Improving Commodity Markets: Stable Equitable Profits

Noah Healy, founder of Coordisc — a company with a sole purpose of improving commodity markets. In this show we talk about lowering costs across the board, reducing risk, making it a less of a game-able market, and creating higher returns for all good actors in the space. Noah is a mathematician and data scientist that has found a way to improve the commodity markets world-wide. http://coordisc.com
  

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Transcript

Triple Bottom Line | Episode 33 | Noah Healy |

[Upbeat theme music plays] 
Female Voice Over 
[00:03] Welcome to the Triple Bottom Line, where we reveal how today’s business leaders are reaching a new level of success with a people-planet-profit approach. And here is your host, Taylor Martin!

Taylor Martin 
[00:17] Hello, everyone. Happy to have you here today. I’d like to introduce you to Noah Healy. He’s the founder of Coordisc, a company with a sole purpose of leveling the commodities market. That’s a big, big statement, but you’ve got to listen to this guy. I’m talking about lowering costs across the board, reducing risk, making it a less gameable market, and creating higher return for all the good actors in the space. Noah is a mathematician and a data scientist that has found a way to improve these commodity markets worldwide. Noah, so happy to have you on the show today. Tell our listeners a little bit more about yourself and what drove you to shake up the commodities market.

Noah Healy
[00:55] Sure, Taylor, and thanks for having me here. Yeah, like you said, I’m a mathematician. That’s what drove me to the space. I was working in communications theory and found an approach which turned out to be far superior to the mechanism we presently have. In terms of what’s driving me, I eat food, use electricity. I’m a recipient of these markets. Having them fixed improves my life. It’s sort of survival is what’s keeping me here.

Taylor Martin
[01:33] When we first connected, I thought, what does this have to do with the Triple Bottom Line? I think you just nailed it right there. It’s how it affects everybody. Because once we get through the end of this podcast, you’re going to understand what Noah is really talking about because the commodities market is kind of a treacherous place. There’s always things, I’d say bad actors, in there moving levers and switches to their benefit and making loads of cash, but what they’re really doing is taking cash from the people that are either making or buying the commodity. Isn’t that correct?

Noah Healy
[02:07] Yes, it is. There’s a slippery concept in economics of opportunity cost. When you make one choice, you’re not making another choice. There is an even more slippery concept in economics of transaction cost. People have some sort of concept of fees. When you buy something at a grocery store with a credit card, the card is charging the store a processing fee on that and we think of that as part of the fee, but another part of the cost is the grocery store, and the people the grocery store had to buy from, and transportation from where the thing was to where the thing is. There’s a great chain of activities that link the stuff that we use to the elements in their raw form. Some of these activities are very productive and important, like moving them from a farm to my table or manufacturing wood into furniture that I would be using, but some of them are very notional and essentially boiled down to nothing more than telling somebody that what they have isn’t worth very much until it’s yours, and then telling somebody else that it’s worth a lot until it’s theirs. Those aspects are part of the friction in the system, as it were, particularly when, as now, we are in a fully globalized environment where there’s large amounts of free capital available to fund these sorts of systems and a large number of people engaged in these behaviors. That has caused a widening crack between the money that we put in to buy the stuff that we need and the money that comes back out and pays for the stuff that we’re using.

Taylor Martin
[04:08] Right, so I’m going to do my best. I’m not a commodities professional or anything like that, but I’m going to do my best to lay the landscape out. I want you to fill in the gaps of anything I’ve missed. I’d like to use farmers because commodities and farmers is just, I think, ubiquitous. I think everybody just knows it’s a commodity. It’s corn. It’s corn or it’s wheat or whatever. We’re talking about someone who is creating a commodity, such as corn, and then we’re talking about the market itself that is going to buy that commodity. The thing is that when a farmer plants his crops, he has to forecast what that is. There’s a lot of actors that are out there guessing what that is going to be. That gives the farmer a little bit of confidence that I’m going to plant this this year or this or a mix or whatever. Having done that on someone else’s notion and then it goes into the market and then once the – because once the product is created, then it goes off into the system of commodities exchanges and pricing and all that stuff. Who is out there that’s going to make all those changes? Who’s the one that’s going to be guessing what the price is going to be? Then the people that are investing in commodities, I mean, there’s just so many rays of light that goes into this. It’s like a bird’s nest, from my point of view. To hear a mathematician come in and say, well, I’ve reviewed all this and I’ve come up with a solution that’s much better, and one of the things you talked about was also allowing the people that are guessing what the future price is going to be of something, you found a way to incentivize them and then to kind of “punish” the bad actors that are in there causing havoc. Can you explain that whole thing?

Noah Healy
[06:04] Certainly, so one of the easiest ways to understand this is something called the wisdom of crowds. This is a well replicated notion that goes back a little over a century to a guy named Francis Galton who was one of the pioneers of weather prediction and statistical regression analysis and so on. He was very interested in sociological measurements, practical sociology. Late in his life, he was in a county fair. He lived in England. He was actually, I think, a distant cousin of Darwin’s. He’s in the county fair and they’re having a contest. There’s a bull. The farmers are supposed to guess the size of the bull. Whichever guess is closest to the size of the bull is going to win the bull. It’s a good bull so everybody wants to win it. After the contest is over, Galton goes in and swipes the slips and his guess is that it’s just going to be all over the map. Nobody is going to really have any idea what they’re doing. The guesses are going to be uncorrelated. There’s just going to be a mismatch of guesses. What he discovers is that the guesses actually cluster quite well, and in fact, when he does the graph and finds the median of the graph, the median of the guesses is off of the true weight of the bull by a third of a pound and is actually better than the best guess that actually won the bull.

This has been checked into and it turns out that if you have a large group of people who have some awareness, so if you go out and you do a man on the street interview and ask them what year or what date the Civil War started, mostly they’re not going to tell you the right answer, but Americans, we had American history. Something is in there some place. If you get like a few thousand of them and get all of those things together, in aggregate they’ll do pretty good actually. What this system does is it says, okay, farmers, manufacturers, people who are studying the weather, people who think that they have insights into this marketplace, why don’t you come in and make guesses about where these prices are going to go? What we’ll do is we’re going to take those medians, we’ll find that aggregate of the best path that everybody was able to come up with, and again, just like the bull, the people whose guesses are closer to that centroid cluster, we’re going to give them a prize. We’re going to give them a high share of the money put in the guess, but we’re also going to augment that with some of the commission from the trades that goes through the system. You’ll get a high share of that as well. You can think of it as guessing. You can think of it as forecasting or predicting the future. You can think of it as just negotiating. It’s not a farmer negotiating with a miller. It’s all the farmers negotiating with all the millers to find a price that they can all live with, but that process of having a record to operate against that is something that human beings can read, look at, think about, and make an informed decision activates the prerequisites for wisdom of crowds to come into play and for people’s guesses to wind up clustering around the right answer.

Taylor Martin
[09:45] You’re sharpening the quality of the output, of the guessing by giving the people that are closest to the right number incentivizing them with money or prizes or whatever. What about the bad guesses? Can anybody just throw my – I mean, I would imagine that everybody has to put in money to make a guess, correct?

Noah Healy
[10:09] Yes, so what my system does, again, because I can measure the amount of information in things and I can measure how much of that information turns out to be useful or turns out to be useless, the investment that goes with your guess is based on how much information is in your guess. Somebody that just sort of waits around until after the system equilibrates and then just says, “Oh, well, since that’s the right answer, I’ll just go repeat what everybody else said and I’ll get a lot of good guesses in and suddenly I’ll get a lot of money,” well, no, you won’t, because you’re not actually offering any new information. At that point, the system already knew what you’re telling it. The system will basically say, well, that’s zero information. We’re going to make that go away. We’re not even going to take that investment because it’s not useful.

Another kind of bad actor who wants to say something like, well, what if the market was really swingy? What if this table thing doesn’t work for me? I’d like prices to be really high one day and really low the next day. The market will charge them a lot of money for that because those guesses are way out of line with the general run of things. Because of the parimutuel structure, that large amount of money that they have to put in becomes prize money for other people to correct their mistakes, and again, because of the sort of median structure of how we’re doing the integration, 1% or 2% or even 10% of the system being far out of whack doesn’t actually move the centroid around very much. Manipulation requires you to get a majority of the people to buy into your scheme. Once the majority of people have bought into the scheme, it’s not manipulation anymore. It’s the marketplace. If most people are making most of their money having a functioning marketplace operate, which is the case – so individual farmers, many of them struggle. They’re not doing that well compared to the guys that are in the glass high rises in New York and Chicago, but according to US government figures, $5 out of every $6 of revenue in the commodity space is going to the producers. In a pure money to money clash, they have five times the resources that the middlemen do. At that point, it’s just not practical for any group to be able to come in and derange the marketplace. All you’re doing is pouring your money down a hole and saying, hey, world, come get it. It’s yours for free. Just fix my mistakes.

Taylor Martin
[13:00] There are a few things I want to talk about that you mentioned here. One, I see year over year the system itself that you’re creating gets sharper and finely tuned. Two, the good actors will probably be more interested in it as they start to sharpen their skills because they’re getting incentivized to do it. It reduces the ability for bad actors to be – because they’re just singled out. They’re one bad actor of many, like you mentioned, and it would take a whole bunch of bad actors to really move the numbers, if you will. I think that’s awesome. Now, how does it get implemented into the world at large?

Noah Healy
[13:43] I’ll start with one tiny thing. It isn’t so much a year over year sharpening. It’s even a day over day sharpening. Because as each person gets to look at what the entire market looks like, they can adjust their own beliefs about where things should be day to day. That leads to exponential increase in the amount of information that people have and are capable of acting on. In terms of starting up, you have to get over a fairly decent opening hump of having at least a couple dozen people that are willing to participate on each side of the market. Now, they don’t have to completely dedicate their entire revenue stream. It’s not an either or. There have to be at least a few dozen people on each side in order to make the batch trade make sense. If there’s only a handful of people on either side, people can just talk to each other one on one and handle that. The advantages of the marketplace don’t show up until that one-on-one communication is going to be too onerous to be useful. The second thing is that the amount that people are going to want to trade through the market has to have a deal flow that’s large enough to make operating the market actually valuable. If operation for a year is going to cost 100,000 and you’re going to be collecting say half a percent of the deal flow, then you’d need 20 million deal flow each year in order to be able to get into the space in the first place. In the abstract, those are not large numbers compared to how big these national and international markets are, but from a person-to-person perspective, that first step is a doozy.

Taylor Martin
[15:37] Yeah, so I keep going back to farmers because farmers to me is just such an easy thing for people to understand and I just relate to it, even though commodities are all over the place. There’s all different types of commodities throughout the world. I see this type of system giving them more of a voice, I would say a stronger voice, in their own outcome, which is going to ultimately benefit them more because I can’t tell you how many times do we hear about, I hate to say it, but farmers, farmer suicide, farmers failing, and then we have industrial farmers that are having problems being environmentally friendly. I see this as a system that could give back to the individual farmer.

Noah Healy
[16:22] Yeah, absolutely. One of the first effects of lowering transaction cost is that that transaction cost is born on the bottom line of producers because we’re paying the money. As consumers, we’re already paying the money for that. If that transaction cost shrinks, that money that we’re paying, less of it gets lost on the way to the farmer. Commodity production is a low margin business. It really has to be because of the high competition involved. That gets into that issue you were talking about where farmers have a lot of stress. There was a show released on Amazon that Jeremy Clarkson, who’s one of the Top Gear guys, pretty famous person, he has a farm in I think it was western England. It’s a cute little show. It’s about six hours long. He’s a blow hard television comedian who comments on cars and he decided to actually farm his own farm and have people follow him around. The punchline of the show at the end of six episodes and triumphs and tragedies and all sorts of things is that on his primary crop for the year he made about $100 or 100 pounds, whereas in a normal year on his farm, it was like $40,000 or something. That’s crazy. Now, of course, he’s a multimillionaire. The farm’s not really that important because he was getting a globally popular Amazon television show out of it. If he’d lost money, he’d be fine.

If that’s your livelihood, if you went to work for a year, and at the end of the year, you found out you’d made $100, maybe next year it’s a bumper and it doubles, but that kind of variant, that’s a lot to take. When the margins are thin, you’re going to be in a situation – I have cousins who farm. The amount of money that goes through their hands is enormous. They have multiple tractors with wheels that are taller than I am. These things cost half a million to $1 million plus. They’ve got three square miles under cultivation that they spend enormous amounts of money upfront. Then they get enormous amounts of money on the backend and they’re pretty good and so they wind up a little ahead of the game. If the amount coming in were to suddenly increase, then that goes directly to the back. There’s a multiplication effect. If you’re operating at 10% margins, every extra one point of revenue is actually 10% better lifestyle. If you’re operating at 20% margins, which is pretty fat, every extra one is a 5% increase in your lifestyle. We’re talking about systemic overheads of around 16%. We could be looking at 50% to 100% improvements in the lifestyles of these farmers in the short and the mediate term. That’s obviously a complete gamechanger.

Taylor Martin
[19:50] I think that example you gave of the British farmer is indicative of farmers across the planet. It’s not just there, of course. I think it was a great test case. He goes out there and he does a case study to show the public how hard it is. I think there’s just too many bad actors with their hands in the cookie jar, as far as I’m concerned. I think your solution helps alleviate some of the pain that they cause in the financial lives of these backbone – the food system of our world. Again, I’m just using farmers as an example just because I just relate to it so much. Let me ask you this question. Where is this new product of yours, you call it the CDM, where is that at right now in terms of actually being a reality?

Noah Healy
[20:39] There’s a few different threads there. It opens first overseas and I’m pursuing a patent in this country. The open-source code can definitely be made more solid but it exists. It’s available for download. You can take a look at it and pull it apart. It’s in a language that runs on the JVM called Clojure so basically any computer system on the planet should be able to run this stuff without any serious problems. In terms of implementation, there are three projects that are working to get off the ground that are integrating my technology, two in blockchain, one in the energy space in South Africa. I’m in the early stages of having some interesting conversations with some people in Egypt and in India about some other projects that we might be able to get off the ground. In terms of the patent office, they’ve just taken total leave of their census. I might be the only person. None of the attorneys I’ve talked to have ever heard of this where they’ve accepted then rejected their own acceptance, then reaccepted then re-rejected their own acceptance. Their reason for their second re-rejection is that they can’t even understand why they’re doing this, but they’re doing it anyway because they’ve been told to and that’s all there is. That’s in a very weird state. It is still pending because I’m in an appeal, but in terms of the structure of that appeal, I’m discussing that with my attorneys and they’re discussing it with other experts because nobody’s really ever been here before that anybody’s aware of.

Taylor Martin
[22:23] It sounds to me like it’s too complicated for them to really fully understand and grasp.

Noah Healy
[22:29] I think the examiner has finally gotten his head cranked around it. It did take some time. I’ve been in the patent process for something like six years now. Now, the first three years don’t really count because the patent office is so backed up that they basically spend the first three years sitting in somebody’s inbox. After that, we’ve had numerous back-and-forths. They have acknowledged that there is no prior art, so there’s nothing within the records that they were able to find that resembles this in any meaningful way and that it is innovative and it looks useful to them, but the quality control department, for reasons which nobody can describe to my patent examiner or his boss, resolutely refuses to allow the patent to move forward.

Taylor Martin
[23:23] All right. That sounds like a bunch of bureaucracy. In terms of, you mentioned possibly India using this, how do you think it could work in a, I don’t want to say a micro market, but if it was just India itself, let’s use that as an example, how could it be implemented across the country?

Noah Healy
[23:43] One of the advantages of the slower human timescale of this information evolution is that up to the instant networking that typifies high frequency trading these days where, if you’re not in Chicago within laser link of the exchange, you’re basically just playing second fiddle to the people that are. Since this market is about daily or possibly even weekly publication of the daily or weekly evolution of future pricing, cellphones these days are in fact ubiquitous. Communication at human scale, even with things like telegraph, train, telephone, the old wire kind, is something that human beings are quite good at. In an environment like India or Africa or anywhere else that does not have extremely high bandwidth, extremely high reliability, linkage everywhere and the ability to move to where the data is, this is creating data that can be moved to where those people are at the same pace that the stuff they have to move around is. There’s no regimes on earth where it’s more expensive to move information than it is to move pallets full of rice. Since we only need the information at the pace that we can actually move the pallets of rice around at, we can always piggyback the information on that system. It should work effectively fine under those contexts.

Taylor Martin
[25:35] It could work within the – it could keep up with the system that they have there at their speed with their network system in their country, again, just using India as an example. The one thing that’s interesting is the mobile phone has been a gamechanger for so many industries in people’s lives, especially in third world countries, because it allows them, some poor third world countries, that might be their only source of internet connection, but I could see, again, using India as an example, if all these phones all over the place and they use that as their link into the system, your CDM, then they could go in there and up to the moment find out what the price is of whatever and do their business.

Noah Healy
[26:22] Yeah, this would allow them not just to have direct access to market information, which right now is separated. I’ve spoken to multiple over the years. So far, it’s all always [26:37] on some kind of bureaucratic reef, but there are on average 30 people who are in the middle of transactions in India. That’s, in the existing markets, the ratio between deliverable and non-deliverable contracts is 40, 50 to 1. While that’s important and notional in theory, that number could shrink or grow or something like that. Those people have sort of an ancillary relationship to the marketplace. If the market can make it less profitable to stick a wedge in, then they might push that number down. In India, it’s very regimented and it’s actually this guy buys stuff from the farm and then delivers it to the guy that transports it to the guy who packages it up who delivers it to the guy who transports it to this guy and it’s fully regimented. Their middlemen are not quite unionized but are a lot more attached to that central system. Price trickles through that system. It would, in all probability, be much more disruptive and much more profitable for these small players to be able to take advantage of that kind of thing. Particularly right now, this guy I was talking to just last week, the rice market in India is up somewhere between 30% and 40% since the previous year. They’re in a serious change cycle. That’s the kind of thing where, if you’re in front of it as a producer, it’s very advantageous and you wind up doing very well. If you are behind it and you’re the last person to know, then basically you just get plowed under. As people get so much money, they can effectively foreclose you out, take over, and just start making the money themselves.

Taylor Martin
[28:38] Yeah, I think the keyword you said in all that was disruptor. My mind throughout this podcast keeps going back to what you’re doing is disrupting a very huge investment market, commodities. I think that’s where the pushback is. I think even with the patent trademark office, I think they see it the same way. I could see those attorneys at their patent trademark office having discussions like, this is going to disrupt so many different things, and blah, blah, blah, and I think the same thing. Like what you just mentioned in India, it is a disruptor. Some of the people that have their hands on the keys, if you will, I don’t think they want to give that up. Again, I keep going back to the common man. This ultimately helps out the common man. I don’t mean just the farmer common man. I’m talking about even a purchaser, not just a producer of the commodity, but the receiver of it as well.

Noah Healy
[29:34] Oh, absolutely, to a pretty decent approximation, people are making their choices about how they’re going to earn their living based on what kind of marginal returns that you see on different things. There’s a little bit of outliers. Lots of boys fantasize about being professional athletes because of how much money and glory is associated with that, or movie stars or stuff like that, but a lot of day-to-day decisions of working in retail versus going out and starting a farm or whatever are going to be based on how hard the work is, how much it’s going to pay. If the return rates on production were to suddenly go up 30%, 40%, 50%, 80%, 100%, which is possible in various industries, lots of people are going to be attracted to getting into that business and we’ll see an increase in the quantity and quality of the goods being produced. That all trickles back to the consumer and lower prices, more reliable availability of product, and so on. That increases the capacity and reliability of the economy, which that’s, to circle back to the beginning, what’s driving me. I’m living off an economy that’s expensive and unreliable. That’s a dangerous choice. I have this system that provides a choice of relying on an economy that is much, much better. I’ve got to keep that nose to the grindstone.

Taylor Martin
[31:22] Yeah, I mean, again, it goes back to it’s always improving with a system like this or a variation thereof. Let me ask you a question. What is it that you need now that can help you get you closer to the finish line that’ll help bring your mathematical product to market?

Noah Healy
[31:40] I need a marketplace that’s willing to innovate. There are existing markets at both local and international scales that have thousands or even tens of thousands of farmers or miners as customers. These people can have competitors from across the world. Right now, they’re actually only getting a pretty small fraction of the total transaction cost. For example, in the United States, the last figures we have for the total transaction cost in commodity were $800 billion a year. The most recent public filing by the CME Group that is carrying virtually all of that trade, their revenues were $4 billion a year. My product could allow a company like that to up their revenue by a factor of ten and still cut the actual transaction cost to the market in half. That would be a tremendous boom both to them and the broader economy. Somebody in that space that wants to innovate and wants to grow is what I’m looking for.

Taylor Martin
[32:57] Yeah, that sounds to me like somebody that – deep pockets, like I said, like a corporation, like you mentioned, but I was thinking about, you mentioned earlier in that answer about maybe like a test case place, some place in the world that would be willing to put this to measure in their commodities markets and to use it as prove of life, prove of user.

Noah Healy
[33:20] Absolutely, and in fact, the project I’m working on with a guy in South Africa right now, he was an energy trader. He now has his own firm doing indices for different forms of energy and he wants to integrate my technology to enable his firm to become a benchmark in his region. That’s exactly the kind of thing I’m looking for.

Taylor Martin
[33:44] Excellent, I hope you can post that on your website. I want to tell everybody. You can go to find out more about Noah and his new product here called coordisc.com. You can search for it there. That’s disc with a C. Is there any other notes you want to leave people with and can they connect with you on LinkedIn?

Noah Healy
[34:02] Absolutely, I’m Noah Healy on LinkedIn. I think the other Noah Healy is a professional athlete so I’m not the only Noah Healy anymore but I’m the oldest one. I managed to get my name on most places.

Taylor Martin
[34:17] You’ve got seniority over him. Noah, thank you for being on today’s show and sharing your passion for changing up the commodities market. It sounds incredibly interesting. I hope the next time you and I speak, you’re that much closer to bringing it to market at least somewhere in the world so that we can understand and see the value that it brings to all parties.

Noah Healy
[34:38] Absolutely, thanks for having me here.

Taylor Martin
[34:40] All right. Over and out, everybody. 

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[34:43] Thanks for tuning into the Triple Bottom Line. Your host, Taylor Martin, is founder and Chief Creative of Design Positive, a strategic branding and accessibility agency. Interested in being interviewed on our podcast? Then visit designpositive.co and fill out our contact form. If you enjoyed today’s podcast, we would appreciate a review on Apple podcasts or whatever provider you are logging in from. This podcast is prepared by Design Positive and is not associated with any other entity. We look forward to having you back for another installment of the Triple Bottom Line.

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