Sunday market outlook: does a new week bring more price opportunity?

Chris

Barron: 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, and we are going into a new week, a new month during this upcoming week, and you've got Chris Barron and Dwayne Lowery here with the Sunday Market Outlook. How's it going, Duane?

Duane

Lowery: Good, Chris. Glad to be here. It's been beautiful weather and harvest is going well, advancing, and I think the weather forecast is going to have a few disruptions but not long-lasting disruptions.

Chris

Barron: Yeah, yeah. Well, you're in the office with me here, or in, I should say, our studio today, so hopefully our audio sounds pretty good and you look good with that headset on.

Duane

Lowery: Well, that would be— it might be something I need to add to my wardrobe.

Chris

Barron: Yeah, you could just walk around with a headset on all the time. And yeah, That'd work good. So hey, uh, let's get going here on the market. So, um, this last week I thought it was interesting, just going to throw this out, it seemed like, you know, the markets all of a sudden didn't like it so much when we weren't waking up in the morning with new sales on the books. Any comments on that?

Duane

Lowery: Well, we did see a lack of sales on Thursday and Friday. I think that In the case of beans, we're getting to the point where you look at the sales on the books, we might be near the end of, of having a lot of Chinese demand built into it. Once you get February and beyond, South American values are more competitive. And so I think we've absorbed a lot of demand expectations. Not to say that we won't have more sales, I'm just saying that we've got the lion's share of it done already.

Chris

Barron: Okay, um, let's talk about harvest for a minute and then we'll get back to some of the price discussion here. But what are you hearing on harvest yields? Are you hearing much on, on anything there?

Duane

Lowery: Well, let's talk about it in terms of regions. You know, Iowa was dry for a large part of the state over more than just the month of August, and then the entire state in, in August. You had some of that in northern Illinois as well. Um, yield reports from these dry areas, I would say, are wide-ranging. And I think what that is representative of is different soil types. The, uh, soil types that couldn't hold a lot of water, those yields are, are, you know, low, but, um, maybe not as low as they feared. And I think that you've got some yields that are close to average, not, uh, not their best yields or anything of this nature, but still relatively good and probably classified as better than expected in these dry areas. And then in the case of beans, you have some bushel per acre that are in the 40, 45 range from the some of the driest areas and some of the lighter ground.

But it's amazing how you can find a lot of, you know, 60 to even 80 yet coming out of dry areas. And so the bean yields have been impressive, and I think that's true outside of the the driest areas. And so it's hard to find areas that are having poor bean yields, and even in the dry areas. So I wonder if that doesn't translate into an eventual increase of some net USDA soybean yield estimates.

Chris

Barron: How does that tie into, you know, you were telling me offline, so last week we saw beans off, would you say, 41 cents for the week Yeah, we were down 41 cents in the nearby November contract, and I think corn was down 13 cents in the nearby contracts.

Duane

Lowery: The deferred contracts wouldn't have been near that level.

Chris

Barron: Okay, and you think what, what's the— is it a combination of harvest pressure and the, the no sales on Thursday, Friday, or what's—

Duane

Lowery: I think it's a few factors. I think, uh, we'd have to honestly say that the, uh last 50 to 75 cents of the bean rally may have been a bit overdone. So I think that's a certain part of it. I think the fact that the export sales commitments to date, especially for China, are way ahead of schedule and very much front-loaded and therefore largely built into the, you know, day-to-day price action absorbed by the marketplace and the price discovery process. And so I think that, you You know, from here forward, if you're going to be looking for bullish factors on beans, it's probably not going to come from announcements. It's probably not going to come from demand or new demand. It's probably going to have to come from South American growing conditions or concerns there.

And we could easily be 60 days away from legitimately talking about that, even though it is talked about to some extent even now. So I think we're running out of bullish things to say about beans for a while. And if we have a problem in South America, obviously then we kick it up another notch. And the other thing that is lurking on the horizon to eventually be a bullish talking point in beans is I think that depending on how you look at balance sheets, we're probably gonna want or need 3 to 4 million additional bean acres in '21 versus what we had in '20. And I think that depending on how the South American growing season, maybe the intensity to need 3 to 4 million could actually increase more than that. So I think that's a potential bullish factor. But keep in mind that Nov '21 beans are more like $9.50 as opposed to the nearby contracts well above that.

So it's not necessarily something that you can look at price action this next week, but it is something to keep in mind, right?

Chris

Barron: Um, the, uh, market where it's at on soybeans and what kind of stability is there, do you think, in that price? So if there's growers out here that are still, you know, selling beans off the combine, maybe they didn't sell as aggressively, aggressively as they should have, or maybe wish they would have at this point, but yet the combine is going to be rolling the next couple of weeks and they're going to be selling off the combine. Is there much downside risk, do you think, or do you think we're fairly stable at these price levels on soybeans?

Duane

Lowery: We might be fairly stable for a while., and we may have an opportunity to get some recovery strength that maybe adds, you know, if somebody said beans could rally 20, 25 cents from where they're at now, I wouldn't argue that. Maybe it could even be a little bit more than that. I'm not sure that the fundamental narrative is, is really there to, to back that up, but marketplace sometimes has to go through a distribution phase after having such a large rally that we've had. We spent all week in correction mode, and we were down 4 days out of 5 this week. So some sort of, you know, stabilization or recovery is certainly a possibility. But I think when you look at— when you take a step back view, there's not many reasons to continue to be optimistic beans beyond the price level, the ranges that we've already had. And we've talked about the fact that the demand is already built in.

I think there's a legitimate rationale that the yields could actually go up. So our supply scenario could be a little bit better or less tight than what the marketplace has feared. And then this week we do have the quarterly stocks report. So we have that unknown. I have no idea what that's going to be. But I think when you look at the, the inverses, the lack of carry, the basis values, prices currently, even after a 40-cent retreat, are probably still a dollar higher than most people thought they'd get during the harvest season or feared they'd get. And so there's a lot of incentive for and justification for producers to be moving through soybeans, uh, sales.

Chris

Barron: Okay, let's roll back to corn and kind of do the same conversation on, on the corn side of things if we can. Based on harvest results, what are you hearing on, on corn? And we're going to work through the kind of the same process on corn we just did on soybeans.

Duane

Lowery: Wide-ranging corn yields, even within the same geo geographic footprint. Again, probably somewhat based on soil type. I think that it's also probably a fair estimate to say that some of our more troubled corn acres are probably what's been harvested, and our best acres are probably— and our best yields are still out in the field because they didn't, uh, you know, mature at a, at a pace that was detrimental to the yield. They weren't under stress. So Maybe the variable yields that we're hearing now is some of our worst yields, and I would say that if the current yield themes that we hear from corn were to continue, this does not sound like a record yield for the country on average. But I, like I said, I would caution being too caught up in that because it seems like the maybe our better yields are yet to come.

Chris

Barron: So on corn, we are at $3.65-ish, right, on Dec. And so same question I had for soybeans on corn here. If guys are rolling some corn yet off the combine possibly, or putting things in the bin, any downside risk potential or upside potential, or what do you see moving forward next week or so here on corn?

Duane

Lowery: Because it's harvest time, we have to say there's some downside risk here. This last week with corn being down 14 cents. And like you said, Dec corn at $3.65, that's about— I think the recent high was $3.79 area. I think it's possible that we might go up to that level again, maybe even a little bit higher. We have the stocks report, who knows what that's going to be, but the marketplace has been wanting to talk about the potential for that to be friendly for several weeks. And if there was a little bit of reduction in stocks versus what the USDA has plugged in, you might be getting that carryout down to a level where people can start to imagine good demand and start to ratchet it down. And again, there are some people that are willing to want to lower production ideas based on this early data. All of that could translate into a push above the recent highs in corn.

I don't think we have conditions that warrant a trending higher move above those highs, but to be able to return to them, to exceed them by 5 or 10 cents, that's not unreasonable. And so I think that the producer, um, the producer doesn't really like the current corn prices, just not enough. And especially if they're concerned about their yields from what their best expectations were. So the producer is less inclined to make sales in corn than he is in beans. He's more inclined to do that. He's probably willing to sell a larger percentages of beans than he would normally, and I think he's leaning on that to be a source for cash flow. Therefore, he's relying on corn less for cash flow, and I think he sees the carry in the futures market. That makes him more willing to hold corn. I think he's seen strong basis for months. That makes it more willing to, to hold corn.

And so it might be kind of difficult to get some of the corn out of the farmer's hands this year. And that might provide some support during harvest season that maybe the harvest lows might come late in the season as opposed to any time early or mid.

Chris

Barron: Mm-hmm. What are you hearing on basis? Let's stick with corn here for a minute and then we'll go back to beans. But on corn, are you hearing anything on basis or is there anything that the producers should be watching for there?

Duane

Lowery: I think it's important to reflect back on what it was like in the summer. During the summer, there was widespread expectations of cheap prices, wide basis. And in that process, the commercials built in some of the wider than normal or, you know, relatively weak compared to what we've had over the last 12-month type basis built into their bids. And as we've gotten into harvest, I think you're finding locations, commercial entities, cash buyers unable to buy as many bushels as they thought they would. And so I think there's been some tendency for the basis to firm, um, in certainly in certain locations. And I think it's going to be difficult for basis to widen very much during harvest, largely because they've got bid structures that already have a relatively wide basis built in. And like I said before, I think prying corn out of the farmer's hands is going to be kind of difficult.

It is harvest time, so you can't, you can't expect maybe basis to improve a lot. But let's roll ahead the calendar and get to a point where we're on where harvest is kind of behind us, the bid structures already have basis quite a bit better in those deferred, you know, like the November, December slots, January. And I think those basis values are probably going to continue to firm. So the incentive for the producer to hold inventory from a basis perspective, it's probably there.

Chris

Barron: So we're seeing some areas, and we are in an area in our own operation where basis is pretty strong right now. Harvest is kind of delayed and slow. And so for those producers that are in areas where basis is pretty strong right now, does it make sense to, you know, to go ahead and deliver a little bit more than you would just because of the basis and then look for an opportunity to, to reown or to price later or something?

Duane

Lowery: You're correct, we're in an area where we do have some of these premium spot shipment bids And if you're able to get those kind of bids, a good basis, somebody really wants that corn early on, then I definitely would look at satisfying that demand, making those sales, because they're giving you, you know, a good value from what I can see.

Chris

Barron: When would you reown that? I mean, if you're looking for opportunities, where would— I guess a better way to ask that— where would be a decent place to look for an opportunity to reown some of that?

Duane

Lowery: Well, let's say that you were moving that corn now and you could do— your motivation to move it was based on basis, okay? And so maybe for the near term, for the immediate term, maybe you just keep it on a basis contract, deliver it, capture the basis, and then you're looking for like this price recovery bounce that I talked about where maybe you go up 15 cents from where it's at now, you maybe make a new high, and then you price it And then if from that point, if you're asking me where would you reown it after that, I think, uh, it's probably somewhere farther away in time. It's probably not going to be until after the first of the year that I'm going to be all that interested.

Chris

Barron: You're not too worried that there's a lot of downside risk in corn right now then either?

Duane

Lowery: In the near term? Yeah, probably not right at the moment. I'm not overly concerned about the stocks report. I'm, uh, we've had a 14-cent pullback. I think somewhere down the road we might see cheaper values in the winter or going into the spring, but I don't see an immediate risk of downside right at the moment.

Chris

Barron: Okay, so on the, on the beans basis, on soybeans, that's a little— I, I guess I'd say it's a little bit easier one, but you know, there's really, there's no carry. A lot of operations need cash. It's a, it's all, it's not a no-brainer, but it's one of those situations where makes probably the most sense for most producers to probably just get rid of it off the combine. Any comments or any observations on basis that you're seeing on the soybean side?

Duane

Lowery: When you look at basis spreads, and I would argue even flat price, I see no incentive for the producer to hold beans, store beans. If he's going to store beans and he's betting on higher prices, he's probably betting on a South American problem, or else he's just betting out of habit because that is what he always does at harvest. But in terms of what the marketplace is offering, it seems to me that these are good sales, good prices, and for many people they're having good yields. And you know, what could you ask for, for a better combination at harvest? Just step aside, put a ribbon on 2020 bean operation, and I think it would be a good deal.

Chris

Barron: Uh, so let me throw you a curveball here. If growers are putting corn in the bin Would it make sense to put some targets in play out there in the, you know, say March, May, July time frame that are price levels that make sense for the operation from a profitability standpoint? And if so, where would be a good place to maybe consider starting to throw some targets out there?

Duane

Lowery: I would definitely think that's a good plan. I believe that while basis levels might improve, and, and if you're storing it on the farm, you're storing it for carry, maybe some basis plays. So maybe an hedge to arrive, or hedging in some fashion, futures puts, whatever it may be. I think that has merit. You know, you've got July futures settled Friday at $3.82. They probably were in the, in the $3.90s for the peak. I don't think it's impossible to get back to $3.90, maybe even $4 in July futures. Uh, but at those levels, given all that we think we know about what the carryout is, USDA has us at 2.5 billion. Let's say it's even 2.2. I think these prices probably high enough to on that type of matrix.

The marketplace also looks at the money that's coming into the farmer's hands through government support and The marketplace has a way of saying, well, if Uncle Sam's paying them X amount of dollars per acre, we don't have to pay them that. And I think that that's the way the producer has to look at it. He can't rely on just the price target that he wants. I think it's also possible that at those price levels, if that doesn't quite work for your operation, look at it that maybe it gets you to third base in your marketing and maybe somewhere between You know, now in the next 6 months, there'll be some way of a sort of suicide squeeze plays that you can get home and, and make it home that way. But you might not be able to get a home run here. And I think that's the, the, the goal. And I think that, um, having the price targets above the market is correct.

And I think those price targets should be in the 10 to 25 cent range from where they're at now. And I'd probably be taken the approach that I, I would want to come away from the next couple of weeks, if there's price strength in that window, I'd want to come away with a very aggressive price protective stance.

Chris

Barron: Okay, that makes a lot of sense. I think it's just one of those things that, that troubles me occasionally when— and we as producers sometimes put stuff in the bin, close the door, and then we just kind of hang out and watch stuff. And I like to see people put targets in because they become the objective that they want to, or the goal they want to achieve. And, you know, and it's written down, it's documented, it's a plan, and it usually will work. As opposed to just sitting there, if you start shooting at something and you don't have a target, you're just shooting in midair.

Duane

Lowery: So, well, I think it's interesting to note that you could go back over the last several years and you find a lot of times that the, the market has a difficult time, uh, achieving the price levels that maybe were offered in advance for like some deferred shipment, but then you can't actually get there when, when that time arrives.

Chris

Barron: Yeah. So, um, last question that I really have for you is the September 30th quarterly stocks report's coming up. Any comments, anything to watch for, for producers to pay attention to in that report?

Duane

Lowery: Well, usually the corn estimates are not that big of a deal. They're usually within 50 or 100 million of what is expected. Last year we had the largest ever, I think, reduction in stocks versus expectations. I think we were 300 million less than, than what was expected, and that was in a year ago quarterly stocks report on September 30th. But normally it's relatively benign. I would say the average trade guess right now is pretty much, uh, identical to what the September USDA— or the, yeah, the September USDA had for a carryout production, which was 2.25 billion bushels. And that's pretty much what the estimate is on beans. The average trade guess is around 575 million, which also was the same as what USDA offered. And so I don't think the marketplace is expecting a lot there.— different than what USDA offered, but then it's the element of surprise.

I think it's interesting to see where we were a year ago and what the price action did a year ago. On September 30th, 2019, after the stocks report, corn was up 16.5 cents and beans were up 23. But it's even more interesting what happened after that. You had your harvest peak occur on October 14th, and from there on, you broke 45.5 cents, uh, into the end of November, December time frame. So this is before COVID even. So the rally couldn't hold. This was last year, last year. And the beans, you had a 23-cent rally on September 30th a year ago, also peaking on October 14th, and then you had a 45-cent decline. So that's kind of what I'm pointing out as a potential scenario here in price outlook, not based on that, but it just happens to be that's what I'm looking for, where you might get a near-term rally in corn, but I don't think we should trust its sustainability.

And in the case of beans, I think we've already seen the highs, and I think now we're talking about maybe a recovery bounce to get as close to that. So I don't think there's a lot of upside potential in beans, and I think whatever we get for upside potential is short-lived. And then, uh, I don't know where the bottom side of that parameters over the next few months in beans could be, but $9.75 futures is not out of the question. So I, I think that it's difficult to, uh, justify, you know, holding these beans unless you want to bet on South American problems. And there again, just why not consider marketing your crop, being done with it, saying thank you, and then if you want to invest 25 cents or 30 cents on call options, you know, go for it. Yeah.

Chris

Barron: Anything I didn't, didn't ask? I think it's just been a great conversation. We got through a lot. There's going to be an interesting week. I think guys are going to be pretty busy in the field. Harvest, I think, is going to pick up a lot in the next week or two. Any, any final comments?

Duane

Lowery: Yeah, I want, I want producers to take a step back, and I want them to remember how they felt for the vast majority of the summer, how prices were how, what they feared for revenue overall. And then I want them to do a reality check of what is offered now and what might be offered over the next week or two on a little bounce in corn like we've talked about. I want them to do the same thing with beans. And there comes a point in time where, you know, it would be reasonable to look at all of this in totality and say, man, this is so much better than I feared, so much better than was expected by virtually everybody. Throughout all of the harvest or all of the growing season. And here I have an opportunity to either make a profit or really get very close to that level and maybe take that.

Um, and I think that we have some stark realities that create a, uh, justification for that approach. You got $2.5 billion carryout in corn. Maybe it's less than that, maybe it's $2.3 billion. I wouldn't have a problem with that. Um, but it's still adequate, still plentiful. If we grow the equal number of acres in '21 and we have equal demand, we are going to add to that carryout figure. So that's difficult to picture something that's, you know, significantly bullish. If you look at the beans, we know we are very front-end loaded with our demand and what's been absorbed by the price discovery system. And it's factored into the prices. And so, um, there's a difficulty in finding that bullish storyline in beans unless you can get it out of South American weather. And betting on that has over the years not been a good bet.

And you look at bean acres for the '21 season, we might have a need for bean acres, okay? But there were 10 million acres in the prevent plant in 2020, and typically 3 to 5 would be more reasonable. So there's probably 5, 6, 7 million acres that we didn't get planted in 2020 that the marketplace is going to want to throw in the balance sheets in '21. So all the— during the winter months, we're going to have to listen to every analyst talking about more acres. They're going to use trendline yields, and those numbers are not going to sound that optimistic. And, uh, so I think that there's some sobering facts there's a wet blanket, what you're saying there. And I think, I think the producers need to be very careful not to get overly bullish because the prices have gone up, and maybe be more thankful that they've gotten, uh, gone up to where we're at. Yes.

And, and maybe just you say thank you and you step out of the arena for a while. And I think there's also a case to take a proactive marketing approach to '21, especially on corn. And maybe not necessarily such an urgency to do it on beans. And so if the producer says, looking at '21, maybe you are more aggressive with your price protection on corn than you normally would be, and maybe you're less interested in being aggressive or making hardly any sales on '21 unless it works for your operation.

Chris

Barron: Right, right. Well, hey, Dwayne, I think this was a great conversation. I think it was all good content, good conversation. Thanks for coming in today too. I really appreciate it.

Duane

Lowery: Thank you, Chris, and everybody have a safe harvest.

Chris

Barron: Yep, and that's exactly what I was going to say too. Guys are going to be busy. There's some areas where the crop's down and things are not super fun. There's going to be long hours, people get tired. Make sure you get some rest and stay safe out there, everybody. And again, Dwayne, thank you, and thanks everybody for listening. We'll catch you again next time on the Ag View Pitch.