Weekly market outlook: July 25-29 - summer weather continues to heat up market volatility

Narrator: 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.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week, the 25th through the 29th of July, the last week of July. I'm lucky enough to have Dwayne Lowery sitting right next to me. Dwayne, how's it going?

Duane

Lowry: Good, Chris. I'm glad to be here. Thank you.

Chris

Barron: Well, it's always better when you're here because I can see your face and see your reaction and see if you think the question was smart or not smart. I don't know.

Duane

Lowry: We'll see. I've never heard you ask a question that wasn't smart.

Chris

Barron: I don't know. I don't know. Let's start out with kind of a basic one. Crop conditions. There's kind of the have and have-nots. I mean, and we saw that last year too, where there's areas that have plenty of rain, plenty of water. We've had some heat, we've had some volatility because of the weather. Some of these areas are terribly burnt up and some of these areas are, are, have plenty of water. Any, any take or any thoughts on what the market's going to be watching in the next month or so as we look forward? To this weather and the weather events?

Duane

Lowry: Well, let's set aside the market thought for just a second and go back to the crop conditions. If you're in Texas, Oklahoma, or Kansas, you've had serious stress.

Chris

Barron: Yeah.

Duane

Lowry: Lack of moisture. In Nebraska. And heat. And if you're in Nebraska, it's the same thing, maybe with some scattering of precip. If you were lucky, you might have got— been in a slightly different situation. But the dryland corn in a lot of these areas in Nebraska They're in, they're in, uh, tough shape. They're done. And, uh, they're looking at harvesting for silage or whatever. Um, if you are in the Dakotas, you've had some different problems to contend with, but not everybody. Some places have done all right. If you're in Missouri, you've had a lot of stress. Here in Arkansas, you're not getting relief, and it doesn't look like you're going to get relief. So they're in trouble. Everything outside of those areas, for the most part, is probably doing quite well. And Illinois was dry in some areas for a period of time, but probably not detrimental to production potential.

Same could have been said about Indiana, parts of Indiana at one time. But right now you got all those other areas that are poised for, you know, some type of record yield, whether that's slightly better, slightly less type of situation. You add up all those bushels in those first areas we described against adding some bushels in the other areas, you still come up with a potential net negative to yield versus the work— USDA working number of 177 on corn. How much you get below the 177 depends upon how much you're willing to bump up the yields in those favorable areas, and that's, that's a very difficult thing. We don't know. The other thing to keep in mind on crop conditions, the marketplace has been acting like the crop is made, and we've certainly seen times where the marketplace tips over by mid-June and it ends up being that the crop was made.

But we don't know if that's how it's going to be. You know, we might find the situation to be different. But right now the marketplace is going through a period where they're acting like the crop is made. They're not worrying about problems in Europe, which are real. They're not worrying about supplies not entering the global arena as it normally would in terms of speed and scope. Coming out of the Black Sea region, which is probably a very real thing that's not going to happen this year. I'm sure those supplies eventually get to market somehow, some way, but they're not going to get there in the same type of level and at the same rate. So that's, that's a situation to be worried about. And, but the marketplace is not focusing on that right now.

Chris

Barron: Mm-hmm. So It kind of what you're saying too is it's a long ways before this crop is made. And there's still, you know, we're, as we look at this week, the 25th through the 29th, we're kind of in the heart of pollination and we're getting sufficient water in a lot of areas. And so that's kind of what the market's looking at. Is there going to be anything else down the road then? Because it seems like pollination timeframe is kind of their big deal. From a market standpoint, even though agronomically we make the crop a lot of times really good or not so good sometimes in that last week of August and first week of September as we do the fill period.

Duane

Lowry: That's the facts, but the marketplace doesn't pay attention to that. They preemptively take a stance and assume that the crop is made if that's what they're— how they're leaning, right? And they will abruptly shift if they're forced to, but they don't want to be forced.

Chris

Barron: Yeah. And, and the other thing too, just as an observation, we've been driving all over the place seeing clients, and the one thing that I've noticed, with the exception of— there's some really nice looking beans in Illinois, but in a lot of areas the soybeans are a long ways from like filling the rows, and, and they're— they seem quite a bit further behind. And soybeans will surprise you one way or the other, but, you know, it looks to me like soybeans might be the one that's, that's the, the lead, the possible market leader What's your opinion of that? I mean, if we get— I mean, we already chopped a bunch of acres off. If we bring the yield off of that 51 number, whatever they're at, is that going to give us a lot of strength on the bean side of things?

Duane

Lowry: Well, statistically speaking, I would say it's a tighter situation in soybeans than it is in corn. In terms of your comments about the soybeans and how they look and not filling in, that is certainly true in some, not all, but certainly true in some. But if we're honest with ourselves, we've heard that over the last few to several years multiple times, only to find out—

Chris

Barron: And then we still grow.

Duane

Lowry: —80 bushels and some unbelievable yields. So I don't want to say too much about that because I just don't know. And I think that's the starting point on estimating bean yields is none of us really know what combination of events it's going to take and how it's all going to work out. But I will say this, that in terms of the marketplace, they're dealing with a small carryout. A reduced carryout because of the acres. They have uncertainty about demand, how that's going to pan out. I think in the case of beans, you know, we think in terms of new crop is November bean futures. It's, it's October, November, and that's what's new crop. And, and we had just had, you know, throughout the previous 12 months or whatever, we had old crop beans always at a premium over new crop, and we had some very high prices in those old crop beans during the spring and late winter.

And then we went down to a whole different threshold of prices with new crop. Well, in terms of a balance sheet, it's very important what the U.S. yields end up being. It might be a situation that the real new crop— and I put that in air quotes— the real new crop might be the new crop harvest in South America, and it's conceivable that U.S. bean prices, the, uh, could still be find themselves moving back to an old crop type of price structure with July of '23 representing what really ends up being the new crop is when the more confident supply comes on from South America. That's not what we have today. But if we have a problem from here forward that threatens the U.S. yield down from, you know, current type estimates, then I think we could have that type of situation apply.

If that were to apply, and these are if with capital I and F letters, if that were to happen, you would have November beans, which are, you know, currently trading at roughly $13, they might suddenly go to $15, and then contract highs, you know, only another 75 cents or something from that. So you could have a scenario that could have that much of a dramatic increase in what we call new crop beans, but that would only return us back to the global price structure that we had for months, you know what I'm saying, right? Um, If so, that's what happens if we get a problem in the U.S. here forward, and then the new crop, the real new crop, ends up being the, the new crop futures for the South American crop, assuming they end up having a good crop or a normal crop.

If we don't have that scenario and we have a plentiful enough supply for the U.S., and we expect to have an abundant supply out of South America, which statistically is a very easy case to build, then all of a sudden we stay at these prices that are greatly subdued from what we had for all our old crop prices in the winter and the spring. But just exactly what fair value is on that probably will have more to do with what the demand structure looks like, uh, you know, a few months from now versus what, what the supply is at the present time. I would say that U.S. soybean production is probably on a national level is probably still on par for what USDA has for working numbers. I don't think we've probably lost enough soybean yield potential yet to have a big impact on that, but it's certainly possible that it could.

Chris

Barron: So, um, a couple of questions, and we're going to keep this conversation a little, a little shorter, but, um, let me rattle these things off. You've got inflation, you've got increasing interest rates, you've got the possibility of recession, and you debate that one. But, uh, we've got war, we've got the funds kind of changing their positions a little bit, it sort of looks like that. And then we've got Chinese demand, and we've got, you know, ethanol, and you've got energy prices, and you've got inputs and all these things. If with all of that stuff into consideration, what, what are some of the key things you're watching that you feel like could give a strength in the market? And what are some of the key things you're watching that could take the market lower?

Duane

Lowry: Well, let's go back in time a little bit. I think probably the last two times I was on the podcast, I talked pretty heavily about being concerned about the Fed fighting inflation and how that could hurt commodity prices. And it would be— it's very difficult to fight the Fed and to never question their power and their ability to do what they want to get done. I think the price weakness that we are experiencing right now, in terms of say the last 10 days or 2 weeks, The marketplace wants to blame that on favorable weather or favorable crop conditions or an expectation the heat's going to subside, moisture will arrive. But if we go back and look, we really started to break— that was more driven by the Fed, by interest rates, by concerns about recession and unwinding of spec long positions, inflation-based bet. That was what started us here.

But I think, in my personal opinion, I still think that what we have witnessed has been largely driven by the Fed. And once that started, then that creates liquidation. Along comes a recognition or a willingness to look at weather slightly, slightly differently. But in terms of, you know, what could— I think you asked the question about what could impact prices from here forward. Yeah.

Chris

Barron: What's going to give us those?

Duane

Lowry: I think we have probably absorbed the worst part of the Fed fight. We've absorbed the worst part of the unwinding of inflation-based trades. We've probably absorbed the I wouldn't say we've absorbed the worst part of the recession fears, but we certainly absorbed quite a bit of it. I think going forward, the greatest threat that I'd say remains on the table is, uh, U.S. relations with China and what might happen there. And I think their supply is improved enough that they might be willing to have a little bit of a trade war with us, even if it was an unspoken trade war where we're the buyer of last resort. I think the other thing that would be a situation would be the outlook on South American production of beans. If they had returned to a normal year, global supplies would be very plentiful, and it's certainly possible that could weigh on, on prices.

On the upside, what would be the best things to focus on to cause prices to go up? I think it would be a, a reduction in, in grain supplies in Europe. They've had problems with heat, lack of moisture. They've also had logistical problems getting stuff out of the Black Sea. So their overall stock situation has declined. And, you know, there might be some surprise there. And then also in kind of in conjunction with that, the rate at which Black Sea supplies get into the global marketplace could still be in a significant bottleneck.. And they might have plenty of supplies statistically on a balance sheet, but some of them are not— they're not fully closed off from the marketplace, but they are slower to get through that bottleneck. That might keep things elevated, uh, for a period of time. And then of course, you know, whatever we see with the final stages of U.S. production potential.

But we've absorbed some of the worst things. The question now is, um, let's say if you are bear and you think prices are going down, You know, um, how, how much are we going to liquidate the spec longs? Are they going to be get short corn and beans, or is that the direction we're going, or are they just liquidating and they're not going to trade from the short side? Have we found a new price paradigm, so to speak, that instead of being a $3.50 to, you know, $4.10 corn market, are we going to be a $4.50 to $5 corn market on the bottom side? And, you know, who knows what the top side is, but have we redefined what is cheap? If we redefined— is that— are we going to have input price structure, energy price structure that, that at the end of the day translates to, to $4.50 corn as being, quote, the new cheap level? Um, or could we slip back into the old $3.50 to $4.10?

I don't think we're going to slip back to the $3.50, $4.10.

Chris

Barron: Well, I hope not, because a lot of the '23s we're, we're starting to look at still showing cost of production on corn, for example, in that $5 range for a lot of guys.

Duane

Lowry: And so absolutely, but to play devil's advocate, there, there's nothing they don't say the marketplace has to give you. Yeah, the market doesn't care, price in a profit before you plant the crop, right? So, um, I don't think we slip to the old levels, but I think it's very important— I've said for several months that the bottom side of Dec '22 corn could easily be $4.50 to $4.80, and that I took a lot of heat for that during February and March and April and May and June But you never take any heat.

Chris

Barron: What do you mean?

Duane

Lowry: But suddenly, suddenly, suddenly we're closer to that level now than we were to the levels we were in, in April. Yeah, sure. I think we— the producer still has to look at it that he still has downside risk. How long prices would stay at those levels if they happened, I don't know. But I think that remains the downside risk if all the right things, you know, align to cause it to happen. I think it's very possible in the case of beans, that same type of a What's the new bottom side price area? Maybe it's $10 soybeans, maybe it's $10, $10.50. That is still the downside risk, but we have potential yet to, uh, have some sort of recovery.

Chris

Barron: Yeah, the saving grace for a lot of guys in '22 is that insurance level for many is sufficient that, you know, that's protecting, kind of protecting some stuff. I guess what I want to do to wrap up the conversation is talk from a pragmatic standpoint for a minute. You know, if we put our farmer hats on here and say, okay, Dwayne the farmer has been marketing along the way, and you can, you know, we can debate on this or go back and forth here for a minute, but what's your thought from a practical standpoint moving forward? You know, there's people listening to this that are 90% risk protected or 95%. I know of a few that covered. And then I also know there's a bunch of people out there that got a lot of marketing to do yet. From a practical standpoint, what's your perspective now?

Duane

Lowry: At the end of the day, you don't want to go into your banker in the— and after harvest is over and say, gee, I didn't market my grains, this, that, and the other thing happened, and all of a sudden the prices plummeted. That's what— this is what my inventory is worth, but my Costs were already locked in. So this is, this is a troubled year compared to what, what I thought I had for potential. You don't want to end up in that position. So if you've already got a lot of stuff marketed, you don't really have to make a decision right now on these— this price dip that we've occurred.

Chris

Barron: Sit on your hands.

Duane

Lowry: If you have priced a minimal amount of stuff and you let those price opportunities go by, you are at risk of something happening that drives the prices down to some of those levels that I mentioned. That may or may not have anything to do with things that we think about in terms of crop condition and weather. It may, it could be some other event like we have with that's geopolitical. So that is a risk that's real, and I think you want to avoid that risk. And I think the first step in avoiding that risk is to recognize you do have the risk and to recognize the odds of you going back to $7.50 corn just aren't very good. And so Um, now you have to readjust your thinking to where if you could get Dec corn back to $6.25 or $6.50, suddenly that becomes— maybe that's an upper part of what the opportunity is.

And, and so you have to readjust your thinking completely and, and just forget the fact that you're— you didn't take $7 corn before.

Chris

Barron: Well, it's a price average you're trying to get to. It's, it's the average, not, not individual sales. So that, that's going to lead me to my last question here for you, which is from a technical standpoint, in that range you're talking about, you're talking about, um, you know, $625 to $650 on the, on the upper end. And the only reason I— and I'm not trying to throw you under the bus so you can see what it looks like under here, but I, I want to ask you from a technical standpoint, from a probability perspective, for those farmers that still do need to catch up. If you, if you, Dwayne, still need to catch up on some sales and you need to put some targets in, because when we see this volatility like we've seen back and forth, you got about 5 minutes and sometimes it's 5 seconds to make a sale, and you need to know where that number is and you need to put those targets in there.

So I guess I'm not asking for a price, I'm just asking for a range where If Dwayne the farmer needs to catch up on corn, where do you— where would you place some of those targets? And on soybeans, where would you maybe place some of those targets to get a few more sales on the books if you need to catch up?

Duane

Lowry: If I need to get caught up and the market started to have a recovery, I would start making those recovery catch-up sales at $6.10 December corn and continue to make them if they extended beyond that point. By the time it got to $6.50, if it got there, I would no longer be in a position where I felt I had to do catch-up sales. To catch up, you'd be caught up. I would caught up by that time.

Chris

Barron: Gotcha, that's where I was trying to get to. Yeah, what about soybeans?

Duane

Lowry: Well, the beans, um, I think would have, um, if the beans start to stage a rally, um, they could have a reason to go a lot more than we might be thinking right now when we see, you know, the depression of prices, you know, now retreated back to this $13 area on Nov beans. So I would be willing to give beans a little bit more of a chance to have a better rally somewhere ahead of us here before harvest. So if I'm a producer and I haven't made as many sales as I should have made or want to have made in corn and beans both, and I'm— and I, uh, embrace the idea of starting at $6.10 and you're done at $6.50, and that's somewhat maybe more aggressive, I would be more aggressive on that corn sale and maybe I'd be a little less aggressive on my bean sale. I might be more patient and wait and see if you couldn't get something better than than, you know, a dollar rally.

Chris

Barron: But do you believe that into harvest? So if, you know, and I've asked some of, some of the other guys this too in the last few weeks, is, you know, does it make more sense to move some of the corn? And, and if you're gonna bend some stuff, maybe this might be the year some of those beans that aren't sold, maybe is there more upside potential in the beans possibly?

Duane

Lowry: Well, if we take the basis out of the equation and we assume you have storage space and you took the approach that you you were going to be more aggressive with the corn sales up front, right? And if we got that kind of rally over the next 3 weeks for whatever reason, um, and then you did get aggressive on the corn sales but you found yourself not having many beans sold, all of a sudden you would have backed into a situation where you— I guess you're going to store more beans, right? That's how I would be. I would accept that now. But if you got beans to go back to $15 or higher, then I'd probably better be— I'd be looking to get rid of those.

Chris

Barron: And, yeah, and, uh, Well, and then it comes back to the thing I preach all the time is the margin, right? You know, I was looking at, you know, what, how much margin, what was your margin objective on the front end too?

Duane

Lowry: Yeah, so those figures that already have to be changed from what you thought they were. Right, right. But, you know, there might still be opportunities ahead. I wouldn't say there's not. I see signs from a technical standpoint on the intraday or the short-term trading technical assessment that would imply that we're close to some sort of a bottom. Here, and we're going to get some sort of a corrective rally. And there are reasons out there to have that. We've— like I said, we could talk about Europe, we could talk delayed supplies out of the Black Sea, we could talk, um, uh, about the fear that the U.S. corn yield will be less than 177. These areas that have got hurt got hurt enough to more than offset.

Chris

Barron: And if the soybeans are less, that's going to pull corn up.

Duane

Lowry: Well, you don't have to take the yield down very much in beans and really mess with it. You know, you have a a carryout situation that looks very tight. Maybe in the end the U.S. carryout most likely won't be as tight as we think it is because, um, the South America will most likely have a good enough crop that we'll lose some market share and suddenly our carryout in the end will end up being higher. But the marketplace won't trade that. The marketplace will trade the fear of a reduced supply in, in the U.S. and they'll trade that way until we get basically to harvest. So if, um, if something happens that causes the marketplace to think seriously and with a level of respect, oh my gosh, we're under 51 on a national yield, we might be at 50 or something like that, the bean market will not take that gracefully.

Now the bean market may have— may be acting very weak right now, but that could be temporary. Could be. Awesome.

Chris

Barron: Well, hey, Dwayne, I think this was a great conversation that you gave everybody some perspective and some things to think about. Both from a practical standpoint and some of the things we need to watch that's going to probably continue to drive volatility both ways for a while, isn't it?

Duane

Lowry: It doesn't look like volatility is going away for a while. No, it doesn't.

Chris

Barron: Probably not. Well, hey, again, Dwayne, thank you very much for being here. Really appreciate it. Thank you, Chris. You bet. And hey everybody, thanks for listening, and we will catch you again next time on the Ag View Pitch.