GameStop, Feruzzi and Other Ag Market Pixie Dust

I’m short selling GameStop. What you say? Well, it’s been kind of a big deal over the last few days and weeks as business pages have been tied up with trying to explain how seemingly poor stock buys like GameStop, Blackberry and AMC have suddenly caught fire on the stock market egged on by an internet chat group on Reddit.

For those of you who don’t know what I’m referring to, you’ve missed a great financial drama. It’s been labeled as Joe Retail investors vs the Wall street goliaths. It has even put the political opinion of such diverse voices as New York Congresswomen Alexandria Ocasio-Cortez, Texas Senator Ted Cruz and Canadian NDP leader Jagmeet Singh on side of the issue. Everybody loves Robin Hood when he wins. Needless to say, GameStop might have gained over a 1000% in the last two weeks, but late today, the stock plummeted 44% as Robinhood Markets, which owns the online app for trading took steps to curb the online trading activity. The injustice of it all! Free markets are sacrosanct!

Of course, it’s not over and I’ll let you google your way to understanding what’s been happening. Take a look at AMC and Blackberry stock too. The world has come a long way since I paid 23.25% interest on a farm loan and at the end of that year invested in 19.5% Canadian savings bonds. What once was a narrow peaceful river of calm financial trading is now a wide raging river and seemingly getting wider every day.

Who knew risk would become a growth industry, especially in the last few days over a stock, whose company made its name through brick-and-mortar video games rentals and sales? I never saw it coming, but it’s been great theatre for an agricultural economist. So much of what I learned about risk in grad school couldn’t have even been imagined back in the 1980s. I even had somebody quote John Maynard Keynes the other day on twitter, warning people about risk. I shot back that Keynes was a real good guy, but he probably could never imagine something called the Reddit Group WallstreetBets. (the name of the subgroup on Reddit ~I knew you knew that)

I had one farmer chime in why he would be interested in stocks, he takes enough risk every day on the farm. I’ve always concurred with that. As farmers we throw huge amounts of dollars into the soil every spring hoping something will grow and we act as if this is normal. I couldn’t imagine selling all my old crop soybeans for $17.50 two weeks ago and putting the money into GameStop stock. Let me see, a 1000% return over the last two weeks would turn those soybeans into $175 a bushel! I digress.

Yes, craziness, right? Risk management is what we do as farmers, but that’s not really risk management. It simply gives you a picture of how crazy things have got. For instance, as farmers we all know how volatile soybeans prices have been over the last few months. Today, nearby soybean futures raced out to a new high, but then dropped 46 cents below the high. We all know, USDA pegged old crop soybean stocks at 140 million bushels. However, futures spreads are inverted with the market screaming that end users want your beans now. How do we manage the risk is always the question? Does the GameStop phenomena of the last few weeks have any application to that.

It’s interesting for sure thinking about this. Remember that young guy who started writing this column 34 years ago? I couldn’t even imagine back then 90% of the tools I’m using today to farm and market my crops. We don’t know the end of the GameStop story yet, but it is an example of how online trading platforms and their associated culture can impact markets. Can you imagine soybean farmers actually being successful holding their physical soybeans off the market and buying the paper instead while noncommercials are trying to short the market? It’s something farmers have dreamed about, but of course has never come to fruition. Needless to say, agricultural markets have had outliers with unusual market action. That’s what regulation is for.

You could make an argument old crop soybean supplies are so tight now; we’re open to unusual market activity. I won’t go there and won’t make that argument. However, back in 1990, I was called to present to the House of Commons Standing Agriculture Committee on possible price manipulation at the then Chicago Board of Trade. In 1989 the Board of Trade ordered Feruzzi to sharply reduce their holdings of soybean contracts for July delivery in an emergency order. Farmers were left holding the bag, along with Feruzzi as prices plummeted. Feruzzi lost about $350 million dollars on the deal, but eventually paid approximately $21.4 million as a settlement in a class action suit brought by the Chicago Board of Trade.

I did the best I could explaining it to the House of Commons agriculture committee. In my parting remarks, I asked them to do something about it, Canadian grain prices discovery depended on it. Well, 31 years later, here we are. Our markets are a wide raging river, with bets and standing pricing orders made on smart phones in real time, stuff not even thought of that day in Ottawa.

I live and breathe farming and agricultural economics. I see almost everything within farming through an agricultural economic lens. That hold true for markets as well. “Price discovery” made through true markets can’t be beat. There is no pixie dust involved. That’s why when GameStop comes along and with Feruzzi in my memory, my antennae goes off. As farmers, we must never take our markets for granted. As our reality changes, so will our markets. Volatility will likely be the default. Yes, the river is wide and getting wider.