Sunday market outlook: pricing opportunities continue, but for how long?

Duane

Lowery: 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!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we are entering a new week of markets, and you've got Chris Barron and Dwayne Lowery here. Dwayne, how's it going?

Duane

Lowery: Good, Chris. How are you doing today?

Chris

Barron: Hanging in there. Yesterday we worked on combines and heads. I should say we, I should say my nephew and Jason, our main man here at the farm. But anyway, they took the combine, made a pass across the field and some soybeans to kind of get things working, make sure everything was up and running. So I guess we could officially say we've started soybean harvest, but. The combine said 11%, we tested them at the dryer and they were 14% and there was quite a few green beans in there, so I think we're gonna wait a couple more days, but I don't think we're too far away from a lot of combines getting rolling. What are you hearing?

Duane

Lowery: Yeah, I think there's a lot of people probably in a position as you described yourself. Went to Des Moines this weekend and there were beans coming out. There was also some corn being taken, but it wasn't quite as much activity as I would have anticipated. But you could see that people are getting ready to go, and you've got quite a bit of corn that's probably ready. You've got quite a few beans that are ready, but you also got quite a few beans that are probably at least a week away also. So harvest is in the process of ramping up, but it is not, you know, it's not all out going yet.

Chris

Barron: Yeah, I think it's going to be next week before, you know, this, this coming week or this week we're in now, I think there'll be some machines rolling, but I think hot and heavy is probably another week away yet. We've got in our area, we've still got a lot of pretty healthy looking corn, but, you know, like I said, you go down to that Derecho area, and I know a lot of those combines are starting to roll, and, and so it sounds like there's kind of yield variability all over, so it'll probably be a while before we know too much there. So, um, wanted to ask you some questions kind of also on basis. What are you seeing there as a few of these combines start rolling? Does it make sense to, um, you know, to maybe go after a farm early or something like that and watch this basis, or what are you seeing with that, that level of—

Duane

Lowery: Well, there had been some premiums for spot shipment, nearby shipment of corn, but I think during the last week we saw that erode almost every day. And if you happen to be in a location where you got a spot premium, I think there's value in going out and capturing what bushels you could deliver on it if you're in that position. As far as new crop basis, there's a couple different schools of thought there. One focuses on the idea that there's going to be 2.5 billion carryout, the size of the crop in general, some loss of storage from the derecho wind event factoring in, and then, you know, everything along that theory line warns about weaker basis values ahead. The other half of that equation focuses on what's the farmer going to do, and, uh, Farmer isn't super excited about selling current corn prices.

Whether that's right or wrong, I guess the future will ultimately unfold and judge that, but at the present time he's not that excited about selling it. He's willing to sell beans, and so that's where his cash flow is going to come. So if the farmer is an aggressive holder of corn and/or prices back up and weaken for whatever reason, does that limit the farmer selling and does that end up creating a situation where basis values will firm? I find it very difficult to get real negative corn basis. I find it Uh, not unreasonable to believe that basis could weaken some as harvest unfolds, but I'm probably not one that believes corn basis is going to weaken a lot, and unless you're forced to sell corn into that gut slot period of harvest when basis is— would most likely be at its weakest point, I'm thinking that once harvest is put away corn basis will probably be quick to recover.

So I'm not overly concerned about basis getting weaker unless you are absolutely in a position where you know you have to sell bushels, move physical bushels, and if you've not yet done that, yeah, I'm probably inclined to get basis locked in on that. But other than that, I'm probably not all that negative basis. How about yourself, Chris?

Chris

Barron: Well, yeah, I think I would agree with that. I think usually what we see in in a lot of instances, you know, for our area, it's going to be that mid-October, that last 2 weeks of October is usually when basis gets nailed the hardest. And that timing is variable across the Corn Belt as you go from south to north, as harvest is, you know, in that what I call that final third of harvest, that final one-third, it seems like that's when the basis pressure hits the most when guys' bins are getting full and they're finishing up and trying to figure out where to put that last you know, 20% of the crop. That seems like that's when, when they can kind of grab those bushels, or I wouldn't say steal them, but they can get them with a lot bigger basis at that point.

One thing that I was going to ask you too, so moving forward, staying with corn for a minute here, last week, you know, you, you're of the opinion, at least last week, as of being a fairly aggressive seller, or a very aggressive seller, I guess. Maybe I put it— I don't want to put words in your mouth, but I'll have you respond on corn specifically. And so you look at Dec corn now in that $3.78, I think, range, and July out there, July '21. So, you know, there's— and we were talking offline a little bit— there's about 17 cents of carry there to that July $3.95 range. What's your thought there if producers are putting this stuff in the bin, you know, how aggressive on sales does one want to be, or what's some strategies there that people may want to be thinking about to put, you know, to at least put a floor on this, on this in case this is a pretty good opportunity?

Duane

Lowery: Well, I resisted sales all summer long, but when prices were in the bottom part of the range, and I had upside targets of approximately $3.70 beans corn We talked about in many podcasts the upside targets for July corn of $3.90 to $4.05 depending upon where the spreads would be at that moment in time, because at $3.70 Dec corn at one time it was thought maybe Dec-July could widen $0.30 there, that puts you at $4, so that's why the variance in where those things might be. So I see the corn market as being up into a price zone that that I want to be a seller and you don't even have to put words in my mouth, I want to be a very aggressive price protector.

So whether that's selling the physical corn, if that's a position that you need to be in, or whether it's, uh, you're going to store it on the farm and try to capture some carry, avoid weaker basis, expect to get stronger basis, which seems like a reasonable approach to me, that basis will ultimately end up firming a fair amount, then find ways to price deferred futures, either by selling futures or HTAs or whatever tool that you want to use to accomplish that, but I want to be an aggressive price seller. The corn market, if you take a look, I just want to offer a little perspective on what current prices are, and before I even offer that perspective, let me define how I see market sentiment, whether that's coming from a trader or whether it's coming from a producer.

You go back to all of the summer and much of the late spring and summer, the conversations were all talking about sub-$3 corn, and then the argument only varied with how much below $3 we were going to get. That was the level of negative sentiment. Then you had a situation where now we are at basically almost $3.80 for spot corn, we're at $3.78.5 on Dec corn, we are— I have July futures now at $3.95, that's where we're at, and now the sentiment has suddenly turned into some bullish euphoria that prices are just getting started. Okay, that seems to be kind of a building sense of sentiment as I read it. Part of that is driven by the scope of the bean rally, which I'm sure we'll get to a little later, but I want to offer a perspective on what current values represent. Current values at spot corn at about $3.80 is basically the midpoint of prices seen for spot corn from 2014 to 2016.

2015 to present. If you want to throw out the high years and the low years— actually, it's not years, the high single-digit number of weeks you were at extreme and the low single-digit number of weeks that you were at extreme on the bottom side, you still end up with an average that's right near that 380. Current levels are not cheap. Current levels are not something that you go, wow, shoot, we have to rally because look how cheap they are. Now look where beans are at. So the corn price right now is still a fairly priced item when you consider the government payments that have been added into the coffers this year, whether you look at how the payments as they receive impacting the '20 crop or whether you look at what the payment is derived from, whether it's derived from the '19 or the '20 crop, either way we just had another one announced Friday that added 23 cents to it.

Um, there are perspectives to be gained looking at the price of corn through those lenses, meaning that when the government offers up money, it seems like the system says, well, if the farmer is getting '23 cents from the government, then we don't have to pay that last 23 cents in price to the farmer.' That seems how the market ultimately ends up responding to these government payments far too often. So when I look at the price, I see the corn prices as being on the high side of the last several years' worth of history, and then I look at the carryout pegged at 2.5, That's certainly not on the low end of carryout projections over the last several years. And then if you look at the balance sheet, how much we've elevated demand on the export side to even prevent the carryout from not being quite a bit above 2.5 billion.

And you look at if we have equal acres next year and a trendline yield, which is we're, we're going to spend the next several months focused on trendline yield. And then acreage discussion, we're going to be talking about a balance sheet that will increase that carryout the next year if we maintain exports at this level. And so I look at it that way and I say, well, corn prices might prove to be quite high in this timeframe when you look out over the next several months and then you look back to September of 2020. This might prove to be a fairly high price. So I'm looking at corn prices through those lenses. I'd offer up a discussion that people should go back and look at a July of 2013 corn chart, which was the marketing year of the 2012 drought, and you will find that the corn market topped out in September.

September, and it was no good for several months thereafter, if good was represented by you could buy breaks and that would work. That was not what was going to work. Those September highs proved to be long-lasting, and they actually lasted until you got into the next growing season, the following summer, and then was seeing whether or not you could get any weather scares. So I'm very troubled by the outlook of corn. And if I were to break it down to something smaller segment than the long dissertation I just gave, I would focus on the 2.5 billion carryout. I would focus on the fact that we have sharply elevated demand within the table that prevents that carryout from not being larger. And if we extrapolate both supply and demand into next year, and have equal acres, we are going to add to that carryout. So I find that troubling. So that's the long answer to that question, Chris.

Chris

Barron: One of the short ways of looking at it that I'm— I see, just in having a conversation with a client last week, is to take all what you said and agree to that, and then just to simplify it even further and say we've had 4 kind of key things that have given us strength in the corn market. We've had Chinese demand. The derecho did kind of turn the table a little bit and got, got the fire started. You know, it was the igniter. The soybeans have been rallying, and then the funds are more engaged now because it looked like maybe there was some investment opportunity. So between China demand, the funds, the derecho, and soybean rally, corn has been here. But all those things could go away pretty fast, right? I mean, the derecho is done. I mean, you can only kill crop once. Soybean rally is here. Yeah. Will it stay here? China demand, will that stay here?

And how committed are the funds to, you know, to continue to go along?

Duane

Lowery: Well, I would say let's start with the last comment about the funds and how committed are they to go along. The commitment traders that came out on Friday provide data as of Tuesday. When you talk to traders or analysts that focus on that Commitment of Traders report, they say that as of Friday's close, they believe that funds are probably long a record amount of soybeans. So the funds already are that committed. When you look at the calendar, it would be a little unusual for the funds to build and sponsor a long position from here forward. And that use of the word sponsor reminds me to, to think about, uh, the fact that funds have been sponsoring a buildup of long position in beans largely from May forward. And just to offer again some perspective here, um, the August USDA report was labeled as bearish. The August report, you know, was what, 5 weeks ago?

6 weeks ago tops, and since that August quote-unquote bearish report, beans have rallied $1.80. And we went from having the funds sponsoring a long position in beans for months from May forward at a time that trade sentiment in general was bearish, and now we have an emotional upside blow-off, and now the public whether it's the farmer or the trader speculator, suddenly decide they want to be bullish beans after being quite bearish after that August report and not turning some shade of bullish until, you know, probably 3 weeks ago. Um, that just looks like a real pump-and-dump scheme, uh, profile where, where, uh, the people who have been long suddenly create the atmosphere where the excitement comes for the, the different crowd to come in and own it. And this transfer of ownership that I think is taking place here typically is not good.

And seasonally, it doesn't seem likely that they're going to sponsor ownership from here forward based on the calendar. And then if we're already at record levels, are they going to sponsor it through the winter months? I just find that a little difficult to believe. The other thing that you brought up in there was Chinese demand and you questioned whether it will stay, and I have no idea the answer to that question. Um, I would point out that ever since Phase 1 was announced, I've been consistently and confidently saying that I thought China would be an active buyer and they would work towards moving to honor that agreement. And I probably still feel that way going forward. However, the vast majority of that time, trader sentiment was very skeptical of it, and now the trade sentiment wants to fully embrace that demand.

The risk here to the Chinese demand part of the equation is that much of their soy demand has already been accomplished. They were aggressive importers, huge importers, from January to present. Present globally and most of that was non-US origin to begin with and then recently it's been US origin. I don't know exactly where they're at on their coverage, but from February forward the cheapest price in the world to buy soybeans, cheapest location is South America and that gap has gotten wider in just the last week. And so you always run the risk that the buying comes in, in the US position, and it reaches a point where the premium over South America is too high, or stated a different way, the South American discount is too much, and you reach a point where some US business gets canceled, and then the origin is switched to South America.

That's something ahead on the horizon that we have to be worried about because we've seen this playbook before and it's something that commonly happens. So that's a threat. There's also a threat that China has already got largely their needs covered through January. We're getting close to that point, at least covered through December, maybe 50% in January and maybe more, I don't know.

The other part of the Chinese demand, getting back to corn or beans, either one, how much of the demand that we're seeing is associated with a rebuilding of inventory because the inventory was drawn down during the trade war and during other problems that China experienced, you know, how much of that demand was based off of this and going forward, even if their demand is quite good from where it's been over the last several years, let's say, what's the chance that we've run into a lull here where that buying subsides for a while because maybe they've got enough coverage to last for a while? The pace at which they've been actually unloading vessels is certainly higher than their actual demand. So we know that they've been adding to their reserves or adding to their inventory, building up stocks.

We just don't know exactly how that evolves, but we're certainly— it's certainly reasonable to assume that we're closer to that end of the spectrum than we are to the other end of the spectrum. So the whole China demand thing is great and positive, and I'm pleased to see that it's arrived, and I'm not overly surprised that it has arrived, but once it arrives, then we have to worry about whether that pace can be continued or whether, you know, we're going to run into a period of time where we've run into a vacuum where there's several weeks of a time where maybe that doesn't occur. So the China demand is good, but we have to soberly recognize that it's possible that a lot of this demand equation has been built into the matrix of sales already announced. And the USDA has certainly factored in sales that they've seen. They've certainly had attaché reports to help them project future demand.

And a lot of this, again, is built into the balance sheet. So I'm a little bit concerned that trader sentiment, again, whether that's the speculator or whether that's the producer, is getting caught up in the emotion of the realization of what has occurred. But the impact of it actually occurring has largely been felt. And that would not be an unreasonable or an uncommon thing to see unfold. But I'm concerned that a lot of this stuff is, is the culmination of things happening, and it's not the beginning or the sign of beginning trends from here forward.

Chris

Barron: Okay, so, um, as we go toward the latter part of the podcast here, let's hit soybeans for a minute. I've got a question here for you, um, that it's basically comments that I've heard from a few producers in different ways. And, and what that is, and I, I define it as seller's remorse. So you talked about, uh, the price going up $1.80 here on soybeans. You know, we, we've got Nov beans at $10.43. And you've got, you know, I've talked to producers that are 30% sold, 50% sold, 70% sold, even a few people that are over 100% sold, you know, that have sold some on the board or whatever, and are a bit frustrated because they feel like they pulled the trigger too soon. But on the same token, they've been selling all along here. I guess, you know, my thinking is, is, you know, I'm not a big believer in seller's remorse.

I think if you pull on the trigger, you're pulling the trigger because that's a sale that works for you. And so you just don't look back. But That's, I think, hard for a lot of people to do. Where we're at right now, for those producers that are 30 to 50% sold on new crop beans, and obviously it depends a little bit on where they're at with yield expectations, what's, what's your take on soybeans right now? And, and we'll use that to kind of wrap up the podcast on, on the soybean side of things here.

Duane

Lowery: Well, if I went back and evaluated soybean prices in the same manner that I did before, going back to like 2014 and look at it over the last several the years. The midpoint in beans, if you take away the U.S.-China trade war and things of this nature, you're going to still come up with a midpoint that somewhere is around, you know, $9.50, $9.80, depending on how you want to do it. And here we're sitting with futures, November futures at $10.43 and a half. So we're already on the high side based on several years' worth of history. We've spent many months, most of the summer, where producers were worried they were never going to get a price that would work. By the time we got to, you know, $9.50, prices started to work for different operations and having different matrix of their costs, etc.

By the time we're at current prices, if current prices don't work in your operation for soybeans, it's been a really difficult several years because you've not had these prices that often to make it work. I think producers that are 30, 40, 50, 60% sold need to get to the point where if prices are up next week that they're joining in with all the other guys with seller's remorse. At some point in time you face the fact that why do you plant this stuff? You plant it to grow it and then to sell it. These prices are extremely good from multiple different sets of matrixes, and we know that the angle of ascent at which we've gone up— like I said, we went up $1.80 from a report that was labeled bearish in August.

I'm not sure that that can be sustained, and history would suggest it can't be sustained when you see the large spec is carrying a record long position, if that's where they're at as of Friday settlement. Those typically end up producing price tops and peaks. They aren't the signs of a beginning of a move or even the middle of a move up. If you look at how much of China's demand they have extended their ownership through, they are very rapidly nearing the point where they're just about done with coverage needs until South American supplies arrive. And they're already offered at a sharp discount to the U.S. for that February timeframe forward. We do have the uncertainty of the South American growing season, but you know, that's something that we always have.

So I find that the futures market offering no carry to hold beans, you actually got, you know, November futures trading at about 13 cents per premiums in July, so there's no carry incentive there. The basis values in most locations are historically on the better side, some quite a bit better. Um, harvest is just ahead of us. I do not understand the merit of holding the beans at all. And again, I want to see producers get to the point where they just, they, they sell as much as they possibly can to the point of exhaustion. Which is where I would recommend being. That's the merit behind my thinking.

The guy that— how many times, Chris, have you seen either yourself or producers in general not sell during a rally, watch their neighbor have seller's remorse, only to find the producer ride that rally up, ride it back down, and be ultimately end up marketing below the point where his neighbor had remorse for selling. I mean, that's, that's a pattern that we've all been caught in at different times, and we're all going to get caught up in that type of scenario sometime again in the future. And I think that that's something that we soberly need to remind ourselves.

Chris

Barron: Well, and the soybeans are, as you said, I think a cash, a cash crop this year for the majority of people, and it's And, you know, from a cash flow perspective, I think it makes a ton of sense and there's no carry like you just said too. So I struggle with why anybody would put them in the bin myself as well. Especially when you look at the majority of operations have a line of credit, have money borrowed. I mean, pay that down. Start, you know, if you don't, you know, start prepaying some stuff. You can buy some, buy seed, crop protection, a lot of those things at discounts this time of year. So the money's working for you instead of, you know, sitting in a bin.

Duane

Lowery: Let me offer another little perspective too. We had a period of time during the last 3 weeks or whatever it's been where soybeans were up 12 days in a row, had a 1-day pullback, then they pushed up again and had a 1-day pullback, which I think would have been probably Tuesday of this last week. And other than those 2 days, I think it's been I think you've had a 19-day run where beans have only closed lower 2 days. Now if your marketing strategy is that I'm not selling anything until the market has been up 17 out of 19 days, you probably still have a bunch of inventory left over from 2014. I mean, this doesn't happen that frequently. That's how odd this type of price rally and price structure to be is.

If your marketing plan manages to get through that rally and you still haven't made a sale, you know, I struggle to figure out what criteria you're using to determine whether a sale is a good move or not.

Chris

Barron: Yeah, I think, I think so. I think, I think the, the moral of the story or the message here is these are some pretty excellent opportunities both in corn and soybeans that we would have that we were probably praying for in, you know, in the June time frame. And back to the CFAP comment you made on the CFAP too, we did do a podcast that is available if you haven't already listened to that, take a listen to it where Paul Nieffer and myself kind of discuss what the rules are. Sign-up is Monday, starts Monday, where you can sign up. To make it simple, there's about 23 cents of value in corn, there's about 31 cents of value in soybeans and about 39 cents of value in, in wheat. And you can go through the, the math with your local FSA office and, and get signed up. So I think this has been a great conversation. Dwayne, is there any quick final thing as we wrap up?

Duane

Lowery: Well, I just, uh, uh, ask producers to do a self-check on what their sentiment was in the first days of August and where they thought prices could be and what they thought a good price would be, and then take a look at their current quote machine and ask themselves why they're not making sales. The current— people can, people could complete all sales on 2020 right now and they would be in so much better shape than they ever dreamed that they were. When you said they were praying for some better prices. The reality is, in as recently as the August USDA report, people would have been laughing at projections that we might get to $9 to $9.50 beans, and here we are at $10.40. So it's beyond just the point of what something that they were hoping to get to.

Um, and, uh, um, after going through 2019, 2018, the, the winter of of 1920 with the COVID with the crude oil debacle that, you know, took away half the ethanol industry's consumption for a period of time. We still have plenty of uncertainty ahead of it, ahead of us with the election, and I think based on what the Fed has been doing, there's plenty of uncertainty about what what the economic outlook is globally. And if through all that turmoil we're able to get the prices that we're able to get now, it seems to me like an opportunity to escape and come away in probably pretty good shape for 2020. And last thing I want to mention is the 2021. These prices for 2021 should not be taken lightly and they should not be ignored.

These opportunities, and I think that's the way they need to be classified, whether it's these '21 corn or no '21 beans, and I'm probably less excited about making no '21 sales on beans, probably willing to make some, but less enthused about that in terms of urgency than I would be on the corn. But I just think producers need to look around and see that there are opportunities and remember the time just measured in weeks or months ago where they felt like there were no opportunities and no place to go to be able to do anything proactively. And I think right now there are ample opportunities to be proactive with marketing, be proactive with crop insurance decisions, and all those factors can lead to a, to a setup for, for a profitable 2021, the way it looks to me.

Chris

Barron: Yep, I would agree 100%, and I think, uh, like you said, you know, you start looking at, at that, all those new crop opportunities and, and roll your numbers forward from the 2020, and, and there's definitely some opportunities there. Dwayne, I think this has been a great conversation as usual, and if anybody needs to get a hold of you, what's your number again if anybody wants to give you a shout on the phone?

Duane

Lowery: Just give me a call, 563-419-1300. They could also go to my website cropproductionscience.com.

Chris

Barron: Sounds good. Hey Dwayne, thanks a lot, appreciate the conversation.

Duane

Lowery: Thank you, Chris.

Chris

Barron: You bet. And we'd like to thank everybody for listening. And again, the CFAP 2.0, if you haven't listened to that, go back and listen to that one. That's got the rules and a lot of the details on what that program looks like. Again, thanks everybody for listening. We will catch you next time on the Ag View Pitch.