[MODERATOR COLIN JOHNSON]
Speaker tonight, Joseph Kerns. Joseph is president
of Kerns and associates. He has 30 years
of experience in working with producers
and suppliers.
A lot of mills as well to support
agriculture operations. He leads a team
of professionals,
with the express purpose of
understanding the financial parameters
around agriculture
markets so that those that
he works with can thrive and prosper.
Very well known to many of you. So Joe,
we're looking forward to your
presentation.
[SPEAKER JOE KERNS] 
So thanks for having me and inviting me
to join in here.
So the title of where do we go from
here is kind of brought forth because of
the perplexing times that we're
currently in.
And we find ourselves to be somewhat
flat-footed and that's understandable
given parameters
 in the COVID
environment and in the shutdown of
facilities.
But my sub-point here is hearing the
whispers amidst the protests.
And when when you take a look at the
nightly news I don't care if it's,
I was recently in Philadelphia with a
business trip and
there's protests going on there. The
Kenosha situation obviously has arisen
here recently, a litter
more closer to home. But we've
got a lot of noise going on.
 And even as I was driving
home tonight, that whether
 you're a Joni Ernst fan
or the Teresa Greenfield fan,
it doesn't matter but this must be a
tight race because
the venom that's getting tossed back and
forth as we
go here it's just kind
of occludes us it kind of
occupies our time. And inside that, I
think there's a silent whisper,
in at least as the mark that's my
parallel here. Is inside of what is
happening with the markets.
and there is a whisper of what to do. And
I kind of want to start to address that.
And if you've 
missed the whisper it's
not your fault.
It's the noise is just like a
clanging gong
right now that it's very easy to
do so.
I am a licensed broker and so
therefore the disclaimer kind of generally
says that if you take my advice and
trade on it,
and don't make money that's 
at your own
accord here. Let's start off with
what's going on in the grain side. And
that's going to kind of set the stage
for what profitability looks like
rolling forward here. And to start
with I've kind of highlighted this
middle tier of a couple of counties in
Iowa
I call it a derecho, Jamie from
the pork board calls it a Dorito. I'm not
sure who's pronouncing this properly,
but we had an event here a couple of
weeks ago that rushed across the strait
across the state it was incredibly
damaging. You know you know the
equivalent
of a category one hurricane or a
category one tornado.
But the swath was unprecedented 
and each county and I was roughly
25 miles wide so when you take a look at
that's about 50 miles
or so about 30 percent of the total corn
production
in the state of Iowa. Fortunately for the
guys the east side of the Mississippi
river, they were largely 
spared they did have a
little bit of down corn
and some problems into the West. It
just was kind of gathering steam,
before it hit those counties in
Western Iowa. But we're still in the
process of trying to discover
just how much damage was done what it
looks like. I'll be on a tour this
weekend we've had,
I was sharing earlier with the team is
we had some folks in last night that are
part of a crop tour.
And this is going to be kind of a
recurring thing. You know we missed the
state fair.
We missed the farm progress show. We
didn't get our normal political thing in
central Iowa. So finally, we have
something that are bringing people into
central Iowa.
Unfortunately, it's because of the
destruction that occurred
not only to crops but also to the
property and the green guns along the
way. But this is largely 
the band where it
occurred. What does that mean to us? Well,
probably not a whole lot. If
you take a look at the USDA
report that was just recently out and
what it means,
notice that with a few
exceptions here that show some very
pronounced
increases. In general, we kind of tend to
to kind of steady out here from the
August crop to the final. With or without
the derecho event. And why is that? Well,
you know the good
excellent ratings are almost like a
beauty contest. When we get to June
everything is green it's looking great
and we get all optimistic. And then
Summer, it sets in and
you're not going to believe this guys.
But sometimes it gets up to 90 degrees
in the middle of Iowa. Right,
in the summertime. Well of course it does
but then the crop doesn't look as good.
And in my beauty pageant example, we
start to decrease the good to excellent
ratings as we roll forward here.
And that does tend also. We get the most
optimism
from this August report. Now this August
report is taken
by field, excuse me, not taken by field
survey.
It's farmer surveys. So because of that,
we've got this optimism that generally
wanes as we roll forward here. 
So my prediction
is that the numbers that we got from the
USDA in the August report are
probably the biggest numbers that we're
going to get.
As far as production is concerned for
the rest of the year,
when we take a look into the supply and
demand side of it here , this is kind of
what the table looks like. And we're
going to walk through this because I
think it's important.
In the rearview mirror here of
the
derecho event. To try to talk about how are
things laying out.
You've got the July and the August USDA
estimates sitting in here. We had a very
pronounced increase
from July to August of what the USDA was
anticipating. You'll see my numbers are
over there in the right-hand column.
And this is where as an analyst you've
got to make one of two choices.
Did we wipe out those acres? And so i
take it off of the harvested acres area
or am i going to 
include them and just be
declined
the yield per acre across the entire
matrix. And that's what I've chosen to do
here just to make things
kind of consistent and simple because
it makes a point here.
Is even if you take my numbers here that
are
a slightly less than the July
report. Very consistent with what the pro
farmer tour
would show you. Is that a disaster?
No guys, that's a record crop. That's a
record
yield that we're looking at. And
sometimes I think that once we started
off with this really high
parameter,
that we're going to be 185 or you know
whatever number you want to conjure up.
And suddenly it comes down to something
that's reality is we get disappointed.
But the truth of the matter
is, it will still be a record yield
on a per-acre basis. Now once we start to
to multiply what are my harvested acres
times what's my yield that gets me
production. It's just a little bit less
If you can see my cursor right here.
Just a little bit less than a 15 billion
bushel crop that would not be a record
simply because of the acreage, mind you.
But let's kind of walkthrough. This
gives us a total supply of 17 billion
bushels or so now. Let me l
kind of add to that,
that means we've got a store
someplace in the neighborhood of 17
billion bushels on or about October 1st
of corn. And then we're going to actually
add
wheat and corn and soy back to that. We're
going to
tax our storage capacity.
Because that wind didn't just take down
corn, it took down storage capacity.
And we're going to build another,
we're going to make another
crop next year. How quickly are we going
to rebuild those storage units?
Whatever the answer is it's not as
quickly. I saw a staff the other day that
was about
60 million bushels worth
of commercial storage that was
impacted about three times that
inside the private farm sector and i
think that's going to be a component to
play with.
Stay with me here just a little bit here,
this
feed and residual line got bumped up by
the USDA.
The biggest correlation to feed and
residual is the size of the crop. So if
I'm reducing
the size of the crop it makes sense that
it also reduce
the feed in residual line. The other one
of interest of course
is what's going on with ethanol. Ethanol
right now
is grinding about 90 percent of
their maximum level.
If you walk through the math on and
find out what the maximum is it's going
to be about 93 percent according to the
USDA I'm not arguing that one
whatsoever. And then again what happens
with this export line. And I think we're
going to be
relatively consistent. Here's the bottom
line guys this ending stocks line this
bottom green line,
is the governor of all trade. And we're
going to in my projections USDA says
we're 2.7
billion bushel carryout with weather
reductions because of
the wind event in Iowa. I think we're
going to be someplace closer to 2.6
billion bushels. But from a pork producer
standpoint here's what's important take
a look at this bottom line
can you live with these numbers at
roughly a
a 16, 17 percent carry out to use ratio.
Can we live with that?
Heck yes! We can. We can do this. To me
the biggest thing from the July to the
August report is right down here on the
bottom line. Take a look at that.
We went from a 335 down to a three
dollars and 10 cents and that doesn't
get talked about
a lot, right. When we take a look at a
regression
of where do we set price-wise relative
to the stocks to carry out use ratio
it's tough to get much tighter
correlation than that. I think we are
fairly priced
where we sit right now in this, this
would have been the day of the
report would have been trading about
three dollars and 30 cents or so.
Certainly, we've escalated from there but
let's give a little rounding here. These
things don't happen in the straight line.
They occur in band and we're certainly
inside
of that band. When we take a look at our
friends in the ethanol industry and what
their fortunes look like you can see
what happened right down here,
in the COVID environment when they were
producing to beat the band.
Suddenly we stopped driving and the next
thing you know we got way too much
ethanol on our hands,
prices plummet, and we actually took
crude oil down to negative values.
Since that point in time profitability
is bumped back up. That encouraged some
plans to come back online,
and now we're about to break even or so.
And so as we sit right now if you're a
plant that's running
you probably don't have a lot of
incentive to do anything other than
continue running it. If you're a plant
that's down what are you going to do?
You're probably going to stay down. And
so I think we're at this really
steady-state. So amidst a lot of the the
turbulence and the turmoil
is we found one thing that's going to be
relatively constant and that's what
ethanol grind looks like. Here's what
production is that's going to match off
very closely or
the inverse technically of what margins
are. You saw the great big swoon
late or late in the first quarter
early into the second
quarter and we've kind of progressed up
just a little bit because of such.
And what happened is take a look at
this peak right here. We
physically ran out of room in order to
store ethanol. And so as the stocks waned
it allowed us to come back online here
just a little bit i think we're at a
very
steady-state as far as ethanol
prior
grind is concerned which gives us DDG
prices someplace in the 125 dollars
plus or minus level four in Iowa
producers and I just don't see that
going too far.
This is what December corn looks like we
rocked along and kind of hit this bottom
about the time of the report. And when i
start talking about whispers,
this is the first one, and guys right
down here.
The day of the report when we got a
relatively bearish report and I wouldn't
even call it a relatively bearish report.
You had record yields, the first time
we've
ever printed 180 plus bushels to the
acre
coming out of the United States and we
had what's called a key reversal. We had
a lower low
and I'm comparing these two lines this
might be a little too minuscule to see
on the screen. But we have a lower low
followed by a higher high. That's a key
reversal. That's a trigger for the funds
to say
I need to buy this market. Well the funds
were short
roughly 200,000 contracts at that point.
I mean you can see what's happened since.
Is we've been on this nice little run-up
here we're
trading at 352, 353
area right now. Technically we could get
up to this Fibonacci retracement value
of 363 or so.
In the big scheme of life, I think
we're starting to exhaust
what this rally might look like. And I
might change my mind once I'm on
with Jack's got a motorcycle tour that
I'm going on this weekend
and it might change your perspective but
i really don't think so i think we're
range bound
between 350 ish give me a little
rounding error inside there,
and 320 and we just don't move
too far off of that. From a soy
standpoint here's what a balance sheet
looks like. And again the USDA bumped up
going from July to August what it looks
like. I have kind of moderated those
levels back again.
But really I think we're in kind of a
steady-state as we go. A little more
tenuous
on the U.S. soy supply and demand. But
notice I said U.S. and there's a reason
for that here, but i'll get to that here
in a moment.
Here's what we've got. We've got some
place in the neighborhood of a 500
million-bushel carry out that would give
me an 11 percent
stocks to use ratio and kind of this
 shrug
type of scenario here. This is what the
regression looks like remember the corn
was sitting right on top
of the regression line and yet here we
are trading
futures a little bit below the
regression line. Why is that?
That has everything to do with the world
situation.
Is the Brazilian re-eye has
weakened versus the dollar by about 36
percent,
year over year the Argentinian peso
has done the same thing. I was in
Argentina about this time last year we
were trading a 60 to 1
peso to us dollar by just by complete
coincidence I've been to Argentina
on or about december first the last two
years in a row.
And two years ago it was trading at
about 40 to 1. Last year is about 60
to 1. So a 50 percent 
spread in between those numbers and now
it's moved out to 73 to 1 so it's
about another 33 percent
spread. My point is this. We're providing
the south Americans every single
incentive necessary in order to plant as
much as they can
and their planting season is about three
weeks away. So there's a little bit of a
bump up in the board here
that you've seen. Don't hit the panic
button, all we're doing is supplying
a world scenario with enough supply
in order to make it. And that's why
because of this world situation,
is that we're trading prices in the
United States slightly less
than where they otherwise would have
been. The big story
in the soy side of it is export sales
to China. A lot of
conjecture about them meeting the
phase
one commitments. And certainly the soy
side of it has been the biggest
beneficiary. This five-year average might be
slightly misleading because it's going
to have 2017,
and 2018 in there which in 18, 19
in 18, 19 was just absolutely dismal.
And so we've had some real clinkers
inside the last
five years that might start to to
make this skew just look a little bit
better.
Barring that make no mistake, we've got
so a really nice advance
in new crop sales. Generally, we're in
this very rhythmic
pattern where the Brazilians sell a
whole bunch of stuff during our
downtime and then and then we
reciprocate notice. This blue line this
is Brazil, the orange line
is the United States. And we're starting
to ramp this one back up as Brazil
is falling back down. Bottom line guys,
we're the only game in town for soy so
don't be hugely surprised
when you see some exports coming our way.
When we take a look at pricing notice
that we're right up on top of that.
Fibonacci retracement
number sitting here at the 922 level
against November soybeans. If you are a
producer of beans I would highly
encourage you to think hard
about where your next sale is going to
be and even as we roll-over
into 2021. I want you to think really
really hard about what another 
six percent acreage in Brazil and the
same in Argentina
might mean to our values. Now keep in
mind a 
six percent increase in their production
equals about an 18 to 20 percent
increase in their exports. Their domestic
use stays relatively static.
So that's all coming down around your
shoulders. That's something to think
about
as an end-user I think you're in pretty
good shape. You probably don't need to do
much and even if you do,
do something it's only through March of
2021
which is enough time to let South
America harvest whatever they're going
to do. So here's kind of our grain
conclusions.
Is even a couple hundred million bushels
of loss in the state of Iowa, and I gotta
tell you I put a plane in the air today
that when you fly over that area it
looks devastating, when you drive along
that area, I happen to live in this
region,
is it's also very devastating. So
even with all that said I think not
I'm very certain that we've got enough
stuff 
i.e corn in the bins in order to make it
from year to year. We are human beings. We
trade on emotion and I think we're
getting just a freckly emotional at this
point in time in the corn market.
The future crop genetics as long as
we keep a price above 330
is going to be we are going to see more
corn acres come in. So I
I want you to pay attention to what,
once we get to February.
Specifically when the insurance
payments are coming on
of what the December futures are trading
and it's certainly higher than the 350.
Right now we've got very very wide
carries in the market Brazilian
production looks like it's going to be
up
and that's what I was sharing earlier
that their
exports are a higher percentage
than their production. Simply because
their domestic case doesn't work in kind
of the
the denominator factor here. Soybean
meal futures are attractive to me kind
of once we get down to this 280
ish, the United States is the only place
to go. All right.
Chinese appetite's been good, and I want
to caution anybody that wants to get
really really bullish to soy based on
China.
As pork producers have we learned
anything about how China might bail us
out of an excess supply situation>
I'm just gonna leave that one hanging
for a moment because it doesn't work
very well. When we swap over the pork
side this is my
picture from last night. I've got a
Traeger grill and I was putting
bacon on it and trying to discover
whether a perforated type of environment,
or a kind of a jelly pan up here
would produce the best yields and no
matter what you look at when you look
over here on the right hand side
it was fantastic. It's BLT season I've
got a big garden sitting out behind me
here
and it worked out really well.
So, anybody that has a Traeger, I'd
highly recommend it by the way.
This rack was the best one once you get
it off the direct heat
as we go. Big argument right now, are we
current. No, we're not. Does this remind
you of the political side of it? Right?
We're gonna take two
opposing
views of the market when we take a look
at this pork side of it,
and where you sit might determine
your perspective. And I'm trying to be a
little agnostic
on this one, and just try not to get
emotional about it but
let's kind of take a look at both sides
or of the argument here.
The hope and change thing worked for
the Obama
administration. Right. It got them elected to two
terms into office they're about about
offering
this hope and perhaps that's what the
market is doing.
And we've got some evidence from those
on 
that particular front here. Is nearly a
fifty dollar top side today in the cash,
up a solid ten dollars from
recent lows even ten days ago from there.
The weights are low. And there might be
some explanations to this certainly the
seasonality,
this is the time we hit our low light on
the weights here,
we've had plenty of heat in here. The
lack of rectally in the rations and the
impact of the whole diet,
and what that looks like probably all
contribute inside here.
When we take a look at federal
inspected slaughter, we are up 1.2 percent 
with production of 2.1. Who would have
guessed that? After our COVID situation,
and we backed off all the kill
for that level, it doesn't feel that way
but the map
doesn't lie. Right. But even with all that
said,
we've got the cutout is down nine
percent from a value standpoint.
Anybody that's priced off the cutout
certainly knows that. And it doesn't
feel all that great that's a heck of a
lot better
than what's going on in any negotiated
market that's down a whopping
43 percent for the year.
And so the question to be answered if
you're in this camp of we are
current is where did the pigs go? And
I've read and heard of many explanations
none of which totally
satisfied me mind you of well they went
out to Connecticut. Well
sure, a few truckloads did. Well we
euthanized a whole bunch to make room
for them.
Okay, I can buy off on a little bit
of that. But none of them can make up for
the backlog that we saw
in the June hogs and pigs report and
I'll get to that here in a moment.
about what that one looks like. And so my
answer on this one is,
it depends how's that for politically
correct.
And it depends largely on where you're
located.
And this is kind of what I've broken, we
normally call a western corn belt in
eastern corn belt.
I tried to do just a little bit better
than that and calling it this far east
corn belt because I think that plays a
role.
And when we started to clean things up
this eastern corn belt, in my opinion,
was the first whisper in the market that
we
are clean. We saw some bids coming from
those eastern processors
that we didn't see for any other market.
It then converted over into the western
corn belt that sure appears to be clean.
But it's this one
over here, this eastern side specifically
the big plant sitting out there in North
Carolina that's been behind schedule,
hasn't been able to catch up and the
backlog of hogs
might be regionally displaced. And so the
both sides might be right
of yes, we have a backlog of hogs. And yes
my local market is current. Right. So,
let's let's kind of hold those two
things
as pull both possibly being true. But
arguing over where we are
is never as important in my opinion is
where we're going. And this
is where i think things start to get
just a little bit sticky. This is
generated by Dr. Steve Meyer
in our office. That red line represents
what packing capacity was
at this time last year this 2.755
million. The green horizontal line
represents what it is in a COVID
environment at 95 percent
of our kill rate. You'll notice that it's
about 2.62.1
I'm going to put my cursor kind of just
where we sit right now. Because last
portion of August we've got Labor Day
coming up.
Which obviously will give us a bit of a
contraction in what the kill looks like.
But
notice the general slope of the line is
going to start to move
higher here. And so whatever you think we
are weather, we're current or we're
behind, we're either going to get
behind or more behind in
my opinion rolling forward. If you just
take the data
from the June hogs and pigs report at
face value. This is what it looks like
coming into that.
At the June hogs and pigs report we had
about 2.5
million head kill backed up kind.
Fast forward to today, right about a
here they would show about 1.8.
We're about 500,000 less than that. Our
internal numbers. We'd say it's about 1.3
million head that are backed up. And most
of those are
in the Carolinas. That's not my point,
my point is
is the slope of whatever we are
moves in a very adverse direction for
the pork production community
as we go forward here. There's a lot of
things I don't know guys. Here's what I
am pretty certain of,
that Christmas falls on a Friday as does
New Year's.
That means coming into the Christmas
week we're going to kill Monday, Tuesday
maybe a half a day Wednesday, perhaps a
half a day Thursday then we're going to
go dark Friday, Saturday, Sunday. And
that's what
this is all about. That's not about
production over on this right hand
portion of the chart.
That's not about production. That's about
the holiday falling at the worst
possible time when we have a lot of
animals coming at us,
in a constriction in the kill schedule
here.
When we take a look at the demand side
of it is
it's erratic right here. This top portion
of the chart is when the beef cut out
went.
By the way, this is pork,
chicken, and beef all combined together
here.
And so once we had the pork cut out
really really spike in
in the height of our COVID environment
that's what that looks like. It has since
falling back down.
And if you're kind of taking average of
it, maybe it kind of moderates, but it's
just been so incredibly volatile
that it's been very difficult to predict
on with any confidence interval.
When does the pain go over this is
courtesy of the folk from Rabobank
Christine there.
They're not seeing it until mid to late
2022.
So, even if we want to hold out this hope,
you're going to have to hold your breath
for a while, and you're going to have to
have a banker that's hanging with you,
and a pricing program for your
animals, that's going to allow you to at
least to survive
that long. When we take a look at the
export market China's certainly
then the stall work in this one.
Chinese exports year over year
undeniably high. However, there's a
troubling trend going on.
China was 11 percent of our total production and
that
slowly whittled down to 5 percent. While most
other countries year over year because
of the COVID environment by and large,
are lower on rushport. Doesn't mean we're
losing market share.
They're just not taking as much stuff as
we go forward.
When we take a look at the sow herd, in
my opinion
at the bare minimum. If we've got 95 percent 
packing capacity that would certainly
mean that we've got to get rid of five
percent of the sows just to
accommodate the slower harvest
logistically.
I think it's going to be a bigger number.
Because if you've got a very highly
productive unit, you're probably not
taking it out of production. So therefore
from a numerical value,
we've got to take more animals out of
production.
Longer-term when you take a peek
under the covers of the genetics
companies. We're not stopping on this
growth curve guys.
We're going to keep on getting bigger
and better as we roll forward here. As a
matter of fact, if we wouldn't have the
COVID environment, we're going to have
our production up four percent
this year alone off of a sour herd that
might have been up one to one and a half
percent.
That's a really good thing. You're in a
growth industry
that unfortunately has some
constrictions associated with it that
are just kind of eating
in for our profitability. So do we need
to reduce?
Yes. Right. We've got to do that in order
to write this ship
going forward. So what's about this
flatten the curve well Dr.
Fauci has suddenly been absent so you've
got Dr. Joe
in order to help you. And I'm just going
to pick out this green line here.
This is what we would normally expect
right. Is we get a summertime that moves
up a little bit and it kind of goes back
down.
Is that what demand looks like? Not at
all. That's because of lack of supply
that we get the higher prices here. And
when we take a look out to the
2021 futures we still have this rhythm
in place
where we've got higher prices in the
summertime
and lower prices in the fall. But let's
take a look at something else here.
If we seasonally index the pork price.
Is what you discover is that this yellow,
excuse me, this orange line which is the
pork cut outside of it
actually has higher demand from an
economist standpoint.
Which is disappearance at a
price
than we do in the summer. You still get a
higher price in the summer
because we have fewer hogs, but demand is
actually
higher in the fall than it is, I'm going
to round this back together here and
kind of bring
these thought processes into full play
here
in a moment. Our slaughter forecasts are
still very large. This is numbers again this is Dr.
Meyers numbers. I want you to be very
careful here.
We're talking about million ahead, USDA
is talking about billions of pounds. So,
when you take a look at the percentages
and say wait a second that doesn't match
off,
be very careful there in.
We see a little bit of an increase this
year.
A little bit more of an increase next
year, and that is certainly not slowing
us down
enough on a head count in order to
accommodate for some of the
constrictions that we've had
in the pork production side of it. Excuse
me, in the packing
side of it here. The 2020
price is certainly going to be lower and
when we take a look out
right now at what our futures prices
versus what our demand
model looks like for prices, there's a
pretty good discrepancy probably 20 to
25 dollars a pig
discrepancy and that's that's nothing to
sneeze at guys.
Is the futures market is still building
in that what we worry we're going to get
back to normal, we're going to see
some profitability in 2021.
Our numbers are a little more
conservative than that. Of thinking that
we're going to stay in this quagmire a
little longer,
based on the foodservice situation
that I shared with you from that Rabbo
bank slide.
And I just don't think things get too
much better here.
This last portion of the time that we're
going to have together i'm going to talk
about something else here.
Because we're having a difficult time.
When I entitled my speech
"What are we going to do." I think there is
actually an opportunity
to own your own future. And we're and
we've started this
the Minnesota 308 B Cooperative, we
hear a lot of 401KS or
or other 501C3 portions of the tax law.
To familiarize yourself with this
this Minnesota 308 B is a cooperative
that the Capra Bolstered Act of 1922
allows collective bargaining to
agricultural entities
specifically. We are forming on the
original concept and when I say we,
it's a group of folk I just happen to be
affiliated with it.
The original concept was to find some
other way in order to provide you some
hedge monies
that don't come out of Mark Greenwood's
pocket.
It's more sense then here. The
establishment of the co-op allows the
members to free
access to production practice .Here's
what it does not allow,
you can't collude. You can't enter into
an agreement of
everybody cut back 10 to 15 percent just to
increase the price.
Supply management is illegal no matter
what your charter looks like. So that I
want to be
very clear. However,
it does allow collective bargaining this
might be one of the better
benefits that the collective we, if we
all had
10,000 head were marketing, we might
not have a whole lot of power but if you
put 100 of us together,
suddenly now we've got a critical mass.
We can go to the market
and actually find a way in order to get
some attention.
Eventual goal of this whole thing is an
uber of market hogs. And stay with me on
this.
Imagine this. Is that we've got a group
of producers all coordinated that you
know
what the size of animals are in every
barn. You've got some packing agreements
because they're kind of stratified
against the geographic
area and now we're moving the proper
animals
into the proper slot. Eventually, I think
that's where we go. That's several years
down the line and I'm not trying to
pretend it's ready to go.
The software is ready to go I'll tell
you that. Our ability to execute on it
is down the road. But I just want to kind
of toss that out
as a portion of hope here. But what does
this look like here.
The department of justice recently
issued against a co-op system that you
cannot
 engage in predatory or cohesive
practices to stifle competition. So again,
the Caprivulsa is a powerful act
but it is not
the end-all of everything. All right, so
let's put a ball on this.
And I try to divide this into what do we
think we know versus what we're pretty
sure we don't know.a
And what I think I know is the Chinese
hog prices are staying high.
They're astronomically higher
six x plus
prices. Priced at hogs in China
doesn't matter anymore. Their production
is increasing stimulated by
the increase in price. And you can
hear all kinds of antidotal as well as
evidential
components that will support that 
trust.
How about this. I truly
believe that by 2022
this whole China thing that we've been
banking on is going to be over.
If you were betting the farm that ASF
someplace else was going to
bring you nirvana i think we watched
that one kind of squiddle down our lake
here.
Exports to most countries are
predictable the U.S. is holding on to
some market share the problem is
is that people just aren't doing too
many. We've got way
too many pigs and we're going to have to
do something soon.
I want you to convert your thought
process in the way we think of this. And
again, this supports my flatten the curve
idea. Is that our shackle space capacity
is the component that dictates what pork
production looked like.
Not the price up. Excuse me, not the
supply of pigs and that's from
I suppose for a brief time in 1998 we
were in this similar scenario none of us
want to go relive that again.
But, in general, our supply of pigs gives
us what supply looks like
not shackle space capacity and that's what
we're looking
at right now.
Demand component, I don't see coming
back to us anytime soon here
in the forward curve says I can hold
it together for 2021.
You as a pork producer have a choice of
whether or not you say
yes to that or not. Peeking under the
covers as I alluded to earlier,
from genetic components we are going to
increase productivity.
And this one might surprise you
a little bit. Is I would contend we're
going to lose packing capacity before we
gain it. The plant in the Carolinas that
recently came back online
after being fabricated for Chinese
export business exclusively
was specifically stated if we have to do
that we'll shut it down. Well because of
some difficulty in processing on the
eastern seaboard,
that didn't happen. Don't think
that the things get back to some level
of normalcy
that we might lose a packing plant
between now and then. What are
pretty sure we don't know this political
thing. I opened up with that.
What was the political bantering
going back and forth right now is going
to fill your airways from now through
early November. I get pretty nauseated
from it.
But what does it mean for agriculture? I
don't know. What's it mean for the
value of the dollar or exports?
You've got the democratic candidate
that's come out and said that he would
ease the restrictions
upon the Chinese tariffs. Maybe
that'll help
agriculture. I don't know. All I know is
I'm terrible
at this political thing and the
political ramifications
are going to be very impactful here
and impact what's going on with China.
And the last thing I'd give you is
notice we've stopped talking about
ASF, and I find that very troubling.
Because the
the opportunity is just as prevalent and
would have negative ramifications on
that 2021 curve
while we've got some opportunity to
at least break even and maybe show
some light green numbers. And with
that I would take
any questions that we might have.
[MODERATOR COLIN JOHNSON] 
"One, optimum market weight continues to be a
debate.
Integrators are very reluctant to
decrease weight where many independent
producers believe that they can
save money by reducing market weight. Is
it really cost-effective to reduce
market weights?
And in a leveraged volume business does
it really make sense to lower the market
weights?"
[SPEAKER JOE KERNS]
I love this question. And I would I
would say absolutely not
lowering market weights. That we are
going,
that the throughput capacity of a packer
is determined by how many pounds he can
put on each shackle that roll through at
a prescribed rate.
If we index our production units based
on their same revenue side, the answer is,
let's optimize the system in general. I
understand the short term
economics might not take a peek at that.
But long term I think we've got to be
taking a look at
at what makes sense for the entire
system. And
if you happen to have read my national
hog farmer article this weekend
I was talking about that. About how we
price our animals, I'm a huge advocate
of cut out prices. Not just because it's
the higher of the options right now,
but I think that getting parallel with
what the packers are receiving
and having that pass through back to the
production things. Listen guys.
I'm a homer for the producers
here. I want them to win,
but I also think that we've got to be
very very realistic in how we're going
about this.
And giving the packers what they want so
they can make money is going to
transcend
into us making money. So to me,
that this is an undeniable truth. And
again I'm going to circle back to the
genetic side of your colon.
Is when you take a look at what are our
genetic,
what's the um of the efficiency of an
animal at 300 pounds now versus 20 years
ago, it's unquestionable.
Is we are still you know we're pushing
out that physiological
maturity to a point where we're still
converting relatively well
at even these, what we consider to be
heavier weights, and suspect
that it's going to be some
infrastructure issues that start to back
us off. I.e, I can only
engineer so much weight carrying
capacity within a plant. But I would
absolutely be an advocate
of heavier weights over time even though
the micro situation might say differently.
[MODERATOR COLIN JOHNSON]
Yeah good answer to that. Hey,
related in these market weights and just
the volume of product that's out there
and coming forward.
You talked about crop production,
grain production in South America. What
about their protein sector?
What's that do to insights on our
markets?
[SPEAKER JOE KERNS] 
The protein sector I
don't see expanding it the same rate.
The money required now keep in mind if
you spend any time in Brazil whatsoever
and take a look at the land that's being
brought back into production we're not
clearing the Amazon Rainforest. I often
reference it as Manhattan, Kansas type of
ground with some character to it.
And it has everything you need you've
got fertility,
you've got sunshine, and you've got a
predictable range. And it's simply a
matter of getting the economics in place
in order to sometimes change the pH
of the soil in order to bring product
back into or bring land
back into production. That incentive
still remains the same.
The economic instability in the
inflation levels
inside of both Brazil and Argentina so
combine those I'm calling those South
America,
mean that it's very difficult from an
infrastructure standpoint or from a
finance standpoint
in order to pump money into a pork
production unit. Ask yourself this right
now.
If you're to lay down 10,000 sows.
You know what is your net return I saw
some statistics.
It's basically zero, we're in a zero
profit environment.
We executed a 10-year bullet swap
yesterday for .6 percent. We're in a
zero inflation rate environment and we
can't make ends meet.
And when you're at a thirty or forty
percent inflation rate
environment regardless, you can't you
can't make ends meet.
My point is this, opening up land is
a lot more economically feasible and
directly one-for-one.
You're selling in u.s dollars you're
buying in your local currency
the production, animal
production site is very different. I
don't see it following at the same pace.
The incentive
eventually will come into play but that
is not our acute
situation right now.
[MODERATOR COLIN JOHNSON]
Another question. I'm an independent
producer who
utilizes 100 of my corn crop.
As far as my APH I've wiped out
well over 50 percent maybe more of that
two weeks ago.
What's the plan going forward for
me?
[SPEAKER JOE KERNS]
All right, so it's still a little
ambiguous about how you're going to be
compensated from your loss. The governor
today was indicating that we had a
hundred million dollars coming from a
four
trillion-dollar fund from the U.S. side
of it that would be allocated out to
producers.
Here's the really disappointing part
with me, you're talking about ten
thousand dollar increments. And if you've
got any scope or scale it's,
the ten thousand dollars isn't going to
go very far. So I'm gonna separate this into two
different buckets. I can't
I can't handicap nor predict, nor do I
wish to the political side.
The market side of it says to you,
that you've got these huge carries in
the market in
any good bull market is characterized by
inverses. We are not
in a bull market right now. So I'd be,
that if you can store corn if you if
you've wiped out your crop, if you've got
physical bins available,
I'd buy as much as I could at harvest
hedge it up against the December sell it
in the forward months against the July
as your protection
and start to pretend that you're a grain
elevator at this point that doesn't have
any production
at your avail. The grain
side of it is not going to be your
nemesis, whether you're producing your
own
or having to buy it in the commercial
market we are going to stay
relatively competitive i.e $3.25
plus or minus across the entire corn
belt .
You're just going to have to play a
little bit of a different game and my
heart goes out to you from the crop loss.
I've driven by it and just sighed in
inside the truck.
[MODERATOR COLIN JOHNSON]
Let me make sure this is a 
question or comment but I'll read it.
We have found that the Japanese could
import pork more cost-effective than
producing it domestically, obviously,
probably the same for China. But will the
national pride interfere with their
imports?
[SPEAKER JOE KERNS]
Yeah you've got two
different, you might have 
different Asian nations,
but you've got two very
different systems here. The Japanese I
think have
accurately ascertained that their
lack of land mass is better utilized for
something else i.e making cars or a
higher value
type of item and exporting it back and
then
importing the lower priced items where
the landmass in the United States can
more efficiently produce things. I don't
think that changes whatsoever
I've been to China a half a dozen
different times.
I am thoroughly convinced we are not
going to out negotiate the Chinese, nor
are they going to allow themselves to be
put into a compromising position of
weakness. They have specifically stated
that the production of protein to feed
their people is
something that's very important to them
I don't think we're going to see the
scene.
We're not going to see the same
transition. The economics are undeniable
that they quote "should" be importing our
pork as well as the Europeans, as well as
the
Brazilians. But they won't do it. Don't
hang your hat
on China to be the savior. Even though
every single piece of logic
says that's the case.
[MODERATOR COLIN JOHNSON]
Feel free everyone to chat some more
questions.
Another comment that there's a lot of
educators preaching a lot of reducing
weights as being an industry concern. So I know
you hear that a lot too.
[SPEAKER JOE KERN]
I'd say wait, obviously, it's hot
outside.
Next week we're gonna cool off. This you
know I pointed out. This lack of paling
is a huge issue in my point.
 I don't get paid by Elacno or
anybody else to say this,
but we as pork producers have mitigated
one of our most valuable molecules that
we've ever had
in the history of pork production and
don't have it at our avalance and that's
just a shame.
We did it from an altruistic
standpoint about wishing to be
competitive in a foreign market
specifically,
China. Even though that's
sustaining us right now because of their
production lows,
long term I think we're going to really
really regret
the lack of availability
of that of that product.
[MODERATOR COLIN JOHNSON]
And we started working on that in the
60's Eli Lilly did.
[SPEAKER JOE KERNS]
Yes he did.
[MODERATOR COLIN JOHNSON]
So we'll remind everyone we've got 
last week's
recording of the,
evaluating the hog supply agreement. we
had Tim Hughes from CIH. That recording
be coming out
shortly so stay patient. Get that posted
in the next week.
And Joe's recording tonight will be
available as well.
Hedging targets for
early 2021, what do you think?
[SPEAKER JOE KERNS]
I think we're kind of sitting there.
You've got these summer futures trading
up to 75.
Or so you've had a little bit of a bump
even in the current nearby stuff into
this 55.
I would be sloughing stuff off
depending upon your pricing mechanism
and again I'm a huge fan of the cutout
if you've got a basis contract this is a
no brainer.
In my opinion that you really
start to lay in at these levels.
I don't think that you wait in order to,
things might get better but we start
participating now.
If you are a medium or even large
producer getting up enough volume
might be difficult. Smaller producers
even
mid-size producers, if you want to put a
plan together
that says over the next week or so
here's my goal it's a very doable
item. In column one thing I didn't
talk about at least in this presentation,
is that I wrote about my national hog
farmer article.
Is that it certainly appears that we're
going to have a cut out contract that's
going to be available to us
very soon and i'm a huge fan of
that
for a myriad of reasons. I can
talk more than
than my allotted time about why I think
we're going there.
But we as a pork production community
have an opportunity to band together
to essentially eliminate the Iowa,
Southern Minnesota, western corn belt
as a marker market and move closer
to what the packer is receiving. It might
feel like you're dancing with the devil
just a little bit.
But I'll tell you you might want to
dance with the devil because your next
partner doesn't look any more attractive.
[MODERATOR COLIN JOHNSON]
Yeah, good point.
You didn't mention, excuse me, you didn't
mention Russia as a world supplier do you
think they will ever get there?
[SPEAKER JOE KERNS]
No. Now you've got you mean you've got
Russia that calls
themselves self-sufficient, simply
because they
mitigate their supply to meet,
you know their current populous by
disallowing
importation.
Russia from a supply point is probably
the greatest promise
that China is from a demand point that
will never occur
in our lifetimes here. I just don't
see it you know you know. If you,
and I've never physically been to Russia
but have talked to several that have.
The productivity of the land would
certainly lead you to believe that
they could be
you know , the Iowa, Illinois of
the eastern portion
of the world.
Yet the political structure and the
finance structure
probably never never see it coming into
fruition
in a way that strongly impacts
what we see. The ASF prevalence is
going to deny them
exports to the world. I just don't see
that one being
the biggest threat on the on the radar
right now.
[MODERATOR COLIN JOHNSON]
Yeah. Here's a question they were
probably
typing before you even answered this. But
you addressed this on Paylean. But it says
Rectopamine was discontinued to sell
variety means to Chinese.
Have we fooled ourselves? And you were
spot on with that Joe saying
we really keep ourselves out of that
product.
[SPEAKER JOE KERNS]
Yeah it really frustrates me.
Yeah you know this all started back in
2005
when the United States basically
punted a WTO dispute 
with Thailand if I'm
not mistaken.
And then China hopped on the back of
that and so
it's good for Thailand it's good for us
if you're not gonna fight it. We
in hindsight ,you know 15 years removed
should have bought that look pretty
awesome.
[MODERATOR COLIN JOHNSON]
When will we truly have a 
better outlook on
on the grain supply in the states?
[SPEAKER JOE KERNS]
Oh the September report
will start the first week of step and
it's actually an objective report that
you'll get folk USDA. Folk out in the
field
that'll come out the second week of
September I think that's going to give
us a really
good feel for
just how much corn has been lost.
Even if you take
all the Iowa acres. And take, oh we did
this in exercise in our office.
All the poor to very poor acres and put
them to zero,
push that back against Iowa yield. That comes out to about 180,
and when you push that against the
national yields it comes out to 178
bushels to the acre which is
you know half a bushel off of what I
gave you in a spreadsheet.
I don't think we're going to get any
worse than that.
I might change my mind after this
coming weekend.
I'm very confident that the
September report will catch
the downed corn specifically
that we've got in and kind of push that
back through the numbers
in order to let us give some
real numbers,
objective data to trade from. Not just oh
my god, that looks bad.
[MODERATOR COLIN JOHNSON]
Probably one final question here will a
cut out contract on the cme lead packers
to offer more cutout contracts?
[SPEAKER JOE KERNS]
Absolutely this is a great
question and and if we only give them
the option of
offering a cut out contract they've got
no place to run or hide.
Over the past several years whether
you've got a western corn belt or
someone's bid you on a cash market that
does not populate the
the market that you're priced off of.
Those have been techniques that have
been utilized. And if we start to
eliminate the ways that we can have
deviancy
within the pricing structure and only
put it against a cutout contract, it
absolutely
will satisfy what we need to do and I'm
a huge advocate
of running headstrong toward that. I
think as a producer you've got to take a
look as an
us against them type of mentality simply
because your backs against the wall.
We want to be Iowa nice all the time and
this is no time
to be Iowa nice. It's you, your future, the
future of your family farm
is resting upon this decision. And I do
not take that lightly.
[MODERATOR COLIN JOHNSON]
Yeah. Great perspective.
Appreciate all the insights tonight,
Joe. I want to thank you for taking your
time to do it.
Put some slides together. Again your
contact information is in front of folks.
Check it out quickly or feel free to
share the recording once it will be
posted to the Pork Industry Center
website.
Thank you to the Iowa pork producers
association for helping to
facilitate this and organize speakers
and the thought process going
into. We understand a lot of the needs
that are out there associated with just
a lot of constraints this year and going
forward as well. So,
thank you for taking everyone tonight stay
safe, God Bless.
[SPEAKER JOE KERNS]
Thank you have a good night.
 
