About This Episode
Everyone walked into the June 2019 report leaning on a billion bushel bean carryout as proof beans could not rally. USDA printed the billion. Beans rallied about twenty cents anyway. Lowry's explanation is that USDA left bean acres and yield alone, which was not a verdict but a refusal to call a crop with 40 percent of the acres still to be planted after June 1. Once the trade noticed, the number everybody had leaned on stopped mattering.
On corn, USDA cut three million planted acres and three million harvested acres, and Lowry suspects a million of that is drowned-out ground that actually got planted, meaning prevent plant is barely addressed. Thirteen to fifteen million intended corn acres were still unplanted Monday night with rain moving through Illinois. He reads prevent plant at six to ten million and leans high. The ten bushel yield cut, driven by planting date rather than condition ratings, looks conservative next to university planting date studies.
Asked where to sell, Lowry says he has been wrong before and could be wrong now, then gives arithmetic instead of a price. December futures at $4.48 against a $4 insurance guarantee is 48 cents of exposure, and revenue still has to fall 15 percent before insurance pays. Fifty cents on 180 bushel corn is $90 an acre. He also notes an Illinois elevator raised its cash bid seven cents that night, five of it basis, with end users worried about supply.
“The most important thing the producer needs to look at right now is, uh, know their own cost of production, know what current prices are and what that means to their operation”
— Duane Lowry
Key Takeaways
A report that changes nothing can simply mean USDA will not call an unfinished crop. Bean acres and yield went untouched with 40 percent still to plant.
The bearish number everyone leans on is often the first one the market quits trading. Beans rallied twenty cents on the billion bushel carryout everybody expected.
Size sales against the gap between futures and your insurance guarantee. At $4.48 versus a $4 guarantee that is 48 cents, or $90 an acre on 180 bushel corn.
Run the yield at your APH, at APH minus 10 and at APH minus 20 before you set any selling percentage.
Growers take prevent plant on beans faster than on corn, because the corn acre pays enough to fight for and the bean acre does not.
Basis can climb while futures rally. One Illinois elevator raised its bid seven cents in a night, five of it basis, because end users doubted supply would be there.
Full Transcript
Chris: Hey everybody, welcome to the Ag Pitch with Ag View Solutions. Chris Barron and Dwayne Lowery here. How's it going today, Dwayne? We're starting without, without the music, but you got any music for us here today?
Dwayne
Lowry: No, I don't have any music, but maybe that's all right. Maybe it's time to take a look at things a little on the serious side too, and we'll probably have music again on the next broadcast, but not today. We just try to stay to the facts.
Chris: Yeah. Talk to me a little bit about, about what we've seen the last couple of days here. We're late in the day Wednesday. What are you seeing? What do you think for the rest of the week? And, and what do you got to tell us?
Dwayne
Lowry: Well, rather than start on corn, the way you asked that question, I'll probably start on beans. Prior to the report, a lot of people leaned on the idea that you're going to have 1 billion carryout in beans, give or take, for both old crop and new crop. And in essence, that's pretty much what USDA delivered. And leaning on that crutch of 1 billion bushels, the general philosophy out here has been that the bean market just absolutely cannot rally. And after we got the report out, which did show that billion bushels, that was still the, the reasoning that you heard mostly was that beans didn't have a lot of upside potential. And there was a lot of downside risk. But the marketplace has done, you know, kind of the opposite. We've had strength in beans. Today, we're up about 20 cents. And marketplace is acting differently.
And I think part of that is driven by the fact that Uh, the truth be known, we don't have a billion bushel carryout. USDA may have pegged new crop at a billion bushels, but they did not adjust acres and they did not adjust yield. And when you've got probably 40% of your, uh, bean acreage is going to be planted after the 1st of June, maybe even more than that, um, you're— the odds of a yield reduction are quite high. We have a short-term forecast right now that's going to make that planting progress remain very slow in the eastern Midwest. And depending on whether that continues into the first date for prevent planting in beans or not, I don't know. But if it does, my feeling is the producer is going to be quicker to take a prevent plant option on those bean acres than he has been willing to take on his corn acres.
And so suddenly the marketplace is, is now no longer focused on the 1 billion bushel carryout. Now we're focused on the, on other things. And I think that, that is just kind of a reminder of how the market can take what we think to be as the most important given and such an overwhelming bearish, in this case, fundamental scenario, and suddenly find out that the marketplace chooses to focus on something else. And part of that something else is going to be going forward, is what is the exact acreage mix going to be. Will prevent plant come into play? Will the weather continue to keep planting pace at a, at a slow pace? So a lot of things here. As far as corn is concerned, um, back up on the beans. The USDA made no changes in the acreage or in the yield, and that should not be mistaken as a sign that it's just the same as it was a month ago.
It was strictly a punting of the of the football, so to speak. They're not making a decision. There was too much unknown, too much things are still fluid, too many acres probably remaining to be planted. And so they just chose not to address it. And I think that's how you should look at it. As far as corn is concerned— go ahead, Chris.
Chris: Stay on beans for a second. And so, you know, they're kicking the can down the road. Part of that maybe too is, I mean, I, what we look at with Profit Manager, it doesn't look to me like, you know, anybody is, is planning on planting beans on what was going to be or what is prevent plant, or, you know, it just doesn't make sense. So we're $2, you know, away from, from that opportunity to have any kind of money. And I mean, the corn-bean ratio is 2.02 as of tonight. So I mean, it just doesn't make sense to plant beans to prevent plant, at least in a lot of cases. Looks like a better option than anything that's marginal as well, but they probably didn't take that into account.
Dwayne
Lowry: Well, I would agree with you. I think the economics absolutely don't encourage them to plant beans over prevent plant. And I think the— there was really, it really was a struggle to make an intended corn acre appear to be better to plant beans either. But yet some people did that. I don't think it was any big volume. So I don't, I I'm not one that believes soybean planted acres are going to be higher than what they had in their, in their March estimates, although a few people think that. I don't share that viewpoint. But the big deal on acreage will be whether or not there's going to be prevent plant acreage in beans, and there will be some. But the question is, are we talking about just a million? Or could we have, you know, 3 or 4 million bean acres that end up going to prevent plant? And, uh, we just don't know how that's going to be.
All I'm saying is the farmer which was, uh, really desired to plant corn and wanted to plant corn and was willing to plant corn after his first prevent plant date, um, I don't think that same ambition will be there with the beans. I just don't think there's quite as much economic incentive to do it. And let's be honest, everybody's tired of the 2019 planting season.
Chris: Gotcha. Um, talk to me a little bit about the corn, how that report shook out. What do you think about it?
Dwayne
Lowry: Well, I think there's some interesting things. Uh, USDA pegged, uh, uh, prevent plant acreage at basically 3 million. That's how much they lowered product or acreage. Um, but when you consider that, uh, They lowered acreage by 3 million, and you know, you got some acres that are flooded out, drowned out, that never got planted, and they lowered harvested acres also by the 3 million. Um, my guess is all this 3 million is not even all prevent plant. I, I'm not so sure you don't have a million acres that could be lost, uh, from the harvested acres, and it, and it had— did get planted. So I think to a large extent they haven't really addressed the prevent planted acreage system very much either, because you still has, as of Monday night, you had, you know, 13 to 15 million acres of corn intended to be planted for corn that were not planted.
And they probably made a little bit of progress at different locations over the last couple days, but now you got rains in Illinois today, and you're probably going to have the next several days have quite a bit of rain scattered throughout, you know, probably near full coverage in the eastern Midwest. So it's just going to be very difficult to get these remaining corn acres planted, and the calendar is going to make it very difficult for the producer to choose to make that decision to plant them. So I think all of a sudden you're— you've got this prevent plant acreage again that's probably seen as 6 million on the low side, and 3 or 4 days ago that, that might have been brought into question. And I think now if you say it's 6 to 10 million acres per plant, I think now you've probably got more people inclined to go with the upper part of that range.
So you still got a lot of adjustment that can come from USDA on the harvested acreage and planted acreage. They did lower the yield by about 10 bushels an acre. I think that was driven completely based on planting date. I don't think it had anything to do with crop condition ratings. And so from here forward, you know, you could make an argument, could be made that they might try to raise that if the, if everything was perfect. And I think an argument can be made that they'll have to lower that some additional. The crop condition ratings, or, you know, go ahead.
Chris: They're starting from a lower number so that if they do lower it, I mean, that's, that's starting to really tell you something. It seems to me that it tells us a lot that, you know, I mean, I know your, your 3 million acres take your million out, but at least they started doing something. There's a lot of people that didn't think they was even going to do that going into this.
Dwayne
Lowry: Yeah, I don't remember if it was the night before the report came out or the morning of the report. But before the report came out, I, I put in my written comments that, that it was pretty amazing how quick USDA was to move on this the whole process of deciding whether or not anybody was going to get any extra money with the prevent plant acres beyond the 55 or 60%. And this has been going on for a couple of weeks that they were, there were certain hints out there that, that they were looking for ways to push more money towards the farmers, and in terms of allowing them to collect on that trade payment without being able to plant a crop. Looking at possibly increasing the payment on the prevent plant acres. And I think all that was a statement about how significant and serious the situation we were dealing with.
And I looked at it from a standpoint that maybe we should look at that and expect USDA will be aggressive with the acreage numbers and the bushel per acre forecast, which would be unusual in a June report, but I felt there was a strong indication that they were going to be more aggressive in the June report. And it turns out that they were. And I think that if that is true, that it's based on how serious USDA recognizes the situation, then I think, you know, there's probably a good chance we're going to see additional reduction in acres, and we might see additional reduction in yield. If you look at some of the studies done by universities based on planting date, this 10 bushel an acre is very conservative from what it could be.
And when you look at some of the conditions that we have here, um, you know, not everywhere, some places are, are pretty decent, but we just know there was a lot of acres planted in soil conditions that were not ideal by any means. And we can see that showing up on the plants as they're going into early development. So we still have a situation here that What USDA did was point us in a direction. But I don't think that we should look at that as being the low production forecast of the season by any means.
Chris: That's where they're heading anyway. What do you, what do you think about, you know, some, you know, real quick, and we kind of want to keep this one fairly short, but real quick, tell me, tell us a little bit about, you know, as we move forward, again, throwing you on the spot, you said the other day, it's okay if I put you on the spot. So What do you think? You know, here, you know, I still hear from growers all the time, you know, hey, should I be, you know, rewarding a rally here? Where should we be plugging these sales in? You know, what do you think? I mean, obviously, you know, you— everything you're saying is indicating this thing could be moving higher. What do you tell a guy when he's saying, you know, what should I be doing here? What do you tell them?
Dwayne
Lowry: Well, the first thing is, you're correct. Everything I'm saying and telling people here leads them to think that the market's going higher. It leads— at minimum, leads them to think that I think it's going higher. But if that's the case, and if that's true, then the second thing I need to tell you is, hey, I've been wrong before. So there's no guarantee I won't be wrong again. And I might be wrong right now. But I'm— so that's always a possibility. And that's the way it is with everybody. The most important thing the producer needs to look at right now is, uh, know their own cost of production, know what current prices are and what that means to their operation, and then do an honest assessment of where they think they're at for yield and production, and then back into that and find out if it's profitable.
And I'm going to say that for most people in the current situation, they're probably some level of profitability.. If they have a lot of concern about their production potential, there's a good chance that the insurance is probably going to kick into play. And with the prices that are offered now, it might still be profitable. So that's the first thing everybody's got to re-figure out those starting points. And I think they need to look at the price from the standpoint, if I get APH, if I get 10 bushels less than APH, if I get 20 bushels less than APH, or whatever it may be, for their particular area. So that's the first thing to look at.
But I think that if the, the government target price or the insurance payout price is $4, and now you got December futures at $4.48, that's 48 cents a bushel that if I'm wrong, and the market suddenly turns lower, or some new development comes over the horizon that none of us saw coming, and prices were to go lower, you're risking 48 cents, plus you're also risking the, the 15% that revenue has to go down before you can start to collect on insurance. And for— if we just said it, if we only focused on the 50 cents that the price is higher than where it was on the above your insurance guarantee price beforehand, before this rally even started, then 50 cents a bushel, if you have 180 bushel corn, that's $90 an acre. That sounds like a lot of dollars to leave on the table. So, uh, a guy probably doesn't want to do that on everything.
So basically what I'm saying is there's probably merit in getting some price protection here, but how much that price protection, how many bushels or what percentage of what you're going to grow is going to depend an awful lot if you're an area where you got all your corn planted as opposed to an area where you did not get it all planted, or you got a large percentage of it planted under conditions that don't make you feel very comfortable about your yield potential. So I think there are different strategies you can look at. There are option strategies available, you know, too many things to go into detail in this broadcast, but you know, anybody can contact me or you to, to talk about those things if they want. But, uh, you look at option strategies, you can look at, you know, hedge-to-arives, a lot of different things.
Uh, but we are probably far enough about that, above that insurance price that there is merit in making some sales here. I get that.
Chris: Wayne, I was going to mention that too, real quick, and we probably should be wrapping up. But like on basis, I mean, that you said hedge to arrive, I mean, to me, for a lot of these growers that are cash only, or, you know, do feel like they want to take a little, you know, have a little bit set up there, to me, that looks like a pretty good approach too, because this basis in some of these areas basis has continually improved both on old crop and if you look at what they're doing with some of the new crop now stuff, that basis has gotten quite a bit better. So I think that might easily continue, and especially in states where planting is not getting done very well.
Dwayne
Lowry: The basis has definitely gotten better. And that's something that we alerted people to a few weeks ago that this, the situation could be such that basis would continue to improve despite the fact that we could have a futures rally. And I think That's worth mentioning again that basis is improving even in the new crop slots here because there's a real concern on the part of the end user about the availability of supply. And they want to own this physical bushels and they're paying a premium over maybe a typical new crop basis value just to get it done. I worked with elevator in Illinois and their cash bid went up 7 cents tonight.. And that was a nickel improvement in basis for old crop and the new crop bids also improved on basis.
And so there, I think there's a real situation going on here that seems to be believed and given a lot more respect by people close to the cash connected circles than say the futures trader, which still really is slow to embrace what we think is the historic part of the situation. Got it.
Chris: Well, Dwayne, I think, is there any last thing, any last comments you got, or we can kind of wrap tonight's conversation up and then we'll kind of wrap one up maybe at the end of the week here? Any other final comments?
Dwayne
Lowry: Well, just to remind everybody again, it's a fluid situation. Things are, uh, can happen and change a lot in both directions, and we don't know exactly what the future is going to hold, but we do know that USDA pointed us in a particular direction. And the odds of them reducing that or shifting that direction, meaning suddenly they're going to add the harvested acres into the corn report, or that there's suddenly increased yields in that report, are— is probably not likely. And even if it did happen, probably wouldn't occur until you got into the August timeframe. It probably won't change in the July timeframe. So There's a lot of things here that can cause markets to have volatility. And I think everybody's got to sharpen their pencil and make sure they have a good grasp on their own situation and how the revenue factors into their own situation.
Chris: Gotcha. Thanks a lot, Duane. And I guess wrapping up what you said, summarizing that volatility moving forward. So, and I think one thing I've learned over the years with a lot of growers is that that volatility does create opportunities. So, you know, we've got some opportunities in front of us. Here as we move forward. So we'll stay in touch and thanks everybody for joining the Ag View Pitch and we will catch you next time. Thanks a lot.