Spring rallies and WASDE review - weekly market outlook: May 13-17th

Andy

Hruby: Welcome everybody to the Ag View Pitch weekly market outlook for the week of May 13th through the 17th. Today you have Andy Ruby with Jim McCormick from AgMarket.net. Jim, how are you?

Jim

McCormick: I'm doing well, Andy. Thanks for having me on, and I appreciate you having me on on a bullish day. Kind of an exciting— we're recording this after the May WASDE numbers. It was kind of nice that the government gave us a little bit friendly news today.

Andy

Hruby: Yeah, I think, you know, for me personally, it kind of caught me off guard. A lot of rumors about a bearish report, and it just kind of felt like, oh, this is going to be one more thing to kind of kick us down and pretty surprised with how things turned out. Let's, you know, let's go into a little bit of detail there. I think that's a good place to start. On corn there, you know, they're talking a 181 yield on 90 million acres for new crop.

Jim

McCormick: What kind of—

Andy

Hruby: where are your thoughts around some of these numbers that they're throwing around on the corn side?

Jim

McCormick: All right. Well, let's just start why they did what they did. I mean, the 90 million acres, that was the acreage survey. That was the March survey. The $181 is trend. That is what they do. There's going to be, Andy, I think, a lot of argument that the $181 is too high, especially with the delay we're seeing in getting this crop planted at the moment. Some of the weather models are a little bit showing maybe a little bit better chance of, I think, a little bit further west you go for coming out of the weekend. But we're definitely a little bit wet. So that is going to be argumentative, but it's a good starting point. And as for the acres of 90 million, That's going to be the working number here till we resurvey the producer here at the beginning of June and release it at the end of June.

My personal opinion is, you know, my snap decision when I saw that 90 million acre, I thought it was a little bit too low, to be quite honest. Remember when, when they were surveying the producer for that March survey, that was when we were seeing some of the worst prices we've seen in a very long time for the corn market. So I think the knee-jerk reaction of the producer was, I'm not going to plant corn, I'm going to plant beans. But a lot of our clients that we deal with, the reality is they're set into rotations. They're geared up iron-wise to produce a certain amount of bushels of corn and beans. So I wouldn't be surprised if that acreage number really doesn't creep back up down the line when we resurvey everybody in March. But, you know, weather will have a final say in it. If we keep wet, like you were mentioning before we started recording in Indiana, is very, very wet.

I don't think it's 2019 wet type of situation, but it's something we need to keep an eye on. But it's a good starting point for the supply is how I would argue it is.

Andy

Hruby: Yeah, no, I agree. And it looked like we had, you know, a little bit of support and increased demand with, with old crop carryout down 100 million. You want to elaborate a little bit on that?

Jim

McCormick: Well, I mean, our group was looking for the carryout to drop a little bit on these old crop numbers. You know, they were a little more aggressive than I thought they would. But, you know, the fact is they raised ethanol demand by 50 million. The ethanol profitability has been very good. So I think you can argue that is there. Exports for corn are also raised, I believe, by 50 million. So you had that 100 million revision up in demand. They took it right off the bottom line and that gave us a little bit friendly number on the July corn today. And then they carried that with that friendly number being carried forward in the new crop balance sheet. Then on top of it, they raised the demand year on year by 100 million. Hence, you got this carryout for this new crop that was a lot of— quite a bit lower than what a lot of people thought. It's a little bit over 2 billion bushels.

And what you're going to hear a lot of people talk about is if this wet weather does stick around and the argument is, hey, if we can't get that 181 trendline yield and it slips back maybe down 5 bushels to 176, your carryout potentially could drop below that 2 billion level, maybe give a— keep this market a little bit supportive. So, you know, there's definitely going to be a story to be watched over the next couple of months.

Andy

Hruby: Yeah, do numbers like these and the weather that we're experiencing, does that catch the funds' attention? You know, we closed higher for the week, for the day, things are looking up. I know they've covered some of their short positions. You know, what's, what's going to be the one thing that they're really looking at? Or have we had enough positive impact in the market from the producer standpoint to get these funds' attention to want to cover more of their short position?

Jim

McCormick: I think you're going to— you have got their attention. Obviously, they've been getting out. This is one of the strongest, highest closes we've had in months in the corn market. And, you know, the wheat market had a very strong day as well. The funds have been lightening up. They have more room to go. I mean, a vast majority of the funds trade technicals, Andy. They just X crosses Y, they buy it, A crosses C, they sell it type of situation. So what's happening as we start going higher, you're going to start getting some technical buy signals. But the other thing funds do and maybe do a little bit better than a lot of producers is they manage risk. And what I mean by that is it really doesn't— it doesn't depend. It really doesn't matter.

Excuse me, on what size of fund it be, be it a $100 million fund, a $5 million fund, a $100,000 fund, they all have— when they put trades on, they're willing to risk a certain amount of their equity on one trade, knowing that every trade is not going to be a winner. A good trader maybe is accurate, makes money half the time. The key to being a good trader is not taking huge losses. So now we're getting to the point now, I think, where you're starting to get a little bit of technical buy signals, but you're also getting to the point where these funds were essentially been selling, been short for the last 2, 3 months. They're now having an equity drawdown and they're going to start triggering points where they say enough's enough, I'm going to get out of this position. I don't want to lose any more money.

The real question is going to be if this wet weather sticks around, is that going to be enough to entice them to actually reverse that position and actually go long?

Andy

Hruby: Right. Now, you know, what do you think? Is that, uh, is that 2 weeks?

Jim

McCormick: Is that 3 weeks?

Andy

Hruby: A month before they really think, oh boy, I want to get, get out of my short position and consider going long? I mean, we look at 2019 and it definitely was later before the funds really got their attention and it took off. Do you think it'll take roughly the same amount of time before we see action like that?

Jim

McCormick: I think it's, it's going to be the same. I mean, I, I would guess, you know, what you're going to see, the Commitment of Traders report that's released after the close on Friday is the data as of Tuesday. A lot of this movement happened later in the week this week. Obviously we had a very big strong movement up on a Friday that, that won't show up until next week's Commitment of Traders report. But no, I, I think you're going to continue to push these funds out if this weather does stay wet. Now, the hard part about the weather is it does change. You know, the one thing about the weather this year that I have found— we deal with clients all across the country— is when you look at the radar, it looks like everyone's getting hit with a lot of rain.

But when you talk to the clients and get down to the field level, it is very, very sporadic where certain clients in certain areas are just getting deluged, multiple inches of rain. And then you'll go 30, 60 miles away And some of his clients didn't get hardly any rain at all. And they're actually farming as we speak. So, you know, it's going to be very hard to tell. But the bias right now looks like it's going to continue to be a wetter, a wetter kind of middle part of May at this point in time. And, you know, we know once you get to the second, third week of May, you're going to hear more and more people talk about, at least on the corn front, that you're taking the top end off this crop potentially.

Andy

Hruby: Right, right. No, I couldn't agree any more. Let's shift gears a little bit on the soybean side. And, and what were the things that really caught your attention in that WASDE report today? As we focus on soybeans?

Jim

McCormick: Well, you look on the old crop, they left it, they, they made no changes for the domestic old crop that was anticipated, that pretty much really didn't have an impact on the market. They did make some revisions to the Brazilian crop., and they are, you know, to the South American crop. But the fact is those revisions were not as much as the trade was looking for. So that might have been a little bit disappointing, but they, they are doing the step lower. That is traditionally what the USDA does, Andy. They don't really make big moves. They tend to use a scalpel instead of a butcher's knife to try to, as they shave the crop down. We'll see what happens. But the big thing you got to look at is going out on the balance sheet. Into '24-'25. The US domestic carryout is going to grow dramatically. The world numbers are going to grow dramatically if these balance sheets are correct.

And there's a lot of what-ifs. Remember, we're looking at a US crop that's not even planted. You're looking at a Brazilian crop that's not the one they're harvesting now. It's the one they're going to plant this upcoming fall. So a lot of water has got to go under that bridge. But if we have anywhere close to these balance sheets being accurate that the government put out today, I would argue prices are unfortunately going to be a lot lower a year from now if these numbers are accurate.

Andy

Hruby: Yeah, yeah, no, it's, it was a pretty large increase in new crop carryout. And, you know, as we, as we think about things to increase demand, where, where are areas that your group's looking at of, okay, if we're going to produce this much more globally, where are we going to go with those beans?

Jim

McCormick: I mean, the reality is this: we need to go all in on renewable diesel, in my opinion. And we've got to get not just the farm behind it. You got to get the government behind it. You've got to get the backing of the oil industry, which I think you are seeing. I mean, a lot of these renewable diesel plants that are being built are being, you know, essentially partially built and financed by Big Oil, per se. So that's a good sign. Unlike ethanol, when we were fighting the, you know, the Big Oil to get ethanol on cars. They are, they are going in on it. But we, you know, it's going to take some time to build out. Right now, if you notice the bean oil market, it's been absolutely trash recently. And part of that problem is the competition. Some of it's used cooking oil. A lot of this comes down to the carbon scoring and how you look at it.

Everything's done about carbon and trying to take, you know, carbon out of the air. Used cooking oil is one of the best carbon squares scores you can get. That is coming into the US right now, and that is essentially offsetting or essentially competing with our, you know, essentially bean oil to, to build out renewable diesel. So we've got some competition. But I think as we get more and more green per se, that builds out, you'll see better demand for the beans. And I think that's a very good sign because the reality is when you look what's going on in Brazil, they've got a lot more acres to open up. By one estimate, They've got 90 to 100 million acres of ground that is ready to go, per se. It's not like they got to cut down rainforest. It is essentially ground that used to be pasture that they could bring into production relatively quick if they got the financing.

So I don't believe if you're an American producer, you want to count on China buying American beans. China's going to continue to buy more and more Brazilian beans. We've got to find another outlet for the beans we're producing. And, you know, this renewable diesel, I think, is it. And I'm very optimistic on it.

Andy

Hruby: Interesting. Yeah. You know, I think as we talk about carbon, there's been so much focus on the ethanol side and carbon scoring and, you know, the tax credits associated with that. But it sure is ironic how that spills over into the bean market with this renewable diesel and, and how everything is tied together.

Jim

McCormick: Yeah, I mean, I was going to say, you're talking about, you know, the thing about the corn market, you know, it's going to be a little bit behind this sustainable aviation fuel. Excuse me. I do think it's coming. I think we've got to be committed to it as a country. It's going to take a little more time. The science, the technology is not being spun up near as fast as it is in this renewable diesel. But I think it's going to be very important that we, we build that out. The reality is this: we are going to see less and less demand for ethanol or, you know, ethanol down the line as more and more cars get electrified. I mean, the fact of the matter is, I think, you know, you look at the— you know, a lot of people talk about how, you know, the car industry got ahead of itself a little bit and they pushed more electric cars onto the consumer than what the consumer is waiting for.

And there's no doubt you're seeing it in the pricing of some of those cars. But the reality is these firms spent billions of dollars retooling to build out electric cars. I just don't see them essentially going back to gas engines. It's something that we as an agriculture have got to understand. That ship has turned and the automobile industry is going to go that way. We are going to have to find a different outlet of ethanol production. This, you know, aviation fuel is a great way to do it. But it's going to take time. And, you know, the best thing I can do is encourage people to really push Washington to say, make this thing go and keep behind it.

Andy

Hruby: Yeah, no, it's— that makes perfect sense. And I think it's something that may have to be done out of necessity for us to capture prices that are profitable and sustain profitability. Back to the report. Let's talk a little bit about wheat. You know, we've seen a small increase in demand, looking at a large new crop carryout. You know, what are the implications and thoughts around that?

Jim

McCormick: I think in the big picture, you got to sell the wheat market. That's what it tells me. I mean, we might, you know, you look at the, you look at the, you look at today's report, and you look at what the market did today, you're, you know, they kind of don't make a lot of sense. The numbers weren't ragingly bullish on the report. The wheat's reacting to what's going on in the world right now, and that's what's going on in Russia. Russia was dealing with dryness issues. Now they got hit with frost this week. There's also some dryness issues in France— or excuse me, France, Ukraine. So the world supplies are tightening up a little bit. But in general, our wheat crop looks good here in the soft red wheat. The hard red wheat's been dealing with some dryness issues, but they're increasing their chances of rain.

So I think this rally we're seeing in the wheat is probably an opportune time to sell into it. One thing I am watching just on the, on the big front, interesting enough, is what's going on in India. I know a lot of people say, why are you worried about India? What's interesting is India historically, Andy, is self-sufficient in wheat. They don't actually, they don't import a lot of wheat. And actually when the Ukrainian war started and Russia invaded them, the Indians were actually talking about exporting wheat to try to drive down, you know, try to essentially drive down the price of wheat for the poor in the world. Well, what's happening in the last couple of months, the last year or so, the Indians have gone the other way.

They are drawing down their domestic stocks to the tightest level in something like 15, 16, 17 years, as what they're trying to do is drive down the price of wheat domestically because they're in a presidential election cycle. But now that they've dropped their wheat stocks to so low, it puts a huge amount of pressure on their upcoming wheat crop to perform. So if that wheat crop does not perform, and essentially India has to come into the world wheat market to essentially make up for potentially any kind of a shortfall, it will have a potential impact, big impact on the world pricing. So something we need to keep an eye on. But in general, like you mentioned, you look at the world wheat stocks, the US stocks used to be down below 50%, but they're still in the 40%. There is no shortage of wheat per se.

So if you're a producer out there, you've been looking for a quote unquote rally to sell, I would argue this is the rally you want to take advantage of.

Andy

Hruby: Okay. That's, that's great information. You know, I think as we kind of wrap things up here, what, what is your team looking at in the, in the next 5 days in the corn and bean and wheat market? You know, what are, what are the kind of key things you think growers listening to this should keep in mind as we go into this next marketing week?

Jim

McCormick: Right now it's going to be all about weather. I mean, the balance sheets are past us. You know, the bean balance sheet, like I said, we mentioned there's no changes on the domestic side. They did cut the US corn side, side a little bit more than we thought, but it's still over 2 billion bushels. There's a comfortable supply of old crop grain out there. It's all going to be about the new crop. It's all going to be about weather. We come out of this weekend and the weather's turning a little bit drier biased and we start planting grain. Quick, I think the psychology could change very, very quick to the bearish side. So if you're a producer outside, out there and you haven't developed— excuse me, you got some old crop grain that you have not marketed, you know, you need to take it serious. I think consider seriously about making some catch-up sales. Same thing with new crop corn.

A lot of client farmers out there and they missed that $5 corn earlier in the year. I think you got to take advantage of it because this is a classic summer, what, spring, wet weather rally. And one thing I can tell people, as you look at it historically, spring-driven, supply-driven rallies like we're not going to get the crop planted, they just don't last. Even in 2019, as wet as it was, we got into the latter part of summer and the market broke. We know that the crop ended up not being there, but you still had that break. So, you know, keep an eye on the weather. If it's wet, you probably can scale back your selling aggressiveness a little bit. But if it starts showing the weather pattern turning around a little bit drier, I'd get a little bit more aggressive. The reality is we can plant a lot of corn and beans at the same time very, very quick.

Andy

Hruby: Yeah, that's, that is one thing that, that the US is very good at and is getting planting done quickly. You know, I think that's great information. And, you know, kind of as I look at our personal marketing plan and The market has given a lot of producers the second opportunity to market old crop that we said 3 or 4 months ago, if these markets ever get back to this level, I'm gonna empty out the bin. And I think those— the time is now and that we get that opportunity that we've been looking for. But what has, you know, from your perspective, what has been the farmer sentiment? Have guys been taking advantage of this? Rally we've seen over the last week to, to clean up on some old crop, or are they still holding tight to it?

Jim

McCormick: You know, Andy, it really kind of depends if you're planning or not, to be quite honest. The clients that I have that have old crop grain that leftover, probably more than we would have liked, but it's worked out at this point. If they've been able to get stuff in the ground, out of the ground and looking good, they've been a little bit more aggressive letting that corn go. I mean, I honestly, I talked to a producer in Indiana. He's got, unfortunately, a lot of old crop corn in his bin, but he's mentally blocked right now because he plants about 5,000 acres of corn. He's got about 300 in and it's just— he's having a hard time letting it go. I'm going to encourage it anyway. Even if you're that wet person, I think you've got to take advantage of it. This is a world market.

And, you know, if the world market decides, hey, we've got enough to get by, even if you're that person, who's wet and you drew the short end of the straw, this market still could go down. You know, if you're worried about having a little bit of seller's remorse out there, consider going out, maybe buying September calls or maybe a vertical call spread, 10, 5, 10, you know, 15, 20 cents or whatever you feel comfortable with. Sell the grain, stop the interest charge. Remember, folks, even if it's on farm, you're losing 3, 3.5 cents a month just in interest on that money. Move the grain, get the money in your pocket. Stop that interest charge. And if you want to reown it, I'd say go buy a September call, vertical call spread. I'll get you all the way in the latter part of August. And let's see what the weather gives us.

But you stop that interest and you cut your risk down to the cost of whatever you want to buy.

Andy

Hruby: Yeah, no, it's— that's so true. I, you know, just kind of making some notes here. And I kind of— some of the key things I took away was, you know, weather really is the driver on this old crop and make sure you take advantage of it. It's, it's very important right now. And here's our opportunity. So let's, let's clean up on some things that we may have missed on. So with that, Jim, if anybody wants to reach out to you, what's, what's the best way to get ahold of you?

Jim

McCormick: Best way to get ahold of us is agmarket.net, our website, or call any of the Ag Market brokers at 844-424-6758.

Andy

Hruby: All right. Well, thanks everybody for listening. And thank you, Jim. We'll catch you next time on the Ag View Pitch.