Broker, Trader, Lawyer, Spy - Eamon Javers [96]
Traders buy and sell futures all day long, without ever touching an actual farm product. Much like trading stocks, the game is all about predicting the future price of the contract. If you think it’s going up, buy. If you think it’s going down, sell. Or you can short a commodity, selling its futures contracts at a high price now, and then buying them back later when the price is low. You pocket the difference as profit. It’s not easy: if you guess wrong and prices increase, you’re on the hook.
In the movie, Aykroyd’s character explains the drama: “One minute you’re up half a million in soybeans and the next, boom, your kids don’t go to college and they’ve repossessed your Bentley.”3 The movie’s heroes get an advance look at the USDA crop report on oranges. With that information, they know which way the market will move and position themselves to make a fortune and wipe out their rivals.
In real life, people are trying to do something similar. They, too, want to be able to send their kids to college and buy a Bentley. Because the USDA crop reports are a key element in moving the commodities markets up and down, the ability to predict what’s in the reports has become an enticing prospect. And now that satellite technology is available to anyone, the government doesn’t have as much of an advantage in predicting crop yields as it used to.
Lanworth uses satellite data to put together reports on the prospects for various agricultural products. Using satellite imagery of the fields, weather data, and other information that the USDA forecasters themselves use, Lanworth works up predictions of what the government will say in its reports. The company sells those predictions to commodities traders desperate for any information on what the market might do next.
Lanworth’s cofounder Shailu Verma says his customers include giant agricultural companies, real estate investment companies, hedge funds, and financial firms. “It’s not our objective to steal USDA’s thunder,” Verma says. “But if we are good, we’re generating the same information as the USDA, just a little bit earlier.”
Lanworth reportedly charges $100,000 per year for its reports,4 but the information those documents provide can be worth millions in the commodity markets. “Our customers are trying to figure out if there’s a deviation between what Lanworth is telling them and what the market expects. If there is, that’s a monetizing opportunity,” says Verma. He, too, is a fan of the movie Trading Places: he calls Lanworth’s business plan “the Eddie Murphy strategy.”
Here’s how it works in the real world.
In June 2008, Lanworth gathered all the data it could on the corn crop in the United States. Disastrous flooding in Iowa that month had caused more than $200 million in damage, and had thrown into question the size of the nation’s corn crop for the entire year (since Iowa normally produces a large proportion of that crop). The USDA’s annual report on crop acreage was due to be issued on Monday, June 30, at 8:30 A.M.
As the report was being prepared, the mid-June floods threw the government’s counting process into disarray, and the diligent bureaucrats at USDA went back to reinterview 1,150 farmers to find out how much the floods had affected the crops. But while the government was working its way through that tedious process, Lanworth’s analysts were poring over images from satellites high overhead. The company uses relatively low-resolution Japanese, Indian, and U.S. government satellites, and calls in high-resolution, more expensive GeoEye and DigitalGlobe images for spot checks.
What Lanworth found was surprising. Despite the flooding, the corn crop appeared to be in good shape. Some areas that had been flooded weren’t a total loss. And although the markets were bidding up the price of corn futures—traders expected corn prices to go up as supply went down after the flood—Verma and his team knew better. The price should come down from where it was, because the corn supply wasn’t damaged as badly as most traders in the market assumed. Corn futures, which