Pay attention to basis now: Steve Johnson, ISU

Shay

Foulk: Hey podcast, thanks for tuning in to another episode of the Ag View Pitch. Today Chris talks with Steve Johnson from Iowa State. He's doing a lot of great work there, I think has a very insightful message for today. It's definitely something that you're going to listen to the full 20 minutes and get something out of. Chris mentions later on in the episode a basis and storage tool. If you are interested in this, please email us right away, cbarron@agviewsolutions.com. Again, that's the letter C, Barron, @agviewsolutions.com.

Steve

Johnson: Enjoy.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we've got Steve Johnson, Iowa State Farm Management Specialist. How's it going today, Steve?

Steve

Johnson: It's going really well. We're getting a little bit of sunshine, and we need about 4 or 5 days of sun and I think we could wrap up a lot of the corn planting in most of Iowa.

Chris

Barron: That would be great. It sounds like, you know, Iowa and, and Nebraska and some of the areas are really getting things in the ground in good shape, and there's a few other areas that are, that are kind of trying to miss a few rain showers here yet, sounds like, too. Yeah, I agree.

Steve

Johnson: I think the western front's set up very well right now, and I think the concern that I have are going to be the corners— too dry in the southwest corner corner, Kansas, Colorado, you know, not enough crop in the ground in North Dakota. But then I see that cool, wet soils, especially from basically Minnesota to Pennsylvania. So I'm really concerned about the eastern northern belt right now.

Chris

Barron: Yeah, yeah. Well, we're gonna, we're gonna get what we, what we get on the weather. And, and sometimes it's kind of that way in the markets. And that's kind of where I wanted to lean into a little bit with this conversation with you, Steve, is around the idea of some of the opportunities that we have, I think, in front of us that we want to make sure we pay attention to. And one of those key things that I think we want to start the conversation with here is basis. I know you sent me some information and have some pretty good ideas on some of the challenges that are in front of us with managing that and with both old crop and new crop. So let's kind of lean into the conversation. I'm going to have you kind of start out and give us a synopsis on some of your thoughts around some of the basis risk that's out there right now.

Steve

Johnson: Yeah, I think COVID-19 increased our basis risk. When we took these ethanol plants offline, especially the big ones in Illinois and Iowa as well as Nebraska, I think we probably weakened our basis probably 10 to 15 cents. Everybody just said, hey, I'm not going to bid up. I'll just bid 10 or 15 cents less. Chris, I'm concerned that we're in a window. I think you got about 30 days. I think by the middle of June this basis game could be over in the Western Belt. It is likely, um, as we see bidders come online, farmers are busy, they put crops in the ground this spring. I think this is a great basis opportunity, and I think it closes very quickly. If you wait until August or September, I believe your basis risk will be even greater. I would believe the basis will probably be another 15 or 20 cents weaker than it is today. So I think there's risk of old crop basis.

Don't let this get away. Um, in the Western Belt, I think you've got 30 days, maybe about 45 days in the Eastern Belt, but as soon as we see these crops go in the ground, I just don't think anybody's bidding up to get old crop corn, especially with the quality concerns that we have for last year's crop.

Chris

Barron: I know you get around a lot. You were kind of all over the place this winter speaking. What are you seeing? I mean, we talk a lot about the poor grain quality as things warm up and the bins start to heat up. That is going to be a pretty big issue, isn't it?

Steve

Johnson: It already is. I mean, every week we hear about farmers that got into their bins and found out there was, you you know, 16 and 17% moisture corn, uh, caked to the walls of the bin. And I just think that's going to play out all spring, well into summer, especially these guys that really don't know what is in their bins. I'd say you'd want to go ahead and get that corn moved now and really be in tune with quality issues, because I think when we get into probably August and September, there's going to be a lot of poor quality corn that's moving. And again, it's probably those that didn't pay any attention to the quality of the corn they stored, and then here comes the weaker basis. And Chris, I'll be honest with you, by August, September, um, I think futures prices will be back to about where they are now or lower.

So I think you've got to be able to separate basis from futures prices right now, both old and new crop.

Chris

Barron: So on the basis, we talked a little bit offline, but there are, there's a category of items that really emphasize why this basis could very easily get worse and worse pretty rapidly. You look at the potential for a good crop coming on, we look at the potential for maybe some price increase And whatever price increase, they're probably going to take that away and base this instantly almost on old crop especially. You look at the lack of demand, the issues going on with ethanol and a lot of the plants either not grinding or barely running. And then the final concern is if everybody starts moving stuff at the same time, to your point, you know, between grain quality and all of a sudden, uh-oh, I got to have the bins for another crop at some point here. People start getting caught up on the spring work and start moving stuff.

So with all those things in mind, what, you know, what are some of the specific things that growers should be doing right now if you're sitting there, you know, if you're a grower that's sitting there with 30% of your old crop, what's the, what's the strategy?

Steve

Johnson: Well, separate basis. So I'd go ahead and commit my bushels to delivery, whether you deliver them now or you at least agree to what the basis will be. So a basis contract, and then fix the basis, agree to deliver the bushels, keep the futures open, stay long the July. And so you reward both. You reduce the risk of basis and cost of ownership, which is cost of storage and interest, and at the same time I think that we could put another 15, maybe even 20 cents on the July corn. Let's stay long July corn, but let's not get into hanging on to July corn much beyond that first notice day. I think by the time we get to, you know, 27th of June, we've got to get out of that contract. But I'm targeting the July corn in that $3.30 to $3.40 range. I see a lot of resistance. I'm a chartist, I'm a little bit of a technician. I see a lot of resistance as we get above $3.30.

So again, I'll sit tight. I'll go ahead and commit my bushels. I'll use a basis contract. I'll deliver the bushels. If you just have a futures account, great, just deliver the cash and buy the July. But I think I want to be long the July at least for the next 4 to 6 weeks. I'm willing to take a little more risk on futures, I just don't want to take that risk on basis.

Chris

Barron: What do you say to the producers that are going to sit there and want to wait first for the price? They're going to— probably likely be giving up a bunch of the basis opportunity.

Steve

Johnson: You're gonna get left behind, guys. This idea, I'll wait for futures to rally, then I'll sell— no. The good marketers that I work with in the Western Belt know that you've got to separate basis from futures. You've got to learn how these contracts work, and if you don't have a broker, you've got to talk to your merchandiser. So if you don't know how basis contract works, then put 5,000 bushel on a basis contract and figure it out. These are really risky times in row crop agriculture, is you've got to learn how to utilize these contracts, and you don't necessarily have to have a broker, but I think a basis contract, like I say, in this window of 4 to 6 weeks and delivering the corn and fixing the cash price, but I want to stay long the July corn a little bit longer. I would say sometime, and June, I'm shooting for that $3.30 to $3.40 range.

Then I'll add on all the money the government's already sent me, or the government's gonna send me, and I'm right back to $3.60, $3.80 corn. I think we're just— we're, we're too focused on a cash price, so we're not thinking about all the money that I've already got from the Market Facilitation Program payment, or I'm going to get from disaster payment, or I'm going to get in October from the PLC payment. So I don't think I don't think farmers are hurting as bad as they would tell you, but I want to move this old crop corn. I want to make that a priority in the next few weeks.

Chris

Barron: Well, and I like, I like your comment there. That's one thing we've, we've tried real hard to make sure the clients at Ag View Solutions that we work with have understood the point that you just made, that the dollars and cents that we've gotten from, you know, the MFP payment or whatever other assistance that we've gotten in some of the northern states, that those dollars that have come in really need to be calculated not on a per-acre basis or not just on a dollar basis, but need to be recalculated to the crop that was on that acre on a per-bushel or per-unit number so that you can assign a value and say, okay, just like you said, I'm selling this corn for $3.60, when you figure the revenue that came in on a per bushel basis rather than, you know, the $3.30 or whatever. That, you know, kind of backing you up there. Yeah, I agree.

Steve

Johnson: I just think we're too focused on just the spot cash price, and you've got to move beyond that because there's futures price risk. And then, like I say, I think we're going to look back at '19 and '20 and say, look at the amount of government money that they put in my checking account and I didn't even consider that as a part of my crop revenue.

Chris

Barron: Right. Anything else, you know, we're going to have another podcast here we're going to kind of touch on MFP in a little bit more detail and a little bit more on the government assistance and COVID-19, but anything else that on the marketing side in this podcast that we want to hit, anything I'm not asking that that you think we should be touching on?

Steve

Johnson: Well, let's move to new crop because I think about the same time that July corn rallies into that $3.30 to $3.40 range, I think that the funds will be initially in the July, but I think we're going to get a new crop opportunity. 8 straight years, Chris, we've rallied new crop corn and new crop beans in May and June, and I think that's going to happen again. Uh, last year it started on the 13th. This year I think it started a little bit early. I'm not saying that we're going to put 50 or 60 cents, but I'm targeting an area—

Chris

Barron: December corn—

Steve

Johnson: I'm targeting an area of $3.56 to $3.65. If you do not have enough corn sold and you've got cash flow concerns this fall and early winter, I think you have got to trigger sales. And again, if you've got storage or you want to use the March contract, there's some carry, not a lot of carry, maybe 12, 13 cents, and you can use the March contract, but I'm targeting an area of $3.56 to $3.65 December '20 corn. And Chris, those are retracement areas, those are Fibonacci retracements, 38.2%, 50%. So I think having some sales in place, and I think you want to make sure you've got a good marketing plan, I'm concerned that if we go plant this 95 to 97 million acres of corn, we're gonna be right back down here to $3 December corn futures come harvest.

So I want to capture that $3.56 to $3.65 December corn futures, add another 12 or 13 cents if you want to use the March contract, if you can store these bushels on farm for a few months. So I think there's a futures need And that need is probably sitting out here in this same 4 to 6 week window, probably before the June 30th report, which is our acreage report and our quarterly grain stock report. So we're going to survive the May 12th USDA reports next week. That's WASDE and crop progress. But remember, that ending stock number that we see for the 2021 crop is going to be way over 3 billion bushels. So I think you've got to take advantage of weather uncertainty, grab December March corn futures, and do not let that get away from you.

Chris

Barron: What about, you know, you talk about, you know, that this Dec '20 and that $3.56 to $3.65 range, you know, for a lot of growers, and one of the tools we're working on at Ag View Solutions and we're working with some clients on is those overrun bushels. Not only the price is an important thing there, but as we've been talking about basis earlier here in the podcast, getting that, that price locked in along with basis, assuming that we're going to get another MFP-like type payment. We'll talk about that in another podcast, but if those are price objectives that we can achieve, at the very least those bushels that have to go off the combine probably need to be calculated now or estimated now, and those probably are the first bushels we need to be making sure that we get covered. Is that kind of what you're thinking?

Steve

Johnson: I absolutely agree. I think you've got to grab the futures price, but Chris, I think you've got to come right back in probably before middle of July, and you've got to lock the basis. Think of the amount of corn that could be headed to town come late September, early October. So I think it's a two-step approach, all right? It's probably an HTA that I fix the basis, but I think I want to have that basis fixed probably by the middle of June before the trade knows that all these bushels are out here. I want to work with my merchandiser, and, and I think, uh, quantity speaks. If I can deliver 50,000 bushel and not 5,000 bushel, I've got a little better play on basis. But right, I know my harvest basis. I think we're going to go right back to normal harvest basis in most of the Corn Belt come October.

I think I want to be able to deliver quality quantity bushels, and I want to negotiate that basis in advance. So again, basis contract old crop corn, probably an HTA or a forward cash contract new crop corn. I don't want this basis to get away from me because once we confirm the size of this 2020 corn crop, I just think we're going to get a wide basis, 30, 40 under at the processor, 50, 60 under at the co-ops, and those overrun bushels need to go to town and they need to hit the scales. And then let's hope that we've got those bushels dry so we don't have drying and shrink costs. But I agree, I think the overrun bushels and the cash flow bushels need to get priced, both futures as well as basis.

Chris

Barron: Yeah, that's a good point. And And, you know, like you said, getting it priced, but part of it, the biggest part of the problem might be where do you put it? You know, if you don't have these things established with the processor, some of these places with what ethanol is doing, it's going to take a while before people are driving in before we get this ethanol moving, don't you think?

Steve

Johnson: Oh, absolutely. I just think that if those bushels that end up at the co-op, I'll pray for you. I'm these right guys that are putting overrun bushels at the elevator and then sitting on them for 8 or 9 months and wondering why they're not making any money farming. Well, I can tell you a big one— it's marketing. It's understanding the importance of price risk management, and that's both the futures price as well as the cash price via basis. So again, I think we're sitting in a window, and it's a very unique window, and we'll look back And we'll say, you know, fool me twice, shame on me.

Chris

Barron: Yeah. Well, we have a storage and harvest planning tool that if anybody wants it too, I can sure email it to anybody that listens to this. Just email me at Ag View Solutions and we will get this out to you. But basically, you just go in, you plug in your storage capacity, you plug in your acres, for each of your crops, and basically you put in your scenario of various yields, and it kind of spits out what your overrun is at various yields. And at least I think a person really needs to get started on a plan now, because I think you wait past— like you say, Steve, I think you wait past June, and I think you're going to be the last one to the water trough, probably.

Steve

Johnson: I agree. I just think there's tremendous risk that's sitting out here, especially if we get into August and September and we've got another large crop coming. It's not gonna be pretty, and I don't think the federal government can save you this time.

Chris

Barron: Right. Uh, before we wrap up, soybeans— you want to hit anything on soybeans?

Steve

Johnson: Well, I think that there's probably a little less risk of soybeans right now, um, based on the fact that, um, even though we've planted a lot of soybeans at a very fast rate, I see weather as a bigger factor that soybeans have to face, including the wet weather in the eastern belt. So I'm not interested yet in pricing old and new crop soybeans, and I hope you have no old crop soybeans. But, you know, if you're looking for a price objective, I'm using the Fibonacci, the July beans, $8.81 to $9. The government's already given you over a dollar a bushel, so I think we're in pretty good shape. As far as making money on soybeans in '19. For new crop beans, um, I'm using the $8.89 to $9.07. It's just the high tick on January 2nd for November beans and the low tick from April 21st. I just multiply that times 38.2%, 50%.

Again, those numbers for new crop beans, the November $8.89 to $9.07. I want to make sure I've got some sales on the books when we get into that price range. Again, same type of discussion. I need cash flow. I don't want these bushels sitting in commercial storage, and I think there is basis risk that's sitting out here in beans. Maybe not as much basis risk as we've got in corn this fall, but I do believe there is risk of basis being much weaker as we get into harvest. A lot of these beans are going to go in the ground about the same time, and I'm guessing that we might be back into a more normal harvest kind of that month of October rather than October-November.

Chris

Barron: So how do you use the storage space then? Because a lot of our growers are using the soybeans historically anyway, a little bit different last year, but historically using soybeans as the fall cash crop and using that storage space for corn. Still same—

Steve

Johnson: same way, same strategy, same strategy. If those beans, if our overrun beans didn't get priced, then I want to use January. I mean, if I have any bushels that have got to go to town, great, but I think we're going to see China in here. We saw the, the best bean price set there in December and January for the whole year. So we might get saved on beans, and the saving grace will be China. And then I think we're setting ourselves up for some weather risk in South America. So watch this approach. Uh, La Niña probably isn't in here fast enough to hurt the US bean crop. But we go La Niña, as a lot of people are starting to talk about this fall, that's when we tend to go dry Brazil, wet Argentina. So again, I want these beans priced, but I want some price objectives.

And I think generating cash flow from beans and not leaving these beans out here in storage is going to be the right answer again.

Chris

Barron: Gotcha. Again, any, any final questions? This has been a great discussion. Like I said, we want to follow up here with podcast, separate one on, on some of the government issues. But any other final thoughts on basis and new and old crop here?

Steve

Johnson: The importance of a written marketing plan. We have a website, it's simply the Iowa Commodity Challenge. We have an editable form that you can go in and create old and new crop marketing plans. Put it in writing. I think discipline and the importance of a written marketing plan is one of the most important things you can do besides put this crop in the ground in May.

Chris

Barron: I like the, the thought process of discipline because a lot of times we get stuff written down, but then you have to follow through, right?

Steve

Johnson: I agree. Like I say, I think net farm income is going lower, but Government support will be the saving grace, but we've got to combine it with good price risk management.

Chris

Barron: That's right. Well, hey, Steve Johnson, Iowa State Farm Management Specialist, thanks for your time today. It was a great conversation.

Steve

Johnson: My pleasure.

Chris

Barron: Thanks, Chris. You bet. And thanks everybody for listening. And again, if you have any questions, you can reach out to Steve. Steve, how do they get a hold of you if they need to or want to look you up?

Steve

Johnson: Yeah, just search on the internet Steve Johnson, Iowa State, and you'll see my email address, my phone number. I'm working remotely, as are most of the extension people in the nation, but we respond to phone calls and emails. And then I'm setting up a new website called the Virtual Ag Marketing Club. We should have that ready to go 1st of June. Again, Steve Johnson, Iowa State University Extension.

Chris

Barron: Awesome. And again, if anybody is interested in tool that I have available for storage and harvest planning, please give me an email and I'll get that out to you. We need to be doing some thinking on where these bushels are going to go because seems like harvest is a long ways away, but a lot of people are getting this crop in the ground and we're probably going to have a lot of bushels to deal with again this year and we need to be thinking about how we're handling it. So again, everybody, thanks for listening and we will catch you next time on the Ag View Pitch.

Shay

Foulk: Don't Forget Podcast to tune in on Monday to the second part of this series featuring Steve Johnson talking about some of the impacts that the virus has and other economic things to consider right now. There's a lot going on in the world. We just want to encourage all of you that are out there planting as you get through some of the cooler weather moving in here and get things rolling again, stay safe out there. As always, let us know if you need anything. You can reach Chris at 319-533-5703 or myself at 319-464-5708. Have a great week, everyone.