Monday market outlook, July 6, 2020

Narrator: Hey podcast, thanks for tuning in to another episode of the Ag View Pitch. If you haven't already, please go over to the website, check out agviewsolutions.com. That's a-g-view-solutions-dot-com. One thing that's pertinent to our timing right now is the margin enhancement tool. So if you click on the useful tools tab at the top of the website, click on that margin enhancement tool, download it. It's a real simple calculator that looks at You know, how can things at this time of the year benefit your overall yield and the profitability return on your farm? So discussion right now is fungicide. Do we make those applications? What kind of return can we expect? And instead of making an emotional decision on that, go look at the tool, download it. It's completely free, completely user-friendly on your end, and put some of that decision-making and numbers to the test.

Thank you all for listening. Hope you enjoy today's episode.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week and you've got Chris Barron, Dwayne Lowery here to talk markets. Dwayne, a lot of stuff happened last week. We got a surprise on a report. We finally got some price strength that people wanted and now maybe there's as many questions in the air, as one would want. We've got weather, you've got COVID that impacts ethanol, uh, China. We're still not to the, to the break-even for a lot of people where the prices are at. And there's another report coming up towards the end of the week, so there's plenty to talk about. Is that right?

Duane

Lowery: Yeah, I'm full of questions. Hopefully you're full of answers to this.

Chris

Barron: Yeah, exactly, exactly. So You know, let's start out with the weather thing. What are some of the models saying that you're seeing, and what are you hearing? What's the topic on the weather at hand currently?

Duane

Lowery: Well, I would say that the weather models for several days has been consistent in building a period of time here where we have well above normal temperatures. It's been rather consistent with that. And that remains consistent through the next 2 weeks. There will be some ebb and flow, possibly towards the end of that 2-week period, but the overall warm outlook and above-normal temperature theme probably is going to extend through the end of the month based on what forecasters are telling me and based on what we've done. So far, I've I find reasons to, to believe that. Moisture is not completely dry. There'll be opportunities for pop-up showers on almost any day with the warm temperatures. There's not a broad general system. There is a cold front that will move through the area this coming weekend, but the models don't suggest a lot of precip associated with it.

and the favorite areas would be Minnesota, the eastern part of the Dakotas, probably for the favorite area. Precip totals in general through this, from this front, might prove to be rather disappointing. The other factor we gotta consider from a weather standpoint, you know, we are starting to move into the period where soon pollination period will begin. It's gonna begin farther south of us, of course, coming up to our area. We're not quite there yet, but, you know, we know it's coming. And we have very warm nighttime temperatures, and that's been kind of a consistent part of the forecast as well. And that's, you know, kind of abnormal. And we know that from times in the past, extended period of above-normal temperatures for a nighttime low that's above 70 degrees can be a problem and detrimental to yield and to fill. We're going to be watching that.

So far, some of the benchmark years for that being a problem was 2010 and 2011. So far, we are above the temperatures that prevailed in those years, and the forecast suggests that we will stay at or above the temperatures experienced during those years. And the line as to where the— how far north these 70-degree-plus nighttime temperatures occur have often been in that Iowa-Minnesota border, sometimes going into Minnesota. And if you wanted to be conservative on that statement, you'd say the, you know, I-80 corridor and south. But there's a lot of days that the forecast has been above 70 degrees on a— in in areas north of that line also. So that's what we're dealing with, with weather. And, you know, on the one hand, prices have gotten back to price levels that we had hoped that we would get some sort of a summer weather event to try to make sales on.

We are just beginning to get into that area with last week's highs, and then the market was down Thursday before the long weekend. And I think I'm a little surprised and somewhat disappointed that the night session on Sunday night wasn't up enough to recover all of Thursday's losses in the corn, which it did not. The beans, however, they continued to push higher, made new highs, and that seems to be a market that is focused on something more than just weather. So, you know, we got— producers have a lot of difficult decisions to make On the one hand, like I said, there was a play and an intention that looked for a summer rally, a weather-inspired rally, looked to make sales and then expect prices to ultimately be lower at harvest time.

That may still be a valid approach, but, you know, last week when USDA took away 5 million acres, they also took away about 900,000 million bushels of cushion, that was part of the logic for why prices might be quite depressed at harvest. We were going to have record supplies of, of both old crop carryover and new crop supply at that harvest time window. That would have been a record level of raw bushels, and even though we take away 900 million bushels, if we achieve the targeted yields, we still have a record supply, which could imply weak basis, could imply weak flat price, and all of this is occurring against the backdrop of demand that is still trying to recover in the case of ethanol and uncertain there, and livestock industry facing troubles and, and cutbacks, and we don't know what the demand outlook is there.

On the export side, it seems like there's always question marks about U.S. export opportunities, but it should also be pointed out while we're talking about weather here in the U.S., you got parts of Russia and Ukraine that probably at least a third of their corn crop, maybe up to half, experienced dryness conditions and they're going to see some triple-digit heat this week. You got parts of Europe that are experiencing dryness conditions as well. So there's a lot of things to look at and And I don't know, Chris, I mean, how are you looking at weather both in the near term, like let's say a 2-week period, if the forecasts verify, how do you feel that affects you personally on your crop area, and how do you feel that affects other places? I know you've been traveling quite a bit recently.

And then, you know, how long does this weather have to extend and become a problem that takes the market to a, you know, a new level or a different level where suddenly selling this rally in this timeframe now, it proves to be a mistake and there won't be a return to contract lows at harvest time and there won't be a chance of an insurance payment. I mean, how do you see that mix unfolding and what's the timeframe and the circumstances that would differentiate between whether current levels are a selling opportunity or whether they're not.

Chris

Barron: That's a big question, but I'll start out with the weather thing. From our perspective, from what we've seen, is nothing but phenomenal crops in our travels. It tells me also that, you know, with corn specifically, you know, as you said, we're not to pollination yet. We're probably a good full week away yet, maybe a little further than that away. When you're in the vegetative growth stage, you're still growing roots, you're still, that plant's still getting down to moisture. The majority of the areas had a pretty good charge of water as far as subsoil goes and things.

It never fails, you watch the yards burn up and it takes a lot longer for the crop to start getting in trouble, with the exception of some sandy ground or some of those high areas or if you've got some compaction and stuff, but we just had such a great planting season that as we drive around, it looks as good as I've probably ever seen as we tour around going from farm to farm. I guess to me, we've probably got some time yet before the weather, generally speaking, is really going to hurt much. Even if it's hot, even if we have those hot hot nighttime temperatures that you're talking about, unless we get extremely excessive or something and you get into the 3 digits. But, you know, that night, you know, that mid-90, low 90-degree temperatures, a little hot for the corn.

But like I said, I still think we're gonna, we're gonna get through this fine for a couple weeks now if we stay dry like this going into the latter part and, and right into the middle part of pollination. Then maybe we're going to start spelling some trouble, but You know, to me it always still comes back to what the market says. I mean, we can all be smarter than the market and the market's going to do what it wants to do based on all the things you just talked about between COVID and ethanol and, and weather, you know, in the future, you know, what they're, you know, what these weather models are saying. Because if all of a sudden there's a, there's a rain coming in a week and, and it's being predicted, that's going to start to be traded as well. So You know, to me, it's like you said, you know, we gotta, we gotta really pay attention right now.

We gotta be on our toes and, and watch, you know, what the forecast is saying. And, and I don't know, what's your thought too on the, on this COVID thing? I mean, there's, they're starting to, um, you know, ask people to quarantine again and all kinds of stuff starting to come up again now. And after the Fourth of July weekend and everybody out there and we start seeing that continued increase, does that continue to mess up ethanol? Because ethanol has been on this slow improvement and now all of a sudden, you know, it's, it's going kind of the other way with the COVID What's your thought there?

Duane

Lowery: Well, I never thought COVID would ever reach a point or ever deserve the point that the entire national economy should ever have been shut down to begin with. I think that the statistics of outbreaks and death rates, etc., and the demographics of who's been proven to be most vulnerable, and raw economic data suggest that the U.S. or any other country will never fully implement another economic shutdown. And I think that the fear of that is probably overrated. I just don't think it's going to happen. Even schools have— are planning to go mostly back to normal this fall. And if schools are planning to do that, you know, that's probably the benchmark to suggest that everybody else is going to be going back to normal either also.

If you— I think most people are beginning to live their life in a manner that they're more willing to go out now than they were, you know, back in March or even April. And I think that right or wrong, or whether they're making themselves more vulnerable or not, people are just kind of more willing to take a few risks. And so I'm not that overly concerned about a second wave impacting fuel usage and transportation and falling into stay-at-home mode. I know that some of that still lingers, is there are still a lot of people working from home and things of this nature, but I don't think it's going to be anything like what we experienced, you know, in that January-April timeframe.

Chris

Barron: I have another question for you too then. All the funds and all these shorts and everything, and that's been one of the talking points about maybe seeing some strength in the market. Give me a brief point on that topic. Where do you see that impacting the—

Duane

Lowery: I'm sure all of the pre-report shorts have not been covered, and I don't think the sentiment, the trade sentiment, has been fully reversed from what it was prior to the USDA report. And I think going into the holiday weekend, there was still a sense by that side of the marketplace that had been bearish. I think they were still bearish. I think that was evident by Thursday having, you know, a day where corn was down 7 cents going into a long weekend. I think it's probably further evidence that corn is only up 4, 4.5 cents on Sunday night after a weekend where the weather forecast advanced another, you know, 4 days, and we still have the same basic theme. So I think that very sentiment still exists.

I would imagine that means we still have some more short-covering activity to unearth this week, and unless the weather forecasts take a decisive turn to something non-threatening, which doesn't appear likely, then unless that happens, I think the market stays firm and we get more short-covering. I don't know that we will fully reverse that this season or not. And now you've got the producer entering in to become a seller, even if the— some other shorts begin to exit, the producer may want to take over those short positions. So I don't know, I find this to be a very tricky situation and, and a situation that's going to be very easy to make a wrong move.

I mean, if you don't make sales on this rally, which is something you had— everybody had hoped for— if you don't make sales on this rally and prices retreat and the weather turns out to be not that bad, the crops perform well like happens often, and prices are cheap at harvest time, and there's possibly an insurance price being kicked out because of prices, and if you didn't make the sales now you're gonna certainly regret it. You're gonna say you missed an opportunity. On the other hand, if you make the sales now at prices that are far below what is desired, um, and it turns out that, um, you don't get a crop insurance payment, there are no government subsidy payments because prices end up being high enough not to generate one, then you're gonna look back and say, why in the world were you selling prices at so far below prices that you needed. So this is not an easy juncture.

I think the best approach is that if you make the decision that you want to establish price protection here, you want to make sales here, then the bushels that you can't store, that you know you have to harvest, those are probably the first bushels to feel comfortable making, making sales on. But then other bushels that maybe you plan to put in storage or whatever, but yet you think you want price protection at these values for all the reasons talked about before, then maybe that has to be through a put ownership. Maybe, maybe this is the year where you have to say, okay, I want price protection, but I don't want to get caught if this weather lingers and continues well into August and it turns out to be, you know, completely different narrative than what marketplace is currently thinking, then maybe now's the time for options.

Chris

Barron: And I'm—

Duane

Lowery: I've kind of leaned all year that options would be a good way to do price protection this year, kind of for this same basic reason, is the fact that you're probably going to be making sales and taking price protective measures at prices that just don't work, but you're doing it for fear that they could get even worse. So I'm inclined to use the option markets and People that know me know that I really don't like options, but I think this might be a year where it provides the right, you know, functions of a tool and a marketing tool for producers that, you know, has a cost, but maybe that cost is better spent there than a cost of having made a poor decision because the market made a much larger move than one expected.

Chris

Barron: Yeah, I agree 100% with you on the— and we talked about that last week in a couple of podcasts too— is just first of all is prioritizing the bushels, and number one is what bushels have to go off the combine at harvest time. You know, what are those estimated bushels? What's that look like for, you know, corn and soybeans specifically? And and start looking at, you know, we're getting close now, especially in the soybean side, to where we're getting into the black, we're getting some black ink here now on some of them I was looking at this morning. So I think, you know, each individual operation's got to start looking at that really close. And then the second comment I would make, that just as an observation, is absolutely not a recommendation, but as an observation, What we see and what I try to do as well is small incremental sales.

You know, when there's a lot of uncertainty, sometimes that's when there's as much opportunity as you may see for a while, or possibly. But, you know, like you said, the big question mark right now is really just— technically is weather. And— but what gave us the strength so far is and, and pretty much was that report last week. And, and now it's— is the question is, is whether gonna, gonna carry this on. So that leads me to kind of a final question here for both corn and soybeans, Duane, is if we, if we start to, you know, give us some strength from a technical perspective, you know, what's the technical side of things telling us on, on the upside for corn and soybeans? And where's the you know, where's the fore, the risk, you know, level on the downside for both, if you can rattle those numbers off.

Duane

Lowery: Well, technical analysis is, of course, an art form, and as well as a scientific form, and everybody's got a different answer and a way of looking at it, but what I said prior to last week's report is the same thing I'm going to say now. Resistance and target areas for Dec corn is somewhere in the $3.60 to $3.75 zone. We got to $3.63 last week. The overnight high Sunday night was $3.60, so we're just entering what I would consider to be a target zone, a resistance zone as we get— resistance builds fairly significantly as we get closer to $3.70 basis Dec corn. So, you know, where we're at here on Monday morning, you know, we're within a dime of finding some notable resistance.

On the other hand, you know, where should we not go if the scenario is correct that this is a rally that needs to be sold and ultimately we're going to see harvest lows that are, you know, back below contract lows in Dec below, possibly below $3. If that scenario is going to be correct, then we're probably not going to get Dec corn above $3.88. That's like 30 cents higher, so you know, you got you know, you got 10 or 15 cents of additional price strength here, and if the scenario is right that these sales were good sales, then you probably shouldn't go 30 cents. And I would kind of— that's kind of what I'm using for a guideline.

I don't know if that's correct, but it would seem to me that based on charts, if we get above $3.88, then all of a sudden the charts take on a different look and —rather than looking like a corrective rally that should be sold, you start to look at the perspective that we just got done trading the bottom side of a, you know, near 15-year price range, and now we're coming up and building upside momentum. And we already know that the fundamental picture is 900 million bushels different than we thought it was because of the acres. And so if we start to get to some of those other price levels, it's probably due to weather suggesting that the crop size is now smaller than we thought it was as well. And in terms of expressing those conclusions through charts or technical analysis, those are the points that I would use to describe it.

What about soybeans on the, you know, where's the resistance out there and Well, I would say that technically the, the beans seem to me to have a lot more upside potential and a lot more room to work with. I'm not sure if they're going to use that or not, but they seem to have more potential there, and I would define the more significant resistance being more like $9.30, $9.40 basis November beans, and that's basically 30 or 40 cents higher than where it is, and I say that and then on the, you know, on the other side of my mouth I'm wanting to say that I question whether, you know, we can build much additional strength here either. So I'm kind of torn between how to handle beans.

The fundamental situation in beans is a little bit more precarious, or at least seems more precarious, because we're dealing with a carryout level that is much closer to being a problem or to being, you know, elevating concerns. And we also have, you know, still have some level of optimism that China's going to be an aggressive buyer of U.S. beans here from this point all the way into the harvest period. So there's a lot of wild cards here, and prices are still at the bottom side of parameters over the last 15 years for beans, even at the current $9 value. So it feels like you're more vulnerable to get to more upside potential than the market expects in— for that type of situation occurring in beans than it is in corn.

But again, these are, these are not easy times to make decisions because we've been so beat down and depressed by prices, and we've been forced to think certain values are maybe selling opportunities, but when we go to look at like Profit Manager, we know they're really not. And so, mm-hmm, I'm struggling, to be honest with you, trying to determine what is a realistic price expectation if there are weather concerns, and a big part of that, trying to find the answer to that question is, how long are these weather concerns gonna linger? I would say this: the vast majority of people do not embrace these weather concerns as being all that threatening. The vast majority of people think that, wow, we got a weather concern, but it'll be temporary, it's not gonna be long-lasting, we've seen this script before. Crop ends up producing well and prices end up going lower.

But, uh, so this year people are slow to embrace that, and somehow usually the markets find a way to, uh, get people to embrace this weather at some point and become fearful. And so I, I find myself thinking we might have several days yet where the marketplace has to contend with these weather forecasts and that might lead to some strengthening during that period, which will, you know, elevate that and change that sentiment. That's what I'm kind of suspicious is happening. So I find myself thinking we got a few days where the market's going to act relatively firm.

Chris

Barron: Yeah, we're entering the corn weather market, and we probably won't enter the soybean weather market until right after pollination, and then all of a sudden we'll be in the soybean potential weather market, if we did happen to stay on the dry and warm side or hot side of things, the bean market— if we got some bean market strength, there could be spillover back over the corn and kind of help carry that, or does corn kind of operate on its own merit?

Duane

Lowery: I think they'll tend to operate somewhat independently, but they both might still have room for price strength to absorb. Concerns about weather. We're just really getting started if we have a right market. I mean, man, the question is how long does it last? But in terms of market embracing it and respecting it and trading it, we're just beginning the process. Mm-hmm. So there's still opportunities.

Chris

Barron: And well, and there could be, you know, this report on Friday could have, have some negative news in it too, potentially. This could kind of offset a little bit of that 900 million bushels you were talking about too, couldn't it?

Duane

Lowery: They'll offset part of that for sure, and yeah, and it won't be a full reduction of carryout. It is possible that you somehow— yeah, it is possible that USDA might be a little less negative towards demand than what the private sector has been talking about. So there's a possibility that Friday's monthly supply and demand report might prove to be not as negative as what some people might be expecting.

Chris

Barron: Let's put it that way. Yeah. Well, I think this was a great conversation, Duane. Anything I didn't ask or anything you want to wrap up? And then again, I would just say that, you know, we'll, we'll stay, stay tuned, I guess. You know, kind of like last year during the price strength and when things were going on, there's a little more to talk about. We'll stay on it on our end too, won't we, Duane?

Duane

Lowery: We need that. Yeah, we'll stay updated. We will. If we see something of interest. The last thing that I would point out there is kind of a big theme for me is stay focused on the 2021 pricing opportunities. I think that if we do end up finding out in the end that this weather rally turned out to be a selling opportunity, opportunity, and if we end up with a more traditional harvest time period where prices are lower more during the harvest as opposed to an August-September low like we've seen recently, then I think in that timeframe of harvest, people are going to start thinking ahead to 2021, start having conversations with their lender, and if we happen to be at the bottom side of price parameters, during that harvest season, that's going to be a very ugly time to be doing cash flow projections.

And yet, you know, right now you've got Dec '21 corn trading above $3.75, maybe it'll go to $3.85 this week. You got, you know, that's something that seems worthy of attention in my mind. And if you can, while you're making some decisions about the 2020 crop, it might be easier to feel good about making some 2021 sales at $3.75 or $3.85 basis December '21 futures and then have those on the books so when you have that conversation with your lender about the 2021 season, you can already point to the fact that you've got some, you know, survivable sales strategies in place as opposed to being forced to maybe deal with some, some value that could be 40 or 50 cents less than that at, you know, during the harvest time window.

Chris

Barron: Mm-hmm. Yep. And I think that's a good point, and, and it also warrants getting your, uh, rolling your cost of production from, from the 2020. Anybody that wants help doing that or wants to chat about that, make sure you get a hold of us because I think dialing some of that in and kind of looking at those opportunities, and I would say that on the, on soybean side of things too, um, there's going to be some opportunities I think on the soybean side there. As well. I know you, you're, you're talking more strength in the soybean side of things, but, but there's some black ink in, in that category as well. A lot of operations from what we're seeing.

Duane

Lowery: Well, the— probably the reason I'm a little hesitant to get too involved in the beans excitement to make sales here is the fact that if, if a guy doesn't make sales in beans here, yeah, you could drift 50 or 60 cents lower again, but unless you are forced to sell it in the harvest time window, I think the opportunity for price strengthening to occur again after harvest is still going to be, you know, quite good actually. I think global demand is for soybeans are quite good. So if you miss a sales opportunity here, it feels like there might be another one coming. On the other hand, in the case of corn, if you miss a sales opportunity here and we do experience the scenario where we go down and we have a weak harvest time window, you know, you're going to be fearful that that weak harvest time window in corn will take a long time to recover.

So that's probably part of the reason why I'm sensing more urgency to focus on corn and less urgency to focus on beans.

Chris

Barron: Gotcha. Well, thanks, Dwayne. I think this was a great conversation, and like I said a little bit ago here, we will stay on it, keep our eye on the weather, and if anything develops, we'll be back and ask everybody to stay tuned. And thanks for your time, Duane, and have a great week. And I'm sure we'll be in touch as the week goes along. All right, thanks, Chris. Yeah, thanks, Duane. And thanks everybody for listening to the Ag View Pitch, and we will catch you next time.

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