Markets reset for a new week

Chris: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch! Welcome everybody to another episode of the Ag View Pitch. We're starting a new week in the markets, thank God, after last week's information that we got from the USDA. And welcome, Dwayne. How's it going today?

Duane: Good, Chris. It's, uh, glad to have a new week and it's glad to have the reports behind us.

Chris: That's for sure. It looks like, uh, Pro Farmer gets started here this week and they're going to have about 4 days out in the field getting some real live samples. So that'll be kind of interesting to see what they get each day along the way as well.

Duane: Certainly will. It'll be interesting to see how the people on the road characterize the crops. I think probably one of the things of most interest is going to be the development and the maturity of the crop. And, you know, just the sense of how many acres are at threat to maybe having their growing season end prematurely, or before, you know, maximum yield potential is visited. It's going to be interesting to see if the crops that were planted late might look okay or whether they were under stress from the dryness and, and how they sort through that. But I think kind of a big theme is going to be how the crop is going to reach maturity. In the last week, there's been quite a few discussions that have gone on related to, you know, not necessarily a frost threat or a freeze threat because nobody has any idea until we get close to that event.

And, and this business has a history of kind of dismissing frost threats and concerns until they actually occur. So, you know, we can't really look at that and say anything with any definitive expectation, but we can look at crop development and know if we're, you know, at risk more so than another year based on the development and the maturity stage of the crop. And with such a large amount of acres planted after the 1st of June in beans and even corn. You know, we think we're at a risk of that greater than normal. And it's been certainly coming up for discussion even the last couple of weeks on the weekly crop condition ratings. The marketplace has been focused on other things and really didn't want to look at it. And then after Monday's report, from USDA, you know, anything bullish will just kind of cast off the sideline.

But the weekly continuation, or the weekly condition reports over the last 2 or 3 weeks have been quite telling that we are definitely behind. And so it's going to be interesting to see what the boots on the ground from the Pro Farmer Tour has to say about that.

Chris: Yeah, it's going to be one of those years where it's tough too, because like I said, when things are so immature, there's gonna definitely have to be some subjectivity in that just to kind of see how these things finish. I know I was out looking at some fields here over the weekend, even in our area, stuff that was planted in April, and it's interesting to me how even that stuff's quite a ways behind. But if you think back, you know, a lot of that stuff didn't come out of the ground for, you know, 3 to 4 weeks. It was planted in April, but it didn't come out.

It took 3 weeks or 4 weeks for a lot of it to come out of the ground, and then The other thing we noticed too, just going out and kind of doing some snooping around in the fields here and hadn't done as much of it as we did here in the last week and just kind of surprised in those early planting that the maturity is a little further along. It looks good, but if you start doing ear counts, there's definitely some stand reduction in some of those areas. So hopefully the yields will be good, but be hard-pressed to equal what we've had last couple of years, I think. So, but having said all that, Dwayne, what's, what's some of the things you're looking at? Like you said, you know, we're going into a new week. What's some of the, uh, some of the things that you're looking at that we might be, uh, might be experiencing as we go into new week?

Duane: Well, we're going to start out the week, uh, reflecting on the weekend moisture and, uh, Much, if not most all of Iowa had some very beneficial rains. Illinois had probably a smaller percentage of their acres received, you know, notable moisture and, you know, real beneficial moisture. Probably the largest percentage of their acres received half inch or less. The southern quarter of the state missed out on things largely, but there's a few things starting to show up on the radar there now. Indiana received scattered beneficial rains, and Ohio's benefit was mostly confined to the northwestern corner. Some of these rains were expected over the last few days, and so it's not a big shock that we had rains.

I would say that the precip totals are probably on the high end of expectations, and I wouldn't be surprised the coverage actually was on the high end of expectations as well, even though You know, we didn't get general coverage in Illinois and Indiana or Ohio like we did in Iowa. But the knee-jerk reaction of that is going to be for the market to be lower. And then Friday, we had a good performance. Corn was up about a dime, beans were up 9 cents, everything finished near their highs. That creates probably an added level of vulnerability to a weekend rain since you, you finished so well, and people will be expecting some of that to be immediately given back here tonight. I think there's certain truth in that. But I think there are other factors at play here.

And we got to remember that this rain occurs and whatever selling pressures may occur tonight are all occurring after the markets had a major flush, a major liquidation phase from last Monday's reports. And sometimes following such a cleansing, event, anything is, is, gets a muted response, even, even a weekend rain event like this. So I think we start lower. My guess is it won't be down as much as maybe some people may fear, especially if you happen to be in an area that got the, the, you know, the better rains. You're probably quite fearful of the weakness here tonight or this week, but I'm guessing it won't be down as much as those fears are.. And I'm also guessing that as the week unfolds, we may find some support coming in from other areas and we may find a lack of selling follow-through interest even if we do open and stay weaker here tonight.

So there's a, there's a lot of different things to look at. So we'll start lower, but I think we'll be fairly well supported, probably at values above last week's lows. I think wheat— we don't really talk about wheat here very often, but I think it's worth pointing out that Kansas City wheat is at a discount to Chicago wheat that we've never seen before. And I got charts that go back like, you know, 49 years and we don't have anything close to this. And the widest discount Kansas City has been to Chicago, we went through that level by about $0.30. You know, U.S. hard red winter wheat is currently the cheapest wheat in the— on the global marketplace. And it's interesting to point out that our export sales are ahead of last year's pace in wheat by about 18%. It's the only bright spot we have on the export side, really.

And it's kind of— that piece of information has kind of been lost in the, in the focus on everything else, but So that's a little bit encouraging. So I would imagine wheat isn't going to want to participate too much in weakness here and probably be well supported. I think it's also interesting to point out some of the commitment of traders data that came out every Friday afternoon. What was released Friday afternoon was as of August 13th, which would have been the day after the USDA report. So the market had basically a day and a half or 2 days settlements basically to to respond to the report and factor that into the Commitment of Traders data. And one of the things that stood out to me was the fact that as of the 13th, so 2 days after that report, East corn that day settled at $3.76 and a half, and Friday it settled at $3.80 and 3/4.

So from that, I think it's fair to glean that the marketplace has digested this report and put some of this stuff behind us, and it's going to be more difficult to build some downside momentum there. But probably the most compelling part of the Commitment of Traders report was in the soy oil data. The funds had been short oil, and they reversed that in pretty dramatic fashion. They bought 47,000 contracts of soybean oil, and now they are long 10,000 contracts. That's a pretty meager amount long position for them to have, and my guess is they are in the process of being willing to sponsor a long position in soy oil and probably have plans to do that for weeks and months ahead.

Part of the fundamental storyline for the soy oil bullishness is based on the fact that China is not importing soybeans and they're not crushing as many beans, and that's due to their reduction in their feed demand due to their hog disease issue and the herd reduction. Despite the fact that they have that going on, their poultry production is up, but overall their feed production is down. And so that means that they're— if they're not producing soy, crushing soybeans for meal, they're also not getting oil. And veg oil demand is pretty inelastic, and it's not real resistant to price, and that's an important staple to them. And so they have to, come to the global marketplace to get veg oil. And so there are, there's a fundamental storyline there that might be very supportive to veg oil prices in the weeks and months ahead.

And I think that's what we're seeing develop in, in, in what the Commitment of Traders data showed. And I think it's very interesting that that develops immediately following, you know, last week's various reports. Now the soybean data wasn't as bearish as the corn data and the soybean data wasn't as bearish as people expected. But overall, people view the soybean data as bearish. So I thought that piece of commitment of data, commitment of trader data was important. Another thing happening on the global front, we have Brazilian soybean prices responding to a very active China, Chinese buyer there. And the— those producers are getting some of their highest prices of the year down there. And so demand is happening there and tightening up the supplies there. In Argentina, they're having all kinds of financial turmoil that's caused their currency to weaken.

As their currency weakens, uh, the— their farmers' best hedge against that is to keep ownership of their physical supplies, and that holds bushels off the market, which helped to tighten their cash market. So There are other aspects of the global pricing mechanism that we're not necessarily seeing or on the forefront of our mind here as we deal with the depressing news of last week's USDA reports and the price action that followed it, but there are some supporting features to the global trade.

Chris: Right now, and that's kind of the, the demand side of it. Let's roll back for a minute to the original discussion we were having about Pro Farmer. Do you think Any of the information that they capture, you know, they looking at both the soybeans and the corn, will that have much bearing, do you think, on the market this week? Or what do you think the market will pay much attention to that?

Duane: I think the marketplace is anxiously looking forward to the Pro Farmer Tour, probably more so than other years, because I think the marketplace feels confused with the data that's out there, feels confused by USDA. Versus what the farmers have been telling them. And so I think they're anxious to get a perspective from the boots on the ground. And Pro Farmer Crop Tour, you know, has a varied history in terms of how much influence it has on the price discovery process on a year-to-year basis. But at the same token, I think they get a lot of respect for the professionalism in which they do their tour, and then there's question about how they come up with their final numbers, but people are very anxious to hear what the comments are from the participants during the tour on a daily basis, and I think it will provide another level of clarity.

We also have to remember that this year was the first year USDA did not give us an objective yield assessment based on field surveys, or field analysis in this August report. So the Pro Farmer tour will give us an additional layer of perspective that, you know, we feel like we've missed out with the August USDA report. So I think the trade is very anxiously looking forward to it. And I would imagine that, that means that the trade may respond to the tone that comes out of that out of that tour.

Chris: Yeah, it'll be interesting because the first day they're going to be in a bunch of areas where there was, you know, a lot of prevent plant. That also probably tells you, you know, they won't be measuring those prevent plant acres, but they will be measuring what was planted in those areas. And those areas are not real great, you know, because of the late planting and the delay and, and the wet conditions that a lot of those guys felt pressured to what they did plant to put in. So first couple of days could be pretty interesting because they're going to be on, especially in the east, in a lot of areas where they've really struggled.

Duane: Yeah, I would agree with that. And the trade, probably more so than other years, is going to be, you know, really interested to hear some of the sound bites from the tour participants themselves. And, and I would imagine even the fact that they're not going to, to look at a field that wasn't planted, it will be interesting to, to hear how people respond to the, to the scope and the vastness of these prevent plant acres. And, and, uh, you know, there's a reason that they weren't planted. They were super wet. And so all those reasons that factored into that, they also have an impact on any of the acres that did get planted. And, and I think we're going to hear, you know, be reminded of that again this week.

Chris: You bet. Anything else, you know, as we head into this new week? We can kind of keep this one shorter, but anything that I haven't asked about or that you think pertinent that we need to be thinking about going into this week besides the crop tour and probably opening a little bit lower? Anything else as we head through the week?

Duane: Well, I think that people are shell-shocked from the last report. And I think if we do a step-back analysis of where prices are at, you know, current corn prices are like 20 cents below the spring insurance price. And the spring insurance price by itself, uh, for many people is not necessarily a profitable venture. And if they happen to have a year where they fall below their APH, even if they're not in an area where they might collect on their yield, they may not collect on their crop insurance. It's not going to work out to be very profitable and certainly fall below their hopeful projections of last winter or spring. And I think that we're dealing with a situation where, whether it's right or it's wrong, the farmer is going to be reluctant to make sales at levels that are not profitable, especially when he doesn't have a good handle on what those yields are going to be.

And I think, right or wrong, the farmer right now is, is going to remain uncertain about his yields until he actually gets in the combine. Now, the last few years, we've had exceptionally good finishes to the growing season, we've packed in a lot of weight. And that's been a pleasant surprise. Farmers are concerned that this year could be the opposite reaction in terms of ear weight. And so until they actually get their own fields harvested, I think they'll be reluctant to make sales at these kind of prices. And, you know, I think that's probably going to have an impact on, on the whole price structure going forward here for the next several weeks.

Chris: What about this? That kind of brings up a question for me. What about basis? You know, we've talked a lot about that in the past. Some of these growers in some areas are going to have extra bushels they're not going to have room for, maybe don't have those sold because, you know, maybe the yields will be a little better than they thought in their area. And conversely, some others may have the opposite problem. But, but, you know, what's your response to basis management?

Duane: Well, I think it's important to realize, of course, that we've had some very good basis here over the last few, few months, really, probably since May. It's kind of firmed up and we got to some very lofty levels in the last short period of time. There's been attempts by the cash buyers to lower nearby basis, and they have done that. But then after the futures market broke, we saw some of those nearby bids get firm again. New crop basis levels in some locations have backed off from their peak, but they're still, you know, historically pretty firm. I would imagine that there will be an attempt by the cash trade to try to lower these new crop basis bids, probably before we get to harvest.

But I think it'll be important to realize those basis values are weakening not based on actual bushels being sold, but based on anticipation, or at least setting the, the stage for, uh, and, uh, hopefully that the cash buyer thinks he can buy some new crop bushels at a cheaper basis. Once we get into harvest, it's very possible that if we've had this pre-harvest weakening of new crop basis, we may find that that doesn't last very long because the farmer may not be willing to sell at these kind of flat prices. So if the futures market doesn't stage a rally of some notable significance, and I would have to say from current levels, you know, in order to feel confident the farmer might make some sales, I think the futures market probably has to rally 30 cents. If that doesn't happen, I think any period of weakness in new crop basis in the early part of harvest will probably be temporary.

If you're an elevator and you're in the eastern part of the Midwest, um, you probably already have made plans that you're going to come out of that harvest season with your facilities full of company-owned grain that wasn't— that space that wasn't occupied by the farmer wanting to store his own bushels. And I think they, especially if you have a feed business that runs out of that same elevator, And so I think those kind of decisions have already been made. So that means there's going to be a lot of bushels, if they are sold by the farmer, will be stopped by the local elevator before they ever get farther down the line. And so I think that makes for a kind of a firm basis tone. It won't prevent there being a period of weakness either before harvest or as in the early days of harvest, but I think it means that basis weakness may prove to be short-lived. And I think—

Chris: go ahead. Well, what about, you know, the producer out there that needs cash flow, maybe isn't sold enough? Does it make sense to, you know, we don't know if there's a rally coming, but like you said, you get— if we'd happen to have a 25 or 30-cent rally, they're going to try to take a bunch of that in basis. Does it make sense to lock a little basis in right now during the timeframe of delivery that the grower knows they're going to have to, to move some physical grain and then hope for a rally, or is there a better strategy than that?

Duane: I think it's a legitimate strategy to talk about doing what you're describing. I think the producer that is most confident in his yield is probably the best candidate to do that. And I think that there's a certain peace of mind knowing that when in the heat of the battle, when he's trying to focus on harvest, that he knows he's got an outlet to you know, a certain location that he's got X amount of bushels that he knows he can, can deliver there. In the same token, it's possible that if, let's say, a guy did that, you know, tomorrow, it's possible that he could experience a period of time where that looked like a really good move. But it's also possible by the time he actually delivered it, especially if he set that up for delivery in the latter part of harvest, he might find that he could have also had the same or better basis by the time he got there.

So I'm kind of giving you an answer talking out of both sides of my mouth here. I don't like to do that. But I think that it is very possible that we can experience a period of weakness in basis in anticipation of harvest. But when harvest arrives, we may find that the farmer selling is less than expected. The big wildcard to that formula is going to be will there or will there not be a futures rally? And will there be a futures rally or not depends a lot on are we going to get confidently lower production national yield numbers coming from either the trade or USDA in, in, in September, in October? Are we going to get combine yield reports that, that back that off? Are we going to get the finish to the growing season that causes anxiety in the trade and that causes the futures market to recover? Are we going to not have the tin can harvest that we've had in recent years?

Is that not going to exist? And when you look at the basis values we've had so far, and you look at conversations with farmers that you've had over the last several weeks, my sense is we're not going to get one of these big Ben Emptying type of pre-harvest movements in the cash grain trade. That also tends to cause the basis maybe not to be as weak as maybe some might expect. And I still think that there are end users that are trying to gobble up supply as much as they can. So if on the other hand, we get some, something that causes the marketplace to be believing that the final yields numbers from USDA will be lowered and/or their harvested acres will be lowered, suddenly that could cause a futures market to rally again.

And if the futures market rallies going into harvest, then yes, I think that increases the chances of farmers making sales, and that does increase the potential for basis weakness to occur. So there's a lot of moving parts to this, but again, getting back to your original question, if you're a producer and you feel confident about your yields, I think it's, um, understandable that you might want to look at some basis sales here, um, to, uh, know that you got some bushels and where you're going to go to free up some space so you don't have to make that decision in season. But I would probably have a tendency to caution one not to get overly aggressive with that just because you think basis levels are historically high.

And the reason I say that is we may have the foundational conditions that could keep basis as a relatively firm undertone and relatively firm historically for, you know, the first half of the marketing year coming up. So I'm cautious about getting too aggressive with it. But I do understand the merit in maybe considering some of that.

Chris: Well, and there's, there's some out there, I suspect, too, that have hedged and have some decent sales that, you know, do you go ahead and take a percentage of that and, and lock in that basis and have a firm price and know where you're at?

Duane: You know, I think that scenario offers the most compelling argument to do that. So if they have some, you know, good hedges in place and, you know, now they can convert that into cash and, and, you know, go full circle in locking in their margin that they plan to have and more than likely might be better than they had planned to have from a basis standpoint, then that's a completed transaction. It's a profitable venture. It takes one less thing to worry about and think about and he's ready to go to the combine and focus on that and can quickly tell his driver, his truck driver, where he's going to go with those bushels. And, and I think that's a very compelling argument for the person in that situation. Yes.

Chris: Yeah, yeah, we're just getting to the point, I think, where a lot of us are going to need to be thinking about some logistics and those kind of things and cash flow, all those fun things that we have to, to do on the business side of things. But probably more, uh, conversation as we get a little closer to harvest, but I just kind of wanted to start going down that path, so I appreciate that. Any final comments or anything you have, Dwayne?

Duane: Well, I do want to touch a little bit on basis and beans and spreads and beans and carry and just the bean market in general. We are caught up in this bean market where we have spillover negativity associated with China trade issues, and that's legitimate. We have spillover negativity associated with China's reduction in pork production and the fear about will they ever need our beans again, and all these kind of storylines. And there's some level of legitimacy in that. But I think that people need to realize that on the global stage, the global price of beans, like South American origin, is kind of firm, and gives indication that it may stay kind of firm.

And the— if you're a commercial entity, we're remembering back last year when we had all these horrendously terrible basis values, especially in, in the West and the Dakotas, like even a $1.50 basis, or they couldn't even find a bid. They couldn't find anybody who even take their beans. Okay, that, that is weighing heavy on people's sentiment. But this year could be set up for it to be completely different. If you're a commercial entity, and you're trying to, to anticipate that you may have less of your storage space occupied, and you're trying to figure out how you can best make money with that, Other than last year, over the history, it's usually been profitable to buy beans from the farmer, hedge them and get basis appreciation in the months that followed harvest.

And I'm guessing that with where the futures market is, the spreads, the carry, while it's not full carry or nothing like that, but there's more carry in the soybean market than there is anywhere else. And if they look at, uh, to, uh, whether they're looking for towards the July contract or whether they're even considering selling stuff in the November of '20, there's an opportunity for the cash grain merchandiser is probably going to be trying to accumulate as many bushels from the farmer he can, not sell them down the street to the processor or to the river market or anything else. He's just going to store them, hedge them, and look for basis appreciation, that can really help to tighten up the cash market in the beans. And there might also be a strategy there that offers producers an opportunity if they have soybean storage.

So that's something that would be talked about on an individual level. But there are things out here in the cash trade and basis and spreads that will also help to tighten up the, the cash soybean market., and thereby, in my opinion, helps to give some credibility that we can put a floor to this soybean price, maybe quicker than people think, or certainly quicker than they fear. And if the— if— and all this is based on if the USDA number is at the— what they got last Monday, and it's not higher. And keep in mind that their number at 48.5 is not that far below last year. And yet, you know, look at the percentage of the acres that were planted after the 1st of June.

So we still have a yield component that's— that is uncertain, but there are other factors here that can help shore up this floor price on beans, and, uh, maybe quite a bit more than what the— some of the greatest fears are out here.

Chris: Yeah, and that again, like you said, that's probably a conversation to continue too, is as to when, when there's a finite amount of storage on the farm, do we put beans in the bin or do we put corn in the bin?

Duane: Well, other than last year, many times beans in the bin was a pretty good return on storage. And I think the elevator over the, you know, course of the last few decades have found soybean hedges as a good, good thing to put in their storage. So that may very well be the case again. We have to have some other factors at play that could, you know, all the pieces have to fit together. But I'm looking at a playing field here that the pieces might work together this year for that to happen, which would be exactly the opposite of what we saw last year.

Chris: Well, yeah, and it's not as much fun to store soybeans as it is corn either. So that plays into it. And also cash flow, there's, there was a lot of years there where, you know, there wasn't any carry in the bean market. And so you know, the beans were the cash crop or the cash flow, fix the cash flow, fill everything else up with corn and try to capture the carry with that, where this year, a little different scenarios to think about.

Duane: Yeah, and like I said, I talked about a little bit earlier, but the— anytime there's financial turmoil in South America, and that affects their currency, which we certainly have that going on, It does create a backdrop that their producers are less willing to let go of their supplies until they're able to convert it into dollars. And those dollars are something they want to spend for input costs that are also calculated in dollars. And so it tends to tighten up that cash global price structure. And, and it seems like we have those kind of conditions in place. So I think that some of the pressure that we fear on the global stage or the U.S. stage because of our lack of exports to China, I'm not so sure that some of that negativity isn't being mitigated by other circumstances.

Chris: Right. Well, we were going to make kind of a short podcast here, and as usual, we start talking and we keep going. I think we can again.

Duane: Chris, that's a real problem of yours. You just talk too much.

Chris: I know. I, I ask a question and then you have a lot of, a lot of content for it.

Duane: So, um, I can't blame you for that. I'm probably the one guilty, made this table.

Chris: Yep. No, it's— that's good. That's all, all good stuff. You know, we started the conversation and again, it's just proof that, you know, we don't rehearse these. These are not pre-planned. It's just a conversation, it's perspective, and that's how we started this and that's how we're going to continue it. It's really just a conversation. It's better than having it at the coffee shop, and hopefully we've got some good content and information that we're bringing out. And if anybody hasn't listened to it, also I would recommend you listen to the podcast I did with Brian Grady on the methodology of the crop tour and what they're doing over— but Specifically over the next 4 days with real data coming out of the field. I think that's going to be like you were saying, Dwayne, what the market's really going to be probably watching, at least for the first 4 days of the tour.

Duane: Yeah, it's, it's going to be very interesting. A lot of people are going to have more interest in this year's Pro Farmer tour comments than maybe they've had in some other years. But they're— the trade is, um, I think they're really looking to the Pro Farmer tour to to be a, you know, a, to legitimize some numbers or to provide some clarity on numbers here. And to give a, you know, add or create some level of confidence about what we're going to have for a national yield that, in all honesty, I don't think we really have a lot of confidence in any particular number at the present time. It just seems very fluid.

Chris: Yeah, that's for sure. So, well, Duane, thanks a lot. We'll probably hook up again, you know, at some point during the week or towards the end of the week, depending on anything that comes up that we feel like we need to cover. And I guess for now that, that should do it. Thanks a lot, Dewayne.

Duane: All right. Thanks, Chris.

Chris: Yep. So thanks everybody for listening and we will catch you again next time on the Ag View Pitch.

Duane: Thanks for joining us on today's episode of the Ag View Pitch. As always, you you can reach out to us at cbarron@agviewsolutions.com or duanel@netins.net. We'll catch you next time on the EggView Pitch.