Farm aid package

Chris: Hi, this is Chris Barron and Dwayne Lowery again here today with your Ag View Pitch. And Dwayne, you're on here with me and we're just sitting here talking a little bit before we started the podcast here, kind of looking at what's— what the kind of the big news is here coming from the administration. You want to talk a little bit about that?

Dwayne

Lowry: Well, for— to all our listeners, on one level I apologize because we don't know exactly all these details and you're going to kind of get to participate in a little bit of a thinking out loud process that Chris and I are going through, kind of talking about what they're giving us. Basically, our understanding is USDA is going to make $14.5 billion direct payments to producers. And that's slightly more than what the payment was last year. And Chris, please correct me if I say something wrong. But last year they got $1.60 a bushel in two different payments, but the dollar—

Chris: $1.65.

Dwayne

Lowry: Okay, $1.65 total in two different payments. And if somebody was growing 55 bushels an acre, that was $90.75 an acre. This year it's slightly more money, but it appears as though based on— I can't tell this off of the, the press release from USDA, but from what's been talked in the trade, the corn grower is going to get a little bit more money than they got before. And they've also taken into account a larger group of farm producers that will be eligible to participate in this payment. So you got extra money, but maybe extra places for it to be distributed. So for the sake of argument, I want to just go with the example. Let's say that it's going to be $100 an acre. Now, in that soybean payment that figured out to $1.65 times 55, that was $90 an acre. That was only on soybean acres, and the corn payment was almost not even worth talking about.

And so if they— if that was $90 and you had a 50/50 rotation, you're talking about $45 an acre on all your acres. Now this year, in an effort for USDA not to tie or not to influence acreage plannings or acreage decisions on this payment, my understanding is the payment is going to be the same per acre No matter what you plant of all the crops that are listed as eligible for those plantings, as long as you plant the acre and as long as your acres are not larger than they were in '18, but every county will have a different rate or could have a different rate from another county. And I wonder, based on the fact that this entire payment is, is directed to offset trade war costs or losses.

They indicate that this payment is going to be made out in up to 3 different payments, the first one being in July or August, and the second and third coming in maybe in November and then sometime later in 2020. My understanding is that the second and third payments are not guaranteed, only the first payments guaranteed. So if they come to a trade agreement with China, for example, in July, they're not going to give you the second and third payment. So if you're somebody that's contemplating prevent plant and you're wondering, okay, do I go with the prevent plant which looks the best for me before today's payment, or since this aid payment is required me to have a crop planted, am I better off to plant the crop and collect this payment?

Well, if we just rough it and say that there's going to be a $100 payment that would be similar to the payment we had last year, but then it's over all acres, not just soybean acres, and we had a 50/50 county, that would be a $50 an acre payment on all acres. And so, uh, then that would mean that like $16 soybean acres, right? No, it's just, it's just all acres. This year it's going to be all acres. This is not based on soybean acres, my understanding. It's based on all acres in, in the county, as long as that's on your farm, as long as it's one of, you know, of a multitude of different commodities.

Chris: Does it have anything on limitations that you read?

Dwayne

Lowry: I do not know the story about limitations. I've heard both sides of that, so I'm not going to say because I do not know. I do not know if there's a—

Chris: we need to be finding out.

Dwayne

Lowry: Last year, I think the people were subject to a cap on those payments, weren't they?

Chris: Yeah, there was a cap last year. It was the standard cap and then And then the payment structure was the same last year as you just described. We're going into, you know, we got the first on soybeans specifically as an example, you got your first half of the payment, the 82.5 cents or whatever it was. And then we got the second payment later. And that second payment was not guaranteed last year either, in the event they would have come to some sort of an agreement on trade.

Dwayne

Lowry: So kind of my understanding is this time it'll be broken into 3 payments and 2 of them you're not guaranteed. So if that would imply to me that if you upfront here without knowing all the facts, all you could probably count on is a third of that payment, right? But for sure, my understanding is the payment is going to be spread out over all the acres. And then they, they are going to determine county by county which county gets more. And supposedly the criteria is going to be how that county was affected by trade policy. So if you're in a county that, you know, 38% of your acres are soybeans and 62% of your acres are corn, soybeans were more impacted than corn on trade.

Okay, that payment for that county is going to be different than if you were a county that was 50% beans and 50% corn, because that county is going to have a greater impact on it due to trade because they, that they had a larger percentage of their acres directed towards beans. So if you're in a county that maybe is livestock driven, which is more likely to grow corn, um, I'm— my understanding is that county should expect to get a smaller payment. Because your impact on trade is going to be more heavily weighted towards those soybean acres. And they have not indicated that exactly, but in, in the wording in their press release, that's how I think it's going to pan out.

And so they have indicated they're not going to announce what those county payments are yet, and my guess is we're not going to get— we won't know that by the time somebody might have to make a prevent plant decision, or make any planning decision. Okay, which is what USDA wants. They do not want the farmers to make a decision on what they're going to plant based on this payment. Or is it—

Chris: Or if they're going to plant as well.

Dwayne

Lowry: Well, an argument could be made that how they set it today, it is possible that since the payment does not come on the acre on unless you planted it. It is possible that somebody will factor in this payment as, uh, in comparison to their prevent plant, um, because they have on one case if they do the prevent plant they get their prevent plant payment which is be roughly $300 give or take from different operations and then if they elect to plant a crop they, uh, will get this, aid payment. My suspicion though is if the last payment was roughly $90 an acre on soybean acres and you had the assumption you were a 50/50 rotation, that's equivalent to $45 an acre on all acres.

Since the dollars this time are larger but not by a significant amount and they're incorporating more crops and they're incorporating hogs and dairy producers, and they're going to probably give corn a larger share of the pot than just a penny, like I've heard up to 4 or 5 cents for their calculation. I'm going to go under the assumption the overall payment per acre is not going to be much different than the last one. And so if it was $90 an acre on all bean acres in your 50/50 rotation, it's a $45 payment overall. If it's a $45 payment overall, and you're only guaranteed a third of it up front, that's $15.

It would seem to me that this is not going to have a large influence on whether somebody chooses to prevent plant for all the reasons he would choose prevent plant, or whether he would look at the prevent plant and say, maybe I can make a little bit more money if I go ahead and, and plant a crop, whether that's beans or corn after the planting date or whatever, because all he's really guaranteed then would be $15 an acre. He might get 45, but he's not guaranteed that. So on my way of thinking, what was announced today, I don't think it's going to have a material impact on acreage mix, or even acreage decision. I think the decision is going to still largely be made on the merit of the prevent-plant program and how that works on your own individual farm. So you tell me, do you think that I've analyzed this incorrectly somewhere?

Chris: No, I think it sounds good. I, you know, I guess a couple things I would say looking at the PREVENT plant analysis from one county to the next, in assuming that there'll be some level of payment, right, from from this program, you know, you could put some number in there, but like you said, you know, I, I wouldn't want to just put a random number in there. So I think you got to go without plugging those numbers in and measure, measure everything without this plan initially. And then if prevent plant looks like it's the alternative, then we maybe then start pulling those other numbers in. And make sure that they don't offset what the prevent plant advantage might be giving to the farm, if that makes sense, Dwayne. Because I mean, I think each individual farm, I mean, first of all, um, needs to talk to their insurance agent.

Um, I would also say that what we do have ready now to go, and I'll just go ahead and say it here, I mean, now we've got our prevent plant and corn soybean side-by-side analysis tool ready to go out to our clients and stuff, or whoever gets this podcast. You can email us and I can send it to you. The value though of that scenario tool is to run the scenario of what you're— what you predict your— you pretty much know your cost of production, so you go in, you plug in your cost of production on each of your line items, and then You plug in a price and yield, and that gives you a, a P&L basically for that crop. Right beside it then is the prevent plant tool, which lays right beside it on the spreadsheet, and you just go in and you plug in your, your prevent plant dollars and cents.

And that's why you need to contact your insurance agent, because from one area to the next it's a little different. And then there was also a buy-up on prevent plant, so Some of the growers may have, you know, 55%, some may have 60%, and so that affects what that prevent plant payment number is. We plug that in, but a whole bunch of other stuff people are forgetting, or some people that I've spoken to already are maybe not totally realizing on prevent plant, is if you, if you PP that ground and don't consider that there's going to be some costs along the way. I mean, I had some conversations today with some growers that had prevent plant in '11, some that had it 2013, and they all told me to a tee that managing that land has some expense.

There's some herbicide costs, there's some tillage costs, you still have principal and interest payments on machinery, and so sometimes that prevent plant scenario realistically when it gets bad enough is, is just a which one is less loss, you know, is the prevent plant providing us an opportunity to mitigate some of the, some of the loss, or, you know, are we still better off to plant and go for it and still try to, to beat the prevent plant? Because when you do the prevent plant, that's a set number. When you plant, if things do change in the next couple of weeks, that does give you some opportunities that you don't have, you know, you've basically thrown in the towel and have a set number. So I think my, my comment, I'm giving you a long answer here, Dwayne, for your question, but I think it has a lot to do with each individual operation.

And that's why I'm advocating, you know, sit down and really run the numbers side by side. And then, you know, we're not here to give recommendations one way or the other on any of this, but we are here to bring perspective, as we've said in the previous podcasts, and What we want to do is make sure that everybody that we work with in our client base looks at this from an analytical perspective and then makes their own objective decision, and then we'll help. I mean, we'll help you think through it, but, but each farmer has to make that, that decision. And, and really realistically, to fill out the sheet, all you really need is contacting your insurance agent and figuring out what your prevent plant dollars and cents are for corn and soybeans, and, and then you can go ahead and fill it out.

Dwayne

Lowry: Does that— have you run through an example with anybody, uh, or some hypotheticals even to, to see how that works out?

Chris: Yeah, in testing I did because I hadn't used the tool since 2013.

Dwayne

Lowry: But if, if I'm thinking this correctly, if somebody had 190 APH and it was $4 a bushel and they had 85% coverage, that's $646 worth of coverage. And then if assuming they got the regular prevent plant, that's 55% payout, that's $355 an acre. Correct. Okay, so if you, if you choose not to do the prevent plant but you choose to plant a crop, if you choose to plant corn but after the, the date, but you just choose to plant the corn, um, you're, you're just, you're just assuming that you're going to get enough crop and enough after your cost, you're going to get enough yield and price will work out that'll be, it'll net out more than the prevent plant. But if you were to choose soybeans, doesn't, doesn't the crop insurance premium come into play again there too?

Chris: Yeah, on the soy, you mean on soybeans the same as the corn scenario you just gave? Yeah, yeah, it's, it's essentially the same process. And the one other thing that I think we need—

Dwayne

Lowry: how many— what, what's the guy going to make that decision on? I mean, it's going to be based on what he thinks he can grow by planting a crop.

Chris: Yeah, that's what we do with the tool. We plug— you plug in your, uh, prospective yield and your whatever you think the price is and then run scenarios. I mean, you know, you lower the yield and increase the price and vice versa, you know.

Dwayne

Lowry: I mean, Let me ask this, let me ask you this, Chris, between your own thoughts for if it was your operation or on input from other producers. If they choose to plant and not take the prevent plant, there is a certain element of risk that they take. Okay. How many dollars extra revenue do they have to feel they're netting beyond the prevent plant for them to be willing to take that risk? I mean, if it was everything was equal, you have one answer, but if they— do they need $20 an acre? Do they need $50? They know they want $75 an acre to take that risk. What, what, what's— what do you think the thought process is there?

Chris: I think that really depends on the individual grower because there are some consequences to not having a crop there. You do have to plant something on that crop or it kind of screws the ground up, for one thing. You know, it just depends on the individual. I mean, because you're making a subjective decision at that point. I mean, you can run the numbers all day and have information overload, but at a certain point an executive decision has to be made with not all the information. Although the scenario, running the scenarios is critically important in my opinion because it gives you a better perspective of the odds one way or it gives you a better picture of what can happen if Plan A works, Plan B or Plan C, you know, whichever thing happens.

But one other thing though too, I do want to point out that, and I would encourage everybody listening to this that to directly talk to your insurance agent about this so that it's clearly understood. But once you get past the last planning date, so there's a final planning date that the insurance company has for each area and I won't, throw that out there because it varies a little bit by area. But, and again, that's why you talk to your own agent. But, you know, what is that final planting date? And then once that final planting date is— you hit it, then every day you plant after that, your crop insurance goes down a percent each day, um, down to 75%, or, you know, basically it takes 25% of your whatever your insurance is away. From your, your guarantee. So if you choose to plant, that's, that's another scenario.

One other scenario though, Dwayne, which ties into the markets a little bit, is on soybeans. Roll over to soybeans for a second. Another thing there too to keep in mind for perspective is, you know, we have, what is it, $9.66 as a soybean guarantee. And I also have a tool for this that you run the numbers and you got to consider, okay, what happens if there are more soybean acres planted because of delayed planting, and people do shift, and, and the price of soybeans, you know, really gets hammered in the fall. And the fall price comes in, say, and I ran a few scenarios this morning just to look, if the price comes in sub-$8, and for most people around their APH, they're in the money collecting on crop insurance on revenue. So You know, a lot of times we tend to think about crop insurance as a yield protection, but it's technically revenue protection.

So price enters into the equation at a later date too. And so that's another thing that I think a lot of people need to keep in mind when you run that prevent plant scenario versus planting. What are the implications later on if the market ebb and flows one way or the other? Because, because it is a revenue policy. So I don't know if that, that throws about 5 more things into the equation, Dwayne, but—

Dwayne

Lowry: Well, let's take a step back here and say that the prevent plant is complicated, varies from farm to farm, region to region, plus everybody will make their own decision as to whether they want to take some risk and plant a crop later than desired, assuming they might get less yield, but they also don't have to deal with planting something else on those crops that don't get planted, uh, just to, to manage them. So let's just set aside the prevent plant, uh, mechanics for a minute, and let's go back to today's press conference and today's information from USDA on this payment. This payment is, is the focus in, in the marketplace today, uh, and the, the, the trade and everybody is trying to figure out was there anything done in today's aid package announcement that is going to encourage farmers to either plant instead of doing prevent plant or to plant one crop or the other?

USDA went out of their way even in today's press conference to indicate that they do not want to distort planning decisions and the payment per acre on this one that they announced today is going to be based on, uh, the same, uh, dollars per acre on all the acres within a county, regardless if you planted, uh, um, all corn or all beans or, or, uh, chickpeas or whatever it happened to be. That's how I understand it. So if you, if you planted 100% corn and somebody else planted 50% beans, I think you're going to walk out of there with the same payment per acre within that county. But the difference is, if a county is 50/50, it's going to have a bigger negative impact from trade because of its larger concentration of bean acres than if you got a county that's 70% corn and 30% beans. That's where I think that— that's where I think the difference is.

Chris: Yeah. And I think that's That's exactly though, Duane, where I think we're going to need to, um, why we run the numbers, because what one county's decision might be different than another, that might be a different scenario one county away. I mean, where we're at here in Iowa, you go two counties from here to the east, it's basically all corn. And we're probably a 50-50, you know, pretty close to that in our county, or as you go west, it's for sure 50-50. So like you said, you know, in the eastern part of Iowa, for example, the far eastern part, they're pretty much all corn. Their payment's going to be pretty low relative to just maybe a couple counties back to the west.

Dwayne

Lowry: But if, if the farm program payment last year was, you know, not too much less money than what the total payment is now, but now it's going to be disseminated over all acres instead of just soybean acres, Aren't we looking at something similar in that $40 to $50 total range per acre? Isn't that what it's really going to be? Because if it was $90 an acre on your soybeans only and you had a 50/50 rotation, that's $45 on all acres. I'm guessing the payment on all acres on a per acre basis, regardless of what crop you grew, is going to fall somewhere in that $40 to $50 an acre payment range. And so— if you had, to the extent that it impacts your prevent-plant decision, if you have 20% of your acres that you can't get planted, that, that 20% is, is going to be $8 an acre. So I really don't see how today's announcement is going to have any material impact on what the producer decides.

In terms of prevent plant or switch from corn to beans or plant corn after the prevent plant date because he thinks that's better than prevent plant. I think the only thing that's important from a market perspective right now is only the impact of the aid payment that's announced today and how that's going to impact decisions. And I don't think it's going to have a large impact. I guess that's my, that's my bottom line. That's kind of where I'm focused at right now. I don't think it has a large impact.

Chris: Yeah. And I think you're talking more, probably more macro, and I'm talking more micro. I'm saying, at the farm gate, I want to do this, this and this and think about it this way. And based on what you're saying, it makes me feel like, well, you know, I for sure don't want to even throw that number into the equation until it's an absolute.

Dwayne

Lowry: No, that's the case, then that's the case. We're back to the same place we were 48 hours ago. And that was that the farmer will make his decision on prevent plant based on his own circumstances. And it won't have anything to do with the government payment. And I think that's still where we are today. But I think the marketplace is looking at it from the standpoint that if the government is making this payment per acre and requires you to have the crop planted in order to get it, they think that's going to cause you to plant something to get this payment. I'm saying that the payment isn't going to be enough of an influence to facilitate that decision if the prevent plant economics don't already facilitate that position.

Chris: That payment's not going to make it stop raining either. So, you know, I mean, that's—

Dwayne

Lowry: at the end of the day, the most important thing is, are we going to get a 5-day window to get something planted here? Right.

Chris: You know, I mean, that's the thing. Some of these guys are still sitting in saturated mud and the forecast doesn't look any better and you get past— again, you get past that, that date, then you really got to run the numbers. And back to answering your question on have I ran some numbers, one of them that I ran did show a fairly reasonable advantage to the prevent plant decision.

Dwayne

Lowry: And so I said, no, what was more specifically what— when you say a fairly reasonable, what is that? Give me a—

Chris: it was like, it was like $50 an acre better for prevent plant versus, you know, versus the yield that the individual had in there. And that was on corn. The soybean one was a little different. It was a little closer, but the corn one, and mainly because of where the individual wanted the corn yield at, and we were using, I think we used 420 for an average price. So that was being pretty optimistic on the price, maybe, you know.

Dwayne

Lowry: You were able to use $420 on a price and you still came up with a $50 an acre advantage for pre-vent plant?

Chris: In his individual case we did, but, uh, well, that's true.

Dwayne

Lowry: If that's true, then, uh, then today's— and for that individual, I find it hard to believe that a, uh, roughly $40 to $50 payment from the aid package is going to be enough for him to not choose the prevent plant, I guess.

Chris: Probably not, because, um, you know, and again, that's where I said, you know, you really got to look at this scenario. I mean, the basis is different in every area, so your price, you know, scenario that you plug into it, your price range you use in the scenario planning is a little different. And then obviously the yield is quite a bit different relative to, you know, this individual had a pretty high APH and bought up on the policy. So the number he gave me was a pretty decent number. He was pushing in the high 3s, I think, or yeah, he was in the high 3s, just looking at my notes here. And so, you know, yeah, there was a definite advantage, but he had his yield significantly lower than, than his APH too. And it was just mainly because the— so saturated and really getting close to the date now of prevent plant.

And, you know, and then like I've been told from a grower we work pretty closely with in South Dakota that said too, in his area, a lot of those guys, you know, they're— you know, that you take the southeast corner of the state of South Dakota, you know, about 60% of the corn production comes from that region of the state. And what he's telling me, and he does a lot of tiling and works in that area pretty extensively, and in his comments were, you know, guys are going out and getting stuck in the side hills when it looks dry, and they're just giving up. I mean, they're going to wreck equipment and stuff. And so part of it is just, you know, the quality and how much do you want to screw your ground up too.

There's some agronomic reasons and So I guess I would buy into what you're saying from a macro perspective, and I'm just coming at it more from a, from a micro perspective, I guess, from each grower. But I get what you're saying, and I buy into it.

Dwayne

Lowry: All right, let me summarize what we've talked about in terms of, in relationship to today's announcement of an aid package from USDA. Number one part of the summary would be everybody's prevent plant calculation is going to be somewhat different from a facts and an actual pure dollars and cents calculation. It's also going to be somewhat different based on each person's individual feeling about having that field sit empty, okay. So, and I don't think, I don't think anything happened today's aid package is going to have a material impact on that prevent plant decision. The other thing that I would summarize is If you did a calculation of a $1.65 payment last year, and, and that was only on your soybean acres and you were 50/50, that translated to about a $45 an acre payment on all your acres last year.

I'm going on the assumption by the time you bring in hog producers, dairy producers, all the other crops, and now you divide it on all acres in the county, I'm going to make an assumption the overall payment per acre probably isn't going to be materially materially different than what they did last year if you did last year's payment on all your acres and didn't look at it from the perspective of just soybean acres. So I'm going under the assumption you're going to have $45 to $50 in payment. The other, the last thing is that I would summarize, you're only guaranteed the first payment, and assuming they break these into thirds, you're guaranteed $15, $17, $18 payment, and the other second and third payment will depend whether or not they get a trade deal with China. And at this point, who has any idea how that's going to work out?

So when I, when I throw all this together, and I try to tie it into an influence on the market, or how the market should think, I find myself focused on the roughly $45 to $50 expected payment on all acres. I find myself focused on the $15 to $18 that I'm going to be guaranteed to get. And I don't have any guarantee on the rest of it, and I find myself thinking that amount of payment, that $15 to $18 that I'm assured, probably isn't going to have a lot of influence on whether I choose prevent plant or I choose whatever I was going to do otherwise. And so I think from a market perspective, I don't think today's, uh, announcement from USDA has any material impact on what final acreage will be, because I don't think it will materially cause people to, to wait an extra week to make sure he can get it planted. He'll go ahead and plant.

I don't think he'll have a, I don't think it'll have a material impact. He's going to make that decision based on the same criteria that you accurately and detailed out, that they're going to go through that process to make that decision. I just don't think today's payment announcement from USDA is going to have a material impact on that farmer's decision. And I think from a market perspective, that's the important thing to figure out. Is it or is it not going to have a material impact? And my vote is it's not.

Chris: Okay, well, I— we got that. That's, that's good, Dwayne. I think a couple of things here, and tell me what your thoughts are. But first of all, I want to thank all the listeners for being here on this podcast. We wanted to kind of touch on, on the press release and kind of some of the comments from the administration on kind of what's happening, what's going on. And there'll be a lot more probably conversation and discussion on this, how it affects farmer decisions at the farm gate and also how it affects the big picture on the marketing side of things. And, and I guess to just want to point out, you know, this is just trying to bring perspective and to all of you. I'm not really making any recommendations.

We all want to make sure everybody's running their own numbers and making their executive decisions, but we want to bring perspective and be there with that information to kind of help you think through it. Dwayne, what are we thinking? You know, maybe we do a little conversation probably, you know, late in the weekend. We got a long weekend coming up. We hope everybody's safe and can enjoy some time with family and stuff.

Dwayne

Lowry: What I'm thinking we try to do something midday Monday or Monday afternoon or something like that. That'll give us a chance to see what the latest weather is. Any other developments, any clarity on this farm program that we don't currently have. And I think if we do something before that, it could easily be outdated by the latest weather forecast on Monday afternoon.

Chris: Right. That sounds good. So Well, any last things I didn't think of, Dwayne, or anything else real quick? Otherwise, I think we can pretty much wrap it up.

Dwayne

Lowry: Yeah, I think that, uh, you know, uh, we're dealing with something that's still a little unknown. The USDA did not announce the exact payments per county, and they indicated they weren't going to announce that anytime soon. So I think, uh, producers are going to go to that, uh, make their final planning decisions not knowing a whole lot more than what we've already given them. And we're not even sure we're 100% right on what we have given.

Chris: Right, right. Well, hey, Duane, thanks. It was great having a conversation with you. And, you know, if people want to reach out to either you by email or phone or myself by email or phone, please do that. The other thing we would throw out there is please remember to let us know if there's a topic you want us to have a conversation on or if you have specific questions or whatever you'd like us to discuss. We'd be more than happy to do that. And I guess with that, thanks a lot for joining us on the Ag View Pitch, and we will look forward to talking to you the next time.

Dwayne

Lowry: Thanks a lot. Thanks everybody, have a great weekend.