Pre-holiday grain marketing opportunities?

Chris: Welcome everybody to another episode of the Ag View Pitch. We're going to do a little bit of a midweek conversation here with Duane Lowry. How's it going, Duane?

Duane

Lowry: Good, Chris. I'm glad to be here.

Chris: Yeah, well, I'm in North Platte, Nebraska, and got a text from you that said, hey, maybe we should have a conversation. And, you know, we've had some pretty good strength in the markets. Since the report there, so what you got cooking?

Duane

Lowry: Well, a couple of things I just thought I'd try to offer some perspective on. First, I think before we talk about what might or might not be an opportunity, I want people to think back to just a week ago, just a few days ago, and maybe even look at just how one has felt over the last 2.5 months, and I think that helps to put into context what has happened since the USDA report. Dec corn from Sunday night has gone up 40 cents. November beans from Sunday night has gone up 45 cents. None of these prices are super fantastic.

None of them are prices that we just, you know, have total confidence in marketing our entire crop or anything of this nature, But in the context of how it has felt for the last few months and in the context of what we thought the future looked like in terms of opportunity and how best to manage to try to find a profit and crop insurance, potential payouts, potential government subsidy payments somewhere down the road and all these different factors, we're now being given an opportunity that, you know, we kind of hoped to get. And it's happened very quickly, and I think it's just worth kind of thinking it through kind of seriously. First thing you have to ask in the case of corn is, anything changed since the report, and to what degree has it changed?

Well, we lost approximately 900 million bushels worth of production, but because people have, you know, a questionable view towards demand, you know, how full— an aggressive— will ethanol come back online? What's the future hold for the livestock industry? Um, all of these factors, and you've gone from people expecting carryout to range anywhere from $3 to as high as $4 billion, and now you've got people thinking that after the report, we're probably still dealing with a carryout that's at least $2.5 billion and maybe 3 billion or slightly higher than that, depending on how they factor in yield and, and final demand. So even on the low end of that projection at 2.5 billion bushels, that's a lot of corn, that's a plentiful supply, and if you want to take a look at the carry-in that we're going to have from the last year's production, which is going to be somewhere around 2.1 to 2.

Billion bushels, and then you add into the supply that we're going to have from, uh, the 2020 crop, you're talking about almost 17.3 billion bushels of probable total supply between the old crop and what we'll harvest this fall. And if you go back, that's going to be a record supply at harvest time if you take the carryout from the previous year and the, the expected supply of the, of that current year, it's going to put your, that total supply figure around 17.3 billion bushels. The next highest level that we've ever had was in 2016 and 2017, we were, when we were at 16.9 billion bushels. So those are the two highest ones. The next highest level was in 2018, and we had $16.5 billion.

Just to give you perspective, you go over the last 10 years, a lot of these times we're in the $14.5 to $15.5 range, um, and then the lowest we got down to was probably around $12 or $13 billion when we had some, uh, crop problems, um, back in 2012, et cetera. So the scope of that supply is probably going to weigh on spreads, probably going to weigh on basis, That was kind of an expectation before this week's report, and I'm not sure that expectation changes all that much because of this report. To the extent that weather is a factor in the current rally, um, it's a possibility that weather is a part of it, but I think much of this rally has been driven by just sheer forced liquidation of shorts that existed before the report.

And so, you know, we also have to ask ourselves, are we dealing with an overall situation between supply— and I've just talked, shared that we're basically going to have a record supply of total corn on hand at the end of this year's harvest. And so are we dealing with something that has changed our overall supply into something more scarce or less plentiful? Not really. We've also got a situation where the weather market, per se, that we're dealing with right now is not about current problems or crop stress. It's about potential that's heat and dryness that may be in the forecast and the extended models and how long that may last.

And none of us know, but I think that for the producers that have bushels that they have to sell at harvest time, they're not going to have storage for, for the producer that feels that he still wants to make sales in advance of harvest because he thinks that the prices might get cheap enough to have a crop insurance payout, or he anticipates, um, a good enough supply based on his own crop conditions that he fears December corn futures might still have a run at $3. Then looking for a place to sell here might not be a bad idea, and these are at— we achieved like $3.63 in Dec corn on Wednesday's trade, and over the last few months we talked about an optimistic, hopeful level that we might get Dec corn up to $3.60 or $3.70, and we're kind of in that range. Just my own personal technical viewpoint, I think we might be within about 10 cents of the upper limits of where we might go.

I don't think there's 20 cents upside in the corn here. That's based on technical interpretation as I would interpret it. And then of course you've got, you know, how weather's going to factor in. So I just think it's worthy having a discussion to put things in perspective, and I'm— I guess I'm going to pose a question to you, Chris. Do you think that there's merit in looking at the entire landscape of all that might be in front of us and thinking that we might have to deal with marketing crops at prices that are not profitable by themselves or not favorable, but we make the decisions to market it because we're trying to avoid marketing at a lower level? Do you think that's a reasonable approach, or do you think we're— dealing with something macro that makes that viewpoint wrong?

Chris: Well, I think two things there, Dwayne. First of all, your question on the bushels that have to go off the combine, I think we had that conversation offline, and I think maybe even online some too, after the report or somewhere around there where you and I were having a conversation. And, and the way I look at it in our own operation as well as with a lot of our clients is that You got to figure out a price opportunity between now and say October, and we're probably likely going to see some sort of a harvest low sometime in mid-September or sometime September, October, November, wherever. Nobody knows for sure, but you're going to see some sort of a harvest low. So, you know, what I like to do with our own operation is just to start selling into the market.

I think I told you offline in our own farm operation, and I'm not ashamed to admit it, I started making some small incremental sales the day of the report on that first initial rally, just because, you know, we all know the obvious— when the, when the rally begins. The problem is, is knowing when the rally is going to end. And so if you sit there and wait for the rally to get to the level that you think it should be to, I don't know that anybody really knows where that to number is, you know. So you got to look at it as an individual producer and say, what works? What keeps us in business? You know, how much risk can I tolerate? How much can I afford to lose? How much can I not afford to lose? And also, what other revenue streams may come in on a per-bushel basis?

Also, some of the growers that I'm talking to right now have a phenomenal crop coming on, and the fastest way to lower your cost of production is to increase yield. And that makes your, your selling number that you need to achieve to achieve some sort of a margin target or a less loss scenario a lot closer. And so I still don't come back to what you, you know, your first part of the question of these bushels that have to go off the combine. I think we just got to watch that real close. Everybody's got to make their own executive decision, but You know, and kind of, kind of joking here, but, you know, usually everybody in our, our, my family's operation that have marketing to do, they usually wait about 3 days after, after I start selling. And then that's about the time to sell because I have a tendency to pull the trigger a little too quick. But, you know, tomorrow's 3 days.

So I don't know, maybe that's telling you something. But, but, you know, I think there's an opportunity here. And from my observation with clients, The best marketers that we work with are the ones that reward rallies no matter what. And they're incremental. They're not like big sales, but they incrementally will work into increasing market because you never know when that thing's going to turn and go the other way. And I think, like you said, weather is a big deal. Like I said, I'm in Nebraska right now. I drove pretty much clear across the state all the way to the sort of the western portion of the state and a lot of good rains in the middle part of the state. But as I got to the western part, boy, the dryland corn is starting to look really tough. So, you know, everybody's got a different situation. You just really gotta look at your own numbers and do the calculations.

That's a long answer to a concise question.

Duane

Lowry: Well, it was a good answer. The other thing you had mentioned, you know, other things that might come into play, like maybe you could get a better yield that would help add to your revenue and things of this nature. Another thing to look at, you've got Dec '20 corn on Wednesday settled at $3.60, July corn of '21 settled basically at $3.80, so you got about a 20-cent spread there. I had mentioned that— we had 3 previous large supply harvest time periods, '16, '17, and '18, that during that— those 3 years, the de-stabilized spread got up to $0.27, $0.30, and $0.28. This year we'll have a larger storage rate calculation from the Board of Trade for— to determine cost of delivery. Or cost of holding deliverable supplies, that could allow that spread to go out farther, maybe by as much as a dime or more from those numbers that I just gave.

So if you look at these spreads and just rough it and say approximately 30 cents, and the spread's at 20 cents now, if a guy were to do— sell futures in Dec at $3.60 or do an HTA in Dec at $3.60 and then by the time we got towards the end of the harvest season that spread had widened out to say 30 cents, then that $3.60 HTA is going to translate to $3.90 HTA in the July and so there might be opportunities here where people might even do HTAs or hedge their farm stored inventory as well, not just the stuff that they have to move and hope that they can roll in a wider carry structure and pick up that carry and start dollaring up revenue that way. And I think that's something that shouldn't be taken too lightly, and I think it should be considered as a good opportunity.

And so I— and as far as basis is concerned, if we're going to have the largest supply ever at the harvest time of total old crop and new crop supplies, it's not unreasonable to think that basis could be relatively wide. Many locations have already widened their new crop basis over the last 60 days, say, and so I don't know how much wider it can get, but it could get worse. And so, you know, you want to try to avoid making sales during that distress period if that happens to come into play. And so I just think there's opportunities here that need to be considered.

I thought we might have, you know, a period of time for this to digest, but shoot, we were up 10 cents here today on Wednesday, and all of a sudden, you know, just a couple of days, you're 40 cents off the lows, and I don't know that we actually have a weather problem that warrants a faster pace than this, and I'm not totally confident even the loss of roughly 900 million in supply due to 5 million acres of smaller planted acres You know, there are other factors that come into play that whittle away at that reduction because of reduced demand or perception of reduced demand, at least at this point in time. And, you know, if you were to ask people, you know, just several days ago or probably any time over the last 2.5 months, you know, if you just said, well, do you think you'd be willing to sell at $360, and everybody would have said, absolutely, sure.

And, you know, now all of a sudden here it is, and I know it's here fast, and I know there might be merit in thinking that we actually do have some time here. We may have more here. I'm not trying to imply that it's absolutely all over here, but I am implying that we are getting up to a price area that the next 10 cents might come more difficult to get, and it might be difficult to get much more than that, even with some weather issues, because we don't have weather issues on top of a crop that's really in trouble, uh, as a large statement about everywhere.

There are areas, and you're in one of those areas right now in western Nebraska, and over the next 2 weeks they're going to see some very hot temperatures in the central and southern plains, and so those dryland acres probably have some trouble ahead, but every year we have some area with trouble, and, you know, we have to look at it in that bigger picture as well. The other thing I want to point out again, I've mentioned this last couple podcasts, I'm pretty keen on looking for opportunities to sell the 2021 crop for this kind of the same basic reason. We have, we we are— have a situation where we're growing more than we're consuming. And so each year we're looking to add the carryout unless we can sharply reduce acres or unless we can, you know, suddenly find new demand, and both of those might be difficult to get.

And with Dec '21 at $3.78, July '22 at $3.95, having sales on the books there now is going to look, uh, very attractive to your lender when you start to have those conversations about pricing the '21 crop, and if you happen to get caught in a year where prices are sliding down into harvest, that conversation with that lender for the 2021 crop might be occurring at prices when they're on their very bottom side, and I think some sales in the books might make that conversation go a lot better. One last thing I would say along that line about the timing, nobody knows when the low will come in, But in the last 3 years that we had supplies as close to what we're going to have this year, '16, '17, and '18, you know, in '18 we peaked on May 25th, made the low on September 18th, and then went in the 30-cent range in through the end of harvest.

On— in '17, we peaked on July 7th, had a steady decline and erosion that lasted all the way into late November. And in 2016, we peaked on June 17th, We declined into September 1st and then had a 30-cent range in sideways activity all the way through the end of November. So all those 3— other 3 years with the supply similar to what we expect to have this year, only not quite as much as we'll have this year, they had a—

Chris: once the market slid, they might have found a bottom, but they couldn't really rally.

Duane

Lowry: They just traversed sideways through harvest, and so if that happened to be what we were dealing with again this year, that 2021 financing conversation with your lender is going to look a lot better if you have some of these more attractive sales on them because of the carry in the futures market. You know, these, these '21 levels and July '22 levels, these are relatively attractive sales that wouldn't have been a bad sale really anytime during the last several years. I'll ask you, Chris, how much is— if you could sell bushels at harvest time versus selling them, let's say February or March, and you put them in storage, etc., how much do you feel that that costs you to store those bushels and take them in and out of the bin? What is the— how many more cents is that? Harvest price worth to you if you don't have to hold it in the bin?

Chris: Well, it depends a little bit on your storage costs, whether it's commercial obviously or on farm, but just the interest alone on corn pushes about 3 cents a bushel per month. So you know, if you're selling October, you know, versus your March, you mean you're talking, you know, probably 30, you know, $0.25 to $0.30. But then, you know, you've got, you've got your storage costs on all that and everything. And the other thing too is moving whatever has to go off the combine. I just, while you were talking, I wrote down the 3 reasons why I agree with you on specifically anyway the bushels that are going to have to go off the combine. And then I agree with you on incrementally plugging in some sales on, you know, that multi-year thing and everything too.

Because just as we look at Profit Manager and we look at cost productions, we can kind of, we can kind of buy some inputs and kind of align some of those things. So, so I'm buying into you with that, you know. And obviously we didn't rehearse any of this. I, I grabbed a beer and some pizza and I'm sitting here chatting with you for, for this. But I, I did jot down when you were talking the 3 reasons why I agree with you on maybe, you know, incrementally trying to get some sales on the books here now for the 2020, what has to go off the combine specifically for the reason that most of us need some cash flow for sure by October. A lot of guys' lines of credit are pretty full by that time. So you get some cash coming in, even if it may not be the price you want exactly.

Again, like I said, the cost of money, you look at that interest, that carrying cost, you know, the storage cost, carrying cost, the whatever. I mean, it just adds up every month. And then the final thing is, is the beautiful part of all this is what you've essentially done is established a floor on those bushels. So if you're not happy with that, you tend to see some sort of a harvest low, like I said, at some point. Well, there's going to be opportunities or ways to reown that, right? You know, you could, you could, you know, buy futures, you could buy some call options, or some things you could do on those bushels as you deliver them to maintain some level of ownership to leave the topside open. So, sure, for those, for those reasons, I concur, you know. And I didn't know what we were going to talk about for sure in this podcast when you said, hey, give me a call, you we need to talk.

So I think, I think this has been a, been a good conversation to just to kind of plant the seed that, you know, hey, wake up, pay attention, run your numbers, look at your situation. There's some, there's, you know, we're done sitting on our hands here. We've had a 40-cent rally. Wake up, I think, is the message. Is that right?

Duane

Lowry: Well, maybe a little softer message, but yes, that's right, right. That's the message. But I would say this, that also if you're looking for a crutch that gives you confidence maybe in making some corn sales at prices you kind of do feel that has merit, even though I can see some short-term downside risk of beans of, you know, 40, 50, 60 cents, you know, something like that, if we, you know, manage to avoid a serious weather threat and a storyline and things of this nature, we might have that kind of weakness here over the next few weeks, but with that being said, maybe there's an argument to being, you know, more aggressive on the corn sales side and maybe of being less aggressive on bean sales and kind of holding that back in case you do have some sort of a weather threat that develops a little bit later when it might be more important to soybeans.

Maybe if you didn't make as much sales in soybeans and kind of held back on those, but did get more aggressive on corn because that's where, you know, some of the more plentiful and excessive supply scenarios exist, are more related to corn than they are to soybeans. You know, there might be some merit in leaning on that as a crutch to give you some confidence, and I know people don't like to look a crop year ahead, but I would just encourage everybody to kind of run through the numbers on this '21 crop and especially run through how that conversation goes with the lender and what your cash flow statement might look like if you are forced to use, you know, a sub-$3.50 price for these '21 or something like that, which is certainly conceivable. So yeah, and a lot of things to kind of focus on here tonight, but I did want to throw that out. And so what were you going to say, Chris?

Chris: Well, I was going to say, you know, it doesn't hurt to call the lender either. You know, you're not— your lender's not your necessarily your market advisor, but on the same token, having a conversation about what you're thinking on a multi-year sale is never, never a bad conversation with the lender either. I mean, it just kind of keeps him in the loop as well on some of what you're thinking.

Duane

Lowry: It's interesting you should mention that because I had a conversation with a a prominent ag lender here within the last week, and I purposely had the meeting and discussion for— to ask exactly that question, saying if producers are dealing with the '21 crop and it's time to start planning for that, I asked him directly, so how are you going to feel about producers either having hedges, cash for old contract, HTAs, whatever it may be, secured at these kind of prices on 2021 crop, how are you going to feel about that versus them not having anything or having prices that are 30 or 40 cents less than that? And we had this discussion before this report came out, but in the papers that I gave him, I put these prices in as a possibility post-report.

I asked him, I says, if this opportunity presents, how is that viewed on your end of the desk by the farmer that brings in and has that sales? And he said that the price level would certainly be far more attractive, which is a plus, but he said they like the idea of knowing that the farmer is taking a proactive step and making those sales, making those commitments to— with the intent of trying to make a balance sheet and a cash flow statement work And then he brought up the fact that those prices at harvest time are worth more than just that price if you compare it to what price you'd have to get to have the same net value, you know, later in the winter or early in the spring. So he was very, very enthusiastically supportive of the idea. So I think that it's something that definitely needs to be a consideration.

Chris: Yeah, because to your point in that question you asked about, you know, the cost of keeping the grain, carrying it, the storage risk, the— there's just a lot of expense to that, electricity and handling and getting it in the bin, getting it back out of the bin and all that. And again, it's different if you have the facilities and you're set up, but, but in everybody's scenario is different. But yeah, I like the point of having that conversation with the lender and, and I concur. I think that was— that's good. Anything else, Duane, before we wrap stuff up?

Duane

Lowry: Yeah, I just like to throw out one other thing too. You know, are we still trying to function in troubling times? I mean, do we have— what's the election uncertainty going to be? Riots, you know, protests, celebrations depending on who wins and how they feel about it. Are we going to be dealing with coronavirus, a second flu season, another flu outbreak, you know, what are all the other black swans? It used to be a black swan, people have to ask, what, what, just exactly what does that mean, a black swan? And now it's, it feels like every time a bird flies overhead, you're just assuming it's a black swan. But so, you know, we have a lot of uncertainties in front of us and And we don't know what it's going to be. We don't know what— how the weather is going to pan out. But we do know there is some merit in looking for prices in this time window.

And these aren't the greatest prices, but given all that we're dealing with and still going to be dealing with a plentiful supply, absent a major weather disruption from here forward, these prices might look good. And if you— if you're questioning whether they're looking good right now, You certainly thought they looked good, you know, 48 hours ago and 4 weeks ago and 8 weeks ago. These prices look good. These are the— where we're at right now, you know, these are the highest bean prices have been since March 6th. They're the highest Dec corn has been since March 30th. So that gives you a kind of a scope of where we're at, how long we stay here, whether we got another 10 cents here or whether we got anything more than that.

I'm not sure, but we are into price areas that, you know, it was considered reasonable and hopeful, and maybe overly hopeful, during the last couple months that we might get to these levels. Well, here we are, and how long this stays, I don't know, but we got a long holiday weekend. We've certainly chased some buyers into the market in short covering with a 40-cent move in corn since Sunday night, and we've pumped in some weather fears, and whether that can be maintained or built upon when we return after the long weekend, I don't know. But some, you know, we do know what's offered to us right now.

Chris: Duane, thanks a lot. I think this is a great conversation. I think we'll wrap it up here, and, and we will be back in touch with everybody just as we did with this podcast and actually the one right after the report. As needed.

Duane

Lowry: Okay, thanks, Chris.

Chris: Hey, Duane, thanks a lot. Appreciate your, your insight and your time, and thanks for prompting us on this. And thanks everybody for listening again, and we will catch you next time on the Ag View Pitch.

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