Outstanding in the Field Podcast

Summary:

Listen in as Mike has an insightful conversation with Tanner Ehmke, Manager of Knowledge Exchange Division with CoBank. They review Tanner’s recent report regarding the U.S. grain elevator outlook for 2020, and even close with a little positive advice you won’t want to miss.

What you will learn in this episode:

  • How and why CoBank compiled this report summarizing the challenges of 2019
  • Highlights of that report, including the expectations of slimmer margins, stressed revenues, and grain quality issues
  • A few positive outlooks for 2020, including future carries trending higher and potential profit opportunities from crop supply blending

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Listen to the podcast:

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Transcription:

Mike Terning: Hello, this is Mike Terning, host of Outstanding in the Field a podcast by Greenstone Systems. Today I’m pleased to introduce a guest to us. Many of you have heard of or seen his publications, maybe some of his videos. His name is Tanner Ehmke with CoBank. Tanner, could you please introduce yourself to our listening audience?

Tanner Ehmke: Sure, absolutely. My name’s Tanner Ehmke and I am the manager of the Knowledge Exchange at CoBank. Knowledge Exchange is the research division where we focus on market and industry outlooks impacting the rural economy.

Mike Terning: Okay, great. So Tanner, you’re joining us this morning from Colorado, I believe. Denver area, is that right?

Tanner Ehmke: Yes. We’re in Denver, Colorado.

Mike Terning: Alright. Explain to the audience kind of where you grew and how you got to where you’re at today.

Tanner Ehmke: Sure. It’s been an interesting fun ride in agriculture for me. So I grew up on a farm in western Kansas. After college—I went to K State, majored in agriculture economics, and went to the Chicago Board of Trade. I was on the trading floor at the CBOT back when we still had open outcry. It seems like a long time ago, but it’s still fresh in my mind being next to the trading pits. I wrote for Dow Jones. I covered the grain markets for Dow for a few years, and then I was a commodities analyst at AgResource Company in Chicago. Then I was at AgWeb for a short time. Then my wife and I came back to Kansas and we were farming with my family. My family has a farm and a seed company. We sold wheat, rye, and triticale certified seed. We also grew out some other crops like grain sorghum in rotation with those crops.

After a few years of that, really CoBank came calling. So I started out as the grains analyst at CoBank back in 2015. Denver’s not too far away from my family’s farm in western Kansas. In western Kansas time, four hours is not too far. So I started out as the grains analyst and a couple years later I took the helm as the manager of our division. So all the economists each have very distinct focus. I manage a research pipeline and work with each of the economists. We have all of the major agricultural industries covered: animal protein, dairy, specialty crops, grain, and farm supply. But we also have infrastructure. We have an economist for communications like rural telephone cooperatives and then also power, water, and energy as well. So really anything impacting the rural economy is what we’re looking at. We put together forecasts on what we see as the major trends in market moving events that will impact our customers and therefore impact CoBank.

Yeah. Well as all the listeners know, it’s been a challenging year. So I authored this report basically summarizing what those challenges are. Really a little bit of background, it is a team effort when we put together our research. We have a grain and a farm supply center of excellence comprised of relationship managers—or loan officers as they’re called at other banks—and credit analysts around the country. We have banking centers all across the U.S. We really have our ear to the rail so to speak at what’s going on with our grain customers. CoBank, I believe, is the lender to about 80 to 90% of this space. So this is something that’s important to CoBank, it’s important to our customers that we have an outlook about what’s going on in the grain handling space.

This entire year, 2019, has just been a really bizarre year. That’s the only word I can come up with is just bizarre when it comes to weather. As everybody knows, we started out with some extreme weather this spring that made planting very impossible for a lot of people. It was record wet weather across the U.S. So that caused a lot of planting delays. That was culminating what we saw within the marketplace with prices, a pretty sharp spike in basis. As anyone in grain handling knows, basis is how you make your money in shared grain elevators. Not the flat price or future price, it’s basis. So we’ve been watching this going along throughout the year. We were looking at this and we were a little concerned about what the impact would be to our customers because this is a nationwide issue. It’s not a local issue. Basis is tight all over the U.S. We know that a lot of our borrowers were concerned about what the profitability was going to be in the year ahead. So we authored this paper really to get a better understanding of what the year ahead is going to look like for such an important set of customers for us.

Going back to what I was saying earlier, the weather started out so extreme in the spring, but it continued in some areas into the summer. We had really wet weather followed by some really hot dry weather in some parts of the corn belt. In the western plains, the rain turned off also. When you look at the dry conditions in the central and southern plains, we’re already looking at a concerning situation for winter weeks, which may be another report forthcoming about what this looks like for the grain elevators in the central and southern plains and also in the northern plains in regards to wheat.

Really, this year has really captured all the commodities—corn, wheat, and soybeans, major commodities we’re referring to here—with tight basis around the country, which is not something you would normally anticipate. Because say for instance with wheat, there’s not a shortage of wheat out there. There’s not a shortage of soybeans out there because of the trade war. We’ve got record carry in of soybeans. We’ve had large stockpiles of wheat throughout the plains because there’s been a pretty profitable carry in the futures market. So elevators were rewarded to store wheat, and that’s been a pretty reliable gain over the last four years.

What kind of situation can we see that basis would be tight for soybeans and wheat? Well it’s this year where new crop supplies aren’t so reliable, and there’s some concern that perhaps end users might not be able to get their hands on a reliable new crop supply. There’s also been a steep drop in soybean acreage really tied directly to the trade war. We’re seeing a steep drop in wheat. That’s kind of been ongoing, but we’re seeing that again this fall with probably another steep drop in winter wheat acreage. So the market is anticipating a drop in future acreage. At the same time, domestic usage has been strong. Crushing margins have been very positive for soybean crushers. We’ve got a strong demand for wheat. We’ve had a pretty strong export pace. We can really thank some global events for that. We’ve had a drought over in Australia. We’re anticipating probably a smaller crop over in Russia. So that’s pulling wheat into the export market. So two dynamics that are in play for two markets that you really wouldn’t figure tight basis would be the scenario for wheat and soybeans, but that’s what we’re seeing.

Then you have corn. Corn has just really been taking the focus this year because we do have strong domestic demand, and then we had fewer planted acres than we anticipated because of the planting conditions this spring. Then it turned hot and dry in some parts of the corn belt. Then here were are, the saga continues for corn. With the snowy weather, the wet weather across the northern plains especially, we’ve got so many acres—especially in North Dakota—that remain unharvest. Corn is an animal into itself where you have all of these unknowns that have driven markets with all this uncertainty. So we’ve seen tightness in basis really with corn to levels in some areas that are the highest since 2012. If you’ll remember, 2012 was an epic draught. So really here I think the concern going forward for the time being is corn because as we head into the new year, we still don’t know how big this corn crop is because so much of it is sitting in the field. That’s a concern for end users because they aren’t quite sure about what availability they’re going to have in terms of just local bushels.

Then at the same time for corn, soybeans, and wheat we have quality concerns. I would say really here the quality concerns this year are really focused on corn. It’s because we’ve had a late planted crop, we had some early frost in October that nipped the crop when it was still green and developing. That’s going to impact test weights. When you have low test weight grain, it’s a less efficient bushel throughout the entire supply chain. What does that mean? So let’s say for instance you’re a grain elevator and you’re managing really low test weight corn, that bushel of corn literally is going to take up more volume. It’s going to take up more space in the grain elevator. So same bushel but bigger volume on size. It will literally take up more cubic feet even though it weighs perhaps the same as a normal bushel. So it’s less efficient on storage, it’s less efficient on management when you’ve got to move the grain or blend it.

Then at the same time, you have less efficiency for the end user. Whether you’re an ethanol plant or a livestock operator or poultry or hog feeder, you literally have to push more volume through the animal or more volume through the ethanol plant to get the same yield or to get the same output. You’ve got to put more volume through an animal to get the same pounds on that animal. So there’s a cost here to the end user, there’s a cost to the grain manager and the grain trader. So inefficiencies will raise the cost throughout the supply chain throughout the entire year. So it’s not just the grain elevators that are going to be struggling with this year’s crop. It’s everybody else that’s going to be touched by the low quality of this year’s crop as well. So a lot of bad news here I’m throwing out at you. That’s kind of what we covered in this report. What are these challenges and what do they look like for the grain handlers especially? For the grain elevators. Unfortunately, these challenges are going to continue throughout the year.

We’ve got a propane crisis in some parts of the corn belt that have just raised the level of uncertainty, raised the level of stress literally for a lot of our customers. When you have a really, really wet crop, you’ve got to dry it down.  When you don’t have the propane down there to dry it down, you’re going to be dealing with higher losses. You want to have that corn sitting out in the field literally or having it sitting in a bunker or try to aerate it. So your management costs go up, your stress level goes up. So all around the board 2019 really has been one for the record books, I would say, in terms of everything that you can throw at a grain elevator, they’re getting it this year I think.

Mike Terning: Yeah. They certainly are. I was at the National Grain and Feed Country Elevator meeting earlier this week at the Sunday afternoon country elevator committee meeting. They go around the room and talk about their crop statuses and where they see things. Boy. You get north of Iowa and they basically stayed about 30% of the crops still on the field in terms of corn and 15/20% of the beans still standing in the field. It’s almost like those who did preventative plant are thankful they did. So quite a year.

Tanner Ehmke: I’ve heard that.

Mike Terning: Quite a year.

Tanner Ehmke: I’ve heard a lot of farmers saying if they could do it all over again, they would not put a crop in the ground. They would just take the [inaudible] plant.

Mike Terning: Yep. Yep. So obviously a lot of strain on the whole supply chain coming due to the quality issues, and as you mentioned, lower test weights. Some elevators reported corn coming in at 35% moisture. There’s going to be eating and FM concerns, foreign material concerns, throughout the handling of this crop. So how is your team advising your grain elevator customers and cooperatives and processors? What advice are you going them as they work through this?

Tanner Ehmke: Well, that is—That’s gonna be dependent upon each elevator’s certain circumstance. What is their crop availability? Do they have propane? It’s going to be varying from one region to another, but it is going to create some conversations about business models and other wings of the grain elevator. For instance, if they’ve got an unprofitable agronomy department and now they no longer are not making the margin on grain that they used to, do we keep the agronomy department? We’re seeing those kind of conversations come up on the table. So definitely some rethinking of some business models perhaps or do we keep certain circumstances? Hopefully, cross your fingers, this is a one year event. As part of the farm credit system, CoBank is committed to our customers. We understand that it’s cyclical. We understand that one bad year does not mean that it’s going to be bad for the next five or ten years. So that’s really the conversation we’re having.

At the same time, there’s elevators out there that are trying to rerenvision new profit opportunities. I know that’s hard when you’re really just trying to play whack-a-mole right now with all these problems. There’s opportunities out there. You have, perhaps if you’ve got old crop in storage you can make some margin there with blending. There might be some opportunity there. Drying revenues could be higher in some areas if they have propane. If they’ve got access to a reliable source of propane, they can benefit with better drying revenues. So there are some opportunities out there, but it’s kind of one of those years where you kind of have to hunker down and just accept lower margins and perhaps reenvision new profit opportunities someplace else in the grain side of the business or on the agronomy side of the business or something else. That’s really going to be up to the grain elevator and what their balance sheet can handle and what that conversation looks like with their relationship manager on perhaps if there’s some other opportunities out there. I know those conversations are happening, but all around though it’s going to be a down year for a lot of grain elevators because of the tight basis. It’s going to be pretty hard to get away from. It’s going to be generally a slimmer year and you’ve just got to prepare for it for the year ahead. That’s probably what it’s going to look like for a lot of people.

Mike Terning: Okay. So starting to look at the cost structures, operating expenses, and trying to keep those things conservative.

Tanner Ehmke: Yep. Cost is always going to be part of it. This will be the year you push those—If they’ve been delaying those conversations, it’s really going to bring it to the forefront of how can we maintain some margin. It’s going to come down to reducing cost. They’ve got to look at where perhaps they’re inefficient. Are they inefficient on labor? Are they inefficient in some other area? Well, then they’re going to have to have some hard conversations there about how to trim that. Those re never easy conversations.

Mike Terning: No. Certainly not, certainly not. In terms of your—if you think about your overall portfolio—in terms of this sector, are you seeing higher debt to equity ratios right now or have they stayed fairly constant?

Tanner Ehmke: Well, last year was a pretty good year for a lot of grain elevators. So we’re coming off of a very good year for a lot of our customers. So heading into a year like this, it’s not going to be do or die for a lot of elevators because we’ve come off from a profitable year. So I wouldn’t want to start projecting a trend here. We haven’t pulled the data yet for 2019. 2019 still isn’t over yet. But we can reasonably assume yeah, it’s going to be a tighter year for sure. There’s no question about that. Remember though. A really good year followed by a really bad year does not—You can’t really connect any dots that this is an industry under significant strain. That’s what’s happening with a lot of farmers and ranchers out there because we’re seeing, you look at the data on debt to income and debt to asset ratios and that’s trending higher. It’s a little too early yet for us to make any projections for what’s happening yet for our grain elevators. We need to get all the data in first before we can really make a judgement on this.

Mike Terning: Sure, sure. In terms of how your relationship managers are working with your clients, are they seeing any strains in the receivable elements on their balance sheets from the growers? If so, how are you advising them to kind of manage that credit risk piece with the grower base?

Tanner Ehmke: Yeah, it’s a great question. Accounts receivables has been trending higher. That’s not nationwide. In some areas, it’s actually gone down. Farmers in some areas have had record crops, believe it or not. I’m from western Kansas and I know a lot of farmers harvested near record or record yields this year. Then they also have the benefit of MFP payments—market facilitation program payments. That was a payout from USDA because of the trade war. So a lot of farmers actually saw an equity increase in some areas of the country. So the coops that are serving those farmers probably are not seeing aging out of some of their AR—of their accounts receivable—they’re not seeing that stress there that perhaps in some other parts of the country they are. Again, some of those things we need to pull together the data for the year still before we can make a judgement on what it looks like across the industry. It is a bit of a mishmash. Some farmers did pretty well this year. They saw an equity increase. So the coops therefore are not gonna see, probably, an increase in accounts receivables, but some others clearly are.

I hate to say this, but the government really had a lot to do with how those MFP payments were distributed county by county. It was not an equitable distribution. So if your coops serving customers in a county that did not get a lot of MFP payments, your accounts receivables may be impacted by that more so than a coop in another region where farmers did get more MFP payments. The irony here is that the government was probably benefiting some coops more than other through those payments. So at any rate, it’s been a mishmash this year from what I’ve understood with accounts receivables. It really kind of comes down to how farmers are doing locally. A lot of that has to do with what they received on the government subsidies.

Mike Terning: Yes, certainly. I would suspect that your communication with your clients is probably not going to lessen as we work through this. It’s probably only going to increase. I would suspect that in terms of your grain and farm supply client base, they would be wanting to have very tight conversations with their producer base and their customer base on working through these issues. Communication’s always the key, right. We like to say if there’s going to be a surprise, let’s talk about it earlier rather than later, right.

Tanner Ehmke: Absolutely. You don’t want to have any secrets with your banker. Likewise. I mean more communication is always better than less generally speaking. So to get that transparency and regular communication, not just with your banker—not with CoBank—but with your staff and all the decision makers that you rely on. People can feed you information. You’ve got to have regular communication there about what’s going on so you can see things coming before they surprise you so you can prepare for it. Let’s keep in mind that these are the years where good management is tested. It’s during the down years where you find out who the good managers are. So see that as an opportunity, we’ll call it, for someone to really cut their teeth in management. If they’ve had some good years recently, let’s hope that this will be a year that they can learn some lessons, rethink some things, and pull their team together. Perhaps this can be a year where management shines. They can come out better on the other side perhaps.

Mike Terning: Yeah, yeah. I read something recently Tanner—and I forget who quoted it—but crisis doesn’t form character. It reveals character. I think this is definitely one of those character revealing years.

Tanner Ehmke: Yeah, I would agree. Yeah. Well, I mean that’s putting it in the positives that you’ll find out if you have the right management in place, if you have the right management team. That really comes down to the kind of team you have. It’s not just the manager alone making decisions. You can’t make decisions in the dark. You’ve got to have a good team. This will be the year that’ll prove that out. Do you have the team that you need?

Mike Terning: Yeah, very true. You did mention too the pockets of positivity out there. I spoke with a customer in Nebraska recently who said they have record yields and good crop. That was the theme at NGFA too. Just the amount of variability is tremendous. Lots of surprises in terms of yields, how good some of them were in spite of certain growing challenges. Which I think it points to some of the genetics that have been developed, possibly, and good grower management too. So it’s amazing what the American–

Tanner Ehmke: Absolutely. It’s a combination, I think, of genetics and management. Farmers today are not the same farmers that we had 30 years ago. Technology is different, not just the genetics and the management but what farmers are able to pull together with data and technology machinery, bigger equipment they’re able to get out in the field a lot faster. So it’s a whole lot of things that have enabled farmers really to pull that Michael Jordan winning shot in such a tight year.

Mike Terning: Yeah, yeah. Or since you’re in Denver, that John Elway throw, right?

Tanner Ehmke: That’s right. The Hail Mary shot that gets that ball in the endzone and the crowd cheers. When everything’s on the line, well it’s in years like this, again going back to management, you can have all the right genetics and the right technology behind you, but it takes a good manager to pull it all together.

Mike Terning: Yes it does. Yes it does. Well, certainly appreciate your insights today Tanner. I’m glad that CoBank is serving our customers well with advice and information like this. Is there anything you’d care to leave for our audience listeners today as they kind of wrap this year up here—we’re in mid-December—and start thinking about 2020 and beyond.

Tanner Ehmke: Well, I’d say always keep the long view. Good times don’t last but neither do bad times. Always keep that in mind. I’d say that this will be the year where I think a lot of managers are really going to come out better when they—This will be a year for them to talk about for years to come. Let’s put it that way. There’ll be some great stories for many, many years to come I think.

Mike Terning: Yep, I think you’re right. In fact, ’93 was a tough year and that was 25/26 years ago. That was on the other side, drought, but yeah.

Tanner Ehmke: Yeah. Let’s hope that we don’t see this for another 25 years.

Mike Terning: That’s right. That’s right. Well, great. Well, Tanner I appreciate your willingness to join Outstanding in the Field today. I wish you a Merry Christmas and the best new year.

Tanner Ehmke: Thanks Mike and happy holidays do you as well.

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