Near-term uncertainty, but the horizons offer hope

Narrator: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch! Together we'll stand, divided we'll fall. Come on now people, let's get on the ball and work together. Come on, come on, let's work together. Now, now people, because together we will stand.

Chris: Welcome everybody to another episode of the Ag View Pitch, and we are entering a new week, and you've got Chris Barron and Duane Lowry here. And how's it going, Duane?

Duane

Lowry: Good, Chris. Myself and probably a lot of other people are kind of hunkered at home and not too interested in making any unnecessary travels.

Chris: Yeah, that's for sure. It's kind of a crazy world right now. It seems like the only news is corona news. What, what's your thoughts on all the craziness that's going on right now?

Duane

Lowry: Well, I guess probably to put it bluntly, I'm probably quite stunned at the scope of measures that we're taking to combat this. I'm stunned that, you know, entire states are shutting down pretty much everything except essential industries. I don't know when that's going to end. I'm stunned that the scope of the amount of dollars the Federal Reserve, the Treasury Department, and Congress are willing to, you know, create and push towards fighting this, which it's not like we got a vault and we just go back and get some of that money and then bring it out and disseminate it into the economy. This is just fake money we've printed. We've just manufactured out of nothing. This is printing— this is turning the printing presses on. And, you know, the entire US economy is roughly $22 trillion.

And we've got an aid package that the Congress is dealing with here today on Sunday that, you know, might be up towards $1.5 to $2 trillion. Started out as a $1 trillion project, and it's talked that that's only the first one. So we're talking about putting lots of trillions of dollars into this thing, and so much so that we're dwarfing the size of the bailouts that occurred in 2008. And so I made a comment to you offline, but it's like, what kind of PowerPoint presentation did lawmakers see? What were they told that would cause Republicans, conservatives, libertarians to abandon some core conservative core principles and just fully embrace this with hardly any reservations and talk about, you know, additional packages coming later. I'm not saying it's wrong, don't read that into it. I'm just shocked that they're willing to do that.

And it makes me think that the scope of it, or the fear of what the scope might be, has been something that has really rattled their thought process so much to embrace this. And when you talk about seeing states shut down for weeks or You know, we don't know if it's going to be months. We don't know exactly what it's going to be. But if you got $22 trillion economy and you're shut down for a month, you're, you're just under $2 trillion a month that's largely out. And if the government's going to underwrite that, you know, and they're talking about, you know, even 2 or 3 months and some, of course, number of months, time frames go out longer than that, all of a sudden you're up to levels that are going to be, you know, 3 to 6 times what was spent for the 2008 crisis.

I think the biggest takeaway from this is somehow the dollar is going to get significantly weaker by printing all this money. And if we hope that it's a short-term gap in our economy, that whether that's measured as a month, 2, 3, 4 months, whatever it is, If they're going to try to backstop all of that with the printing of money, I don't see how the outcome isn't a very weak US dollar over the months ahead. And ultimately that leads to inflation when we get— actually come out of this on the other side. I personally think that's a very big storyline that nobody's really talking about. But so I'm just kind of stunned at the scope of this thing. It's It's something that none of us have ever experienced anything quite like it.

Chris: That's just it, you know, it's hard to ask a question and feel like anybody can give anybody an answer because pretty much everybody's in uncharted territory, wouldn't you say, here?

Duane

Lowry: Well, I think that's correct. There's probably no other way you can really look at it. I will say this though, markets seem to go through the same stages and the same processes, whether it's, you know, a normal swing of emotions from, you know, the markets being big bullish to big bears or vice versa. They go through the same type of structural changes and the same patterns show up. But in this particular one, you're wondering what the scope of that is. And everything we've talked about so far has been all about this coronavirus. Well, last week you had China start to move towards making some purchases, which should give some validation to the idea that maybe Phase 1 is still legit. You have news reports from inside China people directly, boots on the ground, businessmen, U.S. businessmen saying U.S. is, you know, ramping up.

I saw the CEO of FedEx was quoted as saying that China's largest companies are at 90% of normal operations right now. And he said that the smaller operations are at 70% of normal. And FedEx is continuing to fly a large number of flights in and out of China every single day. So he's in a position to, to kind of know, and that sounds encouraging. The other thing that I would point out, that if you went back to February 25th and you plotted what China's domestic soybean price was, and then you plotted that last week, it was up like, you know, 20%. Well, that's like a dollar and a half in beans. I'm not saying it translated to $1.5, but in terms of percentages, that shows there's recovery. I think on the one hand, we should feel positive and confident that we get out of this, get through this, you know, things could quickly improve.

We also have an economy that's structurally much different and better than what, say, it was in 2007, 2008, before things finally cratered at the end of 2008. So the— if, if the— what the government and the Fed are doing now to pump trillions of dollars into the system to try to fill the gap for what's being lost, if that proves to be the correct approach and proves to be successful, we can come out of this and very quickly start to ramp things up. So that's kind of encouraging. So we also have a situation last week, it was kind of in the trade Thursday and Friday, that the marketplace was hearing talk or expectations or however you want to call it, that some of these South American ports would shut down and not be able to ship. And that would make the U.S. like the only game in town.

Over the weekend, there's been conflicting statements on that where some government officials there have indicated that they're going to keep the ports open. As we're recording this, I don't really know what the outcome of that is or what it will be. But there's just a tremendous amount of things that are circulating here. And the other part of it is, and I— you can't get away from it, all of this is operating under a cloud of fear and emotion that, in all honesty, may not have peaked. It may have peaked in terms of initial fear and emotion, but now that fear and emotion is concerned about how long this thing drags on. And I'm not sure that has peaked yet.

And as long as the numbers are going to continue to go up in the U.S., which they will because they're getting more testing out there available, you know, I'm afraid the attitudes around here are going to stay, you know, soft, concerned, and fearful. And it's possible that continues all week long and into the reports that we have from USDA on March 31st. So I'm concerned that price action this week will violate last week's lows. May not be by a lot, and it may not stay down there for an extended period of time or have prolonged trending lower patterns from there, but it'll be— feel like an extremely heavy burden to bear in, in the mind and the mindsets of traders. And so I'm suspicious that happens.

In the same token, despite all of this stuff we've talked about, which is basically everything in the here and now, I am fully convinced that once we get out of this, get onto the other side, and we will get to the other side, then I think that the entire economy can, can come back quickly and robustly. And I think that the U.S. ag sector can as well. And again, I think it's going to be very, very interesting to watch what that US dollar index does. Right now it's about 20% higher, maybe more than that, at least 20% higher than it was during the 2008-9-10 period. And at that time, it seems to me that the Fed, if they're pumping all this to try to create inflation, the odds of getting a weaker dollar would seem high, and it might even be part of their plan.

And so I think if that dollar were to go back to where it was in 2008, which I think could actually go lower, that's a 20% reduction there. That can, that can have quite an influence on agricultural prices. It's, it's an unknown, but it's something that I think everybody should keep an eye on and start watching that dollar index and see if that indeed is what is going to happen, that we, we turn that dollar in and start turning it to the downside. So there's just a lot of things here to watch. We still have the crude oil situation with Saudi Arabia and Russia. I personally think in terms of market sentiment, I think that's actually more concerning to the marketplace than the coronavirus is, but the coronavirus gets all the headlines.

So far we don't have a fix there, and So as long as we got some more pain coming from there, that's— that none of this creates a good environment in the short term, but it may offer lots of opportunity for better prices after the short term.

Chris: So you talked about a bunch of different things there. One of the things last week, uh, just to tie back in here to the corn and soybean market, we saw some pretty good strength in the soybean market, and we saw that ratio Corn to bean ratio improve, you know, where corn or where soybeans now are, are, are getting a little bit better where, you know, I've heard some analysts talk about, you know, some farmers may be looking at beans as an opportunity now, maybe more so than they did a couple weeks ago.

I played with some numbers earlier today with some of our key clients that really know their cost of production, dialed things in really well, and they took about 15 of them and did some math and came up with you know, still, we're about 40 cents away just in that data set of just some, some top-level producers I grabbed, looked at the numbers, you know, beans were still 40 cents away from where they would need to be for, for any of those 15 anyway, to sit down and say, gee, maybe I should think about planting a few more beans. And at that point, that was just bringing the playing field to equal. It wasn't saying that, okay, soybeans would be better, plus a lot of people already have their decisions made, I think, on what they're going to plant. Do you have any comments on that, on where we're at?

You know, because you hear, you hear people have these conversations, and when I sit down and look at the actual numbers with some real farmers and put some real data together, I'm not seeing that yet. What, what are you seeing there in that relationship between corn and soybeans?

Duane

Lowry: Well, first of all, when that relationship shifts, it depends what the back— what kind of a backdrop we have. If those relationships are, you know, profitable, it means one thing.

Chris: If they—

Duane

Lowry: if those relationships shift and both crops are not producing a profit, it creates less incentive, I think, to make that shift. The, uh, relationship right now between corn and beans— yes, beans have gained on corn, but I think if you look at it from the perspective of going back to 2008, you're still on the bottom side of most of the time frame of the last, you know, 12 or 13 years. So there's not any great incentive to beans, but the pressure on the corn, the ethanol situation, which we haven't even talked about yet, The ethanol situation has created a fear that this cloud and burden of corn could last for an extended period of time. And so it was just this last week that corn basis at ethanol plants started to take a tumble, and the ethanol plants basically said, we don't want any corn for a while. And some of them, you know, are just not taking any corn for a while.

There is a fear that that could last for an extended period of time, that is having some people— causing people to at least have the conversation of, do we switch? Okay, and then you have— so there's, there's talk of it. I know some people that actually have made a decision in the last 2 weeks to switch to less acres of corn and more acres of beans, but I'm not sure that there's anything really statistically here that is driving that as a, as a confident reason to make the change. It's more of a fear that the corn market, you know, won't be able to recover for a while, as opposed to the, to the fact that the bean market is going to be all that great. And they also— people also have a fear about what that acreage report will be on the 31st. They're fearing big numbers. So people are talking about it. The stats may or may not back that up, but people are talking about it.

So, you know, maybe some occurs that way. I mean, I Your numbers, you're saying they don't, they don't suggest any switch. Is that the present time? Is that how you answer that?

Chris: Well, that's what I'm seeing with our client base. And part of it too is, you know, it's a little different when you get into fringe areas too. I mean, there are, there could be some exceptions to this. But just generally speaking, I don't see much shifting yet. I mean, we still, we still need probably another 40, 50 cents yet in the bean market relative to corn. And then to your point of, you made a good point where if both of them are still in the red, you know, you're going to plant whichever of the two you're going to lose the most, the least amount of money on at a certain point, unfortunately.

And, and part of it too is, is what, what's your insurable level, you know, in, in some cases where we see in the I-states, for example, where land cost is a little higher, you know, it's hard to plant the soybeans because you know, the gross dollars that you can insure significantly higher on the corn side of things, and so it lends itself more to the corn. And then it also has a lot to do with, with just, you know, your yield prospects of corn versus soybeans. The corn, for a lot of the people we work with, has tendency to give you a little bit more reliability in terms of yield consistency. And so there's some other factors that that go back into that as well.

So I guess I'm— all I'm saying is I'm just seeing it a little different than what I've been hearing some of the analysts talk about, and that was kind of why I was looking for your opinion on that, because I just— I don't see that anywhere close to people considering going to beans yet, if you really sit down and do the math and really analyze, analyze it from a financial perspective.

Duane

Lowry: I agree with that, but it is starting to be talked about, and I think the break from the ethanol-related situation has really caused people to step back and say, oh my gosh, what happens to corn if, you know, a consumer of a third of our inventory suddenly wants to purchase, you know, a sizable less quantity? So I think that's caused that fear level. I will also say this. If that March 31st acreage report happened to be kind of bullish beans and started some sort of a price rise in beans, I think it could very quickly become something where people would, would, would make adjustments and lower corn and raise beans if that report gave market action that encouraged it. I think at that point the farmers might be in a, in a frame of mind that they're more quickly to embrace it.

This year than they maybe would have been in other years under similar situations where maybe the bean market started to rally.

Chris: Well, Dwayne, if, if growers are considering that, you know, adding more bean acres to your mix, you better be putting a floor on that bean market if we have a rally in the meantime, and you all of a sudden shift those acres over because of that, and then something else happens 2 months later that's unforeseen, and you made that shift over. So many times I see people add acres of one crop or another, and then they don't put a floor in, or they don't price protect, make that decision based on the here and now, and then some other dynamic changes things and, and they're on the other side of it the other way. I mean, does that make sense?

Duane

Lowry: Well, there's, there's truth in that. And I would not necessarily argue with somebody that's putting in place price floors. But there is no way I'm going to encourage anybody make sales at current prices, or even on a small recovery. I would be willing to say, okay, if you want to buy puts, that's fine. If you want to buy puts and sell calls that are out of the money, you want to— whatever you do, I think the marketing strategy should still leave you some room to get better prices if they actually were to unfold. And, uh, so I think there are two different things. Establishing a price floor is one thing. Uh, creating finality in your opportunities to get any more is something completely different, right?

Chris: And I'm just saying, you know, a lot of times we see acre shifts and then dynamics change, you know. Absolutely.

Duane

Lowry: They're not—

Chris: absolutely— a constant.

Duane

Lowry: So, um, having said that, switch—

Chris: yeah, and, and having said that too, you know, you, you know, you alluded to the ethanol, um, and some of the plant closings and some of that kind of stuff, and with basis widening out That's, that's something that we've all seen, we're all dealing with. But, you know, you and I were talking offline with all the stuff going on in the conversation with coronavirus, you're hardly hearing anything about the USDA report that we're going to be, you know, looking at here, not this week, but the following week. Is there any comments on that, things we should be thinking about, or how that relates maybe to basis on what we might hear from that, or any, any any thoughts, I guess, on new crop or whatever that we need to be thinking about as, as we get towards that?

Because like I said, everybody's talking coronavirus right now and nobody's thinking about what that would be big news if this other stuff wasn't going on.

Duane

Lowry: Well, typically this time of year we would all be keyed in on that acreage report and stocks report. As far as the acreage report, I think we've kind of covered that to a lot degree, and I think the marketplace has kind of had one eye on that for some time, especially the corn aspect of it. I'm not sure the marketplace has really grasped or embraced just how low of a bean number we could possibly get out of that acreage report. They've been more focused on a big corn number. But the stocks report, you know, right now people have completely forgot there's a stocks report coming out on the 31st.

But you go back in time 2, 3, 4, 5 months, then that first quarterly stocks report was seen as— not the first one, but the March one— was seen as a strong indication of how the consumption was and possibly a statement about whether the 2019 crop may have been overstated, which in real time most people thought it was. And I think to some extent, even after harvest, They still thought it was, and— but I've heard from ethanol plants, I've heard from livestock feeders and processors, all of them have told me that the value of a pound of corn from '19's crop is not producing the results at the end as much as, say, an '18 crop. So we're taking more of those bushels to get the same result. And if that is true, if that's a legitimate trend that is serviced, we might find that in that quarterly stocks report. And thus we could find usage higher than expected, carryout lower than expected.

You know, that's an important dynamic that, that might still be ahead of us. So I think that while that's kind of gotten forgotten, it is something that is worth keeping an eye on. But you know, even though we think it might be worth keeping an eye on, the marketplace is still largely engulfed in, in fear and uncertainty.

Chris: What do you— I want to ask a question that, as you were discussing that, that just come to mind. You know, we're sitting here, what do you, what do you tell a producer that's sitting on a fair amount of old crop corn right now? Um, because, you know, we were talking about basis and Also heard some analysts saying, well, there was a fair amount of fear sales going on, possibly too. And I've talked to a couple of processors that told me they were buying some corn. So somebody was selling some stuff. What do you tell people that are sitting on a fair amount of old crop corn right now, you know, with all the fear that's going on, to be calm and what's the plan?

Duane

Lowry: Well, in my daily comments this past week, uh, uh, and I might even have it in there on my Sunday comments, I don't recall last week, but I talked about possibly removing some of your risk in the corn and replacing it with risk in a soybean position. And some will say, well, maybe that's speculative. Well, doing nothing and holding your position, corn position, is also speculative. It's just a matter of where do you want the risk? And I looked at it from the standpoint, the historical price relationship of beans versus corn. And the beginning, that onslaught of that ethanol storyline made me, you know, be willing to shift that risk away from beans or corn and into beans. So there's something like that. That's not for everybody. And that's probably for a small number of people.

I also talked to growers about possibly buying puts that expire, you know, very quickly just to try to get, you know, some near-term protection. That may have had merit for some. Others I talked to on Friday about taking advantage of the strength to hedge up for those positions for a short period of time, whether that was futures or options. And the last thing, choice that you have, if you don't want to do any of those, which a lot of people would fall in the category that none of that what I just said was appealing, Some will just choose to hold. And if they do that, my— I would urge them to say that if you're committed to holding, you have to be committed to holding them, holding your inventory for 60 or 90 days. You can't be committed to holding them for 2 or 3 weeks and then see what it looks like then, because you run the risk of, you know, selling at the bottom.

But if you're going to hold it and take the mindset, I'm gonna hold this till we come out of the coronavirus thing, I think that's a legitimate course of action. I don't think that's, that's a, that's a bad course of action. Selling at these prices may prove to be the mistake. You know, I don't know, but it's, it's not unreasonable. I would just encourage somebody that's on a pathway where they are going to hold that inventory. They just kind of have to tune things out for the next week or two and try to keep their focus on, on the optimism that once we get through this thing, things will be better. And you try to avoid the panic sales. So I guess that would be my recommendation is I don't think that selling here in the next week or two is going to be a good approach. When you get 60 or 90 days out and you look back and evaluate, was that a good sale that I made on the last day of March?

I'm guessing the answer will be no.

Chris: Yeah, and in the meantime, keeping a close eye on the quality of the physical stuff too, because we've heard a lot of people talking about condition, even when it looked good, smelled good, starting to become in question too. So if, if somebody has to move stuff along those lines and, you know, do you do it, do you do a basis contract, or, you know, what's your thought there?

Duane

Lowry: If you're— obviously the condition of the grain would be the, the worst thing that could happen to you. So if you have corn that maybe was put away at 18 or 20%, which there certainly was some of that, keeping that grain, that temperature, moisture of grain over the winter is one thing. As temperature warms up, that's a completely different scenario. If you're caught in that position, then you don't have a lot of choice. You are going to have to move that product. And then, you know, you could sell it and be done with it, which I think would be a mistake. You could do a basis contract, which might be okay. And, uh, otherwise you could find somebody that's got, uh, free DP or something, something of this nature. But, uh, um, my inclination would be to, uh, if you're in that position where you're forced to make that sale I guess I'd make that sale now.

And I would look for an opportunity to reown that on paper, whether that was with options or futures, and, and/or I would, would look at doing the basis contract, which in essence is the same thing. Gotcha.

Chris: Sounds good. Well, I'm just trying to look at my list. You did, you do a good job of answering my questions before I get to them. So we've discussed the, the US dollar and the crude oil thing and China basis. Coronavirus and a few other things. Anything that we haven't touched on that, you know, that you think we need to be paying attention to, other than the fact that I want to say that, you know, with all the fear that's in the environment right now, want to put a plug in for a podcast that I'm going to be doing with the pastor from our church on Tuesday on just managing fear through faith. And, you know, it's faith versus fear. And I think that's a key thing. We gotta, you know, pay attention to what's going on, obviously, but not let the fear drive our decisions and all the crazy noise and everything that's going on in the environment right now.

As you said, Dwayne, on the corn side of things, not letting the noise cause bad decision-making either. So any final comments though that you have or anything that, you know, that we want to, leave the listeners with going into this new week?

Duane

Lowry: At the bottom and core of my soul, I believe that the— we are not made to live a life of fear based on fear. Fear of and respect is one thing. Being consumed by fear is something greatly different. I think I know the pastor that you're going to interview on Tuesday, and I guarantee the audience that that will be a podcast worth listening to. And so I think you've touched on something that is a great way to finish here. And so out of the last thing that I would say would be highlight that, and that probably takes precedence over anything. The other things I would say is try to avoid making marketing decisions right now in this window. This is probably not a good time to do it. I happen to think short-term we are vulnerable to some additional weakness going into month end, uh, possibly below last week's lows.

Um, I think the big picture, keep an eye on that dollar because if that dollar weakens, and I, I think it's a high probability it does, that sets the stage for something much better for agriculture coming out of this than what you're dealing with right now. And try to keep your focus on what's ahead when we come out. Try not to focus on, on this crater activity here, which we hope is temporary. And I kind of think we have to hope that it's temporary. And so I'd watch the dollar index, have a positive attitude, try to focus on a timeframe that is past this, not in the, in the trenches that we're in right now.. And, uh, um, tune in for Tuesday's podcast because I think it'll be an exceptional one.

Chris: Sounds good, Dwayne. I appreciate the conversation today. I think we had covered some good stuff. And if anybody out there has any other questions or things that we need to be discussing, please let us know. But thanks for the conversation, Dwayne.

Duane

Lowry: All right, thanks, Chris.

Chris: You bet. And thanks everybody for listening again. To the Ag View Pitch, and we will catch you next time.

Narrator: Thanks for joining us on today's episode of the EggView Pitch. As always, you can reach out to us at cbarron@agviewsolutions.com or duanel@netins.net. We'll catch you next time on the EggView Pitch.