About This Episode
Recording from a grain cart, Duane Lowry makes an argument about leverage that survives the week it was made. He observes that strong cash basis and reluctant farmer selling have left elevators with unusually small hedged inventory, which means end users must source from farmers rather than the trade. An elevator will move grain for a few cents; a farmer sells on flat price. That difference decides who has to be aggressive.
Asked whether to lock basis while it looks strong, Lowry says no, and his reasoning is the useful part. Locking basis when basis is already historically strong gives up the side of the trade with the least room to improve, and it hands over the physical commodity along with all negotiating leverage. He would rather wait for the moment cash is genuinely needed, sell then, and decide separately about re-owning on paper.
He also reframes a discouraging selloff. Long liquidation moves ownership from one holder to another without telling you where price goes next, which is healthy market plumbing even when it feels like defeat. Chris Barron adds client data showing growers are still well below willing seller levels. Asked what he is thankful for at Thanksgiving, Lowry answers that hope can be pressed but not taken away.
“I just think it's a bad policy to give up your leverage going forward out in the months ahead when it's the physical commodity that's going to be in demand.”
— Duane Lowry
Key Takeaways
Locking basis when basis is already historically strong gives away the side of the trade with the least upside left.
A cash sale hands over the physical commodity and the leverage with it, so make the commitment only when you need the money.
When elevators carry little hedged inventory, buyers have to come to the farmer. Know who has to be aggressive before you negotiate.
Liquidation transfers ownership between holders. It tells you who is positioned, not where price goes next.
Separate the cash flow decision from the price decision: sell when you need cash, then decide whether to re-own on paper.
Early in a marketing year nobody is a forced seller. Forced selling shows up on the calendar, not in the mood.
Full Transcript
Narrator: Welcome, podcast, and all of our new listeners. Thanks for joining us today for the Sunday Night Market Outlook. We quickly wanted to promote the Farm Future Summit that's taking place on January 23rd and 24th in Iowa City, Iowa. This event hosts the top producers and business people in today's industry. We think it's a fantastic event to attend. If you're looking for networking, education, and ways to improve your overall operation, be sure to check it out. Also be sure to email us at agviewpitch@gmail.com to get signed up for our podcast subscription to ensure you get the Ag View Pitch delivered right to your inbox with every podcast update. Thanks again for listening, everyone. Enjoy.
Chris: Welcome everybody to another episode of the Ag View Pitch, and we're heading into a new week. We've got Dewayne Lowery out in the field today and Chris Barron here with you as well. Playing dryer operator and truck driver. So how's it going out in the field today, Dwayne?
Duane
Lowery: It's a sunny day. We're advancing harvest. I don't think we can complain.
Chris: That's good. That's good. Well, let's just get right into it. I know you're busy chasing combine around the field there. As we head into a new week, we got a short week coming up. What do you, what do you see coming in corn and soybeans as we go into a new week?
Duane
Lowery: Well, the markets got beat up pretty bad last week in beans, liquidation pressures. Corn selling seems to have kind of stabilized. We finished the week lower but not very much. People are discouraged, depressed. This is not the time of year that we tend to get a good strong rally into the end of the of the year, you know, so people are aware that expecting such a thing is a little bit out of the norm, not that it doesn't happen. But what we do have going for us is the market has sold off a lot, we have liquidated, we've got people discouraged, cash basis levels still firm, harvest is wrapping up soon, farmers are not willing to sell 30-some cents off the October highs these price levels are also below the prices that they had a year ago or pre-planning. Yields are down this year, yields are down probably over the last, in relationship to each of the last 4 years.
All of this makes a situation where stuff just doesn't dollar up. And I think that creates a situation that the farmer is not going to sell a lot. I've made quite a few comments lately that the cash basis structure is such that between producer selling and cash basis levels, the hedger, the co-op, the elevator, they do not have a very large hedged inventory. I would say they historically are very small in that regard. And that sets up a situation where as users need to get supply, They're going to have to go rely more on the farmer making sales than they are elevators because the elevator doesn't have a lot of inventory of hedge ownership. And what that means is an elevator could be motivated to make a sale based on just getting a few cents out of his inventory, maybe a push on the bid, things of this nature, keep his trucks busy. The farmer is more motivated on flat price.
And, uh, that environment is not something that creates movement with ease. In other words, the, uh, user is going to have to be a little bit more aggressive. I've heard a lot of reports where, um, uh, buyers are trying to entice producers to make commitments for sales, uh, December, January, even February just to make sure that the supplies are there. That tells me that the cash buyer already knows probably based on conversations with the elevator that supplies are going to be tight, it's not going to be easy to make a sale. And I think that paints a completely different picture than what the futures market is reflecting. There has been a huge disconnect between the cash market and the futures market.
And that's an— that whole discussion is worthy of probably an hour-long podcast of which we're not going to get into today, except for the standpoint that going forward, um, I think that makes a situation where the producer has very little, if any, incentive to make sales now. And based on prices in relationship to where they were last year with a higher carryout projection, you know, I don't see the urgency to make a sale. Sometimes you just got to sit and wait. And I think that's where we're at right now.
Chris: What about basis? And so I'm going to ask you a question here. I may have given you an earlier hint on, but it's just a situation of if the basis is really look strong out there and let's say December, January, February, and you want to or you know you're going to have to make some sales for cash flow, what's wrong with locking that basis in, in the assumption that the price is going to go up, or is that not something that a grower is going to want to do?
Duane
Lowery: Well, let's say that, that you think the price is going up, which I do. And let's say you happen to be right about that. Okay. Most likely, if the futures went up enough, basis could weaken based off of that. However, if the futures market is going up because of cash market is strong, and you lock that basis in now, it's possible the basis stays this strong, okay, and then there was no need to do it. If you, if the market rallies significantly for some reason, you would be, you'd probably look like a genius if you locked that basis in. But if the futures go up significantly, you would still be gaining on your cash position. If, however, you decide to lock in that basis now, which price levels may be historically fairly good, they are not necessarily good when times where basis levels are very strong.
We've just gone through an entire summer and a harvest season with basis very, very strong. My concern is if you make a sale in basis now and we're wrong about the futures and the futures heads lower for whatever reason, then you're going to lose on that basis position because the basis will only get stronger under that scenario. And, uh, I think that your risk is greater making a commitment to that basis contract, even though it might appear attractive, than your risk would be if you just absolutely did nothing. And relied on the cash futures, or the, excuse me, the cash flat price that has basis and futures both in it rather than making a commitment on the basis where you ultimately, or you possibly could lose on that decision.
I would prefer to take my chances not doing anything, and if the futures market rallied significantly, I would hopefully get benefit out of that, and maybe I missed an opportunity with basis, but the worst case scenario is you bet the futures is going to go up, you sell the— your— commit your corn to a basis contract to a particular buyer. Now you've removed all opportunities to get a better spot bid if some buyer really needs a bid. And on a bigger scale, the problem I don't like about it is you're giving up physical ownership, satisfying the demand of the cash user, whether that's livestock guy, or a processor or an ethanol plant and so you've lost all leverage. They've now got a commitment from you on your bushels and that's all they really need and they've turned over and given you value on a piece of paper based off of futures contract.
And we've already talked about the fact there's been a lot of disconnect between futures markets and cash and I'm just concerned that or not really concerned. I just think it's a bad policy to give up your leverage going forward out in the months ahead when it's the physical commodity that's going to be in demand. So I just prefer not to make any commitment.
Chris: So when it's time to make a sale and you need the cash flow, go ahead and make the sale at that time because there's going to be a, be a certain point where guys are going to have to make some sales for cash flow reasons and, you know, paying 2020 input costs.
Duane
Lowery: Chris, that is always the case. You know, when the cash flow— when you need cash flow, you need it. At that point in time, you make the sale, and then based on conditions at the time, you decide whether you want to reown it on paper. That's fine. And, uh, if it turns out that you need that cash, uh, uh, flow right, you know, right now or, or in December, that's great. But I wouldn't make the commitment on the cash bushels to who that was going to go to and what that basis was going to be until the time where I had to do it. I would not do it 60 days, 30 days in advance. I've been around a long time and I know cash markets can change significantly during the winter months based on movement and these kind of things. So I just would not make that commitment, especially when I think the backdrop is such that the cash market is going to be pretty firm.
Chris: Well, and we've got that January 10th report that, that's likely going to give us some strength. I mean, we keep thinking that we're going to get a report that does, and we haven't as of yet much, but eventually maybe, maybe that'll occur, huh?
Duane
Lowery: Well, we don't know what it's going to be. I mean, I talked to a lot of people, and the— I certainly don't get the feel from all the people I talked to in, in, in, uh, a large diverse area that matches USDA's yield trends. But that is, you know, that doesn't always guarantee that you're right in your general thinking. But the game's not over yet. And we have certainly seen times in history where January yields produce surprises. And I don't know why this wouldn't be considered a prime candidate for such an event.
Chris: Right. So, uh, like we said, we got a short week coming up. Um, let's talk a little bit about soybeans. Any, anything out there, um, we want to be thinking about from the production, you know, sales side of things there or anything?
Duane
Lowery: Well, prices aren't good by many measures of standards of measurement. Beans are very cheap from a historical relationship to corn. When you look ahead in the next 120 days The U.S. is going to be in position to have some of the best prices and availability of supply as anybody. And South American supplies are not going to be as plentiful, they're not going to be as difficult competitor as they have been. I think the U.S. is in good position. I don't know what's going to happen with U.S.-China trade talks, but China continues to buy. There's clearly a demand there, a need for it. Technical conditions, price action feels bad, that needs to turn. I don't know if it will, I expect it to. I don't know if we're mature enough on this selloff or not. But I find it very difficult to give you an explanation why beans were down 17 cents or whatever it was for the week.
Some people will say nervousness to the U.S.-China trade, but that nervousness wasn't reflected in the stock market. So it's just very difficult for me to offer that fundamental narrative. Farmers are not selling any beans right now. I don't even know what it's going to take to get the farmer to make sales of beans out of inventory. I think it's going to be a calendar and/or price. I don't see anything that motivates them to make a move right now. Cash basis in beans seems firm. And I would imagine that's going to continue.
Chris: Well, to tack on to that, I would say that, you know, from what little bit we've done to this point, and we'll have more podcasts on this as we get more data in. But the average grower we've looked at to this point, and like I said, it's not a lot of them, but we're a dollar away, 85 cents to a dollar away on soybeans for the majority of these growers to be willing sellers, probably. So I don't know if you know where that stands in the cards for possibilities on the soybean side and on the corn side, you know, probably a good 50 to 55 cents in that range from what we're seeing right now with the increased drying costs that we've talked about in previous podcasts, along with a little bit lower yields and all those kinds of things.
So, you know, we'll have to see what, what's in the cards, but we're definitely a ways away from any farmers with any, with any level of volume being willing sellers. That's for sure.
Duane
Lowery: We have to remember this is still the beginning of the marketing season. The bottom line is farmers have fewer bushels, a poor price, and I offer that not in relationship just last year, but over the last 4 years they're poor. And if this were April or if this were July, the farmer can be in a position where he's forced to make those sales. It's too early in the season to say that he's forced to make those sales and the cash market tells us no storyline, offers no storyline that he is making sales now in a forced environment. The sales just are not there and the cash market tells us that. The futures market is telling us a story that they're trying to get spec longs out of the market and I think they were very successful with that last week.
That only means, that doesn't mean the market is not going up, it just means that the person that is possessing possessing the ticket for the next ride up may not be the same one that it is today. That's all, right? It doesn't mean anything about what prices will do in the future. It only means that we're taking some current holders of longs out of position, being replaced with ownership by a different entity. And I guess so— I guess in, in marketing terms that's healthy. In producer terms, that seems frustrating. So I just pass it along as something that we must accept. We don't necessarily have to like it.
Chris: Anything else as we head into this short week? Um, it sounds like you're majorly multitasking, and there's probably not too many market analysts that are out in the middle of the field, in the cornfield, uh, analyzing the market while they're doing 100 other things. So I commend you.
Duane
Lowery: Right now I'm trying to match up to a combine and not spill corn. That's what I'm trying to do right now.
Chris: Well, you— it sounds like you're doing good, at least. I don't know how you're doing visually, but it sounds all right.
Duane
Lowery: Well, I see corn in the— in the cart, but I don't see any on the ground, so, so far so good.
Chris: Well, that's good. Well, that's good. Anything else, uh, you know, before you have to go to the semi, um, and we don't want you spilling corn there either. Anything else for the, for the week, uh, to kind of wrap up?
Duane
Lowery: I would say that the markets have not performed well. They've not necessarily performed as I expected them to perform. Uh, it's depressing, it's discouraging, but I would remind people that this is not the time of year that produces your best sales opportunity for the marketing season. It is possible that the market could stay dull and discouraged for into the end of the year, that's not uncommon. I'm hopeful that's not going to be the case this year, but the point is the odds based on history, along with what I consider a reasonable fundamental assessment of conditions now and looking forward over the next 90 to 120 days, I think it's reasonable to believe that we'll get better sales opportunities. And I think history is strongly on our side. And I think the cash market is supporting that view.
And I think when you look at supply availability from competing exporters, I think the U.S. is in position to have a much brighter export and business outlook going forward than what they've had.
Chris: Well, that's hopeful and hopefully we get some price strength because like we said earlier here, I don't think a lot of growers are too keen on making sales at these levels and we're going to need some strength to get up above this breakeven cost of production level and be able to start talking margin targets again. So with that said, Dwayne, one final thing, throwing you a curveball while you're busy there. Thanksgiving is on Thursday. What are you thankful for?
Duane
Lowery: Well, I'm thankful that there's always hope. I'm thankful that whatever the conditions are that you're facing, As bad as they may be, as much fear and anxiety as you may have, hope is something that can't be completely taken away. It can be pressed, but it can't be taken away. And hope is something that comes from within and from whoever possesses you from within. And I guess I'm thankful for that. And I guess if at a foundational level, if you have hope, If you have some level of optimism and some drive, hopefully that leads to a positive future and something that you can continually be thankful for.
Chris: Well, that's a good, good answer because I didn't tell you that one was coming. Not that I told you any of the questions were coming, but that, that's a good answer to, to that. And, and from our standpoint at Ag View Solutions and for myself personally, I'm, I'm really thankful for our family. All of our kids and our grandkids and one that's coming up. And also really thankful for our partnerships with our farmers and our clients and with you, Duane, and with Shay and Alyssa and everybody to try to work with producers and thankful to have the opportunity to be involved in farming and agriculture. And I'm sure you're thankful today to once that semi's full and you can pull away, you didn't spill any corn. Yes, I think so. All right, well, hey, let's wrap this one up so you can get back at it. Uh, thanks everybody, uh, for listening.
Have a great Thanksgiving holiday season, and we will catch you next time, uh, next week on the Ag View Pitch. Thanks a lot for listening.
Narrator: Thanks again for listening, everyone. If you would like to hear more content from Ag View Solutions, listen to our other podcasts such as Dad's Wisdom or our current Harvest Series. Ag View Solutions works as an integral part of operations like yours, side by side for farm profit management, business collaboration and structuring, facilitating industry-leading peer groups, and coaching and consulting tailored to your farm's unique needs. We know that no two farms are the same, and we are here to help make your farm be the best it can be. You can learn more at AgViewSolutions.com, email us at AgViewPitch@gmail.com, or call Chris Barron at 319-533-5703. We really look forward to talking with you.