Weekly market outlook Oct. 18-22nd: time to reset price opportunity?

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, and we are heading into a new week of October the 18th through the 22nd, and we're lucky enough to have Duane Lowery here in the studio sitting right beside me. Dwayne, how's it going?

Duane

Lowery: Good, Chris, glad to be here.

Chris

Barron: I'm glad you're here too. I was drying corn, you just came out to see me in my shack where we were drying corn to— how was I doing?

Duane

Lowery: You're always doing great, Chris, at anything you do.

Chris

Barron: Right, yeah, sure. So yeah, we are, uh, we're drying corn and it's right in the middle of harvest, and I know a lot of our listeners are doing the same thing. A lot of guys have been struggling trying to get some beans out because it's been a little damp across the area, and so it's kind of limited soybean harvest. So I think in this, this week now that we were going to have a little window here so some guys can knock some of the beans out. We're seeing some really good yields in a lot of areas too, Dwayne. What are you hearing from your clients?

Duane

Lowery: Well, I think the client themselves, the producer themselves have gotten quite a bit, well, a lot better yields than what they feared at different points during the growing season. As we got closer to harvest, I think they began to get a little bit more optimistic about what it could be. But a lot of areas are getting yields that are better than expected. In some cases, you're getting some really exceptional yields, some farm record yields. But you've also got, you know, the same areas might also have some disappointment. But overall, I would say that you could classify yields as being better than expected. Exception to that might be in the Dakotas where things were just so rough. But in western Iowa, which at one time was considered a real trouble spot, those guys are definitely getting better yields than they expected.

And I think in the case of beans, it's just almost some people are uncomfortable telling you what their yields are. And I think it's not because they're too low.

Chris

Barron: Yeah. And that's just it. You know, it's hard when things aren't as good, you're hearing about it. And We've had to pry some stuff out. There's, there's some phenomenal yields out there in both corn and soybeans, but like you said, you know, you talk to some of the guys up in the Dakotas, it's, it's pretty rough.

Duane

Lowery: I would add a little asterisk to that. If you're a grower in the eastern part of the Midwest, certainly parts of Illinois, you might be disappointed with your yields. You had some late season problems, but keep in mind that throughout the growing season they were considered to be really exceptional. I think the estimates got quite high, and so there was some yield drag compared to what they expected, but they still ended up with, you know, good yields.

Chris

Barron: So what do you think with the production we're hearing right now, where USDA is at right now? Are they pretty close in your estimation, you think, on yields? Do you see them tweaking that stuff a little bit? One way or the other? In other words, are the good areas good enough to offset the bad areas or not?

Duane

Lowery: Well, for all practical purposes, USDA at face value is a record yield, record national yield. And to believe that we have a record national yield after the problems we had all summer, the percent of normal precip that we had in such large areas, the, you know, significant problems in the Dakotas, it is hard to believe that. However, I do believe it. And I think that the odds are that the yields from USDA will actually get higher in later reports. Recently there's been a couple of examples where they, they've declined from the October report. I don't believe that's the way it will be this year. I think we will only see the yields grow on a national level. So I, I believe USDA, and if I don't believe USDA, what else? It doesn't matter, right? There's no, no point in arguing with it. But to me It seems very reasonable.

I felt it was reasonable even when we were in August that we could be at this type of yield, but now that we've got actual yield reports from producers, um, I honestly think if you woke up out of a deep sleep for 3 or 4 months and you listened to the yield forecast and were unaware of the growing season that we had, I think you'd believe that the yields were higher than this to be honest with you. So I think the risk is that the yields grow from USDA.

Chris

Barron: Let's shift gears to basis for a minute and, and decision-making that producers are going to be faced with as we continue through harvest. You know, we're in that third week, kind of probably in a lot of areas in that gut slot of harvest. Basis has weakened significantly in a lot of areas. It's still got some strength in some, some pockets and really strong obviously in the areas where the yields are off so much. But what, what do you think producers should be thinking about with managing basis, you know, in the next couple of weeks here? You know, there's a lot of— I've mentioned this, you know, at least from our clients, from what I see— there's a lot of HTAs out there yet that are sitting there on the deese, and there's not a lot of carry. But on the same token, you can only deliver so much Not everybody's going to want all that income in this year.

How do you manage the, the basis and the carry scenario? What, what's some of the things that guys should be thinking about managing that?

Duane

Lowery: Well, first off, I think that most places started out the harvest season with some very good basis levels that were kind of a carryover from old crop. And the, if you were lucky enough to have, be in a position to capture some of those early premiums, I think a lot of guys did try to capture that. Now we're seeing basis values back off, but they're probably still better than we've seen at other times in other years. I think that the basis, you know, maybe it has potential to weaken some just because of the pressure of harvest, but I don't think basis will weaken very much, and I don't think it will stay weak for very long.

So I think that producers, if you are forced to move stuff at harvest time and your bids are maybe have backed off from what they were, but they're still quite a bit better than they have been, and you know that you have a narrow window that you must, must deliver, I would probably try to capture that. However, if you are in a position that you've got farm storage and you don't have to make a basis move right now, I probably would not encourage that. I think you'll get better basis. You're correct, there's not much carry in the, in the market. The futures market doesn't have much carry, but whatever carry it has, that's probably about as much carry as you're going to get. I think the carry will flatten out, and eventually we may find some of these markets at inverses. I think that's how it will work through the winter.

I think by the time we get to spring, summer, that could become a different equation. I think the farmer is going to, right or wrong, he's going to sit on a lot of bushels of grain this year, corn and beans both. Whatever his cash flow and his storage space will allow, I think that's what they want to sit on. And to the extent that they do, do have more bushels than they expected. I think those bushels are all going to go in storages and they're going to try to hold those off the market. That will help support basis for a period of time into the winter, but there comes a point where that table turns.

And if we happen to move the calendar forward and we get into spring and the farmer is faced with the large cash flow and needs for the input costs that, that he's going to face, hasn't made much for sales, you know, he starts to get into position where he's going to be forced to make some sales. At the same time, you know, what's our demand going to be like? Our export sales pace right now is not where we'd like it to be, and if the, you know, demand happens to stay on that slower than desired or slower than expected level into the late winter, then I think that there is a risk that whatever basis premiums and strength that we might see during the winter, I could see that weaken as we get into the spring, because I think the pressure on, on the seller might become more aggressive than the pressure on the buyer.

But for right now, if you're going to have bushels in storage on the farm, whether it's corn or beans, either one, I think that they— if you think they feel that they need to be hedged, I think the hedge needs to go out into the July contract because I expect the spreads to tighten. I think July will be the weakest in the corn. I think July will probably be the weakest in the beans. I think the South American hedging pressure will come out there in those deferred slots, and that's where that'll be felt. I think in the case of new crop beans, there's a possibility they could actually be the weakest contract month, but we'll see. A lot of it will depend on how South American production turns out to be, but I think at the present time we have to assume they're going to be normal until proven wrong.

And under that situation, I think that there is merit in getting your bushels hedged that you're going to store. And I'm making that comment about where the spreads are at, that keep those hedges in the deferreds, not in the front end. And I think based on basis, as opposed to selling some harvest weakness, I think there will be better basis and probably some premiums at different times during the winter. And as far as flat price decision about whether those hedges need to be done now or some other time, that, that's a different part of probably our discussion.

Chris

Barron: That was a question I was going to get to. Okay, so, you know, you have— you've thought about basis or whatever, but when you start looking at flat price opportunity, you know, these are some pretty darn good prices. Okay, I'm just going to throw this out there and is obviously not recommendations. And I'm one that likes margin, right? I like profit margin. And this year is essentially setting a record for a lot of producers and a lot of what we see. So I guess my question is, you know, how much more do we need or want? You know, I mean, what's the upside potential? And what's the downside risk, I guess, is my question, you know, for the stuff we're putting in the bin that's unpriced that we need to probably be doing something with, or, or do we?

Duane

Lowery: Well, I think there's a, uh, that question can be approached from a lot of different perspectives. I'm going to start with one that's not really price-based, just based on your own operation. If you happen to be in an area that you do have more bushels than you expected, your yield was better, the prices are good, maybe had some forward sales, maybe you didn't, either way they're going to dollar up to a pretty profitable $21. So I think that the first decision needs to be made from the perspective of your own operation. What does the current bushels you have, what did you produce at the current prices offered, whether that's sold in the cash market or whether it's hedged and delivered later to move the income around or trying to capture some additional basis or whatever it may be, you know, how do those dollars up? If that and what do those dollars mean to your operation?

What does it mean to your family? And I think it's going to be a good profitable '21, but when you look ahead either '22 or '23, you have to be wondering how's that going to shake out? We could be threatened by inflated costs, but maybe our products that we sell don't get inflated as much. We could be threatened by maybe an uptick in interest rates out there. So I think the, if you've got a good opportunity at profit, I— my inclination is to, to think that there's value in at least considering if you want to lock it up for that reason alone and not based on price outlook. If you ask me about price outlook, I would say that, um, $5.50 July corn is where we were at here before the report. We're $5.30-something, you know, today. The opportunity to get back to $5.50 is not unreasonable. It's very possible, I think, over the next couple of weeks.

But $5.50 for a July hedge might be an attractive thing on inventory. I've spent, you know, a long time in this business, and I would say the vast majority of time the producer does not make money storing their crop. It does not cover the storage costs and interest costs unless they hedge it. Okay. Most of the time they don't get an appreciation and flat price. There are exceptions, but most of the time that doesn't work out. So I'm inclined to think that looking for opportunities in near— for near-term strength and to consider that a selling opportunity or hedging opportunity, I think that makes sense. And I think for the operations that are fortunate enough to have good yields and have a profitable '21, I think it makes exceptional sense. To have an opinion that the market is going to go up, there's a lot of different things that you could look at.

But I think that we have a major undercurrent here that is a little bit different than we had in the last 12 months. We have USDA that raised carryouts, uh, to comfortable levels, um, not excessive but very certainly comfortable. They have demand projections in there that are still optimistic by a lot of people's measurement, not, not just my opinion. And there's a very good chance that demand gets scaled back in those balance sheets there's a possibility, like we talked about earlier, that yield could get bumped up a bit. If those combinations occur, and they don't have to occur in a big way, suddenly we've got, you know, 1.5 billion or more of corn for carryout. That doesn't warrant $5 futures. And we've got, you know, an ample supply of beans. We've got acreage in South America that's going to be up around 4 or 5%.

If they have a normal production, the world's going to have plenty of inventory. Now you can talk about inflation and say maybe that's going to keep things supported. Um, again, inflation is a very macro, uh, big picture item that might be true for an outlook over the next 5 years, but nobody gets to market the '21 production or even the '22 production in a 5-year window. They got a much smaller window to do that. And I think that, um, if you want to talk about inflation as a reason to be bullish, I would point you back to the last 3 or 4 months. Any hedge fund that decided to buy agricultural commodities as a hedge against inflation or as an inflation bet, they've got losing positions. The market has been down ever since, you know, peaking in March, April, May, whenever it was for each different commodity. But that's largely when our price peaks were made. And we've been sliding since.

And the fundamental base that we're dealing with now is different than we had a year ago or different than what we envisioned maybe in the spring and certainly different than what envisioned during the summer when they thought the crop was going to be a lot smaller. So I think these undercurrents need to be taken at face value, decisions made on those based on face value, and I would not lean too heavy on what the impact of inflation might have on your commodity price. I would be fearful that it has an impact on your inputs, but I'm not confident that it's going to have an impact on your end product. At least not under the conditions that we have right now. I think down the road, I think inflation is an undercurrent that provides support to agriculture, and I think it is a factor. But at what point does it provide support?

Does it provide support at $5, $5.50 corn, or does this provide support at $4.25, $4.50? I'm afraid it's the latter. So in other words, I don't think the infla— the prices that we have now necessarily build on inflation alone. I think there has to be other factors. And right now we have what appears to be a plentiful enough supply that we can't generate a price rally on things that we know. We're going to have to have something we don't know to come along. And I think it's troubling that the bullish side needs some news. It needs new news because it's, it's so much anticipated everything from a very optimistic perspective for the last several months. Including the demand projections for China. China has told us for at least 3 months that they're not going to import as much corn as they did before.

You know, the, the temptation is to not believe them, but that's been coming from multiple sources, both government and private, in China. So at the present time, I have to believe that the sales pace so far would leave credibility to that as well. So I think that we need to be concerned that Let's just say between now and the 1st of April, you know, I am concerned that we don't have a good source for bullish information to fuel these prices other than something happening in South America. And that is typically, based on my experience, not a good bet to make.

Chris

Barron: So I'm going to ask you a different question that I ask a lot of people then, is You've expressed a bunch of things that are watch-outs or things to be concerned of with the hold and hope sort of deal, right? Putting it in the bin and just hold on and hope, and, and maybe there's something that might come out of this in April, May, in that spring time frame, early summer, with a weather issue or challenge or something that could give us price strength. Is there anything other than that that you see out there that gives hold and hope person some, something, some merit to hold on to?

Duane

Lowery: I honestly don't see any, and I don't see anything on the demand side that provides that hope. I don't think China will be here in a manner that exceeds what's already expected of them. I'm afraid that they will be here and Mexico doesn't do enough, and they're considered routine business, right? And we're not going to get a market reaction off that. I'm afraid that China, China's the big swing factor. Yeah. And I'm afraid that they will not be here in a fashion that meets or exceeds what's already been anticipated. I think that they'll be here in a fashion that is somewhat of disappointment. I'm also concerned that with the sales pace so far behind where it should be in order to achieve the numbers that are in there, it appears to me that China must think they're able— going to be able to get to a South American supply.

And Ukraine's going to have ample corn to offer for sale, and I'm afraid the U.S. is going to be the source of last resort. And this is a little bit off topic, but not exactly. As the, you know, a year ago, and even maybe 2 years ago, we had the cash market set up in a manner— we talked about it on podcasts, if I remember— where the commercials were large, long, a lot of inventory, a lot of physical ownership. And when they're in that position, that puts them in a position to get the price structure in a manner to create exports. What we have now, I'm afraid, is that the farmer is going to hold a large amount of inventory. I don't think the commercial has a large amount of inventory, and with export sales well behind where they should be, I'm afraid that the, the commercial, which is our global entities, they're going to find it easier to source supplies in other locations.

And this will be especially true if South America does not have production problems and production concerns. And if that's the case, the U.S. will be priced in a manner that it's the, it's the source of last resort. And that's why I'm concerned about what that basis looks like sometime from spring into summer next year, you know. So I think the basis now can be supported for domestic issues. But I, I have concerns about the, uh, timing of export programs, and I'm afraid that that is not going to be supportive to the futures market.

Chris

Barron: So on soybeans, pretty much that you're, you're talking corn and soybeans generally, and on both of those, as far as we look at, say, '22, um, and that's kind of my last question here, but 2022 corn and soybeans both, I mean, you're a farmer and you gotta you're sitting here staring at these high input costs. There's going to be a whole conversation. We're going to do some podcasts on crop rotation here after harvest and when people start needing to do some more critical thinking on that rotation decision. But you're a farmer, and Dwayne, and you are looking at '22 input costs. You realize what, what that's done. You know, it's $150 an acre more to put a corn crop in, $75 more to put soybeans in. Are you selling grain? Are you selling some '22, or, or are you sitting on your hands and wait until spring, or what's your thought there?

Duane

Lowery: I've been an advocate of selling '22 here for the last couple of months, and I would continue to encourage that. I guess I think that, uh, in the case of, uh, corn bean acres, I don't know how that's going to all work out, but I will say this, there is We've had a tendency in the Midwest where people are getting more confident in their bean yields. They're seeing what that potential can be, and I think that's different than it was 5 or 6 years ago, and I think it's— that's gone up. And we've had a situation where a lot of people, especially in the West— this may not be so much true in the East— but we've had a lot of corn on corn in the last couple years. This year particularly, we've had these winds, we've had rootworm issues, And I think agronomically you got people shifting to want to plant more bean acres. Maybe they don't want to, but they feel that they need to.

And I think they're starting down the road for that reason.

Chris

Barron: Along— tar spots, another one. Exactly.

Duane

Lowery: Along comes the high input cost. That takes you another couple steps down that decision road to maybe picking beans. And you look at the price of beans and how they dollar up, and you start thinking, geez, I got some pretty good yields. If that, if that could turn out again, especially on this field that's been corn for a long time, you know, I think you're going to see people pushing to get more bean acres. How that comes out and how many millions of acres that turns out to be, I have no idea, but I certainly see that as something that are real conversations taking place, real decisions that are being made. And again, you've got, you know, $12+ for Nov '22. You might say, well, that's not that great a price. We saw 15, better than 10, but it, it's, uh, still historically pretty good. It's still profitable, and there is still downside risk.

Yeah, if we get a large South American crop and if, uh, we find out global demand is off, uh, from what we had plugged in, um, because keep in mind it's not so much that demand is going to be down significantly, it's, it's a factor, it's down from what was expected. And if that's what it is and carryout is rising and South America does well and they've had, you know, big increase in supply because, you know, they have the acreage increase, suddenly $10 soybeans is not unreasonable. It might be unreasonable, but how often does the market on its way down not stop at something that's reasonable or fair? They go to a point of pain, and that's right, that's, that's the risk here. So I would say that if you're faced with a situation of high input costs That means the risks on the table are a lot higher. I think that means that you have to make some forward sales.

I think it depends a lot on where you're at for your operation, whether it's profitable or not, but I think for most it probably is profitable and I would be inclined to want to capture some of that.

Chris

Barron: Okay, Duane, I think that was a good place to wrap it up here. I think we kind of covered the gamma anything that I didn't hit on that you want? You got last word.

Duane

Lowery: I'm going to give you a last word. Um, the last word would be that I want people to soberly evaluate where prices are at compared to where they were in the summer and compared to what they thought they were going to be in the summer. And the reason I want you to do that, because if you look at a chart, you find out that prices are in the bottom side of parameters. And now here recently, in the last couple days, we've got a bounce here after the report that was negative, um, and we might get a little bit more of a bounce here. But I want people to look at the bounces that we get near term and in a manner that maybe they ought to be searched for a selling opportunity because of what I think are these undercurrents of rising carryout, possibly rising production, and somewhat questionable demand.

I don't think any of those real underlying factors can be trumped by an inflation statement. Just the word, just uttering the word inflation without some merit behind it, some driver behind it. And so I think that we are looking at a few months ahead of us that has some downside risk that needs to be respected. Overall, long term, if you want to talk about inflation being reason to be bullish agriculture, I can buy into that. I can agree with that. But I am very concerned about the next 3 to 6 months.

Chris

Barron: For the hold and hope, it's how long you want to hold.

Duane

Lowery: Yes, or how long can you hold.

Chris

Barron: Yeah, exactly. So hey, Dwayne, thanks a lot. I really appreciate you being here, and maybe we can go dry some more corn.

Duane

Lowery: All right, thank you, Chris.

Chris

Barron: All right, thanks a lot, and thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.