Hot and dry: Effects on corn and beans

Chris

Barron: Welcome everybody to the Ag View Pitch. You've got Chris Barron and Dwayne Lowery, and we're here on Late Sunday afternoon and going to talk a little bit here about how the market's going through the evening and into Monday and anything we want to talk about for the week. How's things going, Dwayne, and what are you seeing out there?

Duane

Lowery: Well, there's going to be, uh, interesting expectations here for Sunday night and the week ahead in general. Um, we have, uh, the, uh, USDA report coming out the 11th. And that's going to be the, the next, you know, big fundamental report to look at. I've seen mixed comments about expectations. So I'm just going to say that the expectations are pretty wide ranging, depending on what type of acreage data you want to use. And so there's a lot of different thoughts there. But I think before we even get to that, I think it's going to be kind of interesting to see how we perform early this week. The competing forces you have, weather forecast today for, you know, the longer range forecast, let's just say day 5 and forward, is much warmer than what the forecast has been, and it's also the driest forecast we've had in, in weeks.

And you have some, and some of this base is based on location, and some of it is based on just how —people want to analyze the market. But you have some places that will welcome the dryness, they'll welcome the heat. You have people that will say that this is all favorable to crop development, and I would say that to a large extent that, that is correct. You also have areas that have been saturated with water, and stuff was— field work was done in, in poor conditions, and a sudden change to dryness creates a soil environment that can get very hard and a root structure that can quickly run short of moisture, lot quicker than you would think given the, the amount of rain that has occurred on that field.

And so we're walking a fine line between whether the market is going to look at warmer, drier weather and say that is beneficial or we're going to, to be concerned it's going to linger, stick around too long and end up being detrimental, therefore being bullish. And I think you're going to find people tonight on both sides of that conversation trying to figure out how it's going to pan out. So I might want to come back to that a little bit. But first, I want to talk a little bit about what's going on in some of these intermarket spreads. And in some respect, I think it kind of leads into this discussion. It's interesting to point out that since the report from USDA, the initial first-day reaction, beans were friendly, corn was negative. But ever since that time, beans have been losing to corn. And I think a lot of that's been tech-related, and not necessarily fundamentally driven.

But you now have soybeans versus corn at some of the cheapest levels it's been since 2007. You have Kansas City wheat versus corn, the cheapest it's been, probably at least in the last 40 years and maybe ever. You have Kansas City cheaper relationship to Chicago that's been in probably 40 years and not by a small amount, by, by quite a notable amount. And so all of this stuff is starting to give the look that if I take off the, the agriculture hat and the farm background hat, and I just put on a trader hat, I look at what's going on in these intermarket spreads. And that makes me want to focus all my attention and being long either Kansas City wheat or long soybeans and not so much being long corn.

And when I look at the weather forecast, I'm not so sure that if there's a bearish argument to the short-term or the nearby forecast that calls for warmer temps and drier conditions, if there's a bearish element to that, it's probably going to be expressed mostly in the corn market. And if there's a bullish element to that, traders will probably most likely want to put that focus on the bean market. So after the bean market has lost 40 cents to corn here in the last several days. I wouldn't be surprised we've got a situation tonight where we're going to see the spec community want to come in and look to buy beans. I'm not sure if that will be the case in, in corn or not. So there's a lot of different things to look at here.

But I think that when I look at these intermarket spread relationships, and I look at the weather forecast, And some people will be quick to say, well, gee, we just got done trading wet weather, how can we be trading a drought already? I get that. But I think most farmers out there will also admit that if they get dryness and they get some heat, there— most people are going to think that their root structure, their plants and their soil are going to create a negative-looking response to their crop a lot quicker this year and under these conditions than they have in other years. So I think the marketplace is going to be, you know, quick to respond to some of these warm, dry forecasts on fears that they're going to stick around too long. And I'm not sure if that will play out in tonight's trade. But I do expect it to play out very quickly.

Some people will look for crop— weekly crop ratings to improve slightly. So that might cause some people to, to wait and not want to buy until they see Monday afternoon's reports. But it looks to me like the market's going to be pretty well supported early this week. And I think the warmer, dry forecast is going to be the spin given to it, whether that's right or it's wrong. I sense that's where we're at.

Chris

Barron: By responding quickly, what do you mean? I mean, do you mean like in the next week if we, let's say, and let me throw you an example. Let's say we are, we turn drier next week and then the following week the forecast is hotter, a little warmer than normal, but mainly just without rain. I mean, I don't think we got to get that hot. You're saying we could have a pretty good response. How much of a response? Good question.

Duane

Lowery: Well, I don't even think the marketplace would be willing to wait a week. In other words, I don't think the market is going to look at a warmer, drier forecast and say, well, this is beneficial to crop. They might look at it that way for a day or two. But I don't think they'll look at it that way for a week. If you have a week of forecasts where you have a dry forecast from days 5 on out, and right now you've kind of got a dry forecast from day 5 all the way out to day, you know, 14 or 15. And if that kind of extends that way, I don't see the market willing to look at this for a week and say this is beneficial to the crop. And we're not at all worried about it staying hot and dry or, or developing into a new pattern. I don't think that's how it'll wait anywhere near that long.

I think we're looking at a very quick transition from this being beneficial to the crop to this being a concern that it might linger too long. So I don't think you're gonna—

Chris

Barron: So they're more calendar-focused than they are crop-progress-focused though, then because You know, we're what, 3 weeks behind, generally speaking, maybe 4 weeks behind on pollination. I mean, we're not going to see a lot of stuff tasseling for the next couple of weeks yet in the vast majority. I mean, I know there's some pockets now that are getting closer that will be in the next week or so, or maybe even starting now, but the vast majority, we're running what, 3 weeks, 3 to 4 weeks behind. So typically, you know, we say, July makes corn and August makes soybeans, where now we're going to be saying August makes corn and September will make soybeans, right? So are they looking— they're not looking at the calendar, they're looking at the crop progress or vice versa?

Duane

Lowery: Well, I'd like to give them enough credit to say they're looking at crop conditions, but I'm not sure I can give them— give the marketplace enough credit for that at all. I'm not even sure if I get— I've got confidence in their ability to look at a calendar. I only have— I'm looking at it from the standpoint, this is something new and different. It's the bright, shiny ball. You know, it's like, it's something new to focus on.

Chris

Barron: Something to trade that's different.

Duane

Lowery: Yes. Yes. And I think that's what— I think it's just that simple. I don't think it's anything deeper than that.

Chris

Barron: And so as producers, we probably are looking at it too deep and the marketplace is just looking at the surface.

Duane

Lowery: Well, I'm not saying you're looking— the producers looking at it too deep. I think they're probably looking at things fairly realistically. I just think that that they need to be aware that the marketplace may be looking at things somewhat differently. And I'm not saying that the farmer has to change how they look at it, they just need to be aware that the marketplace is looking at other things. And I think that if the— if you had 100 traders out here, and you just suddenly dropped them in a room and said, hey, the forecast is turning hot and dry, and we're not sure how long this is going to continue, and ask them, to immediately give you an answer. What are you going to buy? You're going to buy corn or beans? I think a large percentage of them are going to run and buy beans.

And that's just based on, on the fact that, you know, somebody mentioned hot and dry in the same sentence. Okay. But when you take into account what the market has done over the last several days where beans have lost quite a bit to corn, and then you— not wheat, if I said wheat, I meant beans— beans have lost quite a bit to corn. And then you look at the historical relationship and where we are at in history in terms of bean prices versus corn prices, and you got to go all the way back down back to 2007 to find anything like it is right now. And when you look at where wheat is in relationship to corn, and we're at, you know, lowest levels in the last 40 years on that type, that spread. Well, that doesn't make— those things don't make people want to buy corn. Okay, they may— it makes them look to look for a bottom to buy wheat, that makes them look for to buy beans.

If there's something exciting and a new shiny object to look at, they're going to want to buy beans, they're not going to want to buy corn. And so I think that's the important thing. That's why kind of why I wanted to talk about the intermarket spread is if there is a different narrative here, and the bright shiny object is the words hot and dry in the same sentence and in the National Weather Service forecast and things of this nature, I do believe the marketplace does have enough background knowledge to know that if we've been this wet throughout this growing season up to this point, and if it turns hot and dry, they do know that there's going to be a response and a reaction to that. And I'm just saying that I think it plays out that they're going to run in here and look to buy beans, especially since beans have been have weakened so much in the last several days.

And, you know, the farmer will be concerned about probably both corn and soybeans. But the marketplace is, I think, is going to look at the beans.

Chris

Barron: Is there anything else as we look forward to the week additionally than what you've said that we need to be thinking about either from a, you know, a decision-making standpoint or just things to watch as we go into the week?

Duane

Lowery: Yes, I think there is something, and I'm going to back into this comment too. First of all, I want to put a little asterisk by what I'm about to say. I'm kind of friendly corn and beans both. I happen to be of the opinion that we're going to see some corn futures trade into that $5 zone this in the next— well, during this upcoming marketing season. And, and when I say it, I actually probably mean that I think it's going to happen here during the growing season is what I'm really saying. However, having said that, when I go back to what I said about how the spreads are performing, and where I think the trade is going to want to put energy, and I think they're going to be looking to buy beans and/or wheat, and I think corn is going to end up being third on the list.

And I— then you throw in what USDA said for their acreage number, as much as I don't believe it, we have to give it credibility because USDA gave it. And I think that forces me to tell the farmer to give some consideration and respect to the recent price levels that were made in June, the highs made in June. And as the corn market, if the if the corn market responds to some weather threat this week. And we add, I don't know how much, just pick any number you want that we add 10 or 15 cents from where we finished Friday. And we do that this week during weather. Maybe there is justification for the farmer to be looking at doing some price protection strategies in corn. And maybe there's reasons for him to be less concerned about doing those price protection strategies in beans. Maybe he should be having some bullish strategies against previous sales in beans.

Maybe he would be looking to advance sales in— look to increase his profit locking in on the corn side, but not so much on the bean side. So I think to some extent the farmer needs to be a little bit of a— have a little bit of a trade mentality here And he needs to say that the beans are still on the bottom side of parameters over the last, you know, 12 years, and corn is at the upper side of the parameters over the last 4 or 5 years. And if you get some— something getting close back to where we were for the June highs, maybe the farmer needs to, to extend his price protection a little bit on corn. And I make that statement especially true for the producer who has his crop the most advanced and is in a pretty good position and feeling fairly decent about his yield potential. So I, on one hand, I'm starting out that conversation talking about $5 corn and being kind of friendly.

And I'm also talking about hot and dry weather and how the market might respond to that. But when I look at these intermarket spreads and the relationships and what's already been done, and I throw in what USDA gave us for an acreage number, it does make me want to give more respect to the corn prices and give, be more willing for the producer to, to be reducing his exposure a little bit in the corn length.

Chris

Barron: I got that leads me to a couple of questions. And maybe I don't know if it's a comment or what. If you, if you're saying $5 corn, you know, and like I just said earlier, so theoretically, you've got August is going to make the corn crop, September is going to make the soybean crop, that means that's probably where the volatility really comes in, which might give you those pricing opportunities. If I'm reading you right, and you can correct me if I'm wrong here in a minute. If my, if I'm reading what you're saying incorrectly, and then So if you got $5 corn, you take that, you use a 2.1 spread, that gives us $10.50 beans. If you use a 2.3 spread, that gives you $11.50 beans. Do you think we have the capacity to get to those kinds of numbers on the soybean side of things?

Or does the spread just continue, you know, that corn-soybean ratio just widen out further and we have a capped number on the soybeans? Or do you think sometime in the month of September when the volatility is there, that we could see those kind of numbers if we can achieve $5 corn, why couldn't we achieve better than $10 soybeans? That's my question.

Duane

Lowery: Well, let's put it this way. If we get a hot, dry weather scenario discussion going, and if we start to have that influence trader sentiment, and the beans start to rally in relative to what the corn has already accomplished, if beans were to do something similar, I think you're talking like $12 soybeans, and I'm not necessarily making that as a prediction. I'm just trying to give you scope as to how much that market can react. And I think the beans have kind of been under a thumb for a long time. And part of that has been excess supply. And part of that has been lack of Chinese business and Maybe they're somewhat intertwined, but that's another development over the weekend. You just continue to dangle that carrot out in front of us again that the US-China trade discussions are advancing or, you know, continuing even though there's not been a face-to-face meeting.

And you had one of the major publications putting out an article saying that They're expecting China to purchase some U.S. agricultural goods. They claim it's as a kind of a good faith effort. I think it's more a situation that they actually really want to, want to maybe need to buy this stuff, but they portray it as a good faith effort. So that you still have that thing on the horizon too. But I'm uncomfortable saying some of these numbers because I'm afraid people will run with that and take it as a prediction. And in some respects, I guess it is kind of a prediction, but I'm mostly, in the case of like that $12 bean comment, I'm mostly trying to give you a perspective. We haven't really traded anything bullish yet in beans.

The marketplace hasn't even responded, in my opinion, to the lateness of the crop, the loss of potential acreage, the decline in acreage from what USDA had, you know, weeks ago. And instead of re-getting a bullish reaction, the bean market broke during the last, you know, several days. So I think the market is completely out of step with some of the fundamentals being given to it. But what I'm trying to point out is that we now have a warm, dry narrative, and we have the words hot and dry out there. And while it might be factually correct that there's a period of time that that's going to be beneficial to corn and beans both, I'm just trying to, to point out that I think it's very easily could see the marketplace skip right past that and go right into the concern about hot and dry and concern about how long it will, will stick around.

And I just wonder with the historical relationships of these intermarket spreads, which I'm trying to point out just how cheap soybeans are relative-wise. That there could be a very dynamic reaction in the marketplace to a hot, dry forecast in the bean market. If a week from now we're still talking those words, hot and dry, and for the longer-range forecast, if that's still around a week from now, we will not be at the prices we're at Friday, and we might be considerably higher than that. So I don't think we wait for a week to see how— whether that forecast is still there. I think the marketplace will take an approach that they're going to expect that to last for— they're going to expect that to be in our forecast for a while. That's what I'm trying to say.

Chris

Barron: Yeah, because if you use $4.50 Dec corn and take that times— I just took that times 2.5, you're $11, $11.25 on soybeans if your corn-soybean ratio were to go back to a quote unquote more of a normal number.

Duane

Lowery: But just those are not unreasonable possibilities. They might sound unreasonable because we've been so depressed in corn, bean prices for so long.

Chris

Barron: But you were sounding unreasonable in May before the market even started to move.

Duane

Lowery: Well, that's true. I'm sure it's not the first time, nor will it be the last. I sound unreasonable. So I mean, it's kind of a constant state of being to be unreasonable. It's just a matter of trying to figure out just how unreasonable are you, you know, that's kind of the way it is.

Chris

Barron: Yeah. Well, and it's, it's what these managed funds are going to do. Are they going to step in at enough volume to literally move the markets?

Duane

Lowery: Probably part of the question too, isn't it? Well, I'm not sure if how much they I guess what I'm saying is I'm not sure they're going to run in and buy it right away tonight, although I'm suspicious that some will. I'm mostly pointing out a situation that most people don't realize just how cheap beans are in relationship to corn over recent history. Most people don't realize just how cheap wheat is in relationship to corn. Most people don't realize just how out of whack these intermarket spreads are. And if you get the weather narrative and the words hot and dry joined together, and then you start to get price action that appears to be embracing that discussion, then at that point in time traders wake up and then they start to look at their charts and they go, oh my gosh, look how cheap beans are. I better get this stuff bought because they are historically cheap.

And that's what I'm saying. I'm not sure there, how many will jump on that right away tonight. But if you get a day or two's price action that appears to be embracing this concern about hot and dry weather, it won't take very long and then they will jump onto it. Because it is, it is, it is a pretty significant condition, the about how cheap beans are here in relationship. And I don't think the marketplace will handle a transformation from, you know, wet flooding and can't get it planted to hot and dry. It won't take as long to react to that as it took them to react to planting delays and excessive moisture. I think they'll be much quicker to respond to the words hot and dry.

Chris

Barron: Yeah, and I would agree with that. It seems like for whatever reason over the years, my experience has been rain, rain makes grain, even if it's like a foot deep in the field, apparently. So yeah, you know, but yeah, no, I appreciate that, Dwayne, and we'll probably keep in touch here Monday. And again, you know, the comments that we make are, are just conversational. We're not really making any, any recommendations here. These are discussions realities, I guess, for lack of a better way to put it, just in kind of what you're saying, Duane. You know, when you look at that corn-soybean spread, you know, with where we're at with corn right now, soybeans— I was just playing with the numbers there— we should be at $11 beans if we used kind of the average corn-soybean spread. We are way out of whack there, so that's a good point. But any last comments, and we'll kind of wrap it up.

Duane

Lowery: Well, getting back to that intermarket spread relationship again, let's say that— let's say what the market does, trade hot and dry. And let's say a week from now, 10 days from now, we still have those words hot and dry in our forecast. And that's become— has become the new storyline and new concern of the marketplace. What I'm trying to describe is people that are focused on corn might find themselves somewhat disappointed with how the corn market responds to this. And they might find them surprised at how aggressively the soybean market responds to this. And part of that is just the, the price relationships that we're at and versus historical relationships. So that makes me think that producers may want to sharpen up their pencils and get those plans in place.

And they may end up being quicker to capture some of the profits and the price levels on corn, especially if, if they're in an area where their own crop happens to, you know, they feel pretty good about it, that potential. But setting all that aside, the most important thing that people need to know in today's podcast is that the words hot and dry are now in the forecast, and the marketplace is probably going to get a little traction on that. And every day that we keep that, those words hot and dry in that forecast, we're going to see the marketplace want to take on a different narrative than it has been.

And if, if people have felt that the marketplace has been slow to respond to the, the planting delays, the excessive moisture, the flooding, and all the, all that storyline, and they've been disappointed with how the marketplace has responded, um, everybody might find that the marketplace is much more sensitive those words hot and dry.

Chris

Barron: Perfect. Well, appreciate the conversation here tonight, Dwayne, and people will be listening to this I'm sure on Monday morning and Monday into the day, so we'll see how smart we are short-term here. But we will probably visit again here later on in the day Monday or sometime early part of the week and, and kind of see where things are looking at that point. And we'd like to thank everybody for joining us again on the Ag View Pitch, and we will catch you next time. Thanks. Thanks for listening, everyone. You can also find Duane on Twitter @Duanelowry and Chris Barron @ChrisBarron24. Please let us know if you have any questions, and we'll catch you next time on the Ag View Pitch.