Sunday night market outlook 04-05-2020

Narrator: And it all comes down to this.

Chris

Barron: 2 on, 2 out, bottom of the 9th. The Farmers lead by 1.

Narrator: Full count, here comes the play at the plate, and it's the Ag View Pitch! Welcome everybody to another episode of the Ag View Pitch, and we are entering kind of the second week of April here, and we're kind of in quarantine here still for a while. And you've got Chris Barron and Duane Lowry.

Chris

Barron: How's it going, Duane? Good, Chris, everything's going fine.

Narrator: Good, good. So we talked offline a little bit about what we're going to see in this next week as we head into it, and there you made the comment we've got a supply and demand report coming up. What are you seeing there in that regard?

Chris

Barron: The supply and demand report, the trade is going to be concerned that corn carryout will go up due to reduced ethanol numbers. The trade will also be concerned about soybean carryout going up due to lack of activity on the Chinese demand side. That's a possibility, but I also wouldn't be surprised if USDA left their projections unchanged. Still maining some— maintaining some optimism that we will achieve the bean export projections. There's also a probable that the crush rate for soybeans will go up, and so I'm not sure that we'll get that much negativity out of the supply and demand report in beans. It might actually be a little supportive, but in the case of the corn, the trade will expect— some higher carryout projections. Probably should also mention that we've had some corn sales to China recently, and my guess is that will continue, and I expect it might get larger.

I just still think there's some awful solid rumors that DDG exports are on the horizon, as well as possibly ethanol. So I'm not sure things are quite as negative from— in terms of that supply and demand report as what the trade expects. I think USDA might prove to be a little slow to make some of these reductions in corn demand.

Narrator: On the ethanol side of things, are you hearing anything there as far as what plants are up to, you know, with them throttling back? And I know the ethanol industry submitted some reports to Washington about— finally about kind of what their struggles are, you know, keeping the doors open and keeping things running. But are you— what are you hearing on the ethanol side of things?

Chris

Barron: Well, I think there are some plants going to reduce their operations, so there will be some that are closing. But I would say that I would summarize the atmosphere in the ethanol industry last week— versus the previous week as being one that maybe they're— the plants are less likely to close now, at least some of them were, versus what they thought maybe a week or more ago. I think there is a push in the ethanol industry to try to get involved in a stimulus package. I think it's highly likely that the government will play a role in providing some money to the ethanol industry. And my guess is it'll be not too different than the Payroll Protection Plan, meaning they will, in order to qualify for payments, they're going to have to be operating. And it'll either be based on their number of gallons of ethanol produced or the number of bushels of corn consumed.

That would be my guess, and that might temper how much the closing takes place. It's also going to be very influential whether or not China comes in and buys any DDGs, and ethanol too, that would be a factor.

Narrator: What about, you know, the correlation to the price of oil with all this on corn specifically? And let's say that they keep these ethanol plants running, we're in quarantine here until for sure the end of the month, and no one knows for sure if that's long enough or whatever. And so if that continues on, or doesn't, either way, what are the— what's the options for storage of ethanol? I mean, if they could— if everybody continues to produce ethanol and we're only consuming so much of it, how much extra ethanol can they actually make and put it—

Chris

Barron: I don't know what the— I don't know what the quantity of that is, but it's definitely a problem where plants are reporting that they're soon going to run out of places to put it, and the transportation bottlenecks have no place to go with it. So that is a potential problem. I don't know how that will all play out. As far as the crude oil impact, I think it's important to step back and say, how long are we going to stay at $20 or low $20 crude oil? And the historical answer in recent history, with recent being defined as the last 15 or 20 years, which suggests that we're going to spend minimum amount of time here. Um, a week ago we had nobody talking, um, uh, publicly anyway, in terms of trying to get a deal put together with OPEC.

In the last week, we went from having $20 futures on spot crude oil to trading as high as $29 on Friday, so you had a— some stabilization and recovery there. You also now have Saudi Arabia and Russia and other OPEC+ countries going to have a virtual meeting that, as of Friday, we thought that virtual meeting was going to take place on Monday. Now it's going to take place on Thursday. You had President Trump enter the arena last week, indicating that he was going to do whatever was necessary to protect the national security interests of the United States. That is represented in the U.S. energy sector, and he basically came out and told Saudi Arabia and Russia to fix this price war situation, to cut back production, and if they don't do it, he was fairly direct in his press conference briefings in the last few days. Indicate that he's perfectly willing to put tariffs on imported oil.

He's willing to do whatever it takes to protect the U.S. energy sector, and protection in this case would mean getting the price of crude oil up, even if he has to impose import tariffs on imported crude. And once he were to do something like that, that takes away all incentive for them to have any price war if their objective was to harm the U.S. shale industry, although both of them want to deny that's the case, and I think that goes to show you that they don't want to fight the U.S. over this particular issue. The reality is that you roll the clock— calendar ahead 3, 3 or 6 months, uh, crude oil prices will probably be double what they are now. We're not going to stay at these depressed prices. They have no choice but to cut back.

The question is going to be how fast are they going to cut back, how long does it take to get the crude oil back up to where it's semi-profitable for the US energy industry, and what's the government going to provide for funding in between to act as a bridge, and what— how is the ethanol industry going to respond to that. The last part of the question that you're really asking is how long is it going to take to get ethanol demand and gasoline back running again. I don't know, but I've watched every one of President Trump's coronavirus daily briefings here, and I would say that over the last few days, there's been a move towards talking about, "We gotta get the country back to work, gotta get it back to work." I think there's these hinting, reading between the lines, that he's gonna wanna move out of this shelter-in-place environment that was currently set to go through the end of April.

I think he's gonna have a drive to try to figure out some way to make that date occur quicker. I actually thought the developments in the coronavirus in terms of how the press conference was handled yesterday on Saturday, the comments from the medical part of the update seemed to be less concerning than it was earlier in the week. So I actually think that looks a little bit better. The marketplace is infatuated with being fearful of everything right now, but I actually thought the landscape for that was a little bit better, a little bit further down the line. And I thought the fact that President Trump was giving OPEC basically an ultimatum, and OPEC responded to According to President Trump, Saudi Arabia said they would cut production 10 billion, maybe more. To me, that's a step in the right direction. It seems like a pretty significant direction. And so we have some bottlenecks.

That's going to be a problem for the ethanol industry, both in just them getting rid of ethanol and gasoline and ethanol consumption returning to normal. That's going to take a little bit of time, but hopefully— marketplace is at a point, or near a point, where it's got a lot of this stuff factored in. That's the hope. Markets don't go down forever, and they don't continue to go down just because the market is filled with fear. At some point in time, that fear point becomes saturated, and it seems to me like we could already be at that point.

Narrator: Could it? Could it happen though that, let's say that, you know, obviously we've pushed demand for ethanol back quite a ways, the tanks are getting full, they step in, they, you know, not to be a Debbie Downer here, but, you know, the tanks are getting full, they give some assistance to the ethanol industry to help them, let's say oil prices do double, they go up, the prices go up, that helps the price of corn go up, well then that, that's probably going to be a negative on basis then, right? Because the ethanol plants, if they're funded and there's some assistance there, doesn't that make basis even go wider maybe into the summer months if the price rebounds but the demand has been sluggish and they're able to continue to run? Is there anything that farmers should be doing with regard to guarding the basis?

Chris

Barron: The only thing they can do to guard the basis is to sell the cash. There is nothing else they can do. If they're that fearful that 40 under or 50 under basis or whatever they're looking at for a bid, that it's going to get even worse, they only have one choice. That's to liquidate the physical bushels. There is no other thing they can do.

Narrator: Is that a— is that not something— is that something that you don't think is an issue or potentially could be?

Chris

Barron: I think it would— I think I personally believe it would be a huge mistake. I think Making a decision like that in this environment of fear, I don't think anything— action taken out of fear usually turns out to be good.

Narrator: So do you think the basis is probably going to improve from where it's at right now? As things—

Chris

Barron: I don't know if it's going to improve or not, but I'm not sure it can get a lot worse. I think it is possible that it could improve, and one of the reasons that it could improve is You know, we could end up getting more and more exports out of this situation. We're exporting corn to China now. It wasn't too long ago we weren't doing that. The potential for that to get larger is very real. So in— at any moment now we're going to be returning to the fields and the last thing on farmers' mind is to be moving grain during planting time. So basis could improve off of that. You know, there are a lot of other factors. The crude oil price could resolve itself rather quickly, and suddenly that makes a difference. There's a lot of things that can happen, but, you know, nobody is thinking along those lines.

Everybody is just scared to death that it's going to get cheaper, and that's where everybody's at. People are very much dominated by the fear that it's going to get worse.

Narrator: So we've spent a fair amount of time on corn.

Chris

Barron: How about soybeans?

Narrator: What are you hearing there? What do you think in this new week as we head into it?

Chris

Barron: I don't think the— we're going to get anything all that negative from the S&D report from USDA on Thursday, so I don't really see that as a threat. I think that the bean market in the last 30 days has performed you know, relatively well. It had the initial sell-off when the crude oil declined, and then we just got done having a 75-80-cent rally that took us back above the levels it was when the crude oil price war started. Now we've had a correction. I don't think the weakness we've had is anything more than a correction of the, the 70-some-cent rally. We had USDA come out with a relatively low carryout number— or not a carryout, the acreage number last Tuesday. You start extrapolating demand projections and USDA acreage numbers, you're— it's not difficult to get a 200 to 250 million carryout in beans for next year. I don't see anything bearish about that.

I think there's a lot of number crunchers that have been ramping up global demand for soy and protein, and I would say the outlook for soybeans is quite good, and the price relationship versus corn is historically cheap enough that I don't think that causes beans to be all that negative. I would say the outlook for beans is extremely positive, if you want my honest truth. The corn is— can be argued that it's different because it's got this whole ethanol thing, the gas, the usage and the bottleneck of supplies, and those are all real things and they may very well have an impact on pricing in real terms. You can talk about larger acres even if they're saved back. Next year's carryout numbers in corn mushroom, get larger. Those are real things that seem very real right now. So if somebody wants to be bearish on corn, Because of that, it's understandable.

The beans are— do not have any of that. Everything that you look at in the beans come— look— points to a declining carryout situation as you look on towards next year. It's completely different. So, you know, the place that the fear is the least warranted is probably beans. So I would say the outlook in beans is quite favorable.

Narrator: So last question for you here as it relates to corn and soybeans. There are still a few growers out there scratching their head a little bit on, on that one farm or whatever, and I know every situation is a little different based on yield and, and, you know, the margin contribution and all that, but what I'm hearing you say is you feel like, you know, if price as part of the equation in that decision, you're much more friendly to soybeans than corn long-term.

Chris

Barron: Well, it's easier to point to a friendly outlook on beans than it is in corn. How that ultimately plays out, who knows. It's possible that China takes 8 million tons of corn this year, and it's possible that they'll take another 8 million tons the next year. Such numbers like that makes up for a lot of lost ethanol demand, uh, if the loss in ethanol demand turns out to be just temporary. So there's a lot of things that could happen on the horizon that are different, that could, that could make the outlook different than what it feels like today. So I would say if the guy's contemplating what to do with that last field, first thing I do is I would wait to make that decision until the last possible moment and see if anything changes. Everything seems to be extremely fluid. We've had plenty of volatility. We've had beans decline 60 cents on a price war with crude oil.

We had beans rally 75 cents, uh, when the coronavirus fears and concerns were only elevating. We had beans rally 75 cents when crude oil was only slipping more and getting worse. And now we've had a— whatever it's been, a 35, 40-cent break or whatever in beans. Things are volatile, things are fluid, and I wouldn't make that decision until I absolutely had to, because I'm not sure that you can be certain the outlook won't look a lot different from 3 weeks from now than it looks today.

Narrator: Gotcha. Is there anything I haven't asked you about? I mean, with everything going on, obviously with the majority of it being negative, is there anything that I haven't asked that we need to discuss?

Chris

Barron: Well, I know people are talking about new crop basis, what to do with that, and most of the bids for new crop basis are on the wider side. They may not be wide, they could end up being worse by the time harvest rolls around, but the odds are new crop basis levels won't change too much here for the next, uh, several weeks. Um, I, I don't know what to tell you people who are contemplating making new crop sales at what feels like a wider basis structure, but It just seems like there's an awful lot of desire by the producer or willingness by the producer or the feeling that they must go out and make a decision and make sales here at a time where the fear level is so heightened. It's been my experience those tend not to be good decisions.

So I really struggle to embrace that attitude that takes an environment like this and responds to the fear and the panic and makes decisions that only might be good is if things got worse and worse and worse, and that is a difficult thing for me to do when prices are not at all attractive to their operation. You make sales now and something comes along and changes and things that we are scared of now turn out not to be as bad as they are feared at the moment, you're gonna look back at those sales and really, really regret them. And this is not typically the time of year where you get your best sales opportunity of the year. So I really struggle with that, and I resist it quite a bit. But I can assure you that there are a lot of farmers that are either making sales at this time or preparing to make sales on just the smallest of a price recovery, and that seems very uncomfortable to me.

Narrator: So pay attention to what you need to do to get a crop in and watch this, but be real careful not to be overly anxious to price into this market.

Chris

Barron: Well, you're really putting me on the spot here, Chris. You're making me look extremely— you're painting me into a corner and it's very uncomfortable. I don't mind being thrown under the bus, but This is going beyond this. You're trying to force me into embracing a sale here, or embracing this fear, and I refuse to do that. And at the moment, the prevailing attitude is embrace the fear and make the sale, because it's going to get so much worse, and we're going to have corn futures under $3 for the foreseeable future. Bates, this will be awful, and everything else. I don't choose to live in that fear-based world. Maybe that's an unwillingness to embrace reality, but I've been around this business a long time, and I've seen far more droughts predicted than ever actually occurred, and I've seen far more doomsday predicted than ever actually occur.

So I try to avoid embracing the greed at the top, and I try to avoid embracing fear at times like this. I just think there will be better time frames and better conditions on which to make decisions. I happen to think that with December corn futures at $3.50, which by the way, in the face of all this, it is worth noting. Dec corn actually closed a penny higher Friday. I think that fact is probably lost in the discussion here. But, you know, I could be persuaded to find the value in making a sale of Dec corn at $3.80 if we could get a 30-cent rally here. And people say, well, that's pie in the sky, you can't get a 30-cent rally. Well, you know, lots of strange things happen around here, you know, so I wouldn't rule it out. So I would be willing to take a defensive approach on something like that. I'm not very willing—

Narrator: I'm not—

Chris

Barron: actually, I'm not at all willing to make the sales now, but you're putting me into a very difficult corner.

Narrator: Yeah, well, and I think, you know, not trying to do that, but I think just saying that, you know, a little patience and watching this, because we are realistically in uncharted territory with all the things going on, and patience— and sometimes doing something is doing nothing too.

Chris

Barron: Well, I mean, $3.50 futures, I mean, you're talking about $3.20, $3.10 corn on the farm. I mean, this is virtually no operations can grow corn at that value.

Narrator: No, and as we look at that, you know, right now the cash on farm price, we're, you know, we're solid 70, 75 cents away from from, um, from margin. So you're right for 100% there. Anything else I haven't asked? And we can kind of wrap things up. I mean, it's— I think we just kind of keep an eye on things as we move into this next week. Anything else?

Chris

Barron: In this business, there's times to buy it, there's time to sell it, there's times to stand aside. I think, uh, for the most part, um, this is the time to stand aside. You don't make decisions here. You don't force decisions into this type of environment, and that's my approach. I think there will be better opportunities ahead, and you've got the entire growing season to see what does end up coming, and shoot, the market doesn't have to go much further and all of a sudden, you know, crop insurance starts to kick in as a safety net. There's going to be more and more farm program payments, I'm sure, then— and you mentioned on multiple podcasts over the last several months how the MFP payment basically was the deciding factor about whether an operation was profitable last year.

I have no reason to doubt that we won't have payments coming from the government this year that will be in excess of what the MFP payments were. I think there's still a very viable, plausible, probable chance that we are going to get nothing but increasing business from China through this Phase 1 in the months ahead, and I don't think anybody cares about that anymore either. There are a lot of things that can come along here and change. You know, we, we're going to get through this coronavirus. We're going to get the country back to work. Uh, the OPEC is going to be forced to cut back production.— because if they don't, Trump's going to come in and impose import tariffs and basically create a $50 or $45 or whatever price he wants to create for our domestic crude oil price. At that point in time, the rest of the world has got no choice. They're going to have to cut back.

They're going to run into the same problems that the ethanol industry has. They're going to run out of tankers and floating vessels to put this crude oil supply on. So, things happen, things change, and I think we have to try to, uh, look at the, this conditions we're dealing with right now and, and feel the, the best course of action is not make a commitment and, and wait for something, uh, different and see how we come out of this coronavirus, see how the crude oil price turns out, see what happens with China, China's demand. And we can't, should not forget all the trillions of dollars that are being pumped into the economy whether it's in the US or other central banks or China stimulus, stimulus programs or whatever.

If, uh, unless you think you're going to come out of this coronavirus in a manner where we never get out of it and we're going into a depression, and if you want to live your life based on that expectation, well, knock yourself out. I'm not going to do that. I think we'll come out of this with a, a much better condition than that, and I think that we'll get better opportunities, and the landscape can look a lot different. And I don't want to make a decision in what I think is a temporary landscape.

Narrator: Sounds good to me. I think that should wrap things up, and appreciate your comments. And we'll kind of keep on this in the next couple of weeks. Like you said, we'll kind of see how things are developing, and we'll deal with these things as they come at us. All right. Yeah, thanks, Dwayne. Appreciate your time. And thanks everybody for listening this time on the Aggie Pitch, and we will catch you next week. Thanks.

Chris

Barron: Thanks for joining us on today's episode of the EggView Pitch. As always, you can reach out to us at cbarron@agviewsolutions.com or duanel@netins.net. We'll catch you next time on the EggView Pitch.