Duane's take may surprise you: Friday's report and producer marketing plan

Duane: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we're heading into another week of marketing coming off a short week and a report. Dwayne, how's it going?

Duane: Good, Chris. Um, glad to have the report behind us and, uh, it's now created opportunities and now we got to figure out what to do with those opportunities.

Chris

Barron: Yeah, yeah. So by now a lot of people have heard, uh, the numbers off the report and all that, so we don't need to spend much time on that. But what I do want to ask you is, is there one or two things, kind of key things, that, that you took away from the report that we need to be thinking about or need to be aware of moving into the next week and, and into the future here?

Duane: Well, I think the, uh, um, probably rather than a couple of items, um, I would say the themes is what I would focus on. And the themes are that maybe the reports, um, have created an opportunity for a producer to do some marketing and hedging. But when you look at the raw numbers out of the report, I'm not sure that they justify sustaining the price levels we're at. You know, to give you a perspective, um, if the carryout in the end is exactly what USDA has projected it in this last report, um, it's the highest stocks-to-use ratio that we've had since 2005. And in terms of a raw carryout at 2.5 billion bushels, you know, you got to go back a long ways to find one larger than that. That's a bit sobering. Another thing that's sobering about the report, USDA lowered usage by 100 million bushels in September versus what they take in August. That's a bit troubling.

If we get— as we go into the winter and we start talking about 2021, and if we use the same acreage as this year and use trendline yields, we'll be talking about adding 500 or 600 million bushels to the carryout for the next year, and that's assuming we have another year of large China corn imports, that's a bit sobering. Um, so if you look at global exporters in the report, um, from like Argentina, Brazil, Russia, South Africa, and Ukraine, their total projected exports, um, are above what they were last year. And equal to the year before. Um, if you look at China's corn imports, USDA didn't really make any changes there. That looks odd and probably is not correct and will have to be updated to a larger import program. But they have U.S. corn exports pegged at 2.3 billion bushels. That was up 560 million bushels from last year. Well, 560 million is 14.2 million metric done.

And so despite all the ramping up of China's corn imports, it would appear that the— yesterday or Friday's report has the vast majority of that, if not all of that, largely factored in. And so if that's what it is, we have all this demand plugged in and we're still talking about a 2.5 billion carryout, that's troubling. And, uh, We're talking about equal acres for next year and you're going to be adding to that carryout. That's troubling. So those things are warning signs, I think. I think you could go through the soybean report and you find some other things that are also a bit sobering. And I think when you look longer term, if you're looking for something bullish to lean on, it's probably the idea that the U.S. needs to attract more soybean acres in '21. And less corn acres.

So is that going to be done through keeping a lid on corn prices, keeping new crop bean prices somewhat propped up? Is there going to be an acreage battle at line drawn at some point? You know, how's that all unfold? I don't know, but the most important thing I think to address regarding yesterday, or for Friday's report is that maybe current prices are difficult to justify from the data from within the report.

Chris

Barron: When that storm went through, one thing we talked about in a couple podcasts ago or whatever, I mean, it was a bit revealing when all those bins got taken out, there was no corn in them. If there's supposed to be corn somewhere, it was probably in the middle part of Iowa. We had good crops last year. Where's the corn at then? I mean, where, where are all these bushels?

Duane: Well, I don't know the answer to that question, and I think it's a legitimate question. There are a lot of people in the commercial grain trade that really ponder seriously whether USDA has over the years maybe overstated our total inventory. Even if that's true, until USDA tells us, you know, it's almost like a moot point. I mean, uh, we've all tried to battle USDA before and it's usually at our own expense. So I think about all we can do is look at it at face value until they decide that they're going to change the numbers. Some will point to the storyline that you've just mentioned and say, well, when we get the next Well, we'll wait for the quarterly stocks report at the end of September, maybe we'll get some clue there.

Well, I think most people have spent far more time dreaming up those type of scenarios only to get disappointed from USDA throughout the years, but I think the best approach is just take it at face value. This is what USDA says it is, and until or unless they change it, we should proceed and make decisions assuming these are are what they are.

Chris

Barron: Uh, talk about basis. What are you seeing or hearing? I mean, if I look at some local basis or, or like Central Iowa, and does that have something to do with the storm that went through there, the basis in that area? I know Cargill struggling to get corn, you know, they're, they're 20 over. A lot of times they're, you know, 30 under or whatever. So Are you seeing that in other parts of the country? What are you seeing on basis, and what do you anticipate as we get closer to harvest? And obviously it's going to be different from one area to another, but let's have you touch on basis for a minute.

Duane: Well, addressing Central Iowa, uh, you know, at one time it was perceived that corn basis might be weak because of that windstorm event, forced sales, etc., lack of storage. But reality is it was reduction in supply, and so the basis strength that you're seeing might be partially due to that. But I think the basis strengthening narrative has been more widespread than just Central Iowa or just a region, and even in areas that have not seen their new crop basis levels improve, and those areas are probably best defined as those areas that have maintained good yield potential throughout this summer and haven't been affected by drought or anything else. Even those locations have a, have a significant improvement in their bids for November, second half November, December, things of this nature.

So that means that there's a lot of room for basis levels to improve in those locations as well. So until proven differently, I'm going to imagine that corn basis will stay somewhat relatively firm. When harvest begins to unfold, maybe we'll see basis weaken in some of the areas that have had the most strength of late, but any prolonged period of basis weakness probably isn't likely. It probably depends a lot on how much producers are selling takes place. I think most producers, whether it's right or it's wrong, are going to try to put bushels into storage and try to defer or delay selling as much as possible. And when— if they're a corn and soybean farmer combined, a lot of them are planning on making much larger sales of soybeans for their cash flow needs, which will only make them even a tighter holder on corn.

So I think there are some things going on in the background that might keep corn basis relatively well supported. And if there's a period of time early mid-harvest where it is weak, it'd probably be a short-lived event.

Chris

Barron: Yeah, you're partially answering the question I was going to ask. I'll ask it anyway and see where this goes, but with corn, Dec corn at $3.68 and a half and Nov beans at $9.96. Aren't we— I mean, if you go back and look, and I was screaming at you, what, I don't know, 7 or 8 podcasts ago, we gotta price this stuff. Well, there's probably people that still didn't price very much. I mean, at what point— I mean, isn't it time, like, on the beans, uh, I don't know of too many clients, and there could be some exceptions to this because I'm not looking at my, my data right now, but isn't— doesn't it make sense to, to be pulling the trigger fairly heavily on soybeans with the, the recent rallies that we've had? And, and, you know, I mean, obviously there could be exceptions to this where the yields are bad or whatever.

There's probably exceptions to everything, but generally speaking, this is pretty darn good price. We've seen a huge increase, haven't we, on soybeans and warrants some sales.

Duane: Um, regardless of what their own individual yield levels are, I'm advocating and pushing my clients to be 100% sold on beans here. At some point in time, we may want to consider replacing that ownership with some call options, but I have no interest in doing that anytime soon. And I have no interest in, in buying, replacing the ownership until we've had a sizable pullback in futures, sizable meaning something greater than 50 cents. So I'm, I want to be very, very aggressive with bean sales. I want the producer to take the attitude that he spent virtually all of 2020 feeling he would never get anywhere close to this level and thought for a large portion of 2020 that he wouldn't even get within a dollar of where it is right now. For many, they'll have yields that these dollars allow them to have a profitable operation.

For those that get hurt in yield, there's no guarantee that the marketplace has to give you a profitable, you know, ending. So I would still, even in those cases, encourage an aggressive selling stance or hedge stance if you're going to store them on the farm. But in reality, if you look at the basis values being offered on beans versus normal, you look at the futures market not having any carry, um, it's difficult to justify storing the physical crop. And, uh, if you think beans are going to $12, um, and anything's possible, um, and if we had a problem in South America we could possibly warrant something like that. You're still probably better off to own the paper than you would own the physical. So I want to see producers aggressively price this stuff, put a ribbon on 2020, call it good, and recognize it's a lot better than they thought it was going to be at one time.

And I would imagine we'll talk about corn, but I have a plan that's not too dissimilar even on corn, but yes, I want to be an aggressive seller.

Chris

Barron: Okay, so the answer is yes, I do want to talk about corn too. So, um, I'm, I'm with you on, on the bean thing because it just, it just makes sense. And for a lot of operations, in my opinion, rather even than, than a reownership, we're still long 2021. We'll get to '21 in a minute. I want to talk about corn, '20 corn for a second first though. So 2020 corn, uh, $3.68 and a half. When we were 50 cents lower than this, um, you, you were not in the mood to do anything. What's your mood now?

Duane: We'll break it down for a few different pers— situations producers might be in. If producers have to move bushels during this harvest window, either for to generate cash flow or due to a lack of storage, I would absolutely price all of those bushels right now. For producers that are going to store corn in the bin on the farm. They want to try to capture carry. They think they get better basis. I think all of that is a legitimate and justified and warranted approach. I would be aggressively pricing, uh, the July contract with HTAs or futures, whatever tool you wanted to use, but July is at $3.88. By the time basis levels improve to something probably quite a bit better than what's offered now. Those are going to be some attractive sales. I would move— I'm encouraging my customers to get to 100% hedged on that also. Now, prices down the road, could they be better at some point?

Maybe. But the approach that I want to see take— I want to completely tie up the 2020 production, get everything priced, hedged, sold, whatever, depending on if you're storing on the farm or not. And then call that good, and then if we get a pullback, which I think is highly likely, then there'll be a time again to maybe consider owning calls, and maybe in that process of establishing calls, you know, sometime down the road, maybe there's be an opportunity to catch another 15 or 20 cents or something like that.

The reason that I'm making an aggressive stance in corn out of price is because at 2.5 billion carryout, at the stocks-to-use ratio the way they are, at a need to either reduce corn acres or to face rising carryouts again for the 2021 crop season, the marketplace would appear to me to have some limitations as far as how far it can rally and when it rallies, and I think it's possible that the corn market will not earn its carry. In other words, by the time we arrive at March, maybe we won't have March corn futures where they are now, or if they are, they will have first staged a break. I'm concerned that downside risk from here is at least 30 cents. Maybe that's 30 cents during the growing season, But here again, I think the producer needs to look at it from this perspective.

We are far higher right now at harvest time than the producer spent much of 2020 thinking he was going to get, worried that he was going to get. And, you know, I think it's time to make the sales and to tie off what is offered. And a lot of times price peaks or price rallies into that harvest timeframe are difficult to be— find a time where that's a bad sale until much, much later. And so I'm a strong advocate of an aggressive sales stance here, which is a lot different than, you know, probably people have heard me on this podcast before, but that's where I'm at.

Chris

Barron: Okay, so you're different than what we, we've been hearing, which that, that's, that's good. That, that, uh, gives us, gives us some direction and some things to really think about and to crunch some numbers on. Let's look at '21 for a minute, and before I do that, I was just looking at the corn-bean ratio. It's 2:4 on 20 crop, and it's a $2.70 on new crop. So when you look at the bean price for the '21 crop, it's not nearly as good as it is for the '20 crop, but yet it's still right in the black for— just getting to the black for a lot of producers where that price level is at. On corn, it's not, you know, I mean, it's there, But you've talked about last summer when we had that rally, you know, be looking at 2021 and you weren't as interested in '20. So what is your interest in 2021 now?

We're at levels that you were talking about earlier this summer and maybe even a little higher. So what, what do you see for 2021? Start with corn.

Duane: I want to be aggressively pricing the 2021 corn crop at current values. Somewhere down the road again, be looking to buy calls against those sales, but right now I want producers to capture what's offered. The price levels we're at on Dec '21 has gotten into the target zone that I laid out last, uh, during the summer as being the target level, and so I want to be very aggressive there. In terms of the beans for '21, and I bring it up now because it's kind of part of the decision for being aggressive on '21 corn sales. I don't want to make any '21 bean sales, but I am willing to be very aggressive on '21 corn sales.

The— like I mentioned before, if we maintain corn acres at the same level next year that we had this year, and we have to listen to everybody talk about trendline yield projections, all the time from November, December, January, all the way into the spring, we're going to be talking about adding 400 to 600 million bushels to whatever the carryout is on this 2020 crop, and that would be approaching us closer to 3 billion bushels again. That narrative going forward for the '21 crop is not going to be very constructive or very positive. On the, the exact opposite is true on beans. Wherever the 2020 soybean carryout is, if we extrapolate this year's yields into 2021, we're not going to be talking about adding much bean carryout at all to U.S.

numbers, and I think that the odds are that in the months ahead as we get to into the South American growing season, there'll be quite a bit of pressure on them to have a good year, not to— and to avoid any major concerns. And I think the market will have a very heightened awareness of any concerns with that growing season. And I— even though normally I would say that would be impacted mostly on the nearby contracts, and it may very well be that way this year also.

With the nearby contracts already at a, you know, 50-cent premium over Nov '21 futures, I'm not so sure a problem in South America with the assumption that Chinese demand is going to be again quite front-end loaded here, I'm not so sure that Nov '21 isn't going to be a pretty strong benefactor of that, and so I'm going to take a very aggressive pricing stance on the '21 corn with my clients, and we're not going to make any sales on '21 beans. So our, our diversification, so to speak, will be just in between crops. You know, we're gonna stay open on the beans and be aggressive on the corn.

Chris

Barron: On the '21 corn, are you an advocate of you know, utilizing the, the carry there too and looking out at that '22, July '22. I think the other day, or I don't know, it was like, it's been up to like $4.03, I think. I don't have it in front of me. But are you pricing some of that, and, or are you pricing stuff that growers would have to move off the combine, or a little of both, or, or everything?

Duane: Well, the 2021 crop, you got Dec corn at just under $3.90. You've got the July '22 you're talking about, on Friday it got up to $4.07 and three-quarters, it settled at $4.07. So that spread at 17 cents, there's probably a strong case that could be made that if you are going to be doing selling there Even if you're hedging and you're selling futures, many would say just sell the Dec because at 17 cents at some point in time that spread might get wider, especially given fundamental backdrop that we've talked about. But to be honest with you, I would probably do some of the July anyway just because $4.07 looks pretty good, and I would just capture some of that. I don't care whether the producer sells Dec '21 here or sells July '22 at current values. I don't care which one.

I think there's justification probably in splitting it up, and I think that people that follow spreads could build a strong case for doing it all in these, and I would concur that they're probably correct with that. But I would still end up doing some in the July '22. But at the end of the day, um, which one you do it in is less important to me than just getting it done.

Chris

Barron: So I'm, I'm getting pretty, pretty wrapped up with questions, I guess. I mean, it's, uh, there's some stuff for us to do. It sounds to me like, you know, based on what you're saying, I think part of it from my perspective is to sit down and run some numbers a little closer. We can, we can roll the 2020 cost of production into '21. I've done that with a lot of our clients to figure out, okay, What type of margin are we talking? What's that look like? The only, I guess the only final question I have for you for this podcast, Dwayne, and then you can kind of wrap up with whatever we haven't talked about that we need to, but is that with moving forward, what, trying to think how I want to ask this question, moving forward, do we, how aggressive do we really want to be?

I mean, is there, is especially in new crop, is there a risk, you know, with inflation, with ethanol demand improving, other things happening that gives us strength in the market that we need to absolutely be sure we're watching to get that stuff re-owned or have calls or some type of way to keep the top side open? What's the threat level there, I guess, is how I should ask the question in the first place.

Duane: The threat level of inflation and something completely changing the, you know, underlying dynamics That's a legitimate concern. I would never encourage any of my clients to be as aggressively priced as I'm describing here if they were not willing to buy it back on paper, either buy futures or buy calls at some point, or in some cases they might have a cash grain buyer that they're able to do HTAs out there, and then that same cash grain buyer will turn around and buy calls for them also as a service, and a fee will be associated with it. But that's also a possibility. If the person is not willing to do that, if they're not willing to do paper reownership, you know, I'm not going to recommend they be as aggressive as I'm describing.

However, I am concerned that before we ever get a change in dynamics like you're describing, of inflation, I think that we'll have plenty of time and opportunities to do a paper reownership against this. In regards to your comment about, you know, pushing the numbers and whether it's profitable, I don't think it'll be a very desirable sale for producers looking at from a profitability standpoint, but here again, the marketplace doesn't have to give you profitability. I think that given what we think we know about production in 2020, for carryout of 2020, all the demand optimism that's already plugged into the old crop balance sheets, I think that the market's absorbed an awful lot.

I think that you're dealing with a situation that these might not be your most desirable prices, but you could easily see December '21 futures, which now are at approximately $3.90— there's nothing saying they couldn't be at $3.50 at some time during the winter. And if you need to have a conversation with your lender for '21 financing, which was the— my main motivation for looking for opportunities to price '21 so that when you came into this winter period that you didn't have to face that lender with a poor situation. I think there's a strong case to be able to walk into your lender and say, hey, I've got a large percentage of my crop priced. I plan to have call options against that. I've made crop insurance decisions that puts me ahead of the game.

You know, and go to them, go to them with a very proactive approach to '21, I think that conversation is going to go a lot better than if you walk in and maybe haven't sold any '20, haven't sold any '21, and prices maybe by the time you get in to see them about '21 financing happens to be 20 or 30 cents lower than they are right now, which in my opinion is very plausible, I think that will make it for very difficult conversation. And so that's another reason for my motivation to be aggressively proactive towards the 21 Prop.

Chris

Barron: Sounds good, Duane. Uh, getting up against probably time here, we should wrap things up. I think this was a great conversation. We got, uh, covered a lot of ground. Is there any final thing or anything I didn't ask that we need to wrap up with?

Duane: No, I think we've kind of covered everything that I think is important. I would ask producers that want to challenge me on, on this approach to reach out, give me a call, and if they got questions about how they might best do that for '21 and they want to and some of the things I've offered are intriguing, I guess again, reach out, let's have a conversation. This is the time of year to be having that conversation because it's going to be difficult to be making decisions and plans on '21 when everybody's busy in the field with harvesting of '20. There's also, you know, crop insurance decisions that need to be done here and now as well. So anybody wants to reach out, talk, I think now's the time to do it.

Chris

Barron: What's the best way for some new listeners that might be on here? What's the quickest way, best way to get hold of you?

Duane: Uh, first thing that they can do, they can go to my website. It's cropproductionscience.com. Um, otherwise my phone number, which is 563-419-1300.

Chris

Barron: 563-419-1300. I was listening. Good. Hey, Dwayne, thanks for the conversation today. It was really good. I think a lot of things for people to think about right now. We've gotten some opportunities that we thought we probably never would have gotten. Probably time to do some math and do some hard thinking. Thanks a lot, Dwayne, and appreciate your time today.

Duane: All right, thanks, bro.

Chris

Barron: You bet. Thanks, everybody. For listening, and we will catch you next time on the Ag View Pitch.