Hot dry forecast: heating up the grain markets this week?

Chris: Welcome everybody to the Ag View Pitch Sunday evening going into a new week of marketing with Dwayne Lowery and Chris Barron. How's it going, Dwayne?

Duane

Lowery: Good, Chris. It's going to be interesting.

Chris: That's for sure. We're gonna see possibly, are we gonna see any fireworks? Well, you know, you and I were just talking offline a little bit here and we'll talk more here now on the weather. What do you think? With the heat in the forecast and not much rain? What do you think that's got in store for us moving forward into the new week?

Duane

Lowery: Well, there's, there's probably multiple different ways people might look at weather, but I don't think there's going to be any doubt that the weather is going to be summarized as being bullish and be concerning. But if we start with the other side of that coin first, there'll be some rains expected in Ohio, parts of Indiana, and maybe the southern third or something like that of Illinois. There might also be some rain chances in far northwestern part of the Midwest here over the next several days. But I think the big storyline here is going to be that temperature maps today versus Friday are all warmer, and I think there's pretty much uniform— universal acceptance of that— assessment on temperatures. And I think that will get the market's attention. And the other thing, in a year like this, where we've had a lot of problems, we've lost some acres, we've lost some potential.

We have late planting dates and all the adversity that we've talked about multiple times about all that. When you throw all that in as a backdrop, I think the marketplace is more concerned about the areas that are— that run the risk of going backwards farther or losing potential that they might currently have. Than they are about some areas that might be able to maintain potential because they get a few rains. So I think there's no doubt that we're going to be higher tonight. And I think there's no doubt that the market is focused on hot weather, dry weather. And, and I think it's also worth mentioning that this is a forecast that extends out at least 10 days. And in terms of how long we've been starting to see these forecasts, probably goes back to about a week ago or maybe even a day or two before that.

And, uh, it's been quite a while, uh, in terms of years that we've had a weather storyline that's developed, uh, with a window this large. And, uh, since it's occurring against the backdrop of all the other things that we have, it makes for a very concerning situation. I also think it's in order to gain the right perspective on the weather outlook today and the opening calls for tonight and things of this nature I think it's important to go back to even just go back to Wednesday or Thursday morning before the USDA report. The sentiment going into that report was negative and concerned and bracing for bearishness. And the focus on weather really wasn't all that intense. And I don't think the focus on weather for many people didn't begin to occur until the price action on Thursday after that report, you know, seemed to be impressive. And then again on Friday.

So in many respects, we might be embarking on a new phase of the 2019 weather market. And in, in many respects, it's not unreasonable to say we're at the infancy part of this new phase. And so heat, dryness, the words flash drought, temperature stress, these are all new things onto the scene in the terms of the marketplace. Just over the last few or several days at most. And then we also have, um, you know, pollination that'll be beginning during this period of stressful period. And it's very difficult to say where you're going to have the pollination because the geographic footprint— within one geographic footprint, you can have crops wide-ranging from beginning to tassel to, you know, thigh high or something like that.

So it's hard to, to simplify and characterize it in a very simple manner, but I guarantee you the pollination concerns with temperatures because of the, the 10-day outlook that we have, and that's kind of a minimum, that's going to be part of the conversation as well. I don't know how much we'll be firmer tonight, but it feels like whatever I say will either be not aggressive enough, or else it'll— I'm afraid to say what I think it'll be because it'll sound absurd. But it feels like, you know, at least a nickel in corn and probably at least $5 to $10 in beans. And I wouldn't be surprised the calls will strengthen as we get closer to our opening tonight.

And I think that's also reasonable to contemplate that this beginning of a, of a new phase of the 2019 weather market, one, if that's an accurate assessment, accurate way to look at it, we might have a situation here where the markets are firm all week and may continue to see that firmness into next week. So this does not feel like something that's going to open higher and fail. It does not feel like it's going to be something that opens higher, trades higher today, tonight, and tomorrow, and then quickly reverts itself back and, and falters. This, this feels like we're going to find buying interest from multiple sectors of the trade, and, uh, you know, feels like we're going to have some elevating emotion here. And I, I don't like to ever sound inflammatory, and I, I'm borderline on that, on that point where it's starting to sound inflammatory now.

But the same token, it is worthwhile to take a reasonable view and assessment of what we're dealing with. And for many people, this is going to be a, a reason to get more emotionally charged with their outlook.

Chris: Yeah, and to your point too on the weather, you know, just looking at where the heat is going to be at, and you talked about rains in Indiana and Ohio, those areas are so far behind, they're not going to be I mean, other than keeping the crop alive, you know, along the way to get to, to tassel or pollination. But those hot areas that they're where the real heat's coming in are the areas where the corn's furthest along and probably going to be getting into pollination during the course of that heat. So that's, that's definitely a good point. I have a question for you too on the soybeans. You know, we've talked all along the last week or two here on that spread deal you're talking about between soybeans and corn and soybeans maybe having a stronger upside potential more even so than corn.

But this is, this hot weather, this heat is, you know, really advantageous for the soy or for the corn market probably. Do you still think that the soybeans lead the way on a march higher if, if this heat forecast really starts to drive market up?

Duane

Lowery: Well, I recognize that the here and now urgency of the weather concern is probably best placed on corn. I get that. And that's probably true that the beans would be able to weather that a little longer without, you know, long-lasting adversity. I kind of get that argument. But I think if it is correct that the marketplace sees this kind of as just the beginning of a new phase, and it's hot, dry phase and all that goes with that, I think the speculator is going to be inclined to want to come after beans more so than corn. And so—

Chris: And wheat as well?

Duane

Lowery: Possibly, and wheat as well, even though, you know, the wheat doesn't really have the weather storyline and harvest is, you know, winding down in a lot of locations. I think it goes back to the historical relationships. And, and if you're an investor, and you're looking at corn, and you're looking at wheat, and you're looking at beans, and you look at history, You're saying yourself, wheat, or excuse me, beans look extremely cheap versus corn from a relationship standpoint, from a historical perspective. And they're going to think that wheat or soybeans is just as vulnerable to weather as corn is. And I think that's going to inspire the, the speculator to come after the bean market more so. And if they're a speculator that has any history in this business, you know, he remembers the big bean markets with weather.

And so it's just a little more fast-paced, and that, that's an allure to some. And so yeah, I think the beans might very well be the upside leader because that's the place that maybe there's more energy to come. And the spec is still short beans, the large funds are still short beans, so that there's a lot of buying energy that can come at that where the corn market, you know, it's not mature by any means. But it's is further along on that process than the corn. And the wheat is somewhere in the middle of that narrative. It's— the wheat may not have the weather narrative. But when you look at the relationship, there's a lot of people that could look at wheat, corn and say, well, if I'm bullish corn, and I want to buy corn, and then I look at this relationship, that tells me I really should be buying wheat instead. So yeah, I think that's a possibility.

It may not look that way on the opening tick tonight. But I do think that it is very possible it unfolds that way.

Chris: Also, and I'll come back to that in a second, but also we had a question thrown at us from Scott in Iowa that said, you know, what happened to this idea that the fund money had learned how to use options and had all of these calls bought? Could that be part of the reason that it took a long time for the rally to happen? And, and the same with soybeans. What's, what's your response to that? And maybe start out by explaining that question if there's a few people that are like, okay, what, what's meant by that question? And then what, what's your response to that?

Duane

Lowery: Well, there are many different funds and many of them have different rules and guidelines about how they conduct their business. And so maybe it's true that some of them are using options and having those kind of plays. But I think for the most part, funds are probably less likely to want to own options. I think they are more— have a greater desire to have futures positions in the direction that they expect the market to move. And then they're more likely to write options to offset or hedge that, or to offer some protection to their position through that. It's kind of like the analysis of You know, if you have a model in front of you of buying an insurance policy, or you have a model in front of you where you get to be the insurance company, which would you rather do? I'd much rather collect the premium than pay the premium.

And so if you're a fund trader, you'd much rather write options and have every day that calendar work in your favor to where time value diminishes every day than to to purchase those options and have time value decay. Now granted, if they had, you know, the right positions and stuff, it'll all work, but I'm just saying, I think most of them are driven to trade futures more so than options, and if they are trading options, they're probably more likely to write them. So I don't know if the funds have a lot of long call positions or not, but my thought is probably not.

Chris: Okay, appreciate the answer to that. Um, if anybody has further questions on those, that, or any other topics, please let us know. Um, another question, um, specifically, you know, what, where do you think this market could go this week if, if we are strong from a technical perspective? I know I've asked you that question before and it kind of puts you on the spot a little bit, but, you know, if we were to, to consider, you know, where could this market go realistically, from a technical perspective, where's the resistance at on both corn, soybeans, and maybe wheat as well, if you, if you want to touch on that, maybe give us the resistance to the upside and, and maybe even the downside as well.

Duane

Lowery: Well, let's start with the downside. I would say that we should, you know, given the way we're expected to open tonight, we probably shouldn't see weakness that gets below Friday's settlement., and that's kind of tight. If you— if I allow myself to give a little bit more space, I would say there's no reason in the world that the marketplace should go back to the low that we had on, on Thursday, the day of the report. So that's kind of a— that would be a disastrous move if that weakness were to develop. So I would say that's kind of a definition of downside risk right now. Um, in terms of upside, it's tough to know, and, and if you say anything too far out there. It just sounds a little silly and inflammatory. But for a long time, I've been talking about $4.80, kind of a minimum upside for spot corn or the next major resistance level.

And at different times, I've mentioned things in that $4.80 to $5.20 zone for spot corn. So that the bottom side of that parameter is only 25 cents away. I say only because in the current environment, 25 cents may not be a lot. And so I think you got some resistance there. But my guess is rather than being a resistance, it might prove to be an acceleration point. And then you got next level of resistance, I'd say for spot corn is right in that $5 to $5.10 zone, which basically is 50 cents higher than where we finished Friday. That sounds like a lot. Maybe it's a lot. And maybe it's too optimistic. But it seems reasonable to me.. And those kind of price moves would not be uncommon to be able to be sustained in a week's worth of trade in a weather market. So it sounds like a long ways away, but it could easily get there this week.

As far as beans are concerned, I, I think it's important to realize that over the last 12 years or whatever, you're at the bottom side of parameters. So I mean, you're starting out really cheap. And so if you were to go to $10 beans, which is only, you know, 70 cents in the November contract, and it's 85 cents in the spot contract, that sounds like a lot. But even if you got there, $10 beans over the last several years is also on the bottom side of parameters. And here you are having a weather market, a loss of acreage, all the concerns associated with the weather we've already experienced.. And I know we did have a billion bushel carryout, but we don't have that now. And we can argue about what's left for a carryout, but it's something significantly less than that.

And so I don't know where we're going to the upside on beans, but the first chart level that kind of stands out as a target zone, resistance zone, whatever you— I'd say is around $10. That's 70 cents away. That sounds like a lot, but it really is not.

Chris: What about wheat?

Duane

Lowery: Well, I guess the, the way I'm going to answer that is if I think that corn has, say, 25 or 50 cents of upside potential, and I also think wheat can gain on corn, then it's something greater than that. Now, if you, if you come up, ask me to give you a storyline for why that's going to be the case, I really don't have one. But if you look at a chart, and the wheat market bottomed in early May just under, you know, $4.50 in the December contract, we had more than a dollar rally. And right now, we are probably 30 cents off the peak that was made in late June. And you look at that chart and you imagine it unfolding to the upside, it would not be difficult to see wheat get to at least $6 in the December contract, that's 65 cents away. So that chart looks like there's more upside potential than what I talked about in corn.

So I think the, the situations are unfolding in a manner that wheat can certainly gain on corn. Like I said, that may not look that way in tonight's opening, it may not look that way even in the early part of this week's trade. But if, if this market has a bullish bias for several days, which seems very plausible to me, then I think in that time we could find out that wheat is actually an upside leader.

Chris: Okay. One comment, and then we're getting close to wrapping things up here. I want to make a comment, and then I want to see if you view this as kind of a reality. But, you know, we've talked about the importance of setting a margin target rather than a price target. And so, you know, I just asked you some price targets. But if growers can, can really kind of start now to dial in, we've got a lot of our expenses figured out, we kind of dial in that margin target, you know, so, so maybe that $4.80 on corn has given us, say for example, 20 cents, and that's our target to get some sales made. You know what I'm understanding, if I'm hearing you right, this is a week to keep your eyes open really close and really watch this market close. If we happen to have a weather market that's driving this thing, because volatility tends to create opportunity almost 100% of the time.

And when I say that, what I'm saying is the opportunity could be this week, it could be the next week. But it's keeping your eyes open along the way. Because, you know, we could have a hot, dry forecast, stay dry for 5 or 6 days. Now, here's the question. What happens if the forecast turns cooler, and we've got pretty good chances of rain coming in in 10 days after we rally on this hot, dry forecast, what happens then?

Duane

Lowery: Well, let's just look at the December contract. December contract of corn topped out at $4.73. And it did that in like mid-June, I think it was around the 15th or 17th of June. And from there, you went down to almost $4.20. So you had about a 50-cent pullback there. Now you are only about 14 cents away from that high. Okay, that 14 cents, that's not hard to imagine getting triggered sometime tomorrow. Okay, so all of a sudden you're back at the June highs, and then all that means you're not very far away from that $4.80 zone. And, um, I, as anybody that's been listening to these podcasts or reads my commentary, they know that I've been very reluctant to make sales or in corn at all during this growing season. But I can assure you this, that once we get above those June highs, I'm not going to talk anybody out of making sales.

And I'm going to be encouraging everybody to sharpen their pencil and develop a game plan and start mapping out a strategy. And maybe that means maybe we go to $5.20, maybe we go to $5.50. I don't know. I'm not, I'm not saying that as a prediction. I'm just trying to say that I don't know, nobody else knows either. But the point here is everybody's situation will be different based on their, their crop conditions and things of this nature. But we will be entering price levels that will return profit margins to most operations under most conditions, especially when they look at their crop insurance things. Levels. And I believe that it's going to be warranted for producers to sell into this rally. That may not mean they have to sell the first day or anything. I'm not trying to say that, but I don't think you're going to want to be caught not selling into the rally.

In other words, if you wait till the market turns, it could turn pretty quickly, and that would be not very desirable. So I will want to be encouraging producers to step up their sales. And then once I say that, if they want to take the approach that they want more upside potential, and they just want to purchase puts, you know, that'll be kind of an expensive approach, but I'd be okay with that. But I, I want to see producers take advantage of this because It is possible that the forecast could change. It's possible that when we get the acreage number, we find out the farmers started out planting more corn acres than what we thought. You know, we don't know what's out there. So since I really haven't been very aggressive with, with sales approaches, I definitely want to get more so on this rally. But right now I'm, I'm thinking there's a good chance that this extends into next week.

So I think that a guy may have all or most of this week to kind of evaluate this, but I definitely want to be looking for ways to, to capture the margin opportunities that are there.

Chris: Yeah, the key is, is just to really focus and pay attention, as we will be doing. And, and like we said all along with the AgVie pitch, our whole goal is to get perspective out there. We're not making any recommendations, as Dwayne just said, you know, it's just literally you and I, Dwayne, just having a conversation and, and about what, what probabilities are looking like, what the weather forecast looking like, no different than we would be at the coffee shop. Any last comments, Dwayne, on, on things to look out that we haven't talked about this week? Washout watchouts or any, anything like that? And then I think we'll, we'll hook back up again here Monday, either I will with you or Shay will, but What any last comments that you have?

Duane

Lowery: Well, I guess I'll give two different perspectives on this last comment. Number one, even though the farmer has been wired into this situation a lot all the way from, you know, May till present, talking about loss of acres and planting delays and all the struggles associated with the '19 crop to date, a large part of the trade has not been. And to a large extent, the trade was much more lined up negatively going into Thursday's report than they were bullishly. So in a lot of respects, you kind of need to look at this situation with the weather that we have to now as a little bit of an infancy stage, even though the farmer knows it's been going on for a while. A large part of the trade does not. So on the one hand, I want to throw that.

The other thing that I want to throw out is, once we get a rally, or if we get a rally, it will also be important to remember and reflect upon the fact that there are other problems out here. There are problems with demand, there are problems with how the ethanol industry will handle a rally in the corn market. There are competing global supplies, there are the relatively abundant supply base from which we started all this. And it's very possible that markets will have a difficult time sustaining price gains that are associated with this weather market. And again, I'm not talking about gains from tonight or tomorrow. I'm talking about gains that are associated with a 10-day outlook that may, may in fact trade this for much of the next 10 days. And where the price level is in that timeframe, who knows?

But there will come a point in time where, Guy, it will be important to remember some of the foundationally negative or concerning aspects of the supply base that we have. And also, you know, the— to whatever extent, you know, we're going to see demand be rationed. So there'll be another side of that coin that the guy's gonna have to flip over and look at every once in a while.

Chris: Yeah, there's going to be volatility. It's not nuts, not just up. So, okay, Duane, thanks a lot for the conversation here today. And if anybody's got questions, as we said before, please, please send us questions because we'd love to get them and have, have them discussed in the podcast and that kind of thing. So We will keep in touch with everybody, and thanks everybody for joining the Ag View Pitch, and we will catch you next time.