Dec 2021 sales? Happy Father's Day!

Duane

Lowry: I'm concerned about June 30th because there are USDA reports. I'm concerned that between now and then we got farmers sitting on basis contracts that are going to have to price them or roll them, and I think a lot of them will opt to price instead of rolling. So I think we have that, and I think we have a situation where the weather forecast doesn't appear threatening enough to me to support prices. And in terms of China demand news, I think there is possibilities that they could announce some, you know, TRQ import quota levels, but even that doesn't translate to an immediate sale. So when I look at the next 9 days, the one thing I'm concerned about is a lack of a reason and a storyline to build upside momentum. In a marketplace that has acted like it's restricted and resistant to anything to go to the upside.

And proof of that, I'm saying we're only 19.75 cents off contract lows in Dec corn, and considering we've had some weather storylines to maybe give it a boost, that's a pathetic performance.

Shay

Foulk: Welcome back, everyone, to another episode of the Ag View Pitch. Today you have Shay Foulk and Duane Lowry with your Sunday Night Market Outlook. And how are things in your area, Duane?

Duane

Lowry: Good, Shay. It's Father's Day, and as a father, everybody's thankful for the family, and it's a special day for those kind of reasons.

Shay

Foulk: Absolutely, and hopefully a lot of the fathers listening today are enjoying some beers and family time, and when they wake up tomorrow, it'll be back to the farming side of things and might have some questions on markets and maybe what they should be thinking about in the week ahead. So you and I were just talking about here offline on something that might seem a little bit surprising to people, but on the top of your mind, or one of the thoughts, is looking at 2021 crop year for new crop, right? The crop that you're going to plant in the spring there.— and people might think you're a little bit crazy looking that far out. So what's on your mind there, Dwayne?

Duane

Lowry: Well, Shay, I'm trying to move the calendar ahead only a few months, and I'm picturing a timeframe somewhere between September and January where people have to sit down with their banker and do cash flow projections for the '21 crop year and start to line up financing for that. And if prices in the nearby are under pressure from a, a good crop, a normal crop, a crop that people have concerns about carryout being 3 billion bushels or more, and prices happen to get depressed. So far we don't have any safety net on the '21 crop.

We don't have a crop insurance product that is, is yet available, and what if we have this year's Dec corn, Dec '20 trading sub-$3 and 50 cents lower than where it is right now, and you got Dec '21 trading at $3.40 or less, and all of a sudden you gotta use a cash bid on a cash flow projection that's getting close to $3 for the '21 crop, I don't think that's going to be a very pleasant, uh, conversation with the banker, and, uh, to avoid that I think there might be merit in making some sales on this '21 crop, which you got these '21 settled Friday at $3.73 and a half. You got the July of '22, that contract settled at $3.92 and a half.

There might be some merit in having some sales on the books at those kind of levels, so when you sit down and have that difficult conversation with the banker where there's not a lot of profit to be seen and maybe it's difficult to project a positive cash flow, there might be a lot of advantage in having these sales on the books. It might make that conversation go a lot better. In the case of the '20 crop, which is growing in the field now, there— depending on what crop insurance policy you picked for the 2020 crop, you're either already getting protection as prices go down or as Dec corn gets below $3.30, you got price protection through an 85% RP, and if it gets below $3.10, you got a protection on an 80% RP.

Well, there is no safety net out there in the '21, so with the prices that are out there, I think there's merit that it at least is worthy of a discussion, and the greater concern you have about having that conversation with the banker for the '21 crop year if prices are very depressed at harvest time, then I would say the greater that concern is, the greater interest there might be and merit there might be in having some sales on the books for '21. So that, that's the reason.

Shay

Foulk: And Dwayne, you asked me some really good questions when we were talking about Dec '20 new crop here a little while ago on if you're thinking of making some sales at this point, what are your reasons why and in what amounts? So I'm gonna, you flip the tables on you here, you know, what kind of percentages, you know, how much are you thinking that producers should maybe consider for that timeframe? Obviously it's pertinent to their cash flow and their operation, but any thoughts on that?

Duane

Lowry: Well, there's a lot of variables, of course, and, you know, to really get the value out of that discussion, it almost needs to take place on an individual level. But if you talk about it in overall, let's say a producer is in a position where he can't store his entire crop or he doesn't want to store his entire crop, he wants to make sales at harvest time, and let's say that he has an 85% RP policy, okay. You've got these '20 futures right now settled at $3.45, at $3.30 and less, his 85% RP policy begins to offer him some revenue protection based off of price alone and based off an assumption that you're going to get a normal APH yield. If you end up with a larger yield, of course, then you're getting— still getting the revenue protection, but you might not get it because of price, you'll just get it because of your extra bushels.

But using that as kind of a baseline here for this discussion, the reason that you would consider making sales is if you were confident about your own crop, your own production in your area, you had an expectation that December corn was going to be— futures were going to be below $3.30 and we were going to have an abundance of supply, and even if we had some new demand show up, we'd still have a very plentiful supply situation The advantage of making the sale now would be that the value of your physical crop that you grow stops going down in value, at least on those bushels that you make that sale, but as prices go down, your potential of getting an indemnity payment through your crop insurance because of price goes up. So as that goes up and your price stays same for those physical bushels, your overall revenue goes up. So that's the motive for making that decision.

If you make that decision and the market turns around and for some unknown reason, either weather problems from July 1st forward or new demand that's massively more than we expected, and suddenly prices— let's just say to exaggerate to get the point across— suddenly Dec corn is trading at $4. Well, now you've made a sale at a price that really doesn't work, and you knew it didn't work as a standalone sale, but you made the sale in hopes that as prices went down, if they went down, that you would end up getting a larger insurance indemnity check. So the risk in making the sales is the price of your corn doesn't go up, therefore it wasn't enough revenue, you no longer have a crop insurance check in play because of, because of the price.

And the other thing that everybody is somewhat hoping, hoping through anticipation or expectation is that there will be some sort of a government support payment on the table for 2020 that we don't know about right now. What, what if prices were to surprise everybody and go to $4, then that scenario is out of play also. And so you know, that's why making a sale here isn't without risk, but it is something that, you know, I know people are considering. So that's kind of what that was about.

Shay

Foulk: Right. And one other thing that ties into that, with the Chinese trade agreement right now, there's a lot of skepticism and pessimism as far as that purchase, you know, those purchase amounts that were agreed upon to be fulfilled when you look at trend lines where historically much further behind than we should be on that purchasing from China. And, you know, definitely it's not beyond measure to think that those could bleed into 2021. So if you look at potential payments aside from insurance on your revenue protection strictly, if we do get some sort of additional program, MFP quote-unquote 2.0, however that looks, there, you know, there could even be ramifications building onto that for new crop of 2021, correct?

Duane

Lowry: Possibly, but as prices go up, there'll be a tendency for more optimism of equal or even larger acres in '21. And equal acres right now, unless demand changes significantly, and a normal crop, we are producing, depending on how you want to look at it and how you plug in demand, we're producing 600 million to a billion bushels more corn than what the market consumes in a year. So to get prices for the '21 crop to go up very much, it's going to be difficult. Could those prices go up 10 to 20 cents? Yes, but if there's a reason for new crop '21 to be going up 20 cents, there must be a reason in the front end for it to be going up 50 or 60 cents. And so, um, the, the back end, the '21, will have somewhat of a ceiling on it where the volatility is going to be in, in the nearby. And, uh, that will work both ways.

If we have conditions that as time goes by that we are dealing with, you know, normal or record yield potential, The old crop, 2020 crop, is— price is going to weaken more rapidly than the '21 crop is going to weaken. So I see the '21 crop as acting more like the gatepost, and the volatility of the unknown, whether it's demand or a production threat, will be the swinging gate here for the 2020 crop season. And so I find value in having that price locked in on bushels that you can go show your banker that you might be able to cash flow current '21 prices that are offered. But if we get a dump in the corn market because everything ends up being favorable for the 2020 crop and China's buying, even if it comes— happens to be delayed until harvest time, we might have— we might be dealing with prices that are looking really, really bad.

We'll have a banker that's dealing with situations that may not be your situation, but it influences how he looks at your operation. And therefore, I think there might be value at least worthy of consideration for making those '21 sales now so that conversation goes a lot easier.

Shay

Foulk: Yeah, that's a great point. Lots of good stuff there for farmers to consider looking out to 2021. Any last thoughts on that? Next year outlook there, Duane?

Duane

Lowry: No, I don't, no, I don't think so. I just want it to be on people's radar and I want them to look at it from the perspective of one, how does the price look right now? Is that livable in price if things in the overall ag economy doesn't look good? Is that livable? And I also want them to imagine what that conversation looks like whenever they have it with their banker talking about the 2021 cash flow projections. If they are also dealing with a very depressed nearby cash corn price at that time and look at the price that the banker might force him to use in that cash flow. And I think if you can avoid that worst-case scenario, there might be value in that for certain operations and maybe all operations. Mm-hmm. Right.

Shay

Foulk: So let's flip a little bit to a basis discussion. And as I was outlining to you in, in my area here in Northwest Illinois, River Market, we actually have some regions that are doing pretty well, historically well on basis, looking at 1 or 2 under or even a little bit over on Dec '20 delivery on corn. And there's some areas, as you mentioned, that bids right now are not great, you know, $25, $30, more under in different areas of the country. So let's look at that on both sides of the coin. If you're in a position right now where you have strong basis in Dec '20 or even further out, you know, looking into '21, or if you're in an area that has really poor basis, what are some considerations for those, for those producers, Duane?

Duane

Lowry: Well, you're correct in, um, saying there's two complete different scenarios out here. There are some areas that are getting very good new crop basis as you describe in yours, and you got other areas that are maybe their bid is based more off the ethanol industry. They're getting new crop basis bids built in that just are not attractive. So let's deal with the first. Let's say you're dealing with something in your area that you've got something better than normal, it would seem to me to be very tempting to want to capture that while it's offered, because we're— all of us are dealing with the backdrop that at the present time, with 70% of the U.S. corn crop rated good to excellent, just having some rains, not every location getting the rain they desire, but having some rain, there's still areas in the eastern Midwest that are supposed to get rains over the next 3 days.

We have longer-range maps that do show heat, but they don't show a blocking pattern of precip, so there's not a glaring weather problem that may be market sensitive. It may be sensitive to crops in a particular region of, you know, your own crops in a certain region, but it may not be market sensitive in terms of— you know, significantly reducing carryout projections. So all of us are dealing with that situation that produces a $3 billion carryout or maybe more, and it's very tempting, or it would seem to me to be very tempting, to want to lock in that new crop basis in that instance. If you're in an area where you've got only ethanol and your current new crop bids don't look that attractive, first of all, put yourself in the ethanol plant's point of view.

They've probably been closed, haven't had a bid, they're just coming online now, or they've— you just start starting to build a little confidence that they can put out a new crop bid, and so they're going to be very protective and not have the greatest bid out there. And so that's not very tempting to make that sale because you're in that situation, you're hoping that something comes along for— to help the ethanol industry build their confidence to where they can be more aggressive, or there's some Chinese business that creates more demand for physical grain to be moving through the pipeline, and so the current river new crop bids, which are better than the current new crop ethanol bids, carry more weight and force the ethanol to come up.

And so that guy that only has the ethanol bid and he's looking at normal or something less than normal for new crop basis, you know, he doesn't have much incentive to make those sales. But if you're fortunate enough to be in an area where the basis is— bids offered now for new crop are better than normal, I think the temptation seems real and justified to be getting some of that locked in.

Shay

Foulk: I agree. Really good points there on basis. I appreciate you addressing that. And, you know, one thing that you touched on there too is weather. And, you know, we've, we've talked to clients kind of all over the Corn Belt here the last week, week and a half, and I know areas in Indiana and Ohio are begging for some rain out there. And of course, rain events are very regional this time of year. But as you mentioned, even with some of those poor-looking crop conditions in those areas, it's probably pretty regional. And with the forecast Hopefully getting some rain to the producers, farmers out there that are listening today. We do hope some rain gets your way.

At this point, the effects that it has on overall yield, overall production for the year are not really anything to write home about in terms of market news or any sort of market events, and I don't know of anything else weather-related that would do that. Do you, Duane?

Duane

Lowry: Well, I think it's always important to look at weather from the perspective of what is our backdrop. If we had a backdrop carryout of $1.5 billion for old crop and the new crop carryout projection, if everything worked good on all cylinders, was going to be $1.8 billion, and you had the potential of some new demand from China that you haven't seen in recent years, then every weather problem becomes more larger, and the weight that you give to the unknown potential of a weather problem to yet occur is more significant.

Given our current backdrop, where you got $2-point-whatever billion carryout for old crop, and now you're talking about $3 billion plus for new crop, the, the belief that there's some flexibility that we can give up a problem in a certain area and it still won't impact the market then all of a sudden, you know, these near-term weather concerns that the spots in the eastern Midwest that do miss out rains or only get a half inch, you know, it just doesn't carry as much weight from a market perspective. And the last thing I would say to maybe draw that point is, over the last couple of weeks, we've had days where we've had weather storylines that seem somewhat threatening that the market should respond to, but I think it was the 8th or 9th day of June that the corn market topped out and it's been going sideways during all that. We couldn't even get a weather rally out of that.

In the last few days of last week we had some bearish slants to the weather and the market, you know, kind of held its own and brushed off some weaker trade during the day and then finished higher, but we still didn't make a new high and at the end of the day Dec corn settled Friday at $3.45 and a quarter. That is a mere 19 and a half— 19 and 3/4 cents off contract lows. So think of that. You're, despite several weeks of possibly building a weather storyline of dryness, possibly having rumors of Chinese business coming sometime in the future, and we're 19 and 3/4 cents off the low. That's— that doesn't seem like very much, and that's a very poor performance if you look at it from that perspective.

And then you have to look at it from this perspective: a lot of times here around the 20th of June, the marketplace wants to say the crop is in good shape and it's somewhat made, and it acts that way. How many years haven't people sat at— on June 20th, thought we had some sort of a weather problem, held on to that, you know, possible possibility out there at the end of the stick, like a carrot at the end of the stick, only to end up at the end of August being disappointed and find out that the market didn't respond. And when you look back, you find out, shoot, this thing was over on the 20th of June. I just didn't want to give up hope that maybe there was more rally ahead. That's happened many, many years, and I'm not even talking about last year.

Last year was kind of an exception, but there are many other years where this time frame of year that has happened, and when you got a backdrop of a very plentiful or excessive old crop carryout and a new crop carryout that might increase by as much as 1 billion bushels, then it's difficult to get a, a weather rally from here forward without some major threat in I don't see that major threat right now, so it's very concerning, and if the marketplace decides to look at it that way and see these rains in the forecast and see the possibility of not having a blocking pattern out there, maybe we're underestimating how much near-term weakness might develop in these markets because we've been put to sleep by the— passive sideways trade of the last several days, and maybe we were led to believe that the market won't care if the crop is, you know, continues to be 70% good and excellent.

And I'm afraid that the calendar, each day we get past the 20th of June, it increases the chance that the marketplace will view the landscape as being non-threatening and lead to more selling. And the last thing I would say in regards to that is right or wrong, the farmer has made very little sales on new crop, and we get to the point here he might tip the scale and say, I might as well make some sales now and then hope that my crop insurance comes through, or hope that government payments come through, but I'm going to need cash flow. And, you know, we are at these points on the calendar where the farmer is starts to become more comfortable with his own crop. If you're in a dry area in eastern Illinois, you're not feeling good about the price, you're not feeling happy with how the market's not listening to your problems, and you're concerned about your own production.

If you're in someplace in the western part of the Midwest and your crop is the point where the plant's reached its nitrogen, it looks great, you've had some rains, you know, you're trying to anticipate 'What am I going to do with all these bushels?' So everybody's got a different situation, but I'm afraid that we might be— we meaning the entire marketplace— might be underestimating how much weakness could occur before prices get to a level where China might decide they are getting a bargain and want to make that purchase.

Shay

Foulk: So that's a great segue into the last question that I have, Duane, and that is, in the week ahead, if you have one thing that you're looking out for whether that's news from China or whatever else it may be, obviously not really any of the weather events we're discussing. You got one thing that you're maybe looking for in the week ahead?

Duane

Lowry: Well, I'll stretch it out to, uh, 9 days into the future, and I'll, I'll make the one thing more of a general background statement. I'm concerned about June 30th. Because they're USDA reports. I'm concerned that between now and then we got farmers sitting on basis contracts that are going to have to price them or roll them, and I think a lot of them will opt to price instead of rolling. So I think we have that, and I think we have a situation where the weather forecast doesn't appear threatening enough to me to support prices. And in terms of China demand news. I think there is possibilities that they could announce some, you know, TRQ import quota levels, but even that doesn't translate to an immediate sale.

So when I look at the next 9 days, the one thing I'm concerned about is a lack of a reason and a storyline to build upside momentum in a marketplace that has acted like it's restricted and resistant to anything to go to the upside. And proof of that, I'm saying, uh, we're only 19.75 cents off contract lows in Dec corn. And considering we've had some weather storylines to maybe give it a boost, that's a pathetic performance. So my concern is— the one thing I would have is my concern is we might all be underestimating how much risk we might have going into these USDA reports. And, you know, there's always a chance that something comes out of there bullish, but I'm afraid that we get something that's going to be labeled "as expected," and there again, we throw that in the pile of not something bullish enough to generate a price rally.

And we are in a timeframe on the calendar where pessimism, negativity, and willingness to embrace various tends to escalate if we don't have a problem. So the one thing I would be saying is I don't think we have a problem in front of us for the next 2 weeks. Gotcha.

Shay

Foulk: Not necessarily an optimistic outlook, not necessarily a pessimistic outlook, just reality. And I think that's the right place to end today's conversation, Duane. I really appreciate the discussion. I appreciate the outlook and the perspective that you provide to the farmers and listeners out there. Hope you had a great Father's Day, and we look forward to talking to you later on this week, Dwayne.

Duane

Lowry: All right, thank you very much, Shay.

Shay

Foulk: And thank you everyone for listening to today's episode of the Ag View Pitch. Happy Father's Day to all of you, and we will catch you next time. Thanks for joining us on today's episode of the Ag View Pitch. As always, you can reach Reach out to us at cbarron@agviewsolutions.com or duanel@netins.net. We'll catch you next time on the EggView Pitch.