Do declining yield prospects equal more price strength?

Duane: 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: Welcome everybody to another episode of the Ag View Pitch, and we are heading into a new week and also heading into a new month. Dewayne, how's it going?

Duane: Good, Chris. We not finishing the summer growing season off very well, but pretty soon harvest is going to be just ahead.

Chris: Yep, yep. Well, we were just talking offline for a minute here. You're in Minneapolis, up there visiting some family. What'd you see on the way up there and Is it pretty peaceful in Minneapolis now?

Duane: Well, at the moment it's peaceful. As I drove through to visit my sons, which live, one pretty close to downtown, the other one not quite as close to downtown, I drove by, you know, a very nice area within 3 blocks of my son and boarded up nice stores, destroyed grocery store, a bunch of things. And I said to my son, I said, hey, you didn't tell me that this was this close to you. And he says, well, that— this wasn't the main event that happened several weeks ago, this was just a couple of nights ago. And I said, what the heck, I didn't even hear about this, you know, I didn't even know. And he said, well Outside of the local media, it seemed to be kind of squashed. It wasn't really in the national media. And so, you know, we had a little heart-to-heart father-son discussion over this whole subject and what it meant, which was a follow-up to what we had before.

But it was just extremely frustrating, sad, and, uh, uh, quite threatening to see this destruction, and to know that it seems to be expanding in the location and the footprint in which it covers. We all know that it's happening, we see it happening, but when you see it up front, or you see it it impacting somebody you know. This is a real problem that I think everybody is developing a building understanding and recognition of it. The frustrating part is that the people in charge seem unwilling to stop it, and it's not going to stop on its own. Whatever amount of pain there might be in having this stopped, that pain will only be an even larger pain the longer it's waited, or allowed to continue. And this is on the verge of being out of control.

Now, it's not out of control at this moment, but when I say on the verge, it's only one event— one spark that triggers an action, and then you are, at that point, you're on the verge of being out of control. So, you know, that's kind of a sobering way to start the podcast, but it's part of the entire narrative that's out in front of us here that we don't know. And we don't know about that, we don't know about the election. Here we are dealing with the weather, we don't really know about that. And we've got an economic backdrop here that is very much in trouble and very much threatened.

And if you don't believe it by certain standards of measurement, one thing that you should be able to recognize that it's a problem when you see that the Federal Reserve and the Treasury Department and all those players are virtually throwing everything, including, I think I saw a kitchen sink fly by the other day. I mean, it's just everything is being thrown. Being thrown at this thing, money upon money, program upon program, and that is a statement, and a clear statement about the problem that those people in charge that are supposed to know about how deep of a problem we're in, that's a reflection of how deep they think we're in, and apparently it's quite deep. So that's quite concerning. This is all occurring against the backdrop of 2020, which has been the year of the black swan.

Again, I think every decision that we make, every way we can find to reduce risk or control risk or manage risk, we need to take it seriously because it no longer is a black swan. An uncommon thing. Now we feel like we see potential things that could be a black swan swirling overhead on a constant basis. So I think these are challenging times.

Chris: Yeah, you said last week, you know, all you gotta do is look up and you see a, you know, a flock of them. And just to echo your, your thing in Minneapolis too, just as a father of a police as a police officer, this stuff's got to stop. It's just, you know, and I don't want to get political and we need to get going here on the markets, but this crap's got to stop. I mean, you can't— we have to have law and order or we don't have a country. And I agree 100%. We gotta, you know, we on the farm, what that means is we got to manage risk. Thankfully, people started with COVID started figuring out where their food comes from. And that's kind of a good thing. But we got to have law and order, and things are going to have to change one way or the other.

Duane: Law and order is not political. It's sad that we have to even throw out that asterisk that says we don't want to get political. Law and order, public safety, that should not be political. It's never been political. It should not be political. And when you talk about the police, we've all seen clips of what the police have to put up in terms of abuse and verbal abuse, but it doesn't stop there. Now they're getting things thrown at them, some very dangerous things thrown at them. They're having to take injury, and yet they're not allowed to do anything. They're being pushed up against and nothing, nothing happens. It used to be if you touched a cop, that was enough, you know, you were taken down and arrested. Now, you know, the— it's, it's the police that have the handcuffs on them, not strapped to them. And this is a, this is a problem.

And, uh, we've read where, uh, police are retiring early, quitting, moving into private, changing locations, whatever. Like I said, in Minneapolis, just here locally, my understanding, there was more than 30 cops resigned just after the recent incident of the last few days. So, um, I don't know, this, uh, everything we talk about here is the description of things getting worse, not getting better. And I agree with you 100%. Um, something's got to be done, and, uh, the police can't continue to take these body blows without being allowed to to respond. And, uh, you know, they're asked to go and serve and protect and then be ambushed. You know, they're asked to serve and protect and, and, uh, have to take incoming but, uh, can't, can't, uh, return fire, so to speak. Um, so this is very, very frustrating, and I think it's frustrating to the vast, vast majority of people.

And as this violence and activity spreads We are finding people that previously would have been anti-police. Well, they're anti-police until they themselves need them, then suddenly their viewpoint changes somewhat. But, uh, the rest of the country has to wake up because, you know, we're talking a very small percentage of people that do not want, um, law and order, and yet they seem to be the ones that's driving the narrative and driving the action. So enough of that. Let's get on to the next troubling spot.

Chris: Yeah, yeah, you know, we, we're not going to solve the world problems in that area for right now. So maybe we go on to something a little happier, especially after what we saw last week, some pretty good strength in the markets. Talk a little bit about corn, what we saw, you know, where we're at, you know, we're in that $3.60 range. We're getting up towards, you know, where maybe we might be seeing some resistance. What's your thoughts there on corn? Let's start there.

Duane: Well, corn was up, I think, 18.75 cents for the week. We had a Commitment of Traders report that came out Friday afternoon like always. That data is always through the Tuesday of that week that it is released, so the data actually goes from the 18th of August through the 25th of August. During that time, the funds covered more of their shorts. They covered another 49,000, but they're still— large funds are still short over 61,000 corn contracts. Since that report date, or during that report period, corn was up 12.75%, and since that report, it's up 4.75%. We are now perched only a few cents away from the highest levels that we traded in early July, and I think technically there are more upside targets to achieve. I would say, you know, $3.70 Dec corn is kind of the minimum number I've been talking about here for several weeks.

And I think it's possible to get to $3.90 when you look at the charts, but when is this going to occur? Are we talking about something that we have to go up to prior to harvest? Is it something that we're going to make a decision— the market's going to make a decision on not until after we see some combine yields, not until after we see USDA There's a lot of different ways to look at this. We have large areas that have had limited precip in the last 30 days and large areas that had limited precip in the last 2 weeks. We've had a lot of rain events forecasted that have all not come to pass, and we're I don't know how to describe this, Chris. On the one hand, we're getting to the point where the corn that's been stressed is past the point where any moisture now is going to help or help very much. And then you have some corn that will still benefit.

You have other corn that is still doing well and probably hasn't lost much yet. Yield potential, and I'm having a very difficult time trying to figure out how this all plays out. If you pull up a map and you look at precip over the last 30 days, your problem areas are western Iowa, southern Iowa, northern third of Illinois, and maybe parts of Nebraska. Of course, some of those are going to be irrigated, but that Outside of that, you probably have enough moisture that the yields are going to pretty closely achieve what their potential was, or if not, they won't be off by that much. On the drive to Minneapolis this weekend, in north central Iowa, they had had a few more rains along the way, and you could tell it, you could see it in the lawns that they were greener.

The crops were in better shape, not that there weren't some areas and some fields that were not in that good a shape, but you could tell there was some better. And then once you got into Minnesota, everything looked to be pretty good as you just drive by it. So again, the areas, the western part of Iowa, the southern part of Iowa, and the northern third of Illinois, that's your key area for production losses. The market has already traded the major windstorm that we had. They don't know how many bushels to take off, but 200-400 million is in the realm.

The people are dropping the state of Iowa's yield off by quite a bit, and maybe it's possible that we've already— the market has absorbed a lot of this yield reduction loss potential in corn, and maybe we've largely absorbed enough of it that it'll be difficult to get the market to respond to a larger cut in production until we actually get into the field and get the report. So I'm not sure how to look at the corn market here. I am— go ahead.

Chris: Let me ask it. Let me ask this question then. So if, you know, last week and pretty much every podcast, I call it the broken record question, okay? So last week you had a pretty good response to just basically hold on here, wait. Well, we've had an 18-cent rally that you just described in corn. Bushels that have to go off the combine, probably a place to pull the trigger on some of that or what?

Duane: Well, I'm not real anxious about telling people to pull the trigger just yet. I think a lot of people, even outside of these worst areas that we described, are probably witnessing a deterioration of crop appearance, and they know they've not had as much precip as they expected or wanted. And they're contemplating whether their yield is going to be less, that changes the interest of marketing at these prices, and these prices are still cheap. They may not be as cheap as they were, but they historically are still cheap. They are still below where people would have wanted or calculated a return earlier in the year or last winter for what they needed. Granted, there are some government payments along the way when So that factors into the equation, but the large spec is still short 60,000 contracts.

Now maybe some of that was covered since the report on Tuesday, but the corn market was not very energetic for the— during that following 4 cents or whatever it was from Tuesday to Friday. It did not appear to have a lot of panic or a lot of aggressive buying in there at that time. On one side of me wants to say there's still more short covering here, there's still more uncertainty ahead, there's still more shorts that are under pressure. We didn't get rain over the weekend to speak of. We don't have much rain in the forecast for pretty much a lot of the Midwest and the places that it's going to impact the most in Iowa, they don't have the rain in the forecast. So I sense that there's probably some more strength to be had. That being said, you take the market 10 cents higher, you're up to that $3.70 target in Dec corn.

You begin to get technical resistance there, you begin to get fundamental resistance there, you may get producers selling there because those are values that may work for some people in some operations. And in this year, if you're able to make it work for your operation and turn a profit, that's probably what you ought to look at doing because as we mentioned before, there's a whole flock of black swans circling overhead that we have no idea how any of that will affect us. So I would describe corn from the angle you're asking about, that 10 cents higher from where we're at, We have to assume there's going to be some resistance, and I think the real most important answer to your question about should a guy be making sale, each producer has to answer that on their own level.

But we are getting up to price levels that may very well translate to, you know, a profitable 2020, and I think that needs to be respected.

Chris: And, and if we tie that and kind of switch over to soybeans for a minute. And you— and again, we talked last week a little bit about storage. And if you look at, you know, the carry, there's a, there's a little bit in corn. I don't consider that very much just because I look at the cost of interest, you know, 2 cents a month on corn, and you factor in the cost of money, it's a little bit, you know, there's some there. Soybeans, there's really nothing there, nothing there to that's even going to come close to covering just the cost of money. Looks to me like it probably makes sense, you know, and with the rally we've seen in soybeans, talk a little bit about that.

Does it, you know, a lot of producers when we look at the average where growers are at, and I'm looking at it right now on Profit Manager, that the majority of our people are getting to the black, in the black ink here on on soybeans, um, where's our resistance level there in your opinion?

Duane: Well, first of all, beans are up 45.75 cents for the week, so that is a significant number and that deserves some respect for how much revenue has increased when you start to do your calculation. The funds are now long 109,000 contracts of beans, It's not a record or anything even really close, so it's theoretically possible there could be more to it. I thought it was interesting though that during the reporting period the beans are up 6.5 cents and the funds only added 2,000 contracts to their position. That was a small amount. Since that report, the market was up 30.25 cents, and I don't know how much that was fund buying or short covering or whatever, but there was a lot of emotion is what I want to describe. There was a lot of emotion during Wednesday, Thursday, and Friday's trade.

I'm— I think it's going to be difficult for the market to build upon that strength this week even though the forecast doesn't have a lot of precip. The important thing to recognize about beans where they're at right now as of Friday's settlement They're basically the highest values, uh, or at very near the highest values we've seen since June 2018 for the spot contract. Therefore, producers are getting their best marketing opportunities since then for, in many cases, and certainly the best opportunities they have to market their grain at, or their soybeans here at harvest time. So getting back to your question about should Should a producer be making sales here? Well, if it's the best prices we've had in more than 2 years, it's the best prices we've had at harvest, there is no carry in the soybean market to speak of.

If you do not make sales here, you're just betting on the market going up and there's nothing wrong with that per se, but you're not getting anything for storage revenue that's clearly offered. Maybe basis values can improve some more into the winter on good export demand and tight farmer holding. That's all possible. But I think there's a strong case with the prices offered, some government payments in this year. There's a strong case to be made that producers have every incentive to make sales here, make— turn 2020 soybean production into a profitable venture. And be done with it and focus your attention to the corn and trying to find an opportunity there. So I'm— with where November beans are at right now, I would say that your resistance levels begin very close to where you're at, and they probably get very intense 30 or 40 cents higher than where they're at.

That would be what I would consider the upper near-term possibility, but I think it's— I think it should be difficult to turn away the prices offered. So I'm inclined to encourage producers to very seriously evaluate whether current opportunities, uh, prices are not, you know, good, good enough opportunities that it should be taken.

Chris: So on new crop corn, earlier in the summer when we saw that that short-term rally in the— I think it was in the front part of July, you were advocating that producers look real close at the 2021. You look at Dec '21 right now, we're in that $3.82 range as we speak. Are you still inclined to think that, you know, based on everything we know with, uh, even though the yield, you know, obviously I think everybody's kind of buying into the to the prospects that this yield is getting smaller, even myself, after months, or at least weeks anyway, of being very high on this corn crop. From what I've seen going across northern, central Iowa, northern Illinois, and northern Indiana this week, definitely seeing things go backwards. Although, you know, things in southern Illinois and south of those areas are still really good.

But with the derecho and everything that's happened, I think this crop is getting smaller. Having said that though, we still are going to have a really big crop. So do we, you know, start looking at this 2021, do you think, or do we have some more possibility there in your opinion?

Duane: I think we definitely have to look at the 2021 crop, and I think we have to look at the prices we're at and what— where we may soon achieve, we have to meet— we have to see that as an opportunity. Now, is it an opportunity to sell everything? Maybe not. The first and best decision you can make for risk management is your crop insurance choice, and there are choices that, that will be— you have an opportunity to make here over the next 30 days that could impact 2021 price floors or your policy. And I think that is the first place that people need to look for an opportunity to try to put in a floor. And I think that opportunity is good given the circling black swans overhead.

In terms of the other incentive to be comfortable making some sales for '21 regardless of your viewpoint on the 2020 crop is that from here forward anything that the market goes up based on production cutback of 2020, it's going to be seen in tightening of spreads and removing of carry. And so the front end is going to be where all the strength comes, if it comes, and the new crop '21 is seen in the marketplace as having somewhat of a ceiling. The new crop '21 is that, you know, the one thing about grain production, every year we start over, and so we have a clean slate for 2021. We'll expect trendline yields, and the marketplace will assume trendline yields until we get into the growing season. And so I think that there will be some sort of a ceiling on these '21 futures.

Now We got to about $3.83, I believe it was, this week in Dec '21, and I think my targets have been, you know, $3.85 and above, you know, you got to be looking at for selling opportunities. But let's say that we have a strong corn market because the production in 2020 is less than what we think. Let's say that's the case. Well, you're going to have a difficult time at any time between now and, and say January getting these '21 to get above $4. So from $3.85 to $4, that's going to act like a ceiling regardless of what happens with the old crop. So I think there's value in getting some new crop sales so you have that floor price established. Look at your insurance choices. Make some decisions that might be out of your comfort zone or something different than you've done before, but make those decisions based on the amount of risk management you can achieve.

And because your normal crop insurance policy isn't going to give you any protection, you don't even know what the price is going to be until February. And, uh, that may be a long time with a lot of important uncertainties on the horizon that we have to experience before we get to February. So if you don't make a crop insurance decision that's different than what you've done in the past, then you're not going to have any floor protection offered through crop insurance until you get to February. In the meantime, having some hedges, HTAs, whatever it is that is your best choice for your operation, it seems to me that there's some warrant in doing that. So I am very much in favor of very seriously looking for opportunities to remove risk or manage risk in the new crop corn values at where we're at and any strength that we might get from here forward.

Chris: Yeah, I think that's good advice. We probably just need to do a podcast here sometime on the margin protection, how that works, because I was just sitting here as we were talking looking at kind of the average in terms of what we're seeing for some forecasts for 2021. And these prices are probably still not quite there yet for a lot of the people that we look at in terms of, you know, you factor in basis to these numbers, we're still not probably quite where we need to be to, to have a producer feel very comfortable about selling much other than if you did something on the board or whatever and could readjust or whatever, but probably something we should follow up on with regard to the margin protection and how that looks and how that works. So anything else as we get towards the end here and wrapping things up on, on the markets?

I was just going to bring up basis real quick and then anything else you want, but it's interesting to me how basis has stayed pretty strong. As, you know, we near harvest. Obviously, the processors are still looking for corn, so, so I think that's interesting. Any comments on that or anything else to wrap up?

Duane: I think basis might stay firm until we get into the, into actual harvest, and I think that the producer is now seeing some glimmer of hope for prices. He doesn't like the prices that he's currently getting, and while at one time he might have felt compelled that he had to sell, maybe, now I think he might have more confidence in storing, and I think that the producer will try to hold off bushels more aggressively, try to hold them off the market than he maybe thought he was going to do 30 days ago, and I think that may tend to support basis. And then we'll see what happens when the yields start to roll in at harvest time and see how that might change, I guess, is how I would describe that about basis. What was the other part of your question?

Chris: Well, just if there's anything you want to wrap up with here as we finish up going into a new week.

Duane: Well, on a sobering thought, I want—

Chris: Why are we sobering?

Duane: Well, I want to— I could— I've pumped in a fair amount of happy in terms of price outlook before and even this week, but this time I want to bring it a little bit closer to maybe reality. We know that we are finishing the growing season with less moisture than desired, and we know that in the case of corn, maybe that moisture, lack of moisture, might not be hurting us as much in the areas outside of Western Iowa, Southern Iowa, the northern third of Illinois. Outside of that, the lack of moisture may not be hurting as much as you might think. But, and the damage that's already been done in the driest areas to some extent that may have been factored into current prices.

And I think that it is, it's very difficult to know what we're dealing with for a final national yield when you have some areas that had still maintained maybe a large portion of their very high yield expectations, and you have other areas in Iowa that have been devastated by yield reduction versus what they had out there for or potential. Um, so, um, the marketplace might be close to a point where it won't want to rally anymore until we see either USDA's reports on September 11th or until we get some actual field data. Um, and with soybean prices basically at the highest values we've had for the last 2+ years for spot prices in the highest in-season or near-to-harvest season prices we've had. That's, you know, needs to be respected. And then you do the calculations of your government payments that have occurred this year.

All of this stuff needs to be respected because maybe there are some limitations about how far demand is going to be able to carry this. So I just think it's important for producers to not get overly caught up in the weather and the market excitement, which might still have more room to it, but not to get overly caught up in that, and instead, now's the time of year to focus on your own operations. You've probably got a pretty good handle on what your own yields can be, do the calculation on what's a good sale and whether you should make a Sale sale. based on your own numbers, not what you think the national yield numbers are, and factor in your government payments and, and whatever else, and, and try to find something that works for you.

And then lastly, to remember all the many days, weeks, and months of 2020 when you thought there was no chance of getting an opportunity to turn 2020 into a profitable year, and for many producers that opportunity is being offered now or is very close to being offered now. And again, I think the focus needs to be on your own operation when it comes to marketing decisions, not on your, your perception or attempt to guess the national yield.

Chris: I think that's a good place to wrap it up. And then just to throw a little icing on the cake for consideration, I was just looking here at the average that we have for— excuse me— for the 2020 crop, and you, you're talking about that additional aid, whether it's, you know, CFAP or any of those other aid packages and PLC and PPP and some of those things that have come into most of the operations in this fiscal year. We're looking at about 34 cents a bushel on 200-bushel corn of value on the, on the corn and on the soybeans at 60 bushel soybeans, we're looking at about $1 a bushel of additional aid. So as you said, and I'm a firm believer, you gotta, you gotta factor that in. Don't just think of the total dollar amount, understand what that is on a per bushel amount, and, and understand what that means to the bottom line.

And if those price levels are sufficient, you got to look in the mirror and make some tough decisions along the way for sure. And we all are going to have to cash flow at some point too and pay down lines of credit and get ready for next year.

Duane: Yeah, I think it's almost at a point here with all the black swans circling overhead and all the uncertainty and all the turmoil and disappointment and despair we went through already in 2020. Maybe it's important to separate marketing and risk management from the speculation or betting that higher prices are ahead. And they might be. I have no problems if somebody says that prices are going to get higher. I have no problems with that at all. But maybe there's different ways to manage that. Maybe you manage your operation, get your profit done, put a ribbon on it, you're done with that, and then decide how many dollars you want to take out of that profit that you just made, and then bet or put at risk to speculate and re-own that crop again and do it on paper and maybe manage that risk separately.

Because I think if people separate it that way, their decision on how flippantly and willingly they are to speculate they find out will be much, much less. And I think maybe that would be a good thing in the current environment.

Chris: Yeah, good place to wrap up, Duane. Um, thanks for the conversation. I think people probably realize, uh, we don't rehearse this, we just kind of start the conversation. That might, might be why we spent 7 or 8 minutes at the front of this podcast talking about civil unrest or whatever. It's not really tied directly to the marketing, but I think all of it has a has a connection here, and I think it's a great conversation and look forward to talking to you again next week. If anything major comes up, we'll definitely break in and, and be back with more. Thanks, Dwayne.

Duane: All right, thanks, Chris.

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