In our weekly series From the Furrow, host Phil Plourd and fellow grain geeks shed light on current market conditions and how grain producers can take action to manage their risk.
This week, Phil is joined by Joe Kerns, President of Ever.Ag’s Livestock Division. What did Joe learn from recent meetings with Brazilian farmers? What should US growers be thinking about for the year ahead? Phil and Joe discuss those topics and a whole lot more.
Questions or comments? Topics you’d like to hear us discuss? Contact us at [email protected].
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Future trading involves risk and is not suitable for all investors. Content provided in this segment is meant for educational purposes and is not a solicitation to buy or sell commodities.
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Hello and welcome to you From The Furrow, brought to you by Ever AG Insights. Each week we talk with subject matter experts on news and topics affecting the grain markets. I’m your host, Phil Lord. Turn to our guest this week. It’s our privilege to have Joe Kerns with us. Joe is a pivotal member of our livestock risk management group.
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He came into the family as the president and proprietor of partners for Production and Agriculture in Ames, Iowa. Swine specialty shop. But Joe is a long time observer of grain markets and the ag world in general, and always fun to talk to Joe Weldon today.
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It’s fun to be here. Thank you Phil.
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So there’s a bunch of things we could talk about surrounding grain markets at the moment, and I’m sure we’ll get to a lot of them. But if you were sifting through all the noise, let’s start with this. What’s the most important thing right now from a grain market perspective?
00;00;54;08 – 00;01;15;28
It’s probably not too far off of what you might anticipate that would normally go on this time of year. We had an election, a meaningful election that just transpired, and we’ve got a lot of hand-wringing and cabinet appointments that are coming through and a lot of handicapping about what that means. And in my opinion, that secondary noise to what is the most important and that is the growing crop down in South America.
00;01;16;02 – 00;01;49;18
We were off to a slow start October. We were waiting for the October rains to come. We didn’t see them for a brief period of time. They came through and we caught up in our planting. Progress, both in Brazil were actually ahead in Argentina right now as far as planting progress is concerned. And every single weather map that you would take a look at, while you might start to get some dissension about what our Midwestern winter is going to look like, there is absolutely universal belief that the northern areas of South America, specifically in Mato Grosso, will continue to get good rains in good growing conditions throughout what it is our winter there, summertime.
00;01;49;18 – 00;02;09;09
So from now until let’s call it February 1st, right now, I think we are setting ourselves up for a record crop coming out of Brazil. USDA has us already pegged at, I want to say, 167 million metric tons. Don’t quote me exactly on that. We’ve got our folks on the ground there that they’re calling it between 170 and 175 million metric tons crop potential.
00;02;09;09 – 00;02;22;13
So I don’t think we can get too far away from taking a look at it and, and really focusing on what that’s side of that. The supply component looks like. And that rises above the noise of the rhetoric of the election fallout. Like six weeks.
00;02;22;13 – 00;02;40;12
Ago, we were like, oh no, it’s not raining yet in Brazil. What are we going to do? And then, like their ability to plant a huge number of hectares, I mean, and fast. Right? When they rolled, they rolled hard. I know you spent some time I had the opportunity to write as well with some farmers of various stripes from Brazil.
00;02;40;12 – 00;02;51;15
Brazil is here, right? I mean, this other headline. Exactly. But once again was reminded that they make a lot of soybeans, and Brazil and Argentina make a lot of corn, too. It’s a force to be reckoned with. And that’s not going away right now.
00;02;51;21 – 00;03;11;03
You’re exactly right. Let’s put a little perspective in this. And to your first point. If you’re in the middle of a flood, a good dry, sunny day doesn’t correct the flood. But if you’re in the middle of a drought, you get three inches of rain. And guess what? The drought’s broken, right? And that’s exactly what you saw. So once those rains started to fall, the farmers were able to catch up.
00;03;11;03 – 00;03;33;22
And keep in mind that the Brazilian farmers get roughly twice as much rain about eight inches a month during their growing season, relative to what a U.S. farmer might anticipate. And the second thing I think you need to remember is this is a relatively new endeavor. You know, Mato Grosso has only opened up 25 years ago. We’ll quote some statistics that in 2018, the United States and Brazil were neck and neck on production.
00;03;33;22 – 00;03;54;01
In 2024, Brazil will produce 50% more than the United States. So not only are they growing, but they are growing as an exponential force and one that is not stopping. We’ve got another 70 million acres worth of production opportunity coming out of northern Brazil. So you are correct. It is established itself. It is the force in the export market.
00;03;54;01 – 00;04;02;11
And this is a reasonably new phenomena to the U.S. farmer that we have sacrificed our mantle as the number one exporter to the world, to the Brazilians.
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And let’s connect the dots back to the election for a second, because trade inevitably is near the top of the list with Trump 2.0, or you want to call it Brazil and China have become fast friends around AG and soybeans in particular. How do we see the return of a Trump presidency and trade and tariffs and all that stuff?
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How does that play into the equation just generally as well as talk about the Brazil dimension of that.
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Yeah. And so when you’ve got Mr. Trump who advertised that tariffs were going to be at the top of his pecking order, which I don’t think they’re the number one item, immigration is going to come absolutely. First, you’ve got a war in Ukraine that he claims he can fix with the flip of a switch. We’ll see if that comes into play.
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But certainly this tariff situation specifically against China is at the top of the list. And so it shouldn’t be a huge surprise that the Chinese are snuggling up to the Brazilians. And they have that. China will represent roughly 70% of the world trade of soybeans, and of that, Brazil will represent about 70% of the exports to China. So it’s some easy numbers to kind of see how that all plays out there.
00;05;04;13 – 00;05;23;23
The expectation that we will roll closer to 80, 85%, I think is very real. It is only logical from a trade standpoint and a value proposition. It only makes sense. You’d shared earlier that I’m the president of a livestock division. Where we start to get some concerns is what happens on the protein sector, and that goes across every single protein.
00;05;23;23 – 00;05;44;26
We export about 25% of our hogs, significantly less beef, significantly less milk. About 5% of our eggs are exported. And so the pork side of it is the one that probably is the most vulnerable to the Brazilian. Starting to capture a little bit more market share, specifically, going into Brazil, not so much muscle cuts, but offal and the items it would take away from the value.
00;05;44;26 – 00;06;03;27
So I think we’ve got a very unknown evolving factor. But I just gave a speech yesterday and I shared this with the group is if you are on the Trump side of the equation and are feeling just a little haughty, that you had a mandate from the public and the whole world sees it your way, I want you to be really, really cautious, because we’re still roughly 50 over 50.
00;06;03;27 – 00;06;27;27
On the distribution of votes. Mr. Trump did get the majority this time, but that’s only because of lack of engagement, the apathy amongst the Democratic base. And I would have told you that whichever party before the election, whichever party loses, you only have yourself to blame for putting up a weak candidate. It is not a mandate. It’s was a reasonably weak field that we had to choose from, and we got what the populace saw was the lesser of evils.
00;06;28;00 – 00;06;42;18
So don’t think that this is a strong mandate. This is a I had to hold my nose and choose one and I did type of environment. And I think that that will lead to less 90 degree turns and more slight inflections on nearly every topic as we go forward.
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So there’s not as much runway maybe as some people think.
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You know, we’re going to get a lot of rhetoric and hand-wringing. And what went wrong for the Democrats in front of the inauguration. It’s going to be the end of the world, and we’re going to wake up on January 22nd. You know, a couple of days after the inauguration, Go Ha sun still came out. I’ve still got a job.
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The economy is rolling. Nothing’s going to change in a heartbeat. It will all be okay.
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Let’s talk about to sort of zooming out a little bit. As someone who’s not been an economist by any stretch of the imagination, I find it fascinating. The development of technology. See, technology. You know, in 2008, Hugh Grant, to his time was the CEO of Monsanto, said that we’re going to double corn and soybean yields between now and 2030.
00;07;25;07 – 00;07;45;29
Back then, Cornelia, about 154 looks like about 181 today. That’s 20% call it being yields were 40 this year. We’re looking at it like 52 I think that’s 30%. So you know there’s still a few years left between here in 2030 obviously. And you know and that kind of growth is impressive. How amazed are you with the productivity of the US row crop farmer.
00;07;45;29 – 00;08;02;16
And we’ve seen these seeds perform well in drought conditions the past few years. And you were like, oh, what could happen if there’s ideal conditions. And I talked to people in Iowa, Joe, that, you know, they had 300 bushel corn. I talked to one guy who was at 99 bushels on beans in one field. You know, I was like huge numbers, right?
00;08;02;17 – 00;08;06;25
How do you see all that? Are you impressed? Where is it going? Are we close to the end or is is it going to keep going?
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This is a great piece. And don’t forget that Hugh Grant was bonus on the performance of Monsanto stock. And so maybe getting a little aggressive with some of his predictions had a vested interest associated with it. And I don’t blame him. How about he was directionally correct and will continue to be directionally correct. I think the 2019, in my opinion, was a watershed year where we had almost zero rain after pollination and still ended up with a record crop that year.
00;08;31;23 – 00;08;50;11
And that should have been our moment for what’s transpired the next five to say you were surprised at what kind of yields we got in some less than favorable years you got, you had all the evidence you needed in one year I would give you this, and I think you touched on it, that the perfect year doesn’t get you the moment as much as the bad years.
00;08;50;11 – 00;09;05;11
You go. Holy smokes. We weren’t as bad as I thought that were bringing up the bottom. We might be taking off a little bit of the top end, and I think that’s the proper way to go about it. Let’s kind of put a pin in where we sit right now and roll forward. We’re probably not going to focus on yield as our primary piece.
00;09;05;11 – 00;09;25;07
We’re going to we’re going to go to sea and spray technology. What can I do to reduce the inputs going on the field that increase my profits, not necessarily increase my yields on a linear fashion. And I think that’s where we’re going. The seed treatments, the fungicides, less trips across the field, less diesel fuel, more sustainability. It tells a great, great story of sustainability.
00;09;25;07 – 00;09;44;17
When I’m burning less diesel and using less herbicide on that acre of ground in order to increase my bottom line as a row crop farmer, while maybe maintaining static or steadily increasing yield, I don’t think we’re just going to flatten out on yields. I think the curve that you just referenced this 20 years or so and you get 20% gains, that’s linear.
00;09;44;17 – 00;10;03;04
We’ve had, I want to say three bushels to the acre more every single year. As far as trend yield, it might be 2.8. But give me a little rounding in here that probably flattens out a little bit. And then once your denominator changes once I’m getting 200 bushel yield, that two bushel increase is only 1%. Whereas if I was 100 bushels would be 2%.
00;10;03;04 – 00;10;20;02
So you got to be really, really careful with the math in the denominator. But I think we get steady yield growth. But what I really think that we get is the input side of agriculture is where the focus is going to be, and whether it’s seed treatments or our behavior inside the field. Drone technology to only spot spray where we’re having difficulty.
00;10;20;02 – 00;10;37;01
The sea and spray technology is fantastic. Big knock, of course, is that the computer can’t keep up. And so if I can run 80 miles an hour across with my sprayer, I can only go 12 with sea and spray technology. Now what am I going to do? Hunt? Let’s send a drone out the day before. Survey the field.
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Download that data now. Guess what? I get to run at 80 miles an hour. I think there’s a lot of technology that’s coming at us from the agronomic sector that saves us money in the field, is environmentally friendly. It’s the right thing to do, and we start to take away that. Focus on yield as being the paramount piece, and we start to look at profits as our paramount driver.
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As you know, one of the better decisions I’ve made in my life is I married an alumnus of Iowa State University, where you matriculated, and I also married into an Iowa farm family. I have at least a very modest passing interest in land values. That’s rooting for anybody’s demise, of course. But how do you see land values generally?
00;11;13;18 – 00;11;25;13
I mean, I would say that they’ve been maybe surprisingly strong or they’ve held up very nicely in a time where, you know, crops have had a little bit volatility down here this year. You have reporting levels. I think that’s something that producers of all stripes I’d like to talk about. What’s your view.
00;11;25;14 – 00;11;47;28
Yeah. And let’s back up a little bit that if we go back to a pre ethanol 2001 and an average acre in Iowa was traded a couple thousand dollars an acre, and you take a look. Now when you’re at $16,000 an acre, you see that is a massive, massive run in a couple of pieces in this. And I just saw this statistic recently, 83% of the farm ground in Iowa is bought and paid for.
00;11;47;28 – 00;12;08;26
And so it’s like we are very wealthy. We’ve got a lot of unrealized capital gains. When the value of that land depreciated. I didn’t get a W-2. I didn’t get a 1099. I didn’t pay taxes on any of that. But my borrowing power went up. And so we’ve seen this huge advent of wealth, of net worth that this isn’t necessarily I get goosebumps talking about.
00;12;08;26 – 00;12;33;08
This stuff did not relate itself into cash flow. And we’re old, you know, we’re over 60 years old now on the average farmer. And so 13% of the farm ground is owned by a widower, a female that’s over 80 years old. And so we are transitioning from sole proprietorships, mostly into trusts. If you take a look at the biggest growth area, it’s into managed land, is that the heirs of the original farmers are now passing that now.
00;12;33;08 – 00;12;58;06
And what was a 600 acre farm, modest farm, 600 acres that could support a family. If I’ve got four kids, you know. Now, suddenly I’m looking at 150 acres a piece. And what am I going to do with it? I’m not going to farm it physically. It’s dad’s land. I’ve got my heart attached to it, but I’m going to more than likely rent that out in the return that if they’re going to see on that investment in a, let’s call it a 4.5% interest rate environment doesn’t look all that special.
00;12;58;06 – 00;13;21;21
You’re going to scratch on this. And I think we’re going to put a cap on land values for a period of time until we normalize out what is the next catalyst that occurs. And keep in mind let’s go back to the beginning of this conversation. Is the ability of the Brazilian farmer to continue to open up ground. At about 50% of the value of Midwestern farm ground is a true threat to the US agronomic sector.
00;13;21;21 – 00;13;41;16
I don’t think that we can overlook that. So I see a real plateau that’s going to occur in land prices. It’s not going to be near as attractive from an appreciation standpoint. The return on investment in a four and a half, 5% interest rate environment is not going to look that special. When I can throw money into T-bills, into a Schwab account, my risk is zero on that money.
00;13;41;16 – 00;13;50;01
I think we’re going to have a really tough time on further appreciation of the land value, and fully recognizing the appreciation of the land value is what brought us here today.
00;13;50;01 – 00;14;04;10
All right. As we close out our conversation, let’s imagine that you’re a grower of corn grower soybeans. Looking at the current scene, what would you be thinking about market wise for the year ahead in corn and beans? Sell the rallies. What would be your M.O..
00;14;04;12 – 00;14;28;02
As a producer? I had a few opportunities. Probably a $6 corn, more than ample opportunity at $5 corn. We made it down to four bucks. We bounced back here just a little bit. We’re below the cost of production right now on corn and soybeans, and the forward curve gives you a break even. We’re 436. I want to say going home on these 25 corn $10 and change on beans and those represent break even or a little below break even.
00;14;28;02 – 00;14;46;00
So I can’t get real inspired here and I’m going to have to get somewhat creative. Your sell the rally concept is, I think, appropriate. I do think we’re going to be in a dance right now. We’ve got a nice little carry in the market, in the corn market out until July. I think you’ve got to manage your bases and your flat price situation differently.
00;14;46;03 – 00;15;04;07
We’re going to tighten up the basis. We’ve already seen that occurring. The farmer is still very wealthy and he’s not very happy with the price of these receiving. I think we’re going to have to rally corn up to 475 plus or minus at some point in time in order to break that loose. I want to be a patient but realistic marketer of my corn.
00;15;04;07 – 00;15;33;18
And on the soy side of it, the suicide almost couldn’t be more bearish. So we’ve got so many beans that are going to be coming at us. We’ve got a U.S. balance sheet that is already going to be heavy, but I think you’ve got to be an incredibly opportunistic seller of soybeans. Maybe as far as out front, reconsider what my planting matrix looks like from year to year, that I don’t just blindly go into a corn soy rotation, but truly evaluate what is my ROI and right now, if I had to guess, we come into March and let’s just say we fast forward from here into March.
00;15;33;18 – 00;15;50;05
As far as planting decisions are concerned, we haven’t done a whole lot of field work. We had a dry fall, anhydrous did not go into the ground simply because it was too warm and it was too dry, and it would have just evaporated into the atmosphere. And so folks weren’t going to do that. We’re starting to get a little late into the season now, and I think I’m going to have every opportunity.
00;15;50;05 – 00;16;09;14
I’m not locked into a crop as I come into the springtime. Both of them are going to look at negative economics. My decision is going to be, what do I know for sure? And I know for sure that beans go into the ground cheaper in corn does. Right? I might not get that great big yield opportunity that you can see in corn, but I know for sure that I’m not going to spend as much per acre.
00;16;09;14 – 00;16;25;03
And I think we’re going to go into another year of very, very heavy soil side of it feel. And we haven’t even talked about what a Trump administration looks like for the Inflation Reduction Act, renewable diesel crush margins. We’ve got a whole set of dynamics that I think are going to be very heavy on the story complex.
00;16;25;08 – 00;16;34;07
Joe, one of our sayings around here is don’t be boring and you are never boring. We really appreciate you joining us today. And thanks for joining us on From The Furrow.
00;16;34;09 – 00;16;36;16
I love talking to you. Thanks for having me on today.
00;16;36;19 – 00;16;47;11
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