Yield trends and market reaction

Narrator: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris: Welcome everybody to another episode of the Ag View Pitch, and we're heading into another week of— it's Dwayne Lowery and Chris Barron here. How's it going? How are you doing today, Dwayne?

Duane

Lowery: Good, Chris. It's been an interesting week and I'm looking forward to getting more harvest yields. And so we're getting to the exciting point of doing harvest and we're in the, out here in the western part of the Midwest, we're getting too much rain. And so the harvest is getting delayed and crops are slow in reaching maturity, but it's getting to be that time of year.

Chris: Yeah, it's been pretty wet here. We've caught a lot of rain here in the last few days. I think there's a lot of soybeans getting close and ground is going to be too wet to get after them, I think, with more rain in the forecast. But as we look last week, you know, we had red on the screen Friday and closed corn in that $3.70 and $3.25 range and beans in that $8.82 range with red on the screen there. What do you think as we go into a new week? I mean, you talked about harvest getting started? Was there any— is there any harvest news as we go into this upcoming week that you think might be impacting the market?

Duane

Lowery: Well, I think everybody's trying to get a handle on what the early harvest yield report trends are. And it's, in all honesty, it's really too early to be able to identify any yield report and then translate that into a trend. But that is kind of the goal that everybody's got, trying to figure out what that trend is going to be. As far as the red ink from Friday's trade, a couple of things. The corn market settled $0.02 lower Friday. That was down— that's $0.04 off the high last week. But in terms of where the market came from for the lows after the— around that September report or just before the September report, I'd say the corn market is performing quite well. Holding in very well. I thought it was interesting. The Commitment of Traders report showed that the funds had increased their short position in Friday afternoon's report up to 170,000 contracts.

That's basically— they expanded their short position by another 25%. But during the reporting period that that week covered, the market had a range of $353.25 to $374.75.. And so since the market settled at a price that is only $0.04 off the top of that range, and during the time that that range was established, the funds had spent, spent 25% or enough energy to increase their short position by 25%. So they didn't get a lot for their efforts. In fact, most of the, the shorts that they established during that window were actually a losing position. At Friday's settlement.

So how important Friday's settlement was, the weakness, or how important the early week trade is, is kind of important because all of a sudden we can see that the funds were large sellers, increased their short position, got nothing to show up for it as in terms of an advantage like increasing the profit in their already existing short position, but instead they've got losses on those new sales. If they're not able to immediately generate some downside momentum here, there's a good chance they're going to be running for the exit doors very quickly. So I think that's kind of an important thing to point out, point out in corn also.

Chris: How much of a positive could that be on the market on corn?

Duane

Lowery: Well, I would say it has the potential being very positive, but by itself, it's not necessarily a factor that drives the market from here forward. It needs a, it needs a catalyst. And if the yield trends happen indicate that yields are coming in disappointing, less than expected, which at the present time I would characterize what we've gotten falls somewhat in that those categories. And over the years, most of the time early yield reports tend to be better than expected. And oftentimes, they are accurate in showing that trend. And that's kind of what happens on a regular basis. However, this year, the early reports don't seem to be indicating that. They seem to be more on the disappointing side.

And some of the places we're getting these yield reports are coming out of areas that were expected to be, you know, quite good, and maybe outside of the the Indiana, Iowa, Illinois type of corridor. But they're, they're coming in, maybe good, but maybe not quite as good as they expected, or some are coming in, you know, quite a bit less than expected. So I find that trend to be a little bit alarming. And the other thing that if you move the calendar back 30 days ago, people expected that the first yield reports we would get might be some of our best ones, because they would be some of the earliest planted. And to the extent that, that, that's where we're at right now, these yield reports are probably disappointing. But here again, we just don't have enough to be able to say that with confidence.

And we don't have enough yield reports out of Iowa, Illinois, Indiana, Ohio, and some of the main part of the Corn Belt here to really have a handle on it. But that's going to be very important if that yield trend starts to show a slant towards disappointing, less than expected, then the, these shorts that have been established by the large funds, that becomes very important, and it becomes a, a potential fuel for a significant short covering phase. And I think there are other sectors of the trade that it wouldn't take much of an encouragement for them to initiate a campaign for new long positions as well. So there, we're sitting at a very important point that could easily generate some upside price activity. We just kind of need to figure out just exactly what these yield trends are going to be.

Chris: Yeah, and I'm even hesitant to even bring this one up, but Shay is back now, and, and he did a podcast yesterday with Russell French. And if you haven't listened to that one, that one's posted now as well, and on harvest in Texas and in the areas that he works. And, and we also With Shay being back, he pulled together a lot of the yield data that's been floating around, you know, and hopefully there's some validity to it, just from some of the broker— brokerage firms and stuff. And we made sure none of them were duplicated. He put a bunch of them together. And what they were showing was what the yield is this year versus the yield last year. And we looked at the percentages of of decline, and every single one of them had a lower percentage with the exception of a couple. And I think he's got about 40 yield checks here or so that were whole farms, whole fields.

Some of them were, you know, 50 or 80-acre pieces or whatever. But, you know, like I said, I'm really hesitant to even say a number because, you know, it's just, it's just the numbers that we were seeing come across on some emails, but we felt like they were pretty reliable. And especially, you know, when you look at it, I mean, we're seeing in that data set, it was an 18% reduction, but also when you look at it and you look at the moisture of the corn, it tells me also that it's a lot of the stuff that was in some of the drought areas. It was the early planted stuff that either had disease or drought affect it. So I think that's partially why the yield reduction versus last year is, is so big right now. So it's going to be interesting. We're going to need a lot more data. I mean, that obviously the numbers we're coming up with are pretty, pretty extreme.

But even if that was a third correct or half correct, you know, if it was a 7 or 8% reduction, that gets your U.S. corn yield average in that 160 range pretty fast, which is scary. So it'll be interesting. And we're gonna need to get a couple more weeks into it. And I don't think we're gonna know anything on corn for another 3 weeks. Do you, Duane? Because, you know, you talk to these people, these guys that are combining are people that, like I said, it was either disease or drought that have allowed these guys, you know, and a couple of them were high moisture, but the majority of them were disease or drought issues. So I mean, what's your thoughts there?

Duane

Lowery: Well, I think that's probably somewhat true. I mean, we know the harvest is going to be quite drawn out. I mean, even where we're at here in Iowa, we have areas that experience dryness in July and/or August. And even those fields, they're still a couple of weeks away from being harvested, I'm sure. So we have, you know, we haven't even got into that yet. And yet, you had a large swath of acres between, uh, Iowa and Illinois that showed up on the, the drought monitor maps. And I don't think we, we've gotten hardly any harvest activity out of any of those areas that have been affected by that drought map in the July and August period. So, uh, we still have some of that to experience. As far as disease is concerned, I think there's been a lot of, uh, signs of disease going back to 15 days after pollination took place.

And the upper part of the plants, a lot of them have showed deterioration in their color of those leaves. And if they're not getting the nutrients there, they're going to, you know, cannibalize the plant and get it out of the stock. And all of a sudden that opens up the potential for harvest losses. And we're dealing with a situation where harvest is going to be drawn out anyway. And then now in the West here, we got a lot of places that have had too much rain, and nobody wants any more rain out here, I don't think. And all of those things can create some of those stalk problems to become more of an issue, especially the longer it takes to get to that harvest point. So there's, there are still places where we have hurdles to get to. And as far as when are we going to know about the yields, you know, it could be a couple of weeks yet.

But I, my guess is as soon as the areas dry out here, we're going to start to get enough yield reports that whether we're right or we're wrong, we're going to think we're seeing a trend to develop, whatever that may be. So I think as soon as the fields dry out and allow some harvest activity to get to occur, I think we're going to start to get a flavor for what these yield trends are.

Chris: Yeah, it should. I mean, the majority there was of that 40-some checks that we had, 16 of them were out of Illinois, and they were out of that drought area where It's been super dry across that area. So that's partly too why I think we got to just be patient for another week or so yet and start seeing, see what's coming once the combines get rolling again.

Duane

Lowery: I think we're actually going to see more soybean harvest activity and get a better, better handle on some of those yields here before we get into the corn. And so that's probably the first thing we're going to get a handle on. And I'm not sure how to react to that because the first soybean yields we get are going to come from the earliest planted soybeans. And that's where we have all season long been expecting our best yields to come about. And so if they end up being disappointing, that will be very interesting. And I have mixed ideas on that. I've seen bean fields that I think can equal last year's yields, but they were— they tend to be the early planted yields., and I got other fields that I've been in where the number of nodes in the pod count seem very low, and so it's going to be a wide range of, of results I would imagine.

Chris: Question for you, so you know we're sitting here talking on the production side again as usual, and it seems like the market has just been on this demand, demand, demand, demand, deal all along, regardless of what news or what information is out there. Assuming that the, the information does trickle in for the next week or so or two, or maybe three, you know, that there's not much of a response to the yield information. Is there any demand, anything demand-wise that you're aware of or anything that's going on in that arena that should be discussed?

Duane

Lowery: Well, number one, I'm kind of tired of this demand story. I'm kind of tired of the demand destruction story. And in some cases, I think it's been misrepresented. I don't think we have a global demand declining situation going on at all. In the case of corn, I think global demand for corn has been very good. But you've had increased crop sizes. You in Ukraine, Brazil, and Argentina. And I think exports out of those 3 locations have been pretty aggressive and some of the largest monthly exports they've ever had. And I think to a large extent, they've been front-end loaded in the early half of their marketing season. And I'm not so sure that from here forward, we won't find that competition to be less severe And I think that we're going to get US corn export demand to improve quite a bit over the next 5 or 6 months.

So I think as you look ahead to demand, I think that there's a lot of difference between what the windshield looks like and what that rearview mirror looks like. And I think the demand destruction story is a little bit too concentrated now in the rearview mirror. And I think there are some things on the horizon in the windshield that look a lot more promising. The other area on corn is, is concerned about demand from the ethanol industry because of plant closings or whatever. Those I think are legitimate concerns. But over the life of ethanol, it seems to me that there's been other times where we've had plant closings and areas of concern about demand, only to find out that somehow when we're all done, we did not lose near as much demand as what was feared from that particular industry. So I, I view some of that with a certain amount of skepticism as well.

But it is important that we try to find some better solution to the ethanol industry after they've, you know, kind of been mistreated here by the EPA. And as soon as we get something that looks like we might be gaining some traction back on that, it seems to get niched by the petroleum industry. And I don't— I'm not sure where we're at there. And I'm not sure what the future holds. But overall, I don't think the demand destruction in that ethanol industry will be near as bad as what some of the headlines of plant closures might imply. But that remains to be seen. On the soybean side of the demand outlook, that's been— most of the concern about demand has been concentrated on trade-related issues with China, which I think are largely on the mend with the additional tariffs really being off the table right now on the beans with what China did recently.

And even though we had a hiccup in the perception of the US-China trade deal when Friday the market sold off because China canceled some visits to US farms, the overall flavor you get from both the US delegation and the Chinese delegation on the trade talks that occurred last week They were both very constructive and positive, and they both labeled the developments this last week as being, being very positive and, and constructive. So I think that's a positive thing. The other area of the demand concern is associated also with China, and that's because of the African swine fever. That certainly is legitimate, and you can't downplay that. But on the same token, that's been going on for quite some time. And China, pork is a staple food product to them and in high demand, and the Chinese are paying record prices for pork right now. And so they have every incentive to increase production.

And they have taken— the government is actively involved in trying to get together, actively involved with private industry, and also with industries from outside of China to try to rebuild their pork industry. And I think they are determined to do it. And I think I think they will be successful in doing it. And I think once they do it, they'll transform that pork industry from coming predominantly from small producers over, you know, large areas that not having near the capability of handling disease issues and quarantine type areas as a larger unit would have. And I think they're going to transform into a production model that is more in line with the larger production models over here in the US. And I think that paints a a pretty optimistic longer-term view of what their demand potential will be.

It may still take some time to get on that pathway, but I think they are determined to get on that pathway. And even that part of the demand, which is still, you know, a real thing, I still think that the, the windshield viewpoint on that is much more important than what's in that rearview mirror. So I, I don't believe the demand destruction storyline is the right one to look at, even talking about demand. I think we have a lot better things in front of us than, than what we are currently, uh, dealing with.

Chris: Well, it's a lot more, um, or how I want to say this is, it's, it's easier to listen to you talk about demand than it is everybody else. So throw you under the bus for a second. Why is it that everybody else keeps talking about demand? You listen to any of the the shows, you listen to any of this stuff, it's just demand, demand, demand. Why, why is that?

Duane

Lowery: Boy, I tell you what, Chris, you are on the verge of putting a quarter in me, and you're on the verge of getting me on the soapbox here.

Chris: And I— and that's putting you under the bus so you can tell me how the view is there. But let's do this quick because I want to, I want to lead into how that ties into basis here in a minute.

Duane

Lowery: Okay, the, the quick version of that of that question is it's easier for the marketplace to talk about demand because the market has been under pressure since, you know, July, or since, well, basically since the June acreage report, or, or since the July S&D report. As the market goes down, nobody's going to write about or talk about bullish things if the market is going down. People don't want to do that because even if they're looking forward and anticipating what might be ahead, They are judged by whether the market was up or down that day. So if somebody has a longer-term viewpoint, they talk about something more optimistic about demand, for example, um, and then they say, oh, by the way, what was the market doing today? Oh, it's down 3 cents. Well, clearly everything you said is stupid, you know, that's the reaction.

So people are not going to talk about that until the price action improves. But as soon as the price action improves, then all of a sudden commentators are looking for narratives that support the market being up that day. And I think it's that simple. And that might sound oversimplified. But I've been in this business for 40 years. And I can assure you, people that write about commentary or talk about markets are not going to want to talk about something that doesn't match the up or down tick for that current day. And I think that's why people are still talking about demand because the market still feels heavy in a lot of people's eyes. As soon as that market changes how it feels, suddenly we will be looking for other things to talk about. And I think at that point in time, the demand slant that I just gave will become more, more of a market story that gains traction.

Chris: Well, that's kind of why I like having these conversations with you. And I think a lot of the listeners appreciate your commentary because you don't mind being under the bus once in a while and communicating with us from there.

Duane

Lowery: It's almost gotten to be like home. I'm talking about under the bus.

Chris: Yeah, exactly. And let's talk for a minute here and then we'll kind of wrap things up. But on basis, you— I sent you a text message from Joe Paulson, a great producer that we work with in Illinois, sent us a basis sheet showing how strong the basis in his local area was. And it— and I can't remember, I don't have it right in front of me, but it was significantly higher than the normal and giving him I think like $4.06 corn for like the next, you know, all the way into mid-October right now. So with that strong of a basis, my reaction to him was, in my text back to him was, you know, the Chicago Board of Trade can lie to us, but, but the cash market can't. What's your response to where basis is at right now with, you know, putting a quarter in, yeah, but keeping it short to kind of wrap things up on basis and where we stand?

Duane

Lowery: All right. I'll try to keep this short. First of all, the basis is stronger than normal. It's been that way going back to late spring, and it's maintained that. And it's important to point out that it's maintained that even into this time frame where people expected basis to have weakened by now by quite a bit, then there's been an expectation that basis would return to some level of normal. I think it's quite clear at this point that basis is not going to return to a quote unquote normal, even when harvest gets underway. And there are probably multiple different storylines one could give as to why that is the case. But one of them has to be the idea that harvest is being delayed, okay, and harvest is going to be protracted over a longer period of time. Both of those tend to support basis.

Next, whatever cash corn is sitting out there, whoever has it, whether it's a farmer or whether it's the commercial entities that have stored inventory that they have hedged, it's in strong hands and they're not coming out. And they're not going to be forced out at some harvest time low price. And they haven't been enticed to be a seller on strong basis, and they're certainly not going to sell it on a harvest time basis. And they weren't, they weren't willing to sell it on a strong summer market, and they're not going to be forced to sell it here. So though it's in strong hands, and it's not coming out for a while. So that makes the market very tight. The other factor is you have in the cash basis markets right now, you basically have a couple of things going on. Number one, you still have a premium for spot old crop shipment from people that are trying to consume this corn immediately.

And they can't get to new crop, they can't get to a more accessible supply. And so that basis continues to stay firm. You then have buyers that are trying to lower their bids to what would be considered something closer to normal levels, and they can put them there, but they're not going to buy anything, and they're not going to have any success buying anything because there's always another buyer in their area that's not— that's willing to pay a little bit more. The gentleman that you spoke of that sent you that email, he sent bids from two different locations, and one of them was trying to put out bids, you know, closer to normal. And, you know, quite a bit less than what he was paying for spot. The other buyer was clearly saying, you can bid anything you want, but I'm not going to take your lead. I want to buy corn.

And until somebody covers me up at this bid, I'm willing to have this bid, which is a better than normal basis, and clearly better than the competition. Because he's trying to get some ownership on— he's got— he obviously has a need for it and a concern. And I think those are the 3 types of things that are going on in the basis markets at many locations across the Midwest. And the common theme to all of those is corn is difficult to buy. And people are not confident that it's going to become easy to buy anytime soon. And I think that's an accurate assessment of it. And I think that's going to tend to keep basis levels well supported. And the last thing I would say, and I've said this all summer long, I think a lot of the ownership of the physical corn goes beyond just the farmer.

I think the, the large cash grain merchandisers, especially those tributary to the export market, I think they've been— they've had a long basis inventory for quite some time, probably going back even to last winter and spring. And my guess is, based on where spreads are at, based on where basis levels are at, they're not going to let go of that until they get— can come up with an export program. And like I mentioned earlier, I think some of the export programs out of our global competitors has been very much front-end loaded. I think the next 5 to 6 months, we're going to see more export demand out of the US. And that's going to create an environment that allows this export demand to get a little bit more aggressive with some of their bids.

And I think that that combination of, of an improved basis tone in the export market can only help what has, has been and will continue to be probably a better than normal basis in the interior, whether that's going into a feed market or processor market or the ethanol, either one. So I think there are a lot of factors at play here that might keep corn basis stronger than normal for another 5 or 6 months. And then how much stronger than normal will depend a lot on what these yield reports are.

Chris: Okay, and on soybeans, similar?

Duane

Lowery: Well, the soybean market, cash market, the basis levels, I would say are still plenty wide. And I would say wider than most of history has been. Maybe not as wide as last year, but I think last year was an abnormally wide year. The soybean spreads are historically quite wide, and they offer a lot of carry. So if you have the storage capacity, soybeans offer a very good return on that storage space. So whether you're a farmer, there's opportunities for storage, to earn some storage revenue through basis and spreads. If you're the next guy up the chain, you're the co-op, the elevator, Country Elevator, or you're the next one up the chain with the larger entities, they all have incentive to buy bushels from the farmer and hedge them and keep them from going to the next one down that chain. And that will continue to be the case until everybody runs out of storage.

This is not a year where we're going to run out of storage. Storage is not going to be a problem this year in total. Everybody will have their own limitations on storage, but storage someplace will be available. And all of that with the way the spreads and the basis are lined up on beans is going to make it appear to be a good thing to store beans for, for those kind of people, the elevator people. And so consequently, it seems to me that we have a situation that basis levels in beans are going to continue and steadily improve probably from now all the way into February. Until a new crop South American supply comes online. So I think this cash soybean market will tighten up much quicker than what people think should happen. And so I think that basis there is going to, going to have a difficult time weakening. And I think the surprise might be how much it improves as harvest progresses.

And in a post-harvest period, and again, the yield storyline coming out of harvest for soybeans will have a lot to say about how much basis improves and how quickly it does. Because if the, if the yields end up proving to be disappointing in soybeans also, not only will basis be firm, but these spreads will be very firm. And the market will have to find a way to take away all the carry and take away the incentive for people to, to hold those beans so the pipeline can— cash pipeline can get some supplies. Because the way it is structured right now, the cash pipeline is going to have a difficult time getting soybeans to move into it other than some, you know, real gut slot harvest time.

And if the harvest on soybeans is, is stretched out, which it probably will be based on planting dates and things of this nature, you know, this is not an environment that should create a weak basis by, uh, atmosphere by any means.

Chris: Gotcha. Well, I'm sure we'll continue to have a lot more conversations on basis as as the weeks go on here and get closer to harvest. One last quick question. You know, where do you think we go this week? You know, obviously it's wet in a lot of areas and stuff. Harvest is going to be slow. Do you think we just kind of turn sideways, or what, what do you, what's your call for the week on corn and beans?

Duane

Lowery: Well, from a weather perspective, the market really hasn't been trading weather on a day-to-day basis. However, after having said that, The weather that we're experiencing right now between the rains we've had recently, like you said, some have been very heavy, and the forecast for rains to continue in kind of the western or the central part of the western Midwest. It looks to be too much rain. And so the weather there is probably a little bit friendly. Then you go to the east or the southeast, they've been dry for the entire month of September, maybe some before that. And they're not finishing real well with the forecast that they have now or what they've been experiencing the last couple of weeks. So weather, if it's anything, is probably a little bit supportive.

And the other thing that will be important to the trade tonight and this week early will be going back to Friday and the market reacting to the fact that China canceled some farm visits and that getting the knee-jerk reaction to the downside, but then reading weekend headlines that seem to imply a much more positive outcome and summary of what took place in those discussions leads me to think that maybe the market overreacted to the fact that China wasn't going to visit some U.S. farms. So I think that might be an opportunity for the market to try to recover some from that. And the last, and what I would say is the most important thing, is what does the market think we are dealing with for yield trends?

And I think the evidence that we've had so far With, with each passing day, it becomes, or it should become, more concerning to the bear in the market that, wait a minute, these yields are not coming in the way I expected the first yields to come in. And, you know, how much longer does that continue before somebody gets concerned? And in, in kind of a, a follow-up to that statement, I think you go back to the Commitment of Traders report, and the funds added— a sizable quantity of shorts in corn, especially based on a percentage of what they already had, and they got nothing out of it. In fact, most of what they added to short positions is a losing position as of Friday's close. And then you go to beans, you know, we didn't talk about that, but the funds aggressively covered half of their short position in the last week's worth of trade.

Now the bean market may be 20 cents off the recent high approximately, But if they were covering those short bean positions as part of a bigger picture narrative and that a longer lasting thing that's on their mission, that's going to be important. And if the price action firms up this week and can't generate much downside follow-through from Friday's weakness, which is what I think will happen, I don't think we'll get much downside follow-through to Friday's weakness, then you have to go back and look at what the large the funds did in the soybean market by covering half of their shorts as, as a maybe a change in their mentality or change in their psychology. And that all of a sudden becomes very important to what might occur in the future. Remember, the funds never covered their short position entirely throughout the whole summer.

And yet here we find them covered half of their position in one week. That looks to me like a change of personality. And it looks like something that it wouldn't take much of an effort to have that build upon and generate into more short covering. And suddenly we might see the market getting long if we could get the right yield narrative out of that, out of that. So I don't see a lot of things pointing towards weakness here. I don't see a harvest coming on in any big way, and even if it does, I don't see the farmer being a seller. And it doesn't take much strength here to get price action that puts the bears a little bit under pressure. And then all of a sudden, you know, we start to run the market in the other direction. So I'm kind of optimistic here. And to say it that way, probably soft pedals how optimistic I really am.

Chris: Yeah. And sounds like maybe the bears or the funds are getting some of the same emails we are and starting to see, you know, it's just a question of if they continue with that same trend.

Duane

Lowery: Well, it's that— that's certainly part of it. I think the China narrative has changed somewhat. And there's potential that business could occur there. And who's to say that China didn't cancel their farm visits just to get the exact reaction that we got, maybe that maybe they're going to be a buyer this weekend or early this week and take advantage of the sell-off on Friday. I mean, I've seen stranger things happen. I think they'd do it twice if they could.

Chris: Yeah, well, I think, I think we've had a pretty good conversation here, Dwayne. Appreciate everything. We'll probably reconvene if there's any exciting activity going on during the course of the week. Otherwise, we'll get back again next Sunday. But, you know, as we've said in the past, you know, we want to bring pertinent information and not overdo anything, but at the same time make sure we're bringing the information that's pertinent and bringing you a good perspective. And so if anybody has questions or things or wants to send us some, some information on basis or yields or anything like that, we'd sure appreciate that because it's information that we can share kind of like Joe did with those basis details and that kind of thing. And, and you can reach either Duane or I. And again, thanks a lot for everything, Duane. Appreciate it.

Duane

Lowery: Thanks, Chris.

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

Narrator: Thanks for joining us on today's episode of the Ag View Pitch. As always, you can reach out to us at cbarron@agviewsolutions.com. Or duanel@netins.net. We'll catch you next time on the EggView Pitch.