13:21.760 --> 0:13:27.040 and traders at a futures exchange is simple volume. That's 0:13:27.080 --> 0:13:31.120 their measure of success. It's easy. Uh, do people want 0:13:31.160 --> 0:13:35.040 to trade it? And are there rising and large volumes 0:13:35.160 --> 0:13:40.520 of contracts exchanged? Very simple objective function. From their perspective, 0:13:41.160 --> 0:13:43.760 An economist looks at a little bit more broadly and asked, 0:13:44.400 --> 0:13:49.880 does the contract fulfill an important role in helping to 0:13:49.960 --> 0:13:55.120 discover prices for that commodity? Uh? And is it a 0:13:55.160 --> 0:13:58.440 good vehicle that a broad swath of people in that 0:13:58.559 --> 0:14:02.320 commodity sector can use to manage their risks? So those 0:14:02.320 --> 0:14:05.079 are the two economic functions that we look at as 0:14:05.080 --> 0:14:09.040 an economist, but exchange looks at it very simply. You 0:14:09.040 --> 0:14:12.200 don't I really like about this podcast is like ostensibly 0:14:12.440 --> 0:14:14.880 we're like, oh, what's going on in grains and food 0:14:15.000 --> 0:14:17.560 and everything? But I love that we just get to 0:14:17.679 --> 0:14:20.200 use this as a time to ask really basic questions 0:14:20.200 --> 0:14:22.360 that like, we would probably never ask in any other form, 0:14:22.440 --> 0:14:25.480 like how does the futures market work? And who actually 0:14:25.520 --> 0:14:29.160 trades it? Because I can't think of any other opportunity 0:14:29.160 --> 0:14:31.200 where I would like get to ask that question except 0:14:31.200 --> 0:14:33.680 this podcast. So I just want to say, is one 0:14:33.720 --> 0:14:39.000 reason I really enjoyed doing it, so Tracy, Uh, I know, 0:14:39.040 --> 0:14:41.160 it's really great, and I'm just like, when else would 0:14:41.160 --> 0:14:42.640 I get to do this? Like if I said this 0:14:42.720 --> 0:14:44.640 on air on TV, I would be laughed at and 0:14:44.680 --> 0:14:47.760 I wouldn't have the time. Okay, so let's get to 0:14:47.880 --> 0:14:53.120 the big question, which is why should we care about, say, 0:14:53.280 --> 0:14:59.600 the introduction of China's new live hog futures, which have 0:14:59.640 --> 0:15:03.000 been trade for just over a month. It looks like, well, 0:15:03.040 --> 0:15:06.920 there you get to the real basic question of you know, 0:15:07.000 --> 0:15:11.880 what's the purpose in the largest sense, what's the value 0:15:12.440 --> 0:15:16.200 of commodity futures markets to an economy and to a society, 0:15:17.200 --> 0:15:23.760 And if it's doing its job right, it basically makes 0:15:24.520 --> 0:15:28.880 the marketing system more efficient. In other words, producers will 0:15:28.920 --> 0:15:35.240 get higher prices and consumers will pay lower prices. That 0:15:35.480 --> 0:15:39.960 margin between the farm price and the ultimate consumer price 0:15:40.880 --> 0:15:43.760 gets a little bit more efficient, a little more competitive 0:15:43.800 --> 0:15:47.800 and cost efficient. That's the core value of a futures 0:15:47.840 --> 0:16:07.560 market that's working well. So one thing I wanted to 0:16:07.600 --> 0:16:12.360 ask you about is how the Dalian contract actually works. 0:16:12.440 --> 0:16:17.600 So I think the size is for sixteen tons of pork, 0:16:17.720 --> 0:16:21.520 which is about sixteen tons of pigs, I should say, 0:16:21.560 --> 0:16:27.760 which apparently is equal to one truck full of hogs. Um. 0:16:27.760 --> 0:16:30.880 So again, like this kind of gets to the standardization element, 0:16:30.920 --> 0:16:35.160 but how are they actually taking delivery of actual hogs? 0:16:35.280 --> 0:16:41.400 And do you think it will help standardize China's pork market? Again, 0:16:42.760 --> 0:16:47.000 you know, I'm not an expert on that particular future contract, 0:16:47.200 --> 0:16:50.880 and what I've read is it seems like the size 0:16:51.000 --> 0:16:55.840 is comparable to what the CME Lane hog contract is 0:16:55.880 --> 0:17:00.400 in terms of the number of hogs it represents. Roughly 0:17:00.560 --> 0:17:06.359 a truckload is kind of a common size, so that 0:17:06.359 --> 0:17:11.000 that makes sense. I think China's challenge will be is 0:17:11.119 --> 0:17:17.640 that there pork sector is far less industrialized than stay 0:17:17.680 --> 0:17:22.680 here in the US, in that they have millions upon 0:17:22.840 --> 0:17:28.439 millions of very very small pork producers and they're not 0:17:28.560 --> 0:17:31.600 going to use the futures market. A futures market will 0:17:31.640 --> 0:17:37.160 be used by the very large industrialized pork operations China, 0:17:37.240 --> 0:17:40.840 which are growing rapidly, but there's still a relatively small 0:17:40.920 --> 0:17:44.800 share of that country's total pork production. And you'll see 0:17:44.960 --> 0:17:47.800 slaughtering plants and you know what I'd like to call that, 0:17:47.920 --> 0:17:51.000 those middle operators or what I call merchants, those will 0:17:52.000 --> 0:17:55.520 almost every futures market tend to be the biggest users, 0:17:55.680 --> 0:17:59.240 and so that's the community I would look to to 0:17:59.240 --> 0:18:02.119 see if it's going to be successful. So I'm really 0:18:02.160 --> 0:18:05.919 fascinated by this point about the sort of uh, the 0:18:06.080 --> 0:18:12.439 inconsistency of the I guess diversity, the inconsistency of the 0:18:12.520 --> 0:18:16.880 domestic pork operations, and how that fits into I guess, 0:18:16.880 --> 0:18:21.240 you know, a standardized futures contract. You buy a uh, 0:18:21.320 --> 0:18:24.119 you know, however, many tons of hogs, and you expect 0:18:24.119 --> 0:18:27.680 a certain like quality and consistency. But I guess that's 0:18:27.840 --> 0:18:32.280 that must be an issue across all futures always, whether 0:18:32.320 --> 0:18:34.720 it's corn or soy, you buy a certain amount, you 0:18:34.760 --> 0:18:38.440 expect a certain grade, a certain quality, and every ear 0:18:38.440 --> 0:18:41.600 of corn I guess it could theoretically be slightly different. 0:18:42.119 --> 0:18:47.440 How do commodity future or commodity traders across the futures 0:18:47.440 --> 0:18:50.840 markets and sort of commercial buyers of them? How does 0:18:50.880 --> 0:18:53.840 that get worked out over time such that the deliveries 0:18:53.840 --> 0:18:58.120 of the actual goods become predictable and standard, And how 0:18:58.119 --> 0:19:01.560 does the futures contract except self is Tracy alluded to 0:19:01.600 --> 0:19:07.040 in the intro sort of accelerate that predictable news, right, Well, 0:19:07.040 --> 0:19:11.399 the first thing to remember is that the vast majority 0:19:11.440 --> 0:19:18.560 of futures contracts are never fulfilled by physical delivery. Like 0:19:18.640 --> 0:19:22.640 in the grains, maybe one or two percent of all 0:19:22.680 --> 0:19:27.960 the contracts that are traded actually end up resulting in 0:19:28.080 --> 0:19:32.359 physical delivery, and that's by design. That doesn't mean there's 0:19:32.440 --> 0:19:36.840 something wrong with the contract, because the futures market is, 0:19:37.560 --> 0:19:43.680 in simplest terms, designed to be a parallel market organization 0:19:44.200 --> 0:19:48.800 or vehicle where you can play side bets if you're 0:19:48.800 --> 0:19:53.439 a producer or a middle operator, and those side bets 0:19:54.600 --> 0:19:59.600 allow you to in essence, manage your price risk. So 0:19:59.680 --> 0:20:03.280 you're here in the futures markets taking long and short 0:20:03.359 --> 0:20:07.120 positions to manage the price risk of whatever is your 0:20:07.240 --> 0:20:11.520 underlying cash position. And what you really are interested in 0:20:11.560 --> 0:20:14.880 then is do my cash prices and my futures prices 0:20:15.280 --> 0:20:19.359 go roughly in parallel, so that if I'm long in 0:20:19.400 --> 0:20:22.480 the cash and I go short in the futures, then 0:20:22.640 --> 0:20:25.640 the price movements roughly offset one another. And that's all 0:20:25.680 --> 0:20:29.200 you care about. You're not using it as a merchandising 0:20:29.320 --> 0:20:33.960 vehicle to actually get the physical commodity. But at the 0:20:34.000 --> 0:20:37.520 same time, why the terms of the contracts, the things 0:20:37.520 --> 0:20:40.600 you were talking about are critical because if you're going 0:20:40.600 --> 0:20:43.359 to manage your risk over here in the cash market 0:20:43.400 --> 0:20:47.119 side with the futures contract, you need a futures contract 0:20:47.600 --> 0:20:52.240 that has terms and reflects the prices as closely as 0:20:52.280 --> 0:20:54.159 you can get to what you're doing over here in 0:20:54.200 --> 0:20:59.080 the cash market. M I wanted to widen out the 0:20:59.080 --> 0:21:03.840 conversation once and talk more about agricultural prices generally. So 0:21:04.160 --> 0:21:09.280 we are seeing lots of talk about agflation. I guess 0:21:09.320 --> 0:21:13.760 my question is what could be done at this moment 0:21:13.800 --> 0:21:19.440 in time, in your opinion, to bring food prices down. Well, 0:21:19.520 --> 0:21:26.760 I don't think that there's probably a lot that governments 0:21:27.160 --> 0:21:31.720 can do around the world because there aren't large excess 0:21:31.880 --> 0:21:35.679 stocks laying around, you know, in these kind of buffer 0:21:35.720 --> 0:21:42.600 stock schemes, except maybe inside China. I'm not myself very 0:21:42.680 --> 0:21:45.119 concerned at this point about I love the term you 0:21:45.160 --> 0:21:49.760 had inflation. We have seen large increases in prices, but 0:21:49.960 --> 0:21:53.239 let's just kind of wait, and you know, coming on 0:21:53.280 --> 0:21:55.640 the other side of this is going to be a 0:21:55.760 --> 0:21:59.680 monstrous supply response around the world, and things like born 0:21:59.720 --> 0:22:02.359 ands a beans and then the livestock, and you just 0:22:02.440 --> 0:22:05.560 kind of gotta give the system a little time. I mean, 0:22:06.200 --> 0:22:10.960 it's very important to remember, like, standing around mid August, 0:22:11.560 --> 0:22:13.600 we thought here in Illinois we were going to have 0:22:15.119 --> 0:22:18.080 one of the worst years we've had for a long 0:22:18.160 --> 0:22:20.800 long time on income, and it wasn't very long ago. 0:22:21.200 --> 0:22:25.280 And then corn and soybean prices started shooting up, and 0:22:26.200 --> 0:22:30.399 we're gonna see a big excrease in acreage. Farmers are 0:22:30.400 --> 0:22:33.840 going to pour the inputs in, and if we get 0:22:33.880 --> 0:22:36.000 any kind of decent weather here in the US, we're 0:22:36.000 --> 0:22:37.639 gonna have a big crop. And it looks like for 0:22:38.040 --> 0:22:39.960 you know, the first cut at the big price high 0:22:39.960 --> 0:22:43.159 prices was in South America, and other than maybe some 0:22:43.200 --> 0:22:45.560 problems in Argentina, they look like they're going to have 0:22:45.600 --> 0:22:49.280 pretty good crops. So I don't see anything in this 0:22:49.480 --> 0:22:54.920 yet that that really deeply concerns me about long term inflation. 0:22:56.119 --> 0:23:00.480 So is there a way to sort of anticipate the 0:23:01.400 --> 0:23:04.880 how long the stocking cycle goes? So obviously you will 0:23:04.920 --> 0:23:08.359 get this and hopefully we get a robust supply response 0:23:08.440 --> 0:23:13.480 to the demand. What about the demand side itself? Can economists? 0:23:13.520 --> 0:23:17.560 Can you anticipate how much more China has left to 0:23:17.640 --> 0:23:20.719 buy before it will be satisfied with its attempts to 0:23:20.760 --> 0:23:23.520 sort of build up a buffer or is that inherently 0:23:23.680 --> 0:23:29.560 unpredictable due to how political it is. With China in particular, 0:23:29.600 --> 0:23:34.720 that is wildly hard to predict because you're purely predicting, 0:23:35.280 --> 0:23:39.720 you know, inside the Chinese Communist Party, what are going 0:23:39.760 --> 0:23:44.440 to be their political decisions on these key kinds of variables, 0:23:44.520 --> 0:23:48.119 And the data is just so poor at least in 0:23:48.160 --> 0:23:50.800 the public domain. Give you an idea of how hard 0:23:50.880 --> 0:23:53.679 this thing is to assess in China. I have some 0:23:54.359 --> 0:23:58.080 colleagues that working hedge funds, and when the African swine 0:23:58.119 --> 0:24:03.600 fever started taking off, you know, there's a huge hedge fund. 0:24:03.600 --> 0:24:06.840 They had no idea, so they started having regular calls 0:24:06.920 --> 0:24:09.919 with veterinarians they could get ahold of insight China directly, 0:24:10.000 --> 0:24:11.639 and they just try to build up a network and 0:24:11.680 --> 0:24:15.840 start talking to people. So it's very hard. You know, 0:24:15.880 --> 0:24:20.080 it's very volatile and uncertain situation when the world's largest 0:24:20.119 --> 0:24:26.040 consumer is this kind of opaque. There's one other big 0:24:26.080 --> 0:24:28.399 thing going on at the moment where that has the 0:24:28.440 --> 0:24:32.239 potential to actually happen um and impact food prices and 0:24:32.600 --> 0:24:36.080 the farming community, and that's the new US President Biden 0:24:36.320 --> 0:24:40.280 coming in presumably with some sort of new agricultural policy. 0:24:40.800 --> 0:24:45.400 He definitely seems to have a focus on climate change UM, 0:24:45.440 --> 0:24:48.679 which would impact things like story beans. How do you 0:24:48.720 --> 0:24:52.760 see that playing out? Well, I think that's going to 0:24:52.800 --> 0:24:56.040 be very interesting, UM and it's going to be layered 0:24:56.119 --> 0:24:59.920 on top of and our ongoing what I call RFS 0:25:00.040 --> 0:25:03.080 swars here in the US politically over the renewable fuels 0:25:03.119 --> 0:25:06.920 mandates that we already have UH here in the US 0:25:07.000 --> 0:25:12.200 by law. So we have that that's ongoing, and then 0:25:12.240 --> 0:25:14.480 you have layered on top of that things like the 0:25:14.760 --> 0:25:19.600 California Low Carbon Fuel Standard, some talk of that being 0:25:19.640 --> 0:25:25.280 expanded going forward. You have something called renewable diesel plants 0:25:25.320 --> 0:25:30.680 being built at a wild pace right now in responding 0:25:30.720 --> 0:25:35.040 to these policy incentives. So this is definitely an area 0:25:35.080 --> 0:25:38.320 that I'm paying really close attention to and I think 0:25:38.720 --> 0:25:46.400 has the potential to be probably the biggest demand game changer, 0:25:46.600 --> 0:25:50.800 both negatively and positively for egg in the next few years. 0:25:51.280 --> 0:25:53.480 Can you can you actually explain that a little bit 0:25:53.600 --> 0:25:59.200 further one could change policy wise that's on the horizon, 0:25:59.440 --> 0:26:05.520 making it making either agg demand go sharply higher or lower. Well, 0:26:05.520 --> 0:26:08.760 probably the first thing I'd come up is, you know, 0:26:08.840 --> 0:26:13.600 what's the Biden administration going to do with ethanol you know? Um, 0:26:13.880 --> 0:26:17.239 I hear chatter that there's certainly the groups are going 0:26:17.280 --> 0:26:21.120 to really be pushing moving from a de facto ten 0:26:21.840 --> 0:26:28.040 standard on gasoline. Would a Biden administration for climate change 0:26:28.680 --> 0:26:32.879 reasons and domestic political reasons go along with that? That 0:26:32.960 --> 0:26:37.960 could be huge. Secondly, what is the new Biden administration's 0:26:38.680 --> 0:26:41.840 position going to be in terms of how we implement 0:26:42.359 --> 0:26:47.040 our renewable fuel mandates? Under the Trump administration, who was 0:26:47.240 --> 0:26:51.280 very closely allied with the crude oil refiners, basically their 0:26:51.440 --> 0:26:54.720 entire strategy was to give it as big a haircut 0:26:54.760 --> 0:26:59.240 as possible, you know, reduce it. We're still kind of 0:26:59.240 --> 0:27:01.320 trying to find out where the Biden administration is going 0:27:01.359 --> 0:27:03.480 to fall on all of these. Plus we have a 0:27:03.480 --> 0:27:05.920 big case in front of the Supreme Court on the 0:27:05.920 --> 0:27:09.080 rentable field standards, so there's a lot of moving pieces 0:27:09.080 --> 0:27:28.119 on that right now. So one of the few things 0:27:28.160 --> 0:27:31.879 I know about the farming community is that they seem 0:27:32.000 --> 0:27:34.919 to be uh, how do I how do I put this? Like, 0:27:35.520 --> 0:27:39.320 for the past few years, they seem to be um. 0:27:39.359 --> 0:27:42.280 They seem to feel bad. What will would it take 0:27:42.359 --> 0:27:46.280