Sunday market outlook: USDA report coming up Friday

Duane: And it all comes down to this. 2 on, 2 out, bottom of the 9th.

Chris

Barron: The Farmers lead by 1.

Duane: 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're heading into a new week, and it's actually a short week. Dwayne, how's it going?

Duane: Ah, good, Chris. I'm looking forward to, uh, watching this week unfold. Got some rains over the weekend, some acres it helped, some it didn't, but it certainly helped soil moisture wherever it fell. And I'd say that, you know, that's, that's a good thing because we've been getting pretty dry for a long time.

Chris

Barron: Yeah, that's for sure. You know, at our location here, we actually get 2 inches of rain, and the last time we get 2 inches of rain was August 10th, which was when that derecho went through. So we were really dry in front of that, and we were really dry in front of this. It's pretty interesting, we had such huge cracks in the ground that we get 2 inches of rain and there's hardly any puddles anywhere. So we really soaked it up, that's for sure.

Duane: Yeah, I think that's the case in pretty much every place that got those kind of rains over the weekend, and there was a lot of rains in that 2-inch-plus category, even a lot of 3.5 to 4.5-inch rains also.

Chris

Barron: Yeah, there were some areas that got missed though too, right?

Duane: Yes, I would say we got the northeastern, you know, diagonal northeastern, uh, 40% of Iowa. We probably got about almost 50% of Illinois, got parts of Indiana, parts of Ohio, Michigan. Areas to the south or west of that got, you know, largely missed. So some of the driest areas got rains, but not all of the driest areas. But I think it was welcome everywhere it was at.

Chris

Barron: So what, what's the market going to make of this, you know, in this, in this week? Is it really going to be a focal point, or is it going to be something else like the, the report that everybody's going to be looking for at the end of the week?

Duane: I think the main focus is on Friday's report coming up. I think the weather and the precip, it's not bullish, it's some degree of bearish. It might be more bearish psychologically than it is factually. It was expected in Friday's trade, you know, probably most of last week's trade, rain in this timeframe was expected. I think what did occur over the weekend was larger coverage and larger amounts. I think the marketplace is, you know, up here at the upper end where harvest is just ahead, reports are ahead, weather will get a bearish spin, and it's one reason that we will be lower tonight on, you know, Monday night. So as far as the report is concerned, I think the trade in general is looking for yield estimates in corn down 3 to 4 bushels an acre, carryout down to somewhere between 2.2 and 2.4 billion bushels.

You got trade estimates in beans looking for yields probably down about 1.5 bushels, 51.8 or so, and carryout estimates probably down around 150 million. Having said that, I think there are also a large amount of people in the commercial side of the business that feel ultimate carryout levels could be lower than that due to China— Chinese demand, as well as, you know, some idea that maybe these yield estimates that I just quoted may not be down enough. So there's a wide range of estimates, I'd say, for this report. And to the extent that yields are down, the trade might soon expect them to be lowered further in future reports. But I think there's a lot of uncertainty on how to handle the market at the levels we've had going into this report.

It's— this is not an easy call, and, you know, we've seen a lot of dry weather, large regions of dry weather for, you know, an extended period of time. We saw the big derecho wind event, but it also feels like the marketplace has absorbed a lot of this expectation, and maybe it's going to be difficult for USDA to match the expectations of yield loss that maybe the market has digested already.

Chris

Barron: So it's going to be kind of an interesting, uh, interesting report. Um, talk a little bit about I mean, if you look at the last report we had, we had kind of a bearish report, but we had a positive reaction. What kind of reaction do you think will— you know, do you think it's going to be tied directly to the report, or are there some other factors going on as well besides just the report?

Duane: Well, the report is certainly important. Chinese business is important, but I'm going to answer that question in a slightly different form. Format. Let's go back and, and ponder what happened last week. Corn for the week was down 1.25 cents, beans for the week were up 17.5, and then if you look at the Commitment of Traders data that was out Friday afternoon, we saw that between August 25th and September 1st, and September 1st would have been last Tuesday, between that time frame the the large funds finally, for the first time in a long time, got long corn. They are now long 18,500 contracts of corn. That's a reversal of about 80,000 contracts from their previous short position. During the time frame that that was happening, corn was up 3.5 cents.

I would say that was kind of a pathetic amount of strength in corn at a time old longs are being chased to the sidelines and develop— excuse me, old shorts are being chased to the sidelines and developed into new long positions. And then since that report, from Tuesday's close to Friday's close, we were unchanged in corn. Now I want to contrast that with what happened in beans during that time. Now in the Commitment of Traders data, the beans fund— large funds are now long 162,000 contracts of beans. That was up 53,000 from the last report. And remember, there's been fund sponsorship in these, uh, bean bullish positions largely since May, and the price move during that adding to of long positions— beans are up 34.5 cents, and since Tuesday's settlement to Friday's cents, it was up another 13.25.

The reason I'm skipping to this point, uh, this area to answer your question is If the corn market was chasing shorts, which tends to be where you get a lot of emotion, and they were only able to get corn up 3.5 cents at the same time beans were moving up basically 47 cents and not chasing shorts, just adding to positions, I would find that corn performance quite poor, um, and so And also what was happening during most of this timeframe was dry weather, no sign of rain, crop ratings declining, yield expectations declining, declining to the point where it was no longer considered absurd to think that we were not going to have a record yield this year. So the market sentiment changed a lot, and yet the corn market only moved 3.5 cents, and last week penny slower for the week.

I find that troubling and I find that means that the report is going to have to deliver a fairly supportive number where the marketplace is going to focus on seasonal factors of harvest ahead, ideas that the farmer maybe has been slow in overall total sales for the '21 crop and yet still has probably at least a normal need for making sales during the harvest period. That opens up the risk that after all this short covering and buying energy that we've gotten in corn over the last few weeks and dry weather, etc., that we are— we appear to be stalling out energy. And if the USDA report happens to stay on the high side of expectations, And I would classify anything that still is still a record yield, if that's still what they're suggesting after all that we've experienced, I think the marketplace will be concerned about that.

If the carryout at USDA with all the China purchases that we've had, if that carryout is still, you know, above 2.2 billion I think that's sobering. So I think your report runs the risk of not living up to what maybe we've already dialed in. So I have concerns for corn here. I was very disappointed with its performance this past week, and we are still kind of hovering in the upper part of the recent range, but I see a lot of reasons to be concerned about that.

Chris

Barron: One of the things you said, you made the comment or used the phrase normal sales. Or odds are that, you know, producers may need to accomplish normal sales. What does that mean, you know, for the, for the marketplace? And when we look at the need for normal sales, we see a lot of our clients with less sales on the books than normal. And I don't know to what percent exactly, but we're definitely undersold from quote-unquote normal. But we've also got a lot of areas that have issues, but we also have areas that have abundance. So what's that mean for the market? What do you mean by that normal sales need? What's that do to basis?

Duane: Well, I think we still have yet to experience a level of producers selling for the '21 crop during the harvest window because of their need for cash flow, space limitations, etc. And I think the impact on the market is If after USDA's report on Friday, the landscape isn't able to produce, you know, a sub-$2.2 or $2.0 billion bushel carryout, the market is going to say, wait a minute, we've had all these problems and this is— we're still going to have carryout at these levels even after increasing exports, China demand, etc. I think that'll be discouraging. And then we still have to experience this farmer sales. I think the farmer will get to that point of making those normal sales. He's been inclined to wait because of declining crop conditions either on his own farm or what he sees across the country.

They've been inclined to wait on holding off sales because they were unsure of their own production for those same type of reasons. And there was also, you know, some insurance element here that Some producers have certain policies that were into a crop insurance payment and they wanted to, you know, try to wait and, and not make the wrong decision there, and yet they probably still have that need. The impact on basis might be to weaken because basis values have been firming from their worst levels quoted for new crop during the summer. And so now that they've strengthened some, maybe there's an argument for some basis weakness there. I'm not sure about that, but I believe that the guy that has to make sales at harvest time for all their individual reasons, um, it seems to me like some price protection stance before this report might might have merit.

We don't have— nobody has any idea what these reports are going to be, and it's not that difficult for me to embrace the idea that the yields from USDA will stay up high enough to not provide a lot of excitement, and it's not difficult for me to see USDA embrace the idea that if somebody said we're going to be in the low end of estimates and It's not difficult for me to embrace that either. So what I'm telling you is I don't have a confident expectation of what to see out of the USDA report, but I am very, very concerned that price action acts like it's stalling out, as I described in that comment from the traders data. And the shorts that were that long held, to be able to exit what I would call very gracefully despite the fact that we had declining crop conditions, dryness, we had soybean market very firm, creating plenty of excitement, and yet corn couldn't do it.

And this was the other thing we had in the backdrop was the, uh, an aggressive amount of purchases from China on corn. And so I think corn is acting poorly here, and, uh, I believe that The overall demand outlook is probably favorable that we're eventually going to get better prices sometime in the winter and after, but, uh, for those that need to make sales in the next 30 or 45 days, you know, maybe some consideration needs to be made that these prices may be as good as we're going, going to get, uh, into and through the harvest season. I don't know if that's the case, but I, like I said, I'm very concerned.

Chris

Barron: So what about soybeans? Is the concern equal there? Because I can also tell you that we see black ink on a large percentage of the producers with where the soybean prices are at right now. Also, if you look at the lack of carry in soybeans, and we've talked in prior podcasts about the finite amount of storage, and so if there has to be a decision between corn and soybeans, nothing's changed there, then I assume between you know, market the beans probably and stash the corn, or anything change there?

Duane: Unless USDA and/or actual yield reports from the combine indicate a significant amount of disappointment in our soybean crop, current prices have accomplished a lot. They've gotten to the highest levels for spot corn or spot soybeans or for soybeans for delivery at this time. It's largely the highest levels we've had since 2014. There might have been a couple of windows in there where it was better, but they were short-lived. And so, you know, you've accomplished that. Like you mentioned, a lot of producers are in the black on the soybeans. If they're not in the black, they're probably have the most profitable situation that they've had here for several years. As far as carry, there is no incentive to carry soybeans based on futures values.

There's about a 10-cent carry between Nov '20 and July of '21, and if you contrast over the last few, few years, you were anywhere from 30 to 50 cents worth of carry for the, you know, at least the last 3 years. And if you go down and you try to find a carryout stocks-to-use ratio that is similar to what we think this year is going to be, some of those years were offered 15 to 30 cents carry, and right now you're only offered 10. So there's no incentive to hold those beans based on what futures carry offers. Basis values for new crop have firmed in beans. There are a lot of places that are quoting some very good historical levels for beans, there's another strong indication that the producer should make a sale. And none of this has anything to do with flat price predictions.

Maybe beans are going to $12, maybe they're going, going to $9, that's irrelevant in relationship to the carry and the basis values. So the producer has every reason to move the physical crop to lock that in lock in flat price and, you know, the futures and the basis lock in the total flat price, and then decide if and how much money he's willing to invest in calls or some reownership. At the present time, I don't think the reownership needs to occur immediately, nor at current levels, but I am inclined to think that the farmer has a lot of merit in rewarding current values, uh, with a large percentage of his 2020 production. And I think after experiencing all that we've seen in 2019 and 2020—black swan events, volatile, uncertain, uh, global issues—I think if there's a profitable part of your operation and finishing that off and putting ribbon on it, calling it done.

That seems like a very good approach to me, so I'm inclined to be fairly aggressive with soybean sales here.

Chris

Barron: Yeah, one other challenge for some I know that probably have made some sales earlier and are sitting there now saying, well, do I sell the rest of this now? I wish I wouldn't have sold that 30% or that 40% of my expected production when I did. But yet, you know, sometimes when the market's rallying, it slows us down as the market goes up because we've sold some, you know, in our mind anyway, sooner than we should have. But that shouldn't really hinder us from pulling the trigger at these levels, probably, right?

Duane: I do not think it should hinder, hinder making these sales. No, I would Continue to fail.

Chris

Barron: It's just a tough psychological thing for some people. I think, you know, you've made sales a little too soon and it's like, well, I gotta average out here, you know. And, and I think what you're saying is these are pretty darn good opportunities right now.

Duane: I think based on recent history, based on, um, you know, production expectations, based on historical levels of basis, based based on the lack of carry in the futures market. I think there's almost every incentive to be an aggressive seller and get the prices locked in, and then I think you view it in two different baskets. On the one basket, lock up profits, close out the 2020 positions, and then choose if and how you're going to establish some reownership and if you want to invest X amount of dollars in call options or whatever. I think that approach is still warranted and justified. I personally am not anxious to do that immediately. I am inclined to, right now in the immediate sense, make the soybean sales, but I'm— I think that I'll have better opportunities for reownership sometime over the next 2 months.

Chris

Barron: What about the— that's my thought. What about the 2021 specifically on soybeans first? What about the 2021 crop? I mean, could part of this trend—

Duane: the 2021 soybean crop, you got those futures sitting at $9.50, right? On the one hand, you can look at that and say $9.50 has been, you know, a good price over the last few years. If you pull that chart out and look over the last 12 years, $9.50 is still at the very bottom side of price parameters for beans. I think that the U.S. carryout will get low enough, the Chinese demand will be strong enough that maybe Nov '21 beans, if the soybean market weakens, it's going to weaken in the front end, not so much the Nov '21. And so I think an argument can be made that the marketplace may find a need or desire to want to try to entice more U.S. bean acres next year. And so I think there's an argument to be made that you could price some, but in the same token, I'm not concerned about a large drop in new crop beans.

So I would look at it and say, you know, some sales are okay, but I'm not all that super concerned about that. When you look at the corn, I think it's a slightly different situation. The corn— East Corn of '21 is sitting at $3.84. This is in the price zone that I talked about, you know, multiple times during the summer, that if we got up to this level, it might warrant some sales. Crop insurance, you can't— most people, what most people choose for crop insurance can't be— price isn't determined until February. There are some crop insurance choices that are in the process of being determined now, but if you don't take that choice that's being determined now, you have no floor protection until we get to February. That makes you vulnerable to, you know, black swan events, so to speak, and the current environment, I find that concerning.

I think that when you look at our ability to produce, not that we may not have gotten that level of production this year because of drought, but when you look at our ability to produce, we're able, still able to produce more corn than we can consume. With the current acreage mix, even with an enlarged export program to China. And so it's possible that, you know, this $3.85 area for Dec '21, maybe that's going to be on the upper side of expectations here through the winter. I'm not sure, but I think there is merit in producers having price protection stances on '21, and I'm inclined to be fairly aggressive with those if the producer is willing to, you know, consider some reownership protective strategies. And I think also his crop insurance choice goes into that a long ways too.

If he happens to choose the price protection plans that are available now for the '21 crop, maybe his level of sales here does not need to be that high, but there is merit in some forward sales here. I mean, July of '22 is at $402,000 approximately.

Chris

Barron: Yeah, $401,000 and three-quarters. Yeah, I'm looking at it. I was thinking the exact same thing looking at that July.

Duane: Yeah, so making some sales there, putting some HTAs, working with a cash buyer that will work with you to— that you could do an HTA now and then later maybe buy a call against that position at some point in time in the future. But 402 futures seems attractive to me, not that we can't get better than that, but if you make sales and HTAs out there, that contract is not going to lead the market to the upside. It'll be leading from by the front end, and maybe that doesn't even begin until the winter. So, um, I think there's merit in producer sales on '21. That's where I'm at. I look at that from the perspective that, that producer needs to be willing to be in a position where they can do some real ownership strategies at some point.

Chris

Barron: Yeah, the other reason I wanted to go into that 2021 conversation is we've rolled some profit managers over. We've looked at cost of production there, you could start to put some, some sales on, maybe a little bit, and for a lot of operations anyway, and it's probably going to work with a 5-year yield average. And then to your point, you know, you look at that July contract, you know, we could also be putting some targets out there, right? So like if this report comes out and we get a bullish response and we, we get a big shot in the market there. Sometimes we have about 10 seconds to make sales, so it always seems like in front of these reports, you know, or for the month, or, you know, 2-3 weeks after those reports, just have some targets in there, some goals or areas that you would make some sales, and just let them, uh, let those hit, you know. Um, it's kind of a strategy.

Duane: I think that's excellent advice, especially if some of these new crop prices are close to where they might work. So I am in favor of that. I really think that producers need to maybe step out of their comfort zone or step outside of their knowledge zone and take a serious look at some crop insurance alternatives here that are outside of their normal. Pattern of what they've been purchasing because they can offer some very good marketing opportunities in conjunction with these crop insurance plans, but those are being established now. They're not something that, you know, that is the normal part of the crop insurance, but in the current environment, anything that helps enhance your revenue protection or helps in your marketing helps to put a floor to protect against these black swan events, I think are a very good thing.

I could go into great detail on an example of this past year's where that played— that crop insurance choice made a very significant— played a very significant role in how comfortable you were as prices declined and where your price protection came in, but that would be a discussion. That would be the definition of another podcast. Exactly. But my point is, in the current environment where it's difficult to find profit without government subsidies, etc., and you're looking ahead to '21, you know, we need to broaden our ideas and open our minds to what is out there because there are other tools that can be used. And So I think that there are opportunities in the, in the current '21 offer or price levels, and I think there's merit in taking a price protective stance at the current level.

I'm not talking about the entire crop, but there's merit in it, and it needs to be explored by each producer on their own level with their own cost, their own insurance agent, or advisor or whatever, but it's worth exploring. Yep.

Chris

Barron: Anything else as we wrap up here that I didn't bring up or that you wanted to comment on, on, on this next week?

Duane: I guess the thing I want to emphasize, two things. The bean levels currently offered have a lot of merit for producers to get involved with sales. The corn prices offered probably don't fit that same criteria, but I'm very concerned that the market— corn market has absorbed a lot of increasingly bullish sentiment, declining bearish sentiment, and the price reactions on corn I would argue have been disappointing, and I'm concerned that the normal pressure of harvest, if yield reports show what they virtually almost always do every year. Every yield report we seem to get usually ends up with the words 'better than expected' attached to them.

I'm concerned that we're going to see the same thing again this year, to be honest with you, and I've been bullish corn, but I'm very disappointed with price action over the last several days, and producers need to take a serious look at whether there's a price protection opportunity for them, but I'm inclined to be concerned about price risk to the downside from here, at least from here to the end of the month, and maybe well into October. And so if you have to make sales in this window, you know, take a look at, you know, whether these sales may be might be attractive for you.

Chris

Barron: Sounds good. I think, uh, things that are all good advice and things that we need to all pay attention, really close attention to here, especially as we get a couple days here in front of the report to kind of do some math and get our numbers figured out. If anybody has questions or wants any help running the math, we've got a couple of tools that are pretty easy to plug some simple numbers in for your operation and kind of gives you some perspective. So if anybody'd like any of those, let us know Dwayne, really good conversation and appreciate that. And if there's any fireworks or interesting things with that report, maybe we'll do a wrap-up that day too. Does that sound all right? Sounds great, Chris. Sounds good. Hey Dwayne, thanks a lot, and thanks everybody for listening again, and we will catch you next time on the Ag View Pitch.