About This Episode
Corn had rallied about thirty cents over thirty days, putting the board near $3.90 to $4.00, which Shay Foulk calls borderline for most operations. Yields were splitting badly: decent reports out of central Illinois, and parts of Iowa fighting to make 90 or 100 bushels after the derecho and the drought. Garret Brown notes 2021 prices look stout too, but the spreads have contracted, which tells him the market sees a 2020 problem rather than a multi-year one.
Light carry between contract months is the market saying supply is tighter than it looks; an inverse says it louder. Brown puts the storage question in dollars, interest and storage cost, then draws the line: it is easy to carry grain just long enough and just as easy to carry it too long. On beans he points at NASA soil moisture maps of Brazil showing very low reserves, and notes that late Brazilian planting pushes the US export window weeks further out.
Then he does the arithmetic that matters. One FCM pegged speculative soybean length near 280,000 contracts, roughly 35,000 to 40,000 above the 2012 record. Forty thousand contracts is about 200 million bushels, so 280,000 is about 1.4 billion, against a crop estimated near 4.3 billion. Funds are long roughly a third of the crop on paper. If rain shows up in Brazil or the Black Sea, that is how much selling is sitting there.
“It can be kind of a fine line between carrying it just long enough and carrying it too long.”
— Garret Brown
Key Takeaways
Narrow carry or an inverse is the market bidding for bushels now. That is a supply signal before it is a price signal.
Interest and storage run against you every month grain sits. If the carry does not cover them, holding is a bet rather than a plan.
Convert fund positions into bushels. 280,000 soybean contracts is about 1.4 billion bushels against a crop near 4.3 billion.
A flat ethanol number in October can be seasonal plant maintenance. Check the calendar before trading one report.
Delayed Brazilian planting pushes the US export campaign weeks later and keeps emptying US supply. That is what the bean spreads were pricing.
Corn at $3.90 to $4.00 is borderline, not clearly profitable. Foulk sends the decision back to cost of production and a margin target.
Full Transcript
Shay: 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: Welcome back everyone to another episode of the Ag View Pitch. This morning you have Shay Foulk with Garret Brown. How are you today, Garret?
Garret
Brown: I'm good, Shea. How are you doing this morning?
Shay: Well, can't complain. We've had some good weather. We were up, uh, running soybeans late last night. Things got pretty dry around, you know, 9-10% on the soybeans, so we decided to let her set until morning and get a good start. I think a lot of guys are in that same situation here. A lot of acres coming out here this last week. Uh, have you seen some Similar in your area?
Garret
Brown: Yeah, similar, uh, over my area here over by Laurel, Illinois. And, uh, speaking with clients up in North Dakota, you know, same thing, we're making some pretty good progress, but at the same time running into some, uh, a little bit wetter stuff that's kind of holding things up. But guys are starting to get into corn here now, finishing up with beans, right?
Shay: And I think as this soybean run starts, keep getting them knocked out, a lot of guys are going to be switching over to corn just to start getting the acres out. Have heard some decent yield reports here from uh, Central Illinois, but I know it's sporadic. Heard some out of Iowa here of struggling to make 90 or 100 bushels on corn just because of the effects of the derecho and the drought here throughout the season. So thinking of all the producers out there that are dealing with some of those issues. But looking at the markets here, um, the first thing I kind of want to touch on this morning, Garret, is you and I were talking offline here. You look over the last 30 days, we've seen about a 30-cent rally in, in corn, and from a market perspective, if you're sitting around that $3.90 to $4, that's right in the profitability range for a lot of producers, but still borderline.
What are some of your thoughts when you think about it from a cost of production standpoint and some of the opportunities the market has presented us? Have you seen action from producers on your end to take advantage of this? And, and what are some further considerations there?
Garret
Brown: You know, a little bit I have. It's definitely, uh, coming into the conversation, you know, because I'm, you know, no doubt we had some sales that were cheaper already. And so we're thinking, well, how can we get that sold higher? What can we do to average up, that sort of thing? Um, you know, I'm trying to, trying to look at volumes. And, you know, obviously not being in the corn yet, not really sure what totally to expect. Um, I guess those are the things that are on my mind and on the minds of the producers. But like you say, I mean, this has been quite a year. We're just kind of hoping to come out of this thing and kind of turn the calendar over, I guess, and look at 2021. Obviously values there are also pretty stout here, but the spreads have really contracted, making you wonder, is this a multi-year issue or is this just a 2020 issue?
And based on where the spreads are at, it kind of implies that, you know, we're focused on the here and now and we feel like we have time to try to make some corrections as we head into 2021.
Shay: Absolutely. And, and I want to touch briefly on, on some other factors that may be impacting that. I know ethanol report came out basically looking pretty stagnant here. Any comments on that, Garret?
Garret
Brown: You know, it's probably partially due to the time of the year. Uh, you know, these ethanol plants going down for seasonal maintenance, and, and we did see a nice step up from the prior, uh, prior week, but it'll be interesting to see kind of where we go from here. Is this kind of a one-off number? Because sometimes one report can be taken out of context.
Shay: Absolutely. I think it is kind of interesting though, talking about the, the maintenance on that seasonal maintenance. A lot of people are, uh, they have questions on that because when a lot of these plants were shut down here earlier this year, whether it's due to COVID or some of the other issues that we had going on, they were taking a lot of time to do maintenance there. So I think that's where some of the questions lie and some of the concern lies maybe on that end of the markets. Um, looking at soybeans, obviously, uh, still fairly strong here this week. Um, What, you know, any, any idea on that, or, or what are your thoughts there, Garret?
Garret
Brown: Well, I think that one's fairly simple, just really hard to try to outguess if that's what an individual is trying to do, right? Um, you know, the dryness down there is very severe, and I was just looking at some of these, uh, soil moisture maps that, uh, I believe it's NASA puts out, and, you know, they're pretty telling. I mean, it's, it's the It's not good. Their soil reserves are very low. And, you know, just again, overnight beans are stronger here. It looks to me like the moisture, that precipitation that's coming, maybe was reduced a little bit. And those expectations are helping to give this market another little boost as we head in here to tomorrow. With the way bean spreads are trading, it's just showing you how important these rains are, that these beans get planted in Brazil. Because if they don't, if If it remains slow, that's going to push the U.S.
export campaign, you know, potentially several weeks further ahead. And basically that continues to empty out the United States. And obviously with the big discount going forward, that's pricing in the supply that is supposedly coming.
Shay: Right. One of the last comments I have here this morning, Garret, is looking at carry in the market, we're pretty light right now. When you look out over the next 6 to 8 months, what what should producers be considering on that as they kind of move into their marketing plan here through the rest of the week and through the rest of the month?
Garret
Brown: Well, certainly, you know, what does it cost us to carry this grain forward? You know, interest, storage costs, you know, the whole gamut of things, I guess, on that end. But, you know, when we're running these small carries, it would suggest that the supply is a little tighter. And in particular, when you run into inverted markets, the market's saying, you know, I want the supply right now. So it can be kind of a fine line between carrying it just long enough and carrying it too long.
Shay: So any last comments here for this morning, Garret, before we wrap up?
Garret
Brown: Uh, you know, I guess the one thing I would just say is watch the forecast, watch the forecast over South America and watch the forecast over the Black Sea. Obviously the wheat market's been pretty peppy here as well, and, uh, you know, we previously have been looking at probably record acreage in Russia, uh, winter wheat. And, you know, that may no longer be the case. We'll have to kind of wait and see what comes out there, but that crop is going into dry dirt, and, you know, if they don't see rain, that could continue to give the wheat market life. And obviously rising tide, you know, we have multiple stories going on here in corn, beans, wheat, and that's what we've been missing, I think, for the past couple years here. But should that change, should we start to see rain in some of these key areas, you know, we have funds that have built up massive positions.
I think I saw this morning that, uh, one FCM was estimating soybean length somewhere around 280,000 contracts. Now if I'm not mistaken, that's around 35,000 to 40,000 contracts more than, uh, what the prior record was back in 2012. Well, 40,000 contracts was around 200 million bushels. So just to put this into context, 280,000 contracts was around 1.4 billion bushels. I think we're estimating current production for this year, granted that might change, at around 4.3 billion. So let's just say they own roughly a third of the crop, supposedly. That's kind of the estimate right now. So, um, it'll be interesting to see where this thing goes. Uh, probably lots of volatility ahead for us to try to wrap our heads around.
Shay: Absolutely. Well, I appreciate the perspective here as always this morning, Garret. And, uh, for everyone listening out there with these marketing decisions, you know, keep this perspective in mind. What is your cost of production? Where do your margin targets lie and how do you take advantage of some of those opportunities moving forward? Garret Kodak Advisory, I appreciate your time here.
Garret
Brown: Thank you.
Shay: And thank you everyone for listening. We will catch you next time on the Ag View Pitch.