Weekly market outlook: Jul. 12-16th - another report and weather drive the markets

Chris: Thank you for listening to the Weekly Market Outlook. It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business. Please reach out anytime by emailing cbarron@agviewsolutions.com. Welcome everybody to another episode of the Ag View Pitch, and we are heading into a new marketing week and we've got with us Peter Meyer. How's it going today, Pete?

Peter

Meyer: I'm well, Chris. How about yourself? Everything all right?

Chris: Oh, it's hanging in there. So doing pretty good. I'm actually driving across Illinois. We've been in Indiana this past week and seen a lot of crops and stuff. So I'll get that to that in a minute and just kind of get your perspective on kind of what you're hearing, what you're seeing from some of the guys you work with.

Peter

Meyer: Well, about 2 weeks ago, I drove about 4,000 miles from Ohio out to the Missouri River in South Dakota and back. My initial take on it was all the crops seem to be a little bit short for this time of year. As you probably know, I usually go out around the third week of June and the crops were short. So you can see the effect of the June heat and dryness. Now what that means for soybeans, probably not too much. But when you talk to agronomists, I mean, the jury is still out on what that'll mean to the corn because the corn ear is, you know, kind of formed itself or that's kind of a done deal. So, you know, I mean, if we were to lose a couple kernels around, if the girth is not there, diameter of the ear, if you'd like, you know, I mean, you just start to lose a couple rows, a couple rows around and all of a sudden on a 14, 14 around ear, you can lose about 12 or 13%.

On a 16 around ear, you'll lose a little bit less than that. But, you know, I, I think there seems to be a lot of uncertainty as to what the short crop means at the moment. Now on the way back, Iowa had received a fair amount of rain, southern Minnesota had gotten some rain, even South Dakota had gotten some rain. The crops looked a little bit better. So I wouldn't say that anything I saw was unhealthy, but I think the jury's out on what that shortness means. And now we've had a little bit of a delayed pollination going on. The other thing I would say was that this is, of all the years I've been doing it, The stands look tremendous. You know, the emergence was very, very good. But that also speaks to the fact that it was dry and you didn't get any drought spots or whatever. So there obviously is some potential there, but it certainly was not without any concern, so to speak.

Chris: Yeah, definitely. And, you know, like I said, as we— so we've driven across pretty much the entire state of Iowa, Illinois, and a big chunk of Indiana. And basically what we're seeing is some pockets in Illinois in particular that caught some massive amounts of rains, a lot of drowned out areas and a lot of funky looking corn that's just basically waterlogged. And it's obviously impacting the beans, seeing a lot of yellow. And then the same thing in Indiana, there was pockets where it was really heavy. And then, you know, go back to Iowa for a minute, my home state and where I live, We're seeing, you know, we're in a pretty dry spot. We've pretty much got an empty tank. Normally this time of year, we've still got a pretty good reserve in the subsoil, but we're sitting here on about an eighth of a fuel tank. So not a lot to get us by.

So we're going to need these rains to come through. And it looks like these rain maps, what they show is about 30% more than actually falls with the exception of some of these areas where it's been really heavy and you're looking at the purple color and some of those have been pretty accurate, but in those dry zones, when it seems like when that map shows the rain, it's a little bit inaccurate. But let me ask this question. What's the market looking at, you know, from the perspective of weather in your view, you know, from some perspective in the next couple of weeks here, what moves the market one way or another as we continue on here in this volatile market?

Peter

Meyer: Well, Chris, I mean, I think that, you know, the market is certainly aware of the fact that it seems like these forecasts are turning hot and dry for the latter part of July, which is going to be an issue, especially in the West. As you just mentioned previously, there's not a lot left in the tank. I would argue that Illinois may be the only state that has anything in the tank as most of the belt and especially in the west has not been recharged and has nothing to fall back on. So today's dip down to $5 certainly was based on the midday GFS which showed heavy rains in Iowa. But nonetheless, this crop in general in my opinion, from what I've seen and what the maps kind of show. I mean, it is being fed from, you know, from spoon-fed, so to speak, and it needs these just-in-time rains and will continue to need it, especially through pollination and after pollination.

Chris: Yeah, so again, you know, from a perspective of a producer, how's the market reacting to this?

Peter

Meyer: Well, the market's reacting very negative to it, and I mean, that just kind of shows us that you know, even though there is the argument that we're in a heavy demand market, that it is primarily a production market. I mean, I'm fond of saying that corn does nothing quietly above $5, right? I mean, just a few weeks ago we were above $6 on a Friday and then we went down to $5.14, then back up to $6 and change after the acreage report. Now we're back down in this $5.10, $5.12 area. You know, it's probably going to test this $5 level but as I said earlier about the market doing nothing quietly above $5, I think that psychologically it would be hurtful to lose the $5 handle. I think that below that we're just going to kind of settle down and stuff. Based on our supply and demand estimates we see the farm price between $4.75 and $5 being a very, very good demand area.

So I'm not really concerned about the market falling apart. And I certainly don't think that the funds are going to jump into this market from the short side. There's no indication that they are at the moment.

Chris: So this podcast comes out on Sunday midday. And so we're going to be coming up on a report, there's gonna be some people listening to this after the report. From the perspective of what you see, and you watch these reports and understand this stuff probably as good or better than anybody I know. So what, What is your thought on this Monday report? How should farmers take it? What do you expect to see? And then what is the perspective out of that?

Peter

Meyer: Well, I think given the quarterly stocks report the market seems to be thinking that the old crop stocks can be down by another 20 or 30 million. I actually think that the USDA might have overshot the export number. We have about 11 million metric tons left to export in corn. Last year around this time I think we had 8. But that doesn't bother me at all because if they were to raise the old crop stocks by let's say 50 and move that into new crop at 1.15, we do have this extra acreage but boy oh boy, this export number that the USDA put out for new crop at 2.45 billion, is so underestimated in our opinion.

I mean, I'm around $2.8 billion, but I think that, I think that, you know, maybe they raise that up to $2.6 or $2.7 because what's happened is that now that we have the acreage numbers and we're going to get a production increase of probably 250 million bushels month over month, that can easily be absorbed on the demand side. So what am I looking for? You know, I guess between 1.05 and 1.1, which was last month's number in old stock carryout, maybe a little bit higher, but I don't think that should worry anybody because nobody is trading old crop contracts at the moment. And in new crop I still see like a 1.3 carryout, maybe a 1.35. I think the market is looking for something closer to 1.4. But is that enough to push the market higher? Will that balance out against the rains? I don't necessarily think so, but I think what we have to really watch is this export number.

USDA was extremely low on their export number, 2.45 billion bushels versus 2.85 last year. And I really see, we can argue or we can discuss whether China is going to import as much as they did last year. That's going to be the wild card. But nonetheless, the Brazilian crop is in some serious trouble. Brazil, that was a crop that was estimated at 107, 110 million metric tons just 6 months ago. We're down to 91 million metric tons. We have boots on the ground in South America that say it could be as low as 80 million metric tons. So right there their exports are going to get slashed. And we're also hearing stories about corn being transferred in and out of the states of Brazil to get to some of the feeding operations.

My focus there, that's a long way of saying, and I apologize for being so long-winded, But that's a long way of saying that I think that the export number, $2.45 billion they put out last year, is woefully underestimated. On the soybean side, way too early to make a call. Chris, I believe we're going to be at pipeline soybean for the next year or so. I don't think that there's any chance of us building up anything over this 120. Can we get to 140 million or 150 million in carryout? Sure. Who cares? We're going to use every bean. And we're not going to use the beans, we're not going to use the beans on the export market, we're going to use it domestically given this tremendous interest in renewable diesel and sustainable aviation fuel and that's all dependent on vegetable oil, for the most, well, it's dependent on vegetable oil prices. The vegetable oil prices have come back a little bit.

This is giving these renewable fuel manufacturers a little bit of comfort and I think we're going to what I call domesticate the soybean crop in the U.S. It's all going to stay home and now it's just a matter of how much crush capacity we have.

Chris: If we stay on beans for a minute, the last time we had you on you sounded pretty bullish. I had several clients comment on your take on the strength in the bean market. And the other thing too with the bean market, just based on what I've seen in the 3 I-states covering pretty much the vast majority of those 3 states in the last number of days, And plus we got a long ways to go before there's anything in the bin. And so, you know, you got that length of time plus everything you're talking about. What's your perspective there? I mean, do we, do we pull the trigger on some stuff when we start getting some opportunities or do you think those opportunities are going to come sooner than later or what's your thought there?

Peter

Meyer: Here's the thing is that I believe that production rallies are meant to be sold and I believe demand rallies are meant to be respected. And I think that in beans we have not seen the demand rally yet. I mean, it's going to be hard for me to believe that we're not going to get back to $14 in beans just because of the scenario that I just presented to you. We're just not, you know, this acreage number, I mean, we hit the corn number, we were around 93, it came in at 92 and change. I missed the bean number because, and I told our clients, we need 90 million acres of beans. We don't have 90 million acres of beans at the moment. Could we get it later on? Who knows?

Chris: So you think in that August report we're going to pick up more acres?

Peter

Meyer: No, no, no, I don't. We're not going to pick up any acres till October. I mean, October, you know, Chris, and that brings another point up is that given the fact that the survey response rate to the acreage survey, a farmer survey, was only about 52% of the surveys were returned. That's down 16% in 2 years. So what does that mean? A, it means that the farmers are holding their cards close to their vest. I totally understand that. But the other thing it says is that the acres could get revised. But that will not happen until the FSA data becomes quote unquote semi-final and that won't happen until the October WASDE. So we are going to be sitting here with this sub-88 million acres of soybeans until October and the demand is going to be there. I like the demand side of soybeans.

I actually think what we've seen the last 2 days, Chris, while corn has been down, beans have held their own if not gone higher. So beans have been, corn has been the leader, beans have been following corn, but I think it's time for that to disconnect. And by that I mean, you know, we trade, we can trade up to 2.8 as far as a ratio is concerned between November beans and December corn. And those numbers I'm looking at are maybe $5 for December corn and $14 for November beans, maybe even as high as 3, 3 to 1, but that would only happen if we got down to let's say $4.75 or something like that December corn. I believe soybeans are going to break out and that they could trade as high as $14.25.

Chris: Last thing I want to hit you up on here, and we're going to keep this one a little short because I am traveling here today and trying to do 10 things at once, and is this, this whole ethanol thing. I mean, you keep track of a lot of stuff that's going on there. What does a farmer need to be paying attention to on the corn side of things?

Peter

Meyer: I don't know. I mean, you know, I mean, it just seems like a normal year. We, we crushed 5.2 billion bushels. We've been at 5.2 billion for the '21-'22 marketing year for a while. The USDA came up to our number. We're starting to see there is some grumblings about the fact that now ethanol production is back up. So maybe they'll increase the old crop number. But at 5.05 billion, which is where they are, they're down about 2.8% from last year. And let's be honest about it, the marketing year, since the marketing year started September, we spent 6 months in a pandemic. So maybe they increase it a little bit. We did see the highest ethanol production number last week for the first time in 70 weeks and people are making headlines out of that. But what happened 70 weeks ago? The pandemic started. So we see it kind of flatlining at $5.02.

We see ethanol or we see gasoline demand kind of peaking probably around the year 2025 and then starting to go lower based on EVs, electric vehicles. But boy, I certainly get the sense that this renewable diesel and sustainable aviation fuel is a deal that's here to stay. And that's going to create tremendous demand on soybean oil and all the other vegetable oils because the feedstock of choice, fats and tallows, we just don't have enough of that production in the U.S. They're going to come get the vegetable oil in my opinion.

Chris: Mm-hmm. Pretty good news for soybeans. Again, echoing what you said the last time. Occasionally I'll ask a last, last question and I want this one to be kind of quick. Quick, but I do want to throw this out there because it's stuff I keep hearing from clients. But, you know, is the concern for input costs in 2022. And when we see these rallies that kind of give us the volatility, either after a report or on a weather forecast or something that gives us volatility and gives us these sales opportunities, quote unquote, that you just said, you know, you reward those little opportunities that come your way. What's your thought on '22 on both corn and soybeans? Are you in the camp of do something or are you in the camp of do nothing or what's your perspective there?

Peter

Meyer: On the soybean side, I wouldn't really do much because I think that we have to let this demand for soybean oil kind of play its way out. And in corn, to be honest with you, I mean, you know, we're not going to know here for a few months until the seed companies set their seed prices. They did not participate in this rally unlike your fertilizer suppliers. I am a little bit worried about the fact that they're going to raise their prices and it's just a fear of the unknown, Chris. Yeah, $5 corn looks great, right? Last year we were talking about this time, we're talking about $3 corn or 70 weeks ago let's say $3 corn, now $5 corn. It doesn't stink but there are so many unknowns and what the suppliers are going to try to get out of, especially the seed companies since they were not able to participate in this rally because their prices were set in the fall.

I think it's too early, too early to be selling, selling 2022 on the unknown in corn and on the fact that we have a good demand market in soybeans. So let's see how it plays out.

Chris: Yeah, no, that's good points. All good points. The thing we look at occasionally, it is an individual farmer by farmer thing too, right? Because we've got some land, we've got some farmers with pretty well locked in land rent numbers, pretty well locked in. You know, maybe they own more land or whatever, but the land is the big one. And then the other big one's machinery and equipment. Those two combined are the number one and number two largest line item expenses, and they're right around that 50— anywhere from 50 to 56% of the total cost of production. So plugging a little in, what's your thought of plugging a little in if a person has those numbers locked in? Are you good with that, or what's your thought?

Peter

Meyer: Certainly with anything getting towards 60%, if it makes financial sense to you, right? Uh, especially on the corn side. Yeah, I think you have to You have to look at the market if it does rally.

Chris: Gotcha. Okay, well, hey, um, really appreciate this. This is kind of a fast one, and I, and I did want to get a hold of you, Pete. I know, I mean, you, you probably, like I said, these reports, when these reports are coming out and going through, you're the foremost expert that I've ever found as far as, you know, really knowing what's going on, knowing how to talk the talk and how to distinguish what's going on. So we really appreciate your, your insight on that. Thanks a lot.

Peter

Meyer: Well, that's very kind of you to say. I'm not sure that I'm worthy of those compliments. But the July numbers, all we're really going to do is plug in the acreage numbers from June and the soybean sheet is not going to change much because those are the same numbers from our Prospective Plantings report. So okay, 130, 140 million carryout, okay, still bullish in my book. And on the corn side, like we said, the exports could suck up what, uh, what's needed here on this additional acreage. So yeah, we'll see how it goes.

Chris: Awesome. Hey, thanks a lot, really appreciate you being on.

Peter

Meyer: Anytime, Chris, thank you.

Chris: All right, we'll talk to you again soon. And then thanks everybody for listening again, and we will catch you next time on the Ag View Pitch.