About This Episode
Duane Lowry spends most of this conversation on how to notice a story before it becomes consensus. He had not been talking about dry weather, but enough people started asking that he pulled ninety, sixty, thirty, and fourteen-day precipitation maps and found a persistent dry signature running from the southwestern Plains through Iowa. He is careful to call it a what-if, not a forecast, while noting that talk of a developing La Nina was picking up among traders.
The method he teaches is watching for price action that no longer fits the accepted narrative. If everyone comes in Sunday night expecting weakness and the market refuses to break, that mismatch is the signal. He reads the same way in the Commitment of Traders data, pointing out that funds added length while prices fell and then failed to press their shorts, which he takes as evidence the selling pressure had exhausted itself.
His practical concern is basis, not futures. Lowry argues that a futures rally driven by short covering would likely be absorbed by weakening basis, especially with old crop still unsold and carryout estimates climbing, so he encourages locking basis first and dealing with the futures price separately. Barron agrees, saying a board rally in his area could be taken back nearly penny for penny. Lowry extends the same caution to new crop basis.
“We need to look for signs that the price action is not consistent with old stories and storylines and narratives that we've been using.”
— Duane Lowry
Key Takeaways
When people start asking you about a story you were not telling, that is a signal the trade is beginning to price it.
Check a pattern across ninety, sixty, thirty, and fourteen-day windows before deciding whether it is noise or a trend.
Watch for price action inconsistent with the accepted narrative; a market that refuses to fall on bad news is telling you the story has changed.
Read fund positioning for conviction, not direction: adding length into a decline says more than the net position does.
Separate the basis decision from the futures decision, and lock the one you have the most risk in first.
In the early stages, a real weather market often does not make sense; that is not a reason to dismiss it.
Full Transcript
Narrator: Hey, podcast. Thanks for tuning in to another episode of the Ag View Pitch. Just a heads up on today's audio. Chris's connection was really bad. I think it's because Skype is getting bogged down here. So bear with the questions. Duane has some great content as part of the discussion. We are working on this moving forward in the future and want to ensure that we are delivering the best quality information and audio to you all. Hope everyone's doing great and staying safe out there.
Chris
Barron: Enjoy. Welcome everybody to another episode of the Ag View Pitch, and today you've got Chris Bairn and Duane Lowery going into a new week of May, first week of May. How's it going, Duane?
Duane
Lowery: Good, Chris. How are you doing?
Chris
Barron: Hanging in there. All right. So kind of still quarantined in the, in the tractor, but we're getting some things done here, uh, in Iowa anyway. We're, um, approaching the, the end of it. I think a lot of, a lot of stuff getting planted this week in a lot of areas. I know there's some areas that are still wet, but there's a lot going in, in the, in some of the dry areas.
Duane
Lowery: Well, right now for this time of year under these circumstances about being quarantined, at least you're quarantined in the tractor and able to go as opposed to quarantine in the house or the shop and you're looking out and you can't go. So that's, that's a good thing.
Chris
Barron: Yeah, yeah, that's for sure. So hey, let's get rolling right away. This won't be a real long one, but we want to get some good information out there. You were a little hesitant to talk about it, but you brought it up offline and I do want, I do want to ask you about it a little bit on weather. Just to talk for a second on You know, there are some areas that are dry. Obviously, there's some areas in the east that are quite wet yet, but what are you hearing there from some of your, your weather experts?
Duane
Lowery: Well, in the here and now, you know, the spring season has been good for planning and progress and field work activity, and that looks like it's going to continue to be the case. The exception to that rule would be areas in the central and southern part of the Midwest and the eastern part of the Midwest. Some of those have been experiencing rains and difficult decisions. I think what you're referring to in the offline discussion that we had, I've noticed in the last few to several days I've had more people ask me about dry weather and patterns and wondering what that means, and I didn't initiate any of those conversation topics. So somebody's out there starting to talk about it. That caused me to do a little research and make a few phone calls on my own. And I thought it was interesting.
If you look at precip pattern over the last 14 days, the percent of normal, you know, if you use like 50% or less than normal, you can definitely see the pattern. And if you go back even to 90 days and look at it, you can see the pattern of dryness in the southwestern plains. Extending up through, you know, just the northern part of Missouri, all of Iowa, southwestern part of Wisconsin, everything along that line. And then to the northwest of that is a relatively dry pattern, and you could see it expand if you look at a 90-day map past precip, and you use like, you know, 50% of normal, you can see it develop in the 90 days, a 60-day the 30-day— last 30 days outlook, and again on the last 2-week outlook. And like yesterday's National Weather Service 6 to 10, 8 to 14 day map was pretty dry, and that was about the second or third day of that that we've seen.
And there's also been a sense— it's difficult to put it on a piece of paper or put on a graph, but there's certainly a sense out here that we've had a lot more forecasted events than we've ever had that actually produce raindrops that hit the ground. And then our precip totals this year have, so far this spring, have been well below normal or on the light side. I know, you know, certain small river streams that every year in the spring they tend to elevate, and a lot of times they overflow. This year there was none of that. I would, I would say these river streams never saw a point where they had even elevated 50% of what would be considered normal in spring.
So while we're all enjoying the weather and the timeliness of plantings right now, and nobody's complaining about anything, nor should they in that regard unless you're in the east, certain parts of the eastern Midwest, but in these areas that are dry, there's really nothing to complain about right now. People are more interested in throwing out the what-if conversation about, you know, if this dry pattern has started at least 90 days ago and we see the progression of it, you know, is that something to be concerned about? Obviously, I don't know the answer to that, but it's something of interest, and I can sense it's getting on more and more traders' minds. I made a couple of phone calls to people I respect in the industry that are deep into the weather, and they are meteorologists for, you know, key players in the industry.
And, you know, the topic that came up was the onset of La Niña conditions and how warm waters off of the California coast, they exist, but their depth is getting thinner and thinner. And if that expands into a full La Niña event, you know, there are increased chances that we'll see dryness expand out of the southwestern plains area and move into the Midwest. And, you know, how much of an impact that will be to production Or more importantly, how much of an impact will that be on market action? Who knows? But I made the comment, I think, to you offline that under this circumstance, I'm not trying to create a story, but I am pointing it out that other people are talking about it. And I think that when we evaluate price action over the next few weeks, we need to look for signs that the price action is not consistent with old stories and storylines and narratives that we've been using.
And we come in here every Sunday night expecting the market to be lower, and that's the default setting. And we've had plenty of Sunday nights that we were lower. Last week we came in with a similar setup, and by Tuesday the lows of the week had been made. And by Wednesday, you'd had a— Wednesday and Thursday, you had the markets turned around and at minimum showed stabilization. In the case of beans, we had, you know, some nice strength for the week. And, uh, so if we come in here this week and, uh, this Sunday, I think the default setting again will be to expect weaker markets. But if we start to see price action that is something better than that, you know, we, we need to take notice and wonder what, what is going on here.
And the last thing I'd say about these, these weather markets that, you know, guys, even ponders and or even discusses on the third day of May is that I have seen many times where when you actually do have a weather market, the beginnings of it don't make sense. And, you know, so I'm a little on guard for that. It's not a prediction. I don't mean to put it in that light, but I am just pointing out that there are— my sense is there are a growing number of people in the trade industry that are recognizing that, hey, maybe there is a different weather narrative than what we've been talking about, and maybe there's something to look at down the road. That's all. So that's a kind of a long answer to what you probably wanted as a short, short answer, but there you go.
Chris
Barron: Yeah, the interesting thing too, it seems like the market last year, for example, we were getting all those rains. The market always seems to think, for whatever reason, rain makes grain, and it gets really frustrating when you're in an area area where it's wet and it continues to rain and no response, no response, no response. But then when it starts to get dry and then if you can get, you can throw some heat on top of it, it seems like they respond to that even though it could be a positive, you know, agronomically they, they do tend to respond to hot and dry better than they do cool and wet.
Duane
Lowery: Yes, and it might be a situation that the marketplace somewhat wants to find something to respond to as well. I've noticed in the Commitment of Traders report over the last few weeks, there seems to be a lack of conviction in some of these positions. I mean, for example, beans in the last few weeks have oscillated between a little bit of a long, a little bit of a short, but the bigger backdrop that has occurred, they've come away from having a big bearish bias in beans. And carrying a bearish position and somewhat sponsoring that. That does not seem to be the case right now. Last week they had gone to the short side. This week they reversed and got a little bit long. And then, you know, if you look at what happened during the reporting period, the beans were down 8.75 cents.
But if you look at what's happened since the report, which the report would have been as of last Tuesday's settlement, so they spent a week in that range and the, the, increased longs at a time where the market went down 8.75 cents. And the 3 days since the report, beans are up 17.5 cents. That does not look like a market that does not look like price action that funds are trying to sponsor any type of short position. It looks to me like they're going the other way and willing to sponsor a long position. That also feeds into my thought process that if we are weaker early this week. I think it will be temporary, and I think that we, uh, should respect it if it starts to reverse, um, as the week unfolds. So that's just something interesting that— as long as talking about Commitment Traders Report, the funds are short 160,000 contracts, but that's down 82 from the previous week.
And during the report, the market was down 5.25 cents, but they didn't build their short positions. Since the report, corn's up 6.5 cents. So that doesn't look like— that looks like and acts like a market that maybe has peaked on some of its selling pressures. And I wonder if short covering isn't ahead in this corn market, just based on that being one of the inputs for that idea.
Chris
Barron: Gotcha. As far as like going into this this week and in the next couple of weeks? You know, we talk about whether, you know, whether or not that is, you know, any kind of a mover this early on. I guess probably questionable, but, you know, um, what should we be looking for in your opinion?
Duane
Lowery: Well, another thing that I think producers have to have on their mind, and I think some of them do, is especially those that are getting to the point where they're either finishing or can see the finish line on the planning process for their own operation. And that is, what are they going to do with old crop corn? I think marketing for the year of 2019 production is probably behind normal, is how I would describe it. I think there's an elevated concern from producers that as, um, planting slows down and people have more time to devote to hauling grain, if that's what they want to do, um, it's going to free up some supplies. Basis levels in some locations had a nice recovery from when things first went south. Other areas had maybe half of that recovery that they participated in.
And all areas are looking at basis levels that are less than they were on the 1st of March, and they're less than where they want to be. But I wonder if we have to look at it from the standpoint of what— could the basis get worse? And I'm afraid the answer to that is yes. So if we get a futures rally in the corn market and there's some short covering activity there, I think that will really weigh on, on cash basis levels, because I think there's a lot of producers that feel that carryout at one time was going to be 2 billion or a little bit less for the old crop. Now everybody's got numbers that are elevating that by, you know, maybe a few to several hundred million bushels because of, because of ethanol, etc. And so people look at that and say, I don't want to be the last guy holding my old crop physical corn. When do I get rid of it? How do I get rid of it?
And, you know, there's not an easy answer to that question. But it seems to me that basis is something that we could try to limit the risk on that. And I understand that the idea could be wrong in general, but I'm a— I am very concerned about corn basis getting weaker. Part of that is driven by the fact I think that there might be a decent rally in short covering energy. If that happens, for example, I'll just throw the question to you, Chris, what do you think basis would do if, if we put 15 or 20 cents onto the futures market?
Chris
Barron: I would venture to say, you know, this is, is, this is my uneducated comment to that, but in our area, I would say it almost would be 1 to 1. And that probably sounds crazy. So you get a a 10-cent improvement in the Board of Trade number, I could see them taking it all away as it goes because there's not that much demand for corn to keep things moving. So I like your idea of at least getting the basis plugged in and then, you know, see what happens on price.
Duane
Lowery: Yeah, I think this summer That's my thoughts. We can't control the futures, we can't even control basis either. But it seems to me that if we look at this, there is certainly reasons to be concerned about basis levels going forward over the next 60 days. And if the futures market rallies, whatever concern that was, I think that concern is elevated, elevated significantly. So I am encouraging people to get the basis locked in. And then worry about the futures price of it a little bit later. I'm not so sure that new crop basis, there isn't merit in making some of those sales also. Current new crop basis levels aren't too bad versus normal in many areas, but it is probably 5 or 10 cents less than it would have been, say, a month or, month or two ago.
That being said, if If you're in an ethanol market and the only new crop bid you got there is from ethanol plants, and maybe it seems like it's too wide for you, maybe that statement on new crop basis is less of a driver, and maybe, maybe that's not the thing to do for your particular area. Maybe you're going to take a chance that the ethanol industry will be back and more vibrant with their bid structure. But the rest of it, I have some concerns about new crop basis as well.
Chris
Barron: What about, what are you hearing on the ethanol front? Anything that you're hearing there? From what I've heard on the DC side of things, it sounds like, you know, they're still trying to figure out some way to do some kind of export, but just no news there yet. Are you hearing anything?
Duane
Lowery: Well, I'm not hearing anything that's—
Chris
Barron: there, I'm losing you for some reason.
Duane
Lowery: Yeah, you were breaking up there, Chris. I'm not sure why. I'm not sure that there's anything real concrete in what I'm hearing, but there is some level of hope. I think a lot of this is going to depend on what happens with crude oil, and that's going to depend on how fast the economy is able to return to some semblance of normal where we're consuming more energy. But, you know, for it to see any instant turnaround, that doesn't seem to be in the cards. And the ethanol industry is going to need something fairly significant to change the outlook or to improve the outlook in any material way. And right now I don't see it. And there's things that we can imagine and hope for, but we can't really see it as a driver yet.
Chris
Barron: Gotcha. Anything else I didn't ask this week? We had a little bit of a break. I'll have to have Shay mention that at the beginning, or somebody, that we had a little, little misconnection. But I almost wonder with the internet right now, there's probably a few people on the internet anymore, so our connection is a little goofy maybe here. Anything going into this new week, anything I haven't asked, or anything top of mind growers need to be thinking about as we wrap the call up here?
Duane
Lowery: Well, I'd be concerned about basis. We talked about that. I would be somewhat hopeful that the futures market will continue to show signs of stabilization and/or improvement. And the setup here looks to me to be favorable for a rally, but I can't give you a good reason for it. I think it's interesting to point out that livestock has, has stabilized and recovered. You know, fairly respectfully from where it was. It still has plenty of problems, still too cheap, but at least we've gotten some improvement there. The crude oil market has stabilized and recovered despite all the talk about oversupplies. The economy, or the— as measured in stock market outlook, you know, we had a break, sell-off the last couple of days, but overall it's been trying to hover up here. And I, I wouldn't be surprised that is a little bit more time of doing that.
I think all of that is a statement that we're trying to look past the immediate with the coronavirus and trying to look forward to the future with maybe something more optimistic. And whether that plays out in the grain trade, I don't know, but I'm encouraged by the technical makeup of the grains. I'm encouraged by some of the stabilization and I'm wondering if we aren't going to see a decent recovery, whether that's temporary or more lasting, who knows, but I'm hopeful we'll get a little bit of an improvement here over the next few weeks.
Chris
Barron: That would be good. We'll definitely keep an eye on it, and we'll definitely reach out to people if we get any news. We just keep hearing the same news about coronavirus over and over. One of these days, maybe there'll be some news in the markets that we can talk about.
Duane
Lowery: Yeah, hopefully.
Chris
Barron: Yeah, so hey Dwayne, thanks a lot for your time today and thanks for the information. And thanks everybody for listening. We'll catch you next week on the Ag View Pitch. Thanks.