Memorial Day 2020: Monday night market outlook

Chris: Welcome everybody to another episode of the Ag View Pitch, and we are starting a new short week coming off Memorial Day. We got Chris Barron and Duane Lowery. How's it going, Duane?

Duane

Lowry: Good, Chris.

Chris: How are you doing? Good. Did you have a good long weekend?

Duane

Lowry: It's been a long weekend, and weather's been fairly decent here for activities, so it's been good.

Chris: Nice. I think weather's been pretty wet in some areas, it sounds like, still. And, you know, coming off this long weekend, it's time to start thinking about markets into a new week here, I guess, coming off of Memorial Day and honoring those who have served and those who have fallen. And just want to make sure we remember the military and all they've done for us. So didn't want to throw that pitch out there. But as we move forward, Duane, you know, you talk about the military. I guess, you know, there's obviously some tension that people are starting to talk about a little bit with China and US. Let's start there. Is there anything there to be concerned about on the marketing side of things, you know, with this Phase One trade deal? Is there a possibility of any impacts there, or what are you hearing?

Duane

Lowry: Well, I guess it depends who you want to listen to. In the last few weeks, it seems like the media is constantly having a story about U.S.-China tensions, and I'm sure that they exist. If you— the most recent one is with Hong Kong and a proposed law that China wants to put on everywhere, including Hong Kong, and the protesters came out there this weekend. So that's the first time they've been out since they— since this COVID-19 situation. And that escalates concerns. But as we're recording this, which is Sunday morning— or excuse me, Monday morning— we got crude oil up 15 cents, and we got the stock index, which does trade, is up 265, the Mini Dow.

So there's no concern there, and like I said, in the last few weeks there's been a constant amount of coverage about U.S.-China tensions, but at the same time, running on parallel tracks, so to speak, has been discussions about Phase 1 and quotes from U.S. officials and Chinese officials, and none of this tension has spilled over into a direct conversation regarding Phase 1. And throughout these— all these tensions and these articles about increasing tensions, we've had some purchases of China for corn and for beans, and the beans are certainly lagging where we want them to be, but if you look at global pricing right now, U.S. is the cheapest priced origin versus South American origin. Brazil's also going through some major problems with dealing with COVID-19. So I can't point to a direct relationship that's been harmed because of these tensions. I can point to U.S.

soybean sales to China as lagging where we want them to be, but you can't necessarily say for certain that it's due to any type of tensions. Anything else. So far they've been buying South American supplies and they've been buying it at record levels. So their demand obviously is there. And to be honest with you, I don't know if the tensions between the US and China are a direct threat to our potential to sell agricultural commodities to them or not. All I can say is that so far you can't point to anything and say for certain that that is— that there is a direct correlation to that. And so I don't know what to say beyond that. I can say that during all these tensions that we've been having and all the articles that have been written in the, in the US media about it, market action hasn't responded in a direct way.

I mean, corn at current levels where we first got to these levels on April 21st, and right now we're 3/4 of a cent higher than we were on April 21st. And if you do the same exercise with beans, you could say that the first time we got to these prices in beans was on the 16th of March, and right now we're 3 cents higher than we closed on the 16th of March. And most of the time from that point to till now has been in a relatively narrow trading range, especially the last 30 or 40 days of trade. And so we've absorbed a lot of negative— negativity. We've absorbed some of the U.S.-China trade tensions, and you can't point to a market that's actually got a clear response to that.

Now maybe, maybe that's going to be something that happens, you know, when we open up here tonight on Monday night, but again, markets that you look to for some guidance that that is creating a problem for trade would be the U.S. stock index. And like I said, on the— the Mini Dow is now up 274 points. Crude oil, which is another place you look to for— to measure those tensions, is now up 23 points. And if you go to Asian stock markets, which were open today, and that— which is another gauge of how important is U.S.-China trade tensions to economic activity, or do they even exist? Japan stock market was up, other Asian markets were up. So that's a long answer, but at the end of that long answer is a, is a statement that so far we can't point to anything pointing to this being a negative influence.

And we look at the markets that are open now before we actually open the grain trade tonight, you don't see signs of this tension spilling into the marketplace. So it's a factor, it's certainly something on everyone's minds, but you can't see the price action that elevates that concern into a market. And maybe, maybe it has to do with the fact that prices are already so cheap that maybe it's factored in so much negativity that, you know, how much more does it matter? So maybe that's the answer.

Chris: And it's probably one of those topics that we're going to have to continue to watch. It's a moving target, as you were saying offline on another topic. You know, it's one of those things you have to keep an eye on because what we think one day and what happens the next could be two different things too. Exactly. So, um, on— so we've talked about basis the last 5 weeks. So it's kind of, you know, one of those topics on, on corn and soybeans for that matter. Anything you're seeing there different than what we've talked about last 5 weeks on that? Anything to watch? Anything moving that we need to be aware of?

Duane

Lowry: Probably not anything too different than what we talked about, but under a microscope, I would say the last week or so there has been some areas that have seen an improvement in basis, and those areas are the areas that maybe were not the best basis levels, and the areas that were the best basis levels, they've kind of leveled off is how I would describe it. In the same token, um, and maybe the— maybe there's been a little bit of a firm tone to it, um, which I think is due to the fact that it doesn't appear to be a lot of grain moving at the present time. But having said that, almost every conversation with a farmer that I have talks about large old crop inventory especially on corn. I'm not sure that's true in beans, but on corn. And if they don't talk about themselves having it, they perceive that their neighbors have a lot of it.

And so there is going to be a lot of grain to move, specifically corn, before we get to new crop, but you can't find evidence of it occurring wholesale yet. That being said, you can tell in conversations that people have lowered their price targets in which they are willing to let it go, and there has been some rationale because of the new payments, the CFAP program, that maybe that would inspire people to move and just say, "We're done with '19," and that type of thing. You sense that the movement is close and getting closer, but you don't sense that there's been a trigger that's caused it to happen. If we were to get a futures rally, I think the farmer selling would be quite steady, steadily increasing, but so far it doesn't appear that it's triggered.

Chris: Okay, we'll continue to watch that one. You know, basis again, that's a moving target, and it's by area. There's some of these areas with excess rain areas that actually had excess rain last year and not a huge production level last year, and now some of these same areas that are dealing with weather. So speaking of weather, as we go into a new week, kind of a two-part question. What are you seeing on weather? What are you hearing? Anything there?

Duane

Lowry: It seems like the market never—

Chris: like we've talked before— never seems to want to respond to wet weather. They like hot and dry to respond to a price increase. But what are you hearing on weather? What's your kind of short-term outlook for this, this week ahead, price-wise for corn and soybeans?

Duane

Lowry: Well, let's put it in the context that we got the, you know, record early planting pace, and yet because of cool temperatures along the way, crop development is now at a point where It seems like all the advantages to early plant in terms of the calendar have kind of been wasted with some cool weather developing up to this point. As far as moisture is concerned, you know, this most recent rain event probably concentrated in areas in western areas of South Dakota and North Dakota., and the heaviest concentration of acres in the eastern areas didn't get the heaviest amounts, but they still got plenty of moisture. Heavy rains in Nebraska were probably seen as unwelcome. There's probably some flooding and standing water there. You got places in Iowa that had beneficial rains.

Illinois, Indiana, and Ohio, you have areas that didn't get much rain at all, if or zero, in the last 3 days, but they have chances over the next 3 or 4 days, as do some of the western areas over the next few days. So I don't think there's a problem with weather that we can point to. Uh, it's interesting to note that, um, temperatures are warming, so hopefully plant development's going to increase here, uh, more rapidly. But it's interesting to note that we've had 2 or 3 days here where the longer-range weather maps, uh, 6 to 14 day period, did show below precip over a large percentage of the production areas that produce the U.S. corn crop, and it's not a problem at the present time, but I think it's worth noting that this— there is a trend towards drier developing, and it's something to keep on the radar, but at the present time, I don't see a problem with weather.

Chris: Yeah, that's one thing. I'll just throw the caveat in there. There are I know personally, and probably small areas, a couple county areas, so while the planning pace was good generally and all that, I would throw out there so we don't frustrate anybody, there was some pockets in Illinois that had 11 inches in a 3-day window. There was a few, but those are isolated, and that's the painful part of it, is you happen to be in a county or a 2-3 county area that catches that massive amount of rain. I know some of those clients that we work with are going to be replanting and dealing with some challenges and issues there that are definitely not fun and extremely reminiscent of last year.

To the point, talking to one of the growers, his comment was, "I learned that last year, Prevent Plant was a tool that could and should be seriously looked at." I wouldn't be surprised if we see some of those in those 2-3 county areas where they've had that massive amount of rain, some of those guys taking some of that.

Duane

Lowry: Yeah, I think you could probably add some counties in Michigan experienced the same type of problems, and maybe in the Dakotas as well.

Chris: North Dakota, South Dakota, and some pockets there too, and some bigger areas in North Dakota.

Duane

Lowry: Sadly, when you're living it in your own operation or your own county, it's awful, and it certainly is from a market perspective. They're not really responding to that concern. And, you know, in the sideways activity that we've had, it's tough to draw a connection to anything. But the weather, I don't think from a market perspective, is seen as that concerning.. But in the same token, it hasn't really been— prices haven't been declining based on weather either.

Chris: Yeah. Anything I didn't bring up, Duane? This, you know, obviously—

Duane

Lowry: Well, why don't you talk about— why don't you touch on CFAP? That's been an area of uncertainty all this past week about what the payments were going to be and how many dollars this was going to add up to. And as is typical, as time has gone by and people have dived deeper into the Federal Register to get the rules on this, we've learned that this payment is going to be less than what the original hopeful level was going to be, and in some cases, it— the program will be a disappointment, and it's certainly a conversational and argumentative discussion when you talk about how this program is structured in terms of payment for inventory as of January 15th. Of course, anybody that had their inventory leave their ownership from January 14th and prior are wondering why they're not included. So why don't you address CPAP payment a little bit?

Chris: Yeah, well, the uncertainty of it you mentioned at the beginning of your question was probably the best comment or the most important word until, you know, we see the the calculator that we will be able to go online and fill out with our own self-certified numbers. So essentially, as we understood it at the end of last week, working through some of the people that we have connections to, and hopefully everybody listening to this listened to Paul and I had a conversation on CPAPs. Specifically when it was first announced, and there's been a few changes on it since then and still probably some more guidance to come yet. But as of the end of the week, basically in a nutshell, what we knew or do know, some of the things we know as a fact is the CARES Act payment is 32 cents for corn and the CCC payment for corn is 35 cents. For soybeans, it's 45 cents and 50 cents.

There are other things in there like wheat, like wheat was 19 cents for the CARES Act and 20 cents for the CCC. And so basically, the uncertainty part of it is exactly how it's calculated. That spreadsheet supposedly is going to be available on Tuesday morning, starting Tuesday. With the payments to follow within as soon as 10 days. But I would imagine there's going to be a lot of backlog when everybody tries to get on there, probably similarly at the same time. It looks like basically what, what you're going to have to know is make sure you go back and look at what your total production number was for each of those crops, have that number handy. They're going to want to know what your inventory was as of 1/15/20, so as of the 15th of January, you're going to want to have that number.

And then what the calculator appears that it does, and I went online and I was telling you this offline, Duane, but I went online and watched the, their example video and I built a spreadsheet to match the calculations they did so that I could run through some of our own farm operations and a couple of our clients just to kind of see what the numbers look like. And basically the way their program appeared is it took that inventory number that you have as of January 15th, it takes 50% of that, okay, and let's use corn as an example, which you can go online and watch that video, it's on YouTube if you haven't already watched it, but basically what it does, it takes that 50% of the inventory that you had on hand. So let's say you had, you know, 50,000 bushels. Let's say first of all you produced 100,000 bushels.

If you had an inventory of half that, let's say the 50,000 bushels, you're going to get paid on half of that. Okay, so 25,000 bushels is the way that tool explained it. And so in that case, 32 cents on corn, that'd be $16,000 on 25,000 bushels. And it would be $17,500 for the CCC for the 35 cents. They add those two numbers together and you get paid 80% of that. So those are numbers and that's information that we were aware of as of the end of the week. So I will qualify this by saying this is subject to change because, you know, Duane, you were asking me offline, what about— basis contracts? What about, you know, deliveries that were as of the day of the 15th? It appears like there's going to be some subjectivity in there. You're going to hopefully have some guidance that will be documented so that we can all have better guidance when we go to fill that out.

It's a self-certified number. You will go in there and you'll put in your total production. I would caution people to make sure you know, you put in the real numbers, obviously. I think that's critical. And they will not pay on, you know, if you had 100,000 bushels of production and you produced, or let's say you had 75,000 on hand, they're only going to, you're only going to be able to identify 50% of that number, and then you get paid on half of that. So you would be, $50,000 would be the most you could you could show even though you had $75,000 on hand. So any other questions, or that's a lot of— that's a mouthful. That's a Duane-type answer to a short question, probably, with a long answer with lots of details.

Duane

Lowry: You know, it's— I find all that very interesting, and then the last part very troubling to think that there's such a thing called a Duane-type answer.

Chris: That's a bad thing. Yeah, it's not.

Duane

Lowry: That's a bad thing to have that reputation.

Chris: It's just that you have the, you know, you have these questions and they're not simple. You know, there's no, there's subjectivity in some of these programs. I mean, from, and I was telling you this, Duane, from the PPP to the EIDL to the CARES Act to the CCC payments and all this. And these are all still yet payments for the 2019 season. So it's going to be interesting just to see what else comes. There's going to be more stuff to come, but this is all tied to the '19 crop yet, and I would imagine when CCC gets funded again, which they will, what's next? So stay tuned, I guess, is the moral of the story.

Duane

Lowry: In the conversations from farmer to farmer, all this is very controversial. You obviously have the farmer that didn't have any inventory and he's frustrated. Then you have, and understandably so, and the party that, you know, still had inventory. Everybody's on different sides here and I'm not trying to pick sides in any way, shape, or form. But there is a situation here where if a guy made a decision that maybe based on basis he decided to put that corn in in a basis contract and he delivered it prior to January 15th, and you know, legal ownership of that corn itself, the physical commodity itself, transferred to the elevator, but he still had price risk.

He still had futures price risk, and this payment is designed, designed to protect against price declines from January through April, and yet he's, he still suffered that price decline but those bushels technically are not eligible based on how the Federal Registry reads, correct?

Chris: Yeah, right. And that's okay.

Duane

Lowry: And then what about the guy— what about the guy that did this, did it synthetically? He sold the physical and he bought it back on the board, same thing. He suffered from the price. Yeah, but he doesn't get to call that as— he doesn't get to apply those bushels. Even the guy that, uh, for maybe due to transportation reasons, logistics timing, he decided to ship his grain and put it on PLC. All right, that's the same thing. He doesn't have ownership of that technically either, but he's got full vulnerability to price. He's opted out of that. I mean, he's forced out of that being eligible. So there's a lot of reasons for people to be upset if they fall into one of those categories. And the guy that doesn't have the farm storage, you know, he's out, but he uses the elevator storage through the PLC program instead of a warehouse receipt, he's out because that's not his physical owner.

He doesn't actually own that physical commodity. So I think there's a lot of points of legitimate concern about that. And it is also possible, and we've seen it in the past, where USDA has come on and changed this later. But for right now, you know, that appears as though the way it is.

Chris: And there could be some concessions and some guidance changes that are applicable here, but as you said, you know, there's just there was just the look at this— don't shoot the messenger here— but there was just a look at who had lost, you know, so there was actual price loss and physical buried bushels and that were completely unpriced, completely unprotected, and so this was just the way of funding some of that and Again, if you look at the total dollar amounts going out to quote unquote farmers, the dollar amounts are significantly larger for, relatively speaking, to the livestock sector, probably rightfully so, and to some of the specialty crops now getting money as opposed to the non-specialty crops like corn, soybeans, wheat, where the non-specialty crops still So, you know, and like I said, this isn't the end of assistance though either.

I would argue that, you know, we're going to see a lot more assistance, but it's probably going to be more tailored eventually here to the 2020 crop. And then these crops like we have too, we do have crop insurance and we do have some of these other things. So I think part of that stuff, and I'm not discounting anything you just said, Duane, I agree wholeheartedly as a farmer. Everything you just said, but I think they're looking at it as, you know, the producers have the opportunity to buy 85% crop insurance coverage. They have some other tools available that some of the other ag sector areas don't quite have, if that makes sense.

Duane

Lowry: I'm not defending it. Yes, this podcast could become quite long if we decided to—

Chris: If we want to debate it, yeah.

Duane

Lowry: Debate and argue about that, but there are plenty of points of legitimate argument and debate that we haven't even talked about.

Chris: Oh, for sure.

Duane

Lowry: And I won't bring up, but they do exist. So who knows what that's going to be. As far as 2020 is concerned, my concern is we won't know anything about any assistance regarding the 2020 crop. Until after January of '21 because I can't, to be honest with you, see a political environment that will allow more funding to go to CCC or any new payments associated with the '20 crop prior to election. And then after the election, the outcome of the election will have a lot to say. And, you know, will there be political grudges against certain sectors that didn't vote for whoever wins, and how does that play in— is agriculture going to be a casualty in that? So it's difficult to count on specifics with the 20 crop and assistance from the government. The odds are that there will be, but it's impossible to put it on a financial balance sheet right now.

And I'm afraid it might— we might not know that at harvest time either. As far as crop insurance, yeah, they have— people have an opportunity to buy 85%, they also have the opportunity to buy 95%, and they also had opportunities to buy 70% or 75% or 80%. And some of these low-end crop insurance payments, even 85%, your starting point of getting protection is basically $3.29 December corn, and that doesn't even take into account the basis. Those crop insurance programs are great for the lending institution because they're going to have everything covered. They're not necessarily that great for a floor protection plan for the grower in terms of, you know, being viable again for the next year. So it's going to be difficult and challenging. After having said all that, it still remains possible that we could have some better marketing opportunity presented between now and harvest.

And the last thing I want to say in conjunction with that is, um, as we look ahead towards what might be there for crop insurance payments, realize that that's what prices have to be at harvest time to get these. If something comes along later and suddenly the crop insurance revenue that we think might be there isn't there, and you made sales based on those expectations that those prices, those crop revenue premiums would be there, then all of a sudden you're out again. There's not an easy path field— pathway to marketing this '22 crop that doesn't have minefields of its own with any decision you make. I mean, I've talked to producers who want to make sales in corn now because they think prices will be $2.50 or less, futures-wise at harvest time.

Well, if they make that sale and something changes and it's not all of a sudden that big revenue they expected through crop insurance is not there, that's a problem. If they wait, you know, that's a problem. There's no safe way here. To me, I'm hoping and hopeful that we will get a decent recovery bounce here of, you know, 25 or 50 cents in corn, and then if people want to make some sales or some price protection strategy, maybe that has merit. But right here, right now, it's very difficult to do anything without feeling vulnerable.

And when you just have this CFAP program based on inventory, you know, I ask you as a farmer, does it make any difference to you about how you might market grain after you fill your grain storage this fall, are you going to be less inclined to move that inventory for fear that some future payment will be based on having still had that inventory, or is that not going to have any influence on you whatsoever?

Chris: I probably wouldn't look at that as an influencing factor. I mean, I can see where it could in some instances, but I think a person is going to want to look at this as kind of a one-time, one-off, you know, type of a process just to get money to the farmers. I think whether it's a good program or a bad program, it's a program, and it was just a way to deliver some funds. You know, it seems like every single one of these has been slightly different. The rules have been different, the guidance has been different, and this is a '19 crop too. You know, you're asking about 20 crop, so, you know, the 20 crop's going to have other variables connected to it that would be disconnected from what this specific payment is connected to.

Duane

Lowry: Right, and I think that was— that was— this CFAP program was very directly tied to coronavirus.

Chris: Yeah.

Duane

Lowry: But, you know, when you got tensions out here with the U.S. and China, I think people will be wondering— you know, about how they're going to handle inventory and how they might do it. I agree with you. I think it was a one-off. I don't think we'll see it structured that way again, but who knows. But in the case of marketing from a farmer perspective, I'll ask you, and let's assume that you have nothing or very little sold of your '20 crop, and you've got storage for half of it. Let's just pick a number. What do you want to do with that other half? Are you going to look for a place to make a sales price commitment before harvest? Or are you going to wait until it's time that you're forced to move it, then make that decision? You know, where do you— where do you want to take your risk and what do you see as risk? Do you see risk as not pricing it?

Or do you see more risk in pricing it and finding out that— you priced in a different price zone than where the crop insurance protection actually falls.

Chris: I'm going to be really careful pricing anything right now because we're so far below our cost of production that I would be more inclined to sit on it for the time being until we know more. There's so many variables yet with weather, with price changes, with China, with the government— either assistance or interference, however you want to look at it. So there's, you know, there's those probably 4 or 5 impending variables that we don't yet have enough information. So I honestly can't answer that question yet. To me, it's how are those variables all coming together sometime between now and the middle part of July or first part of August. And one of those key ones at that point then too still does become the weather as to what's my production look like. We have already I mean, I'll just say that.

I mean, we've already— we're already locking basis, taking your recommendation from 4 weeks ago or whatever on new crop bushels so that I know that those bushels have a home if we produce a big crop, which in our specific area looks like we may do that. But again, you know, it's going to— for every farmer, it's going to depend a lot on, you know, did they plant early, does their crop yield look really good, and then You know, that all factors into it. Those kind of key 4 variables, I think, are the— how I would answer your question. Moving target. Keep asking and I'll tell you more each week. How's that sound?

Duane

Lowry: That's fine. And it is a moving target. And even though price action isn't moving the decision process, it seems like it's becoming riskier and riskier to make it— to do anything. I have been in favor of some new crop basis sales. Fearing that basis values could be very weak this fall. So I still believe that's something to be looked at. I'm not so sure that even some sales out in the March, April, May of next year in terms of basis, I'm not so sure those aren't good, right, good things to consider.

But there is no decision that can be made right now that doesn't have a lot of risk, the potential, and— and special consequences, and I'd argue that even more so than some other years, when you're sitting down here at your crop insurance levels, and I find the path of least resistance or the most acceptable is to— is largely take inaction at the present time and wait for either a better opportunity or something else other than the basis things we've talked about. So it's, it's not an easy year to market grain.

Chris: Yeah, sometimes doing nothing is actually doing something, you know. Yes, that's okay to sit on your hands once in a while, and this is probably the time.

Duane

Lowry: Well, I'm kind of— think that's the only semi-safe path we have at the moment.

Chris: Yeah, other than paying attention to basis both on old crop and new crop across the board. But hey, Duane, I think we've We've probably used up all of our time here, but I think it was good conversation. I mean, there was a little more, more than just quote unquote the markets, or not to say just the markets, but I think this, the CFAP, if I can say this right, is one of those things that factors into our marketing decisions along with some of these other things that come along in conversation. So I think it was a good talk today and We will be back next week with a short week this week. We'll be back next Sunday and have another conversation, and hopefully everybody can stay tuned, and we'll follow this moving target, won't we, Duane?

Duane

Lowry: Yes, we'll definitely try to follow it.

Chris: That's for sure. Hey everybody, hopefully you got good information out of this. If anybody has other topics, things we're not hitting, things that you'd like us to do different, better, Please subscribe, please get us some information or send us questions or comments. Let us know how we're doing. If there's anything we can do different or better, we'd appreciate the feedback, good or bad, whichever. That always helps us to try to improve to get you good perspective. So again, thanks, Dwayne. Appreciate your time.

Duane

Lowry: All right, thanks, Chris.

Chris: You bet. Thanks everybody for listening to the Ag View Pitch, and we will catch you next time.