Margin-free hedging for US farmers
A Conversation with Nick Tsiolis
Good morning, Nick, and welcome to Commodity Conversations. Could you tell me a little about yourself?
My name is Nick Tsiolis. I'm the founder and CEO of Farmers Keeper, based in Chicago. We help US farmers manage price risk when selling their physical grain. We offer them margin-free hedging structures derived from futures and options, giving them flexibility regarding where they eventually deliver their cash grain.
Our team manages the execution of price risk to physical delivery and settlement for over 1,000 farmers from North Dakota down to Mississippi and all over the “I” states of Illinois, Iowa, and Indiana. We are not a physical elevator but work with over 1,000 grain elevator operations, processors, feedlot operators, merchandisers, and ethanol producers.
What did you do before setting up Farmers Keeper?
I was in the supply chain industry with CH Robinson, the world's largest supply chain consultant. I dealt with Fortune 500 CPG companies down to mom-and-pop operations moving freight across the planet.
I got involved in the grain industry, working with commodity brokerages, and helping farmers hedge their futures and options risk without using paper financial products.
I met many farmers across the country and realized that to get margin-free finance, they had to commit delivery ahead of time to sell their physical grain to a particular elevator. But when the time came for them to deliver their grain, that elevator might not offer the best physical basis. I saw an opportunity for them to hedge their outright price risk ahead of time and lock in the basis later.
I launched the company about four years ago.
You work with a thousand farmers and a thousand grain elevators. Are you happy with your progress so far?
I am. I own the company outright. We are not looking for investor dollars. We are a profitable company that adds value to our customers. We are growing our customer base, and our brand recognition has shot through the roof in the past year.
We give out information on cash grain marketing via social media and the American agriculture news media - free information about how basis works and how the global supply and demand markets dictate what happens to local prices.
What is your biggest challenge?
I don't have enough resources on my team to keep up with all the farmers that reach out to us, to vet them and give them access to what we're doing.
Our challenge is to scale our model and still give each farmer a personalized white glove service. As we expand and bring on new farmers, I want to continue giving every one of those farmers one point of contact.
How big is your team?
There are five of us.
Are you hiring?
Yes. As a matter of fact, I sent out one offer this morning.
Where does your revenue come from?
We charge a fee per bushel when farmers transact through us—the cost ranges between corn, soybeans, and wheat - our core products.
We advise a handful of customers on their local markets, but it's a separate business line and not our core model.
How does your core model work?
We leverage the same clearing firms that the grain elevators use to hedge their grain when they directly purchase from farmers, except we don't take delivery of the grain.
We marry up the futures contract with a physical sale, just like grain elevators do when contracting grain, sometimes years out. However, we leave the delivery component of that futures contract open. It allows the farmer to choose later where to deliver his physical grain.
The average US farmer delivers to four different grain elevators. There can be an enormous variation between the bids that each offers. We allow our farmers to deliver their physical grain to the elevator that provides the highest price at delivery. They don't have to decide ahead of time.
We help farmers hedge some of their price risk ahead of time through the clearing firms in the same way the elevators do, without putting up margin money.
We leave the delivery component open. When a farmer decides when they want to sell their grain, we help them with our analytics and our local market knowledge.
Do you only lock in the basis at delivery?
About 70 to 80 per cent of the time, our farmers lock in the basis one month before delivery. The rest of the time, farmers will lock in their basis earlier, depending on the market opportunities that arise.
Leaving it to the last month doesn’t necessarily give you the best price, but we offer our farmers the option to lock in their basis at any time up to delivery.
So, you act as a marketing agency for their physical grain and as an introductory broker to the exchange members – the clearing firms – who handle the futures and options. Is that correct?
Who is the counterparty?
The clearing member is the counterparty on the futures and options element, and the elevator is the counterparty on the farmer’s sale of physical grain.
If the market moves higher, the clearing member must post variation margins with the clearing house. Do the farmers pay the variation margins?
The clearing firm pays those variation margins. But the bit you are missing is that the farmer sells the equivalent quantity of physical grain to the clearing firm at the same time as he hedges the futures. The clearing firm hedges that purchase from the farmers and creates an offsetting futures position on the exchange. When the farmer eventually sells his physical grain to an elevator, the clearing member exchanges their futures with the elevator.
Isn’t there a risk that a farmer sells grain he doesn’t have?
We do due diligence on every farmer we deal with and submit an onboarding application – like a credit application – on the farmer to the clearing firm.
We vet the farmer regarding their acreage, average yield, crop insurance, grain storage capacity, how they market their grain today, what grain elevators they deliver to, and finally, their corporate structure.
Under the existing system, if a farmer sells to an elevator, the elevator will give them margin-free pricing. But if the farmer wants to keep a choice of where they sell it to, they will have to hedge futures in their account. That is your advantage over the existing system. Is that correct?
Correct. We want farmers to understand their available options and how to perform one of the most complex parts of their job: selling their grain. We don’t take positions in markets. We enable farmers to take their own margin-free positions with the flexibility of basis delivery to any elevator.
I understood from earlier that you don't have any competitors.
We’re a hybrid between two well-established industries: grain elevators and commodity brokerages. We view elevators as partners because we carry the hedge for them from farm to elevator. We're a conduit for grain flowing from farm to elevator. The elevators see us as a source for the millions of bushels we manage and can route to them if they want.
In that sense, you're a client of the elevators.
Yes. We are also a client of the clearing firms.
I read recently that US farmers have been building storage capacity on their farms and taking business away from the existing silo operators like the ABCD+ companies. Why have they done this, and is it working for them?
On this side of the pond, we don't say silos, we say grain bins.
Before the 1990s, we had a decentralized model in the United States: a cooperative model where small farms pooled their resources, built centralized grain storage, and then, as a group via the cooperative’s corporate entity, sold the grain to a grain processor (like an ethanol plant).
As yields have increased and farms have gotten larger, they’ve attained the economies of scale to build their own on-farm storage. Now they’re vertically integrating into their own merchandising operation, equipped with logistics capabilities to ship grain further afield towards end-users.
Do farmers deliver grain to the elevator, or does the elevator collect it from the farm?
The farmer transports the grain to the elevator. They may hire a trucking company, but as the farms get bigger, they often run trucking companies themselves, renting out the trucks during the off-season.
Is the cooperative structure in the USA disappearing?
It's a complex subject in the grain world because grain co-ops have played an essential role in the community for so long. The farmers owned them, and they provided a lot of value.
They were – and still are - pillars of many communities. So, there's a lot of loyalty from the farmer's perspective.
The cooperative model will face challenges to stand alongside the new vertically integrated farms that don't need grain storage, trucking capacity, or help with merchandising.
Farms are getting bigger; they're becoming more vertically integrated; they're taking more control of their businesses and becoming more formalized in a corporate structure.
How are farmers adapting to these changes?
There is a lot of anxiety in the countryside about how out-of-town land speculators and wealthy individuals buy and rent farmland back to farmers. That anxiety comes from two places.
First, it's taking away local control of that production land. The farmer is losing the ownership that, in many cases, has been passed down for generations. In that sense, farming risks going the same way as local restaurants and retail stores have already gone, bought out by large corporate chains.
Second, should one person or one entity have that much control over such a wide swath of land? What are they doing with that resource – are they looking after the land correctly?
Thanks, Nick, for your time and input.
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