Big impact report: what does it mean?

Narrator: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and it is report day today, and we've got Dwayne Lowery and myself here and want to have a little conversation about what this report said and what it might mean for moving forward here with the market. So, Duane, go ahead and kind of give us a little outline of what's coming out of this report.

Duane

Lowery: Well, let's start with the corn. The corn has some disappointing elements if you want the price to go up, but I'm not sure that they're long-lasting disappointing elements. Um, USDA left the yield, uh, pretty much unchanged at, uh, 168.4. That was, uh, compared to 168.2 last month. And, uh, but it's above what the trade estimated at 166.8. Production, they, uh, came in at 13.779. That's only 20 million less. Than last month. The carryout was projected to be at 1.929. That's only down about $160 million— excuse me, that's down about $260 million from last month. I think the trade was looking for something closer to around 1.7, so we're like $230 million above trade estimates. That's a certain element of disappointment. If you break down into the, the table from USDA, they minimally lowered the planted acres by 100,000. They lowered harvested acres by a couple hundred thousand.

That's not statistically significant, but it's a nice little tipping of the hand. The yield, like I said, was 168.4 versus 168.2 last month. The beginning stocks were dropped to 300 million, and we knew that from the stocks report last week. By the time you get through ethanol usage, which they dropped 50 million, and they dropped exports another 150 million, and I'll make a prediction, that's the lowest you're going to see for the next marketing year of any month we get from USDA in terms of their corn export projections. The feed usage for corn, they actually went up 125 million to 5.3 billion. All that ended up with a carryout of the 1.929. The average farm price they pegged at $3.80, which is up 20 cents from last month. I thought that was a little interesting.

And I want to, I guess what I want to say about the corn, we're getting, we got a negative reaction from the marketplace after this report came out. And I think that negative reaction is based on disappointment versus expectations, which expected these numbers to be more positive. But I want to look at this and say USDA largely punted on the yield estimates. Just to give perspective, in Monday's Crop Progress Report, corn harvest was 15% nationally, and your key production states were less than that. And if you looked at bean harvest, that we were 14% national and key production states were less than that, I think an argument can be made that USDA did not make any significant adjustment on yield. And it had more to do with the fact that maybe they didn't have enough data considering the lateness of the harvest and the lack of harvest activity in key production states.

So I think the, the argument could very well be that We have yet to have USDA really fully weigh in on what this harvest yield time estimates are going to be. So I think that if we react to the report and the negative price reaction, I think it's important that we put it in perspective, that it's a disappointment in, in compared to expectations. It's not necessarily something that's all that negative from a raw data perspective.

Chris

Barron: So do you think, you know, there's an initial negative response? Do you think, you know, we can, can get that back and this is a flash in the pan on, on corn specifically?

Duane

Lowery: Yes, I think that's a fair statement. I also think it's a fair statement to say this is not going to be the beginning of a trending lower period on corn.

Chris

Barron: Is it a buying opportunity then?

Duane

Lowery: It might be. I think, and I'll talk about it more when we get to beans, I think from a speculative standpoint there's a stronger case to maybe want to be more bullish beans than there is corn. But looking at corn individually, it might very well be a buying opportunity. And if we move the calendar ahead 4 or 5 days and we've maintained something in that $3.75 or area as the bottom side on Dec corn, then I would say that it's with a little bit more confidence that it's a buying opportunity. But I don't expect prices to fall very much. And I'm going to give you a, that's based on probably somewhat of a technical opinion, but also I'm going to give it to you from a fundamental perspective. We're going to have a long drawn-out harvest.

We have cash basis that is still much above historical norms, seasonal norms, and cash buyers have a mindset that they need to buy corn whenever they get an offer because they don't think they're going to be able to buy much through the harvest season. I think that's driven by an understanding that storage space is not really a problem. I think it's driven by the idea that, um, most farmers are looking at yields that are less than last year. We can argue about how much, but most of them are less, in some cases by a decent amount. And the prices that we're given right now just don't seem attractive enough for the producer's operation on a net profit return that makes him super anxious to sell at harvest time.

And so, you know, nothing in today's report is going to cause a farmer to go out and say, well, I didn't want to sell it yesterday or, or at 10:45 this morning, but now that it's, you know, 13 cents lower, I want to go sell it. I don't think that's going to happen. You know, we do have seasonal weight of harvest. Eventually harvest will expand. Basis might try to weaken from the lofty levels we have right now. But it's going to be drawn out enough that I think it's still going to be very difficult to have the cash market break very much. And so I think the market will be well supported. I also think that the speculator has not, does not have, has not had a large long position in the corn market. And so therefore, I don't think you have the liquid threat of a multi-day liquidation period. And I think that the large specs have been short corn.

With some signs that they're looking to get out of shorts in general. They've significantly covered bean shorts, they're probably going to get long beans, they've covered some corn shorts. I don't think anything about this environment makes them want to go add to corn shorts, so I don't see the downside energy on weakness here really building much momentum.

Chris

Barron: Okay, so, um, you talked— you mentioned basis there. The short-term negative reaction on the flat price side of things is probably a good thing for basis to be better and strengthened. But what do you think? I mean, if you do— I mean, do you really think basis is going to continue? I mean, we've heard and we've seen locally about continued basis improvement. I mean, do you think— what's your thought there?

Duane

Lowery: Well, I don't know how much more it will improve from the spot bid, and eventually that spot bid will soften for a period of time as we expand into corn harvest. But it's still a situation, we're not going back to a normal level of basis. We're going to stay with the firm elevated basis levels versus normal. And once the crop is put away, whatever weakness we did have, it's probably going to come back again. And so I think that firm basis tone is probably here to stay. And the one possible exception for that will be some sort of an aggressive futures market that takes you to $4.20 and above Dec corn. And with the market down, you know, 13, 14 cents today, now all of a sudden that's 40 cents away. It still could happen. But, you know, right now that's about the only way I see basis falling very hard.

The other thing I wanted to point out about the corn market, we're all going to be disappointed that corn was 13 or 14 cents lower today, and I get that. It's understandable. But it's important to put in perspective that December corn had a 44-cent rally from the early days of September to right now. And that 44-cent rally didn't actually peak until earlier, or actually yesterday is when that peaked. So if we're down 13 or 14 cents today, That's basically the first real correction we've had. And we haven't had a correction bigger than that, I don't think, since early September. So on a $0.44 run, if you give back $0.14 or shoot, you could give back $0.20, $0.22. That's only a 50% retracement. I'm guessing the market has a very difficult time getting that type of retracement. And so the market overall is healthy. It's performed well. We get a correction reaction to the report.

I'm not sure it's a long-lasting one.

Chris

Barron: Okay. What about soybeans, um, you know, on the report? And where do you, where do you see things going here on the soybean side of the equation?

Duane

Lowery: Well, again, USDA did not alter the soybean numbers very much in terms of production or yield. Their production was 3.550 billion. That's 21 million below the average guess. And it's down about 83 million from last month. They did lower yields by 1 bushel an acre. I don't know this for a fact, obviously, but I'm suspicious that that bushel an acre is more a reflection of the adjustment they made in last year's yield numbers in the stocks report last week, on that day of that stocks report last week. And I think that's what this is. So if you happen to be somebody that feels national soybean acre or national soybean yields need to be lowered, I would say you should be confidently looking forward to November and thinking that adjustment is still yet to come.

I still am under the opinion that with harvest progress less than 15% nationally, less than, even less than that in the key production states, that USDA didn't have enough data to make a strong statement about changing '19 yields. If that is true and you go back to what the yield trends have been, we might still be set up for a notable correction or lowering of national yield in beans here.

Chris

Barron: And also corn.

Duane

Lowery: And possibly also in corn, correct. And so that still might be ahead. And I think that storyline might build a little traction over the next few to several days as people kind of think through these numbers. So the, the yield, well, like I said, was down about a bushel. The harvested acres, they lowered slightly as well, I think 300,000, and I thought that was interesting. I think some people had thought they might eventually raise those up a little bit, so I thought that was a supportive feature. The crush, they raised 5 million bushels, so largely unchanged. They left the exports unchanged, which by the way is already on the low side. And with China active buying beans recently, I still contend that they're buying them not as some goodwill gesture, they're buying because they need them. And if that was not the case, they would be buying a different origin.

So I think the, the bean demand balance sheet has got the worst demand we're going to get. I think from here forward we're going to get better demand numbers. And then when you threw all this together, they end up with ending stocks at 460 million, and that's down from September, which was pegged at 640. And the trade had expected ending stocks to be at 510, and we come out 460. So we're 500 million less on ending stocks. That's 10% less than they expected. And, you know, to put that in context, it's important to realize we spent an entire year with a billion bushel carryout number and we spent virtually the, almost the entire year expecting that this year that we're entering now to have another billion for that marketing year or maybe higher. So this is still, you're saying that I also want to say, go back and put this in perspective.

The beans had from early September till just moments before the report, they were on an 80-cent rally. And if a speculator was looking to buy beans on a break in some comfortable, confident, deeper correction that he could feel good about, he never got it, he never got those beans bought. And so minutes before today's report we're on an 80-cent rally and then minutes after the report we're still on that same rally, we made a new high. And we haven't had a deep correction. So, you know, is there anything in today's reports that's going to cause the marketplace to say, well, this is a flash in the pan and whatever strength we had in beans, it's not going to last and this is it, it's all over, we're going to focus on harvest pressure. I don't think that's the case. I think the other side is there's actually some foundational things that have been happening in beans over the last few weeks.

And I think it's been, You've seen the large specs cover shorts in a fairly aggressive manner, and that's something they did not do throughout the summer growing season. And here it is, harvest time, and they're, I'm sure by now, out of shorts and probably going to build into a long position. So the bean market looks pretty good. The other thing I would like to summarize a little bit before we get into a discussion, Chris, is the fact that I want to draw emphasis to the idea that I don't think USDA addressed yields in this report because of the, the amount of harvest that's done. If that is still to come and we see corn and bean yields both lowered, and we already got bean carryout down to 460, it remains very possible, plausible, if not, I would say, argue likely that sometime between now and next spring we're going to have an acreage battle discussion.

Rather than being where we thought we were, say, 60 days ago, where everybody was going to plant wall-to-wall corn and people worried about 95 million or 100 million or whatever number you wanted to throw out there for corn acres, that narrative is changing. And as the price adjustments unfold here where beans gain on corn in some way or fashion, we can't have either of those yields drop very much in '19. And then still avoid an acreage battle. If we get the acreage battle discussion, that's really friendly beans because many Midwest farmer calculations over the last year have probably, you know, and every operation is different, but just lumping it together, there's probably $50 an acre more profit growing corn than growing beans if people just use some benchmark numbers.

And well, that $50 an acre, that's approximately $1 a bushel beans have to go just to get themselves back to even even if you get a battle of acreage going on where corn happens to rally, and I don't care that corn is 13 or 14 cents lower a day, that can all change in a month, in a couple weeks. But if you get 20 cents onto corn, that's another $40 an acre, which is another 80 cents that beans have to rally. So it doesn't take much strengthening in corn that if there is an acreage battle storyline to go with it, all of a sudden we've just talked about $1.80 that needs to go up in beans just to make all this work and turn into an acreage battle. That may sound absurd, but it, it really isn't that absurd, really.

Chris

Barron: Another component to that though, too, possibly, Dwayne, isn't it that if the corn yield doesn't drop as much as the bean yield does either, right, on, on this current harvest? So say we see beans take a couple more bushel off, corn stay the same, that's going to bring that ratio a little closer together too, correct?

Duane

Lowery: I mean, we— it is possible you could have that acreage battle discussion come from a different starting point in terms of where that ratio is at now, and it could— that could occur because corn market is weak. But I'll still make the argument that even in today's report, USDA raised their farmer average price by 20 cents, and I think within that is wrapped a message that the corn market is not that bearish.

Chris

Barron: But this year that 20 cents is going to be eaten up by drying costs. Correct.

Duane

Lowery: But we're also getting some better basis than we thought we had.

Chris

Barron: Yeah, we are.

Duane

Lowery: And so I think there's a lot of story ahead of us. And I think that, you know, I'm sure people are disappointed with the corn price reaction to today's report. But I don't think this is the same type of report reaction that we got with June with the acreage numbers. It's not going to be the same type of reaction we got with the August report. This will be a, a less deep correction. It'll be less lasting period of a reaction to it. And so I'm not that troubled by this because we just had a nice rally from early September, and this is really our first noticeable correction. And we can linger in this corrective mode into the early days of next week, but I'm guessing that we're not going to build a lot of downside momentum to this.

Chris

Barron: I've always called these reports like this one a typical flash in the pan, where you have your, your, your standard fundamentals and technicals that are moving the market in one direction or another. This happens, it's a 2-3 day reaction, and then we get back to quote unquote the regular narratives of harvest and yield and the demand story that you love to talk about so much and that kind of stuff.

Duane

Lowery: I agree with that. And on a foundational level, we still have a firm basis tone. And I'll guarantee you that as much as the farmer doesn't like this market being down after this report, the cash buyer hates it even more.

Chris

Barron: Oh yeah, exactly.

Duane

Lowery: Because he's not going to buy any corn here. And he, now he's wondering how much more am I going to push? Am I just going to keep this spot bid and just extend it week by week until I finally get some corn to move? But they're concerned that they're going to really struggle to get anywhere close to their normal—

Chris

Barron: Well, short term, this is going to give us even more basis opportunity because a lot of people aren't going to want to sell on a, you know, 14, 15 cent down market or whatever we end up with the next day or two. Lower, that is, like I said, the buyers don't want to see that, but it's going to give some of these farmers that are able to get out and get some corn out some opportunities for basis.

Duane

Lowery: I agree with that. But it is also true that after the, what rains move through the Midwest here in the next 48 hours, it looks like we got a little bit better window and eventually, eventually harvest expands and then more farmers get going on corn and then there's contracted bushels that has to come.

Chris

Barron: It's going to be a slow process though, like you've said, because of the moisture and because of a lot of other issues. You know, there's some areas where it's— where harvest isn't going to be as delayed, but you know, there's a lot of pockets where it's pretty wet. And not only is the grain wet, but the ground is wet, you know.

Duane

Lowery: And, and I've been hesitant to get too excited about locking in basis, um, because I, I feel that this firm tone is something that we're probably going to have through the winter period with only a temporary disruption during harvest. But if you happen to be a producer and you can harvest corn or you are harvesting corn now and you have some, you know, good spot bids or you can get them to push some additional or give you some forward contracts—

Chris

Barron: or you have some hedge that arrives there or you have something hedged on the board—

Duane

Lowery: you know, there is an opportunity here that you might want to lock in some of that basis on those kind of bushels before you get a little bit of a downturn in basis from expansion of harvest. But looking at it from a bigger picture, I think we're going to continue to have a firm basis tone and whatever weakness we get during gut slot harvest, and there will be some, it'll probably be only temporary. So that's kind of how I see the reports. Even the beans, again, You know, we're on an 80-cent rally. We've not had anything deep for corrections. People that wanted to buy beans could never get a deep enough correction to feel good about it. And so now we get a report out that I would argue is foundationally constructive.

And I think that if we get any type of corrective activity just because the report's behind us and maybe some will be disappointed that the market didn't maintain its initial post-report reaction, of strength. But again, put it in perspective. You had an 80-cent rally without much of a correction, and now you get some weakness after the report comes out. So what if that lingers for some days going into early next week? Overall, this is a constructive pattern. Overall, the balance sheet is moving in the right direction. We got China buying, which 30 days ago people didn't think was going to happen. We— you can continue to find stories about China being aggressive in doing things to shore up their pork production industry and they are determined they're going to get that done. So there's a lot of constructive things that should keep any weakness to a relative minimum here.

So I think that to the extent people are disappointed in today's reporter price reaction, put it in perspective and I think this is not going to be long long-lasting period of weakness.

Chris

Barron: Great. Well, I think this has been a good conversation. Any final questions I didn't ask, and we'll get this wrapped up, that you can think of?

Duane

Lowery: No, not that I can— not that I can think of. The last thing I'd want to say, whether the market is on a down market or it's on an up market, yield variability is very wide across the Midwest, probably wide even within the footprint of your own region. Okay. So whether you're listening to Chris and I talk about price levels or somebody else, or you read an article about it, or you hear a neighbor talk about a price, your marketing decisions need to be based on your own numbers. You know, what's your— what's the basis you can get in your region? What's the yield look like on your operation, your costs? You got to make those decisions based on your own. If you base a decision because somebody thinks futures going to a certain level or a certain level is a great price. How does anybody know that? Basis levels are too different from one location to the next.

Yields are so different from one farm to the next within the same location. Don't get caught into a trap of missing sales opportunities that are given to you either by basis or spreads or futures or whatever, or maybe a combination of yield. You had a good yield, you know, Make sure you run through the calculations and focus only on your own operation.

Chris

Barron: Sometimes trying to get that extra 2 or 3 cents can cost you 20 cents.

Duane

Lowery: Or make you wait a long time again.

Chris

Barron: Yeah, to get back to that level. So, well, hey Dwayne, thanks a lot for the conversation. I appreciate your final comments there too, 'cause that echoes the Ag View Solutions motto of run your business based on your own numbers. And I think that's really a, key thing. And so, um, we'll be back on Sunday again with a market update and outlook for the new week. And unless something wild and crazy happens, uh, then the very end of this week. So thanks a lot, Dwayne. Appreciate it.

Duane

Lowery: Thanks, Chris.

Chris

Barron: You bet. And thanks everybody for listening. And we will catch you again next time on the Ag View Pitch.

Narrator: Thanks for joining us on today's episode of the Ag View Pitch. As always, you can reach out to us at cbarron@agviewsolutions.com or duanel@netins.net. We'll catch you next time on the Egg View Pitch.