Halloween and markets could both be scary: weekly market outlook, Oct. 31 - Nov. 4th

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: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week and going to have another Weekly Market Outlook conversation with Dwayne Lowry. And as we get rolling here, it's the last day of October this week and the first week of November. Dwayne, how is it going?

Duane

Lowry: Good, Chris. Glad to be here.

Chris: Well, it's great to have you here. And it's, uh, it's, uh, I guess you could call it Halloween week or whatever, but that, that first week in November usually is an indication that, uh harvest is nearing completion in a lot of areas, although I know there's still a lot of people hammering away yet with some really good yields. I was just talking to you offline, our frustrating thing here is I think, you know, we had that early frost, and I'm pretty sure as we start to get our full season hybrids in here at my dryer, as the, the dryer operator in our operation, I can tell it looks like some of these full season hybrids definitely got nipped by the frost. Took a little bit of the top end off. Last year we had record yield, this year I think we're off the pace a little bit.

And you were also asking me offline, so we'll have a little discussion on this to start with, but you were asking me offline, you know, kind of what, what I was hearing from producers and stuff. And it's kind of a confusing year, isn't it, Dwayne, with, you know, just the have and have-nots. There are some areas where it's really good, but there's some areas where it's not very good, and it makes it really tough to figure out the production, doesn't it?

Duane

Lowry: It seems a little strange this year, and I don't know if it's because I'm not listening or I'm not connecting with enough people, but the part that seems strange to me is it seems like it's more and more difficult to find out, get yield reports. People, it doesn't really come up in conversation directly, and a lot of times I hate to ask, but I would say there are some places, some areas that are looking at record yields. Others are looking at something close to record. Others are well off. The Plains are, you know, obviously had some significant problems. Parts in Western Iowa I've not really heard a lot from. I know that they're off, but a part of me wants to label the quietness in terms of yield as a possible indication that things are better than worse feared.

You know, when the Pro Farmer tour went through, that kind of filled up the Twitter space and the online talk, and I don't find the harvest yield reports necessarily mimicking that level of panic and emotion about how bad the crop was. So part of me wants to ponder whether that's an indication the crop is maybe a little bit better than what USDA is saying. But on the other hand, I don't have a strong feel.

Chris: How would the market react if the USDA did come in and bumps the yield up a little bit more from where they're at, do you think?

Duane

Lowry: Well, the marketplace in the last, I don't know, 60 days has added quite a bit of market enthusiasm and bullish expectations to the price discovery process of corn, but it hasn't necessarily added to the raw price itself. I mean, the price that we're trading at right now as of, you know, Friday's settlement, basically we got to that level in the last few days of August, and I don't remember exactly when the Pro Farmer tour was, but it was around the 20th of August, So since getting that reaction, we really haven't gone anywhere. And I find that troubling. We'll probably talk about that later, but I find that troubling because the market has pumped in a lot of bullish sentiment in there, and yet the market hasn't responded to that with prices. Now, some will argue that maybe that's this fact that we're able to stay up here in the face of harvest is a sign of strength.

Maybe, but I'm not really buying into that argument.

Chris: Yeah, it's still back to— it's still the same theme we've had for a long time here, it seems like, is we're trading sideways violently. We talked about that the last time, you know, you were on, and that— stealing that quote from Jared Creed. But, um, as far as, you know, that's kind of the production side, you know, there is a demand side of this whole equation. And as harvest kind of wraps up and the bins get closed— and we'll talk about basis here in a minute— but I want to first talk about export sales and the demand side of the equation, because as you know, once the crop is in, USDA has another report and all that kind of stuff, it kind of shifts over more to the demand side, and it probably already is to a large extent. Talk a little bit about, about that side of the equation.

Duane

Lowry: Well, USDA has corn exports that currently projected that are about 13% below last year and down about 22% from 2 years ago. And the export sales probably, at least the shipment part, has probably been impacted to some degree by the water levels getting in down, getting supplies down to the Gulf. But Through October 20th, which has been this last report, the accumulated shipments are down 29% from last year and they're down 60% from 2 years ago, and the sales are down 42% from last year and they're also down 42% from 2 years ago. And both of those figures are well below what they have projected for final exports.

And it, you know, when we talk about these river levels, it seems a little bit troubling or concerning that we're missing a window of opportunity to make some sales and get some shipments out, because if, and this is a big capitalized word, if, if South America has a good crop, We are definitely going to lose market share, and that opens the door up for export numbers, even though they're already lowered from the last 2 years, to be low— to be lowered some more, and therefore result in rising carryout. So that's concerning on the corn. And if you look at the same data on the beans, they've got— USDA has exports projected to be down 5% from last year and down 10% from 2 years ago. But the accumulation of exports to date are down 8% from last year, but down 48% from 2 years ago. The total sales are up 9% from last year.

They're down 26% from 2 years ago, but with the sales up 9%, but shipments down 8%,, and the river situation maybe, uh, hampering the ability of supplies to get to the Gulf, or at least to get there in a competitive manner. Um, again, if South America has a favorable production season, it's a certainty that we are going to lose market share. And therefore, with the outstanding sales up 9% and the shipment pace behind This is a prime candidate for having some of these sales have their origin being switched from the U.S. to South America. And with U.S. ending stocks that I think is still projected at 200 million from, uh, USDA last month, that's very tight. So the marketplace is going to, uh, very likely develop a pricing structure from a global and U.S. versus South American perspective that is going to tip the scale in towards having supplies sourced from South America.

The— and so if South America has a favorable production season, it's a virtual certainty that U.S. export projections will end up being lowered and therefore raising carryout. So the point of looking at these exports sales on both corn and beans both is we know we have a quote-unquote tight U.S. supply situation, but that's an extremely moving target, and we're early in the marketing year, and there's plenty of opportunity for the global pricing structure to slant origins away from the U.S., and these sales appear like they're primed for that to happen. So I don't think that we should be confident in the U.S. ending stocks projections, and I don't think that we should buy into the narrative that supplies in the U.S. are tight. That might be a story, but it doesn't have to be a story with the ultimate key being South America.

So in terms of a raw fundamental, what is the most important fundamental thing looking forward over the next 6 months, say, It is definitely what happens in South America. And as long as I'm talking about that, I might as well mention weather. You know, we know that, um, South America, both Brazil and Argentina, had a period of time where they were very dry. In the case of Argentina, they continue to be largely very dry. In the case of Brazil, they've had a big improvement in their soil moisture situation, and in some places they've had excess water. And then in terms of recent moisture activity in Brazil, their planting should be off to a good start. Their 2-week outlook is favorable, so there's no bullish storyline there.

If you go to Argentina, um, they have had one period of rain, but they were relatively light amounts, but it helped for the immediate process of getting early planting to go., and in the near-term forecast they have some relatively light totals over the next 7 days, and it's not necessarily broad coverage. But you go out in the second week of the forecast, which had been more on the dry side, and we're taping this on Saturday morning, and their forecast this morning actually for that second week of the forecast is actually quite a bit wetter than it even was on Friday. And, uh, so everything about how their production season is going to go is still out in front of us. What the amount of dryness they've had isn't really a certainty to have an impact on yield at all. It's about what happens from here forward. And Brazil so far is off to a good start, but it's extremely early.

And Argentina is still way too dry, but they're off to a good enough start in terms of getting things planted, and the current 2-week outlook will aid in that, and then ultimately the story will be determined by what happens with weather there. So at the end of the day, you don't have any immediate weather market conditions in South America. One might develop, but you don't currently have one.

Chris: Yeah, so you're talking about, you know, there's, there's a number of different things we've just talked about fundamentally that literally could, could be influencing to the market one way or the other. Is there anything technical that you're watching? And then I got another question for you so you can hit that side of the equation, if the— if there's anything there you're watching, or not really so much because we've been sideways so long.

Duane

Lowry: Well, in terms of technical, it's hard to have those kind of conversations in a podcast without looking at the charts, but I would, I would say this. I think there's a sobering assessment here, and that is that throughout all of April, all of May, and the first 20 days in June, the price of December corn futures was well above where prices are at today, and probably in terms of the average in that time window I just mentioned, versus where it is right now, things were probably at least 30 cents higher then for an average, okay? And in that timeframe of April, May, June, one, we didn't know yet that Europe was going to lose 25% of their production. We were trading a U.S. yield of 177 to 180 plus, and now we're at sub-171. So what's wrong with this picture? There's something else going on here.

I have said before that I believe it's the Fed and what they are doing, and so I find that concerning. And from a technical standpoint, maybe there's some technical part that would narrow, marry into that, but I just want to look at it just in common sense and a certain amount of logic. What is wrong with this picture? And then I guess I'm going to use that to kind of branch off and point out some things going on in other markets. Might very well catch some of our listeners by surprise. Wheat prices where they are right now, we're down 42% from where they peaked. And during that decline, there was nothing but 100% bullish headline narrative discussions, all related to Ukraine, Russia, etc. Not to mention the fact that we also had, you know, a smaller U.S. wheat crop in the making during all that decline. So that, that's a problem that you have to wonder what's going on.

The spot crude oil market went from $115, $120 down to trade sub-$80. That was a 36% decline. Again, throughout that whole period of prices declining, the headline narratives were all 100% bullish, again focused on Ukraine, Russia, and as well as just inflation in general. And which, by the way, as I mention these things, keep in mind, the inflation argument has been nothing but something seen as a bullish input, but yet all of these prices I'm going to mention have declined significantly. So crude oil is down 36%. Cotton prices are down 49%. They are the cheapest they've been here for quite a while. Natural gas even, which we know set major records prices in Europe, they're down 52% from the peak that was made probably, I don't know, sometime in that last 60 days, and they're down 52%.

Even natural gas prices in Europe have come off their peak, and probably I think they're at like lowest level they've been in the last 4 or 5 months or so. The lumber prices dropped 72%. You're basically back to places where you were at, you know, months ago. The oat market, and, you know, there's a little saying, you know, oats no, and I don't necessarily buy into that. However, the oat market is down 58%, and much of that price decline has occurred in the last several months. And so that's, that's to me is a warning sign. You can find housing start data, you can find home prices that are arguments against the entire inflationary argument. You can find Chinese data that's down. You can find global Baltic freight rates that are down significantly, which implies less economic activity.

I know that we have inflation, and I know the prices that we pay at multiple places we stop to shop are not going to change in the immediate term, but everything I've just mentioned does have an impact on, impact on the investor and where they want to put their money, and absolutely nothing I've said here in this last minute or two has provided those investors with any reason or rationale to want to run in and buy corn and soybean prices. And so when you look at the fact that these corn prices are now well off of those highs seen late March, all of April, all of May, and most of June, you know, you have to ponder if this is a problem. And when you look at the scope of which all these other markets have declined, it makes, you know, corn prices look overpriced. It makes soybeans prices possibly seem overpriced to the investor.

Chris: You probably don't have those percent, or maybe you do. What's the percent corn's off from the high in soybeans? Do you have those?

Duane

Lowry: Well, if you— Dec corn is trading at roughly $6.90 and you had a high of $7.60 or something like that, so 70 cents, call it, say that's 10% off the highs there. If you go back to the spot contract, the corn, it was, you know, got up to like $8 or something like that.

Chris: What about soybeans?

Duane

Lowry: Equating that, it's off more. Well, the soybean prices, uh, if you look at spot, it'd be, you know, quite a bit off of those highs. If you looked at like just the, you know, January contract, it topped out at, I don't know, $15.75 give or take, and you're at $14 now, so you're $1.75. So you— that's what, 12% give or take? You're forcing me to do some math in my head.

Chris: Yeah, that's close.

Duane

Lowry: But all of both of those numbers are still far off of what these other numbers that I quoted. Well, so I think—

Chris: go ahead. That's just it. I mean, you know, for whatever reason, corn and soybeans have been pretty sideways to stable, even though they're off, you know, 10, 12% or whatever. They're— what the message I'm getting from you, there's a threat here, a pretty good threat.

Duane

Lowry: There's a major threat. There is a major threat, and this threat does spill over into technicals. Because you've got these markets that are going sideways that causes moving averages to move up and cross over or be put in a situation where it doesn't take much weakness to suddenly be in that position. And so, you know, um, it's like taking a 25-foot tape measure and extending it out at 22.5-degree angle and, uh, saying, boy, this tape measure, it's really resilient. It just keeps going, it's going, it's going, and all of a sudden When it goes and flips over, it doesn't go quietly, it just collapses. And that's the same way markets work in this environment, because you can't pump all this enthusiasm of USDA lowering yields in corn and beans, of the pro-farmer tour and everything with that narrative, and yet have markets only go sideways, only barely have any upside energy.

And now find yourself at the bottom edges of the price levels we've been for the last 3 or 4 months, or in case of beans maybe it's only been maybe a couple of months, and corn, you can't do that without threatening all those long positions. So if people were enthused by all these yield reductions and yet they don't have anything to show for it and now the market, the charts, they start rolling over, suddenly it doesn't take much of a certain type of price action and all of a sudden the selling increases. I'm afraid that we are extremely vulnerable to that right at the present time. I was kind of friendly here 2 or 3 weeks ago or 30 days ago. I thought there were some opportunities that we could do something to the upside, both corn and beans.

Probably I was, at the time, I was more focused on beans having more upside energy, But here we go, we spend weeks or days, weeks off the calendar, we miss opportunities as I'll characterize it for the market to rally. We had a rally in beans that was the highest we'd been in a few months and it failed. We got bullish report and it failed. So these are warning signs. So this viewpoint that I'm talking about as being threatening Like I said, 2 or 3 weeks ago, I wrote some fairly friendly commentary, and so I'm very disappointed at what's transpired, and I saw this week's, past week's price action as not being constructive at all, and so I do have a lot of concerns. Maybe it's just Halloween and maybe I'm just very scared.

Chris: You're scared.

Duane

Lowry: Maybe that's it. Maybe it's just a scary forecast. You know, if you capitalize on it and it turns out to be right, then maybe there'll be some treats in that after all.

Chris: Yeah.

Duane

Lowry: But, you know, the other problem is, and this is psychological, but for the last 2 years, anytime a farmer made a sale, almost it seemed like it was a bad sale by the time he got the grain delivered.

Chris: And, well, sometimes pre-sales are going to work someday, someday, right?

Duane

Lowry: But the problem is, after 2 years of that type of thing The farmer is, you know, scared to make the sale and they find themselves, most of them having less sold than they did. And many of them are taking the approach they want to store as much as possible. And that's leading to an awful lot of complacency. And when you have some of the best net revenue ever offered in for many people in many locations, um, that to me is a concern.

Chris: Yeah. Sometimes a brain bend can be expensive.

Duane

Lowry: Yeah, maybe the more bullish thing out there might be the basis narrative. We might have reasons for basis to strengthen and maybe strengthen quite a bit from now forward, but the basis alone is not going to be the driver of the futures market. And if the futures market is driven by speculative liquidation, that may make the basis market stronger, but in the end it will turn out to be something that was not a good reason to store a bushel, right?

Chris: Could be a net negative. Um, what are you looking at? I mean, on the bright side of things, you know, there's opportunities here right now to make sales both for both crops. You know, I would argue there's probably people listening that could sell right now and still going to have a crappy year in '22, but the majority of the people could sell probably everything that's left that's unmarketed in the 22 and have a pretty darn good year. The majority of the listeners, um, you've given us some good reasons why to, to be super careful here and watch this very carefully and, and manage that greed and fear emotion. What, what were you watching a couple weeks ago, or what could be driving the market the other way? I mean, what, what on the positive side of things? Because, you know, you talked about inflation, the economy, interest rates continue to go up.

You know, there's a lot of down things, but, you know, is there anything out there that could turn it the other way too? Because every market can go either direction.

Duane

Lowry: I don't think there's anything under the inflation economic umbrella that, uh, in the next 6 months is going to cause prices to go up. I think that the only fundamental you can look at right now and, and say with a high degree of confidence that it could have a notable impact on the upside on corn and soybean prices is South American weather and production potential. That's it. There's nothing else. That's the only fundamental that a bull in corn or a bull in soybeans can point to. Well, tight U.S. carryouts are irrelevant. It's all dependent on what happens in South America.

Chris: The other one might be USDA giving us another shocker, yields down lower yet, but like you said the last time, that didn't hold either.

Duane

Lowry: But I doubt if that happens, but that's why they have the word surprise. But I doubt if that happens, right? But, uh, you know, I'd say it's 50/50 whether they nudge them up or nudge them down. But I, I don't think— I think that would pale in comparison to whatever is going on.

Chris: Yeah, it'd be a short, it'd be a short-term deal off a report.

Duane

Lowry: The last two reports that we've had in corn and beans, the bullish reactions we got from USDA— I don't know this for a fact, but I, my gut instinct tells me that current prices right now are below where the market reacted to those levels. So, um, you know, the market didn't adhere to that for very long. So again, I'd say this is another warning.

Chris: Yeah, I think, I think to me it's an indication, you know, to be careful if you're storing more bushels that are unprotected than ever because you've got a really good crop. And, and like you said, we've been, we've unintentionally been recalibrated or whatever in our thinking of how to market because of what we've seen the last couple of years. And eventually it's going to swing the other way, the pendulum will, and marketing ahead and being proactive is going to pay.

Duane

Lowry: You know, people hate to hedge and they hate to talk about basis gains and they hate to hedge for basis gains because in reality what that does, it takes away from them having, you know, gained a lot if the flat price goes up because they have it hedged. But this might be a good year for that because there is a strong argument that basis levels could improve.— and I've mentioned all these reasons why the futures market may not go up, and we certainly can see how it has not responded in as much as maybe people would have expected. But, you know, if the futures market declines, and maybe it's initially led by spec liquidation, but then it's followed up by South America having a favorable production season, The tight U.S. spot supplies would have an impact maybe on basis, at least through April or May, maybe not so much after that.

But, you know, if you got— this might be the opportunity where it is, it does pay to hedge it. And if a guy's got corn in the bin, I don't necessarily want to see him sell the physical crop. I think the basis gives him justified reasons to own it.. But I do think he should give very serious consideration to having it hedged. And the other thing that needs to be mentioned too, because we've had so many years where interest didn't matter, but now, you know, if interest is worth 6% to somebody, all of a sudden, you know— Or 7 or 8. Yeah. It really starts to rack up quite a bit and it's a new calculation people have forgot to look at. And I think that's something they better take into serious consideration too. And lastly, on this whole discussion, the farmer has felt very good about revenue for quite a while.

He was probably in some areas of the country, he felt good about his yield production capability all year long. He was optimistic about prices for months, and so he's betting and banking on and probably spending and borrowing against this revenue that he expects that he's going to get. It would be really sad if he let this slip away.

Chris: Yeah, I'm going to echo what you said on the interest rates, and actually, believe it or not, we have a tool to calculate what the cost of your interest rate is. If anybody wants that, just email me and I'll forward it out to you. And it's basically, you, you go in and you plug in either what you have on line of credit or what you have for bushels, and then it's got a category there for your percent of interest you're paying. But interestingly enough, you know, it shows you your cost per day for your total inventory you're sitting on, unpriced inventory, or, or maybe it is priced but it's, you know, not delivered, going to be delivered till May or whatever. And it also gives you a per day and a per month cost for that. And then the other side of that is, is if you look at it in terms of cost per acre. I know I was just looking at it with a client the other day.

It was costing him $10 an acre per month to sit on the grain. So you got to think about that, you know. How much, how much do you want to spend to sit on it? Because a lot of times people talk about the, you know, capturing carry, you know. Well, there's carry in the market, I'm going to capture that. Well, there's a cost to capture carry or to hope for a better market too. So I appreciate you mentioning that. Yeah, so, but hey, Dwayne, this has been a really good conversation. I hate to cut it short, but I am Mr. Grain Dryer Operator here, and I think this has been a really good conversation. We've laid out a lot of things that I think people need to pay attention to, really close attention to, and, you know, wrap this up and make sure it is a good year.

And we didn't talk much on '23, but I think it's kind of the same thing with '23 is pay attention and, and not giving any marketing advice here, but we're just trying to make sure that we give really good perspective and you did a great job with that today, Dwayne. I really appreciate it.

Duane

Lowry: You're welcome. And last thing I would add to the farmer is just be very careful that you don't get complacent here because the world looks different at this snapshot in time than it did a few months ago or 6 months ago, and I've highlighted all those reasons why it looks different, and I think many of those are factors that really need to be paid attention to.

Chris: Excellent, excellent advice, Dwayne. Thank you very much, appreciate it.

Duane

Lowry: All right, thanks, Chris.

Chris: Yeah, you bet, and thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.