USDA report: good news or bad news? Weekly market outlook, August 12-16th

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We're heading into another marketing week, August 12th through the 16th. This growing season just continues to roll. We're lucky enough to have with us today Chad Hart, Iowa State Marketing Extension Specialist. He said I could call him anything, so I'm gonna— that's what I'm gonna call you, Chad. How's it going today?

Chad

Hart: Oh, it's going all right. Although I kind of wish I was at the state fair today. It just would have been the best day to probably get down there.

Chris

Barron: Yeah.

Chad

Hart: Yeah.

Chris

Barron: As we record this, it's about 68 degrees in, in Iowa. The corn's filling and the yield prospects just continue to grow, don't they?

Chad

Hart: And that seems to be everywhere across the country. I mean, as you look at the crop progress report and what it's showing for both corn and soybeans rated above average for this time of year. Yeah, it, it is looking like some major crops will be coming in this fall.

Chris

Barron: Yeah, I think that's one of the things I was just talking to a grower that's out east, and they've, they've had some dry weather, and then they get hurricanes, and they get all kinds of interesting things to, to impact their, their crops. So there's, there, there are some areas out there where it's really rough, and, you know, crop insurance is going to be a big savior for some. There's others where it's just bad enough the crop insurance might not quite fix the issues. And then consequently, I think so many of the area— and I was just telling another person this, just all the driving around I do from state to state— I think this is maybe one of the best, if not the best, crops I've ever seen. And the soybeans are really starting to look good too, I would say. What are you— what's your thoughts? What are you seeing?

Chad

Hart: I would agree with a lot of that. The idea is that when, like I say, when we're looking at this on a national scale, yeah, we're seeing some of the best crops we've ever seen at this time of year. When you focus down more locally, yeah, you can find those problem spots, you can find those individual losses, but we're just not seeing those broaden enough to really pull down the overall numbers.

Chris

Barron: Mm-hmm. Yeah. So I guess kind of a couple of things I want to hit on here in this conversation. But, you know, we had you at one of our meetings here earlier this summer, and one of your themes was you know, welcome to the new normal. Talk a little bit about, you know, what producers need to be doing. Maybe, you know, we're going to talk about the report here in a second, but before we do that, because the dust will settle on a report and it may set the trajectory one way or another, but if we are in a new normal and we got to recalibrate, what are some of the key things that producers need to keep in mind just to, to make sure we are making sales and that we're managing basis and all those things? Any comments on that before we—

Chad

Hart: Oh yeah. You know, I think, you know, especially in comparison to the last couple of years where we've had tremendous profitability and those strong record net farm incomes, the idea is oftentimes I think we get lost in thinking that that profitability is going to extend for a longer period of time than it actually does, and that most of the time within agriculture our prices are around our production cost where you're having to work, having to claw for that profitability at times. And that's more normal in agriculture than we care to admit. And I think that's the period of time we're going into now that, you know, actually we've already gotten into now, that that is the situation we're in. But that's the situation we should be used to, especially if we think back to the period of time, say 2013 to 2019.

Where we struggled with lower prices and you had to find that profitability where you can. We're back in that boat again. And I think it's, you know, trying to like say let things settle, but make sure that we're controlling our costs, looking at that return on investment and grabbing those profitable opportunities from the markets when they appear.

Chris

Barron: Mm-hmm. One of the other things that I, that I've been analyzing and looking at with producers this summer is the fact that, you know, there's carry in the market now for the first time ever. However, something else has changed too. Interest rates are up, you know, so are lines of credit in a lot of cases. You know, we've, you know, a lot of operations burn through a little working capital in '23, some a lot. Some not as much, but, you know, working capital is, is a concern. And then also interest rates are up there.

So those operations who are sitting on a strong liquidity position can turn around and put that money in a, you know, in a money market, you know, Vanguard money market and get 5.25% interest and you're gaining money on your money as opposed to the bit, the corn sitting in the bin and the carry that, you know, we've seen, you know, 15, 16 cents, let's say, and we'll use Dec corn as an example from, you know, December to March. Any debate with that, or any— are we looking at something wrong there? Because it seems like, you know, if you sell $4 corn, let's say for example, if you could sell $4 corn in October versus sitting on it till March, you need about a 30-cent carry to offset when you factor in the cost of interest, the opportunity cost in the money. There's just not enough. I mean, there's a lot of carry there, but it's not enough in this environment.

Any— can you, can you throw any darts at that, or—

Chad

Hart: No, I'd agree with that, but I think it brings back in something that we haven't had to think about for a while. You're right. I mean, you look back over the last 10 to 15 years, we have gotten used to incredibly inexpensive money. Where we haven't really had to pay those interest costs. And so we've never had to really look at the opportunity cost of money for the past several years. Now we need to. You're right. The idea is that, you know, I can think of it as I can sell that corn at harvest at a certain price and put that money into a money market account or some other account, pull interest that way, or I can keep that corn and look for the value of the corn to increase by that same amount. And so the corn market is competing against that interest rate.

And right now, with that interest rate being stronger than it has been for the past 10, 15 years, corn market's having a hard time keeping up with that. And I like to describe it as just because we build a bin doesn't mean that that's the most profitable thing to utilize. A bin is just a tool and we should only use that tool when it makes sense to use that tool. And in this case, it's when— if the market will provide us enough carry that the corn market can compete or outcompete that interest rate, then yeah, that's the time we want to store. But if the market's not providing us enough there, it makes sense to let the corn go and invest that money elsewhere so that we can get that return on investment that we need.

Chris

Barron: Yeah, I would guarantee you there's probably some listeners thinking, okay, there's a few other pieces to that equation. You know, let's do all the algebra here is probably what some are thinking. And, you know, some are betting on the come. They're betting on the price goes up and I've sold it. I'm not participating. Well, that's where call options and some reownership might be a consideration. It's not a recommendation. Just there's tools, right?

Chad

Hart: Right.

Chris

Barron: The other one I think are taxes. So some people it's like, well, you know, I buy into that, but I'm going to sell after January. And so, you know, and you can do deferred, but, you know, I think there's some thinking that. And then the other one that I really want to quiz you on is basis, is managing that basis. And, you know, there's the early harvest basis opportunities, which may be limited this year, probably in a lot of areas, but then there's also, you know, the once the bin doors are locked, you know, it's that December time frame going into Christmas, it seems like there's always some basis opportunities in that window because snowstorms show up and guys don't want any money until January. And so there's usually that basis opportunity there.

Any comments on just managing basis and things that growers need to think about as they look at managing that basis and going into harvest and then, and maybe after that as well?

Chad

Hart: Well, yeah, and I'd agree that, you know, a few of those basis relationships have changed over the past couple of years. We have seen a lot more positive basis in the state of Iowa over the past 2 years than we usually see. But we're also expecting— and, you know, when I'm looking at some of the forward bids I've been seeing for the past 6 to 8 months, they're reflecting a move back towards a more normal basis pattern as we go through this next harvest and into, you know, the next marketing year. And so that means maybe those basis levels won't be as strong as we've had for the past couple of years. And we may not see that basis necessarily strengthen back up to the levels that we've had over the past couple of years. And so you do need to, again, try to take advantage of that. The idea is that especially in marketing today, it's no longer just capturing a good price.

We should be looking to capture the best basis we can and the best futures position we can and putting those two together because they don't maximize at the same time. Mm-hmm. So we can gain by taking those decisions apart as we look out there. But I think that all goes into the calculus of, yeah, again, thinking about when we're using our storage. Yeah, we do need to look at what's the interest rate, what are we expecting in basis movements and why we're expecting those things. I think one of my fears going into this next growing season or growing into the next marketing year as we look out here, is this idea of that, just as we were talking about at the lead of the show here, the crop looks good, we're going to have tremendous supplies on hand. And in those years, you tend to see less of that basis bounce than what we traditionally get.

Chris

Barron: Mm-hmm. Yeah, that's for sure. So, you know, I think we're going to have to navigate all all of those things, like you say, in the equation. Another thing I want to kind of jump over to is that I love that you said a few minutes ago, you said the grain bin is a tool. And I love that because it is so true. I think a lot of times what our dilemma is, is we build grain systems and then we feel like they got to be full when we're done harvesting. They don't have to be full, right? And one of the challenges and one of the issues that I think could arise this year, and I want your two cents on this one as well, is that bin utilization and the lack of sales for the '24 crop first, and we'll get to '25 in a minute, but that '24 crop is going to outyield in many cases, you know.

So there's people listening that this isn't exactly for, and but a high percentage of them are going to outyield what they think they're going to yield they're going to have more— they're going to overrun more, more bushels than what they have storage for. And likely many of those bushels are not sold. And so, you know, one of the things I like to see people do is to think about, okay, if, if I've already made some sales, but I make this, this additional sale going into harvest, again, you could buy a call option, you could reown some of it on paper, whatever. But I think the dilemma is going to be that last 10 or 15% of harvest. Every every elevator is going to be full. The processors are going to be slowing down because the demand is only a certain amount on the pipeline on the other end.

And we're going to have a glut of corn in the fields and maybe soybeans for that matter, where there's no place to go with it. So I think the early bird is going to get the worm. Am I viewing this wrong? Am I predicting something that's not going to happen? Or what's your two cents on this? Because that's my concern and what I'm worried about.

Chad

Hart: I would agree with that because we're not only dealing with the crop that's coming in from the field, but if you think about what USDA has also told us about how we've already utilized those bins from last year's crop and how we still have a lot in on-farm storage even as we go through the summer here. So you're not only competing against this year's crop and trying to beat other folks in to try to capture that market, you're also trying to beat old corn and old crop soybeans that needs to move as well. And so I think that does lend itself to this idea of that, yeah, we're going to see more pressure in the markets as we look forward, especially if the harvest is as bountiful as we think it is, that, yeah, we're going to see some not only price pressure on the futures market, but this takes us back to the basis comment here.

The idea is especially that harvest basis, late harvest basis, could be much weaker than we expect because everybody's full up and there's still crop that needs to move.

Chris

Barron: Mm-hmm. Yeah, something that I think we got to be really concerned about. So two last two things I want to hit on. A lot of people, I think, are wondering, when do I start on '25? And when we look at '25 cost of production, we've not done a lot of that. We've still been kind of dealing with the '24 when we look at Profit Manager and helping people with analyzing cost of production on that side of the equation. But On 25, it looks like, you know, I don't know, I'm trying to think how I want to ask this nicely. It looks, it looks not very good, not very shiny. What's your thought on, on managing 25? I mean, other, you know, you talked about managing expenses, you can do a point, a part of that, but anything on 25 guys should be looking at thinking about, and you can hit corn, soybeans, wheat, whatever there.

Chad

Hart: Well, I think as we're looking out to '25, I mean, you're right, like in the corn market, we do have some of that carry. And so we're looking at that Dec '25 floating in that $4.40 range. Yeah, I agree. It's not very attractive right now. But what I would tell folks is it's not that I'm necessarily looking to make a move on '25, but you mentioned the key to me doing some of our homework, getting ready for '25, looking at where we think our production costs are. And thinking about what's that mean in terms of a pricing level I really need to hit. So sort of developing those targets that we hope to hit in 2025. Mm-hmm. Because I always like to look at it as you basically have, to me, two big windows typically when you're looking to market a crop. And I describe it as, you know, typically we want to think about that seasonal pattern we see for corn or soybeans or wheat.

You know, in corn and soy, it's the idea of that we tend to see our highest prices of the year April through June, then we dial back down towards harvest time. Well, you know, I get two shots at taking advantage of that typically once, you know, sort of pre-harvest, you know, during the planting window. That's time when you get an opportunity there. And then the reason we build the bins, you've also got another shot at that post-harvest. So for 2025, I would tell folks, start doing your homework now to prepare for next spring, knowing— do you know where your production cost estimates are? Having those price targets in mind, because the other thing we know is the prices don't have to hit the high necessarily when the seasonals are there. You need to start looking at, are there opportunities for earlier than that.

And I think in this case, it's better to grab a profitable price even though it's a little early than to wait for a higher price and then see it never materialize. Yeah, for sure.

Chris

Barron: Good advice. And I think just things that, that we all gotta, gotta start putting our thinking caps on and start running the numbers. And, and, uh, don't let '24 mess up our thinking for '25 either. Yeah, stay objective. And just stay positive too.

Chad

Hart: Yeah, if you think about— I mean, the idea is we didn't have to think about it for a while. If you think through 2021, 2022, the markets were strong throughout, and yeah, you didn't have to sort of sweat the details. Now we sort of need to, but I'm also going to say, even though we do, is it a little harder work?

Chris

Barron: Sure.

Chad

Hart: But the idea is there will be opportunities out there. Yeah, you know, I think back to this past spring and, you know, did we see that seasonal bump and was it good enough to provide some profitability opportunities? And the answer was yes, it did. Right. And we'll likely see another one as we look forward into 2025. But we've got to be ready to take advantage of them when they appear because they can appear and disappear fairly quickly.

Chris

Barron: Yeah. And know what that number is based on your individual costs, which everybody's are different, you know.

Chad

Hart: So.

Chris

Barron: All right. Last question I have for you. It's been an excellent conversation. We're going into, you know, we're, we're recording this. This comes out on Sunday the 11th, and, and people will be listening to this throughout the 12th through the 16th. But guess what happens on the 12th? We got this big report coming out that has a tendency to move the market. I think there's some people that get frustrated with USDA and, you know, and I guess tough because that's just— those are the numbers and that's what's going to get traded. Um, talk a little bit about the report. Um, we don't know what it's going to say, and there's going to be people listening to this on the 14th and 15th, and, and you probably don't have your crystal ball, or maybe you have it hid there and I can't see it, but any comments on, you know, what guys should be thinking, what should they be doing?

And, and people are going to be listening to this on, on Sunday the 11th and early on in the morning on Monday, they're gonna have a little bit of time to do something in front of the report. Is there anything they should be doing, or do you let it happen and let the dust settle? I'm going to shut up and let you give your two cents.

Chad

Hart: All right, I'm going to answer your last question first. I'm probably going to be one to say maybe sit on your hands here, but I don't expect a bullish report. I am expecting a bearish report, but at the same time, I'm like, now is not the time I want to be making significant moves if I have to, because— or if I don't have to, because when we're looking here, we have watched the downbeat of prices for the past couple of months. And as we're looking at the report on Monday, my expectation is that we'll likely see actually both corn and soybean production numbers increase because we'll likely see that adjustment in yield that I think everybody's preparing for. And we are expecting a higher yield estimate for both corn and soybeans. The thing I'm watching for, though, is do we see that acreage slip as we work in the FSA and RMA data?

One of the things that I've been trying to track through is just how much the flooding and the hail events. And as you mentioned, we've got, you know, now, was it her, you know, what had been Hurricane Debbie and that impact there. Is that going to start to, let's call it, erode some of that, you know, some of that acreage line, which will help offset some of the yield increase? I don't think it will completely offset it, but it will hopefully cushion some of that blow. The other thing I'm going to be watching is the export line within the WASDE tables. On the corn side, old crop corn sales remain stronger than usual. Right now, especially at this time of year, that's been helpful. We're going to need to see more of that if we're going to see the usage side help us pull out of this production glut that we've got right now.

And we did see a few more sales announced even this morning that is helping boost the prospects there for maybe an adjustment up, especially on corn exports. Gotcha.

Chris

Barron: Well, um, I think it's going to be interesting. You know, one thing that, that I've always said with reports, it seems like the report will move the market and then the dust settles and we go back to trading whatever we were trading before. And it seems like there's, like you said, there's, there's been so much bad news built into this. And, and the other point you made was the demand side of the, of the balance sheet is You know, maybe the yield's higher than what some people think it should be, but so is the demand side. And that's going to have to be adjusted, I would think, unless China comes out of the middle of nowhere or somebody does and starts buying some of our stuff. You know, I guess it's just going to be interesting to see. So with that said, I'm going to wrap this up, but I want to give you the last word.

I want to have you— anything I didn't ask, anything that, that you want to leave producers with as we, you know, get toward the latter part of the growing season and get closer and closer to harvest here?

Chad

Hart: Well, like I say, I guess as I sort of hit the group with, as you mentioned, when, you know, when I came out to talk with folks there at the in-person event that we did, it is a return towards normal where we are, like I say, having to do a little homework to find those profitable opportunities. But I always like to tell folks, even though we've been through some really rough pricing, especially over the past couple of months. We also know there'll be some opportunities over the next year to market, like I say, crops at profitable levels. It's just a matter of being willing to not only be ready to hit those opportunities, but to be willing to accept those opportunities. You know, oftentimes we get caught up in once we start to see prices increase, oh, they've got to keep going higher. They don't take advantage of those opportunities when you see them.

Chris

Barron: Yeah, for sure. Great advice because the market moves up $0.30 or $0.40 on any of the commodities and then people get poised to make some sales and they're like, well, I'm gonna put some targets in and then they don't get there. You know, you kind of like you said, you kind of got to start making sales. And especially in this environment, it seems reminiscent of '14, '15, '16, '17, '18. Hopefully not that long out here, but it's— you know, it kind of looks like we're starting to play that same movie over again here, possibly. So we'll see what happens. But Chad, this has been an excellent conversation. Really appreciate your contribution. Definitely going to have you back again if you're willing to come back again and get some of that Iowa State wisdom coming our way. So, you know, I appreciate that. So, but again, Chad Hart, Marketing Specialist with Iowa State University.

Thanks, Chad.

Chad

Hart: Appreciate it. Thank you. Pleasure to be on the program.

Chris

Barron: Great to have you. And again, everybody, thanks for, for being here. And also keep an eye out for 19 Minutes. If you're not on that, please check that out too. We've got some great episodes on there. I think there's like 65 different episodes on there now. And check that out. Good thing to get lined up, get signed up for, for harvest, and you can go back and kind of work on those business topics as you're, as you're rolling in the field. With that said, thanks everybody. We'll catch you again next time on the Ag View Pitch.