Sunday night market outlook: October 27, 2019

Narrator: The Ag View Pitch is created by Ag View Solutions to provide value to its clients and farmers like you. We'd like to welcome our new listeners today and encourage you to check out our other podcast on The Ag View Pitch, which can be found on Apple Podcasts, Anchor, and Podbean. You can also find us on Facebook at Ag View Solutions and online at agviewsolutions.com.

Shay

Foulk: Enjoy. Welcome back everyone to the Ag View Pitch. This is Shay Foulk and joined today with Dwayne Lowery. Thanks for being here today, Dwayne.

Duane

Lowry: Glad to be here. Anxious to see how things are going to unfold this week after Friday's performance and everybody's got one eyeball on snow that's in the forecast. So, you know, the season just continues to progress.

Shay

Foulk: It'll be an interesting week ahead for sure. One thing that I want to jump into here as we get started is a little bit of update here in the Illinois-Indiana region. I had the opportunity here last week to talk with a different few different producers kind of in the area. Of course, I'm located here in northwest Illinois. I had the opportunity to talk with Jeff in Indiana and Alyssa in Illinois. Wanted to give a little bit of an update on that and what's going on in that region that people might be hearing. So from Jeff, you know, about 40% of corn is harvested in that area with 60% of soybeans harvested. They're seeing a lot of disparity throughout Indiana, kind of from north to south. Some of the northern operations are really just getting started on beans, but some of the areas in central and southern Indiana are finishing up.

And I think we've seen a lot of that here throughout the season of just that extreme variability over a short distance. So some producers will probably be finishing beans this week if they haven't already through central Indiana. Little bit of a slow start here. We had some rainfall early in the week through Illinois and Indiana. Some of those regions that are looking to do tillage needed that just to kind of soften things up a little bit. So with them being a little bit behind here on their average annual rainfall, and especially for this September, October timeframe, so much needed rain there. Corn yields running about 10% off APH in general. Now there's vast differences from farm operation to farm operation, as you would expect, anywhere from 10 to 40 bushels below average last year, but in general still looking at just over, just over APH.

So fungicide appears to be paying well in a lot of, a lot of areas that had high pressure. Now, depending on the region that you're in, and depending on when those timely applications were made, obviously is having a huge difference, but anywhere from 15 to 20 different— 15 to 20 bushels per acre on that soybean farm averages a little bit low, again, about 10 bushels off what producers saw last year. And the thing about this, and something to keep in mind for the producers listening to this, is the sentiment that we've seen kind of throughout the Midwest, whether that's Missouri, Illinois, Indiana, or Iowa, is even though these are off last year's, they are a little bit better than what producers were expecting, or that's what we've been hearing. Some things to keep in mind, stock quality and standability. We heard this from both Alyssa and Jeff through Indiana and Illinois.

We've seen this on our operation as well in Illinois, going after that stuff that has potential standability issues and just making sure that as you look at your harvest progression plan, that you're taking that into consideration. We've also seen in our area, tar spot was a heavy one that we got hit with this year. And some of the, some of the standability issues are only being compounded by some of the effects that we've seen there for disease. But overall, some of the conditions, you know, we've had great last 10 to 14 days of harvest here. A little bit of rain that got us slowed up today, but it's a good opportunity for the dryers to catch up, maybe get some of those wet bins emptied down a little bit and hit it hard here in the next few days. So just wanted to drop that in here. Really appreciate Jeff and Alyssa taking the time to fill us in on that.

What are you seeing over in your area, Dwayne? Kind of a similar pattern, or what should we be expecting out of the Iowa area?

Duane

Lowry: I would say, uh, somewhat similar maybe, but I would classify that, uh, we have some yields that are equal or better than last year, but I would say that's a small percentage, but they do exist. We have some yields that are well off last year, but I don't think they're a large percentage either, and I would imagine that we have a little less variability than the guys in Illinois and Indiana. But I would classify most yields being the, the averages of the state are going to be below last year. I'll say it that way. I thought it was interesting that as you described it initially, you described yields versus last year and also versus APH. And then at the end, you kind of wrapped it up by saying that, you yields were better than expected. I think there's a discussion that needs to occur there. I would say it is, is an accurate statement that yields are coming in better than expected.

However, it's important to realize that better than expected doesn't really tell us anything about where we're at versus USDA, because the marketplace, the farmers, etc., did not expect USDA numbers. So they were starting at some level lower than that. And so they can still be better than expected, but still be low numbers that translate to USDA's October yields. For example, you know, October corn yield is down about 5% from last year. From USDA, the bean number was down about 7% from last year. And I would, I would characterize, and I think you described something very similar, I would describe out here in Iowa, and also kind of a general national theme, I think we're somewhere between 5% and 15% below last year. That swath is going to cover a lot of our yields.

And when we throw it all together, I think we are more than probably 10% or 15%— excuse me, we are in more likely to be in that range of 10% to 15% than we are in the range of 5% to 10%. And so while people are getting better yields than they may have anticipated, we are still ending up with yields that appear to me to warrant a lower number from USDA. So we can be better than expected, but that number is still below last year. And I think the best comparison is always versus last year, because that's a, that's a known, everybody knows what they got for a yield last year. You start using APH, that's kind of a rolling number. Some people use APH with raw data. Some people have a rolling, you know, FSA adjusted APH. But comparison to last year is something very particular and very easily identifiable. And that's how I like to ask questions when I talk to producers.

They give me a yield and they talk about better than expected, and you drill down and you ask, okay, how's that compared to last year? 'Well, we're definitely below last year.' So there— it's not uncommon to get the better than expected, but it's also not uncommon that those same people also still say we're less than last year. So I think that every place you go, even in a small geographic footprint, there can be a wide variance in yield. And I think that has to do with things like field drainage, how wet the field was when you worked it, I think it has to do with individual agronomic decisions. Do you side dress? Do you know? Do you use starter? Do you don't? Did you foliar, uh, feed? Did you, uh, use a fungicide? All those things that maybe in another year, um, all of those might not have had a clear impact.

This year I think they are identifiable, and I think that makes for a wide variance within a small footprint just based on those factors. And anytime you've got a wide yield variance, it's very difficult to take that, that scenario and come up with something close to record. And even though the USDA numbers in October are below last year, they're still pretty close to being plastered up against the ceiling of what record yields are. And I think we're dealing with a number that from USDA that will be lowered from what we got in October. A lot of people in the trade don't think that will happen in November. I'm not exactly sure why they feel that way. But I'm inclined to think USDA will make a statement about yields in November, which will be just the opposite of what they did in October, which they largely punted and didn't make any statement about yields. And this time I think they will.

And my guess is they will probably offer a bullish surprise. And if they, if that's correct, and if they are lowered, the trade will then also expect that these future monthly reports, like January, the final number will also be lowered. It's interesting to point out that the harvest progress where we're at, we still have the latest planted stuff yet to go. And I think there's a general theme within the, the amount of harvest we've already done that already falls in this category, somewhere between 5 to 15% below last year. And I would argue a lot of it's going to fall in that 10 to 15%. Category. And then the last 40% of the harvest, 50% of the harvest that you have, those are going to be probably the, the weaker of the yields.

And so if we're already comfortable in that 10 to 15% reduction from last year, I can't believe that the final part of that harvest is going to make that storyline any more optimistic. It's either going to confirm it or it's going to, you know, help to weigh it down a little bit more. So I'm actually looking forward to the USDA report in November thinking USDA will, will give us a fairly firm opinion about yields, and I think it'll be a bit of a bullish surprise.

Shay

Foulk: Yeah, and thanks for clarifying that point there, Dwayne. I just wanted to re-emphasize that when you actually look at what national yield average was last year and what they're predict— projecting for this year, the difference there isn't talking, you know, to what we're seeing from producers in the field. So I appreciate you kind of expanding on that idea. And, you know, in the operation that I work with here in Illinois, to give a little bit of perspective to that, when you talk about what we were expecting versus what we're actually seeing, sure, it's better than we expected. But we were anticipating anywhere from 50 to 70 bushels below And so below last year, excuse me. And when you see the yields coming in at 40 bushels below last year, you know, you feel a little bit better. There's a little bit of reprieve that comes with that.

But on a macro scale, when you look at how that's affecting national averages and look at the wide area that is consistent here, you'll see the same thing. And also from our end, we haven't gotten into a lot of that later planted stuff that is planted past the prevent plant date. Into less than ideal conditions and some of those wet fields that were planted last there. So let's, let's turn course here a little bit and look at maybe the direct effect that that is currently having on markets or some of the other things that are coming into play there. If you want to touch on how things closed out last week and what you are considering as we move forward into the week ahead, Duane.

Duane

Lowry: Well, we've had a period of consolidation and sideways trade and corrective activity. And that's true about corn, wheat, soybeans. The beans had been in a very narrow range for about 2 weeks and then had a kind of a dump day on Friday. Don't really have a good explanation for it at all. The corn market had had more of a correction throughout the last 10 days or so. And the wheat market had had a correction. Those that follow my daily written commentary, know that I've been looking for a little bit of a correction, but in the same token, beans did not quite get as high as I thought they would before they put in this correction. And so I'm not surprised that we have a correction here. But in the same token, I do not believe this is going to be a deep correction. I do not believe this will be a prolonged correction.

In the case of corn and wheat, I think they're the corrective process is mature enough that we probably don't get hardly anything additional in terms of corrective weakness. And, uh, it's interesting to point out that corn and wheat on Friday did not participate in the, uh, bean one-day flush that they had. As far as beans are concerned, everybody had all weekend to look at the chart, and I guarantee you they look at the chart and everybody's, uh, going to be fearful or talking about lower numbers, a deeper correction. And that's all fine. But I don't think that's how this is going to materialize. You step back and take a little bit bigger picture view. We've had the large spec traders covering short positions, building long positions for the last 4 or 5 weeks.

And for beans to have the break that they did on, on Friday, it might appear a little threatening, but against a backdrop where they're the is probably still willing to build a lot— large, long position, position, and where values are still above levels where they began to buy. I think they are more likely to see this as a buying opportunity, less likely to look to try to press the short side. And I think that for a large amount of the trade has been out of step with the market since we started to rally in early September. And, you know, from that time, you know, we had, you know, close to a 90-cent rally in beans and close to a 50-cent rally in corn. And these type of corrections are not that deep. And I don't think they will get that deep. So I don't necessarily expect any follow-through to the downside from Friday's break in beans to have any effect on wheat and corn.

And I think it will have minimal effect on beans. I do believe that it's fair to also point out that there are people in the trade that will expect that to happen. They will expect Friday's trade in beans to be a signal that there could be another 15 or 20 cents down. I just don't happen to agree with that. Harvest is progressing to a point that the trade is going to expect bean harvest at 60-some percent complete. Farmers are not really selling anything and they're not going to be motivated to sell on weakness. If their own operation has experienced yields declines of 7 to 15% off of last year, that means there's, there are that many bushels off of what they projected and the price and the gross dollars per acres are just not enough to make them be enticed to make a sale here.

They also have a certain amount of optimism with the China trade deal that's going on and what they expect that might mean for the future. The Marketplace is also talking a little bit about, you know, different concerns for South America. I think it's very early in the year to get too excited about that. And I've been trying to avoid talking about it. But it is something that on any given day we can reach back and explain a day's price action based on weather forecasts in South America as well. Also. But in terms of Friday's performance, I don't expect that weakness, which was only soybeans, or the soy complex, I don't expect it to have much of any follow-through at all. By the end of the week, I think that market will have stabilized.

And when I step back and look at it, and wheat, corn's had a 2-week corrective phase here, basically beans have had 2 weeks of either sideways or correction activity. And we have— now we're only 2 weeks away from the USDA report. I think there's a better chance that the marketplace is strengthening into that November report than it is to be weakening into that. If that statement is true, there's not too many more days left where we're going to experience corrective weakness.

Shay

Foulk: Great. One other thing that affects the decisions on producers' end of whether to be moving this product or not is basis, and we haven't touched on that here yet. In my area, we've seen seeing that basis has consistently had, you know, stayed strong here for a little while, a little bit of weakening here recently. What are you seeing in your area? And how do you think that progresses in the weeks ahead with harvest continuing to roll on?

Duane

Lowry: Well, we transitioned from a spot of having a premium for nearby shipment that extended a lot longer than the buyers expected they would have to. And I think that was partially driven by a delayed harvest. I think it was also partially driven by the fact that producers weren't making sales and didn't have any interest to make sales. We've now had harvest progress far enough that those spot premiums bids are gone. We've seen some weakness develop, not getting back to normal levels, but getting, you know, closer to a normal level. I think that the the overall condition where farmers are reluctant sellers, that they're seeing less yield than, than last year and the dollars to gross dollars just don't dollar up, the storage space isn't a problem. I don't think the farmer is that anxious to, or feels pressured to make sales here. Certainly don't feel pressure to make sales on weakness.

As far as basis is concerned, this is not uncommon to get some weakness in basis here. What's going to be The important to see is how long does this last? And my guess is that the period of time that we experience a weak basis is going to be very short-lived. And to back up that theory, all I got to do is point to you about how things unfolded all summer long. And I don't think we have largely changed that landscape. I think the buyer is going to have a very difficult time. He's not going to get the ownership that he had hoped for. During the harvest season. And as they become— begin to realize that they see harvest advancing, I think they are going to push those basis levels back up again. So I just see basis weakness here as strictly being temporary.

And once we get the harvest put away, the odds are that we're going to have overall environment and bid structure that keeps having to bid up to try to unleash bushels. And we're probably going to go back to an inverted market where there are premiums for spot shipment. That's, that's kind of how I see the basis unfolding. Let's just say through February, I think that's going to be the general theme through February.

Shay

Foulk: Okay, I appreciate you expanding on that. And I want to make one caveat off of that is obviously this is more of a general Midwest outlook on that, whereas some of the producers in the Dakotas that I've been talking with have seen some strengthening in basis due to the fact that they have had horrible conditions over here— over there in the last week or two. They had that snow, a lot of winds coming through the region there throughout the western Midwest, and other pressure as far as they're just wet. I mean, they've seen almost 2 times the average annual rainfall in that region. And so there are areas that, you know, very little of the soybeans have actually been touched, very little of the corn has been harvested. And they're going to have continued issues as the fall progresses, even if we can get a good freeze for them to get out into the fields here.

So just, you know, wanted to keep in mind there too, that the basis discussions that we're having is kind of a general trend. Your, your area, the producers' areas throughout the Midwest can, can always be a little bit different.

Duane

Lowry: Correct. And then anything that stretches out harvest tends to have a supportive element to basis as well. Great.

Shay

Foulk: Maybe one or two other things that we should touch on or make note of here. There is more talk about China Phase One trade deals progressing. Do you have any thoughts or comments on that, Duane?

Duane

Lowry: Well, number one, I think progressing is a good way to describe it. I think that both sides have a desire to get a deal. I think both sides have a desire to put together a deal that can be signed before the 1st of December. And so I think that's all progressing well. I also tend to think that China has done things to tip their hand that suggests to me purchases they make or purchases they're going to make are not at all driven by a, you know, an olive branch type of approach. They are driven by a raw need for our product, whether that's pork or whether that's soybeans or whatever it is. I think it's driven by a raw need. So I, I think the demand outlook here is going to be much improved, at least through, you know, the February time frame. Once we get to a new South American harvest, a new you know, that, that might change somewhat.

But I think in front of us here, we have a few months where the U.S. can capture some export business.

Shay

Foulk: Good point there, Duane. And this is something to keep in mind, that this has been a discussion that's going on for a very long time. I think there's a lot of positivity around the subject right now, probably more so than we've seen here in the last 4 to 6 months as this has gone on. And so I'll be anxious to watch as this develops here in the next couple of weeks.

Duane

Lowry: Weeks.

Shay

Foulk: Any other thoughts that you have, Dwayne, kind of what's going on out there that those who are listening should be taking into consideration?

Duane

Lowry: Well, I want to touch a little bit on spreads. And I've already mentioned my idea on basis, that basis can firm again once the crop is put away. And we can go back to some inverted markets. I think that may also develop in the spreads where we get inverted markets there, and I bring that up in the context that this might produce some good opportunities for 2019 production, but it also— people have to be, have a mindful eye on 2020 production, and I'm not sure that we're at price levels yet that are super attractive, and it might be a while before we are. But I think the first and the most important step for 2020 sales is to first have an idea of what your production costs are going to be to a very intricate degree.

And then the next thing is going to be— won't be long, people will be making crop insurance decisions, and then they have to decide how they want to approach that, whether they want to, to use that as part of their marketing tool, or if they want to use that only as a way of— you know, putting a floor into a disaster. But there's a lot of different opportunities that could be presented there, but everybody's got to look at that individually. But I would encourage everybody, whether it's on down days during harvest or as soon as harvest is put away, to start getting very serious about figuring out exactly what your production costs are against what you would consider a normal yield, and then look for those profit opportunities and start to find different tools for different strategies where you can capture those, uh, profit opportunities.

And I'm not— this might be a year in 2020 where it may not be just one tool that you're going to use out of the toolbox. There may be multiple tools that will work together to, to provide a floor and also give some level of upside potential and also give some firm commitments on sales. But this might be a year where, um, if we can get some good things to happen on the demand front, if we can get some good things to happen from a U.S. perspective regarding South American production ideas, get some concern to develop there, get some rallies— these rallies are probably going to be mostly front-end loaded. They're probably not going to impact 2020 prices all that much, but there can be a spillover effect. And I think that we have to look forward and think about the fact that the balance sheet looks a lot different now than it did before.

But after having, you know, a large number of acres that didn't get planted this year, we start putting the numbers to next year. You know, it, it's a threat to profit if you wait too long to make some of these marketing decisions. So I think there will come a point in time where where people need to confidently take a stand on 2020 production and sales and try to lock in some profits, but until you know what your actual production costs are, it's difficult to do that. So I would strongly urge people to plan ahead and really get these production costs figured out.

Shay

Foulk: I appreciate you making a note on that, Dwayne, and I know we have a lot of new listeners out there. Chris Barron wasn't able to join us today. He's busy out in the field and drying and running trucks and everything. He's normally doing this with you, Dwayne. And he is sometimes shies away from this, but I'm going to go ahead and give him a plug here that Chris has developed a system called Profit Manager. And I think you said it very well, Dwayne, on the year ahead with the cropping decisions that need to be made and looking at how the profits will be affected on every farm operation is going to be a little bit different than what we've seen in the past. And this tool that Chris developed, Profit Manager, works intimately with your operation, allows you to put in all that and really get your cost of production dialed in. So again, just another tool in the box.

Chris does a lot of speaking on this. If you know of any events that he's going to be at in the year ahead, I highly encourage anybody out there to listen. If you have any questions on Profit Manager, you can look us up at AgViewSolutions.com or send us an email here. Agviewpitch@gmail.com. And, you know, get some of that dialogue going. It really is, it really is important. It can be the difference maker in an operation, and it's going to be truly important with some of the marketing decisions as we move forward here. So I appreciate you bringing that up, Duane.

Duane

Lowry: Yeah, it's going to be some exciting times, maybe some opportunities in the near term ahead of us, we hope. But, you know, we look ahead. If we were to revert back to something more normal with weather, normal with acreage, it's not going to take the marketplace too long to start talking about building these ending stocks again.

Shay

Foulk: Good point there. And also for everyone out there listening, uh, Dwayne does this daily commentary that he puts out, uh, the First Look and then the Edge on Sundays, and he does a fantastic job about taking this information, this technical data, looking at the macro trends of what's going on, and really dials it into something that's digestible to those that are listening, the producers out there throughout the country. So if you enjoy the conversations that we have here, if you enjoy listening in on the Ag View Pitch, please subscribe, reach out to us again, agviewpitch@gmail.com. If you're interested in Duane's daily commentary, we can get that forwarded over to you to try it out and see what you think about that. A lot of good information there. Dwayne, I imagine we'll be talking with you here later on this week.

And again, if any, any major price movement happens or if we have any storylines, we'll be jumping back in there. We've been pretty busy here with harvest. So I know we haven't heard from a lot of you out there, been putting out as much information as we normally do, but we're always available. You can call myself, Dwayne, or Chris. And, you know, we look, we really look forward to hearing, hearing from you all. But Thanks, Duane, for joining us today. I really appreciate it.

Duane

Lowry: Thanks.

Shay

Foulk: All right, well, thanks everyone for listening, and we will catch you next time on the Ag View Pitch.

Narrator: Thanks again for listening, everyone. If you would like to hear more content from Ag View Solutions, listen to our other podcasts such as Dad's Wisdom or our current Harvest series. Ag View Solutions works as an integral part of operations like yours, side by side for farm profit management, business collaboration and structuring, facilitating industry-leading peer groups, and coaching and consulting tailored to your farm's unique needs. We know that no two farms are the same, and we are here to help make your farm be the best it can be. You can learn more at agviewsolutions.com, email us at agviewpitch@gmail.com, at gmail.com or call Chris Barron at 319-533-5703.

Shay

Foulk: We really look forward to talking with you.