Hot, dry forecast driving the grain markets higher next week?

Narrator: Hey podcast, we hope you have a great weekend. Whether you're headed to a wedding, finishing up spraying beans, or finally enjoying a bit of time off, be sure to listen in to Chris and Duane's discussion on the weather in the week ahead and how it will impact the markets. Don't forget to subscribe in Apple Podcasts and share with friends and family who you think would benefit from our timely perspective. Enjoy.

Chris

Barron: Welcome everybody to the Ag View Pitch. You've got Chris Barron here and Duane Lowry, and we're kind of having a weekend episode here after we closed the markets on Friday. This is kind of an exciting day and, and pretty positive at the end of the day. Tell us a little bit about your thoughts on how we finished the week up, Duane, and where are we going from here?

Duane

Lowry: Well, it was a positive performance today, and, you know, people got to be happy with the price action today. Few different characteristics. But before we talk about that, I think it's fair to go back and just look at the week in general, look at the week in whole. And for the first part of the week, markets were somewhat on the defensive and somewhat fearful of bearish numbers, bearish headline comments from USDA on Thursday. And that kind of dominated the theme going into Thursday. And then we did get headline bearish news on Thursday from USDA and We spent the entire day wondering, you know, how we were going to finish and kind of how we finished was going to kind of set the tone. And we finished well yesterday, and then we come through with follow-through performance today.

And when you consider the fact that we've had a lot of weather discussions this spring, we've lost acres, we've had prevent plant acres, we've had excessive rains, we had planting delays, we had All of these things, but most people would say that it's felt like we've been, you know, trying to push, push a string uphill. You know, it's been, feels like we're fighting the market, like the market doesn't want to embrace what we see out here for planting delays, etc. And they, maybe it's a little oversimplified, but the market acts, has acted throughout the last several weeks as if rain makes grain and with no mention of whether it could possibly be excessive. So now, today, and, you know, we've been talking about the possibility of some heat and dryness for several days, but marketplace in general didn't want to talk about that before Thursday's report.

But since yesterday's report and the performance was pretty good there, you know, all of a sudden today, heat and dryness concerns took center stage. And we managed to make new highs late in the session. Sustained gains that were established early. And that's a little bit out of character for how we've been performing in the last several weeks through the excessive moisture part of it. And I kind of, I feel like I want to say that we're kind of turning the page to a different weather forecast, a new era of weather trading for this year. And how long-lived it is or how short-lived, we don't know. But The forecast is certainly got plenty of heat in it. It's got less precip in it today than it had, you know, a day or two ago or a week ago.

And there are people that have crops that beginning to show stress, and the ones— the fields are showing the most stress are the ones that were under stress before from excessive moisture. But it feels like we're kind of turning the page into something new and different. And If this forecast continues to verify and we can continue to keep rains out of the Midwest, and I don't mean that as in, in totality, I just mean if we continue to have areas that are going to shrink and be under stress, I think the market's going to respond to that. And if we— the bigger the area of the heat and dryness and the the bigger the lack of precip will be, the more emotions that we're going to get into it. But if that's where we're going, and if this forecast sticks around, it feels like we're to a large extent in the infancy of this particular new phase of a weather trade.

The Commitment of Traders report still have funds short beans, they're short meal, they're short oil. So they're not caught— they're not in the best position for this market to turn. But yet, you know, here we are getting close to where the highs have been recently. And it feels like there could be some upward momentum. The funds at one time were short quite a bit of corn. They're now long corn. They added to the corn links this past week. And they did reduce their, their short positions in Kansas City wheat. But like in beans, they continued to sell and get more short on beans. So if this weather turns out to be something that's a talking point for several days or a couple of weeks, there's a lot of buying power here that can be unearthed.

And in the case of the corn, you know, it brings up a whole nother discussion about what we're dealing with for yield potential if we actually do start a dry phase of, of this weather market.

Chris

Barron: Yeah, I just noticed today driving around, we got back into Iowa here and we'll be heading to Canada here over the weekend. So we're gonna get some more drive time up through northern Iowa and up through Minnesota. So we'll have a little crop report from that venture. But it looks to me like, you know, the early corn, as you've said, you know, is really starting to show some stress almost all fronts. In other words, wherever, wherever the tractor went, wherever there were any kind of tillage issues, the majority of those fields, growers probably were there a day or two early, admittedly, by most of them, than maybe they would have been otherwise.

And then also today, we're starting to notice the, you know, the rolling or the pineappling of the corn on some of the lighter soils, you know, we're in Northeast Iowa in an area where there's a lot of more rolling soils, and we're supposedly in the garden spot. And I think, you know, we are from the standpoint of we got a lot of the crop planted pretty early, and, you know, and maybe 20% of it planted late. That 20% showing issues, the, the other 75 to 80% of the crop is starting to show issues. On certain soil types already. So that's telling me that, you know, we probably didn't set up a very good root structure, even on the stuff that was planted that's looked good, that's got to the nitrogen, that's got good color and everything.

But, you know, if we get to 90 degrees or above and stay above 90 degrees for extended period of time without water, I'm starting to really hone in on what you said a few days ago, with, you know, how much faster this crop's going to show stress. I'm really buying into that now because we're, we're already starting to see it in a supposed garden spot of the, of the crop growing area.

Duane

Lowry: Yeah, it definitely is. We're going to see these kind of stresses show up a lot earlier than we would see in a normal year, and we're, like you said, we're starting to see it in what we would consider to be our better corn. And we, you know, we don't mean that we're seeing it in terms like it's really a bad situation right now. It's just that we're just starting to see that. And the areas that were on problems, they were excessive water, or they were clearly compaction issues, you know, that stuff is getting advanced very rapidly in terms of the stress. And so it's, it's concerning and It bears watching. And, you know, everybody's going to want to see some moisture.

And I think by the time we get to Sunday night, Monday, and we've had a few days pass, the marketplace is not going to handle this very gracefully if this forecast stays the way it is right now and it doesn't improve for the next 5 or 6 days. I don't think it's going to handle it very gracefully. And we have a month to go before we get the acreage number from USDA. So in many respects, we're a little bit flying in the dark. And if we have the weather concerns, the marketplace is going to start to embrace some of the worst-case scenarios as opposed to some of the best-case scenarios, which is kind of where the market has been wanting to. As far as the 90-degree temps that you mentioned, I saw a local forecast had a statistic up that they had a forecast of 9 days in a row that we were going to see 90-degree temperatures.

and I forget exactly what the— that when that last occurred, but I think they said the last time we had 8 days in a row was in 2012. So I do recall over the last few years commenting how by the time we got to harvest and we had pretty good yields, I remember the comment being said more than once that, you know, we had some regional problems, a few periods of dry spells, but we never really had the heat. We never suffered a lot from heat. And this year, uh, we're— we are going to have a heat spell. And, uh, it— the heat's bad enough if you've got, you know, good root development, good soil conditions going into it. But when you have a year like we have this year where everything is, you know, substandard of where you want it to be, it's going to make for a very delicate situation.

And like I said, I don't think the market's going to handle this very gracefully if we continue to have this type of forecast, say, for much of next week.

Chris

Barron: Right. Yeah, we're definitely setting up— we're susceptible. I have a question on the soybean side of things. You talk about the trade being pretty short. So how do they unwind those positions if this market starts taking off going up? I mean, how's that— explain to me kind of what can happen there or how do they reposition or what happens in that process if all of a sudden we stay really hot in this market, needs to rally?

Duane

Lowry: What— well, they'll unwind it the same as you or I would if we had a bad position on. They'll do it as fast as they can. They'll, they'll try to move as fast as they can. But what will happen is every possible bullish strategy that they could put on, they're going to try to put on. So that means your spreads are going to tighten, your strength will all be in the front end, your weakness or the selling activity will be in far deferreds like November of '20 and things of this nature. And so when markets start to turn and they go up, Everybody knows that those certain things happen and we get those bull spreads to work and we get, you know, they'll probably look at doing some meal and oil and my guess is they'll probably want to come after oil more aggressively than they do on meal.

So even if they have a short bean position on, these funds will look to everything that they can think of that might be a bullish strategy and they'll try to get that on as well. So it'll, it'll be, you'll see it manifest in the spreads, which we saw today. I think you'll see it manifest in oil gaining on meal. And I'm not sure that we saw that today. But oil had the first show of life today that it's had in quite a few days. And if you look at the soybean oil chart, from a historical perspective of where prices are now versus, you know, in recent history, we are at the very bottom side of parameters. So there's a lot of room for that to occur. So in terms of how do they come out of their shorts, they'll, they'll do it as fast as they can. And sometimes that'll be disruptive to the marketplace, and sometimes they'll try to be patient and try not to be disruptive to their own detriment.

But it's— it would appear to me this is just an opinion, certainly not a fact, but it would appear to me that they've already been doing some of that for the last few weeks and, um, or last couple of weeks anyway. And I think that if they decide that they have to come more aggressively, I think they probably do exactly that. They get much more aggressive, which means our price action response will be much more swift, much much more aggressive. And so I guess what I'm saying is if we come in Sunday night, and we have the same forecast that we have now, and it looks like that forecast is somewhat entrenched and not a lot of carrots at the end of the stick that says, well, 3 days from now you might get a rain or 7 days from now you might get a rain.

If we don't have a lot of that, I'm guessing that they'll be fairly aggressive and fairly quick to try to get bullish positions or get out of their shorts, get new long positions on. And like I've mentioned, you know, several weeks ago, in the case of the corn, when they were still short corn, they would not stop at just getting out of their shorts, they were going to get bullish positions on, they were going to get long. And right now the funds are long 187,000 contracts of corn. So that's what happened there. And I think the same exact thing will happen in the beans, they're not going to be content just getting out of shorts. There's going to— they're going to be building a long position.

And when we're talking about beans, I think it's very important that we point out that the bean market has been a bear market for a long time, much more than a year, because it's been a year with China influence being a negative aspect. But it's been a building supply situation for longer than that. And the marketplace has gotten complacent in constantly being bearish. Constantly being willing to carry shorts even if they go against them. They're like, well, can't really go anywhere, you got a billion bushels of bean carryout, etc. Well, I mentioned here even a week or two ago, we don't have a billion bushels of corn or bean carryout anymore. That's gone between loss of acreage, planting dates. And, you know, we were already probably had that cut in half. And you throw in a dry scare now, you know, it's something quite a bit more bullish than that even.

So the trade has been lulled into feeling complacent to be short beans. And we have to unwind that. And we have the set of fundamental factors right now that make it very plausible that we will unwind that. And when we unwind it, they don't stop at flat, they're going to get long. And when we look at— try to be objective, but yet not be overly emotional. Just look at the forecast. And, you know, there's— it's very plausible that this thing is going to last for a while. And then you throw it on top of what our planting dates were, the loss of acreage, etc. You know, the ingredients are here. You know, if I don't know if they're going to bake the cake or not, but the ingredients are here, the oven's turned on, and the pan's greased and ready to go. So, if they don't generate a bull market out of this, I will be surprised. And granted, the forecast can change before we finish the podcast.

But right now, this looks like a situation that is more likely to become more emotionally charged before it becomes less emotionally charged.

Chris

Barron: The interesting thing to me is, and I was going to use the word rhyme, but it's almost like an echo of what you were telling me on corn. In early, late April, early May, because, you know, the wet forecast, and then we got into May and it stayed wet. And it was a forecast that was positive to the market that was going to drive the corn market and everything. And that's why I asked the question on the short positions and how do they get out of this, how they unwind. Your answers to me are very much an echo of what I heard almost verbatim, you talking about the corn market. The only difference is that was because of wet weather and cold. And now it's because of dry weather and heat. Does that make sense? And it's a different— well, but it's— and it's a different crop, but it's the same narrative really that, that's going to— that, that has the potential to drive this market.

Duane

Lowry: Well, no, no two markets are ever exactly the same. And if they are, you— that's only known after it's over. In the process of them unfolding, you never know for sure. How they're going to unfold or if they will be the same, the same. But there are certain things that tend to happen when markets in the, in the grain world at least tend to turn a trend and tend to turn upside, to turn to the upside. One of the things that tends to happen frequently is the spreads tighten. And we saw that happen dramatically in the corn. And we are already seeing the signs of it begin to happen in beans. And I've alluded to the fact for a week or two that the intermarket spreads were starting to show a turn to where they were going to be buying beans, not so much buying the corn.

And while the weather impacts both of them at this point, and maybe some would argue it would be the weather is more of an impact on corn. The point is that corn is farther along in the maturity scale. I mean, they're no longer short, they're long. The, the public has been aware of the corn situation for a while. It's not quite the same in the case of the beans. It's much more of an infancy where maybe until, uh, today or yesterday, a lot of people didn't even think they had to cover short beans. So we're just at the infancy of that, but when they come for it, it's not unreasonable, and it's usually likely that the spreads tighten and they come for the front end.

And though, like I said, anything that could possibly be construed as a bullish position, that they'll tend to come after that because they're trying to get as much, much on as they can to offset their shorts or to build new long positions. And that's one of the reasons why I think the trade is going to be favoring beans here over corn. Is because there's just a lot more potential for energy to come at the bean market than there is in the corn. It's just a little bit more mature in the corn market. So it— I didn't intend to be an echo chamber for the comments I made in corn, but I guess there is a certain logic, train logic there that does cause me to kind of come up with the same conclusion.

Chris

Barron: Yeah. What, you know, going into the, the next week, you know, if the bean market does start to get strength, I mean, we talked about this in the previous podcast a week or two ago about it probably leading the market. Does that lead corn and wheat? And, you know, what do you think there?

Duane

Lowry: Well, I think I mentioned before that wheat looks to me, based on historical relationships, that it's going to outpace corn corn. And I have, at the time I said I have no fundamental reason for it. And I still don't really have a legitimate fundamental reason for it. But yesterday we saw wheat up like 18 and corn was up 9. And I know one day does not a market make. And today corn gained on wheat, but I am suspicious that somehow wheat is going to continue to be very well supported here because it's just too cheap from a historical relationship. To corn. So to some extent, a weather market here, a dryness concern, whatever it may be, you know, a rising tide floats all boats. And right now every single one of these markets is poised for strength.

And even though the focus might be on corn weather and bean weather, you know, wheat may very well outpace corn if we get out, you know, 6 or 8 weeks from now, and we look back and find out, okay, which one did go up more? It won't surprise me if it turns out to be wheat, even though the focus of weather was actually on corn.

Chris

Barron: And even though we're in the middle of wheat harvest.

Duane

Lowry: Exactly. I don't, I don't think the wheat harvest makes a lot of difference. And I think the wheat market harvest didn't put a lot of weight on basis. Storage space is not a problem. And the wheat market still has carry in it. It's like the only grain market that does have carry. And so if you're a commercial, you know, you have no reason to liquidate that physical. If the farmer sells it to you, you're going to hang on to that, keep it in your bin, and you're going to hedge the deferred. So, you know, basis in wheat is most likely only going to improve. And, you know, so the weight of harvest just really is going to be a non-event because even though the farmer might sell it, the commercial is just going to sit there and hang on to it.

They're not going to, they're not going to pressure the cash market, because they have, they got, they're looking for something to put into storage. And since wheat's got some carry in the futures market, it's the only place they can get that really.

Chris

Barron: Okay, what, what do you think for, you know, kind of last question here, we can get things wrapped up. But as far as the weather goes, Maybe we have a conversation again here Sunday night and kind of look at what the forecast is at that point. Is there anything else as we go into next week? I mean, it's pretty much sounds like it's a weather market. Any other things we need to be watching as we go into, into the next week?

Duane

Lowry: Well, just off a knee-jerk reaction to that question, I think weather is the only thing we're going to have to talk about from a fundamental perspective until we get to that August USDA report. And that's a month away. And so I don't think there's anything else that's really going to be very important to us other than weather. And if I did have to look over the horizon and try to imagine what's over that horizon, the only other thing I can think of that's really important is what's China going to do? I happen to think China is going to be a buyer here, and I think they're going to be a buyer very quickly. So I, I'm looking over that horizon and, and halfway imagining them arriving. But, uh, other than that, I don't think there's a fundamental, uh, report or a fundamental driver other than weather.

And I think so, we have 3 to 4 weeks here where weather is going to be, I think, the dominant feature. And if it continues to be slanted towards one of concern, um, I would imagine the marketplace, uh, staying firm going into that August crop report. And, uh, I say that, but I also want to somewhat end with this. I've been talking about a $4.80 to $5.20 zone in, in spot corn as being kind of the technical resistance level. And I'm not saying it couldn't go higher than that if the weather, uh, dictated it as such. But all of a sudden, we're now only 25 cents away from the bottom side of that range. And in the case of the Dec contract, we're only 20 cents away from that. It wasn't too long ago that looked like a long ways away. Now it's one day's trade. Okay. And I'm not saying we'll get there in one day. I'm saying it could get there that quick.

And farmers, it's going to be very important for them to make a transition to be able to almost have dual tracks. They can be talking about weather, they can be focused on weather, they can recognize the significance of it, and be concerned about what that does to the national production. But at the same time, they need to be running a dual track that says, okay, what does my yield look like? What does my farm look like? Where does my insurance begin? How much do I have sold? Did I do things on the spec side? Am I carrying long futures position to offset previous sales, things of this nature, and they got to look at those in a, in a dual fashion. And there's going to be a time that could happen relatively quickly, where they need to set aside what their view of the national concern is about production and the weather, and make decisions based on their own operation.

And the guy that's got the most troubled, stressful crop, his decision process is going to be a lot different than the guy that maybe is still, uh, looking to get production that'll be something above where he gets an insurance payout, and maybe he has made a small amount of sales. So, um, there's going to be a coming— a time that could occur very quickly that I'm going to be trying to encourage people down that dual track to get much more aggressive with a price protection strategy And when we get there, we'll talk about different things, whether that's a, a simple buying of a put, whether it's a cash forward contract, whether it's a hedge to arrive, or whatever it may be.

Uh, all of them have different nuances, but it's going to be very, very important that the farmer is able to make that dual track of analyzing the market on the big picture, but looking at his own operation, not at all from a price perspective,. But as you always call it, a profit perspective, a margin perspective. And I think that it— there appears to be a good chance that producers are going to get to look at those kind of decisions. And I think it's going to be important to be able to separate these two types of analysis out.

Chris

Barron: Right. And that's— I'll just echo that we do have margin target scenario planning tool that we can send to people too. So if people want to email me, at cbarron@agviewsolutions.com. We can send you that tool as well, because I would agree 100%, Dwayne, you know, if we, if we're ready to go, I mean, I'm not saying, you know, that the market's going to do exactly what it's done in the last, I don't know, maybe forever, but it seems like, you know, when that opportunity comes, it lasts for several hours, not several days sometimes. And if we're ready for it, then we can take action. But if we're still fumbling around trying to figure out what we should be doing, or is this the right target or not, you know. And part of that's making sure you got your cost of production dialed in correctly and you've got a target in place.

It's pretty hard to shoot at something if you don't know what you're shooting at, so.

Duane

Lowry: Right. And, and, you know, if somebody wants to say that corn's going to some, you know, magical price a long ways away, um, that, that's fine. They can have that opinion and they could be 100% correct, but it comes to a point where you know, how much are you willing to risk? There are ways to still, uh, be aggressive with a price floor and take advantage of, of strength that can happen in the short term and still leave some level of upside potential in it. But, uh, you don't have to do absolutely nothing, and that's, that's the trap, you know.

You get caught doing nothing and all of a sudden you, you go home on a Friday thinking the market's going to be sharply higher the entire next week, and next thing you know, the forecast changed, or something changes with, uh, with a government policy or a trade policy, or some political thing happens, and all of a sudden, you know, you're, you're trapped. And that's what we want to avoid. And I'm just saying that I see that transition coming up possibly fairly soon where we have to make that transition and start focusing on more than just whatever price objective we think might occur.

Chris

Barron: Yeah, it's like you said, you don't, you don't have to do nothing, but you don't have to do everything either. So you can— there's always a balance and a happy medium in there along the way.

Duane

Lowry: So there's a lot of different ways to do, accomplish price protection, and maybe some combination will work, you know, to someone's advantage and be put them in a comfort level, comfort zone, but doing nothing isn't usually the best approach.

Chris

Barron: Right. Well, Duane, thanks a lot for the conversation over the weekend here, and we'll have a conversation hopefully here Sunday night if it looks like there's a change in the weather. If not, we'll, we'll discuss things on Monday, but we'll try to kind of keep an eye on what the weather's doing, what the forecast's doing, and we'll get back together when when the time warrants. Appreciate you and your conversation here tonight, or today, and over the weekend. And thanks everybody for joining us on the Ag View Pitch, and we will catch you next time.

Narrator: Thanks for listening, podcast. We hope this perspective helps and always appreciate your feedback. One quick note we would like to make is ensuring you know you're not alone out there. It's been a tough year and we're going through this together. If you ever need to talk, please reach out to us. We're here for you. Enjoy the rest of your weekend, and we'll catch you next time on the Eggview Pitch.