Weekly market outlook - July 3-7th: USDA sticker shock

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. We're lucky enough today to have with us Grant Schimmick. Grant, how's it going?

Grant

Shimek: Great. Yourself, Chris?

Chris: Doing good. Doing good. So I guess what we want to do is figure out here what's happening with the USDA report. We had a close on Friday that was kind of strange. I don't know if I ever remember seeing that much diversity from, you know, the soybeans going up so much and the corn going down so much at the exact same time. Have you seen that before?

Grant

Shimek: Not that I can remember. That was wild.

Chris: That's kind of strange. So, um, I guess, you know, talk a little bit about, you know, what you're taking away from that report and, and what's that mean for the week or weeks ahead? You know, is that, is that something that's gonna get the bean, the, the beans back to where maybe they're close to corn and profitability, or are they gonna come back together again, or what's your, what's your thought there?

Grant

Shimek: Well, it's the wonders of a quarterly data dump. And that's, you know, we've seen big shocks before. You don't always know what the surprise is. You know, I talked to people last week and I mentioned, you know, we've always got to be open to some big shock to the market. And the question always is, what is that? And that's what makes it a surprise. So about the one thing I'd note in the report is there was a special note in it that said that, you know, they, as of the time they did the survey, which is between, I think, May 30th and June 15th, they had— there was still around 2.49 million acres of corn to plant and somewhere in that vicinity of 8 to 8.2 million acres of beans within that survey.

So things can change a lot, but these numbers are, are etched in stone for the time being, and we can go through lots of weather and things and so forth, but the acreage number unlikely to change dramatically. Now we probably will see things shift and the other stats that make things statistically right the ship as we, you know, look out. When I say that, I'm thinking 8, 10 months down the road, not necessarily next month or so forth. But the WASDE report will be a big deal coming up as far as what the USDA is going to use for a yield number, because with this many corn acres and less bean acres, what we use for yield is still going to be extremely important and weather is going to be the big driving factor. We'll probably trade this report data for another day. I don't think we'll get past 3 days.

And that's the norm with big market shock is going to be priced in 2 to 3 days and then we'll go back to the next thing or the main thing, which is going to be the production conditions we're dealing with.

Chris: Mm-hmm. So You know, what, what do you think the— I mean, is that mostly algorithms trading that stuff that quick and that much? Or it seems like the computers like overdo it on the upside, the downside, or whatever. What, what do you see the funds doing as they look at something like that? Does that create an opportunity for beans to take off even more yet? Or is corn going to hold it back if you know, and they're— and like I said, come back together again.

Grant

Shimek: If corn is going to keep breaking like this, my guess is it's not— it's going to hinder the beans being able to run by themselves. Also, if the wheat market is going to get hit also, then it's going to be tough for beans to be— to maverick it, in my opinion. So, you know, as we go into this, well, the low in May was $4.93 on corn. When we did that, we had fallen 5 consecutive months into that low at $4.93. These markets like to not leave 5 bars up or down just hanging out there for too long. So that is not shocking that we're getting close to that level. It's shocking that you do it in about 6 trading days from, from a peak to a trough. You know, we had big sell-offs as far as within the Dec '23 contract from last year. We fell about $1.46 and a half a bushel from peak to trough. From the fall highs to the, to this recent low in May, we had about $1.36 and a half.

What we've done about that in 6 days. So that's the shocking part of it. As far as how the data goes from here on out, we'll, we'll see. It's going to kind of— the corn data is going to overhang the market and be a shock. So we probably still going to jab it down and push more out of this. Sunday night, Monday.

Chris: So we'll get to some more fundamentals here in a minute. But I want to ask you about the technical side of that. Hit corn first. What I mean, did we break anything? Does that, you know, mean that we're going to go lower or what? You know, from a technical standpoint, hit corn first and then soybeans as, as it relates to—

Grant

Shimek: well, it's close. As close as we are to the May low on Dec corn, which is $4.93, you have to say to yourself, with this low yesterday being within a few cents of it, why wouldn't we gun through that and harvest orders? Now, will we close below $4.93? Well, that, that's something that yet to be proven. But when I step back and look at the last, say, 10 years of trading, when you think about that 2015 to 2019 timeframe, where did December corn futures during the growing seasons usually end up terminating their runs to the upside? Well, it's lots of $4.37 to $4.73 highs, thereabouts. So if we can really, you know, what's the big panic zone to the downside? I'd say it's, you know, probably at $4.43 to $4.76.

And at that stage, I think we are, in my opinion, pricing everything to perfection and, and having assumptions that number one, we're gonna get all these, all these acres are, that the acres are true and that the percent that's gonna get harvested is also gonna be high, let alone, what's that yield. Now obviously if you're anywhere in the 170s, you get big numbers as far as total production. Uh, as time goes on, if we do get that low, we're also going to spur demand. And there are other factors around the world that are happening too. You know, China's going to have some 110-degree temps in one of their main corn-growing regions this week. So other things can all of a sudden change the perspective here. And I, I think we're headed to a 3-year cycle low, and once it's in, things look positive to me.

But between here and say the 10th of August, things can get hammered and we can really saturate this thing with some major pessimism.

Chris: What other, what other, so that was kind of some of the technicals and you mentioned fundamental there. What's some other fundamental things that could, or things that we need to be watching that you're paying attention to?

Grant

Shimek: Outside of the, the worldwide weather's going to be a driver, the, and therefore you could see a pickup in demand. Now, US corn is priced expensive to the rest of the world. And so we're kind of doing some catch up there with that. And so, but as far as the main driver is going to be weather and some of the weather forecasters that I follow, they do have this moisture that we've been seeing in this first part of July being there. But not in intensive, intensive amounts as some of the models have. And then it's drying out around mid-July in the heat coming into the eastern Corn Belt from, let's say, Chicago, Chicago East. And we may see a relatively drier weather compared to the western Corn Belt, let's say somewhere eastern Iowa East. So I don't think we're necessarily out of the production woods yet.

And that in and of itself is gonna, you know, how we finish is going to be major this year.

Chris: Yeah, it just seems like the market though recognizes pollination as a crucial time. And it always seems like the fill period in August, you know, the— a lot of times you hear conversations about, well, corn, it's so important in July and beans are important in August. Well, corn's just as important in August as soybeans are, it seems like, because you during that build period. But it seems like sometimes the market doesn't trade that. And, you know, you mentioned the weather we get, you know, we get an inch here or there. You know, some people have been lucky and got more, some people have gotten nothing. And there's, you know, what we're doing is we're getting rain just in time in a lot of areas, right? We're just getting enough to keep, keep us alive and keep us, you know, potentially having a really good crop.

I mean, stuff looks good in a lot of areas, but also looks crappy in a few areas. And, and then, you know, you had saw that derecho go through, which is different than an August derecho because you didn't, you know, you didn't have ears that were in the process of trying to fill and all that kind of stuff. And maybe not quite as big of an area, but it's still, really hard on the system and, and sure as heck doesn't help the yield at all when you lay the corn down at any stage. Anything that, that you, that you see there that the market would eventually start to recognize, or is it just going to take the dryness?

Grant

Shimek: If it is a multitude of those things added together, that's kind of like if it's going to add up, it's death by a thousand cuts. So you can have derechos, you can have these hail events like we saw in Kansas, you know, a lot, there was lots of hail in Kansas over the last few days. And in and of themselves, they don't matter. They matter if they're your ground and you see a decimated, you know, 80 acres. You need a lot of those events to add up. Can they? Absolutely. I mean, I think the volatility here in this market is amazing. So I don't, I don't think it's all in, all done. I think you can actually have some, some, you know, weather has become intense over the last few years, or that surely is my perception. So to say that you can't have significant events like that here or around the world, they can't all of a sudden turn what looks to be obviously one way, go the other.

I think that's very well possible.

Chris: So one of the other things that, that we need to hit on here quick too is on the demand side of the equation, because, you know, everything that we've seen so far with market moves primarily have been You know, really on the production side, talk a little bit about the demand side. What, what are you watching there that, that we need to be paying attention to? You know, is it China? You know, they're, they don't seem to want anything. Are they going to want something at some point? You know, are they waiting for harvest lows to buy? What, what do you, what are you seeing? What are you hearing there?

Grant

Shimek: They're, they're definitely going to buy value in that. So if they can, if it can get cheap enough, they're gonna, they're gonna step in there. And if their product, their production truly looks at risk this year with their weather, if people aren't following it, it has been in the key growing area, which is in the Northeast, has been very hot and dry. Now the Southeast, you can see video, videos of flooding, and it's like, well, there's lots of rain. Well, not in, in the north. And obviously that northern growing region is pretty much the same latitude as the US, somewhere between 40, 50 degrees north. And that can all of a sudden be where they come, come to the market out of sheer need.

The— as far as one concept I want to make sure I mention is those people who are listening to this that have feed needs or they're, they're, they're net buyers and they're not growing a lot of their production. You really got to look at this and say, if you were, if you were growing this crop this year, what's your, what's the low, low-end cost production at average yields? Well, probably $4.75, $4.90, and you could probably speak to that much better than I, Chris, as far as where cost is. So if we're going to end up taking these markets kind of down into that, what I think, think is a kind of a panic zone in that $4.40s to $4.70s, one really has to sit up and look at that as a value area because you definitely couldn't grow it for that. And I think the market will have a way of swinging the pendulum that will, will not spend a lot of time in that level or even below it.

Chris: I'm going to ask you a question that I haven't asked anybody yet this year, and this is the 5th year we've done the Ag View Pitch already. It's amazing how time flies. And one of the questions I started asking during the growing season, I haven't asked anybody this yet. On those extra bushels in the fall that you cannot store, that you don't have a place for. Basis opportunities are going to be different from one region to another. But in some areas, it seems like, you know, that early, early basis is definitely an opportunity for those who haven't or maybe missed getting those quote unquote extra bushels priced because they quote unquote didn't know what they have yet. You know, I mean, when, when the crop looks good, but it's dry, and there's no rain in the forecast, it makes it really hard to make those sales.

But yet on the same token, if you can hold 100,000 bushel, let's say, and you're going to have 50,000 extra, if you just have an average crop, getting those bushels priced, what are some targets? Or what are some areas? Or what are some strategies that guys need to be thinking about as we turn through the growing season? Because if we catch some rains and do get things pollinated decently, you know, people have— are going to really start paying attention to that probably.

Grant

Shimek: I mean, first and foremost, it is— it's local. It's your basis is your local market and your own operation. As far as what you— if you're confident of your production, you know, yeah, I'm going to have these bushels are definitely coming out. First and foremost, focus on that basis. As far as price levels, you know, if you know where you're going to be making some reasonable net dollars and we do get some kind of scare later on and we're back into the mid-fives, which I don't think is far, far from impossible. Well, I think that's a very achievable target. But it's the basis. It's— you got to move it physically. You can always go to paper and create an ownership position with the futures. But if in your region you end up having a good-sized crop and with the psychology of this data point yesterday, that basis could get, get hammered.

And so it's focus on the basis, not so much what you're going to do with the futures. It's a two-step process.

Chris: Anything different for the soybeans?

Grant

Shimek: I don't, I don't think so. I mean, because number one, if you know you don't have storage for it, it's about making sure you have a home for it, especially if it's coming off the combine. The bean market, you know, if we, we get a shot in this $14.20 to $14.40 zone, I think that's a zone where you got to look at doing some kind of protection. Say that without knowing what your, your basis you're dealing with is at that moment, because we could very well in your individual's regency basis back off a lot if we all of a sudden didn't get there here in the near term. But you just have to weigh it on an individual basis.

Chris: Yeah, because the storage strategy is something people need to be thinking about now moving forward, right? Is okay, do we store some beans? Do we store some corn? How do we manage that? And then marketing sometimes in that futures market really pays. And the reason I'm asking that is, you know, we saw that what we started the conversation with where beans were up so much, corn was down a lot. It's like, okay, that is— that an opportunity, you know, you're in that mid-$13 range cost production-wise for our average client is, you know, and I think it was like in that $12.80-something range, you know, just under $13 for a lot of guys or right around $13. So if you can, you know, get some, some sales plugged in there, but I think we're all calibrated right now to 14+ and we're calibrated to $6.

And so it makes it really hard to make sales when, when you're saying, you know, $5.50 something or $13 something, you know, you get, but you know, $14 something doesn't sound so bad, you know, for a lot of guys to, to, to pull the trigger on some beans.

Grant

Shimek: I understand what you're saying, but I would try to make those two very separate decisions. Yeah, a basis decision and then a futures decision. Obviously you got to end up with a cash price, but if you focus too much on the flat price, you may miss the opportunity to make sure this stuff has a home for these on-price bushels. Yeah. So, you know, you get stuck on trying to want to be hit a, hit that nice round number. But if you really are lacking storage and need to move it, just focus on that basis and get a home for it and deal. You can, you can defer that, the futures decision and the final flat price much more so.

Chris: Yeah, for sure. So as we wrap up here, I'm going to throw the blanket open-ended question to you. You know, you farm too, so in the next couple of weeks, what are the, the main couple of drivers that you're going to be paying attention to and that farmers need to be thinking about?

Grant

Shimek: Number one, we've locked in one, we've locked these quarterly reports are kind of not, they're locked in. So now it goes back to, it's the variables, it's weather, it's, it's, you know, it somewhat rhymes with 2013 where everybody thought that the USDA was wrong on planted acres and it was gonna, we're gonna see the reality that was gonna all of a sudden show up from FSA data, so forth. Yeah, you look way out there in September, that might be an issue. But in the near term, it's all gonna be weather and action from outside markets. If it makes the wind blow one direction or the other may hinder or help us. And I think that's really what's, what's in front of us. It wouldn't surprise me to see if we, if we actually do push this corn that much lower into some of those panic zones, I don't think beans will be able to overcome gravity. And I think it'll come to that too.

So as negative as corn looks, I would, you know, be careful if we keep getting too far ahead of our skis here on the upside on beans, it might be tough work in the short run to keep going. In the long run, things still to me look positive for both of them.

Chris: Last question, does wheat do anything? I mean, or comments there.

Grant

Shimek: Yeah, the wheat market, I, I think is, as we go through, we get, we got to clear out harvest pressure, it'll be a little while. But as I think it's possible to go to have the wheat get close to or even check a new low for what it's made the last 60 days. But, uh, also there. I think we're putting in probably what are 8-month, 18-month cycle lows, maybe longer. And it doesn't mean it's a wild bull market on the other side of that, but I do think there'll be opportunities. So I'm, I'm not as pessimistic as some because I think there'll be chances there. But we do want all three of the big sisters to turn and be on the same page, and I think that's probably some more, more so turning point I would expect to be August, September. And I still think we could have a shot at all of them having a good finish to the calendar year. But the next 30 to 60 days might be pretty gut-wrenching.

Chris: Yeah, it seems like those— I like how you said that the three sisters, they kind of follow each other around. So that's for sure. So hey, Grant, really appreciate your comments today. As usual, really good insight and Look forward to having you back real, again, real soon.

Grant

Shimek: Okay, thanks, Chris.

Chris: Yeah, thanks a lot. And like to thank everybody for listening again, and happy Fourth of July to everyone, and have a great Fourth of July week, and good luck on marketing, and pay attention to the weather, be safe, and we'll catch you next time on the Ag View Pitch.