About This Episode
Steve Johnson of Iowa State University argues the most important number on a producer's screen is local basis, not the futures board. He has tracked basis at multiple Iowa locations for ten years, and the pattern he relies on is that the strongest basis improvement of the year typically runs from mid-November to Christmas. That single data point reframes the storage decision: the rally in futures is the headline, but the basis is where the recoverable value sits.
From there he builds a decision method. Commercial storage rarely pays once drying, shrink, monthly storage and interest are counted, so he questions why bushels go there at all. On-farm, he likes separating the two components: lock basis while it is historically strong, stay long futures with a deferred contract, and use tax timing deliberately by deferring income into the next year rather than closing the bin doors purely to avoid a tax bill.
On the following crop, Johnson's rule is to sell into strength because waiting for the high means selling after it. He describes farmers already twenty to twenty-five percent priced on new crop soybeans through HTAs at defined targets, and would step into corn at his own price objectives rather than at random. He closes with a risk most producers overlook: delivering grain and deferring the check makes you an unsecured creditor of that buyer.
“You sell as the market's going up, because once the market puts in a high and heads lower, you take your marbles and go home. And that's a terrible marketing plan.”
— Steve Johnson
Key Takeaways
Track your own local basis over years. Johnson's data shows the best basis of the year usually falls between mid-November and Christmas.
Price commercial storage honestly. Drying, shrink, four to five cents a bushel a month and interest all have to be beaten before storing pays.
Separate the two decisions: lock basis when it is historically strong and stay long futures with a deferred contract if you like the price.
Sell into a rally. Waiting until the market has topped means taking your marbles and going home, which is not a plan.
Delivering grain but taking the check next year makes you an unsecured creditor of that elevator. Understand the counterparty risk.
Set written price objectives for next year's crop and start early on the crop whose acreage is most likely to expand.
Full Transcript
Steve
Johnson: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!
Chris
Barron: Welcome everybody to another episode of the Ag View Pitch. We're going into a new week and we've got Steve Johnson with Iowa State University. Steve, how's it going?
Steve
Johnson: It's going great.
Chris
Barron: Good, good deal. So we, we got the election out of the way, and as of this recording, we're still not sure who the president might be yet, but it's been, been kind of an interesting count, hasn't it, so far?
Steve
Johnson: Yeah, and I don't think we're gonna know, you know, if the Republicans control the Senate till we have that runoff on January 5th. So we're going into a period of probably 2 months of uncertainty, and eventually I think it'll play into the market. But right now I think the equities are strong, the outside markets are strong except for crude oil, and we've got a major report again, both November crop production as well as WASDE coming up on Tuesday, November 10th.
Chris
Barron: Okay, so let's hit on that report a little bit, you know, going into this new week. What, what do producers need to be kind of looking at short-term here in this week and with that report?
Steve
Johnson: I think your local basis is the most important thing you should be focused on right now, especially these bushels that are going to head for commercial storage. I really have to question why you would put bushels in commercial storage when you know that you're going to possibly pay for drying and shrink on corn. You're going to lock into 4 to 5 cents a bushel a month just in storage costs plus interest if you have debt. And then what's the chances you're gonna get higher futures price in combination with better basis? The data that I review, and again, we've been tracking basis for 10 years at several different locations, the best basis improvement of the year tends to occur from about the middle of November to Christmas.
So we're playing right into some of the better basis opportunities, and I think that's the biggest surprise besides this rally in both soybeans as well as corn and wheat futures. I think the surprise is the point at all, it's on a strong basis.
Chris
Barron: With the commercial, you know, you talk a little bit about the commercial storage and that not really panning out, probably something that people want to avoid. What about like our own storage as well? You know, I mean, if we— a lot of producers that I talked to have a bit of seller's remorse. Okay, geez, I sold some too soon, shouldn't have. And now as we look going forward, there's still some bushels not yet priced, the basis is really strong. Tell me why we wouldn't be making some sales, and why does it make sense to put it even in our own storage if, if we could use the cash flow?
Steve
Johnson: Yeah, I think the thing that's going to play out very quickly is going to be income tax strategies, especially for cash basis income tax payers. The fact is, is that I think we've got more income than we're anticipating, so you might want to defer some of that income until the next tax year. If you're on an annual cash basis because I believe with CFAP, CFAP 2, and the crop insurance payments that are still coming that I can go ahead and defer that income until '21. I believe that might be part of the strategy. I think you look at a basis contract. I'll be honest with you, I think for corn and soybeans you got your own on-farm storage. Why don't you go ahead and lock in basis, go ahead and put the corn away for a couple months, 6 weeks, because I really believe we're going to see some strong basis all the way through the first of the year.
A lot of your neighbors don't want to sell for income for income tax purposes, why don't you sell? You can defer that income, lock the basis, and you can still stay long the future using the January contract. I expect January beans as well as March corn to stay relatively strong. There's just too much uncertainty of production as well as the supply out here, and I think the South America weather is playing right into our hands. This November, December. Let's take advantage of it, but let's make sure we've got a home for those bushels that we're going to store, or let's just go ahead and move the bushels and avoid commercial storage costs.
Chris
Barron: Yeah, I have a question on the other side of that though too. You know, like, okay, so we could lock the basis. What, what's wrong with maybe doing an HTA and not locking the basis if the price works and waiting for a little better opportunity, or do you think the best opportunity in basis is there now?
Steve
Johnson: I think some of the best opportunities in basis is there now or will be bid out over the next 6 weeks. I like that basis in that last half of these. I'll never walk away from some of the best basis I've seen of the whole winter, last half of these. So I might do a combination of both. I might go ahead and do an HTA because I like the futures price, especially beans. And then I might go ahead and say, you know, I'll deliver those beans. I've got a lot of farmers negotiating that right now. You know, we're typically 40 to 45 under the Jan this time of year here in Central Iowa. Some of our bids are 30 under, and I've got farmers with offers of 25 under, and they're getting hit. So I think maybe you do a combination of both. If you're okay with January beans up here, this $11.05, $11.12, maybe $11.18, I think it's hopefully our objective.
Let's go ahead and grab the futures, but let's not walk away from basis. I think a lot of farmers will close the grain bin doors after harvest once they see their income tax liabilities that could be coming with another large income for 2020.
Chris
Barron: So let's say we, we close the doors as producers. We're in sort of a demand market that should be giving us probably some long longevity or strength here. Talk to me a little bit about the market and the dynamics, um, specifically on the demand side of the picture.
Steve
Johnson: Well, I think we've got large global demand for protein, and that includes both our feed grains as well as our oilseed crops. And I still see this playing out most of the fall and well into winter. I just don't know what the global economy plays out like when we get beyond February. We know we've got a strong La Niña. We know we're going to likely keep South America, especially southern Brazil and Argentina, dry, but You know, eventually we get those crops planted, but maybe we slow the safrinha crop. So I feel good about our markets over this next 90-day period. The question that I have is a likely slowing global economy and uncertainty in the U.S. I just see the fact that the equity markets took off this week and drug a lot of the commodity markets with it. I just don't know that we're going to be as strong as we get into this late winter and spring period.
And this glut of protein demand globally is already playing out. And I'm really cautious about sub-$40 crude oil. Chris, I'm concerned that ethanol is not going to have good demand when we're staying sub-$40 crude oil all fall well into the winter price period. So again, I'm a little cautious. Good exports, good domestic demand, but can we really think that ethanol is going to be well supported when we have low crude oil prices and fewer people driving this winter as the pandemic continues?
Chris
Barron: Well, as I was going to ask you, with, with COVID increasing, and, you know, like with you and I both being in Iowa, we're seeing record, record numbers here as we go into this new week of cases. Does that play out directly into this market, do you think, here fairly soon?
Steve
Johnson: I think it does. I just don't think we're traveling. I just do not see that we're going to have normal transportation types of costs and the demand on transportation fuel as we normally would during the winter period. And I'm not saying it's going to be like March, April, May. I'm just saying there's a real drag with people that are not doing normal activities, going out to eat. The whole idea of meals, activities at school. Iowa State University is gonna go down for 2 months. Our winter break is 2 months long. And so the fact is, I think a lot of schools probably do the same thing, probably shut down before Christmas and might not come back until late January. So I see a drag on the US economy, but perhaps the global economy, as we get late into that first quarter of '21, And I think I want to have a plan in this next 90 days, Chris, old and new crop.
I want to go ahead and capture these prices while I have that opportunity and don't get so bold up that I recognize that the cure for high prices is high prices.
Chris
Barron: Well, when we look at the, the final numbers and the profitability levels for the majority of producers, there's always exceptions to everything, but a lot of producers with where the prices are at right now, even, even with some of those early sales that people wish they wouldn't have made but did, with the other assistance that we've had and stuff, most of the farm operations that I look at anyway are going to have a pretty darn good year. What's wrong with, you know, buttoning up the 2020 sales? And then I'm going to get to a question on 2021 in a minute, but what's wrong with buttoning up the sales now— like you said, either, you know, on both corn and soybeans, you know, a lot of people have the beans gone, but buttoning up these sales, have this stuff done so you can eventually start to focus on 2021. What's wrong with that, and what's the lookout or the issue with that?
Steve
Johnson: There's nothing wrong with it. The best marketers that I work with have pretty much done with their 20-crop sales. They might not have delivered those bushels, But the futures are locked. They're— they have offers in. They're selling right into this attractive basis here in the last 3, 4 weeks of this year, maybe first week of '21, deferring income into '21. Crop insurance indemnity claims are large. A lot of farmers being audited because they've got over $200,000 loss. Per crop per county. I think we're going to look back at net farm income in 2020 actual with CFAP and CFAP2 and these PPP loans that turned into grants and go, you know what, '20 was a really good year, and look at the prices that I can start to sell some '21 crop at.
Chris
Barron: Yeah, it was a— fiscally it's going to end up shaking out to be a pretty decent year in the midst of pandemic and storms and all kinds of other crazy stuff. It's amazing. Um, with that said, now, okay, let's do think about 2021 for a minute. You're talking the next 90 days to be buttoning up, wrapping up these 2020 sales. What about 2021? What's the window for that? Do we do some of those sales for 2021 during that window, or do we kind of hold off and wait? What's your thought there?
Steve
Johnson: I think you've got to be selling into this rally. I think what we've learned is that you sell as the market's going up because once the market puts in a high and heads lower, you take your marbles and go home. And that's a terrible marketing plan. I've got farmers with the move in new crop soybeans today. They have 20 to 25% of the '21 crop soybeans already priced. Most of them are HTAs. They're all above $9.85. And that market rallied into that the last 2 days and hit our targets, got some of the early sales. Chris, my concern is, is that we're going to probably plant 4 to 5 million more bean acres next year. And so the fact is, is that when you see the potential profitability that's sitting there with beans, it's coming with this $9.80, $9.90, $10, $10.10. Those are my price objectives. For the '21 bean crop.
I think we got to start early, especially soybeans, because we're going to see a lot more soybeans grown in the U.S. this next spring. So I think plan accordingly. Let's get started. Let's get started on beans and then let's step into corn. But let's wait for December '21 corn to get into that $4, $4.05, $4.10 area, the same area we were waiting for last year. Is the area that we want to start pricing some '21 corn bushels.
Chris
Barron: What kind of levels do you go to on those sales?
Steve
Johnson: Well, I think my initial sales would be 10 to 20%, especially on beans. I might be up to 30%. And those are low-cost producers. And these guys that know how crop insurance works— most farmers I talk to are buying up their crop insurance. We're going to have higher spring prices. So we're going to have higher revenue guarantees, we're going to have higher premiums, and we're going to get a new crop insurance product called ECO that I think most everybody's going to be interested in buying up to 95% level of coverage and letting the government subsidize it. So we're going to use RP and then use this ECO product next year and not count on ARC PLC kind of payments, hope that we're above $3.70.
National average cash price for corn '21 crop and $8.40 beans and pay less attention to ARC PLC, pay attention to crop insurance and getting some early sales on the books to make sure I can cash flow this '21 crop, I anticipate we're going to get more corn and especially more bean acres in '21.
Chris
Barron: I think that's a great lead-in to another podcast that we're going to need to do here in about a week or two on this crop insurance. Decision-making in advance of the decision, right? We're gonna need to probably be looking at that and talking about what that looks like and what that means to the operation.
Steve
Johnson: And large indemnity payments. I've got a lot of people who are gonna get checks that would choke a horse, and you can delay that income into '21 even if you take the cash by using Income Tax Form 451. So let's cover that on a future podcast. But yeah, crop insurance solves a lot of problems.— even when the market price rallied, we were able to collect from crop insurance where we had these losses due to drought and derecho.
Chris
Barron: Right. So what haven't we talked about? What haven't I asked about? We talked a little bit about the report. Is there anything else on that that we're expecting or anything that growers need to be thinking about in this new week?
Steve
Johnson: Yeah, I think the support will be— the report on Tuesday, both reports on Tuesday will be supportive. I think we'll probably see some adjustments, but the bigger adjustments could be on export demand, and that's key. As we're seeing, you know, China in for both corn as well as soybeans. And again, let's just hope they don't cancel those orders, but I won't be surprised that we probably see a little smaller corn crop, perhaps a little larger bean crop, but it will be on the export side. So I think the futures market rally that we've seen, especially this week, probably reflects we've had really good demand And the funds stay net long corn, soybeans, and wheat.
Chris
Barron: Okay, my last question for you, and you mentioned it, the funds, they're in the market fairly heavy right now. I mean, speaking from the standpoint of other opportunities, right, you know, so the stock market's been doing decent, pretty good, and there's been more money pouring into the commodities. What do you see happening with, with the funds? Do you see them continuing to pour some money into commodities, or does that fit into that next 90-day window you're talking about and then fading away?
Steve
Johnson: I think that's a part of the 90-day window. I would expect funds to probably keep these long positions as long as the fundamentals support it, likely South American weather uncertainty, smaller U.S. crops. But I would be careful as we enter the last 2 weeks of December. We could see some of these funds leave the markets. Take their profits because that'll look good on that fourth quarter report of how much money I made for you investing as a commodity fund.
Chris
Barron: Right, right. Well, hey, I think we've covered pretty much everything. Again, last question, anything I didn't cover?
Steve
Johnson: No, like I say, I'd be really intent with my local basis and I would not be afraid to deliver these cash corn and soybean bushels, these extra bushels, deliver them direct to the market, decide whether you want to defer that income into '21, but make sure you understand that was a credit sale that you made, that you are exposed should there be some sort of default from that co-op, that processor that you're delivering grain to but not taking that check until after the first of the year.
Chris
Barron: You bet. Well, hey, let's follow up with that insurance podcast down the road, and I think this has been great for the market discussion into a new week. Thanks a lot, Steve. Appreciate it.
Steve
Johnson: Okay, be safe out there.
Chris
Barron: Yeah, thanks a lot. And again, thanks to everybody else. Steve Johnson from Iowa State University. And like to thank everybody for listening, and we will catch you again next time on the Ag View Pitch.