Sunday outlook: China vs. South American weather

Shay

Foulk: And it all comes down to this. 2 on, 2 out, bottom of the 9th.

Garret

Brown: The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Garret Brown of Kodak Risk Advisory. How's it going, Garret?

Garret

Brown: Oh, it's going well. How are you doing?

Shay

Foulk: Well, it's been another one of those weeks. You feel good when you get to the end of the week and kind of interesting to take a look back on, particularly when we look at the markets. We saw a little bit of action here, didn't we?

Garret

Brown: Yeah, we sure did. You know, obviously, particularly on Tuesday when the report came out, it was, you know, well received, but it just hasn't had a lot of staying power.

Shay

Foulk: Now, I think a lot of farmers out there maybe have questions as to, why that is. And of course, um, yeah, I mean, a big jump there initially on both sides of the spectrum. Um, so let's talk about that a little bit. Let's jump right into it. Why do you think that is? Um, we saw that initial jump and then things tapered off a little bit there.

Garret

Brown: Well, it's, it's not really any surprise to anybody. I don't think that, uh, everybody, it seems like, was bullish going into this report, which is always something that I think veteran traders who look at that and say, well, we should probably be a little bit cautious when everybody's on one side of the boat. If all of a sudden it's a wild disappointment, what happens next? If all of a sudden there's, uh, somebody in the market that needs to make a change based on their position, uh, and, you know, essentially this report, uh, we got a very bullish report, which is actually pretty consistent with what we got on USDA this year, you know, uh, the planting report in June. You know, we had a massively bullish, uh, report that was outside of, I think, probably anything we've ever seen before, certainly in recent memory. Uh, the stocks report, kind of the same thing.

And we've also had a couple other monthly reports too from a demand perspective where we've seen massive jumps that are kind of outside the realm of, uh, normal trade. So, you know, we were all kind of looking for it, we kind of all got it, and now I think the market's kind of sitting here thinking, now what? When we look at the corn and soybean story, I mean, that's kind of where it's at. The wheat story has kind of died out here a little bit with some of the rains that have taken place in Russia and HRW areas here in the United States. You know, I look at this as China first, then we'll talk about South America production. Over the last 4 weeks here, I just have some notes. You know, we've seen declining soybean sales.. We've seen spreads back off. You know, I've in particular, I'm looking at North Dakota values.

I mean, to me, uh, values for shipping corn to the PNW seem to have fallen off maybe a dime. Um, you know, just kind of depends on what you're using for freight and basis, obviously. Um, all the while the funds are sitting on extremely long positions, went into an election, uh, you know, COVID's kind of starting up again. We've had shutdowns across Taiwan, threats of shutdowns here, lots of rhetoric going back and forth, you know, an election that's still not totally settled here as we have lawsuits going back and forth. So I guess when you think about this, again, those funds sitting on long positions, you kind of have to wonder, you know, are they going to continue to do that? Do they get nervous? And I guess basically where we have these balance sheets right now for soybeans, we could really tighten this thing up, or we could kind of relax it a little bit.

But what is that dependent on? First, what's China going to do? Are they going to continue to take beans in February? And then, you know, what's going to happen with that southern Brazil, part of Argentina where, you know, obviously things are dry as a whole there, but in that area, it doesn't look like there's much relief here over the next 2 weeks. So that could have a huge impact on soybeans. And then obviously, like I said, for corn, upfront Chinese demand, shipments have been slow out of the United States. So that every week that shipments continue to be slow, it means that we've got to ship that much more later on to kind of pick things back up again. And then from a production standpoint down in South America, I think that's more of a, you know, down the road story. So ultimately, for me, the next kind of big fundamental thing kind of comes after the first of the year.

So as far as when I'll feel comfortable about knowing more, and that might keep the market, you know, fairly supported for corn. Barring any big headline news, at least here nearby.

Shay

Foulk: Now let's go back to soybeans for a minute. I'm gonna poke you a little bit on that one and maybe play a little bit of devil's advocate. We're still looking at record export sales on that side here for 2020 and '21 projections. Is that right?

Garret

Brown: It is, yeah, like 2.2 billion.

Shay

Foulk: So, you know, when you look at that and we're not going to see a lot out of the government here in terms of reports over the next month or two, kind of like you're referring to maybe the beginning of the year. Do you, do you really think that China is going to be the number one player in that as opposed to the weather out of South America? I mean, how are you making that decision to place that ahead of the weather conditions when we're looking at 5 to 6 weeks here of lack of reports outside of weather?

Garret

Brown: Well, one of the things that we've been watching is, you know, every day we get or we don't get the flash export sales out of USDA. And I think we've had maybe one since March— or not March, since October 15th. And then I mentioned that export sales themselves have been getting slower over the last 4 weeks. Say, you know, obviously 5 weeks ago we kind of hit our peak. So is that telling us that as weather conditions or growing conditions, that sort of thing, have gradually improved, you know, not for everywhere down south, but certainly have improved as a whole, and the forecast over the next 2 weeks seems to, you know, be decent enough to kind of continue to get growth going down there? Obviously, southern Brazil, there's still problem areas, no doubt. I just don't know if that's necessarily worsening.

So we still need China to continue to come in and buy to get us to these objectives. And I guess I see the— if the weather continues or say gets worse, that probably keeps China buying. But I guess that's kind of the way I look at it. And going back to the corn piece, you know, obviously they're pretty closely tied because we, you know, we're shipping, you know, a bean book first, then we're shipping a corn book after the first of the year. I just wonder, did USDA just blow it all here in the November report? I mean, could yields come down further? Yeah, maybe. I had a— I guess I didn't believe that there was a record crop out there based on what USDA did last year and their, you know, their late adjustments in September to actually raise yield. I didn't know if they could really justifiably go out there and, you know, decrease yield too much for this particular year.

Just so happens they didn't believe there was a record crop out there either anymore. So here we are at 175. Now to go out there and continue to reach these objectives, I think I'm kind of working from memory here, but I think we have to do just about 55 million bushels a week in shipments to get us— and this is FGIS data— but to get us to that $2.65 billion in exports. And I've been hearing big grumblings of $2.6, $2.7, maybe even $2.8 on exports, but That's what we got to do from here on out. Well, we haven't been getting there. And say last year, I think we maybe would have hit that one week in the entire year. Year before that, we never hit it at all. The year before that, Brazil had their crop failure. And for about 20 weeks starting on March 15th, we averaged about 61 million bushels per week in shipments.

Now we need to start ramping up our shipments here pretty soon, or that 54.7 or 8 or 9 million bushels per week on a linear basis is only going to grow every week, and it's just going to get that much harder to reach. So if we are going to see exports rise from the $2.65 billion, shipments need to pick up. Otherwise, it just doesn't— you know what I mean? If you're a fund sitting on a massive long position, you might kind of say, well, okay, have we done enough? So maybe we're not even falling back so much, but maybe we push this market far enough and we see some profit taking. I think that's kind of what we've seen right now. And then the long-term projections, we've also seen where I think USDA's estimates— and just take them with a grain of salt. Yeah, they can't hardly get one month right, let alone the next 10 years. It's an impossible job. We'll just kind of throw that out there.

But their estimate is that we're going to hit 5.15 billion over the next 10 years. That's the high. That's 100 million bushels more than they have figured in. Now we might be looking at another shutdown. And so far from what I've seen is they they probably would have had a justifiable reason to go and reduce ethanol or corn ground for ethanol in this past report. So maybe they've done enough for now. Maybe we just saw some profit taking and now we need to see, you know, the fundamentals come in line to justify the numbers we have, perhaps.

Shay

Foulk: So stepping away from the speculator role and looking at it from a farmer's perspective, might be scratching your head a little bit thinking, okay, what kind of position does this put me in? Maybe you've taken advantage of the opportunity over the last few weeks. And feel good about some of the sales, whether cash sales or looking at some bookings for next year even. With that being said, is there anything in particular that producers should be doing to protect themselves in the event, you know, maybe this is the rhetoric that we're seeing as we move into the end of the year? Are there any protection strategies, or is there something that they should maybe be looking at on making additional sales if this is the case?

Garret

Brown: You know, absolutely. I mean, everybody's different. And just to kind of reiterate like we do here is that, you know, consult your broker. You know, this isn't advice into any particular individual situation, but you know, what is your biggest fear? I mean, whether we're looking at old crop or new crop, you know, what kind of position do we have? What's our personal risk tolerance? And I think, you know, that is dependent on cost of production. You know, what's your actual breakeven? What's your debt load? Delivery storage needs, you know, and Last but not least, you know, what's your ability to sleep at night? But, you know, if we're out there, say, looking at put options, you know, put options are just like call options, fairly spicy. If the market does fall, you know, it's not a perfect catch. There's certainly no doubt about that.

So what time, you know, when do you need to deliver the grain and basis might also play a role in that. But at least put options might allow you to have some level of protection here in case we fall a bit overnight for whatever. I mean, it is 2020. We've had a lot of opportunities in this, uh, we're not seeing a lot of opportunities, but situations where adverse things happen that we're not expecting. Um, on the other hand, you know, if we're going out and making cash sales or, or what have you, you know, owning that call right now is a lot easier to justify at these prices than it was here, you know, a month and a half ago at, say, half the price. Given that now we actually have some margin to work with to take that reownership should it fail.

You know, and as we look into next year, I guess I just think it's really important to be reviewing these 2021 numbers, you know, with Dec corn around that $4 figure, $4.05, you know, new crop beans $10.30 to $10.40. Where does that put us from a profitability standpoint? I like looking at it in terms of margin per acre. Because cents per bushel doesn't really mean anything. Production is different every year, so we just got to start from, you know, point A. What kind of margin per acre are we looking at? And one of the big questions I have is, with such an early fall, and it seems to me like there's lots of gas on, you know, lots of urea being spread, you know, have we already bought our corn acres? Right. Do you think that's possible?

Shay

Foulk: Yeah, well, and it's kind of, it's kind of interesting when you look at it from that perspective too, looking at how that acreage decision might be made as we move closer to next year. Um, and I want to hit on that too because I think we see it from two different perspectives on the, on the margin per acre. Because most farm marketing is done in cost of production on dollars per bushel, we see that go both ways. We see, we see farmers make the marketing decisions based off of different ways. So however it is that you have your cost of production analyzed, make sure that you're taking opportunities on it, um, when, when the opportunity presents itself. The second thing that I'll say on that too is, uh, Chris and I sometimes help operations take a look at the time value of their money, right?

So if you think you have opportunity on the table and, and profitability right now, but you're maybe hesitant on pulling the trigger on more sales or a larger portion of your sales Uh, send us an email. We, we have a tool that takes a look at what the time value of your money is and how can you utilize that money to work for you in the meantime, as opposed to sitting there in storage, maybe incurring extra costs. This year we don't have nearly the issue on grain quality or anything like that that we've had over the last few years, but these are all parts of the consideration when it comes to the time value of that money. So I, you know, I think these are all important questions to be asking. I'm glad that you brought it up from that standpoint as well. And, uh, again, just on that margin target, what, what is your breakeven price with that margin target factored in?

And if you're not as forward sold as you would like to be, um, you know, how do you take advantage of this opportunity? Because what happens if we do have a switch in the, in the fund position on that and they've decided that they do have have taken enough of the profit off the top there and, and start changing their minds here a little bit. So, uh, no, I appreciate the perspective on that. Any, any kind of last thoughts, um, in regards to what we've seen over the last week or, or even looking into the week ahead, uh, in particular here, Garret?

Garret

Brown: Sure. Well, uh, you know, beans were able to maintain those gains pretty well, I guess. So that was That was good to see. And it's pretty easy to see that soybeans have, you know, are at least in my opinion, the closest to a situation where we need to ration demand to some degree. You know, and typically we learn that soybeans are a little bit tougher to ration demand for, you know, corn, very much the opposite. We were very much looking like we were going to eliminate all of the gains that we had in that report. So that's just, the kind of sentiment that that's giving us is we need to be watching corn and, you know, is beans going to take corn along or is corn going to drag beans down?

Again, what do we— what can we live with, I guess, you know, and then kind of trying to position ourselves that way, making sure that we're out there protecting ourselves from making sales when, when we can at the values that we, again, can live with. So Yeah, as we move forward, I guess I'm going to be looking to see, you know, how is demand, what's basis doing, what are spreads doing, are we getting any of those export sales announcements, or are we continuing to trend lower here, and hopefully not seeing China punt on U.S. supply here for February.

Shay

Foulk: Absolutely. Garret, as always, you know, we appreciate your perspective here. And as a reminder to everyone listening, you know, none of this is advice that we're giving out. This is more so just the perspective, having the conversation and talking through this, hopefully providing some value on this. And Garret, if anybody's listening to this and they want to get a hold of you, what's the best way to do that?

Garret

Brown: Sure, uh, my email, G as in Garret Brown, at kodakgroup.com.

Shay

Foulk: Great. Thanks everyone for listening, and we will catch you next time on another episode of the Ag View Pitch.