Start planning how to react: Sunday night market outlook 1-19-2020

Narrator: Hey podcast, thanks for tuning in to another episode of the Ag View Pitch. We have had a bunch of new listeners lately and want to make sure you know where to find us. We're on Facebook at Ag View Solutions and online at AgViewSolutions.com. The whole purpose of this podcast is to provide value to farmers and ag businesses that Ag View Solutions works with value to everyone who listens. If you haven't already, please subscribe to the podcast wherever you listen and leave us a review. If you have specific questions, you can email us at agviewpitch@gmail.com. And if you have any questions, listen for Chris and Duane's email at the end of the podcast. We appreciate you all taking time out of your day to listen to our perspective and hope we continue to bring your farm, family, and business value. Enjoy today's podcast.

Chris: Welcome everybody to another episode of the Ag View Pitch, and we're starting out a new marketing week, but we're starting it out on Monday night instead of Sunday night. So how's it going, Dwayne?

Duane: I'm good, Chris. It's, uh, all weekend long I've had a hard time keeping track of what day it really is. Every, every day seems like the wrong day.

Chris: Yeah, yeah. Well, um, we had kind of an interesting week towards the end of the week last week with, uh, um, you know, Thursday saw a lot of red on the screen. I was kind of scratching my head at that. And then, and then Friday we had a pretty good rebound. What's, what's the story there?

Duane: Well, starting out with Thursday, um, I was not really surprised at the weakness in the soybeans, and I've kind of felt, and I think I probably mentioned it last week, I felt that beans were a little vulnerable to sell-off of at that time maybe being, you know, 15, 20, 25 cent type break. And we pretty much got into that area on Thursday. So looking at that little snapshot, I wasn't really surprised at that. I think that was tech-driven. I don't think there was a fundamental storyline behind that. You know, people always try to back into a fundamental excuse after a market, you know, makes a move. But in reality, in real time, you know, ahead of time, I don't think there was a fundamental factor there. I think it was mostly tech-driven. As far as the corn decline on Thursday, I have no idea why it was down.

I would not have been surprised if we'd seen, you know, 2 or 3 cent break, but we end up with, you know, like a 12-cent break. I have no idea why that happened. And I'm not going to give it the credibility of trying to back into some sort of explanation to, to explain it. I think it's, it's one of those things that happens in the marketplace. And I, I don't really have an answer. But I think the most important part of what happened last week is the fact that, you know, we were able to reject that trade of Thursday and end up back picking up all of that back on Friday. And I don't know if we are exactly at— we're probably not exactly at the highest recent close, but we're up there, you know, pretty significantly right near the top. And after Thursday's demise, to come back and put on more than that on Friday, I think is impressive.

Yes, there was a fundamental storyline on Friday in terms of Russian rumors of buying a few cargoes of U.S. corn off the Northwest. I haven't— I'm not aware if that's been confirmed or not, but I want to go backwards a few steps. And I think this goes back to an assessment of the trade deal in general. And I think last week I mentioned I felt like I was on another planet because I felt this was a significantly constructive deal, and I thought it was significant how China moved dramatically towards the U.S. side to get the deal, and the deal has mechanisms in it that forces— it doesn't force them to comply, but it provides opportunities for the U.S. to put tariffs on if they don't comply. And they also signed a deal that didn't fully take away their tariffs, and those tariffs won't come off until certain criteria are met, benchmarks are met, and/or they get a Phase 2 signed.

And I thought it was interesting that China's response or reaction or assessment of that trade deal— they said all the right things. And yes, there might be a history of, of, you know, not living up to deals, but I think it's very significant that they moved so far passed the middle in order to get this deal done, that, and the fact that we still have leverage on them with tariffs, I believe they're going to live up to their agricultural commitments over at least the next 1 or 2 years. After that, who knows? But I think it's a big deal. I thought it was a big deal, and the marketplace has been wanting to not trust that deal and not trust any enthusiasm from it. And so Thursday's price action brought all of those naysayers out of the woodwork to basically say, I told you so. And by Friday, they're back into the woodwork again.

And I think that whether or not there's an announcement of a confirmation of these sales or not, I think that the marketplace is going to start to give more respect to this trade deal. And my guess is we're going to begin to see more announcements of transactions, and I got a feeling it's going to end up being larger transactions that take place than what the rumors are. So I think the marketplace can respond, uh, well from this, uh, USDA— or not USDA, but the trade deal. And I think that Friday's price action is going to be seen as the real deal. Thursday's price action was the head fake. You got commercial speculators, large specs, in the Commitment of Traders report data that was released on Friday. They're short 78,000 contracts. I doubt if anything changed a lot between Wednesday, Thursday, and Friday to change that very much.

That tells me there's a lot of short covering energy that could be unleashed. I think it's highly likely it will be unleashed. I was pleased at the spread price action in corn on Friday, and I think the spread performance is a strong underlying factor that adds merit to this, to the, you know, significance and importance of the price action on Friday. And I think that we have a situation where we could see markets move quickly and attain very attractive levels as early as the end of February. And I think that's going to be something to watch. And I think that as we watch the next several days unfold, the thing to keep in mind is, is that again, that some of this price objectives could occur rather quickly.

Chris: So let's say in the next couple of weeks we see, see some price strength. You think that's going to impact basis much? It seems like basis has still been really strong and continues to get a little bit better. What I'm seeing and hearing from a lot of clients that we work with is that, is that in the majority of the areas, uh, the processors are actually making phone calls and, and bringing in some grain, and offering up better than what the posted bids are on basis. And so that tells me the basis has improved since that report quite a bit. I mean, if we see some strength, do you think this, this basis levels we're at now are as good as it gets, or do they continue to stay as strong as what we've seen recently?

Duane: I understand the justification for being, um, concerned that basis could weaken a futures rally. And I, you know, just got done saying that Maybe futures have a fairly notable rally here over the next several weeks. Um, and I understand the expectation that that could weaken basis and maybe an expectation that it should weaken basis, but we've spent several months with the basis levels staying firm, always seeming to climb a wall of worry, so to speak. And I don't think the basis is going to back off very much. And if they attempt to do it on a day like Friday. I think it, it, uh, is only short-lived. I would argue, make a case that it might be a situation that all of a sudden, um, maybe not exactly here today, but the marketplace might see an opportunity here or an expectation where the river/export market is going to start to compete with the domestic market.

And that's something the ethanol plants and the processors haven't had to deal with for quite some time. And so I think that could actually cause a situation where basis levels might even get more firm. So I think, um, we have a situation here where a lot of things could converge and we could get a reaction that occurs in a short period of time. And yet the marketplace will transform from a naysayer about the whole China 'US-China trade deal' that it would ever happen to 'they won't sign it' to 'okay, they signed it but they won't live up to it' to 'okay, well, okay, we got one sale and that's it.' All that stuff will transform into some expectation that, 'Oh my gosh, this really is for real,' and they got to get to $40 billion or $38 billion, and look how much stuff they have to buy to get that done.

And then all that sentiment will shift over to something that will expect this to continue throughout the growing season. I don't know how the China purchases play out. I don't think anybody does, at least not anybody that's talking publicly for sure. And, but I'm inclined to think that for logistical reasons, both on the part of China as an importer and for those that are going to be doing the export business, I'm inclined to think they're going to be actively making deals in time to take advantage of full river open and navigational waters in our US export tributary system. That implies to me that these— we're going to have activity moving, you know, very— not very— couple of months from now And in some cases, they're probably ready to ship a sizable quantity now.

So what I'm saying is, I think this, this transformation of being a naysayer to embracing it is going to happen very quickly. And I think it's possible that we could get a sizable price gain going into the end of February, maybe the first week or so of March., and then it's possible that that could be it for a while. And at that point in time, maybe it is— the cash market will reach a point where that's far enough in basis and it's far enough in futures both. And so I think that producers need to be mapping a plan and doing some what-if thinking and says— that says, you know, you got March corn at $3.90, you got July corn at $4.01. So they're, they're 10, 12 cents difference on that spread. They need to start thinking about what am I going to do if March corn's at $4.20, meaning futures have gone up 30 cents. What am I going to do if July corn's at $4.30?

You know, uh, what am I going to do if basis held its own or actually improved? What does that mean to my bottom line? And I think for the most part, certainly prior to Friday and probably still even after Friday, Most people aren't even thinking that far ahead because they haven't come to believe that it's even a possibility. I'm just saying I think people should consider it a possibility, and they start to start thinking about that. And they should consider that this type of thing that I'm talking about could occur as early as the 1st of March. And that could—

Narrator: it—

Duane: and you could— once you got that done, you got the specs out of their short, got you them long, got everybody else to embrace this. You got other people to buy in the market. You get the futures and the cash markets up to levels that they will legitimately trigger farmer selling for all the right reasons. Because by the time we get to those levels, even guys that had reduced yields in 2019 probably have a profit opportunity. The other thing that could happen here is I, I am suspicious the farmers sold more in the fall and up until, you know, the first week or so of January because the weather was favorable and basis was good. Nobody had much for optimism. We were at the upper end of cash prices had been in, you know, since harvest time. And so it's possible that we hit a hole here where we don't have a lot of farmers selling.

But if you get up to those levels, you will have— and at that point in time, who's to say the market's not going to shift gears and going to be start talking about more acres for 2020, a favorable start, and what's that going to look like. So again, I'll go back to the thing that I think farmers ought to be start mapping out a plan about what price do they want, because there's a, there's a reasonable chance that their wish list might get triggered here. That's my opinion.

Chris: Yeah, and I, I would agree. I think, you know, that's going to get growers motivated to make sales. Just kind of looking at some of our numbers here, you know, a 20-cent or so number from where we're at right now on, on the old crop is probably going to get a lot of guys to where they would move, move another good chunk and Part of the reasons I see for those sales too, are, you know, the, the March cash, you know, the cash rents, and then just additional input payments and those kinds of things are going to be coming, coming down the pike, and there's going to need to be some cash, cash flow plugging along there too. That's probably also going to limit, you know, if there's a bunch of farmers selling during that timeframe, is that kind of what caps the market to the upside, do you think, or is or, you know, ironic—

Duane: ironically, in my experience, uh, moves like I'm anticipating, um, the farmer selling does not seem to cap it. It seems like the market finds a way to get to that level, then churn up there, maybe even poke a little higher, absorb that farmer selling, and then, then the market fades after that. So I don't think the first wave of farmers selling will stop it. I think it would continue. Um, but I think that the other thing that, um, we have to kind of keep in mind, the month of February, we get these, uh, crop insurance prices established, and it's not uncommon to get a decent price move into that period, and it's not uncommon to see a price move fall off of those levels after that even if that, you know, retreat, so to speak, is temporary.

And so there's just a lot of things that— if, and I would capitalize these, the I and the F in if, if I was writing this— but if we get to those type of levels, you know, 20, 30, maybe even 40 cents in corn would not completely shock me here at all, that if we got to those type of levels and it was, you know, late February to mid-March, you're going to have a lot of indicators offering farmers reasons and justification to be making old crop sales. And who knows, maybe new crop, we'll have to find out how the spreads perform. But Dec corn is sitting at $4.02 and 3/4 where it settled on Friday. And you know, your resistance level is going to be $4.20 to $4.40. I don't think $4.40 can happen in Dec corn until, unless we get a production problem during the growing season.

So I would say your pre-growing season price peak in Dec corn is probably somewhere in that $4.20 to $4.30 zone, which is, you know, maybe 20 cents, maybe a little more than that. But the old crop could be— it could be— it should be more than that. If these can go up 20, old crop should go up at least 40. And I want to go back again to that China trade deal. If you're trying to get $40 billion and you're trying to get $16 billion more than what you've had in the past, you know, I don't have these numbers in front of me, but 8 million tons of corn is like a billion and a half dollars. And you could do a chunk of beans and you just, you, it's just hard to find that $16 billion to spend. So they're going to have to be hitting on all cylinders. They're going to have to be doing sorghum, DDGs, corn, some wheat.

They also got some WTO rulings from months ago that along with this trade deal would imply that they're going to buy those. You got, you know, cotton that's probably going to benefit. It's just going to have to be everything in order to get to that $16 billion. You're not going to do it just on soybeans. You're not going to do it just on pork. You just can't dollar it up that fast. So that's why I think this is a big deal. And I expect them to honor their commitment. And if we get many more days like we had Friday, and/or we get some announcements or continued pattern of rumors where these rumors don't end, you know, the marketplace can very quickly transform their naysayer thought into something more closely aligned to what I've been saying. And that's what I'm suspicious is probably going to happen.

Chris: I was going to ask you, and I had heard somebody mention that like some of the stuff that China can buy is like like processed food, higher value, higher dollar, higher value stuff. Do you hear anything about that?

Duane: Um, I haven't heard anything about it that I can say, um, sounds like it comes from a rock-solid knowledgeable source. And their history— their, their history is, uh, that would be quite contrary to their history about what types of things they buy. So I, I'm not saying it's not possible. I'm just saying that would be a change in their buying pattern. Um, so there might be some of that. I doubt if there's going to be waves of that, and I doubt if their thought process is we're going to buy higher dollar values, and that's how we're going to get to those things as opposed to volume and tonnage, etc. I— that doesn't pass my logic test. It may sound good, and maybe it's 100% correct, but right now I would have my doubts about that.

Chris: Okay, on another question, you were talking about the 2020 crop on the corn side. What about on the soybean side if no beans You know, Nov '20 beans are in that $9.60 range, and you're talking about some rally stuff there. I mean, where, where's the, you know, where's a theoretical target there? You talk about corn, you know, maybe having the potential to get up that $4.30 range. What's that mean for soybeans, in your opinion?

Duane: Well, I'll give you a couple thoughts on that. March corn, or excuse me, March soybeans settled at basically $9.30. I think your bigger picture resistance on the spot contract is somewhere in that $9.80 to $10.20 range. So that implies a 70 to 90 cent move. No, I take that back, a 50 to— yeah, 50 to 90 cent move. I'm not sure of that, but that's what I would say. And as far as November, I think you got $10.50 would be a technical target for November, but it's possible that too can't be achieved until you get into a growing season. So your target would probably be something less than that. And, um, if the corn market goes up, I think spreads tighten and nearby gain. I'm not sure how the beans act to this. I'm guessing the beans will be led by the front end and the spreads will tighten, but I'm not 100% sure of that.

The most important thing I'd like to know the answer to, and you're just the guy to figure this out, I'd like to know, are we going to have a narrative develop here where we end up having an acreage battle? And if we get an acreage battle, it's not going to come instigated by corn, it's going to come from beans. It's going to come from people saying, well, we got 470 million carryout, give or take, projected now. And then they're going to start to think, well, maybe China is going to take 10 million tons more of corn or of beans, or 5 million tons. That's a 200 million that wasn't expected. All of a sudden, the carryout, see, in my mind, can very quickly quickly and very conceivably get to a level that is not comfortable and where the marketplace would feel a necessity to want to buy acres.

And if that happens, you know, beans, like we've talked about in multiple podcasts over the last few months, beans have a lot of work to do to get that. And so some of these numbers I, I quote out here for possible target in beans, I recognize that these numbers sound, you know, far-fetched. You know, I get that. But when you do the numbers, you do the analysis, and you crunch it out, it's really not. They are very attainable numbers. And if you get an acreage battle scenario, some of these numbers will get higher than we think. I'm suspicious that's going to happen, but I can't point to anything contract— concrete that says it will happen. But it would seem to me that it wouldn't take too much of an amount of extra anticipation of soybean purchases from the US to get people to start talking about that. And I think that's when things get interesting.

And obviously, if you're going to have an acreage battle, I mean, you can't have that narrative in June. You know, you're going to have to have that narrative, you know, unfold here basically now. It'll be now to the 1st of April, but after that, it's kind of too late. And so if that comes, that's another reason why this stuff could be on a fast track, which is how I started out this podcast talking, implying that producers need to gear up and get ready for something happening relatively quickly. Now, after saying all that, I sound like a raging bull, and maybe that's somewhat accurate of an assessment, but as soon as you do that, you know, you run the risk of being disappointed. And I get that, but it seems to me that the only way you're going to be disappointed is if the China trade deal truly is a bust. And I'm completely on the other end of the spectrum. I do not expect that.

And due to logistics, they can't suddenly import $16 billion and decide that, oh, it's like, it's the 15th of September, I guess we better get started. You know, it's not going to work that way. They got to take advantage of the logistics throughout the whole period. And I would find it shocking that if indeed I'm correct that China is going to fulfill their commitments in this trade deal, I would find it absolutely shocking if both China as the importer and our global grain companies that do the exporters, if they didn't both find it to their advantage to make sure they fully utilize the river open navigation season and used all of that. So again, all of that implies this business is going to start to be seen right away. Yeah.

Chris: While you were talking, not that I wasn't listening, I was listening very intently, but I was doing some math here. On what you said with, you know, your $4.20 corn and just looking at the cost of production here for some of our clients and happen to have some of that stuff bundled up here. So I was able to do some math quick, but your $4.20 for the majority of our guys that we've got some Profit Manager numbers put together with means that we've got to be somewhere in that $10.40 range on soybeans to justify additional acres.

That's not to say that most of these guys have pretty much already decided what they're going to plant for corn and what they're going to plant for beans, and they're leaning heavier on the corn side of things, with the exception of a lot of the guys to the north because they're— I mean, they haven't even— I mean, there's a lot of guys up there haven't even started picking corn yet. So, and it's wet and it's snow is deep and, you know, there's a million acres. I talked to a guy the other day, there's a million acres up there yet that's not even harvested and a big chunk of it may not get harvested. And so that's, you know, that's part of the thing that goes into consideration.

The other thing too, having been in Alabama and Georgia last week and talking to a lot of the growers in the, in the South that grow cotton and corn, they're leaning really heavy towards corn instead of cotton because the cotton's not dollaring up like the corn is either. And that's kind of what we're seeing with Profit Manager there. So just some, some commentary from me. I don't know if that stokes any more thoughts from you or not.

Duane: Well, any, any comment from you, Chris, is always extremely enlightening. So always know that. As far as cotton, cotton's had a pretty dramatic rally since August, but in the same token, but it's not generating nearly enough money relative to the corn. That's correct. Cotton and corn, agreed. It's had a good rally, but it's not had enough of a rally, uh, to, to, uh, it started in such a hole. I guess that's what I'm trying to say, right? Because, you know, you got cotton around 70 cents, maybe a little more than that, some of the deferreds. But a year ago at this time, you had cotton, well, probably in the mid-80s. So it's still a long, long ways from where it was, you know, last spring. So I'm— you're not surprising me when you tell me that they might be leaning towards something other than cotton.

So I'm not sure if that means cotton's got a job to do to try to, you know, buy some acres here or not. I don't know enough about cotton to be able to offer an intelligent thought on that other than to say, even though cotton's had a notable rally in the last few months, it started from such a hole that it's still lower than it was a year ago. So yeah, so, and I'm going back to what you— the math that you did, and clearly the math was correct. So that means you really weren't listening to me all that intently. But I was listening. I was—

Chris: I can do— I can do two things at once, even though Not everybody thinks that.

Duane: I can't even do one thing at once, but the $10.40 you said for additional— to build additional acres takes $10.40. Well, that kind of marries in closely with what I would consider the technical resistance in November beans on a little, a little bit bigger picture scale is around $10.50. So again, there's another reason why farmers are start planning that You know, hey, maybe $10.50 beans is, is a, uh, going to be an attractive new crop, uh, pricing level. And I'm not sure, um, we're going to have to see number one, whether any of these rallies that I'm talking about occur. And number two, we're going to have to make an assessment of what the news is that's driving it at the time.

But all I'm saying is start preparing a plan for some, you know, quite attractive figure possibly, you know, coming across your quote screen and your cash bid email by the 1st of March and then start pondering what are you going to do with that and what's that mean to your operation. And I would— I've said for a few months and for multiple podcasts that this year ahead of us, we might have the type of conditions that could create a fairly notable price peak relatively early in the calendar year. And if we got that sometime in, you know, late February to mid-March or something like that, that would be quite notably early.

And, you know, these— I don't like to get too married to a time frame as far as a prediction, but I'm very willing to get married to a timeframe in a thinking out loud process that says, hey, if this happens and we get here in this time window, what are we going to do with it? And I think that for a lot of reasons, producers should be given very serious consideration to aggressively getting their '19 production tied up and probably a good start on, on '20. I think that's always a good— let us get there, you know.

Chris: Yeah, and that's always a good thing too. I mean, we've seen it for years and years with a lot of the growers we work with that clean up the old crop, do a lot better job on the new crop. But there's a, there's a direct correlation there. We see it every single year, the difference between those that clean up old crop versus those that don't and pulling the trigger on the new crop. And, and it's hard, it's hard to market two crops at once and, you know, and be trying to protect risk and do different things. So I'm 100% with you. I like seeing our growers that are on Profit Manager and that we're running numbers with, you know, take, take the profit, take the risk off the table with the old crop and get cranking on the new crop. I think that's always a good plan.

Duane: Yeah, I don't disagree with that. It's kind of like a trader that's, you know, lugging a losing position. It could be the smallest position he's got, got on. But it occupies 90% of his brain energy. You know, sometimes you're better off to just get rid of it and clean your mind and then focus on something else. So it's kind of the same philosophy. Um, so I certainly agree.

Chris: Anything else as we head into this, uh, shortened week? One, your one last thing quickly.

Duane: I don't even know if I have one last thing. I, I, so I might, but if you give me like, I don't know, another second, I'll have one. But But I would just say again that I don't know what we're going to expect this week. I think the marketplace, a lot of people went away Friday, you know, not really believing this or saying, well, there better be an announcement on, on Tuesday morning or everything's going to be given back. I've seen some commercial emails go out implying that producers better get it sold because just like the market went down Thursday, they missed it, they, they better get it sold. I don't agree with that right now, but that's the prevailing thinking out there. And so I think that what we really want as the producer, what we really want to see is some confirmation of these rumors. We want the rumor mill to continue.

We want— if they, if they announced they did some corn, you know, 2 days later, we want to see that they bought some, some wheat, or they bought some cotton or some pork. We just kind of want to see this grocery list, you know, continue to start ratcheting up. It doesn't have to happen every day, but we gotta get to the point where it turns traders' heads and, and says, gee, maybe they will actually buy this stuff. And I think we're going to see that, but So other than that, I don't have a last thought.

Chris: All right. Well, thanks, Duane. Hey, I want to, I want to just throw a plug in too for the Farm Futures Business Summit. Duane, you said you're going to be down there. Is that right?

Duane: Yes, I'll be there.

Chris: You'll be there floating around, and obviously we'll both be down there. And if anybody hasn't signed up yet, and I think you can still do that. But anyway, the, the boot camp is on the 22nd on Wednesday, and then the Farm Futures Business Summit's 23rd and 24th. So Any of you out there, if you can make it, we'd love to see you guys all down there. And in the meantime, feel free to give either of us a call. And thanks, Duane, for the conversation. Duane, today it was a good one.

Duane: Thanks, Chris. I would echo your plug for the Farm Futures event in Iowa City. And what might make this week even more interesting down there is we're going to have a new narrative to talk about. And it's going to be interesting to see what some of the speakers have to say, uh, regards to this. It's also going to be interesting to mingle with, you know, other producers and see how they're planning to do this. It could be, you know, a pretty valuable week.

Chris: I think it will be. So with that, thanks, Duane. We'll catch you next time.

Duane: All right. Thanks, Chris.

Chris: You bet. And thanks everybody for listening. We'll catch you next time on the Ag View Pitch.

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.