Sunday night market outlook 07-12-2020

Chris: 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! Welcome everybody to another episode of the Ag View Pitch. And today we're going into a new week. You've got Chris Barron, Dewayne Lowery. How's it going, Dewayne?

Duane

Lowery: Good, Chris. How are you doing?

Chris: Pretty good. Just got done doing a little crop tour, at least locally here. Obviously been kind of all over the place in the last couple of weeks. In multiple states, but unfortunately we got a little bit of a weather system that went through here yesterday, or went through here on Saturday, I guess, say it that way, and got some hail and some wind. And we had had some wind the week before that too, but the hail with it, I'd say, chopped down a lot of, maybe a third of our corn acres, I guess, in our operation that had, you know, various levels of hail damage, and so that's not much fun to go look at, but one of the things—

Duane

Lowery: Well, talking about crop conditions, I know you had that hail system go through near you. I know a different hail system went through not too far from where I'm located, and I know that there were hail and windstorms reported doing crop damage in Nebraska, South Dakota, Minnesota, Iowa, Illinois. Since I know you've been doing a lot of traveling in the last week or two, why don't you give us an overview of what you're seeing for crop conditions in your travels and where points might be where they might be vulnerable to conditions over the next couple of weeks? Sure.

Chris: Well, week before last, we were actually traveling to South Dakota. So we went essentially across northern Iowa and southern Minnesota and into South Dakota, and basically what we saw is, in my opinion anyway, is probably the best-looking crop in that, that trek that we take a lot of times to the center part of South Dakota, maybe about the best we'd ever seen, although it was getting dry at that time, and I know they've gotten a little bit of released since then. But the crop sure looked awesome, nice and even and just looked really good.

Then we, that same week, so that went to Nebraska, so we came back home and then left and then went across central Iowa down into western Iowa down through that southwestern part of the state and then clear, clear across Nebraska all the way across the state essentially and And it was interesting because in Iowa, you know, like I said, what we saw to the south, pretty much the whole entire state looks pretty awesome. You know, there's obviously a field here and there that's struggling, but really just a really solid crop it looked like. Nebraska, pretty much the same thing, although it got pretty dry as we got about halfway across Nebraska. So western Nebraska, obviously, and down into Kansas in that area, they're They're definitely, definitely dry and you could see it in the dry land. You know, the irrigated stuff always looks pretty good, but we didn't see any pivots sitting.

All the pivots were moving and watering stuff. So that's what we saw there. And then this last week we spent the majority of our travels working with growers in Illinois and Iowa, but Illinois primarily, and we were pretty much all over that state. And the interesting thing about Illinois, the crop looked really good, but I would say the stages of development are kind of all over the board. So we saw, you know, Shay and I were at multiple farms and we saw corn that was brown silk and you would go a mile and see corn that was knee-high. And so obviously they had a lot of different planting dates and some areas of Illinois obviously had some replant too from a couple of things. On the soybean side of things, there was some replant I think because of frost on the early planted soybeans. But the soybeans looked awesome as well.

Just kind of various stages of development, but the beans look a lot further along obviously this year than last year. And the corn kind of variable, but the color is good, the uniformity is good. And just some of those areas where, you know, they had some late rains too, where there was some replant out in the middle of some of the fields. But even the replant—

Duane

Lowery: excuse me—

Chris: even the replant looks really good. So I don't know, Dwayne, we're gonna do a bunch more traveling in the next couple of weeks, so I'll give you a little bit more feedback on that, but it sure looks to me like we're setting up for a pretty huge crop potentially, assuming we get some rains and those continue. So I'm gonna throw a question back at you though. So having said all that, you know, with some of these areas being dry and we did catch some rains in some of these areas, over the last few days here now going into this new week. What are you hearing on weather and what's the trade kind of thinking about on the weather side of things?

Duane

Lowery: Well, what the trade is thinking sometimes is groupthink. I'm not sure exactly how to describe that. But I will say this, that the— let's start with the easy part. The temperature theme has been above to well above normal in forecast, probably going back into the last week or two of June, maybe even before that. Even in, say, 6 to 10 and 8 to 14 day maps, the temperatures continue to be above or well above normal, even though they introduced some precip into the northern and probably eastern Midwest. It would be the best way to say where precip is most favored over the next couple of weeks as they move the ridge more to the southwest. That being said, we had prior to recent rains, we had dryness issues in parts of Illinois, some rather serious. We had dryness issues in parts of Indiana and Ohio, as well as Nebraska. Missouri.

We had scattered precip occur probably in all of those areas. I use the word scattered because there are areas that are noteworthy enough to identify as being, you know, having gotten quite minimal amounts of precip. The forecast from Friday to today would probably be best characterized as being slightly cooler, um, and slightly wetter if you're talking about the eastern Midwest. As you move more to the west or to the south, you find that precip expectations are, versus Friday, are similar or maybe even a little bit less. You still have, um, having said that, the temperatures forecast today versus Friday is a little bit cooler. You still have mostly above normal temperatures in most days over most areas. As the frontal front moves through at different times, you get a little temporary cool down, but overall the above temperatures are there.

If you compare the temperatures to 2010, 2011, when we did have yields negatively impacted by heat. So far we are ahead of their pace, and we have been warmer than they were in that year. And with heat still in the forecast, I think heat is still has to be seen as a threat. I think the nighttime temperature forecasts have been pretty consistent in keeping temperatures, you know, at the 70-degree or higher mark. Over the last few weeks and looking forward. The location of that has varied. Some, some days the forecast would have that line of 70+ temperatures all the way up to Minneapolis. Frequently it was like the Iowa-Minnesota border, and recently I would say it's more like an I-80 corridor and south has had the warmer than desired temperatures. So that continues to be somewhat of a threat, um, but the weather has a less threatening tone to it today than it would have had on Friday.

But if you want to count raindrops, it's drier today on Sunday afternoon than it would have been on Friday evening or Saturday or, or even the first model runs that came out early on Sunday morning. So, and I'm talking— when I'm talking here, I'm trying to focus on a near-term focus over the next, let's just say, 3 to 7 days, which is, you know, something we would hope we have a little better handle on what that precip looks like in that time window. The areas from— of concern based on weather right now probably would be most of Missouri, southern, western Iowa, parts of central Illinois, southern western Illinois, parts of Indiana, and parts of Ohio.

All of those areas, as well as some scattered parts in Nebraska, all of those are somewhat prone to dryness concerns over the next couple of weeks, but total area under dryness concern today is less than it would have been on, say, Thursday of last week or something like that. I don't think it's a— I'm not trying to paint a dire picture by any means, but I think it's important to remember that the marketplace, the trade, USDA, and their balance sheets are factoring in record national yields. And so therefore, that's the starting point. That's where the bar has been set. I think the world has changed a fair amount in the last 2 weeks. I'm not sure the marketplace has embraced that idea that it's changed. Number 1, we lost 5 million acres. That's about $900 million worth of potential supply.

We have, in USDA's report on Friday, which contrary to what some might believe because the market was down Friday, was actually rather constructive. It had— USDA had elevated their average national farm price to $3.35 a bushel versus $3.20 the month before, and considering the vast majority of people continue to embrace an idea that we're going to have sub-$3 December corn futures, for USDA to up their average price from $3.20 to $3.35 To me, that seems noteworthy. And to get to their carryout of about $2.6 billion when most private estimates had factored in somewhere between a $3.3 and a $4 billion carryout, now to have USDA come in at, you know, $2.6 something, I think that should be sobering, but it's really not in terms of trader sentiment. It's not really in terms of producer sentiment.

Most have pretty much the same attitude that they had on the 28th or 29th of June before we found out we had 5 million less acres to contend with. So I would say that there's a lot of bearish sentiment that's kind of discouraged, and that's what we've been dealing with for months. I do think, as some of the things I've just pointed out, I do think there are elements that should make us feel the market is somewhat different at minimum. And I think there's some encouragement that can be found in that. I think there's encouragement that can be found from a market outlook standpoint based on the, the temperatures that we've had. I think there's encouragement in China having made a 1.4 million metric ton purchase of corn that was announced on Friday. That was their largest single corn purchase from the US. In more than 25 years. So I think that's encouraging.

I think it's encouraging that such a purchase is occurring at a time where U.S. and China trade is seen as, you know, difficult. And so I think there are encouraging things. And when you look at where the market has been in history over the last 12 to 14 years, you know, we're at the bottom side of what those price parameters are. So market seems more negative and seems too negative and seems vulnerable to be being trapped again, just like what happened before that June 30th acreage report. And personally, I don't see corn prices returning to the bottom side of where they were at the end of June. And I don't think that we have reason to see that kind of downside momentum build here. You know, usually to get that type of a sell-off, you'd have to have the market long. Well, the large specs are still short. The producer is not bullish.

The producer has never really bought into the weather scare of the last couple of weeks, so trade sentiment doesn't seem to me to be lined up with expecting a sharp sell-off here just because we had a poor performance on Friday.

Chris: So let's start with corn here. And so we, like I said, we closed down 12, you know, double digits, somewhere in that $3.44 range for Dec corn going in, starting a new week. For growers that need to you know, take some risk off the table on— especially again, I brought this question up in the last couple of podcasts, but a large percentage of the growers that we work do have to move some during harvest sort of off the combine that they don't have storage for. What do you watch for there? I mean, you know, it's so that we are able to take some risk off the table, not get too crazy sitting there, or do you think that the price just continues to climb and there's not that much downside, you know, as we, you know, work through a weather scenario that we hopefully get an opportunity to price? What's your thought there?

Duane

Lowery: Well, the, you know, the term taking risk off the table, I'm struggling to know how to deal with that because there's a few different ways to look at that. That. If somebody happened to have purchased margin protection crop insurance, they have a, a price that's protecting them from $3.83 on down. So with prices at $3.45, um, as Dec corn fluctuates downward, they're being fully protected through their crop insurance plan.

Therefore, if they were to make sales just because they know they have to make them at harvest time, and if they make those sales and then somehow some way something changes and suddenly we take the market back up and go higher than we were here the last week or two, then all of a sudden he's running the risk of having no crop insurance payment generated off of price, and yet he made a sale here, so that sale here wasn't removing risk, it was actually adding an element of risk.

If the producer happens to have an 85% RP policy, his price protection through crop insurance starts basically around $3.30, so if you got Dec corn here at $3.45 and he elects to make a sale, okay, and if the market drops 30 cents, he bettered himself by about 15 cents, or maybe I guess you could say bettered himself more than that, but he's— is he really removing risk if he's got crop protection price levels at $3.30 and we're at $3.45, and for that 15 cents of risk he has removed, is that worth the exposure of all the unknowns that might lie ahead of us that we don't know about? I struggle with that, you know, so I'm not sure making a sale here at these levels are really removing a lot of risk. I'm just struggling with that concept.

I understand that if you make the sale, it's going to look a lot better if prices are cheaper at harvest time, but if prices end up being higher than this, you're going to look back and say, why in the world was I making a sale at $3.45 when I had crop insurance protection at $3.30? And as soon as you make that sale, he puts himself actually at a, in my opinion, a position of greater risk.

Chris: But if we see weather, just to play devil's advocate, if we see weather over the, say, the next 3 weeks give us some slow strength in the corn market specifically, and we know we have to take some grain off the combine, wouldn't it be prudent to step into that market a little bit at a time as that market does give us some price opportunity, or do you think that there's a likelihood of something that could cause— I mean, what's out there that could cause the market— let's say we push through that, you know, $3.67, you know, get into that $3.77 somewhere in those ranges there. Wouldn't it be prudent to be making some sales as we approach those levels if we know we need to make sales? Off the combine as opposed to waiting.

It's not like you're gonna sell all of it, but at the same time, you know, plugging those in, it's really hard to, you know, hard, hard to wait, I guess, in my opinion. I'm just asking that question of, you know, you got to be rewarding the rally to some degree, don't you, or not?

Duane

Lowery: Well, again, if you've got, uh, 85% RP and crop insurance, you have a price protection built into your crop insurance plan that is within 15 cents of where you're at. So theoretically on your entire crop you have no more than 15 cents of risk from where it is right now without—

Chris: But wouldn't—

Duane

Lowery: crop insurance protecting you.

Chris: But let's say that you need to sell 25% of your total production off the combine, wouldn't it make sense to have some of that price going into fall?

Duane

Lowery: Well, let's say you do that. Let's say you make some— that 25% sale now and the price has gone up, you know, all you gained by making the sale is the protection from $3.45 down to $3.30 because at $3.30 your crop insurance kicks in. You know, if you go back to the last several days of June, Dec corn had gone from $3.45 down to $3.22 and made new contract lows and the Broad, widespread, common belief was that the summer highs were in, okay? They topped out in that mid-June where it's common, and that was the wide expectation. People made sales just before that June crop report, okay? And suddenly things changed and we rallied 40 cents in the corn market.

You know, if you go back to where you were last fall, last winter, when you planned the 2020 crop, and you were looking at the time at these futures of $3.90 to $4.05 and whatever you plugged in for your cost, I guarantee you making a sale at $3.45, the concept at that time would not ever have been seen as a, uh, taking risk off or as an opportunity or as rewarding the market. $3.45 is a pathetic price. The only way a sale at $3.45 even comes close to working is if the producer makes the sale with the expectation that he's going to be able to double dip through a crop insurance payout, or if he thinks that prices are going to be so poor that there's going to be a government support payment coming in some fashion or another, and then maybe he can think that this is a great sale. I just struggle with that—

Chris: make calling it a great sale.

Duane

Lowery: I struggle with calling it rewarding it.

Chris: Yeah, and I'm not saying it's a great sale, but what I'm saying is if we get— from what I'm seeing with Profit Manager with clients here in the last couple of weeks, a lot of growers with the yield expectation that's there, the quickest way to lower your cost of production is to increase bushels. And as if we get through pollination and there's a weather rally and a producer is in a specific situation where all of a sudden they're in the black and some of those bushels have to go off the combine, I guess I'm not advocating making these great big sales up front. I'm just saying that I think people need to watch their individual numbers and, and, you know, we're seeing that with soybeans in particular too, and we'll get to beans here in a minute.

But, you know, to where if you're getting really close to what your yield expectation is and you get into the latter part of July, it just seems to me like there could be the threat of, of a harvest low that could easily be lower than that and selling in a down market. I've never seen anybody when the market starts going lower ever hardly want to pull the trigger or ever even pull the trigger even if they wanted to. But when it's going up, it's a little bit easier to, you know, regardless of where the price is, if they're— if they've got sufficient bushels and they're close to the black, you know, and again, I'm not saying sell 25% or 100% of that 25%. I'm just saying plugging some of that in.

Duane

Lowery: Appears to be— in the past, uh, 13 or 14 years, uh, price range, we are in the bottom probably 10% of that price level. The amount of time that we have spent at current levels or lower over that time frame have been very limited. If we go back to the last several years, the amount of times that we've made a bottom in the corn market, you know, sometime late July to to early August and then only to see prices better at harvest time despite having ample supplies during all those scenarios, it wasn't always good to make sales here. I, I, I can't get excited about it. In the end, we're going to find out whether this was a good sale here or not. But the way I look at it, I don't care what a guy expects he's going to get. He doesn't really know what he's going to get on the 12th day of July.

Things can change no matter— and you're— it's not like you're making sales at price levels that are actually work, they're actually good. These are awful prices.

Chris: The—

Duane

Lowery: you make the sale only with the intent or the hope or the expectation it'll be even worse. I'm not sure that's a good bet when everybody up and down the street has been super bearish and super negative for the past few months, missed the entire 40-cent rally, didn't expect that to happen, and have returned to talking about sub-$3 corn, and yet we've removed 900 million bushels out of the expected supply that they had. We've had some dry temperatures, we— or dry conditions. We've had ample heat. We still have heat in the forecast, and we still have a growing season ahead of us. And we have crop insurance that protects the 85% RP at only 15 cents away from where it's at. The way— when I lean on that heavily, I find myself not being super excited about making a sale that's 15 cents above where my crop insurance revenue protects me, and it's prices that aren't even attractive.

So I, I had mentioned in the last few podcasts that we're probably even going back several weeks that I had a hopeful target that we'd be able to sell these corn something above $3.60, maybe $3.70. And, you know, I had guys make some sales this last week or two, but in the same token, I can't see the advantage for getting too excited about it. And to be honest with you, I think there's just as much, if not a greater risk, by taking your foot off first base here and making a sale this close to your crop insurance value, because if something comes along, I guarantee you're going to look back and say it was not at all a good sale, or it wasn't even a good risk management thing to make a sale at $3.45. So I don't necessarily share the same embrace as you do because I, I just don't see how these prices have any element of attractiveness.

And I feel that if you make a sale here at $3.45 December futures, you're taking on just as much, if not more, risk than doing absolutely nothing.

Chris: Yeah, well, and I'm not talking about making sales at $3.45. What I'm saying is if we get back to where we were, and then we can work through that sum, and you get back into that, you know, you You know, and what we're seeing with clients is that that $3.67, you start seeing a few guys getting real close and you get back up to that $3.88, back up to that insurance number. That's getting, you know, half the— half or maybe a higher percentage than that depending on how the crop's looking at that point. If we could get that kind of strength. The problem is, is, you know, and I hope you're right, is getting that strength. If weather is good and the crop yield looks good and then is the price there, you know, prior to or if it's not there at fall, you know, and the opportunity is there.

Duane

Lowery: If we're talking about sales at $3.88, that's a completely different question than asking me whether I want to make sales here and I'm not, you know, the farther up you go, the farther away from you get a from your crop insurance, the better odds you have of justifying making a sale. But right here, and assuming the market's going to be lower tonight, I got virtually zero interest in making any sales. I'd take the approach, I'd really sit and wait and see if there won't be another, you know, opportunity present itself. Over the last several weeks, we've had dryness in Ukraine, dryness in Russia. We've had Russia talk about placing export quotas on their marketing season right from the beginning. We've had China make its largest purchase in 25 years.

We've had China be very aggressive with purchases of South American supplies where on a monthly basis they were exporting record levels. There's a— they have a limited amount of supply. Over the next few months, you know, the U.S. is going to be in a good position to get export business. So there are other factors here that also give me willingness to be patient and wait. I've talked about the fact that, you know, the amount of trillions of dollars the Fed and the Treasury has dumped into the economy. Creating potential for inflation, creating the potential for a weak U.S. dollar, which makes U.S. dollar-based commodities look even cheaper. And there's just a lot of other factors out here that make— making sales at poor prices that are not very far away from your crop insurance, there comes a point in time where I can't call it an opportunity. Or rewarding on a rally where we're at.

You know, there are levels that you get higher, but not here.

Chris: Right. So, so that's, that's kind of a discussion. We're getting a little long on time here, but I do want to hit soybeans here. Um, what's your take on soybeans as we move into this new week?

Duane

Lowery: Well, if you look at it from a chart perspective, the beans look kind of vulnerable. Fundamentally, I'm not exactly sure what the focus here should be on. We have precip maps that are taking some precip out versus where it would have been, you know, 12 or 24 hours ago in the forecast, but yet the forecast is better than it was during its worst fears moments of last week. Temperatures, I don't know if that's a big concern at the moment for beans. Supply-wise, we got carryout projection from USDA at 425 million bushels. That's not that large. Um, it's possible that that could be challenged by either weather or demand. I think global soy demand has been very good, and I think the odds are that it's going to continue to be good, and it may very well be understated in the USDA report, so I think that potentially supportive.

In the case of beans, I would lean heavy on the argument of looking at where the price of beans are over the last, you know, 10 or 12 years and recognize that the only time we've been at or below current prices was when we had a trade war with China. And, you know, that supposedly is supposed to be somewhat over in terms of agriculture based on the signing of Phase 1. So, um, I think there's reasons to believe that soybean prices could get better, and I think there are reasons to believe that we have no need to be justifying bean spending any length of time below $8.50 futures. So, um, there too, I, I don't necessarily find current prices all that attractive.

Chris: Real quick, let me light a fire under you here on soybeans as well. Coming off the combine, back to my client visits that we're working on right now, a lot of growers, the soybean crop is the cash crop. There's a lot of soybeans not priced and a lot of soybeans that will need to be priced off the combine. Any thoughts on that in that regard to that?

Duane

Lowery: I— unless you tell me you see something different, I'm not sure that anything you said is different than another year. Tell me what's different. I mean, would you normally see producers having had priced more of their new crop by the 12th of July, or what are you telling me?

Chris: Yeah, some years we see, we've seen that, and I mean, we've seen less priced maybe this year than we have probably on average anyway. And I guess my question is, you know, what's your thoughts on, you know, a weather rally? A lot of times that might not happen for, it's a little further out obviously, you know, August is kind of where the trade looks at the weather necessity for, for making the soybean crop, although the crop was planted a lot earlier this year, so that's— I think that timing is going to be a little different. I guess my question is just, you know, if you— if a grower needs the price off the combine, you know, what are, what are some of those price target levels, or what's your thoughts on, on the corn— on the soybean market, similar to how we just had the conversation on corn?

Duane

Lowery: Well, in relationship to corn, if you had a producer and he wanted to sell something, let's say he wanted to sell something today, I would rather see him sell beans than this at current price versus corn at current prices. But again, when I look at where beans are at in history versus the last, you know, 10+ years, I look at the carryout as a percentage of usage. I struggle to feel the pressure to make sales here. I think if you make the sales, you know, what's the worst-case scenario?

What's the— why would we have prices going lower than where we've been in the last year or two when we've got less carryout than we had spent most of the last couple years fearing that we would have, and we have We don't— the only time in history we've been at these prices in the last 10 years is when we had a trade war with China, which we hope that we don't have any longer in terms of agriculture. So I, I'm not, I'm not excited about making sales. I don't fear they're going to, going to 7-something, you know, from, like I said, from where they're at right now, I'd be surprised if they had 40 or 50 cents of downside risk and And I— if they got to that level, I don't think they would stay at that level.

Chris: From a technical standpoint, what do you think they have?

Duane

Lowery: They could go to the upside. Yeah, I'd say the next real resistance area is like $9.49, $9.50. So from where you're at, you're talking 50, 60 seconds— 50 or 60 cents of upside potential. I think that In the— if there's ever a reason to get to that level, you'll probably be building a decent amount of momentum, and the mistake would probably be underestimating where it would go. But I think that would be the next point that I would consider to be a resistance or a target zone. Gotcha.

Chris: We're getting up against time. Anything I didn't ask? I mean, we've kind of hit mostly on weather, and I think a good discussion here on just thinking through pricing strategies and stuff as we move into, hopefully, or maybe hopefully, maybe not hopefully, a weather market, but whatever it is, it is. Anything I didn't ask or anything that we should have touched on that we didn't hit?

Duane

Lowery: No, I would just like to, you know, put a little exclamation point up along the idea of the theme that I've basically been trying to convey is I want people to evaluate their entire situation in relationship to their crop insurance payout. And I'd be very, very careful about playing the game of expecting the double dip. It might work, but realize and run through the examples that if you make that sale and something comes along and causes prices to go up, you're going to look back and wonder why that sale was made, because it was far below any projection you had during the winter. I do think the fundamental storyline has changed. Somewhat from where it was just a few weeks ago. And these are difficult times, and there are dangers in making marketing decisions here, whether you hold or whether you stay up, sell, because selling here isn't without risk of itself.

Chris: Sounds good. Hey, Duane, I think this has been a good conversation, and we didn't break in last week, but the week before we did. So if any fireworks comes up or anything, we'll definitely break in, won't we?

Duane

Lowery: Yes, we will be back.

Chris: That sounds good. So hey, Duane, thanks a lot for the conversation. I think this is a good one, and we'll chat again here soon.

Duane

Lowery: All right, thanks, Chris.

Chris: Yeah, thanks, Duane, and thanks everybody for listening to the Ag View Pitch, and we will catch you next time. Thanks for joining us on today's episode of the EggView 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.