Fear, markets, and opportunities

Chris: Welcome everybody to another episode of the Ag View Pitch, and we're starting another new week. We're in the middle of March and we're dealing with all kinds of craziness in the markets and things affecting the stock market and all kinds of things. Dwayne, you're here and hopefully we can have a good conversation about some kind of major challenges we're seeing in the market. What's cooking today?

Duane: Well, I think everybody's anxious to find the point where fear has been maxed out in terms of market reaction. Friday's— back up a second. We know, we talked about before that the ultimate endgame from this was going to be a broad series of stimulus packages, both from the US Federal Reserve, all central banks, and government and their fiscal policies, and we've started to see that unfold. Treasury Secretary Mnuchin describes what's been done so far as only being the second inning, and he was only talking about economic stimulus packages when he was referring to that second inning. And I think that's a fair picture of the landscape about what's in front of us. I think the stock market being up on Friday helps to calm fears to some extent. We're going to come in here on Sunday night and Asian equity markets are going to be firm. Europe's going to be firm.

Asia sees themselves on the downhill side of this and they're actively trying to get everybody back to work, ramp up factories, etc. Europe's in panic mode, as you would expect out of Europe. And the US is in panic mode without the statistics really to back up the justification for the panic. But that doesn't matter either. But I would imagine that everybody's trying to figure out what is the point where all this craziness is factored in, and when and if will the markets ever reach a point where statistics are more important than, than the panic. You know, right now you got Everybody, everything closing down, and if you don't close down, you're gonna be labeled as not caring about your employees or your, your people that are gathered with you or whatever it may be. And that's true whether you're a business or you're somebody that's got a wedding coming up or anywhere along this gamut.

So I— it's, it's just crazy and beyond reason as far as I'm concerned.

Chris: Yeah, it's— there's a lot there's obviously a tremendous amount of fear. And I guess, you know, one could say that, you know, if you look at what Europe has gone through, and prior to that, you know, China and some of the other countries and stuff, it's probably— the fear is probably gonna continue even further yet, wouldn't you think, in the next week or two before the US gets to that point? What's your thought?

Duane: Jeepers, it seems to me like if this— if we haven't already experienced a crescendo in fear, when people are scared to death they're gonna run out of toilet paper. I'm not exactly sure what you would need for an indicator to suggest that you've already reached a crazy stupid level. I mean, gosh sakes, you know, you've got 5 states in the US that as of today have cases, not deaths, just cases that ring in the triple digits. You have 27 states that have cases ringing the double digits. You got 18 states that have cases that are only in the single digit. I recognize and understand the case numbers are going to go up, but what, what is left for you, for you to panic on? I mean, my wife is a second grade teacher. She used to be a first or a kindergarten teacher.

And, you know, is there a, is there a more exposed petri dish people are exposed to on an annual basis than than an elementary classroom? I don't think so. And so I just really struggle with this. You know, they talked about, I saw headlines where the hospitals were going to close, or not close, but not do elective surgeries because they're afraid they're gonna run out of space. But you know, what we're talking about cases, many of these cases end up going home to deal with it and may never end up in the hospital. And yet every year you have hundreds of thousands of hospital cases that are flu-related. You have deaths that are flu-related every year, according to the CDC, that far exceed any death toll that we've had so far globally, and certainly what we'll have just inside the US. So I, I, I just don't think the statistics are here to back this up.

But, um, in, in terms of marketplace, We are trying to figure out where is that point where the panic has peaked. And you go back to Friday's price action, we already mentioned the Dow traded in the negative territory. This is after a horrendously down week. And, you know, we ended up with 2,000 points higher. And according to President Trump, that's the highest one-day gain we had. So, or probably, actually, it's probably the highest gain we had on a percentage basis. And, uh, um, so I would hope that's some level of stabilization. You had the bean market panic in the double-digit losses Thursday night only to rally like 27 cents, um, at one point from those lows during the day on Friday. Yes, beans came down and closed low range, but the whole process is some sort of a stabilization factor. You had wheat close higher, you had corn close unchanged. You had crude oil close higher.

And as far as I'm concerned, the crude oil is more of a threat to us than the coronavirus is in terms of market structure, price structure of commodities in general, and the overall economic well-being of the world. So I'm more concerned about that than I am the coronavirus. So in the effort to find that point where we've maxed out on, on fear, I would think that the toilet paper example and Friday's price action and the Dow movement on Friday and all of the stimulus and fiscal policies that are in the works and being talked about and moving down the pipeline and the fact that China, South Korea are definitely past the worst of it by a long shot and, you know, on the road to some sort of recovery. And the fact that most everything in the US is now closed in some fashion or another, and I guess I'm of the opinion that we've already experienced that worst amount of fear.

Chris: Yeah, and I was talking to you right before we started the conversation recording here for just a minute and was mentioning, you know, I'm writing a column right now, and and titled it Black Swan Turbulence. And one of the things that I'm mentioning in the column is, you know, these black swans that occur typically create some pretty big opportunities. And so one of them I'm going to throw out there, then I'm going to ask you a question. But to me, it looks like as a producer and someone who works with a lot of growers across the US and Canada, and specifically in the US, is that, you know, if you look at what interest rates did with the latest reduction and the potential for, you know, taking interest rates down further yet significantly is going to create some huge opportunities, I think, for some refinance, you know, refinancing, restructure.

We've got a lot of clients that could utilize that opportunity. And, you know, over a period of 20 years, if you can restructure some of the intermediate and long-term debt at this point, you know, in the next month or two, it's going to create some huge economic opportunities for us as producers, I guess. Do you have any comments on that as, as I just described it? And then furthering the question out, what do you see in the next, you know, foreseeable future in terms of opportunities that this is probably going to create, you know, in the in the commodity markets?

Duane: I'm aware of refinancing, I'm aware of banks contacting producers saying they can do it, and they're aggressively trying to get producers to focus on it. I'm aware of producers trying to use that refinancing not only to, to get lower interest rates, but also to stretch out their amortization schedule to lower their overall payments. My thoughts on that Um, I would encourage every single producer to try to take advantage of that, uh, both for the, uh, interest rate savings, uh, but I would also consider, um, changing your amortization schedule, um, to try to, uh, put yourself in the best position to handle any adversity if it were to stick around. Just because you schedule that out over a longer period of months doesn't mean you can't pay it back. On a schedule based on a lower amount. It just means you're more in control about what that payment will be.

So I think that's an important thing to do. It's also a situation that, you know, you really have no downside to doing that. If interest rates go up, you know, you've helped yourself. If interest rates go down, you can do it all over again. So I think that's a great point. You're correct that these things create opportunities. As far as the impact on the commodity markets, All of these stimulus things, all of what the central bank is going to do, it is all logs of inflation being thrown on a fire. Maybe that fire is just little embers and they're trying to get started, but the Fed wants inflation, and all of these things will add to that opportunity for inflation. But, you know, we got to get the fire started and going. But once it goes, that's— that stuff will stay there and continue to fuel inflation.

And most likely these central banks will continue to leave rates low for a longer period of time than what they need to because they all want inflation. And in the end, all of this is going to be very supportive to commodity prices. So I'm trying to, to have people look past the fear and the panic and the discouragement of what you're dealing with now and look at what is, is most likely to come down the road. All this coronavirus, to the extent that it even has an influence, is going to be a short-lived influence. The crude oil, if you were to stay at $30 less crude oil, that would be a problem. And that goes completely against what the Fed wants. So I think there's an awful lot of pressure coming to bear against Russia to reconsider their stance and possibly go, come to a different agreement with Saudi Arabia.

To me, I am much more interested in how that unfolds through the rest of the month than I am anything to do with coronavirus.

Chris: So talk a little bit about short-term then as well, Duane, as far as over the course of the next couple of weeks, you know, both with that, you know, what you're talking about with, with what happens with crude prices and those kind of things, the impact on that, how that influences things, and, you know, the what to do, you know, not that we're going to sit here and make recommendations on absolutely what we as producers need to be doing. But at the same time, you know, there are some, some things we need to be cognizant of, right? You know, if the prices start to go up, I'm just going to throw out, for example, you know, where basis is at right now. Basis has continually gotten a little bit stronger even in the last week now from what we've seen, um, just on price pressure probably alone.

So, you know, what's your thought there on keeping an eye on basis and, you know, as prices at some point will recover, you know, what kind of impact do you think that'll have, and what kind of strategy should we be considering?

Duane: Well, again, the most important thing— we're in search of where is that maximum fear been digested by the marketplace. I think and hope that we've already seen that point. I guess we won't know until we see, you know, a few days' price action, but I'm hopeful that's the case. It was interesting that in the Weekly Commitment of Traders report data that the large funds are short corn, but they covered shorts, and yet the market was down anyway. They're short soybeans, but they reduced the amount of shorts, but yet the market was down anyway. That implies to me that one of two things probably is happening. Even the bears and shorts aren't confident and comfortable in their position and they're not trying to add to it. Instead, they're looking to exit.

Yet the market goes down, which implies somebody sold it, and the only category that you're really left to assume did would be a bunch of small traders, okay? Typically, that is not the crowd that you want to be with, okay? That would be one thing. Second thing, in all my years of experience in this business, I have never, ever seen a point where you have saturation of fear and panic and joining that ends up being the right thing. It is always a mistake. So I would argue that the producer has little incentive to make sales here. He has— there are times to be a buyer, there's times to be a seller, and there's times just to cool your jets, stand on the sideline, and wait for something different. And not make any decisions because, um, making a decision is more likely to be wrong than it will be to be right. So I would just tell people to just hold off and not do anything.

In terms of basis, there are some areas that have experienced weaker corn basis during the last week, and that was driven by fear coming from the ethanol industry because of the crude oil price decline. I doubt if in the end that has much of an impact on ethanol usage, but it is one of the things that, that's out there and that has caused some basis to weaken. It also may have weakened because, um, there has been some panic producer sales in old crop corn physical stocks. And so some locations have experienced some weakness. As far as, um, what is ahead in basis I would have— I guess I would have a tendency to think that there might be an argument why basis levels could stay firm for a little bit longer, but in the same token, basis levels are very high historically, very good, and I would not talk anybody out of wanting to move their physical corn, wanting to lock in that basis.

I can understand why that might be a reasonable approach. Because my concern would be, one, that there would be some merit to having demand and usage be down, and therefore that cash market would be vulnerable. I don't really believe that, but let's just say there was merit, that would make it a risk to the basis.

I also think that if, if, if it ends up being something in the other direction where we much more rapidly get out of this and the market starts to focus on inflationary thing and, and investment capital moves into commodities and see that as an opportunity because they expect the Fed to just dump money into the system and every other central bank to dump money into the system, which is exactly what's going to happen, then in that case, you have to wonder what if there's a surprise here and the futures market outperforms expectations over the next 75 days for this and maybe some other little reasons that are on the horizon that most people aren't focused on or or they don't think about or don't give any weight to it, that too would threaten basis. So I, I have told some producers to move through their physical position, but I don't want to price it.

I want to maintain an open pricing stance in the future. But I have encouraged some people to move through on basis in the case of corn. So that kind of tells you what I'm thinking there in terms of what is ahead, actually. Again, we hope that we find stabilization. If we are able to find that stabilization, I think prices can rebound more than people think today. And I think the biggest key is whether or not Russia and Saudi Arabia walk back from the brink on this whole price war glut with crude oil. If they walk that back, then I think the opportunities on the upside are, you know, quite significant. If they don't walk that back, it's an anchor, it's a problem, it's a concern. And I'm not sure how we unfold that, but it definitely would be troubling if that remained the case. And, and Destiny said we actually had several months of sub-$30 crude oil.

If you go to long-term charts and look at it, when we've had these events, they were— they tended to be short-lived. I think a very good correlation here And for a moment, I want to set aside what Russia and Saudi Arabia did last on the 7th of March. But if you go back to 2008, the stock market was declining for other reasons before we ever got a panic. It was well under its weight. It was a few to several months later that the crude oil started to weaken with it. And then ultimately they all end up cratering together. But when, when we got down there in a in the end of 2008, early 2009, the economic outlook was very troubling and it was expected to be troubling for an extended period of time.

Now we have an economic outlook that absent coronavirus, all this stuff might end up being short-lived and the foundational part of the economy is such that we don't think we're going to have a prolonged period of weakness. So that economy can recover. But what happened in crude oil prices after the end of 2008, from there forward, and what happened in agri— agriculture prices, basically in parallel at the same time, was that the impact of the Fed and all central banks dumping money into the system, lowering interest rates, you know, turning on the printing presses, all of that was very supportive to energy prices and it was supportive to agriculture. Now, people will look at the agriculture and say, well, there are other factors, Case. You know, okay, granted, all that's true.

But if you look at the energy sector, they can't say energy prices rallied because of aggressive demand and global consumption and expanding robust economic activity. The energy prices went up almost solely because of the amount of investment capital that was being pumped into the system in a manner that I've already described. I think the outcome will be exactly the same. Now, the difference here is this whole thing with Saudi Arabia and Russia. I, I believe it's very possible that this can get walked back, but that is the one wild card. And even when they have had price wars that were— they were trying to take out the shale producers, that still ended up being a relatively short period of time because the reality is Russia and Saudi Arabia can't function well without self-financial ruin under those values either. They have budgets that far exceed what $30 crude oil is, is all about.

So they themselves can't last on that for very long. So I am hopeful and optimistic that down the road all this activity that we've already talked about will be very inflationary. I'm also hopeful hopeful that either the amount of time we spend down here with crude oil ultimately proves to be short-lived, or even better yet, I hope that by the end of the month Russia and Saudi Arabia have agreed to something different than an all-out price war.

Chris: Yeah, it's hard to believe, as you said, you know, that they can tolerate these low prices for an extended period of time anyway with, with what their production costs are. You know, and, and the losses that they're incurring at those levels, you know, over time got to be some big numbers.

Duane: It's big numbers. Even, even at $50 crude, they're, they're not able to cover their, their budgets. Okay. So for the way the tax structure is set up with crude oil production in Russia, they can produce oil, price goes down, and the price goes down, their tax bill also goes down. But then it gets to a point where the tax revenue is down enough, long enough, suddenly that impacts President Putin, their social spending programs, their defense spending programs, and suddenly that becomes not tolerable either. So, you know, they're kidding themselves if they think they can stay there long enough. Can they stay there long enough to take some U.S. shale out of production? Sure they can. But are they going to stay there long enough to keep US shale out of production? No, because that would, that would be their own demise as well.

And if they want to compare, you know, longevity and staying power of financial systems of us or against Russia or Saudi Arabia, it's not even close. We outlast them both. And then the last component of this is, which is actually a bigger component and a more real thing, is China's economy. China, while they're the largest importer of energy on the planet, they don't want sub-$30 energy for any length of time either, because their economy is very dependent upon exports. And if we have sub-$30 energy prices, we are going to have struggling global economic activity. And China is in a dire financial situation. They need to ramp up production. They need to ramp up exports, and they can't do that if the global economy is having problems. And so they also need to get rid of these US tariffs. They can't get that unless they honor Phase 1.

They are trapped into a corner, and that's a very significant deal. And I think that's another reason why all the financial power horses behind the scenes are going to be pushing Russia and Saudi Arabia to come to a different conclusion than what they're trying to tell us that they're going to do. That's, that's my opinion.

Chris: Interesting, and it's definitely a lot to watch. And as you said, I think you've convinced me now that that's probably a bigger deal for the commodities than what the coronavirus is, and probably some of the listeners as well, although the media is going to continue to keep that in front of our faces for the extended period of time, probably.

Duane: I can assure you this about the media, if you wanted me to get on a rant, and I'm not gonna because We're already too far into this. But the 24/7 media system that we have, which they have a profit incentive to increase hype and increase interest, I mean, that's how they survive. And I don't have any problem against the profit aspect of the media. But it is not a friend of our public when you look at it in totality. It's not a good thing. I mean, I think the days back when I was a kid and you had 30 Minutes of Walter Cronkite Conkite, 30 minutes of your local TV station. And as far as we were concerned, the rest of the day, the most important part of the day and the most important part of the program was Dr. Max and Mambo, you know.

And I think that we'd all be better off if we had 30 minutes access to national news so that they could give us some real news as opposed to 24/7 of basically propaganda, whether it's from the left or the right. Both sides are guilty of it. And they just generate time after time after time stuff that is just trying to fuel emotions, and I don't think that's good for us. And as individuals, we may not be able to control that, but we certainly have control over the mute button. We certainly have control over the channel button. We can certainly walk away and choose not to be influenced. And I guess that would— if we were at the point in this broadcast that maybe we are with my last— what's that, my last point?

My last point is hit the mute button, turn it off, go for a walk, enjoy the outside, work out, do anything, but, but try to not get caught up in the spiral of the, the 24/7 propaganda machine.

Chris: Well, and that includes, you know, really social media is driving that as well. So it's not just the media, but it's the social media aspect of it too, wouldn't you say?

Duane: Well, the social media is even worse. I'm assuming our listeners are all smart enough. They've already tuned that one out. I'm hoping. I mean, that's also awful as well. There's no value in that. And, you know, we are designed and built to have a sound mind and not a spirit of fear. And if there's ever a time to kind of take those words to heart and use your own efforts to embrace that by your own— by how you alter your own actions and habits, I would think now is a very good time to do it.

Chris: Well, in your experience, how often over the 40 years of being involved in the markets, how often has fear worked for you in decision-making? Never. Okay, I think that, that answers a good question then. Good, a good, a good place to probably wrap up. Uh, any, any last final thought? I'm giving you one, I'm giving you one minute for a last final thought as we go into the new week.

Duane: I would summarize everything I've said by encouraging people to take a step back, not live by fear, look for the opportunities that history says in markets and investing and business opportunities. These situations always create opportunities. So you can either choose to dwell in the uncertainty, the pain, the frustration, and the fear, and constantly be trolling through your Twitter feeds and Facebook feeds and constantly looking at 24/7 when you know full well they're not going to tell you anything they haven't been telling you for the last 24 hours. Just, I would encourage you to get out of that system because it's a trap. It's not doing you any good whatsoever. And if you actually get out of that and then 48 hours or 3 days later, whatever it is, you come back and and then you want to, to be in search of news or even the Twitter feeds or whatever it is, guess what?

You will have a different discerning spirit when you are listening or reading that material. And some of the stuff that you got caught up in before, you will realize, well, that's kind of stupid, or that doesn't make any sense. But you've got to have a break from all that, and you've got to step away from it and clear your mind. Otherwise This is a trap and there's nothing healthy about it. And I mean those comments on every single level that I could try to express them, whether, whether it was business, whether it was markets, investing, or whether it was on a spiritual level. I'm telling you, there's nothing valuable in to your life and well-being by getting caught up in all this stuff that fuels this fear.

Chris: Great advice going into a new week, Duane. Appreciate that. And then, and maybe next week we can start getting into a little different topic. You know, we're gonna be heading towards the USDA report, and, and we talk a little bit about acres and some of that stuff as we head into the next week. And appreciate all your comments and conversation today, Duane. Thanks.

Duane: You're welcome, Chris. And you're right, the acreage report coming up is, is something we should be thinking about. I'm not sure anybody has a really solid explanation about what that will be. There's a certain default setting that we're going to be fearful of some large soybean— or excuse me, some corn acres. But I really ask all producers to ask themselves and, and think about what other producers are doing. And, and that will— the one element that seems that it's going to have to be addressed, or else we're going to— if market doesn't address the situation it would seem to me that we're gonna have— the element of surprise will be that we're gonna have very small soybean acres, and that might be a legitimate storyline. But, you know, again, we'll talk about that another week.

But I can't help but think we haven't done anything in the last week to inspire people to plant soybeans.

Chris: That's for sure. And I think we're gonna have plenty to talk about the next few weeks as we get towards springtime here. So thanks, Dwayne, and we will look forward to chatting to you again next time.

Duane: All right, thanks, Chris.

Chris: You bet. And thanks everybody for listening. We appreciate it, and we will catch you again next time on the Ag View Pitch.

Narrator: Thanks again for listening, everyone. If you would like to hear more content from Ag View Solutions, listen to our other podcasts such as Dad's Wisdom or our current Harvest Series. Ag View Solutions works as an integral part of operations like yours, side by side for farm profit management, business collaboration and structuring, facilitating industry-leading peer groups, and coaching and consulting tailored to your farm's unique needs. We know that no two farms are the same, and we are here to help make your farm be the best it can be. You can learn more at agviewsolutions.com, email us at agviewpitch@gmail.com, or call Chris Barron at 319-533-5703. We really look forward to talking with you.