Pre-prospective plantings report discussion

Shay: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one.

Garret

Brown: Full count, here comes the play at the plate, and it's the Ag View Pitch!

Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Garret Brown of Kodak Risk Advisory. And Garret, I was wondering if you could just take a minute here to tell the listeners, uh, where you're located and kind of who you work with.

Garret

Brown: Sure, well, I'm located just outside of Peoria, Illinois. Work with a company called Kodak Risk Advisory as well as Lakefront Futures and Options, and essentially giving us the ability to work with farmer clients to help them market and manage the risk that goes along with their cash crop. Majority of the clients that we work with are up in North Dakota, but then we also work with a handful of clients down in Illinois as well.

Shay: Yeah, and I think that's important too, because location in markets like today does not restrict you from working with clients kind of all over the place. And it's, it's a little bit of a unique opportunity, I'd say.

Garret

Brown: Yeah, it's been really rewarding. You know, I grew up in North Dakota, as anybody that listens to my accent can probably understand or figure out, but it allows me to continue to maintain those relationships that I've had growing up. And then as well as in my early professional career working with farmers up there and just over time, you know, farmers are creatures of habit and I think they like to continue working with the people that they've become familiar with. And it's just nice to be able to grow those relationships, you know, over the years.

Shay: Well, and when you start working with a trusted advisor, it makes it really hard to get away from that. So I appreciate you joining us here today. And of course, with today's outlook in the last week of March here, primarily we're going to be focused at the upcoming reports this week. Wednesday, 12 Eastern, they'll be posting. I want to just start off with just a general perspective and kind of outlook on what you see, how the climate and conditions are as we move into the report this week.

Garret

Brown: Sure. Well, there's no doubt that that, you know, the funds remain very long. We find that out every Friday where they were as of every Tuesday in the Commitment of Traders report. You know, in the last one here that came out on Friday, we learned that the managed money crowd is very near net long in corn. You know, they maintain a fairly large position in soybeans as well. But unlike corn, we've seen where that position really peaked quite a while ago. And so lately we've been seeing open interest and volume on the decline, which is typically very countertrend, but not necessarily something we've been able to rely on from an instantaneous marketing direction perspective. In this year, we've just seen a lot of things that just kind of make you question all the things you think you know about which way the market's going to head next.

But that being the case, We've been just kind of grinding things lower here as we come into the report here midweek, which again, if you're sitting on massive long positions and you're thinking, okay, we've made really big gains, maybe we should take some profits here and exit this market. If they're long the market, they make sales, they liquidate. That could be driving some of this lower open interest and lower price action on the board.

Shay: And of course, there's lots of other variables that we'll get into here in a little bit. But you and I were talking offline a little bit. There are some weather considerations, soil moisture considerations as we move into springtime. Of course, planting progress is coming along and soon going to be hitting the central United States here and moving north from there. So we do have moisture considerations. One thing we didn't talk about offline is, you know, what are we seeing for global production, especially out of South America? Has climate and condition changed on that end at all?

Garret

Brown: You know, I don't know if it's necessarily changed so much. It just seems like it's kind of been more of the same. And I think the story down there this year has been just-in-time precipitation. You know, largely, you know, we've expected this Argentine soybean crop to come down in production size. But I think most of us have also expected that would be made up by Brazil, who's having a bang-up crop larger than last year. You know, we had nice expansion of acres there again over the past year, and it's just something that we've become accustomed to. Now, on the corn side, it's going to be quite a bit different. Now, they're— I think Argentina is just starting with their corn harvest right now, you know, and Brazil just basically just wrapped up getting a lot of their corn in.

I'm sure there's probably still some stragglers still going on down there, but the main thing, I guess, with that is, you know, that safrinha crop, if my math is right, it's around 80%, 75-80% of their production And a lot of that planting was done outside of what the optimal window is. And so they run into basically two different risks, you know, the first one being the drought, the dryness, you know, that crop went in likely into wet conditions. And we know what that does here in our soil, even though their soil is significantly different down there in Brazil than ours is. But then on the back end of what maybe people aren't quite as familiar with is the potential for frost and different things like that. So, you know, that's very much in front of us. And that's why, you know, perhaps the soybean seasonal shifted more towards the winter versus the corn seasonal.

We typically still see, you know, the strongest prices of the year in that May-June timeframe when, you know, the US crop is in the process of getting planted and, and, you know, we're starting to get things sprayed and whatnot. And also they're in that reproductive stage.

Shay: I appreciate you touching on that. Moving into the, uh, prospective plantings that we have coming up. So doing some reading on this, looks like we're going to have a tremendous amount of acres, a lot of acres coming back online that we maybe haven't seen over the last few years. Uh, let's start in corn, soybeans, and wheat and talk through kind of what some expectations are there.

Garret

Brown: Sure. Well, um, you know, I'll just kind of give you some of the estimates here. So for corn, average analyst estimates around 93.2 million acres, with soybeans right around 90 million, and all wheat around 45 million acres, with— I'm going to quote spring wheat just because that's what we're dealing with in North Dakota— around 11.6. You know, just from our expectations of, or, and thought process of this, I guess we tend to lean a little bit on the aggressive side of the corn acres just because we've had a couple challenging years spring and fall. And I think people really got out and tried to, you know, get the fieldwork done. And quite frankly, at the time, I don't think the corn-soybean ratio was necessarily pointing one way or the other.

And, you know, internally, our research would seem to show that if the weather's good, if it's early, if guys, guys or gals can plant corn, they're going to plant corn. So I guess based on that alone, and not having, you know, touchpoints anywhere and everywhere necessarily, we tend to probably skew closer to that 94 million acre mark. But, you know, for soybeans, really, based on the S&D, at 90 million acres, that doesn't leave a whole lot of room for error here this summer. And so we could be in a situation where immediately we're back to rationing. For, for spring wheat, you know, this 11.6 million acres, I think You know, I'd have to go back and look. I think that pretty much puts us flat year over year, and I don't know virtually anybody who expects that in our neck of the woods.

You know, the thing about spring wheat is virtually all of that territory is in a drought right now, whether you're in the U.S. or Canada. But then you throw onto that, you know, the profitability of virtually anything else versus wheat right now, whether it be canola up north or or canola, soybeans, corn down south, um, it can definitely put a dent in spring wheat acres this year.

Shay: Yeah, I know canola is having a big play there. And one thing that you mentioned that's really interesting is that the soil moisture that we're seeing in some of these areas— and I know there's people listening to this podcast all across the country, but areas in the, the northwest, uh, northwest portion of the Corn Belt up into the Dakotas and even further west there have seen very little moisture. And so we had talked about maybe making acreage changes based on that. And then when you look at the pricing too, pretty comparable really when it comes to some of those spring wheat prices versus corn. Is that right?

Garret

Brown: Well, exactly. When you start looking at, you know, prices of old crop wheat and old crop corn, for example, the price, you know, on a one-to-one basis is actually not all that different. You know, obviously in North Dakota, we've, we've had decent supplies of spring wheat stocks here in the past. And I would say even now we, we still do, which, you know, spring wheat futures, you know, wheat just hasn't rallied like corn has. And so basis being regular, you know, we're, we're sub-$6 wheat here again, and actually by a significant margin in many areas. And then you start looking at corn, which we're, you know, largely in a deficit now this year, because we we didn't have the crop, you know, we didn't have the acres there either. And then so we have, you know, a decent-sized domestic market with, with ethanol plants we have that are trying to pull this corn.

So yeah, prices are not all that, all that different. And that's not a common theme for us up in North Dakota.

Shay: Now, when it comes to basis too, you and I were talking that we've actually seen some pretty strong basis numbers consistently across the country. Can you speak to that a little bit?

Garret

Brown: Well, I think it just brings back the general tightness that we've seen here over this whole year. You know, spreads have actually, you know, for beans and really for corn have kind of started to weaken here a little bit off these recent highs, but, but basis has not. And so basically, you know, with a lack of farmer movement, you know, the basis has to do the work to continue marching higher to, to push it, pull the bushels out of the bin, or more likely to get these commercials to make a move on the supplies that they have in-house.

Shay: One other area that we haven't touched on yet is looking at China and some of the things that are going on there, not to mention Chinese prices, but also looking at ASF over there. What are your thoughts on that and how it plays into this whole picture?

Garret

Brown: Well, it certainly brings about a risk that I think everybody's aware of, but everybody wants to assume has been fixed. So I guess that takes us back to is trying to find sources of where we can get information that might not be manipulated by the news media in China. So looking at Dalian soybean meal prices, I think they're trending down since the middle of January. I've heard piglet prices are rising. I think that Even with the slowdown in crush, I think soy meal has been backing up. You know, what's really helped soybean prices in particular has been soybean oil. You know, with the, with the renewable diesel efforts, I believe some of this vegetable oil too might actually be getting added to some of these rations to try to find a different product rather than just corn.

So if, if that herd is rebuilt like they were saying it was, Why are soy, you know, meal stocks building up like they are? You know, and then you kind of start, you know, this isn't necessarily China, but getting into the US, you know, we've seen DDG prices coming down, we've seen soybean prices here too. And it just kind of like we said, it makes you wonder from a feed component where things are really at. Is high prices, are they really curing high prices?

Shay: It's kind of interesting though, just as this overall picture, you know, Yeah, you add some of these things up, the feed demand, kind of what we're seeing as far as stocks, I think they will have a play in this. As you mentioned, you know, pretty, pretty tight on the soybean side of things. And with potentially a lot of corn acres coming online, it may sound to some people like we have a little bit of a bearish tone going into the report. What are your thoughts?

Garret

Brown: I would definitely agree with that. You know, again, When you're starting to see consolidation going into a report like this, when the funds are this long, it can be very easy to have your face 6 inches from the screen, so to speak, and not be thinking of the bigger picture. But we're seeing new crop spreads widening, which would seem to imply that the market is becoming a little bit more comfortable with the situation right now. Again, volume and open interest declining, again, kind of countertrend as we go into spring. Really, I guess, you know, if we have a spring like we do now, rapid planting, you know, and likely more acres than expected is going to be the story.

And so that leaves us with either, you know, we need to see another round of Chinese buying perhaps that hasn't already happened, that's just waiting to be, you know, flash sale, something that will really get the market thinking of increases in demand again. Or, you know, we're back to the safrinha crop. Was that going to have an issue? Or is the US crop going to have an issue? Otherwise, yes, we could very much have a bearish tone here. Soybeans, you know, quite a bit different than corn though, really. Where, again, if we come in below that 90 million acre mark, I think many of us expect this, that, you know, it could be off to the races again, as we start to continue to talk about rationing. And at that point, it really You know, if I have a bearish tone on corn and a bullish, you know, stance kind of on beans going in here, which one's going to overpower?

Um, you know, we don't— obviously we don't really know, but it kind of plays a role in how do we, you know, position clients to be protected, so to speak, in case a new trend develops. And then, you know, one other thing I kind of want to mention too is, you know, we keep talking about corn and beans and we keep comparing it to say that 2012 timeframe. And then it's like, well, how similar is it? And I know one of the things that we sent out to clients here over the weekend was just a reminder. Yeah, things are tight, things are likely to get tighter. You know, our domestic balance sheets for corn and beans. But if you look at the global stocks to use for corn, I mean, unless I have an update in my chart here, it looks dramatically different in 2012 versus where we're currently— it is currently implied to be here in 2020. Now beans, very similar. Corn, not so much.

So, um, a guy has to be really careful about getting sucked into, uh, kind of words of confirmation on our bias and just be prepared for what happens if, uh, USDA comes out and says stocks are higher than, than what the trade generally expects. Because like we said offline, this export program largely hasn't been shipped yet for the corn, you know. So if that's still here, that, that's going to show up in our stocks because it's pre-shipment. If feed demand isn't quite as good as what, you know, what USDA has been saying in the past, that could show up in this particular report. It could go either way though. I mean, you don't have to look back very far in these quarterly stocks report over the last 12 to 18 months and find a lot of volatility on report day. And that basically tells you that we don't really have a great track record for trying to guess USDA.

Shay: So what I hear you saying there, kind of in closing, is, uh, you know, question any confirmation bias, uh, don't miss the forest for the trees, and just kind of stay on your toes. You know, we have some, some interesting things coming out in the week ahead here, and I think it'll be interesting to, uh, you know, look at this as we move into the end of the week and see how it impacts us. But ultimately, I think there's a lot of optimism moving into this year. Of course, the farmers are the eternal optimists, but we do generally have good spring conditions. A lot of field work got done here in 2020, and just thankful for, you know, another opportunity in front of us. So any last thoughts here, Garret?

Garret

Brown: You know, just be flexible. You know, it's, Important, like you said, with that confirmation bias. I think we're all guilty of it. We're all searching for those words of wisdom or confidence and trying to outguess this thing. And quite frankly, we just can't. So try to be flexible, be open to change. And yeah, we'll see what happens on Wednesday.

Shay: Garret Brown of Kodak Risk Advisory. Garret, if they want to get in touch with you, how can listeners find you?

Garret

Brown: Well, you can visit our website at kodakgroup.com. Or you can shoot me an email, gbrown@kodakgroup.com.

Shay: Absolutely. Thanks so much for your time, Garret. Really appreciate it.

Garret

Brown: Thank you.

Shay: And thank you everyone for listening to another episode of the Ag View Pitch. We will catch you next time.