Bullish market drivers ahead?

Chris

Barron: 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! Welcome everybody to another episode of the Ag View Pitch, and today we're heading into a new week of marketing, and you've got Chris Barron and Dewayne Lowery here. Dewayne, we're sitting across the table from each other. We've got a little new technology in front of us. What do you think?

Duane

Lowery: Well, I think the microphone is interesting that I'm looking at. And I've been told I can't move my head left or right. So I have to be pretty much center.

Chris

Barron: Yeah, well, we're just trying to improve the quality of the podcast here and make it a little bit easier to listen to if guys are in the tractor, running around in the pickup or those kinds of things. So hopefully this helps. Hopefully. Yeah. So it'll make you sound a lot more intelligent probably too.

Duane

Lowery: As long as you're only talking about volume or something like that. And not— Content of the words, maybe.

Chris

Barron: Yeah, well, speaking of content, maybe we should kind of start working toward that. And so I guess what I would like to start out with today, as we think about the markets in the next week or two, weather is obviously probably one of those things that's kind of creeping back into the market. It looks like the forecast is bringing some heat back into the equation here now. So talk a little bit about what you're seeing with weather and does that have any impact on the market? Here in the next week or two, in your opinion?

Duane

Lowery: Well, I think weather's kind of been important here for a couple of weeks, but the marketplace in general hasn't seemed too willing to talk about it. You don't see it labeled as a reason we're up or down on a given day. We're not always able to attach a weather forecast to price action on a given day. But what I see here in weather is we've had an area of the Midwest, specifically Iowa, that's been dry for several weeks. And in the last 2 or 3 weeks, we've been seeing the size of this footprint that's suffering from precip well below normal. We've seen that size of that footprint expand, and it's been expanding into the, you know, everybody kind of notices it now type of stage. And this next week, we have some low mid-90 temperatures that are going to be moving through the Midwest.

And that might not be so bad if it was only a few days at other times of the year on a crop that's not stressed. But some— on some of these acres that is, let's face it, they're approaching the end of the growing season here. And this is going to be a finishing nail, I think, for the stuff that's been suffering the longest. And the driest spots, the lightest ground in certain fields, they're probably past the point where rain is going to really improve anything anyway. Um, so I think that with the temperatures this week, maybe it's going to kick up the level of interest in the dryness. But if you look at the moisture, there's some moisture opportunities like in Minnesota, along the northern part of the Midwest, and then as you go east and south precip opportunities improve, but pretty much most of this activity doesn't really develop until about Friday of this next week.

So we've still got more days where we're seeing crops under stress, hurting yield potential to some degree. I think beans have got to be included on this stress concern as well. We've probably got a lot of acres that, based on the calendar and the lack of moisture. Even if moisture arrives next week, that moisture is going to be beneficial for filling beans, and, and I think it'll be beneficial for the corn except for the driest of the corn. But it's too late on the calendar, I think, for the beans to put on new growth and talk about getting a new bean. So whatever potential is out there, we're just trying to salvage what's there, which might still be very good, but I'm just saying that we're late enough on the calendar that a lot of times weather doesn't really matter. But at the present time, I think we're still losing bushels.

Chris

Barron: So do you— do you— so how do you quantify that in the market? I mean, do you— let's say that we keep the— we crank the heat up and we keep, you know, the, the rain away. I mean, does the market, you know, on corn for example, throw another 10 cents, 15 cents in there? I mean, what, what kind of potential is there in your opinion there?

Duane

Lowery: Well, let's separate this in a few segments. Number one, the marketplace in general hasn't been too worried about weather. They haven't been too worried about yield. They've been under the mindset the crop was made, and then some have altered that viewpoint, but that, that was the viewpoint that the market had. We had the windstorm that went through, that was kind of an eye-opener to some, and so we had to shave some bushels off that. That bushel that needs to be reduced because of that event is wide-ranging. I don't know what it is as much as anybody else does, and most people probably have a better idea than I do, but I'm thinking it's 200 to 400 million bushels from that windstorm event by itself.

I've heard larger numbers, but I think it's difficult to pencil those larger numbers, numbers in, um, in terms of the, uh, the dryness though Um, I think you have a lot of people in the marketplace. I want to back up and tell a little story here. We had a period of time during the, the May-June time frame, maybe even back at the preseason time frame, where the marketplace anticipated good yields, plentiful supplies, massive carryout ranging from 3.5 to 4 billion bushels. And with that came a certain narrative, and that market got a lot of embrace of that narrative. And we also had the black swan of events of crude oil trading in negative territory, the ethanol industry going to 50% of capacity, all of that fed the narrative. But then on June 30th, we had an acreage reduction equivalent to about 900 million bushels. Few people altered their narrative.

They either talked about poor demand, still questioned the ethanol industry, or they just felt the crop was that robust. And even if it wasn't going to be 3.5 to 4 billion bushels, it was still going to be around 3 billion bushels. And so, uh, the trade was negative even after that. Then we got to the point where we had some dryness begin to develop. Again, the market didn't want to change that narrative. And I think what has happened, we've had this windstorm, which was kind of a, you know, jolted some people with their estimates. Yes. But we've also had this dryness issue develop. We've also had China step in and buy a sizable amount of US corn. And I think there's a very strong likelihood they got a lot more US corn yet to buy. So I think the demand side there looks pretty good. And so with the last USDA, they had yields projected in at 181.8.

That was over 5 bushels an acre better than the record. And when we— the year that we had the record, and there were two other years that were very close or similar in yields nationally, all of those years had strong finishes and/or a late extended growing season. This year we are experiencing something on the other side of that spectrum. Iowa in particular, northern third, northern half of Illinois also has experienced dryness. Even parts of Illinois that, you know, 2 weeks ago they didn't think dryness was an issue, they've started to talk about it. And they've got another few days to experience that yet. So I think that we should— I think the foundational factors have changed that this 181.8 is no longer a viable target. And I think that the— so I think we need to take our starting point back to a previous record.

So I want to take 5 or 6 bushels an acre off of that USDA figure that we just got here in August.

Chris

Barron: And I think that that'd be a pretty extreme—

Duane

Lowery: well, why is it extreme? It sounds extreme only because you're starting at 181.8.

Chris

Barron: Because I don't know, you think the USDA is going to come in that, that extreme? Would they come in that extreme in September, or you're thinking down the road?

Duane

Lowery: I don't know, but I know this about USDA. They're so confident in their numbers, they, they tell you in advance they're going to give you a new one every single month. So it can change. But my point is, it's not— why is it unreasonable or shocking to go back to what is record? A record is pretty significant. And so, uh, in fact, we had one year that during the season we were projected to have a new record. In the end, we didn't have a new record. So I think it's not unreasonable to take 5 or 6 bushels an acre off. That takes off about $500 million worth of production. And if you take that off of what USDA had for carryout, you're down to about $2.2 billion carryout.

Chris

Barron: Mm-hmm.

Duane

Lowery: That's not that oppressive. Uh, we've dealt with that before and we've dealt with that type of number before and had basis values firm throughout the year. Which surprised people, but, um, that's worth noting. If China comes in here to buy more, uh, and, and we get more business there, and I think that's very plausible, all of a sudden the marketplace might get to the point where it has to ponder a carryout of $2 billion or less. And if the marketplace gets to the point where it has to ponder that, whether that's real or not, the marketplace and the market participants have to change their positions. They've been short corn for a long time. Just in the last Commitment of Traders report that we had on, on Friday, the funds are still short corn, but now they're only short 110,000 contracts. That's down 62,000 from the previous week.

During the, the time frame of that reporting period, the corn market was up 18.25 cents. Since that report, uh, ending date, which would have been Tuesday, we're down 1.25 cents. So the market was up 18 cents on— probably a lot of that was short covering. So I think, uh, if the marketplace has to transform away from at one time 3.5 to 4 billion carryout, um, down to 2.8 to 3 billion carryout, because there's a lot of people think that the— we're still got a close to a $3 billion carryout. As the marketplace is forced to transform that thinking, that leads to price action that can, can produce a fair amount of strength. And so I think there's a real good chance that we have to— we will see the market's mindset change a lot here over the next several weeks. But I do admit I'm probably in the minority.

Chris

Barron: So that's a pretty bullish story. I mean, there's a lot of bullish to that, you know, from the yield standpoint, from the demand standpoint and everything you're throwing out there. Um, what about if we see this report and the yield doesn't change much because the numbers they're accumulating right now— if we're dry in 2 weeks from now and the data they're accumulating, and obviously they look at how dry it is and all that kind of stuff that they factor into this— if that doesn't change much I mean, where do you think we're at in terms of a harvest low? Did we already see it? So you're saying probably, you know, the downside here is pretty limited, or do we have, you know, some more downside potentially at some point?

Duane

Lowery: I think you asked me a question similar to that last week, and I made the comment that I—

Chris

Barron: I was trying to get an answer.

Duane

Lowery: I thought there was a good chance we were— that we might not— we might not have to make new harvest lows. I'll go farther this week and say, yeah, I think the harvest lows are in. I don't think we're going to go back towards contract lows in Dec corn at all. I don't think we're going to get anywhere close to it. I think that we have an adjustment the marketplace needs to digest, and we haven't done that yet.

Chris

Barron: Okay, so what about soybeans? Let's shift over to soybeans for a minute. You know, what was their number?

Duane

Lowery: 50 Or— oh, let's see, they had a national yield of 53.3, and, uh, I don't think that's that absurd. And even with the dryness that we have or whatever, I'm not sure that that yield isn't still attainable. And if it is shaved, maybe it's not shaved that much. So I don't have any axe to grind with their numbers. I don't even think USDA You know, I'm not— I'm— it's not fair to hold USDA even to their August number. Number one, you had the windstorm, right? Number two, things have gotten drier, notably. And I think they'll affect—

Chris

Barron: well, the windstorm by itself probably is going to take a bushel off of that anyway, or bushel and a half maybe.

Duane

Lowery: Um, probably, probably more than that. And, uh, um, so I think they'll make an adjustment. So I'm not going to, uh even hold USDA to their number right now. I'm sure that's a, that's a work in progress, and I'm sure, I'm sure that they're going to lower it. Now the question is, and the debate comes, how much are they going to lower it? But I think there's more to be done. Getting back to your beans though, we may not have to lower production very much on the beans. I, I don't have a strong opinion, but I'm going to start there. But I think the demand is still understated. In beans. I mean, China's been buying 10, 11 million tons of beans per month all year long, 7+ months. They've started to buy U.S. in fairly good size and quantity. And on the world stage, we are the main source for beans right now.

And their demand is impressive because it falls on the heel of swine fever, on the heels of the coronavirus, uh, issues they had to deal with. So you have to ask yourself, why are they making these purchases? Is it just to appease us on Phase 1? Highly unlikely. Is it due to production shortfall there? I have no idea, but it's not an unreasonable thing to ponder. I mean, shoot, they've been dealing with record flooding issues, and we don't know what their losses have been on the agricultural front. Uh, the stuff that's grown in the Northeast, they had periods of dryness that they had to contend with, and then you got all this record flooding. I can't help but think that hurt their production to some extent, but more importantly, they have been using corn at a pace that exceeds their production on an annual basis for an extended period of time.

I think, uh, even USDA numbers, which the China numbers are very uncertain, anyway, but even in USDA and not going any farther than that, they're, they're consuming 15 to 20 million tons of corn more per year than, than they're producing. So I think it's, uh, reasonable that the reason they're making these purchases because they need them, and their domestic price structure clearly indicates a problem on two fronts. Number one, the buyers have gobbled up everything offered from the state reserves through their auction process for several weeks. And keep in mind, there's always some of that stuff that nobody wants, either based on the quality of it or based on the location, but yet it's all gobbled up. The cash price in corn has been anywhere from $7 to $9 at different times, different parts of the country. So it's, it's clear that they have a need for imported corn.

It's clear that Phase 1 laid the groundwork for them to purchase a lot more U.S. corn because Phase 1, China agreed, and by every standard of measurement they have followed this, they have removed some of their hurdles for imports. So I think that that's only going to lead to an improvement of imports down the road. So I, I think there's a decent chance that both corn and soybean demand is probably understated in that in the USDA balance sheets.

Chris

Barron: Yeah, and, and they're probably not buying any more than they have to because they're not big fans of Trump anyway. So until after the election, that's going to be a tell after the election, I would think too, don't you think?

Duane

Lowery: If— well, I think the election is a defining moment. What exactly motivates them to purchase or not, I'm not, I'm not sure. But I'll play devil's advocate with you for a minute. Let's just say you're right. Let's say they don't like Trump and they don't want to import. Well, if their recent increase of imports of U.S. corn and beans is being done when they don't like Trump, what will it look like?

Chris

Barron: And that was my point.

Duane

Lowery: What's it going to look like after? And if that's true, if your logic is true, then I'm going to say, well, that means that their supply situation is that much worse.

Chris

Barron: Yeah, yeah, that was my point. I mean, is that, is that a practical consideration?

Duane

Lowery: I mean, if It's as practical as any thought is in this business, and I would say it's a very practical thought.

Chris

Barron: Yeah, I mean, that's, that's something we're going to find out probably a couple months after the election and see, see kind of what the purchases look like at that point and the actual deliveries and the follow-through.

Duane

Lowery: Yeah, I think it's interesting the point you said we might find out after harvest, which probably— or after election. That's probably all true, but I wonder if we're not seeing some signs of something changing in the mindset of the large commercials here. Basis values have been firm again. New crop basis values have begun to improve in some locations. I wonder if that's a statement about export program. I wonder if it's a statement about supply not being quite as large as we anticipated. And I also wondered if it's not a reaction of a cash market that may have gotten too short along the way Maybe people were too aggressive selling basis anticipating wide basis at harvest, and now we may find out it's something less.

Chris

Barron: So you also wonder how much supply we had along the way because you, you know, where this derecho went through and all these facilities that are gone, there wasn't any corn in any of these bins.

Duane

Lowery: Well, there's been—

Chris

Barron: how is that compared to every place else? If the wind would have went through the entire country, I mean, that, that should just be a cross-section, I would think. And, and very few of those bins had any corn in them.

Duane

Lowery: Well, I think it's very revealing, and I think that it's interesting, but on the heels— that falls on the heels of in the last 18 months, there's been a lot of conversations about questioning whether our supplies are as large as we think, or is it possible that the U.S. balance sheets aren't quite exactly right because cash markets have been telling us story that doesn't seem to line up.

Chris

Barron: Basis has been telling, telling that story.

Duane

Lowery: So there's a lot of entities in the commercial trade that have a lot of doubts, and, and they really do wonder that.

Chris

Barron: So having said that, um, as we move into this, you know, and through this next week or two working towards the report, what, what's your— what do you think we're gonna— what might we see?

Duane

Lowery: Well, you're talking about the September USDA report?

Chris

Barron: Well, yeah, I mean, I'm, I'm not asking the report, I'm just saying, you know, and I'm going to be a broken record, I guess, is I'll get to here. I'm wondering, as a producer, if we've got bushels that still yet have to be sold before the combines roll, do we sit here and wait and not price those bushels, those, those bushels of quote-unquote overrun that don't fit in storage that are not yet priced, or do we, you know, wait and, and see?

Duane

Lowery: I think you wait and see. I don't think the prices right now offer you opportunities. If you happen to be contemplating whether you're going to get an insurance check or not, that's a— that's a—

Chris

Barron: what about, what about small rallies? So like last week on Tuesday, we had that bump in the market, you know. Do you, do you plug a little bit in each time you see a little bump in the market along the way, or do you still sit on your hands and wait till you actually physically have to deliver?

Duane

Lowery: I don't know if you'll have to wait till you actually have to physically deliver, but for the time being, I think you sit on your hands. I'm describing a scenario here where I think the marketplace is, is out of step. They're still telling— there's a lot of analysts and producers and market watchers that are still talking the same talk that they did in May, there's an April and, and June. And I think the world has changed. Number one, um, the ethanol industry is not running at 50% capacity, it's at 90% plus. We, uh, have actually seen China purchases of U.S. corn in size, as opposed to pondering whether they might occur. We have seen a drought impact the US's number one producing state, and we are still seeing it impacted. And we've seen the size of the footprint of areas that are suffering from moisture and seeing crop stress expand. We had a major windstorm go through.

We don't know what that is, but we had, we have that to contend with. So I think things are changing. I think that the spreads are indicating something also. Spreads between Dec of '20 and Dec of '21, or even just within the same crop year of Dec '20 versus July '21, they're on the wider areas that we were at all summer. But we've moved a few cents now off of those levels. And it looks to me the market acts like those spreads are going to move some more. And those tend not to happen, especially going into harvest, and they tend not to happen unless, you know, there's a notable change in the overall situation. And that's really what I'm trying to paint a picture of.

Chris

Barron: Okay, last broken record question, uh, number 2, I guess, is as far as, uh, storage, do we put the corn in the bin or the beans in the bin when the combines start rolling? Because with that finite amount of storage, again, I asked that question last week, but I'm going to ask it again. Is there any changes in, in the philosophy there? And I know it's going to be different. We probably should just do a podcast specific to the damaged areas because their storage and their situation is quite a bit different. But generally speaking, you know, what do we what do we use that bin space for?

Duane

Lowery: Well, if you were to look at— you can judge that in multiple different ways, but let's start with the futures market. The futures in beans don't have a lot of carry. Now, that by itself doesn't mean that it won't pay to store, because it's not uncommon for the bean market to go to an inverse. And July soybeans are basically the place that new crop South American supplies are hedged. So it's almost like a new crop. It's almost like it's a different crop here. So that's a little bit different animal. But the corn, that December spread between Dec '20 and July of '21 has been as wide as about 27.5 here in the last few weeks. And it's more into that 24, 25 range right now. If I were making a decision right now, I would plan on storing corn and I would plan on hedging in July futures at some point, not yet, but at some point, and I'd try to capture that carry.

The problem is that spread— let's say the spread's at 25 cents right now. If something causes the market to strengthen because of a concern about supply, whether this is, uh, just Duane's dream or whether it turns into something the marketplace sees as a reality, that spread will tighten and that 20, 25 cents a carry will maybe not completely go away, but it'll shrink significantly. And basis values would firm after the harvest is done and things of this nature. And so if you're a producer and you've got bushels of farm storage that you plan or would like to put corn in it, and you're looking at this 25 cents carry, um, you need to do something to lock in that carry. And you only can lock in that carry one of two ways.

You're either going to sell July futures which basically establishes a price on your corn, but you will wait till the spreads narrow or till basis improves or both, and then you'll move the physical corn. And that's how you benefit by putting in storage. Or if you don't want to sell the July corn, then the only other way you're going to lock in that carry is you're going to have to put on a future spread where you're going to buy Dec, sell July, and then as harvest rolls along if that spread— let's say, to exaggerate to get the point, let's say the spread went to even money, so there was no carry. Well, you would have lost all that carry in your cash market, so it won't— may not pay to store your corn. So then you didn't get any storage space revenue out of it, but you— if you put the spread on, you'd have made it in the spread.

On the other hand, if the spread widens to, say, $35, which is not likely, but let's— for to say so. If it widened to 35, you'd lose, you know, 8 to 10 cents on your future spread that you had put on, but the cash market would still have the benefit of this 35-cent carry. So it would— wouldn't pay you to put it into storage. So based on current spreads, I think storing corn is probably the only logical answer I can give you at the present time. But I'm just warning that there's a possibility that the storage calculation and the storage is built into your bids now— or not storage, uh, the carry that's built into your bids now. I'm concerned that that's going to shrink as, as we get into harvest and as we go through harvest, which is a little bit abnormal for that to happen until later, but I'm suspicious it's going to start sooner.

In the case of beans, I think that all the things that you're looking at with your cash bids. It probably, um, also there's incentive to store the beans, but if you have to pick right now, corn, corn, I'm probably going to store the corn. But I'm hoping that the beans will— maybe we could get a period here where we might get a little bit better bean basis. Or what I'm really hoping for, I'm hoping November futures are able to get to somewhere $9.40 and higher. And from that point on, then I think you start selling beans and you don't really care what the basis is as much unless you're storing it for yourself on the farm. And then you, then you probably go sell some July deferred.

Chris

Barron: You see that strength in beans though, that's going to probably indicate some strength on the corn side too though.

Duane

Lowery: Well, maybe not necessarily, but yeah, I hear your logic. But the point about if we get beans to that level a lot of operations are able to have a profitable year with those kind of cash prices that will emanate from that, especially if they happen to have some, you know, better than normal yields.

Chris

Barron: That's exactly how I would wrap up this conversation is that, you know, every farm is so individually unique and some of the operations are going to be in the black on beans significantly faster than they're going to be in the black on corn. And if we can get some price strength later on in the year on the corn side of things, um, you know, maybe we can get to some profitable levels on the corn. But guys are, at least from what we're seeing with Profit Manager anyway, guys are getting to profitable levels a lot faster on the soybean side, especially if that yield number can stay up there. And the way these yields look like they may come in, it's a big deal. But hey, this has been a good conversation. I want to ask if there's anything I haven't asked or anything you want to wrap up here, and we'll kind of put a bow on it here.

Duane

Lowery: I want to follow up on the last comments you made. There's a lot of wisdom in what you said there. 2020 has been quite a unique year, and that follows on the heels of 2019, which was its own strangely disastrous year. And if you're able to come through 2020, all the black swans that we had to deal with, you know, it used to be a year ago you talk about black swans, people would have had to to Google it to find out what a black swan was. Now you don't have to look at like 5 in one year. Yeah. Now we don't, don't look it up on Google. We just look up in the sky and we see a flock of them, you know? Yeah. So after experiencing all that, if you're able to take your soybean production and over the next few weeks, maybe we get a boost for whatever reasons, I think a guy is going to have to be willing to take those values, lock that profit in.

Take the carry that's built into the corn market and maybe hope that you got better opportunities ahead. And I'm a little suspicious that the corn market is going to do better than people expect here over the next 30 or 75 days, and you might get some of these selling opportunities quicker than you think. But I think that if we step back, and, and between government payments, maybe your own operation, you had had good yields. And, and, uh, if, if you can make 2020 work, um, I think that you're— that's not something you're going to want to pass over lightly in hopes that something is happening, you know, in April or May of next year, you know what I mean?

Chris

Barron: Yep. Hey, Dwayne, I think this was a good conversation. You did a good job speaking into the mic. You kept the right distance, and, and even with the halter on to keep you from getting too far away, you weren't bucking or anything. So that was good.

Duane

Lowery: Well, that's— it took a halter.

Chris

Barron: Yeah. So hey, thanks a lot for all your wisdom today, and I hope you're right on some of the bullish outlook there. And I think there's some hope here for a lot of us, and our hearts and prayers are still with all of the people in the wind area. Area. And I know if anybody is interested in helping people, Cedar Rapids, Iowa is still in need of a lot of assistance yet. So I know there's different places on Farm Bureau and some other places on the web where you can go and donate to Cedar Rapids. There was a lot of people misplaced, some homes severely damaged and not livable in, and the same thing with some apartment buildings. I know We've been down there a few of the different days, Alyssa has, and there's a lot of people living in tents and it's just total devastation and unbelievable.

So if you can check that out and if anybody can do anything to assist those people, that's always greatly appreciated. But again, Duane, thanks for the conversation today.

Duane

Lowery: All right. Thank you, Chris.

Chris

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