Scott Irwin is the Laurence J. Norton Chair of Agricultural Marketing, Department of Agricultural and Consumer Economics, University of Illinois at Urbana-Champaign. He is one of – if not the – most respected agricultural commodity academics globally.
Scott, could you tell me briefly about your new book, Back to the Futures and what prompted you to write it?
The book’s purpose is to be an entertaining way to learn about commodity futures markets, emphasising the fun part. It has a serious teaching purpose, but it’s wrapped in, hopefully, entertainment that keeps the reader moving along.
Why did I write it? I have been teaching, writing, and researching commodity markets since I was a senior in high school. My interest in the markets goes way back. I’ve been involved in them as an academic my whole adult life.
Most people don’t understand how markets work. I wanted to write something to explain how commodity markets work, but I didn’t want to do another academic project or write a textbook.
It’s also my professional DNA. Every ten or fifteen years, I need to do something that challenges me and keeps me interested and energetic. Writing this book was one of those challenges.
Would you describe the book as a biography?
It has a memoir or autobiographical component, but it’s neither an autobiography nor a memoir.
I included the memoir material to make the book fun. I wanted to make it entertaining to entice the reader to learn about futures markets.
As a good friend told me, each memoir story is designed to be a market parable. Each one is intended to illustrate some part of the operation or functioning of commodity futures markets.
I introduce my childhood friend, Jack Hunter, and his daredevil, reckless behaviour early in the book. I’m as equally guilty as Jack was, but I use Jack as my stand-in for a speculator, taking unreasonable risks. A few chapters later, I introduce my father, a farmer, to explain the concept of hedging. He struggled with that aspect of his farm business; his personal stories illustrate that.
You co-authored the book with Doug Peterson.
Doug is a close friend and a professional author with over 70 books to his credit.
About five or six years ago, I discussed the idea for this book with him. He loved drawing on my large inventory of crazy, insane stories growing up in rural Iowa. I would not have had the courage to write the book without Doug.
I knew that I needed Doug to achieve my objective of a fun way to teach people about the futures markets. After nearly 40 years of writing for an academic audience, I knew I didn’t have the skills to write the book I envisaged.
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Did you have a target audience in mind when you were writing it?
My target audience was anyone interested in learning about commodity markets – someone with some knowledge and experience who would like to develop a deeper understanding of the markets. I view my core audience as farmers, hedgers, merchandisers, and agricultural commodity traders. I aimed the book at someone who would never read a textbook but wanted to learn.
Let’s talk now a little bit about you. You had two attempts to trade on the grain futures markets. The first was in August 1981 when you were a graduate student, and you thought that the market was overestimating yields. The second was more recently when you believed the market was overestimating acreage. You lost money on both occasions. What did you learn from those experiences?
The first was hair raising, a near-death for my graduate school experience. It taught me that I didn’t have the nerves to be a trader.
I was stupid to take those kinds of risks as a graduate student – it was insane. But it was a good lesson to learn without getting bounced out of graduate school. It taught me to stick to what I’m good at. I am pretty good at academics and research, but I don’t have the stomach to carry that financial risk. I’m just not built that way.
If you’d made money on that first trade, would you have persevered and tried to become a trader?
That’s an interesting question.
It was the classic newbie trader story. I made enough money in the first few months to be dangerous. I got blown out. I had considered buying a seat on the old Mid-America Commodity Exchange. Had I not been blown out, I may have done that. However, the odds of that happening were low.
Traders typically experience enormous volatility in their fortunes. I always like to tell people that if they want to understand what the trading process is like, go read Jack Schweiger’s first book, Market Wizards. You will shake your head at the financial calamity that most traders experienced before becoming successful. I don’t think I had the fortitude to push through that. I didn’t love it that much.
I started trading again in 2010. First, I became a principal in a small firm providing real-time yield forecasts for US corn and soybeans. I believed it could give me the edge a trader must have to succeed.
Second, my father passed away in 2009. Our family still had a substantial farm operation, and I inherited the corn and soybean marketing for our farms back in Iowa, working with my mother. It forced me to be closer to the markets on a day-to-day basis.
Third, I believe that trading makes me a better teacher and a better researcher. It gives me a quicker awareness of emerging issues in the markets. My motivation was to have skin in the game, but not so much that you get flayed!
So, yes, I trade now a little, but only options.
Your book describes how your father repeatedly tried to beat the markets but failed. What was he doing wrong?
I believe he made a series of errors that most farmers repeat.
The fundamental purpose of hedging is to manage your risk, to reduce the fluctuations in your revenue over time. However, most hedgers work their positions selectively, looking to pick up some gain and extra return. Farmers aren’t unusual in this regard. They want to manage the risk exposure of their crops and livestock, but they don’t understand that you must have an edge to be successful.
It’s hard for farmers psychically because they’re so connected to their crops. They have an intimate knowledge of what’s going on in their fields in their area. It leads them to believe they have an edge about what will happen with supply. There is a maxim: don’t get caught looking out your back door. It was always a big problem for my dad.
As a farmer, you compete in an incredibly sophisticated, billion-dollar business where your opponents are more sophisticated than you. You must understand who you’re trying to beat.
If you’re going to play the game, you must be prepared for the ups and downs. Even if you’re beating the market on average over time, you will have significant drawdowns and big gains. Hopefully, a few big gains offset your losses.
I don’t think my father had the mindset to understand the overall purpose of what he was doing and how difficult it was to win the game of selective hedging.
Since my dad died in 2009, I do the marketing with my mom, who will be 88 in a few days. She would have made one heck of a good trader. Her instincts about the markets are better than mine. A good trader has an intuition that I can’t describe and a personality that can deal with the ups and downs. She has both.
You must also have a short memory to survive if you are speculating or selectively hedging. We’ve made some big mistakes in our marketing, but my mom always moves quickly onto the next opportunity.
My dad wanted so badly to hit the highs. It’s a terrible mentality to win in this game. If we do a great job marketing our corn, we’ll get a better price of 20 or 25 cents a bushel than our neighbours. It doesn’t sound much, but if you do that for 20 years, man, it adds up.
Your mother was a better trader than your dad. It raises the question: why there aren’t there more women traders in the market?
Almost all US universities are now majority female, but, as far as agricultural commodities are concerned, I’m lucky if I get 25 per cent females. It is a puzzle to me that I do not understand. I see it changing, though, slowly. More and more females are going into grain merchandising, but it’s still not the 50 per cent it should be.
You mentioned that you need an edge to be a successful trader. What else do you need?
You must have an above-average ability to collect and process information.
Equally important is the right kind of psychological makeup. Probably the best typology for a trader I’ve ever seen is in the book Superforecasting: The Art and Science of Prediction by Philip Tetlock and Dan Gardner. It is one of my favourite books of the last decade. Being a trader is not necessarily the same as being a forecaster, but this book is about people who make predictions. A trader constantly makes predictions.
A good trader must have a Sherlock Holmes brain – an insatiable curiosity to dig into the facts and understand relationships – and not necessarily believe what everybody else thinks. It’s not a normal personality, the ability to believe in your own skills and attributes. But to be a great trader, you must have that kind of Sherlock Holmes personality.
Great traders must have a nimbleness of mind to know when they’re wrong and change their positions. I don’t think there’s any way to teach that.
Great traders are super intelligent people, but they also have the drive and psychology to take that cognitive frame of mind and implement it into trading.
The Super Forecasters Project suggests that maybe only one to two per cent of people line up with the potential to be a super forecaster or a super trader. It’s a rare set of skills.
At one stage in your career, you tracked market advisors and found that, except for Dan Basse, they added little value to the market. Why do you think that is?
First, let me say that even though they didn’t necessarily beat the market, it didn’t mean they didn’t provide value to their farmer subscribers. We believe that many farmers underperform in the markets. If you faithfully follow the advice of these services, at least you’d be average, which would be an improvement. As you can imagine, that was a challenging message to sell.
So why did these firms not consistently deliver value? I think it’s because they tended to be boutique shops without the resources to be competitive with the big grain trading companies.
You’re famous for solving what has been called the crime of the century in the grain markets. During the 2000s, wheat futures didn’t converge with the physicals at expiry. Most observers at the time blamed excessive speculation, particularly by the index funds. You found that it was a technical issue regarding exchange-stipulated storage fees: traders saw that the futures were worth more than the physicals because they had a cheaper cost of storage to carry them. My question is, why couldn’t you have asked one of the trade houses? After all, the trade houses were taking delivery of the futures.
We did try to talk to the big grain companies, but they weren’t talking. They’re highly jealous of protecting any perceived edge because they know how hard it is to win, even for them. They’ve got the other majors wanting to crush them all the time. Nobody would say, okay, Professor, I will sit you down and explain this to you.
They also had agendas regarding what they perceived as their commercial advantage in the delivery process. They maybe wanted to use the issue to drive significant changes in the contracts that they felt would have benefited them commercially.
The other thing is that this had never happened to anything remotely this magnitude or length of time. So even the big grain traders were slightly taken aback and unsure how to explain it.
I understand that you have a second book coming out soon on the role of index funds and speculators. Throughout your career, you have relentlessly tried to explain that speculators add value to the markets. Why is it so hard to get that message across?
Whenever fluctuations in commodity prices cause economic pain, there’s a natural, psychological reaction to look for a scapegoat. It’s a human emotion, and it’s repeated over and over.
There is also a fallacious belief that if you’re not engaged in the physical side of the market, for example, processing or growing corn, you are somehow a parasite in the economic system. It is the belief that you can only contribute if you’re actively involved in the physical side of the production and consumption of goods.
On top of that, there are spectacular stories historically – and they’re still sometimes occurring today – of attempts at market manipulation. It feeds into that anti-speculation mentality.
Now I have a question about high-frequency trading (HFT). You write in your book about the FBI investigations into the floor locals in the 1980s. The agency fined locals millions of dollars for front-running orders. Some in the physical trade argue that HFT funds have replaced locals in front running orders and spoofing the market by placing and cancelling large orders. Do you have a view on high-frequency trading? Do they add or distract value?
I don’t think that there’s any doubt that they add value. I covered the issue in a 2022 paper in my second book. It’s one of my favourites because we accidentally discovered something very significant. We examined how much commodity index investors paid for the monthly role in order execution costs. We measured it back to the early 1990s for the GSCI (Goldman Sachs Commodity Index).
What we found was astonishing. Until 2007, index investors paid through the nose to roll their positions, but the cost fell significantly after 2007.
How do you explain that?
We don’t have a formal model to prove it, but it’s evident that it was the move to electronic trade. It was an 80 per cent drop in their order execution costs. Electronic trading with high-frequency traders is a vastly cheaper way to trade than open outcry.
We must learn what guardrails we need in this new world of high-frequency trading and electronic markets. It is a learning process. For the past five years, it has been our top research priority for my group here at the University of Illinois. It’s a big economic question.
You mentioned in your book that you are possibly better known now for your work on biofuels than on the futures markets. In 2007, a UN spokesman called biofuels a crime against humanity. The UN later withdrew that statement, but some still argue that biofuels are unethical because they raise food prices and cause hunger among the poor. What would you say to that?
Economically, it’s not a simple question to answer. It’s complicated on both the supply and the demand side.
Let me start on the supply side. The growth of biofuels has certainly raised prices, principally corn and soybean prices. I don’t think anyone can deny that, but by how much is a great debate among economists. And it matters. My view is it’s substantial for corn prices.
But what’s interesting on that supply side is that ethanol can now stand on its own two feet without mandates or tax credits. It’s competitive as a blending component in gasoline blends in the US. We wouldn’t use one gallon less if you removed the mandates. It’s not true for renewable diesel and biodiesel; both are wildly expensive relative to the diesel they replace.
The intriguing part of this – why it is so complex – is that many poor people in the world are subsistence or small-scale farmers who benefit from higher agricultural prices. High food prices hurt the urban poor – and there’s where the rioting and political problems occur. Out in the countryside, farmers quietly benefit from higher prices.
It’s not as simple to say higher prices hurt the global poor. It is a false statement on the surface. I’ve read country studies that suggest higher agricultural prices benefit some less developed countries, particularly those with extensive crop agriculture. Unfortunately, it’s a perspective few people want to hear, particularly in Europe.
I recognise that food price spikes hurt billions of people in less developed urban settings. Still, perhaps a more significant issue is that beggar thy neighbour export restrictions aggravate their suffering. When a country bans food exports to protect its domestic consumers, it transfers the price volatility to importing countries. It is a big problem.
Do you think biofuels have a role to play in the decarbonisation of the economy, or do you see the car fleet becoming exclusively electric?
I’ve been public in my views about the transition that we’re in, and I’m not particularly popular among farm groups and the biofuels industry. But you are not paying attention if you don’t believe that most of our surface transportation fleet will become electric. It’s coming. EVs are vastly better consumer products.
However, I believe the EV evangelists portray a faster transition than will happen. In the US, we have nearly 280 million internal combustion engines that we must depreciate. It is going to take decades.
Tractors began coming to the US in the late 1910s and early 1920s. It wasn’t until after World War II that tractors and not horses provided more than half of the power in US agriculture. There was a lot of horse agriculture in the 1950s in the United States. The market for ethanol and gasoline will eventually peak, but these transitions take a long time at this societal scale.
The decline in diesel usage will probably be slower, but it will eventually go down. However, biofuels have an ace in the hole in sustainable air fuel (SAF). It’s a vast global fuel market. We will need liquid jet fuel for the foreseeable future, and biofuels will play an essential role in decarbonising aviation. They may also have a role in maritime shipping.
What about renewable diesel? The US has some massive plans, but does it have enough vegetable oil? And can trucks be electrified?
Let’s start with the last one. Can trucks be electrified? Probably, but I’m guessing it’ll be slower because the amount of power you need will make the batteries so heavy they’d be inefficient, at least for a while. Short-haul delivery trucks will be electrified sooner; long-haul trucks and trains will take longer.
Regarding your question about renewable diesel, there is enough feedstock for the renewable diesel plants we’re building. If they all get built, we can supply them. But can we do it at a price that won’t cause a huge political controversy? We may price ourselves out of the exports of fats and oils.
I’m writing a lot about it now in my research. I’m sceptical that all the announced capacity will come online. I don’t think we will mandate enough demand through the RFS to justify all the plants we’re building.
I wanted to ask you about the courses your university offers in agricultural marketing.
We offer three courses at the undergraduate level.
The first is a popular freshman-sophomore course on agricultural marketing. We also provide junior-senior classes on commodity price analysis and commodity futures markets. And then we have the commodity futures markets course, looking at the markets and how you hedge and speculate in them.
We also offer three courses at the graduate level. One covers time series econometrics applications in commodity futures markets. We have a second one that covers traditional supply and demand and trade policy in agricultural markets.
And then, we have a unique and fantastic course in our PhD program, a one-semester seminar course where students read as much cutting-edge literature as they can in a semester. It’s kind of the jumping-off point for students doing dissertation research.
Last question. What advice would you give a young person looking for a career in agricultural marketing?
First, get as much academic training as you can. We have recruiters constantly engaging with the students at the undergraduate level. We never have enough Master students for the market demand.
Second, while you’re getting that training, do as many internships with grain and trading companies as possible to find out if you have the profile for the business.
Third, I tell my students to start following the markets and the daily market narrative. Get engaged in what I call the everyday market conversation.
Fourth, read as much as you can. I tell my students to start with your book, Commodity Conversations. I then ask them to read The Economics of Futures Trading by Thomas A. Hieronymus, followed by The World for Sale by Javier Blas and Jack Farchy.
I’m honoured to be in the top three. Thank you, Scott, for your time and input. It has been a fascinating conversation, and I have greatly enjoyed talking with you.
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