About This Episode
Brown had been in the camp arguing not whether corn would go under $3 but how far under, so the September rally caught him out. His answer was to sell into it rather than defend the call, averaging up as producers got comfortable. The balance sheet did not support enthusiasm: USDA's 2.5 billion bushel carryout worked out to a 17.1 percent stocks-to-use ratio on his spreadsheet, near the high end of history, which made 40-cent monthly price swings hard to explain.
The sharpest point concerned CFAP money. Producers were using the payment to cash flow, which let them sit on bushels instead of hauling them in, and Brown called that the wrong use. Run the payment through your breakeven, see what the number becomes, then execute against it. He added that the market tends to take back whatever value got handed out. Government money also slows farmer selling, and that plus tight basis and tightening spreads can make supply feel scarcer than it is.
On South America, dryness under La Nina delays planting, which delays harvest, which holds the United States in the soybean export window a couple of weeks longer. At one to two million tonnes a week that pulls carryout down, and a late Brazilian harvest also pushes back their corn planting. Whether that outruns harvest pressure and a strengthening dollar was open. Both men landed in the same place, though: you cannot know your margin without knowing your cost of production.
“We don't know what our margin is if we don't know what our cost of production is.”
— Garret Brown
Key Takeaways
Do not use a government payment as a put option that lets you wait. Run it through your breakeven and act on the new number.
Brown was wrong on direction and sold into the rally anyway, averaging up as producers got comfortable rather than waiting to be proven right.
A 2.5 billion bushel carryout and a 17.1 percent stocks-to-use ratio sit at the heavy end of history, which makes 40-cent monthly swings hard to justify.
Aid money slows farmer selling, and that plus tight basis and tightening spreads can make the market feel tighter than the balance sheet is.
Dry South American planting delays harvest there and extends the US soybean export window, and at one to two million tonnes a week that draws carryout down.
You cannot know your margin without knowing your cost of production, so that number comes first.
Full Transcript
Shay
Foulk: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one.
Garret
Brown: Full count, here comes the play at the plate, and it's the Ag View Pitch!
Shay
Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Garret. And Garret, I'd love if you could just take a minute here to introduce yourself, tell the listeners who you are and where you operate.
Garret
Brown: Sure. Well, my name is Garret Brown, originally hail from North Dakota. About 2 years ago, my wife and I moved from the Valley City, North Dakota area down to lower Illinois. And I'm a farm kid, grew up in northeastern North Dakota, went down to NDSU, worked in grain elevation, and then in the ethanol space for about the first 5 years of my career. And then from there, I got into working with farmers on risk management, helping them to market their cash grain and Now here we are.
Shay
Foulk: So, um, yeah, it's nice to be talking to another, uh, I call myself an import into Illinois. Apparently we wanted to pay more taxes and we, uh, we followed a lady back to the state of Illinois and this is where we sit.
Garret
Brown: Yeah, you're absolutely right. There's, uh, certainly some changes and, you know, I'm a little different. I have the accent as many on here can probably sense. Um, yeah, it's, it's pretty, uh, what do you want to call it?
Shay
Foulk: Um, very unique, very distinct.
Garret
Brown: Yeah, yeah, very unique. Yeah, I, you know, where I grew up, you're, uh, you're almost Canadian. There's not too much further you can go in the continental US and still say yourself Alaskan.
Shay
Foulk: Well, Garret, you said it, not me, so you can't hold that against me. But no, I just wanted to have Garret on here today to have a little bit of a midweek market outlook. And just as a reminder, this is more so just a discussion, not offering any advice to anybody out there. We would like to bring value and perspective to the listeners here at the Ag View Pitch. So Garret, I was wondering if we could kick it off by talking a little bit, you know, as a midweek market outlook here today. What have we seen in the markets up until today, and what are your thoughts as we move into the rest of the week here?
Garret
Brown: Well, you know, as we kind of finished out last week, and maybe start there, we saw a lot of strength, you know, in corn and beans and spring wheat. And one of the things I was kind of scratching my head on spring wheat is, you know, the The crop I think was decent, wasn't fabulous, wasn't horrible. I think we had plenty of wheat on hand. We came into this marketing year with plenty of stock. So anyway, long story short, I'm like, okay, what's this strength coming from? And there's been some talk in the Black Sea. So fast forward into Monday, I thought, well, shoot, maybe we'll see some carry-through from Friday. And that did not happen. We saw some pretty aggressive selling, basically in corn, beans, spring wheat. I think beans were down 21 cents, corn I think was down 8, 9 cents, something like that, and spring wheat was down about 16. And so it was definitely a surprise.
You know, we've seen a lot of pressure in outside markets. US dollar has been very aggressively stronger here through the first part of the week, and I guess it, it just kind of makes you wonder what's next now that we have corn sitting on some moving averages and some key support as well as soybeans.
Shay
Foulk: Right. Any, any major things going on, you know, either across the country or throughout the world that you think will have an impact here as we look into the next 3, 4 days finishing out the week here?
Garret
Brown: Well, over the next couple days, obviously we're gonna be watching some of these outside markets. I mean, is there, is there a fear of growth or further contraction here? You know, we are moving into harvest. So the big question is, you know, is harvest pressure going to be enough to overpower the fund buying that's gone on here over the past several weeks? So, you know, will the dollar continue to get stronger and kind of deflate some of this inflationary story? You know, I think that inflationary story is probably a longer-term issue, but you can definitely tell that harvest is starting to accelerate, and I guess time will tell, right?
Shay
Foulk: You know, you and I were talking here offline that Hindsight's 20/20, a lot easier to look back than it is looking forward. But be interesting when we get 4 to 6 weeks down the road here, take a look back at what we were seeing. Obviously we've seen some price strength here over the last week and a half or so, and I was hoping we could talk about that a little bit. What are your thoughts, obviously, with what we've seen here lately, but then even moving into 2021? There's been talk on pricing, what's the long-term outlook, are there any other opportunities? And a little of me wants to think that maybe that's a little hard to say right now. But there are, there are some profit margins out there. And I think that's something that producers need to consider. Do you have any thoughts on that, Garret?
Garret
Brown: Well, I would definitely agree. Now, I guess my outlook on this thing is I've been kind of dragging my feet a little bit on this rally, might say a little pessimistic. But I guess I was one of those that never really thought we priced in this market. I think on Sunday, maybe it was your Sunday discussion, you know, the talk was, well, it's not are we going to blow $3 corn, it's how far below $3 corn are we going to go. And I guess I was probably in that camp. So it's been a bit of a surprise to see this market rally like it has. You know, USDA's latest values, I think they're like a 2.5 billion bushel carryout, which just quick look here on my spreadsheet puts us at a 17.1% stocks-to-use.
And if I go back and look over history here, You know, we're, we're definitely on the upper end here, so seeing some of this farmer seed price fluctuation, you know, month to month of 40 cents a bushel just seems a little bit, uh, kind of just a head scratcher, I guess. Um, so with all of this, I've been kind of tending to make sure that we're trying to reward this market, um, you know, when producers are comfortable trying to average up on some sales. And, you know, so I've been kind of slow maybe to go out there and produce or do a whole lot of risk management for this next year. But that doesn't necessarily mean that it's a bad thing. I think the aggressive hedgers or risk managers here should be— well, really everybody should be sharpening their pencils and looking to see what these margins look like because there, there are opportunities out there from what I can see.
But obviously with La Niña, you know, that's getting to be more of a point of discussion here. What's going to happen in South America? You know, things are dry there. Things are dry in the Black Sea. And again, go back to South America. The longer that it takes for them to get moisture, potentially the longer it's going to take for them to really get going planting. Well, if those beans don't get planted, it can push off, you know, harvest down there. And that can extend some life into the U.S. export program for soybeans a couple of weeks. And obviously, if we're doing 1 million, 2 million tons a week, that can really add to the front end or the— well, let's say the front end of the export program.— the main export program for this season. And by doing that, it also extends or reduces our carryout.
So when that happens, obviously, if we have a delayed harvest down in South America, that can also push back their corn planting. So I guess with that, like I said, just, I don't know, maybe been a little bit more conservative and just kind of seeing how things are going to play out. And yeah. Just making sure we're not missing an opportunity here on the front end.
Shay
Foulk: Yeah, I wholeheartedly agree on that. And then, you know, obviously here in the last 10 days, Coronavirus Food Assistance Program version 2.0 rolled out. A lot of producers getting signed up for that, and hopefully they've had a chance to listen to the podcast with Paul Niefer talking about what it, what it all means, how to get signed up, and any other information regarding that. When you tie that back into a cost of production, it can have a pretty large impact as we, as we look at those payments that are being kicked out. I think the program's a little bit more straightforward, but again, adding to that bottom line with some of the price points that we've seen here.
And so again, you know, Chris talks about it a lot, I talk about it a lot, ensuring that we have those margin targets set, knowing when we're in a profitable zone, and just ensuring that we're, we're we're making sales when it makes sense for our own operation. Do you have any other thoughts on that, Garret?
Garret
Brown: No, I wholeheartedly agree. I think a lot of times, like I mentioned earlier, we tend to use that or maybe as a put option because we don't need to, you know, we can use that to cash flow. We don't need to haul something in. We can afford to kind of wait and see what happens a little bit. And that's probably not the best way to be looking at it. We should be saying, well, what does that do to our breakeven? And getting out there and executing on that. And just making sure we're not going to waste that because, you know, oftentimes it seems like the market takes whatever that value is, whatever got passed out there, and it ends up removing that value from the market anyhow. Not necessarily every time, but, you know, looking at some of these spreads, spreads have been tightening up both in corn and beans.
They may be relaxed a little bit again the past couple days, but between that and basis, basis has been tight. I think sometimes the lack of movement in this extra steel we were talking about So basically say the lack of steel with this, this government money that's coming in can make a market actually feel a little bit tighter, and it can almost give you like a false sense of what's actually out there. So again, just going back to it, I think the focus here needs to be on, on what is our margin. And obviously we don't know what our margin is if we don't know what our cost of production is. So that's very important.
Shay
Foulk: Absolutely. Looking ahead into next week, you know, on the 30th, USDA report coming out. Any last thoughts on what we've talked about here today? And then one, one last curveball I want to throw at you too that we didn't discuss beforehand here is China. Anything going on on the China front? How are we looking as we move into well beyond the second half of the year on, on any of the promises that they made? What are your thoughts there?
Garret
Brown: Well, China is an interesting animal. Um, you know, do they, do they come in and start canceling? I think I'd heard some rumors that they were starting to back out of some sorghum. And, you know, I don't know if they're purchasing South American corn or what they're doing necessarily, but, you know, they need the grain. They'd love to have the grain, whether it be, you know, the oilseeds or whatever. But obviously they have a political dog in this fight too. And we can all kind of see whether they decide to cancel or they decide to take it. It's just we don't know which one it's going to be. So there's definitely going to be some risk from that standpoint. But as we move, you know, into further into harvest here, I guess, and as we're watching these sales announcements come through on a daily basis, we kind of have to wonder, okay, at what point have they bought enough?
And what they are, or at what point are they covered? And as we move into February, looking at the discounts of Brazilian beans versus American beans, you know, every day we're getting a day closer to that. And it just makes you wonder, with that story, are the funds going to continue to buy a 2.5 billion bushel carryout? Even if it's a little bit less, are they going to continue to buy that? Or on the soybean front, are they going to continue to push into what is assumed to be a record long, you know, dating back to 2012? And, you know, those are things that we don't know, but those are some risks, especially with harvest that's just kind of getting underway. You know, in terms of the stocks report here at the end of the month, you know, things have been tight. You know, you keep hearing that folks are having a hard time buying corn, buying beans, getting covered.
And, you know, we might have a little bit of a revelation at the end of the month here as to how much was actually out there. And, and who knows, maybe this market has been actually tighter than we all thought. And obviously that could have an impact on where the WASDE goes here in October. Right.
Shay
Foulk: I think you're asking all the right questions. Looking forward to Staying in touch here, Garret, as we move through harvest and beyond. I appreciate you taking the time here. If listeners want to reach out to you, pick your brain a little bit, or if they have any other questions, where can they find you at?
Garret
Brown: Well, I guess they can just give me a, give me a phone call. My number is 701-521-0055. That's probably the best way to get a hold of me, or my email at gbrown@kodakgroup.com. And that's Kodak with a C. Real good.
Shay
Foulk: Thanks again, Garret. Really appreciate the time, and, uh, we'll look forward to staying in touch here.
Garret
Brown: You betcha.
Shay
Foulk: Thanks. And thank you everyone for listening to another episode of the Ag View Pitch. We will catch you next time.