Sunday night market outlook: February 9, 2020

Duane

Lowery: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. 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 another new week, second week of February, and we've got Chris Barron and Dwayne Lowery. What's cooking today, Dwayne?

Duane

Lowery: Well, it's a little colder temperatures and I got a little snow in the forecast, so that's going to be a little bit different. We just getting started on the month of February and kind of a key month when crop insurance and all the planning that goes associated with that. So quite a bit of things up in the air and anxious to see the next 3 weeks, I guess.

Chris

Barron: Yeah, it's going to be interesting. So corn kind of, kind of stayed steady this week. But we were kind of hoping for a little more up than what we got. And beans were maybe up on the week a little bit, maybe 9 or 10 cents or something like that. But what's that kind of spell for the insurance? Where are we at on the 5-day, you know, the 5 days that we started on— start with corn first, but what— where are we at for an insurance price as of right now in the first 5 days?

Duane

Lowery: Well, in the first 5 days, you're just under $3.92 for an average, and you settled Friday at $3.94. And beans are just under $9.19, and you settled Friday at $9.18 and a half. So basically where the beans settled at, that is the average for the first 5 days. And, you know, you got— you only have 19 days this month to impact that. So the next 15 days, you know, you're going to have to— let's say the target or the hope is that you get these corn to $4. In order to get that average, you basically got to average almost $4.05 in the next 3 weeks. And that's, you know, 11 cents above where you're at now. So if you're hoping for $4 on an average, you're going to have to see some pretty notable strength, a lot more strength than we've seen recently. In fact, the, the high so far in the December through current date in Dec corn, I think, is like $4.04 and three-quarters.

So in order to get your $4 Dec corn for your insurance price that you had last year, if you wanted to match that, you know, you're asking the market to do some pretty fancy things to get that done. Not saying it can't happen, just saying that's, that's what you're up against. You know, that's what, that's the drag effect on those first, first 5 days here that, you know, have been on the low side of where we want it to be.

Chris

Barron: Yeah, and one thing we were talking about offline too, Dwayne, is the, you know, if you compare that to last year's $4, you know, level, and, or, you know, if we were to get to $4 now, that's, you know, we're 9 or 10 cents off of there. There's $18 or $20 an acre less coverage on corn. So while 9 cents or whatever compared to last year, if we come in at 3, say $3.91 versus $4, doesn't seem like a big deal, but it kind of is, you know, $20 an acre here and $20 an acre there is kind of a big deal.

Duane

Lowery: Yeah, and each year, you know, it's been a difficult environment for farmers to try to generate a profit and not chew into, you know, working capital. And this past year, you know, a lot of people were dealing with less yields than they've been having the last 4 years. And they had, you know, significantly more expenses getting this crop into the bin or off to market in the form of drying. And so these prices don't work. And if you're going backwards a little bit, Everybody's got a heightened sense of anxiety over that, and bankers are finding more hoops to jump through and a little higher bars to jump over. And all of a sudden, that $18 to $20 difference in crop insurance rate, you know, has a lot of implications towards how people are feeling and, and the mood in the country. And so, you know, what we need is we need some really good performance.

And basically for the last month, or actually no, not probably since November, probably since early November, we've probably been in— for corn has probably been in, you know, a 20-cent range, 22-cent range, something like that. So we're just marking time. Basis has held steady. So maybe firm some, probably from those levels, but we're just not getting you know, to the type of price levels people really want to see with the added expenses last year and the smaller yields. So it's, it's a challenging time. And, you know, we need some Chinese business. We need, you know, a little shot in the arm here.

Chris

Barron: So speaking of that, going into this next week, and even further on, but, you know, this WASDE report on Tuesday, do you expect anything there? I mean, what What can we hope for? What, what are the threats here? You know, it seems like every time we get news, it's not good news. What, what do you think? Talk about that.

Duane

Lowery: Well, let's start with the threat part of it. You know, we've been surprised by USDA reports before, and I would say the, the trade is not expecting anything significant for deviation from the last report. I mean, the corn carryout is going to be expected on average to be down about 50 million bushels. Bean estimates may be down 25 million, something like that. And wheat just marginally lower on carryout. These are not big changes. And I would say what I just described for expectations going into this report is based on no notable changes to the WASDE report from the US-China trade deal being signed. And I think that a lot of people still have doubts about that trade deal being honored anyway. And I think there's a lot of uncertainty with how USDA is going to handle it.

And I make that comment, but USDA did release basically a white paper describing what they were going to do But I read that, and it's very evasive, and I'm not sure I know any more now than I did before I read it. You know, they say they're going to use things like, you know, they'll factor in trade and policies that are in effect and publicly available information, you know, and things of this nature. Well, we know they signed it. That's public information. We know that Chinese leaders said they're going to buy it. We know that US Trade Representative said there are specific figures that of each commodity in terms of quantity that's part of that deal, but those numbers are not public.

So there, we know they're not public, but in all honesty, if you're in the job of forecasting and trying to look ahead to what demand is gonna be, I don't understand how they can have a signed agreement and with all the fanfare and all the expectations and then say, well, we're not doing anything with it until we get an actual first purchase. So I don't know how they're going to look at it. I'm tired of trying to outguess USDA. I don't know how they're going to do it. I read their paper. I thought it was very confusing. And not clear and left them a lot of flexibility. But it would seem to me that logic of the agreement, logic of their own white paper describing what they would take into consideration, I'm inclined to think that they're going to show some level of optimism toward these exports. They won't identify it as China.

But they can still adjust those demand projections upward based on what is public available. That, that would be my opinion. That's my logic. You know, I don't necessarily have confidence that my logic will mirror what USDA says on Tuesday, but it— after reading their own papers, I'm inclined to think they're more likely to have an improving demand base than a declining one. And with that in mind, going back to your question, you know, where are we vulnerable, where's the surprises or the implication that there'd be some negative, I just can't believe there'll be anything. First of all, most people are expecting little changes, and to the extent there will be changes, I think that those changes will be improving demand. So I would say the surprise potential here would be that USDA lowered carryout more than what people are expecting.

And I think that they could, they could do that, get somewhat of a bullish reaction. I'm not talking a big reaction. And that would seem reasonable, and it wouldn't have to necessarily identify any of that particular as being China. And part of the reason the reaction would be bullish wasn't necessarily the raw data itself, It's the fact that this trade sentiment is just, you know, can't quite imagine and have no— has zero faith that USDA will give us anything bullish. Now, whether that assessment is justified or not, I'll let everybody decide that on their own. I'm just saying that is the sentiment going into it. So I'd be very surprised if there was anything in here that seemed to cast a negative light on, on these projections.

And for those that are worried about, you know, new crop acres, we're not going to get anything from USDA projecting supply and demand on the WASDE until the May report. So that's a ways away, and before that we'll, we'll have acreage and anxieties and all that junk to deal with. But I would imagine there'll be a slightly supportive undertone out of Tuesday's USDA report. That would be my expectation.

Chris

Barron: Probably not enough to average the 5 or the $4.05 or whatever to get us back to the $4 corn, probably, huh?

Duane

Lowery: Well, I mean, I think it's important when you ask a question like that to go back to the perspective that the corn market's been in a 23-cent range since the 5th of November. So what is that? Dec, Jan, Feb, you're talking 3 months in a 23-cent range. And during that time, the Commitment of Traders report last week, the funds, they're short about 56,000 contracts of corn in Friday afternoon's report release. That was up 26,000 from the previous week. So to put it in another perspective, they increased their short position by 50%. And this kind of pressing on, on the downside, on the bear side, is in a 23-cent range seems like a very vulnerable position. And so if the market did have a reason to generate a little bit of upside momentum, I got a feeling we're not stopping at the highs that we've had since January— November 5th.

And if, if that's correct, then you have all these shorts that are going to be looking for the exit door so that the opportunity in terms of the profile of the market and the setup of the market, it is primed, you know, very, very well to get upside energy and maybe more upside energy than the news itself might reflect because we'd have people chasing out of shorts. So I think that the opportunities are maybe a lot better than what the, you know, somewhat passive discouraged sentiment reflects. That's my opinion. And the other thing that I want to point out, it's probably a good time to do it right now. This past week was a strange week. We had the bean market experience, you know, a 90-cent flush or whatever it was. The corn market maintained in a range. They were looking relatively decent.

And then the market comes in this week and we have a day or two where we look very vulnerable and it looks like the chart's going to break down. And that's about the time all these shorts are being put on by the, the large specs. And then by the time Friday rolls around, we've, we've traded 9 cents off of this week's low. And to put, again, to put that in perspective, that means about 45% of the range you've had in 3 months was was just eclipsed in about 2 days. And the other thing to point out in that is the day that we looked the most vulnerable, which was probably Thursday morning, the market traded like 4.75 cents down. That was the low of the week, but 4.75 cents lower on the day on Thursday. The spreads were losing about a penny and a half to 2 cents with old crop versus Dec.

By the end of the day, the market had settled down, you know, a small amount, like a penny and a half, something like that. Not that big a rally, but the spreads had reversed by 3, 3.5 cents from early that morning to the settlement. And then that was followed by us, you know, a pretty solid performance here on Friday. So when I look at that and I see the spreads moving like that, that to me is very significant. We were extremely vulnerable to getting some sort of a mini flush in the corn market at midweek, and the market managed to reverse that. And because of the spread movement and because of Friday's actions, I feel like they, they reversed that with a decent amount of authority. And so I think these— all these shorts that were added, which would have been, you know, as of Tuesday, um, I think that they might be in a little bit of trouble here if we get just a few cents higher.

So if we can find any reason to get a little bit of a boost, I think that we can generate some follow-through on that. So, um, that's my level of optimism there. And like I said before, I don't think USDA is going to deliver us anything bearish. I think the most bearish thing they could do was basically leave the data largely unchanged and not reflect anything. If they did that, the marketplace probably wouldn't be all that excited about the bear side because they would say that they just haven't factored in anything with the China deal. And for most people, that would be what they're expecting. So I don't think the market would get much of a downside reaction here. The reaction, if we're going to get one, is going to be on the upside because the, the trade is so heavily short and sentiment is so negative and nobody wants to buy in front of this report.

And so if we do get a post-report positive reaction, there just seems like there'd be a lot of pent-up buying that could suddenly come to the forefront.

Chris

Barron: I'm just wondering also, taking the other side of it too, if we, you know, and you know better than me, so I'll ask the question first. What's the resistance level to the upside? And then at what point, you know, because there's a lot of growers out there that are sitting on inventory and we need to get some cash into the operations, a lot of them here, you know, going into March just because of cash rents coming due and everything. Do you think that being met with some farmer selling would limit the upside at a certain point, or what do you think there?

Duane

Lowery: I'll get back to that answer. I'm going to start to answer what— how you worded that question early on, saying, where's the resistance? And the resistance— and I'm going to start with the Dec contract because it's the easiest one to explain. The December corn contract, basically since the first few days of November, the highest it's been is $4.04 and 3/4, and that was at the last few days of December. And I think they matched again in some of the early days of January. Or mid-January. And so at $3.94 where Dec corn settled at now, that's 10.75 cents away. Okay, that's nothing, but yet the range for the last 3 months in, in the Dec contract has basically been 15 to 18 cents. That's it. That's all it's moved. So for 3 months basically since harvest, the market has sat here and Farmers have sold. These are natural things that happen. They need money.

They've sold because they are concerned about the condition. There's reports of a lot of places dealing with corn that's easily going out of condition. So that's part of the reason we moved stuff. And there's a discouragement factor here that the market's just not going up, and they're looking forward to spring being not that far away, and they're looking at a gap between now and when the spring does arrive, that they might have some roads embargoed, they won't be able to haul it anyway, and then their elevators are offering some free DP. There's some— the basis is good, so there is corn moving here, and if you've got a relatively small rally, I'm sure that the selling would be there. In the case of the Dec, like I said, that's only 10 cents, you know, above where we're at.

You If you go and do the similar type exercise in the March contract, it peaked at $3.94, and that was not that long ago. That was only the 23rd of January. But again, since the first few days in November, we spent the vast majority of time in about a 12-cent trading range, and then, you know, minor pokes outside of that. And in order to get above that January 23rd high, you've got to go up about 10 cents. So getting to answer the first part of your question, the resistance level is 10 cents. The next part of your question, talking about farmers' movement and where will they sell or what, what they should do, I am sure that there are a lot of farmers that would be very tempted to make sales on a 10-cent rally with basis where they're at, and the fact that that would be the best cash price they've basically seen since the early days of November.

And I think there is a level of frustration that they might want to get it sold. I think there's a level of fear that prices could get worse because they're looking at expanded 2020 acreage. And let's face it, you're far enough past harvest that, you know, people need money. It's just a natural thing. And so I think there will be selling, starting, you know, 10 higher. And I think there'll probably be kind of layers of producers willing to make those sales. And from a chart resistance point, I expect us to take out these levels of resistance that's 10 cents higher. I think the place we're really going to go is probably closer to 25 or 30 cents above where we're at. And in the current environment, that sounds like crazy talk, and, but, and I accept that.

But if the market is able to clear these highs and resistance 10 cents higher, I think because the trade is so short and the large specs are short and the sentiment so negative, I think that, that we, we could be able to continue to push higher even if we had farmers selling. I don't think farmer selling would necessarily stop this market if we're able to you know, start to get that upside momentum. So the first levels of resistance, 10 higher, I think the place that the market really wants to go to from a technical perspective is more like 25, 30 cents higher. So that was my answer to your question.

Chris

Barron: Gotcha. Well, you know, I think, I just think that this old crap stuff that we're sitting on, guys are gonna gonna need to be watching that close just from the standpoint of managing, managing the cash flow and all that kind of stuff. Anything else going into the new week that I haven't asked about or that we need to discuss? With the risk of a whole bunch of stuff that I didn't think of.

Duane

Lowery: I don't think that— I can't think of anything that's on the horizon that, you know, we haven't talked about or you know, some threatening thing ahead of us that we can't think of. I would say that the cash corn markets have a firm tone yet, especially in the East. I would say that the futures market is acting a lot better than what the narrow range of price movement might suggest. And I make that comment based on the spreads and what they've basically been doing since about the 16th of January. And I would point to the beans, and the biggest comment I'd say about that is from a historical perspective, they are very, very cheap with multiple ways of trying to measure that.

And I'm finding it hard to look on the horizon and know what that fundamental narrative is that's going to give us better prices other than this, you know, difficult to define potential that China will, will come in for Phase 1. I personally think this Phase 1 is a huge deal. I expect them to honor it, and I think it has potential of jump-starting global demand to a kind of a new level of late. So I'm, I'm a little more optimistic about that, but I can't point to anything specifically. The But I mean, I happen to be encouraged by what I think the technical outlook is. And I can't give you the fundamental storyline, but I'm looking for prices to, you know, have that type of a rally in corn. And the highs that we made in January on the beans, you know, which are now, you know, 60-some, 70 cents away, whatever it is, I think those highs are going out. But that's a technical opinion.

And I don't really have that fundamental storyline to back that up. But at any given time, you can always reach into that China drawer if they start to do some business. And the last thing I would say about the China thing, with the price flush that we've had in beans, the corn having been at the bottom side of its trading range, the global freight rates being reduced to China because of the coronavirus and decline in activity. I don't know what China could be looking for, asking for, or dreaming about that would be a better buying opportunity than what they're getting right now. And they're getting lower cost on both raw price and they're getting lower cost on the freight. And I, again, I point to these corn spreads. I just wonder if that this isn't the precursor to some business taking place.

So I'm certainly more optimistic here than, than, you know, a stagnating market would imply I should be.

Chris

Barron: Well, that's good to hear because it's not very difficult to listen to a whole bunch of other people talk on the other side of it. So I appreciate that perspective personally. So, so any, any, um, I think that's probably about everything. I think next week we want to spend a little bit of time on new crop. I think we'll kind of hold off on that and talk a little bit on Acres 2020 and kind of see what this price discovery does, you know, as we go through another week. So I think that's really all I had, Dwayne. If you got everything covered, I think we're good to go.

Duane

Lowery: Sounds good. Look forward to talking again next week, and I'm, like I said, I'm kind of anxious to see if we can't get a little friendly market action surprises here. So I'm hopeful, I'm Hopefully we'll have something good to talk about over the next couple of weeks.

Chris

Barron: That would be great. We hope so. So, well, thanks everybody, uh, for listening, and we will catch you again next time on the Ag View Pitch.

Duane

Lowery: Thanks for joining us on today's episode of the Ag View 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.