Hot weather rally possibilities: weekly market outlook Jun. 17-21

Andy

Hruby: Welcome everybody to the Ag View Pitch weekly market outlook for the week of June 17th through the 21st. Today you have Andy Ruby with Jared Creed. Jared, what's new out your way?

Jarod

Creed: Hot, hot. Good day. That's good. Last couple days to be in the office. How about that?

Andy

Hruby: But yeah, next week might even be better.

Jarod

Creed: What's that?

Andy

Hruby: I said next week might even be better to be in the office. Yeah.

Jarod

Creed: No kidding. No kidding. Certainly appears that way. Yeah.

Andy

Hruby: No, that's— I think that's a good place to start. You know, as, as we look at where the calendar is and what the weather's doing, I think kind of at the top of producers' minds is, is this going to bring us our rally opportunity to clean up any '23 crop we have, take advantage for '24? I guess I'll kind of let you know, leave it there and let you lead the conversation from there. But I think that's definitely a good place to start.

Jarod

Creed: Yep, story old as time. Here we are getting into the heart of US growing season. Before we dive into that too deep, I think it's worthwhile just mentioning that it felt like even 30 days ago, the market didn't really care about planting pace. And I think Chris and I talked about this here recently that At the end of the day, it really didn't have much of a need to, at least from a global view, our planting pace ended up being on just fine of a pace. Without a doubt, there might have been some crops put in in less than ideal conditions that obviously weather here moving forward can have an impact on. But again, the last 30 days, okay, we're slow planting, we get it done. Markets were still firm-ish, at least in the wheat complex. And since then, you know, wheat has shaved off every bit of a dollar a bushel or more depending on which class of wheat you're looking at.

And that's basically the, um, you know, we've subsided the story of what is taking place in Ukraine and Russia regarding weather, not the conflict between the two countries, but more so the cut, fear of drop in productions. And at this point You know, USDA earlier this week shaved off another 5 million tons off the Russia wheat crop, taking them from 88 million tons down to 83 million tons. I have no dog in that fight to, you know, kind of try to pinpoint what that actual production is. But the fact of the matter is the market definitely perceives that as being enough. On the way up, we drove out all the shorts in the wheat market, and then you pretty much ran out of natural buyers because of the lack of story. And once that wheat story started to slow down, you know, corn got a little slippery, started losing its footing.

And it's still amazing to me that including this entire last week, every single day, calendar year 2024, with the exception of 7 days, we've seen December corn be between $4.60 and $4.90. So at times you feel like we've got a rally starting to happen. And then at times it looks like, oh, we're starting to slip and go lower. And just this last week, we tested the bottom end of that range, traded right there at $4.60 and started to bounce back. And, you know, $4.75 area got plenty of visits in the tail end of the week on December corn. And you take a step back and think that, all right, well, we're right there in the middle of that range. And bunch of, you know, a bunch of oxygen wasted for the last several months trying to make up a story for higher or lower prices. And now maybe we start transitioning into summer weather and emotions are going to start ramping up.

Forecast definitely is warmer than normal, drier than normal. You can catch about every opinion you want. I should put a caveat to that, that North Dakota, South Dakota, big swath of Minnesota You know, big chunks of Nebraska, Northwest Iowa, uh, in the last couple days of the end of this week, uh, we definitely saw the weather models put a little bit more moisture into those areas. Still warm, but that's a lot of acres grown in the Corn Belt in that part of the world as well. I mean, you're talking about area of coverage there, give or take, 30 million acres. And, you know, a third of the U.S. corn crop is going to get a nice drink, says the forecast, in the next 4 or 5 days, even in the face of heat. Eastern Corn Belt, not so much, forecasted to stay hot and dry. So will the market care? Um, yeah, I think it probably will. But will it matter long term? At this point, probably not.

Uh, it's all about what the forecast is going to look like, you know, first 2 weeks of July. And at this point in time, it almost sounds mind-numbing for me to even say these stats. I just never can really wrap my mind around it. You know, you got a 50% chance of being above normal temperatures and below normal precip, which also means the other 50% means you got a 50% chance of just being normal. And maybe the weather turns into a benign situation. But again, the market in general, why is it not reacting to those forecasts. I don't think it's necessarily a deal of fool me once, fool me twice. I think it's more of a deal that we have ample supply in global markets at this point in time. And you're still in a situation, lack of direction, where your users, your buyers, they're not real aggressive on buying right now.

And at the same time, you've got a farmer that's severely disengaged and not interested in selling. So here we find ourselves bouncing back and forth. And, you know, especially the corn market, back and forth 10, 15 cents. And generally speaking, soybeans, yes, a little bit of range bound. But they're definitely on the lower end of the range here recently. So, you know, to summarize that, Andy, here's my fear. Here's what I think still ends up happening. Yeah, we might shave off a little bit of production from this crop. The market might have to put in a little bit of weather premium. In the fear that that crop could go further down than what we perceive today. Uh, but at the end of the day, all the dust settles, you know, we're in the top 170s of the U.S. corn crop, anywhere around 50 in beans. It's not a story. So don't want the farmer emotion. It's just a story, oldest time.

Weather's tough, crops going backwards. Markets rally. And it takes us away from thinking if we rally, I'm going to sell something to a new, a new attitude of I can't sell anything because it's going higher, because I'm fearful that the crop is getting smaller and smaller, smaller. That's my, you know, gut feeling that we're gonna have an opportunity driven by weather. It's going to be possibly the best opportunity for the entire calendar year. Especially in the corn side. And if we don't do anything about it, the backside of that is the real scare factor. Okay, $4.60 to $4.90. We've watched that for 5, 6 months. What happens if all of a sudden that new range is $4.30 to $4.60? And you take that stair step down another 30 cents, then we're kind of in a world of hurt and searching for another story. Black swans happen, I get it.

But at that point, maybe the next weather market that would be on people's mind would be South America this winter. No doubt weather patterns there have been a little challenging as of late. It doesn't really appear to have impacted the corn crop that finished, the safrinha corn crop. But they've got a big, big estimate out there for the 169 million ton soybean crop this next winter. And maybe the market can be a little complacent on the certainty that that crop is coming our way. But the fact of the matter is now we're sitting there waiting for a weather story 6 months out from now that has nothing to do with the US crop.

Andy

Hruby: Right? Yeah, it's, it's definitely concerning. And as a, you know, as a producer, you sit here and you look at the forecast, it makes you wonder, what do I do? What am I going to have in 3 months from now? What's, you know, what's fall going to look like? But I do agree with you that I think taking advantage of whatever opportunity we may be presented here in the next 3 weeks, let's say even month, may be the only opportunity we get until after harvest. And then even after harvest, I mean, what if we make some harvest lows? Is there anything that you're seeing would, other than South America weather, that would kind of liven this market up as we look into You know, kind of that January through May timeframe.

Jarod

Creed: You read a lot of different stories about the possible impact on equities and commodities tied to the result of the upcoming election. That can certainly create a little bit of uncertainty or volatility. Perhaps that is just a risk-off attitude as well. If you don't have a lot of certainty, why are you going to do anything? And that can certainly be a negative impact on prices. At the same time, for months and months and months, the global market, the US economy still has this feeling that inflation is not slowing down. CPI numbers have continued to suggest that now all of a sudden we're grasping at straws that we're going to have a quarter point rate cut out in October, November, one of those two months. But we've been told that for the better part of what feels like a year now.

And absent of any rate cuts, in the back of my mind, it almost feels like there can still be another inflation trade, that commodities as a hedge to inflation. And it probably is going to have to come on the backs of things getting worse before they get better. From an economy standpoint. But I just wonder if somebody's going to slip up someday and just make mention that, well, you know, we want to cut rates, we have stats that show inflation is cooling, but we probably should have raised rates more. And I think that could send things in a tizzy in a hurry. And, you know, like I said, for months it's felt like we're set up for a buy commodities, sell equities type of trade. But that just hasn't unfolded. Uh, goes without saying that it has not unfolded. I would say that that's maybe the biggest catalyst, looming catalyst, that's out there.

And that might not be a 6-month play, that might be an 18-month deal. Um, you know, what type of policy changes happen, uh, at the result of this next election, and what type of impacts can that have on money flow through multiple different markets. That's, that's a hard one to put your finger on. But that, I guess the point of bringing that up, Andy, is that can definitely be a catalyst, but not just a positive catalyst. It can definitely be a negative catalyst as well.

Andy

Hruby: Right. And I think that was part of the reason I brought it up was, you know, I think kind of like we were talking is people get reluctant to make decisions on marketing when we have opportunities in the summer. And a crop that looks mediocre due to the weather at the time. And, you know, I think you just drove home the point of there may be some opportunities to market this stuff if you put it in the bin and, you know, kind of holding hope, but there's no solid— nothing solid out there stating that, hey, I think this is really on the horizon, and we're really going to have some great opportunity. So it's just really good for producers to kind of keep that in mind as we— if you missed this last rally that we had, this may be, may be your chance to kind of redeem yourself and really stay focused on 2024.

Jarod

Creed: It is alarming, the lack of purchases or lack of farmer selling from that $4.80 to just above $4.90 area in December corn. I'm not implying that everybody should have been jumping in and doing something. But there was hardly anything done. So what a producer can do in the here and now, the crop is generally planted. Hopefully you certified your acres at the FSA to this point. Get your schedule of insurance from your insurance agent and start thinking about this math. Let's just— very simple math. Let's just use a 200-bushel APH in corn, 80% policy. I'm guaranteed 160 bushels an acre now that that crop is planted. What does a 50-cent rally in the market above and beyond the insurance price mean to my insurance?

If we take corn from— perhaps this could be a reach— but from $4.66 to $5.16 basis to the December contract, that 50 cents a bushel has a direct impact on that 160 bushel an acre that I'm guaranteed. Which in essence is an increase of $80 an acre guaranteed to me if I'm actually marketing those bushels that I'm guaranteed. So I got my costs over here, I've got my original insurance guarantees right beside it. How high does the market need to go to move that insurance guarantee at or at least near what my cost is? And start identifying maybe what my worst-case possibilities are. And can I stomach a situation that my bushels are worth no, um, you know, less than $4.66 if I'm raising a good crop? Uh, and even in the event that I have a poor crop, can I afford to have those bushels be worth, um, a minimum of $4.66? Do I need those guaranteed bushels to be worth 40, 50, 60 cents higher?

And Chris and I might have talked about this a while back, you know, not trying to give recommendations. And we're still, you know, I hate to use the word hope, but I'm optimistic. I'm still hopeful that there's going to be a better opportunity come around that when you go through that math and identify what your insurance bushels could become worth on both corn and soybeans, um, it might create a situation that it requires higher than normal, uh, or greater than normal aggressiveness and maybe using the old-fashioned minimum price type of strategy of if I get an opportunity to maybe hedge, sell equivalent of $5 December board price, maybe I just go out there and cover a chunk of those with buying some out-of-the-money call options. I'm not a fan of spending money on options to pay somebody be get longer something, you already are long.

However, if that is the best tool that we have in the toolbox that allows us to move the needle at a bigger percentage of sales, then let's use it. And we get to identify what our best case, worst case situation is. Market goes higher, I still got a seat at the table because of that purchase of that option. Market goes lower, yeah, I wasted the money on that option, but I still got my corn and soybeans sold. So it might be a deal that it's not all that hard to manage. Yeah, you probably got to have a, you know, a per se, a trusted advisor walking you through that. But it's definitely a way to help entice making those larger percentage sales, especially in a volatile market that you're questioning what type of yield potential you have out in the field like you alluded to before.

Andy

Hruby: Yeah, and I think, you know, what we're talking about just needs to be a constant reminder to growers is, is we often think about insurance as we're guaranteeing our production, we're guaranteeing a certain amount of revenue per acre, but the other side of that coin is, is it can be used as a great marketing tool to take advantage of situations like this. So I think, I think that was, you know, just really good for you to walk through that and just kind of a constant reminder of use those tools in the toolbox to create— I shouldn't say create, but take advantage of opportunities because you have the tools. Mm-hmm. Let's shift gears a little bit. I mean, you cover a wide area. We hear some talk about some basis. What kind of— what have you been seeing in basis and some basis opportunities that there may be as We've heard basis improvements in some areas.

Jarod

Creed: Okay, so twofold type of deal here. And this is kind of a real-time situation. The spread between July and September corn narrowed significantly in the last couple of weeks. They went from an 11 to 12 cent carry all the way down to, I think, almost a penny and a half carry, almost got inverted. Meaning July would have been higher than September. And the July contract has a couple more weeks in it before the farmer doesn't have access to that. But that was happening in the face of the index roll, which I don't need to get too deep in the weeds there. That spread probably shouldn't have been moving or should have got wider. But instead, it rallied significantly. But then in a day's time, it gave back up, you know, a good nickel of that and back down to a 6 to 7 cent carry.

And I think what you run the risk of now is Andy, I'm the farmer, you're the commercial elevator, and I sold you corn 2 weeks ago. And that elevator had the intent in rolling their purchase from the July contract to the September contract, in anticipation of picking up maybe 12, 13, 14 cents a carry, their cost to carry, make some money putting in the elevator, keeping it off the market for a little while. Well, instead, what happens if the farmer had been selling grain to the elevator, the spreads narrow, all of a sudden the carry opportunity goes away for the elevator if they have not locked it in. And basis firms at the same time, making cash today worth more than what it is a week to 4 weeks out.

So the point in all this is basis firmed, spreads firmed, the market kind of rallied, but probably leaving the commercial with ownership from the farmer almost being forced to dump a significant amount of supply onto the market in a short amount of time. Because their, their opportunity to carry that corn went from I can make some money to all of a sudden, oh boy, if I keep this in my house for more than 30 days, I'm gonna lose money now. That's not every case. But that's the general theme around the country. Elevator across all the US, basis firms, spreads firms, farmer was engaging, elevator lost the ability to, you know, carry that at a profit margin. And now possibly creates the risk with how the spread has backed off that we might see basis step back again. Not a prediction, but that's the most probable outcome here.

Short-term pop, maybe it's related to slow farmer selling, planting, fieldwork, so on and so on. But nonetheless, I don't think that we're staring down the barrel of basis just stair-stepping higher and higher and higher. In fact, with the slow farmer selling pace on last year's crop, we're probably gearing up for the second harvest now. We're gearing up for farmers emptying bins to be prepared for the next crop coming at us. And you think about crop development in the next 30 days, there's going to be a lot more confidence, um, in what crop is coming to us, resulting in grain movement from July 15th to September 1st. At a much larger clip than what we've had in the last couple months. So I don't think there's a lot of reasons to be excited about corn basis. There certainly is not a big story in corn demand, both domestically and for export.

So if we start seeing some significant export sales on corn, all right, maybe there's a little bit of reason behind the madness. But I don't— like I said, I don't think there's a a reason to be excited about corn basis today. If you're still in an opportunity that you're looking at an elevated basis from where you were a couple weeks ago and the board gives you a little rally, I think you got to let her go. Uh, no doubt about it, there's some big, big processors in the Western Corn Belt, uh, this past week kind of shopping around, well, with $4.90 to $5 cash buy the corn. And that was definitely equivalent of, you know, anywhere from 30 to 40 over basis levels. But that's about the top side in the western Corn Belt, in the heart of the Corn Belt, I should say.

Andy

Hruby: Okay. You know, as we talk about farmers emptying out bins and kind of being reluctant to clean out old crop, I guess a question I have for you is, are we as producers, how bad are we kicking the can down the road as we delay hauling grain in? And harvest that, you know, that window between grain, old crop getting hauled in and new crop being harvested, you start putting that elevator in a pinch to get space created for that new crop. What kind of implications are there going to be on, let's say, harvest delivery and possibly even into December, January delivery? As we are, as producers are reluctant to haul in and we're gobbling up elevator space so close to harvest.

Jarod

Creed: So on the front end, first, kicking the can down the road is not free. Obviously, if you charge yourself a modest penny or 2 cents a month for storage on the farm, and if you're paying any sort of operating interest, every 5,000 bushel is worth give or take 5, 6, 6 5 to 6 cents a month right now, right? So if it sat in the bin for the last 5 months, you know, there's a 25-cent hit most likely. And it takes big market moves though to make up for that. And historically, the market doesn't make up for it, it actually takes more away. So there's a financial, uh, risk on the short term before you start considering the possible implications on new crop, especially if you're in local areas that had that, that possibly have big back-to-back crops. That's where your bigger issues are going to arise.

And it's probably a little early to start that speculation that that is going to be a true risk. You know, there's such thing as space equaling demand. And what I mean by that is an elevator doesn't make any money if they're empty. And that can be a little bit of false sense of security in demand to drive basis values higher. But it's almost like you got to— you have to define why you are making the choice not to do something every day. Doing nothing is still a choice and not implying that that choice to do nothing is right or wrong. But you have to also understand what do I now need to accomplish if I don't do it this week? Now what do I need to accomplish next week? To actually come out financially ahead from the decision I made to do nothing. And that can snowball, Andy, that can snowball all the way into the front end of harvest.

Especially maybe you could go as far as saying that some of this crop that was planted a little later, right now it obviously looks like we're going to have the heat to push this thing along. But if we would find ourselves in a bigger wet crop, you know, a couple points wetter than normal in some big areas, that would be a big issue. In the face of not being able to get rid of it to the export market through shuttle loaders that would primarily be able to dry that crop down. Uh, and at the same time, you know, only a certain amount of daily demand from your domestic crusher. So soybeans, yeah, it's probably not really that much of a problem there. I don't think you run in the risk of being plugged per se going into harvest, but corn, it can be a big deal.

And at the same time too, Western Corn Belt, and to a certain extent Eastern Corn Belt, corn grower that has no wheat needs to realize that wheat is playing a big, big role against their corn today as well. There's some huge, huge wheat yields out there, you know, the Delta pulling off 80 to 120 bushel wheat in broad areas. Uh, the Northern Plains should have some tremendous amount of wheat, and Kansas crop is kind of so-so. Uh, and in the face of not having the demand to move that out the country, you just basically create more and more feed wheat, and the relationship between wheat and corn gets tighter, runs the risk of displacing corn out of the feed ration here or there, which adds up over time. And a big wheat crop that can't move can be just as big of an issue on corn space as anything, especially back to the carry environment.

There's a lot better opportunities making money and storing wheat right now than even considering handling corn. Like, a farmer wouldn't like to hear that, but I'm an elevator and I can make 3x the amount of money on just sitting on a wheat crop instead of buying your corn. Or being aggressive to buy your corn, I'm going to go ahead and do that. And you're not going to like the basis that you're going to receive on your corn.

Andy

Hruby: Yeah, no, that's good. And, you know, I think we just got to remember they're in the business to make money too. So that's, that's kind of why I brought that up is, you know, what, what are they looking at? What are they thinking about? And so I think that was all really good information, Jared. Is there anything else you want to leave listeners with?

Jarod

Creed: Yeah, I think just one last thing. Nobody likes sitting down at the bank, Andy, but I think it's, um, getting to a point here. I'm sure you've seen what equipment prices have been doing. We're well aware of what Deere has happening. Uh, I mean, I think there's some stuff happening at Case IH too, and it seems like the economy is slowing pretty quickly. The guys possibly sitting on a bunch of equipment on the farm that could be significantly overvalued from where it was 6 to 12 months ago. And it's time to have a financial health check at the bank. So you don't find yourself in a tough situation if things don't, you know, if you don't get a bigger and better opportunity. And quite frankly, that health check can maybe start leading you to making the business smart decisions for the 2024 crop, let alone possibly 2025. So just, I think it's time to tighten the belt.

You know, you got the crop in. The business side of farming is just as important as everything else, of having that mid-year review with the accountant and the banker to identify where you need to end up, not where you want to end up, but where you need to end up in the next 6 to 7 months.

Andy

Hruby: Yeah, no, I think that's a, you know, a great point. Like Chris always says, you can be happier informed and The sooner you get informed, the more time you have to make decisions and take advantage of any opportunity we have. So that's great. Well, Jared, I guess one last thing. I just want to say Happy Father's Day and Happy Father's Day to all the listeners out there Sunday. Hopefully everybody gets a chance to pick their feet up for a little bit. I know it's, it's been a long, busy spring for most. So with that, I will, uh, we'll kind of sign off and thank everybody for listening to the Ag View Pitch.