GameStop and Investing Against the Grain
February 01, 2021
Author: Guy Soreq
Like many people around the world, the Glowlit team has been watching the stock market in awe and disbelief. GameStop (GME), a chain of brick and mortar stores selling video games, saw its stock price rise as much as 1,700% this week, driven largely by an army of individual investors trading on the fee-free app Robinhood. These retail investors rallied online in a popular forum called WallStreetBets on the social media platform Reddit, with the intent of raising the stock’s price to combat a short position taken by hedge fund Melvin Capital. The result has been both historic and unprecedented, a David versus Goliath, Main Street versus Wall Street drama playing out in the public markets. Melvin Capital closed its position last week at an undisclosed loss believed to be in the billions.
The meteoric rise of the GME stock is undoubtedly the biggest story in the financial sector, and has many people asking: can this happen here? We’re asking ourselves the same question when it comes to the agricultural industry. How applicable is the GameStop story to soft commodities such as corn and soy? The answer to that question comes down to the relationship between value and price.
The market cap of GameStop was in the neighborhood of 1 Billion USD towards the end of 2020 and has soared past 20 Billion USD over the last few days, a mighty peculiar increase for a supposedly doomed retail business model further hampered by the pandemic. The push and pull of speculative trading, both from large institutional investors and small independent investors, has wholly divorced the GME stock price from the current value of the company. Even if we imagine that this battle is being waged over the company’s future unrealized potential, it is still hard to argue that the market is doing anything but using GameStop as a pawn in a proxy war.
Agricultural commodity markets work differently. The value of a bushel of corn at some future point in time is determined by the supply and demand at that point in time. The price follows the value, determined by the demand from actual feed mills at the end of a supply chain buying actual product. Commodity traders make up an integral part of this supply chain, taking on risk and making capital available. Unlike the battle being played out in the stock market, the big traders and small buyers of agricultural commodities are not at odds with each other, but part of a continuum.
While we’re unlikely to see a similar battle to the one being waged over GME in the agricultural industry, we’ve noticed that traders often get very little love from farmers, despite being on the same team. At Glowlit, we believe that by increasing the transparency surrounding demand in our market, we can help capital flow to where it is needed most and repair those rifts. Greater market transparency can cure many of the ills we’re seeing, whether in the commodity market or stock market. More on that later. For now, we’re watching this GameStop show unfold at the edge of our seats.