Merry Christmas market outlook

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Duane

Lowery: Enjoy.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today you've got Dwayne Lowery and Chris Barron, and we are heading into Christmas week. We've seen some pretty good strength in the markets in the last week or so. Dwayne, how are things going and what can we expect in this week ahead, do you think, with Christmas being here maybe sooner than some of us are ready for.

Duane

Lowery: Well, I'm never ready for it, so I definitely fall in that category. Markets have probably performed better than most people have expected as a general overview. I think the market probably has also performed better than we tend to associate with the holiday window, and I think we're probably going to see some additional strength this next week. I don't know if The default setting at this time is always to expect it to be quiet, and that's understandable, and the vast majority of time that's correct. Currently, the market's got a lot of shorts trapped and caught out of position. I think that's true about users as well, may not have a position, but maybe they normally would be— have some coverage and some ownership coming out of Harvest. I don't think they did that. So the marketplace is caught, like I said, a little bit out of position with the Phase 1 trade agreement with China.

You know, we're really susceptible to at any given time finding out that we get some sales announcement that maybe the marketplace didn't really trust or believe or expect. And so the pressure is still on the bear here, I think.

Chris

Barron: Gotcha. As far as, you know, looking at the cash market, and, you know, I probably sound like a broken record, but you think back about last few podcasts, I keep bringing up the idea of, you know, where basis is at, you know, both for corn and soybeans, and, and in particular, and cash flow and all those kind of things. What are you seeing on basis and are there any topics there that we should be thinking about or aware of?

Duane

Lowery: In general terms, basis has continued to be firm, and you can find locations that are pushing bids, and you can find some movement that's a little difficult to find. In the same token, I fielded quite a few calls from producers about beans over the last week or two, and I There's certainly some interest in moving beans. Some of it is to pull the tops out of bins. Some are— is to try to raise cash based on their tax planning for the end of the year. Some cases, and I'm finding this probably more frequently than normal, people are trying to take advantage of prepaid discounts for 2020, get their financing lined up for 2020, prepare for those kind of plans., and they're finding the lender is being more difficult than normal in terms of their inventory.

And rather than see a lot of inventory on their balance sheet as an asset, they want to see that reduced or eliminated to turn into cash before they'll finalize 2020 input costs. And so a lot of that has spurred some interest in—— in making sales on the physical commodity. In the case of beans, bean basis has improved a lot from where it was most of this year and versus last year, and they've improved a lot from where it was at the beginning or middle part of harvest or even the end of harvest. We are getting to levels that are close to some of the historical highs on basis.— for this time of year. That's not to say that it can't get stronger down the road, but the strong base that we have right now, the futures market is within probably 15 to 20 cents of the highest we traded on spot contract of beans all summer long.

And so if you exceed that, and so you're certainly within 20 cents of that, That implies that we'll be seeing futures prices for the lead contract, the spot contract, at the highest levels we've seen since the market was kind of falling rather precipitously in early-mid 2018 in response to the U.S.-China trade war. So that means producers, between the combination of the futures up near that level and basis levels a lot stronger than they have been— during the last several months. That means producers are getting some of the best cash prices for beans they've seen for a long time, in more than a year, and I think that also is causing producers to have an interest in making some sales. And I would say this, because basis has been firm, because carryout is a lot less than it was expected at one time, depending on how you feel about the January USDA report.

If you were to get some reduction in yield, maybe some reduction in harvested acres, and the carryout lowered from that aspect, the USDA is also going to have to take into consideration we have a Phase 1 trade agreement, and with that's going to come some expectation of increased purchases of U.S. soybeans by China. And since USDA took it out of their balance sheet and adjusted their balance sheet when, when the table was reversed, I assume they're going to make some adjustments on the balance sheet, but that may not happen in the January report. They may wait until the business actually starts to show. I'm not sure how they'll handle that. But you do have combination of factors here that could cause the cash bean market to be a lot tighter than what we think it is now. And so therefore, I'm a little hesitant to be confident to think that making a cash basis sale here is the best move.

In the same token, if you're facing one of these situations where you have a desire to make the cash sale, to turn it into cash, or you're feeling the pressure from your lender to make those cash sales, I think you can make those cash sales and do it with, uh, some level of confidence, and you certainly can feel comfortable for sure making that sale and then replacing it on paper ownership form of some kind if you feel that the futures market has more upside to go. You do not have to feel like you're being forced to sell your physical commodity into a cash market that is depressed and taking advantage of you. That may have been the case early in the harvest season, but that's not the case now.

These are legitimately good basis levels and you shouldn't feel bad about making those sales and there are certainly opportunities through paper transactions either with a basis contract with your cash buyer, replace with a long futures position, some sort of a call position, maybe a call spread, maybe some combination of buying calls, selling puts, you know, the— it's almost endless the amount of different strategies one could come up with. So if you just focused on a predicament where you, you find yourself needing to make some cash sales and you're really maybe not wanting to do that, I just would offer some level of comfort that these are good enough historical sales that you can feel good about the sale and then look for other ways to participate in some upside if that's what you think exists out there.

Chris

Barron: One thing, Duane, that we've seen is as we've been, you know, helping more and more producers now in the last, you know, 10 days to 2 weeks, getting cash flows done, balance sheets, getting set up for 2020, wrapping up this '19 year and looking at the yields, to your point, you know, some of these operations, we've seen enough of a price increase and on-farm cash price depending on the yield.

If the yield's good enough and you look at the MSP payment and you couple those together and you look at the margin or the rate of return on that, on soybeans in particular, as a cost production and then going with your margin target like I always talk about, I think in a lot of cases we've seen some operations actually hit their margin target and probably in my opinion could feel good enough to go ahead and make, you know, I know you probably disagree, but you know, I would be inclined to make some significant sales if the, if your margin target is achieved. But then like you said, maybe open up the top side on some of that, you know, either with futures or some options or something. But I still come back to the fact that, you know, the bank and the operations and stuff really got to look at that margin target specific to their individual operation.

And we've seen with beans, we've seen it get hit and in some cases corn. I'm not quite sure why we're seeing it a little quicker with beans in a few cases, but I think part of it's just the basis has, has really gotten better. And so in some areas, I know there's other areas where we haven't seen as much basis improvement, but just to kind of tack on to what you said there. Any other comments going into the week or rebuttals to what I just said?

Duane

Lowery: Well, not necessarily a rebuttal, but I do have— want to add to that just a little bit. I think it is possible that Midwest growers might be achieving those margin targets with beans if they were in a position that they had a very favorable yield. There's a lot of people that didn't get those very favorable yields and they ended up with yields on the low end of where they feel like they should be or want to be, and I doubt if those guys are getting up to their margin target.

Chris

Barron: Well, it depends on where they're at, Dwayne. I mean, some of them, you're right, if you had just enough yield that you didn't quite collect on insurance, but conversely, there's operations that we've seen a couple that were really on the low end on yield and really limited on inventory, but when you add in the crop insurance, MFP payment, and the current price on existing inventory, it gets them in the black. So there's— you're right, there's a, there's a range in there in the middle, what we call the danger zone, where yields were just quite— just about good enough, but that you didn't quite collect on insurance. And so some of those operations definitely are a ways away yet from probably achieving a margin target.

Duane

Lowery: I would describe it this way, uh, in my thought. I do feel that there is some decent upside potential, and I look into the future just a little bit, and I think it's very plausible to significantly alter the fundamental balance sheet of soybeans, uh, in relationship to what the marketplace currently is wanting to think that it is. The marketplace feels it's a plentiful supply, a well-enough supplied supply that, you know, we're not going to have any shortages. And I understand that and I accept that at face value. However, face value can change and, you know, January 10th could alter that somewhat. I think how China ends up purchasing U.S. beans could alter that somewhat.

I think whether China buys beans to build their stocks, therefore implying that the beans that they're buying from the US doesn't necessarily prevent them from buying other beans in some of their commitments to Argentina or Brazil either if they're going to go directly into stocks— stock building, which is a possibility. So that doesn't leave a lot of relief or pressure off of the other global users. So I I think that it's possible that, you know, I don't want to sound crazy, but to put $1 or $2 on the bean market with the current set of fundamentals we have and the possibilities of how things could be altered between China's demand and January's USDA reports, I don't think that's an unreasonable statement.

In the same token, if you're up into those margin targets and you've got some pressure where you need to turn some inventory into cash, in order to feel comfortable and, and just take some of the stress off of your operation and your family and yourself, you shouldn't feel bad at all about making these cash soybean sales and getting some of that inventory off your balance sheet. I just think this might be also time to be willing to invest some of those funds into some type of strategy that puts you back in a position to gain some upside potential. That's all. So I, I don't There's times that I'm going to come out on this podcast with a really, really hard sell approach, and I don't want to waste that on this one because I don't think that's where I want to be.

But there's a big difference between being aggressively making sales because you are feeling that market's at a top, and there's a difference between that and making sales because you've achieved your margin, margin target. Those are two different reasons for sales. So I, I'm willing to embrace sales here. I'm going to make that— embrace cash sales, but I'm not— I don't want to be trying to imply that we're at the top side of the market. The way I want to talk about it, and I'm sure somewhere along the lines we'll talk about Commitment Traders, but as long as we're on this subject, I'm going to bring this up right now. In the Commitment Traders report, released yesterday afternoon, Friday afternoon. We're taping this actually on Saturday. But the large funds are still short about 80,000 contracts of beans. Now they covered 33,000 of those this past week.

And during that reporting period, because that reporting period ends on Tuesday, so it's from the previous Wednesday to Tuesday of this last week, that's that reporting period. During that window, the prices rallied 13 cents. And then at the close of that window, which is on Tuesday, you got prices at the, you know, within 15 cents of the highest we've been since the summer of '18. You got them within 20, 25 cents of the contract highs made by the March, May, and July during last summer. So you're perched up against some chart points here, and We also have President Xi saying, I think it was Friday, that basically reaffirmed that Phase 1 is a done deal, he's anxious to get it signed, and he praised it as good for China and the U.S. I still say he moved a long ways towards President Trump to get this deal done, but he's on record now in the public domain of saying this is a done deal.

And you still got the market short and you got— you're on the verge of having soybean prices at the highest levels you've been in a year, year and a half, and I don't think that's a comfortable place for a bear to be when the marketplace is short and we have arguably new business to add into the balance sheet that we didn't think we had. And actually, I would argue that the vast majority of the trade doesn't even believe China's going to follow through on Phase 1. So there's a lot left to unfold here. So I just want to— I guess I'm going to just leave it at that for the moment as to why I— there's a difference between being willing to make sales and trying to indicate that this is it, it's all over, and make a sale for that reason. I don't want to be on record for saying that. No, that's good.

Chris

Barron: And I think, you know, like we've talked in all lots of previous other podcasts, we've, you know, the whole idea of the conversation here is for perspective, right? You know, we're gonna not always completely agree on exactly how, how we do this, and every farm operation is different. Every farm operation gets their, gets to make their executive decisions, and hopefully we're having a conversation about all the pertinent information, you know, both from a macro and a micro sense for growers to ponder when they get to pull the trigger and, and, you know, measure how much upside and all that they need to have. And I think, I think that's what makes this podcast and this conversation useful. We've been talking about soybeans, you know, primarily. I want to add one more thing to that.

Duane

Lowery: I'm going to actually come back and put a little bit of an exclamation point on your perspective on this. If you're the grower in a situation where they had a good soybean yield this last year, and some did, some were, and they have the MFP payment, they got a good basis, the futures are up here. If you're at your margin targets and this works, I would, I would give a strong thumbs up to being willing to take that and, and then go ahead and decide if and how much you want to invest or put at risk in some other transaction to keep you in the game, get some additional strength.

And I would also say it this way, if your corn bushels in your corn operation is not at your margin target, and I would say the vast, vast majority of people are not, okay, and if they're not, and if you're going to take a stance that you want to wait for higher prices in corn, that's another strong reason to remove some of the risk off the table and maybe go ahead and and capture the cash, capture the basis, capture the margin targets on the beans, and then a smaller amount of money you're putting at risk for something greater later, especially if you, you know, you can't get there in the corn.

So I'm willing to move your direction to the point that if you look at your entire operation and you still have dollars you need to try to get to and you're wanting to remove some risk, you want to turn physical inventory into cash, you know, then I would probably give another thumbs up to making those soybean sales now. I just— so I'm not trying to indicate not to make them, I just wanted to put things in perspective. Yeah, and that clarifies things.

Chris

Barron: And I think, again, I think, you know, the idea is having this conversation and making sure that the growers are really thinking through this from a critical perspective, as I know they do, but having, having these conversations and laying out the macro and micro information, I think, is so, so important. So having said that, on the corn side, you know, what can we be hoping for? What can we be watching for? Are there any Christmas presents ahead, you know, on the, on the corn side of things? It seems like, you know, you hear some negative news on the ethanol side and, and you, it just makes you wonder in the back of your mind.

And then while I say that, you know, I talk about good yields and soybeans and there's some good yields in corn too, but I can also talk on the other side of my mouth and say, well, you know, there's a lot of areas where, and probably more areas where the yields are a little lower. And in particular with corn, you've got so many more gross dollars you're dealing with, and so our reach is a little further What do you see there? I mean, what kind of hope do we have? Because in a lot of cases, when we look at margin target there, we're a ways away yet. And give us some perspective on that the next week or two.

Duane

Lowery: All right, I'm going to— I'll give you some perspective, but maybe a little different angle than you would anticipate. But you started out this conversation about, are there any Christmas presents? Well, People struggled a lot in 2019, the stress of getting the crop in, all the activities associated with, you know, just fighting your way through the Mother Nature aspects of '19 and the time crunch of only having 24 hours in a day and things of this nature. But the Christmas presents that I would point to is in many cases Yields ended up being better than people feared. They are still, I would argue, most are lower than last year and quite a few by a much larger amount than what a USDA-style number might suggest. And so the Christmas present is that, you know, this could be worse.

Secondly, the basis strength that we've had this this year in general, and we're still maintaining now, is certainly a big plus compared to what current prices would translate to otherwise. And if you look at a spot contract of corn at, let's just say, $3.90, which is pretty close to where we're at right now, and you go back from 2000 and, you know, late in 2014, I'll guarantee you that we have spent spent, I don't know, maybe 5 times as much time below $3.90 spot futures, which means 3 below where we're at now than we have ever spent above this price level in the last— since late 2014, and a chunk of that time was last summer. So prices are not bad if you look at it from that perspective.

The problem is most people had yields that were, you know, 10 to 20 or 30 to 40 bushels below last year and we just can't get enough bushels to dollar up gross revenue even with the pluses of the futures price where it is and the basis where it is, I'm still optimistic that we're going to see better prices than what we have right now and I think it could be by quite a bit. But if we just take a snapshot of right now today, I think there are some Christmas presents here. We maybe want something a little bit more, but there are reasons to feel somewhat positive or optimistic and look forward to 2020 with a little bit of optimism. We certainly, for this time of year, are sitting at a fairly decent price level, and I think the arguments to believe that we've already seen our marketing year high are probably not very good odds of that statement being true.

I think there are better odds that we're going to take out the October highs, and it's not unreasonable to believe that we could possibly attack the summer highs or even exceed them. But in order for that to happen, we have to get some interest and new demand coming from China in corn that we— marketplace hasn't really been expecting, and for most people, they don't believe it. And we also probably need to get some help from USDA on January 10th where they lower harvested acres and they lower yield. I think both are very plausible scenarios. So I think that there's some reasons to be, be encouraged and optimistic, and I'm hoping that the technical makeup of the market, the fundamental baseline, will be— maintain a situation that at worst we're not going to see a lot of downside risk here over the next 60 or 90 days.

Chris

Barron: If we— and this is kind of, you know, I think we've covered a lot in this podcast in a short period of time— on— it's a quick question on 2020. If we, you know, we keep talking about the strength and stuff coming our way and we pull the trigger on some things on current crop, is there reason to be thinking we should be doing some on the 2020 on any of these commodities as we move forward? If we're pulling the trigger on old crop, should we be looking at new crop at the same time?

Duane

Lowery: Well, I'm not feeling that great about new crop prices at $4 these futures right now. To me, that's not a real great price with still a lot of unknown things out there. And I think that if something came along that was more negative to the marketplace, I don't know that I believe Dec corn is going to get below $3.90, that— or the bottom side of where we've been here over the last few weeks in front of us anytime real soon. So I'm not super anxious to get excited about that. I also believe that if we have a strong corn market for something positive from USDA, positive out of China, that type of storyline, it's going to be largely led by the front end. It's not going to be led by new crop Dec '20 corn, and so Dec '20 corn at $4.20 and higher, yes, I'm probably interested in looking to get some price floors established. I'm hoping that we get up to those levels.

At a time that we can get some extra revenue protection through the crop insurance program, and depending on how people like to purchase crop insurance, that may or may not be part of their marketing plan or not. And so I think it's okay to look forward to possibly making some decisions, but I just feel that there's enough unknown things here that I think could land towards our favor and not enough things that are likely to slant against our favor that I'm not willing to make sales just because of new crop. And if you're motivated to make sales in new crop corn based on fear, which I think has been largely what's motivated that storyline for the last— well, let's see, set back no— at least the last 90, if not the last 120 days, people have been motivated to consider or plan to make sales in Dec '20 corn around current levels, uh, for the last 3 or 4 months.

But that— I, I think that was solely based on fear, fear of large acres and things of this nature. And I'm not willing to make sales in new crop corn based on fear because I don't feel that the fear element is necessary right now. So that— I, I'm, I'm a little slow to look forward to 2020 here.

Chris

Barron: Yeah, one of the challenges for 2020 as we look at forecasting into next year is we've worked with a lot of clients too, is your $4.20 beef price for 2020 and, and what that brings to the bottom line on an average yield is just barely getting a lot of operations in the black too going into this next year depending on how this year shakes out and if we carry some losses forward into the upcoming year. So our outlook has to be pretty disciplined, I think, too. So, you know, I think we don't want to reach too far, but I think we also need to be patient and be prudent and know what those numbers are so we can, you know, like you said, take some risk off the table, maybe, maybe do some type of strategy. And that's probably a podcast for another time where we talk about some strategies to relieve risk, go going into 2020 might be a podcast we need to do down the road.

Duane

Lowery: I definitely share the idea that looking ahead to 2020, it may very well be a good year to try to reduce some exposure and try to be proactive in some sort of a marketing plan. I have no problem with that concept. I agree with that. And once we get above $4.20, I'm willing to, you know, be active in searching for opportunities, but I might also want to pick multiple opportunities that some of those things provided me a floor but still gave me some upside potential. But I definitely will be wanting to look forward. So I guess in that broad sense, I kind of agree with you. I don't know if that's— if I'm supposed to feel bad for you now because now you've got the anchor of having me on your side on that. Or whether I should feel bad about my opinion if I'm agreeing with you.

One of us is possibly a bad luck charm, and I guess based on knowing history, I would probably be fearful that I'm the bad luck charm. Yeah, well, sometimes we're on—

Chris

Barron: we tend to agree, I think, in the end result, but how we get there sometimes is a different path, which is fine. And having talked about the corn on the 2020, what about soybeans? Beans, you know, you talk. So, so I guess here's my question: what does, what does $4.20 Dec corn mean for soybeans in your opinion?

Duane

Lowery: Well, I'll go, I'll answer this the way I've answered it multiple times before, either in what I've written on a daily basis or other podcasts. $4.20 Dec corn is 20 cents higher than where it is right now, and 20 cents up on a 200-bushel operation is $40 an acre. If beans, you know, that basically means beans have to go up 75 cents from where they're at right now to hold everything equal. I, when it comes to beans and new crop, I am highly driven with my new crop marketing plan and to some extent my old crop marketing plan as well I am highly driven by the fact that soybean prices right now versus corn from a relationship standpoint is in the bottom 15% of that price relationship we've seen for the last 12 years, give or take.

Okay, I can't get excited about aggressively pricing something into the new crop when it's, you know, you got a whole growing season of unknowns You have an unknown about what's going to happen with China and Phase 1 and how that's going to unfold. You have an unknown, or it is known, but you got veg oil prices globally that have been trending higher for some period of time, and you got spot soybean oil prices that are at some of the highest values we've seen in, well, at least the last 2 years. And won't be too far away from levels higher than that. So I don't find that to be an attractive sale to make new crop— get aggressive with sales of new crop at when you're in the bottom 15% of a price relationship with beans over a 12-year period. That just doesn't feel good to me at all.

And the other problem is you look at the futures and you think, well, that's not too bad of a futures price with Nov '20 beans at $9.65, give or take. But what happens if you got, you know, undesirable basis levels next spring? It just feels like that's just a very cheap price. So until we get to something that has soybeans building back some of the price relationship it had before we lost the China business, when we're right here on the verge of hopefully getting the China business back, at least for a year or two, I want to wait. I don't want to be very quick to make new crop bean sales here.

Chris

Barron: Sounds good. Is there anything else we haven't talked about?

Duane

Lowery: Not that I can think of. Okay. I will say this, going back to the China Trade Agreement, the vast majority of the people in the trade are really poo-pooing this thing, and they don't think anything is going to come out of it, or they don't want to admit that something's going to come out of it, but I would caution people to recognize The vast majority of the trade is either an uncovered user, a speculative short, or a producer that's discouraged enough that they don't have a lot of optimism. And the last thing I want to say about the China trade agreement, there's a Chinese agricultural consulting firm called JCI., and they're probably the most well-known and they're a fairly high-dollar consulting firm to have in your camp.

And they released in one of their articles, I think it was Thursday or Friday, probably Friday, that they laid out a possibility of how China could get to the $40 million in purchases, and people might not— I don't necessarily agree with it, but they have— they got China increasing their imports on soybeans considerably. They got them buying 8 million tons of corn. Just to give you a perspective, that's roughly 320 million bushels. They got them buying 5 million tons of wheat, 8 million tons of sorghum, and 8 million tons of DDGs. And they got them buying pork, poultry, all of that, and plus a bunch of cotton. And to the extent that people don't want to believe that's going to happen, the fact that JCI even actually puts it— put it into their commentary, and they're China-based, I think that gives it quite a bit of credibility, and it may end up being a different figure.

But the marketplace still has to contend with this possible influx of new demand, and we've not yet done that. So that's probably the last thing I want to say regarding what happened this past week that may actually still have implications here in front of us.

Chris

Barron: Well, there's definitely a lot to watch, and there's going to be a lot going on as we move forward here into a new year. But for the meantime, Duane, I think we've covered a lot, and I think we're going into this week Christmas, and hopefully everybody can take a breather. I know there's still a fair amount of operations in the north that are still chipping away at harvest. I talked to a few guys that hadn't even started on corn yet, and maybe a lot of spring harvest, and we just hope everybody stays safe and everybody just takes a break and takes some time with family and enjoy Christmas and I thank you, Duane, for the conversation today, and Merry Christmas to you.

Duane

Lowery: Merry Christmas to you, Chris. Merry Christmas to all our listeners. We thank you for your support, and, you know, if you ever need to talk about markets or anything that we've talked about here, reach out to us. We'd be happy to talk. And if you ever find yourself in a situation, especially at this time of year, where the pressure of the season, the pressure of 2019, and the pressure of looking ahead with the unknowns of 2020 that seem too difficult to bear, I'm confident I speak for Chris as well as myself that we would both be very happy to talk to you about those situations, try to help you put those in perspective. And I think there are reasons to feel that maybe the future looks a little bit brighter than what you may feel on your worst day. And this is the time of year to look forward with optimism and the regenerative powers of a new birth.

Chris

Barron: I couldn't have said it better myself. So thanks, Dewayne. And again, Merry Christmas to everybody. And we will catch you next week and next time on the Ag View Pitch. Thanks for listening.

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 319-533-5755. 03. We really look forward to talking with you.