Under pressure

Narrator: Hey podcast, thanks for joining us on the Ag View Pitch with today's episode, Under Pressure. Today, Dwayne, Chris, and special guest Grant Schiemek with Black Oak Financial Brokerage talk about what's going on in the market and what we need moving forward. Bear with us for the first 2 minutes of the audio with some background road noise. It does cancel out after the first few minutes.

Chris: Enjoy. Hey everybody, welcome to the Ag View Pitch today, Monday afternoon. And today we've got Dwayne Lowery and Chris Barron again, and we've got a special guest, Grant Schiemek. And Grant, go ahead and introduce yourself if you would, and then we'll kind of get the conversation going with Dwayne and yourself and me along the way. Okay.

Grant

Shimek: Oh, Grant Schiemek, I'm Owner of Black Oak Financial, introducing brokerage in northeast Iowa. Been in the business, this will be my 21st year, and also do consulting with crop and livestock producers throughout the U.S. Great.

Chris: So what do you guys thinking here? Either Duane or Grant, you guys can chime in. I, I've gotten a bunch of phone calls here today. What's going on with my calls?

Duane

Lowry: Should I be worried?

Chris: There's that, you know, I think, Duane, you and I have kind of talked about it here in the last couple of days. But what you guys' thoughts, what we're seeing here price action-wise?

Grant

Shimek: I can say from as far as call options, I think I doubt that's the a high tick, or at least we should get some kind of retest. But time is always the question with that. So someone has August options, or they probably going to run out of time in my opinion, or they're going to come close.

Duane

Lowry: Dwayne? Well, I don't know about an option standpoint, but, um, if I want to take a, a big picture view, the first question that I want an answer to, or want to trying to formulate at least in my own mind is, are we dealing with a situation that it's an all over situation? Is that what we're dealing with? It's all over and that's the end of the 2019 rally? And I guess I have a pretty firm opinion that we are not dealing with an it's all over situation. I don't believe that we had the technical or fundamental setup or market sentiment setup going into the price peak that we made earlier this month or into the report itself last Friday that creates that type of a situation. So I'm seeing this as a correction, a temporary move, a situation that we're not going to experience trending lower action from here forward.

And so if I'm comfortable with the concept that it's not all over then I guess I'm comfortable feeling that there will be better selling opportunities ahead than what we have right now. And I think it's very possible, in fact I would say plausible if not likely, that the better selling opportunities ahead may very well include levels higher than what we've already experienced in June. And I say that about corn and beans both.

Chris: What's your thought, Grant?

Grant

Shimek: I think that very well can be the case. I mean, what we had here with corn in particular is you had a market that rallied from May 13th through June 17th with very little correction. I think, you know, mostly just slightly more than a 23% correction, and that's not much of a tree shaking. So, you know, we were due for this. So I doubt it is that type of thing. It's just that what the ghost in everybody's head or the thought in the back of our minds is other Julys where things just melt down. And July does have a history to do that, though. When we look at the, the fundamental side of it and even like the basis situation in the eastern Corn Belt is still very tight and has stayed tight today from what I can tell, the contacts I've had.

And even here in the Western Corn Belt, I know locally, just looking at a few ethanol plant bids and looking at the last 2 weeks, we've actually come in 5 to 8 cents. So that doesn't look like a market to me that's, you know, the cash side of the market is interested in owning this product if you can.

Chris: Do you guys think that, you know, part of the calls I'm getting is just, you know, do they really realize what's out here? You know, we're looking at a corn crop that's a month behind in maturity, even if it was planted early because of the lack of GDUs. I drove across Illinois, northern Illinois, and that's where I'm at right now doing, talking to you guys, and both the corn crop, I mean, there's some cornfields that look decent, but the majority, there's a lot of prevent plant across the northern portion of Illinois where I drove today, a pretty massive amount. And then on the soybean soybean side of things, I haven't seen one field of soybeans that is much past, you know, V1 or something like that. You know, I mean, they're just emerged, they were planted a couple weeks ago at best, it looks like.

So I mean, do you think the market is recognizing that and this pause is going to be a short-term thing? I mean, you guys are kind of echoing that, but you know, what's your thoughts with regard to where the crop's really at versus, you know, Is there— I mean, do they recognize this, do you think?

Duane

Lowry: Well, I don't think that they fully recognized it even before we had this break. I think there was a reluctance to fully embrace it by the marketplace before. There was skepticism from the, you know, Chicago crowd or the non-ag community crowd. And so I don't really think they've fully factored it in. Part of that problem is nobody can get a handle on what we're really dealing with for either acreage starting point or prevent plant acres. You know, we thought we were fairly— there had been fairly much a consensus around, you know, 8 to 9 million acres of prevent plant on corn. And nobody really knew where we're going to be at in beans. But each week of the last 2 weeks that you had planting progress, it was quite evident that you were dealing with the historic situation and, and the prevent plant could be quite high.

Today USDA said that, you know, the prevent plant acres are going to be able to get the trade payment. They'll consider a cover crop as being eligible for that. So they will require you put a cover crop on. But with prices down today and looking at the crop progress, planting progress for the week that was released this afternoon, there's still 6.5 million acre beans that have not been planted. There's just under 14 million acres that haven't even emerged yet. And this on the heels of, you know, a very large percentage of the the soybean crop that was planted, you know, very, very late in a yield-reducing type of time window that if the market really was trading that, I don't think we'd be trading at the current prices. So no, I don't think we're trading it at all.

But everybody, including the farmer, people that can be looking right at the field just like yourself and see the fields that are not planted or see the fields that are clearly delayed. Yet we are trained over our times in the, in the industry to be fearful of downturns in this timeframe. Because we've seen before where they have just kind of continued to mushroom into trend. I understand that and I have respect for that. But in the same token, this seems so historic on so many different standards of measurement that I'm, I'm not willing to embrace that thought for the, for this year at this time.

Chris: Comments, Grant?

Grant

Shimek: Yes, I'd echo that. I think, you know, when you take a look at, to say, a long-term corn continuation chart, we spent about 5 years between never, never breaching $4.39 and a quarter. So now that we spent time above it, now we've come back below it. That's, you know, people are fearful because we've been conditioned to you get bullish and you're going to get slapped. And I think that is part of it. And the follow-through today is just, I think, technical price action. I don't think it's a 1 1 2 fundamental answer.

Duane

Lowry: I would agree with that. And the other thing I would point out is, even after the break of the last couple of days, which there was also a break a little bit before that, but December corn is trading at $4.22 right now. After all this break, I'll guarantee you that's probably anywhere from 10 to 20 cents higher than where a lot of people's average sales were whether those sales occurred in the winter or whether they occurred on the initial rally going up. So we're not even, we're not even back to the levels where a lot of these early sales were made. So I offer that as a perspective to say that even after having this break, we're still above that level. And as Grant put out in relationship to where we just got to for the first time in 5 years, now to get a pullback back under that level is really not alarming by any type of technical type of perspective.

And it might very well just be a, a reasonable and normal type of corrective event. And I think that as soon as the emotion kind of wears off and the fear and the panic wears off, I think that you're gonna quickly find support and buying interest surface from multiple sectors of the trade including users, the ag community, producers and speculators, all of them. But first we've got to get things calmed down. I also think that it's very possible that at any moment the break that we are currently experiencing could quickly be over and it would only take one day's price action to quickly turn the tables and quickly add stability. And quickly make the market feel better about itself. So I don't, the question is what is the head fake? Was the entire rally bogus and ill-conceived and having no merit? Or is this weakness a correction of the main trend and thus that main trend can resume?

I tend to think the latter. I tend to think that there was a lot of legitimacy in the rally that we've had. And I think the correction, which is not uncommon to see the swiftness occur that we've had, especially when you get a report involved, but I do believe this is strictly a correction. It's not the main trend, and that's kind of how I'm gonna proceed.

Chris: So this is probably a legitimate— was a legitimate rally then based on what you guys are saying, and this is probably a healthy break. And maybe we need to manage our emotions and expect more volatility to continue forward with the probability of people starting to realize what's really out in the field. Am I summarizing what you guys are saying okay? Or—

Duane

Lowry: Well, I would say so. In fact, I would say the legitimacy comes from two main areas. It comes from the planting dates and crop condition aspect of, for, for Merit. And I think another area of that justifies or provides merit is, is what has happened in the cash basis arena. And it's not just old crop, but it's also new crop. Typically in this time of year, if you get a strength in the basis, it's probably old crop and it's something related to the here and now. It typically is not related to new crop because new crop is seen as the reset button where, you know, okay, we'll have an entire new set of supply available. Then we'll have a whole year to merchandise that. So nobody's going to pay up for a new crop basis. This year that's not the case. You got new crop basis also responding to the basis strength and very firm and nobody's willing to short that.

And it's not that they're emotionally caught up and so bullish, it's that they actually have a fear about supply and they're looking in their own area saying we don't have the acres, we don't have the condition, whatever it may be, and they're not willing to sell that. And I find that is very much justification for the idea that there's merit to the rally that we already had. Contrast that with the merit for this break. The merit for this break is largely Friday's USDA reports and there's so much merit in that report that USDA has already said they're going to completely resurvey it. So I think if you stack them up against one versus the other and where is the real merit I think it'd be hard pressed to say that there's not merit in the rally that we experienced.

Grant

Shimek: There's probably more, there's definitely more merit in the rally that took place. The short-term merit of the sell-off is the report, and it's also money flow because of the calendar. Exactly. And that's pushed us down. I guess I would only add that my perspective would be this first 3, 2, 3 weeks of July, I think it's going to be a real tug of war just because of the market's history with this timeframe. There'll be a lot of people on rips to the upside willing to get short and try to make the market prove itself. And I believe historically, if we can get past July 12th in December corn and close to a new high, that, that opens us up to a much higher probability of being able to run into August. So that's the one, one big hurdle I'd like to see. And we do have the July Crop Production Report will be on the 11th.

Chris: So what do you guys think in there? Or Grant, I guess, specifically with what Duane's been saying on the cash market and stuff, what are you seeing and hearing with your clients across the board?

Grant

Shimek: Basically, the market stuff, lots of willing buyers. On the break. I had, I had a cattle feeder on Friday when we were limited down, called excitedly and said, man, this is an opportunity. And he went and bought a fairly substantial amount of limited down and was happy. You know, he wasn't bothered at all by it breaking down today. Because, you know, just looking at the fundamentals, he's not— it's a greater risk to him that we're up and out the top, then we, then we broke another $0.40 to his, to the economics of his business. And even my clients in the, in the eastern Corn Belt, you know, nothing's what they see. Like you've said, what's in front of their eyes is shocking. And it only makes to them, it's emotionally driven, of course, but it only appears the rational thing to do is get coverage to the upside in some way.

Because if there's an— if there's something else, you know, we're going to need a narrative to get amplified or get a new twist to this narrative to make that next leg up. Yes, anything's possible. And somehow it could get derailed. But right now, it seems to me more likely that we, we get that next narrative to build and then we go up. And I think that's what most of the people in the cash business, especially in the Eastern Corn Belt, are perceiving than being worried about it being another meltdown like the past 4 or 5 years.

Chris: Any other comments, Dwayne? Or let me ask you guys this question. We've been talking about corn. As I said, as I drive through Illinois, I'm shocked. The thing that shocked me was the soybeans. You know how far behind behind they are. And, you know, our day length is getting shorter already again now. And, and, you know, we've got beans that are 2 inches tall at the, at the most here. What, what do you guys think on the bean market? You know, does that have any bearing on stuff? Obviously it will at some point, probably. But what are you guys seeing on the bean side of things?

Duane

Lowry: Well, I think the, the planting date on beans And the scope of acres that were planted so late. I mean, we're not just talking marginally later, later than desired, but actually later into a window that it's difficult to argue that there's not a loss of reduction based on plant— planting dates alone in terms of yield. And when you go back to, I think it was just last week, we were talking about 30-some percent of the soybean crop hadn't even emerged. You know, we're into a window where anything planted, you know, now is basically a double crop yield potential. It's— I find it absolutely impossible that we could get an APH for a national average given the planting dates that we have. I don't know what the acres are going to be, but I think that Obviously, we're going to have— obviously, that we're going to have some prevent plant acres in beans.

So we're going to lose some acres there. We're going to lose yield potential. The biggest factor weighing down beans has been this concept of a billion bushel carryout along with China never to come back to the US. And it's a slight exaggeration, but basically a lack of hope that they would or when they would. And, you know, both of those bearish arguments have, you know, seem vulnerable with the current set of fundamentals that we're dealing with. I mean, China just bought 544,000 metric tons of old crop soybeans last week. And, you know, things, things are different. And if I would argue that at least half of that, half of or at least half of the 1 billion carryout no longer exists. And I don't think it takes much of a creative imagination to make it a larger percentage than that, that, that has been erased. So, um, I think the bean market has a lot of potential.

And I think it's important that when you evaluate soybean potential from current prices, that you put current prices in context and current prices in context means that you're at the bottom side of price parameters for the the last 12 years, you're looking at a corn-bean ratio that is historically very narrow. And part of that is because we haven't been perceived to have any soybean story. If we do have a soybean story because a change in acres and because of a change in national yield potential, along with some level of optimism that maybe China will return, then all of a sudden you know, you've got another dynamic here. So I'm pretty friendly to soybean prices and at minimum feeling that downside potential here is very limited and upside potential will probably depend a lot about what happens here forward in terms of weather. But it's very amazing how small and delayed and the U.S.

soybean crop is. Again, by many different measuring sticks of data, not to mention your own eyes just driving down the road.

Grant

Shimek: I'd say also that when it comes to soybeans, we've, we've really been lulled into complacency with these yields the last 4 years. They've just been tremendous. And I don't— one could say, and I really think a lot of it has been more just planting technology and timing. I don't think it's genetics. Because I have clients who plant, been planting seed beans for years, and a lot of them are planting the same seed, same varieties for 6, 7 years. So I don't think that's the driver, like it may be with corn as far as some of the benefits we've seen in yield. So now you get in this late and we have this kind of stress. It's, you know, we saw tremendous increases inconsistency in national yield the last few years. I mean, it wasn't that long ago being in the 40s was— in the low 40s was typical.

So we can see it, a tremendous percentage drop with the, with the right conditions in over the next 60 days for yield.

Duane

Lowry: I think Grant makes an excellent, excellent point. There, there might be some yield advantage with some different hybrids that and I wouldn't want to completely rule that out, but he makes an excellent point that there are a lot of producers getting better yields in the last few years using the same, uh, hybrid technology that they've been using. And there has been a change. There's been a change in farmers' attitude about when they plant, trying to plant early, and that's driven by what they've seen for results when they did plant early. And there's also been maybe a greater willingness to do some foliar feeding and other type of agronomic investments into the soybean crop that they didn't used to do. And so I, and I think the other thing is, maybe we've just been blessed with some really exceptionally favorable weather conditions for soybeans the last few years.

And, and now you contrast any or all of those things with what you're dealing with this year. And And it's, it's completely different. And it's very possible that, like Grant said, we revert back to some yield scenario that's similar to a timeframe, you know, 4 or 5 years ago.

Chris: You bet. Do you guys have any advice for dealing with the emotion right now? Because I think from, from the farmer's perspective, you know, like I said, just seeing reality and then watching the market do what doesn't seem like reality. We'll kind of get towards wrapping things up here, but either one of you guys want to tackle that topic?

Duane

Lowry: Well, go ahead, it's all yours, you take it.

Grant

Shimek: Well, just from a structuring position, you know, I'm not big— I've never been big on options, believe it or not. Probably more so the last couple of years just to create opportunities. And I know some people hate things like courage calls, but I think in this environment, soybeans especially, you know, we've seen this year's high on Nov beans, I think is around $9.60, $9.71 area. You know, is that a profitable price?

Chris: Maybe. Easily for a lot of guys, right?

Grant

Shimek: If you have great yields, you might be able to pull it off. But it's not something you want to trap yourself in potentially with bad prices. But we can also make the case that in the environment we're in politically, and I even make the case inside— big follower of market cycles— that still at the end of the year, we can have some cyclical risk to the downside in the commodity complex. But I try to at least structure some positions like buying calls and maybe even selling some calls. Like soybeans, buy 9.60 November bean calls and sell something against that in the November 2020 on a percentage that is in the realm of what you typically plant, you know, well, like 20-30%. So getting to near the annual highs, you can get short but still backstopped.

Duane

Lowry: Now, folks pushing to cut value, taking out—

Chris: getting some background noise there from one of your guys' mics, I think.

Duane

Lowry: Um, I, I heard, uh, Grant kind of breaking up. I, I haven't changed anything I'm not— no different location or anything.

Grant

Shimek: Okay, well, I muted my mic and I don't think it was me.

Chris: Okay, gotcha. Well, you're coming in good now, so that last thought, we got most of that, I think. Okay, so any— anything you guys want to wrap up with or anything, you know, any, uh, comments for the rest of the week? And we can reconvene again here, you know, midweek, but any— any final thoughts or anything as we roll into the rest of the week?

Duane

Lowry: Well, I guess I would, in follow-up to the theme of your last question in terms of emotion and things of this nature, I would, uh, I would think that it would be wise to take a step-back view of what we're dealing with, recognize the certain amount of historic nature of it, also recognize the uncertainty of it. And uncertainty always has a certain amount of premium in the marketplace for the what-ifs and the unknowns of all the what-ifs ahead of you. And if that's really true, and we have some historic things and we still have unknowns, and there is some question about whether we're really going to know for sure what the prevent plant data is in August, we know we're not going to know it in the July USDA report. If you have the historic Asport, you should have the unknown.

I think it's perfectly reasonable and acceptable and maybe even a good approach to say, you know what, I'm not going to get caught up in a 1 or 2 day reaction to a report and all the emotion goes with it, especially when there was shock element to the report, and it's even extra, uh, reasoning that I'm not going to get caught up with that when USDA came out immediately said, oh, by the way, we're not sure about this either. So we're going to resurvey and they didn't say we'll resurvey 2 or 3 states and said we'd resurvey 14. That's basically all of the Midwest. So there's a lot of unknowns here. And, and it's, I don't think it would be wise to step in here and try to sell weakness to suddenly get caught up or, or make sales here on this type of a sell-off against the overall backdrop that we have.

And maybe you're, maybe somebody will want to make a sale on a recovery to get caught up or get a few sales on. I could understand that. But there's a lot of uncertainty here. And prices have accomplished something. We do have historic things that we think are for a fundamental foundation. And I think sometimes there's times to just take a step back and say, you know, I'm not going to make a decision, I'm not going to make a rash decision. And I think now would be a good time to subscribe to that type of theory. Just allow a little time to pass here and see if things don't alter what they're— what we're dealing with. You know, I, I would think that tonight, which is just a small snapshot of the marketplace, But I would think tonight we're going to come in here and open higher right out of the gate, corn and beans both. Their crop condition ratings were pretty much unchanged.

People expected them to go up. And if you look at a state-by-state breakdown, some of your key eastern states, Illinois, Indiana, Ohio, showed notable declines in crop ratings. So, you know, that further adds a level of credibility that we have issues out here. And so I think today's weakness was largely overdone. I think as Grant pointed out this is a money move and we trade money and this was an equity liquidation pressure and this can be over very quickly in terms of that type of selling pressure. So I would expect us to be higher tonight. I would expect us to probably stay higher and I think today's lows are something that may not go out for a while.

Chris: Grant, as we go into the rest of the week, additional comments and we'll kind of wrap things up.

Grant

Shimek: Not too much to add, just to echo that, especially on the corn conditions tonight. The key states, you know, it was really shocking to see Ohio down 8% with all it's gone through, and, and Indiana, Illinois, of course Iowa is up a couple points, but the major increases in conditions came from No offense to the growers there, but more outlier states like Colorado and Pennsylvania, which don't make up a large percentage of total production.

Chris: Right. Well guys, thanks a lot, um, for your discussion here tonight. And if I, uh, were to echo what I heard from you guys, or to sum it up, I think sometimes it's okay to watch what the market's doing and maybe sit on your hands, and sometimes A decision to do nothing is an okay decision once in a while along the way too. And, and, and in some cases there's probably people that need to be doing some things. But Grant, people can get a hold of you how?

Grant

Shimek: I can just go to my website, blackoakfinancial.com, or give me a call, 866-263-7336.

Chris: Gotcha. And Duane?

Duane

Lowry: I go to my website cropproductionscience.com. That's probably the best way to get all my contact information.

Chris: Gotcha. So again, guys, thanks a lot. And a little quick disclaimer here. Again, this is just— this podcast, the Ag View Pitch, is designed for perspective, a conversation on what the markets are doing, what's going on with things, and just some ideas and discussion. Not, not giving any recommendations here, but rather just some perspective and conversation and discussion. If there's questions or things that you'd like us to discuss, please let us know and we will be sure to get that on the podcast as well. And again, thanks everybody for joining us on the Ag View Pitch, and we will catch you next time.

Narrator: Thanks for listening, everyone. You can also find Duane on Twitter @Duanelowry and Chris Barron @ChrisBarron24. Please let us know if you have any questions, and we'll catch you next time on the Ag View Pitch.