Sunday night market outlook 05-17-2020

Chris

Barron: And it all comes down to this.

Duane

Lowery: 2 on, 2 out, bottom of the 9th. The Farmers lead by 1.

Chris

Barron: Full count, here comes the play at the plate, and it's the Ag View Pitch! Welcome everybody to another episode of the Ag View Pitch, and we're entering another week as usual with conversation here with Chris Barron and Dwayne Lowery. What's cooking, Dwayne?

Duane

Lowery: Not much, Chris. We're getting some rain here today.

Chris

Barron: Yeah, yeah, we're finally getting some rain in these areas that needed it. Probably not every single area is getting what they want or enough of it, but I did hear from a farmer that we work with in Michigan yesterday, and he said it's kind of like Groundhog Day in his area around the Lansing area. He said 500 acres of corn and 500 acres of soybeans to plant yet, and it's, it's super wet, so There's always some weather frustrations around, that's for sure.

Duane

Lowery: Yeah, it's never perfect, and there are a few areas that have been struggling with getting planting weather that allowed them to get in and get done. Other areas, they've been hoping for a little bit better rain than they have gotten. But all in all, weather doesn't appear to be a market factor yet, or at least at this time. Either good or bad, it's just all generally favorable, I guess, other than a few locations.

Chris

Barron: Yeah, yeah. Let's dive into some conversation here a little bit. We've got a lot of growers that we work with, you know, still sitting on some old crop corn, and, you know, that ties in a little bit to ethanol, you know, the demand, you know, the domestic demand and just what's, what's going on. What's your thought there? I mean, are you hearing anything, you know, anything that farmers should be thinking with this old crop as far as strategy and where the basis is at? And is ethanol picking up a little bit so we can start hoping for some demand so we can get some of this stuff moved at some point and be thinking about that?

Duane

Lowery: Well, it is interesting to note that Some ethanol plants have either increased their production a little bit, they've gotten more aggressive in their bid structure, and so they've become more competitive. And the result of that is that if you're in a location that was close to a fairly good bid prior, maybe your basis values haven't seen much of a change. If you were an area that was very dependent upon that ethanol plant for your bid, you've probably seen some basis improvement. The ethanol industry, must be some improvement taking place.

They must have some inventory draw— well, we know the inventory drawdown has taken place, and we know that production has been cut in like half, and we also know that the economy is starting to be turned loose a little bit and ramping up, and so we know that gasoline demand is increasing, and the net result of that is something that's a little bit more optimistic for the ethanol industry. Their margins must be improving a little bit to make them come in and be aggressive here on the bid structure. As far as what that means to the producer and his old crop inventory, I think that the— there remains a concern that even with the ethanol bids getting more aggressive, there remains a concern concerned that there might be an overwhelming amount of supply in relationship to demand for old crop, and at some point in time that leads to basis weakness.

And I think that probably the only thing keeping basis from weakening so far to date has been the lack of a futures market rally, and its prices are relatively flat and stagnant, even though the producers sitting out here with a fair amount of old crop yet to move and, and wants to get it moved and doesn't want to be the last one to hold on to the bag. At the same time, the price is awful, and even though basis may have improved in some of those worst areas, the bid is still awful. And if the futures market were to stage a rally, I don't think basis would hold in very well. I think that's the only component here that's kept basis values from weakening, is the lack of a futures market, which is the lack of a new price structure and some new price bid that entices that farmer to make a sale.— if we're able to get a futures recovery rally, then I think basis weakens.

If you look at the corn market, it has been pretty stable and sideways here for, you know, several weeks. You know, the prices that we're at right now were first traded in, you know, like mid-April, and since that time we've been sideways in a relatively narrow range. We had last week's report. We had the anticipation of that report, and basically for a month here we've done nothing but absorb, you know, negative news, and yet the price action in the futures market has been sideways and actually trying to gravitate higher here over the last 2 or 3 weeks. I think the futures market is poised for a recovery rally, and the Commitment of Traders report that we had out on Friday showed that the funds had gotten, to a net short position of 214,000 contracts.

That was up 23,000 contracts, so about a 10% increase in their short value, and I think that is a little more than what people probably expected, and at the same time they started to build a long position in the bean market. I think that Commitment of Traders report might be able— might cause a little bit of support to come into the corn market this week., and it might be the beginning, uh, markings of a short-covering rally after a month of sideways trade. And if that is true and we start to see the futures market rally, I think basis will weaken.

So like we have talked about for the last few weeks, um, basis, um, is vulnerable, it's fragile, and even though some of the ethanol bids have come in to broaden that basis support, I think it's still vulnerable in relationship to having a futures market stage a rally, because I think the farmers are going to be moving old crop inventory out, and I think they're going to probably be doing— willing to do it on a relatively small rally. So my inclination is to look at getting the basis established, hold off on putting a price tag on it with the futures, and see if we can't get something a little bit more notable for a futures recovery rally. And from where it is right now, you know, to get 30 cents of a price recovery would not be that difficult. And so my approach would still be to be willing to lock in the basis part of it, but probably not necessarily the futures part of it.

Chris

Barron: What about some of the operations that, you know, are are in a situation where the cash flow is a thing, you know, for everybody it is, but, you know, is more of an immediate issue and are sitting there looking at, okay, we got to move this corn, we probably just need to price it, what tool do you use to maintain ownership? Call, you call, you know, buy it back and what month, and any suggestions or ideas there, you know, not obviously a recommendation as much as just some perspective there.

Duane

Lowery: Well, if they're going to buy it back, at the present time I would keep the length in the front end, like in the July contract. Dec feels is the new crop and probably the weakest leg, And if we get strength, it's probably going to be more old crop dominated than focused on new crop, so I would say you want to buy it back in the nearby July contract. As far as, you know, whether it's options or futures, whichever one someone is most comfortable with, you start buying an option in the July contract and, you know, you've only got about a month to go on those options, and by the time you pay the option cost, that doesn't seem very attractive. I think if, as opposed to spending the money for the option, my inclination would be more inclined on maybe just making the sale and being done with it.

I'm not, you know, my bias would be to buy it back in the futures market because I don't like spending the money on the call option. But if that's not attractive, then I think the scale tips a little bit more towards just picking a price and calling it quits and you're done with it. Otherwise, the cost of the option seems too expensive to me, but the option would be the other way to go.

Chris

Barron: Yeah, on this old crop, you know, a lot of people have a high percent sold but still have some yet to move, and it's a cash flow thing. It's a— grain quality thing, it's a basis risk thing. So like I said, everybody's kind of got to look at this and, and weigh their, their scenario out and, and kind of figure it out. But it's, you know, if you look at where a lot of guys have an average selling price and you sell the last 20% at where we're at, it doesn't lower the price as much as one might think. You need to do the math and look at that, but, you know, assuming that Like Steve Johnson was saying on a prior podcast, you know, the Help Is on the Way podcast, you know, there's still some, some additional income likely to come in yet on the '19 crop year.

So you add that, those dollars and cents in terms of a price per bushel, it's still not, you know, definitely not a train wreck for the '19 year in terms of pricing. It's just maybe not where people want to be. And with all the attitudes between COVID and ethanol and crappy prices and everything, it's— you got to step back and step out of the woods a little bit and get a little better picture, I think, here. Anything else? You know, what I'd like to do is— anything else on that topic? I got another question for you here. Anything else that you want to comment on? And on that, that discussion?

Duane

Lowery: No, not really. The— not really. I mean, an at-the-money— I'll just add to it a little bit of figures. An at-the-money call option in July corn, a $3.20 call option, is going to cost you a dime. And in the current environment, spending another dime doesn't seem real attractive to me, but You know, if I'm looking for a 30-cent rally and you spend a dime, maybe there's 20 cents left to be had. It just doesn't feel as comfortable making that recommendation or that thought.

But I hear what you're saying in regards to the, you know, the price in totality may not be that bad, but I'm sorry, I think the price is still quite awful, and it's quite less than what where anybody thinks it should be, and my only last thought would be this, all right, maybe you have to just call it quits and make that sale and be done with it, but maybe somewhere down the road you'll look at buying it back also. Maybe it'll be after a harvest time break. I don't know exactly how you want to look at it, but these prices are not good, but when we look on the horizon, You know, it's going to be difficult to get them better.

Chris

Barron: And at some point you got to just stick a fork in '19 and start focusing on '20 too, because it gets— it can get confusing and it can get over, you know, almost too much of a burden when you're sitting there trying to finish up a crop year and look at the new one. And there's a lot of folks out there that don't have anything done on '20 or '21.— you know, and not that we should be doing anything now, but we need to be making sure the plan's in place and all that kind of stuff too.

Duane

Lowery: But, well, there's, there's certainly a certain amount of benefit always when you can clear your mind and remove that out of your mind, and now you can focus on new crop. But when you got Dec corn sitting at $3.32, and if somebody's got an 85% RP policy that kicks in at $3.29, where's the incentive to make a sale here? Making a sale here only opens up a door to greater risk, does not reduce risk. And so there's nothing to be done here on, on new crop in terms of marketing. I don't care if a guy's got zero sold or not, there's, there's nothing to be done here. And so, but yeah, the old crop price is not a good thing.

Chris

Barron: Yeah. Shift gears here and talk a little bit, kind of the last question I have for you unless you have something else, but this China thing, you keep hearing each week a little bit of a dabble here and a dabble there of China purchasing stuff. What are you hearing? What's really going on?

Duane

Lowery: Well, I think the, it's important to realize that they've been very aggressive buyers of South American and that's helped South America set monthly records for several months on exports. And so clearly China has an appetite. I think they have an appetite that is much stronger than what people have anticipated over the last several months. And I think that's a good thing. Some people have said, well, they're not going to buy any U.S. and they're only buying South America and they have no interest in— buying U.S., and they're never going to honor Phase I, and they never planned on honoring Phase I. Again, all the people that are supposed to know, and are supposed to provide some insight, indicate that they expect China will make their Phase I commitments, and either they're lying to us, or they've been duped, or something.

I'm going to go with the standpoint that they are going to honor Phase 1, and they've continued to make some purchases of U.S. goods despite tensions over coronavirus, despite statements by politicians that would be, you know, contrary to what China wants to hear, that in years past China would have, you know, walked away, and they haven't walked away. So I think it is still a very good chance that they're going to be very large buyers of U.S. corn and beans in the months ahead, and I think that is a potential bright spot. As to when that happens, who knows, but I'm going to stay with the baseline expectation that they are going to buy, and they're going to buy large quantities. And just to put in perspective, you find it's very difficult to get up to those dollars without some very, very large purchases.

And it's also very conceivable that they drew down their stocks during the trade war over previous years actually in the case of corn, that their ability to stockpile some inventory would— is also something that's warranted. And so I'm optimistic that that part is going to be favorable. You talk to export traders. Connected traders and business leaders, and they're quite optimistic towards U.S. corn export potential in the— over the next 6 months, and they're quite optimistic towards Chinese demand. So I think that's still a bright spot yet that we have not fully experienced yet.

Chris

Barron: Sounds good. Any— anything else on the horizon going into this new week? Anything I haven't asked about? It's not a real long one, but not a lot going on. So anything else I'm missing or you want to talk about?

Duane

Lowery: I don't see a lot. I mean, weather's not a negative in terms of towards production. It's not a negative towards price. The marketplace is absorbing all kinds of private discussions of 4 billion bushel carryout despite what as USDA said last week, they're absorbing larger bean numbers for acres, planted acres, than what, uh, USDA had in March. And the markets, uh, despite absorbing all that and the early crop off to an early start, early planting dates, etc., and most people would consider we're off to a favorable start here, despite all that, the markets like I said, gone sideways. The market's also absorbed a lot of negative concerns about U.S.-China trade relations over the COVID spread and who's to blame and what are you going to do about it type of thing.

And the market's absorbed that negativity, so it feels to me like the market's already built in kind of the worst-case scenario for this time of the year, and in front of us is, you know, a couple of months of unknowns, both weather and production and whatever else might be lurking on the horizon. But yet we factored in probably the worst-case scenarios, and so I think the opportunity for some short covering is possible. I think the opportunity for some speculative buying interest is there. I think the What happens with the dollar index is going to be an important subject in the months ahead. It's been fairly sideways here as well, but there might be something yet on the horizon regarding that.

Stock market has performed relatively well, gravitating upwards on hopes with— associated with the economy opening back up, but it's very difficult to find a narrative-specific grain trade here that isn't something that the market's already been talking about. So we look ahead to this week, you know, the main thing we can be hoping for is a market that is saturated with selling, the selling pressures are over, we absorb the most negative side of the equation, and the market starts to gravitate up and generate some short covering and things of this nature, which seems plausible to me. The one thing I should put— should point out in relationship to all of that, the crude oil market has been steadily climbing and acts like it has a mission that it wants to continue to do so. And the— we've seen significant reduction in production in the U.S.

and other places around the globe just due to the cost and the supply glut. But that's not going to last for an extended period of time, and I'm hopeful that that is something that changes the overall outlook of the equation and the ethanol industry outlook as well. But otherwise, it's very difficult to find something super specific that we're going to be trading on here this next week.

Chris

Barron: Yep, I think it's just, uh, take it a week at a time and, and we'll kind of see what's going on. So Hey, Duane, I was telling you at the beginning of the conversation, our kids are doing everything they can to help with demand for farmers. And we have 4 chicks that the kids got on Saturday at the Farm Fleet store. So now we're in the livestock business again. I haven't been personally in the livestock business for a lot of years, so finding out what it's like to have a chicken house in our garage. And I guess we're doing our part. So maybe we'll have you over for chicken dinner in about 8 or 9 weeks, if that sounds good.

Duane

Lowery: Well, speaking on behalf of all the farmers across the country, I hope you feed them very, very well. And you want some very large chicken breasts out of this deal.

Chris

Barron: Yeah, well, I'm hoping so. But Amelia, our daughter, is the one that wanted them. And she made a deal with her brother. He's going to be the one that does the butchering. And sounds like the night we have chicken, she's going to have pork burgers. So we're going to, we're going to kind of contribute to a couple of the meat industry levels anyway.

Duane

Lowery: So, well, that should be an interesting next couple of months for you.

Chris

Barron: Yeah. Well, we're looking forward to— hopefully we're not in quarantine. You guys can come over and we'll have, we'll have chicken.

Duane

Lowery: So I hope everybody's out of quarantine.

Chris

Barron: Yeah. Yeah, we hope so. So hey, Duane, thanks a lot for the conversation. I think it was a good one, and we will be in touch next week. And not a lot, a lot of news this week, but as time goes on, we'll, we'll stay in touch and keep everybody updated as much as we can with the best perspective we can. Thanks, Duane, appreciate it.

Duane

Lowery: Thanks, Chris.

Chris

Barron: Yep, thanks, and thanks everybody for listening. We will catch you next time on the Aggie Pitch. Thanks for joining us on today's episode of the EggView Pitch.

Duane

Lowery: 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.