Don't stop believing

Chris

Barron: Well, here we go with the Ag View Pitch. Welcome everybody and good to be here with you. You've got Chris Barron and Boleen Lowery again. How's it going?

Duane: Good, good, Chris.

Chris

Barron: Good, good. Hey, uh, started out tonight with Don't Stop Believin'. I got a lot of, uh, text messages and phone calls today on this market saying, hey, what's going on here? This thing's going down, supposed to be going the other way. It's all this prevent plant and all the issues out here. What's going on?

Duane: Well, you're asking for a logical solution in a business that isn't always logical. That's the first thing. It's amazing, and I'm not trying to say that I saw this coming because I did not, but it's not uncommon that we get an emotional reaction to some news that's in the direction of what you expect, and then it ends up being a temporary reaction. The market finds a way to go against that. That's what happened with Monday. We come in here Monday night, we have planning progress that that is in line with what we kind of expected. It seemed to add a little fuel to the fire, it seemed to confirm the argument, the expectation that we've got a situation here that's truly historic, truly something we've not seen before. And they come out and confirm that their planning progress is the slowest on record and fell short of people's expectations.

And the market comes in and, and trades higher, but the higher that in the night session was made in a matter of minutes after the opening and, and kind of faded from there. And that disappointment led to another round of selling today. The good thing about that is I don't believe that's the main trend. I don't believe that's the main reaction. I think that's more of the correction. And after we'd had almost a 90-cent rally, here we find ourselves setting back about 25 cents from that. And hopefully we'll not see a lot more weakness. To put in perspective, if somebody bought it on Monday night following the crop progress report and we broke 25 cents, that 25 cents represents more money lost than what he had to put up to have the position to begin with, which tends to mean that the liquidation of that long purchase Monday night probably occurred rather quickly.

And so, you know, sometimes it's healthy to have these markets move back and forth as opposed to just streak straight higher. Sometimes if they move back and forth, they tend to last a little bit longer. So let's try to be optimistic and say that the weakness we've had the last day or two maybe is a sign of better things to come and for a little bit longer duration.

Chris

Barron: There's definitely a lot of frustration out there right now too, especially with these guys that have not been able to do very much of anything. And some of the other comments I hear, you know, is there any other year like this? And really there isn't. I mean, a lot of times we hear 1993, but one thing that I wanted to bring up about 1993 and get your comments on it, Duane, is, you know, that was an absolute, you know, nightmare year as well, rained. But, you know, the difference was we actually got planted in a little better shape. We got actually not— it was a late, very late, but it was just wet throughout the whole year. What, you know, what's the difference here? I mean, that, that year, nothing really rallied until, you know, October through December, you know, and we got this early rally.

I mean, what's to say that we can't go a while and, and just kind of tread water for a while here till the market you know, says, okay, you know, this warrants some more up here. What's your thoughts on that? And is there an analog year that you can compare?

Duane: Well, in agriculture and in growing a crop, we always use the phrase, you know, what's normal or what's average. The reality is average is a whole lot of abnormals just averaged together and made some fictitious normal year. But, you know, no year is really normal. Every year seems to be kind of unique. Having said that, I understand the correlation with '93. It is somewhat different. And as far as to answer your question, kind of backwards, the last thing you said and implied was, well, maybe the market's going to take a long time before they figure out what we think we've already figured out. Possible, but I don't think that's what's going on here. In '93, you're right, we got the crop planted. And it wasn't, you know, the the easiest to get it planted, but it was not as late as this year. And then it just continued to be wet and wet and wet.

And if I remember correctly, it was, we didn't have a lot of heat units or a lot of sunlight that year. It just seemed to be kind of an off year. I think the reason the market was slow to react that way that year was there's a saying in the business that rain makes grain and the Chicago crowd wants to be fairly optimistic about potential once the crop is planted and in the ground. And after that, they want to view rain— that rain is good and rain makes grain. And in the end, it proved that we had other situations going on that, that we found out too much rain wasn't good either. This year, what I think is different, you know, it's a cold, hard fact that this is the slowest planting pace we've ever had. It's a cold, hard fact, fact that we got into June and had, you know, less than 70% of the crop planted.

It's a cold, hard fact that we're going to have largest prevent plant that we've ever had. Some of these things are real, and they're known now, aren't going to be fully known very soon. If they're not, the argument might take take place regarding what the yield potential is on the stuff that is planted late. But, uh, I think this is different than '93 in that regard. So I think the market is going to act differently. And let's face it, you know, we're, we're unhappy because the market set back the last 2 days and, and from where it opened Monday night, we're 25 cents lower than that at today's finish, roughly. But if we take a step back and say, where were we on the 10th of May? And where— how far did we go? We rallied $0.90, and we just gave back $0.25. That's still a pretty good move and a lot different than any move you had early in '93. So we're already different.

It's not the same as '93. And I think we already have an understanding that this is something more historic and a more difficult situation. And I think the exception to that was seen in— Yesterday and today's trade, and I guess it remains to be seen, but I don't think we will continue to see price action that was similar today. I think that will soon be proven to be the exception and not the new rule.

Chris

Barron: Yeah, and I think the bottom line, like you said, you know, having some correction along the way just makes it a longer-term market. And I like that comment because I think that that can give people some reason to, you know, don't stop believing, I guess, you know, because it is frustrating, you know, when you, you're sitting there in the mud and, you know, and there's a lot of growers out there that got some stuff planted, but it just, you know, looked at pretty marginal stuff that is in the ground and, and not being able to do anything and I think I was showing you offline, Dwayne, too, you know, running some of the numbers off of Profit Manager with, with growers. You know, if you take, uh, 20% off of this, um, you know, and we were at 187 with our group of growers as the 5-year yield average. If you take 20% off of that, that's 150 bushel corn.

And at that 187 yield, the breakeven cost production was $380, and that's covering all expenses including family living and everything as we always do it. But if you go to $1.50, you take that 20% off, that's $4.67 for a price for corn. And, and we'll come back to corn for a second. I want to run that thought process on soybeans as well. You take, you know, if we get late on soybeans, and I'm not saying we're there yet, but you take 20% off the top of the soybean yield, and I think we're going to take some of that off, that's 11 bushel. That changes the cost of production by $2.05 a bushel, or increase, you know, that's how much it increases the cost production. So back to corn though, if the cost of production with 20% off for the average grower that we work with is $4.67, that's cash on farm price that we need. We're not even anywhere close, we haven't got there.

So, you know, for the growers that are listening to this and recognizing their real true cost of production and looking at the prospects of maybe their overall yield being off 20%, and granted some people are going to have prevent plant on everything, but I'm talking on the acres that are planted, you know, are we going to get to these price levels, do you think? Because you got basis on that, so you're probably looking at close to $5 corn. That you need for those acres that are planted, you know, unless the yield is significantly better, you know, which can happen as well. So it's that, that revenue is a combination of price and yield. I get that. But what's your thoughts on where the price action's been? And, and can we get to those levels, do you think, to cover that, that margin requirement?

Duane: Well, first of all, let's start with the idea that the marketplace does not owe you a profit. It does not owe you a margin. And so that's the first place to start. So if you happen to be in a small enough area and your calculations come out to exactly as you described, 20% less production requires a price change of 87 cents of $3.80 before that covered your costs. If you had $187, 5-year average, But if you dropped your yield this year to 150, all of a sudden to get the same revenue, you needed $4.67 on those bushels. So if you're in a small enough area, the marketplace is not going to care what Chris Barron is getting for a crop in his particular area.

So the question is, as soon as you— the area being impacted is large enough that it affects the total picture and the total supply-demand carryout, then the marketplace does have a mission to do, and it does have to try to align itself in a manner to help offset that. And if it— the supply and demand carryout projection gets to the point where the marketplace has to ration supplies, then it definitely gets to that place that it has to ration supplies. And that's what happens in order for you to get to your $4.67 cash or your $5 futures price to make that happen. So to answer your question, the first thing we need to do is ask ourselves and try to give an honest answer: do we have a situation that's developed in the U.S. corn market right now that is drastically different than what was expected?

Is it, is it so significant in its implications that the carryout, uh, will be affected in a manner that it does affect the price discovery process? Or will it only be affected, uh, in a manner that it hurts the farmers in those locations, it reduces their revenue, but we're not getting enough of a threshold in loss of production to force the users to pay more, to force the market to price in the supply drop. Now, I personally think that we have, uh, reached the point where this year's situation does trigger the price global, the US price discovery process in a manner that we will have to ration supplies. Part of that is based on loss of acreage through prevent plant. I personally happen to think that it's still going to be somewhere around 10 million acres.

Nobody knows yet, there's a wide range, but I think it'll be somewhere close to 10 million acres that will be lost to prevent plant. And if you depending on what— how you want to look at that, that's at least 1.5 billion bushels. And if you want to take some sort of production off the national yield based on planting date alone, not factoring in anything that happens from here forward, just the loss from the planting date, it's not difficult to come up with another, you know, 7 to 10 bushels an acre, and all of a sudden now you're up to you know, 600 to 800 million bushels, and you combine that with your loss and your prevent plant, and you've just, you've just reduced production equivalent to your carryout. And the pipeline has to have some supply, and it can't be down to zero. And so that means that prices have to ration supply.

Now, I've heard a lot of people say recently that the marketplace doesn't have to supply ration supplies now, we won't run out of corn until next summer. But as soon as the marketplace realizes that it has to ration supplies, it begins to do that. And why does it do that? Is because everybody that's feeding hogs or feeding chicken or feeding cattle, or they're an ethanol plant, or they're an, uh, an importer from another country, they all see that eventually the price has to be rationed, and they all prepare for that. And so that process unfolds right away. So I do not subscribe to the theory that the marketplace doesn't need to respond, uh, until sometime next summer. And that's the kind of comment that is made after a day like today or after a day like yesterday where the market kind of pauses, stops going up, backs up a little bit, it puts in a correction.

Then people come out and start to say, well, maybe the market just doesn't have to go up now because we really don't have to ration supplies. But I believe that as more and more people come to grips with just how historic this situation is and start to put a pencil to it, no user is going to look at this and say, you know what, I'm just going to go hand to mouth. I'm not concerned about supply, number one, and I'm not concerned about prices going up. That's just not a natural reaction. They're all going to want some level of price protection. So I think the marketplace begins to try to get to a price level that generates revenue similar to what the producer had before. He felt that there's going to be a loss of production, and I think we start to move towards a level where we have to— we get to price levels where we try to ration supplies.

And then the point where we really kick into that will be if we get a production threat during pollination, which this year is going to be a wide window based on the wide range of planting dates, but a lot of pollination is going to occur in the last part of July and early part of August.

Chris

Barron: Yeah, and back to your 10 million acres of prevent plant comment too. Um, two things today, or in the last couple of days, that have incentivized growers to select that option as opposed to trying to you know, go with an unknown is, you know, the— we've had pretty widespread rains in the wrong spots, one. And then number two, the other thing is, with the price going lower, that's totally an incentive to go more towards the prevent plant. We needed the market to go the other way to incentivize guys to plant. And so I know quite a few, I can think of 5 or 6 right off the top of my head that I talked to in the last 2 days that the prevent plant actually has gone up in the last couple of days, even with some weather improvement, just because the price scenario. And as long as the insurance adjuster's there and giving them the approval, you know, that option's there.

Plus then you don't have— you get to take a mulligan on, you know, your APH. You don't have to worry about this year's potential lower yield messing up your APH either. So I think I think just, just backing up on the, on the, the 10 million acres plus, because I know there's a few coming in a fair amount lower than that, but I just don't, you know, based on what we're hearing, it's going to be that plus probably.

Duane: Well, there's a lot of reason farmers don't want to do the prevent plant. Not one, it's not natural. Everybody wants to plant. Two, they're optimistic that they can grow a crop and get a good yield. And they think that, that's going to be better. But there does come a point in time on the calendar where the odds just get stacked up against them. But you're still left with a situation where the farmer doesn't want to participate in the prevent plant because they don't want the stigma of not having gotten their crop planted and all that goes with it. They're all concerned about what's the relationship going to be with the landlord? How's that going to look to my neighbors? People don't like to have to think about not being able to plant their crop.

But when you look around your neighborhood and you find that everybody's got a situation where they don't have all their acres planted, or a vast majority of them do not, then— and you find out that this is a situation that's on the national news headline, and it's, it's countrywide, Midwest-wide, it's region-wide, it's not just your location or your operation, but it's something much larger. I think that as we get to the point where we're at right now in the calendar, I think that the, the concern about the stigma of not getting it planted no longer is as much of an issue when they realize everybody's in the same boat. And it's not a statement at all about your own management operability. It's just a statement of the conditions that made it impossible to, to get into the field and get things done.

And I think that at that point in time, uh, producers start to look at the numbers and the pencil and, and calculate it, and it's now real. You know, 2 weeks ago there was still a lot of opportunity to be hopeful and to, to stand strong that you were going to plant, you know, no matter what. You didn't want to do prevent plant. But now that the calendar has been moved forward and now you're right in the thick of it, and this is the do-or-die timeframe, you either get to plant or you can now choose prevent plant. I think the numbers vary from operation to operation. It depends on if they have any inputs down or if they do not. But in many cases, these areas that are most impacted, they did not have an opportunity to get costs down.

And from conversations I've had and the conversations that I've heard about, there's many situations where prevent plant is the best choice just economically, and then you have agronomic reasons and soil condition reasons and equipment reasons that maybe prevent plants might be the best.

Chris

Barron: Duane, let me throw something else in there too that we've seen a couple instances today with a couple of guys too that are in the May 25th late plant period are at 11% reduction already in their standard revenue policy. And so that takes about $80 of coverage away from the original guarantee. And the May 31st is at about 7%, which takes about $50 off. So, you know, that's another factor in the equation that has cropped up here in the last few days that's that's weighing on this too.

So again, just to throw that AgPitch comment out there again, that if you're, if you're in a situation where you do have some of these acres and you haven't ran the numbers and need to run those numbers, we'll send you this tool so you can kind of run the scenario, make one last chance at, you know, whether you're going to plant or prevent plant here because we're still inside this window and You know, we're not saying prevent plant's the option. We're not saying planting's the op— you know, every farm operation's got to make their own economic decisions, and, and so that's really the point. Any other things, Dwayne, quick on the markets, and we can kind of get things wrapped up, but anything else as we work through the rest of the week here?

Duane: Well, if the premise of what I have described is, is close to being accurate, the marketplace is going to find difficulty getting any additional momentum to follow through with what they did yesterday and today. And I would think that the market consolidates and catches here, and at worst-case scenario, maybe gives up another 3 or 4 cents. But otherwise, I think we'll find technical support. I think we'll find buying interest from multiple sectors of the trade that maybe didn't get involved with this market earlier because they didn't realize the scope of what we're dealing with.

But, you Even though the marketplace was down the last 2 days, I think the scope of understanding in the marketplace, whether that's on the producer level, the speculator level, the commercial level, the agronomy supplier level, everybody seems to have a greater understanding and acceptance and a belief that, okay, this is a serious deal and these numbers are big. And so I think we're growing in an understanding and an embracing of the situation as is, even if the marketplace on the last day or two doesn't necessarily reflect that. So I think that stay focused on your operation, on what your yield looks like, what choices you have as if prevent plant or planting is an option, run the numbers and do what's best for your own operation, whatever that may be. But everybody's going to have a challenging year.

And the best way to work through this is to make sure you know your, costs and realistic yield expectations so you can make sure you're getting revenue that compensates for, for what you're dealing with.

Chris

Barron: Sounds good, Dwayne. Well, in other words, don't stop believing here. I think guys are frustrated in a lot of areas, and, and I think the market just kind of compounded that the last couple of days. And hopefully as the week goes on, we'll kind of see some strength. We'll get back together here, uh, the next day or two, or if something comes up, uh, right, Duane? And then, uh, we'll kind of wrap it up from there.

Duane: All right, Chris, thanks.

Chris

Barron: All right, that sounds good. Everybody, thanks for joining us on the Ag View Pitch today, and we will catch you next time. Thank you.