Market Plus: Darrin Newsom (January 11, 2019)

Jan 11, 2019  | 13 min  | Ep4421 | Podcast


Howell: This is the Friday, January 11, 2019 version of the Market Plus segment. Joining us now is Darin Newsom. Darin, welcome back.

Newsom: Thank you, Delaney.

Howell: Darin, we're going to have a lot of interesting conversation in this Market Plus episode. I want to start out here talking about the cotton markets because you had an interesting idea that perhaps the industrial hemp market is causing a ruckus in the cotton market.

Newsom: Yeah, we're seeing right now we've just got the cotton market, particularly if we look off at the December 2019 contract, new crop contract, it's just collapsing right now. It lost ground again this past week. And it's not just fund selling, we've also got spreads getting weaker, excuse me, we've got spreads showing a more bearish situation. So it's indicating there's a dramatic change or there appears to be a drastic change in the fundamentals of this market. And it certainly seems to be coming from this industrial hemp craze. It was part of the Farm Bill if I recall and the talk is now even though we have already slowed demand for U.S. cotton now we're going to threaten the domestic demand and other parts of the demand by introducing a competing product. So this has cotton on the defensive. It's in a contraseasonal selloff right now, it should be going up, it's going down, it has no friends. It's kind of taking the place of where wheat usually is when you can say it has no friends. I just don't see it stopping any time soon unless something changes, unless acreage talks change, weather change, something happens.

Howell: If we get a trade deal with China is that enough to change the --

Newsom: No. Number one, we're not going to immediately get a trade deal with China, we're not going to get our tariff situation with India taken care of, none of these things are going to happen I don't think in time for spring planting and so there could be something out there that lifts cotton but I don't think it's going to come from that avenue.

Howell: Okay, let's talk about planting intentions. We've got a question here from Brian in Illinois. He said, what are your thoughts on planting intentions? Do you think beans will hold their own? Or will corn totally steal the show?

Newsom: My thoughts on the planting intentions report is I hope USDA is still shut down because it's a completely unnecessarily, irrelevant report.

Howell: Get a couple more jabs in there.

Newsom: A couple more jabs. That's not what the question is asking. What I'm hearing as I make the way around and you're probably hearing much the same thing as you make your way around the country is all of the pundits were talking about how we were going to see a 4 to 5 million acre switch, we were going to see more corn, we were going to see less beans, we were going to see more cotton, the possibility that we could see some canola, we talked about it on the show. By and large we are going to see some small adjustments in the acres but when we compare corn and soybeans they were both at that 89, 90 million acre mark in '18, 2018. I would guess that we're going to come in about 50/50 again. We may see a little more corn, maybe a little less beans, but I don't think it's going to be as dramatic a shift as what we were talking about. Now, when will we know this? We won't. Hopefully we never will. Hopefully we'll just have market signals as to what it believes is bullish or bearish and we don't have to worry about these silly numbers all the time and argue about these numbers starting at the end of March. Most likely at some point we're going to start seeing reports again and we're going to start getting acreage guesses. My thought is we're not going to see the huge shift that we were talking about maybe three to four months ago.

Howell: Yeah, that's what I've been hearing across the country too. I want to throw one more question in there that we kind of talked about a little bit here before we started recording. Let's say 10, 20 years out in the future, do you see countries like South America and Brazil, Argentina, coming in and being the main drivers of crops like soybeans and corn and instead switching some of those more traditional states like the I states into crops like canola, cotton, industrial hemp?

Newsom: 10, 20 years down the road I think there's a possibility. I think we could readjust the growing patterns worldwide. Will the U.S. ever give up on corn? Unlikely. We could see, lose some interest in soybeans. Let's say we never get another trade deal, let's say we stay at a constant trade war with China, yeah we can lose some interest in soybeans. Wheat, I can see why people lose interest in wheat. So I think and from what I'm hearing is that people are willing to try different crops, alternative crops. 10, 20 years down the road that could just be more of a custom thing than an oddity.

Howell: I think it's going to be interesting to see.

Newsom: It will be.

Howell: Hopefully in our lifetime we get to see that.

Newsom: The analysts who are still working at that point will have a lot of fun talking about it. I'm not planning on it.

Howell: Okay. Well let's talk about South American weather here. We've got a question from Philip in Dresden, Ontario talking about South American weather in particular. He said, it's hot and dry in Brazil but still mountains of soybeans in the Western Midwest. Are there butterflies fluttering we can't see? And if so, what is the future of soybean prices in 2019?

Newsom: I really enjoy Philip's question because he always ties it back to chaos theory, the butterfly effect and so on. We do supposedly, not we, but South America supposedly, particularly Brazil, has problems with its crop. We've talked about how estimates are being lowered from the 120 million plus down to I think 116 to 118 million metric tons. That is noticeable and it should be getting the market's attention. But what's more important here, the fact that that's what all the talk is about or the fact that the market is not reacting to it at all? To me the important thing is that the market is not reacting. So what this says is okay maybe we're losing some production there but yes we still have mountains of soybeans all over the United States, we still have no trade deal, we have trade talks that are going nowhere and it's possible China's demand again isn't as strong because of some of the other problems that it's having. So we don't know all the whys. We don't know all of the whys that are out there but we can see the what and the what is market still isn't concerned about anything tightening up even if we are seeing the possibility of larger crops reduced, that's a terrible way of saying it, but the crops reduced in Brazil.

Howell: But does it really matter if we're not going to hit a billion bushel carryover anyways?

Newsom: The market is saying it doesn't matter at all. Let's go back to the discussion we had where the U.S. ending stocks are really only about 560 to 600 million bushels, that's still too many and if Brazil's production isn't as large the market should be getting excited and it's not. If we look at the new crop spreads they're not as bearish right now, in fact some of them are leaning towards the bullish side. I would say that could get people excited except for one problem, that's normally the case this time of year because it's just so far out there. So until we actually see the market starting to get interested in this I see no reason to get overly excited about it.

Howell: Darin, you keep saying 500 to 600 million bushels of soybeans. What do we need to see to have some strength or be at a level where supply and demand are closer together?

Newsom: Okay, what we need to see is those spreads, the forward curve of the soybean market, we need to see the carry in those spreads start to weaken a little bit. Right now we're covering 70% plus of full commercial carry. If we can get that down below 65%, 66%, start getting it into the lower 60s, maybe upper 50% of full commercial carry then something is going on. We can also watch basis. Right now we're still running below the weakest that we've been over the last five years, we're seeing some seasonal strength because everybody shut their bin doors but overall we've got to see those things happen. There won't be any actual change in the market until we see spreads and basis react.

Howell: Okay. Let's switch things up here a little bit and talk about the feeder cattle markets. I know you said earlier in the show you haven't had time to look at the charts. So answer this the best you can, I'm sure you will. We've got LH in South Dakota saying his particular operation they background 450 pound calves to 1000 pound calves. We did protect on the board but that does not guarantee a profit. So what are your thoughts on feeder cattle prices for next June?

Newsom: I think if we start going out to the summer part of me just I guess wants to naturally be bearish the feeder cattle market as we head off into the summer. That's usually one of the stronger times for the grain markets, pushes that higher, and usually you see an inverse relationship --

Howell: Why be bearish then?

Newsom: Because I can't help it. But right now if we look at the way the situation is right now I'm going to say I think we could still sometime between say here in mid-winter through say mid-spring I think we're still going to see the market move up a little bit. Can it hold all the way through June? Most likely not. I think the market will come down by then. But I think we're going to have some opportunities to get some sales, get some hedges on the books.

Howell: Okay. When should we be looking to put those hedges on the books?

Newsom: Probably again sometime between now and mid-spring keeping a close eye on the summer contracts.

Howell: All right. Let's take one more question here which might lead into further discussion. We've got Roger @RogerCooper62 on Twitter. Why has GM and Ford quite making flex fuel 8 cylinder or cycle engines for SUV's and pickups starting in 2015? And how does that help or hurt future ethanol production?

Newsom: Roger, that's a really good question and I don't know the answer to why they would be ending unless this has to do more with the 8 cylinder than the flex fuel. I don't know. I know there's a lot going on in the energy markets right now. If we're looking at crude oil, if we're looking at ethanol, if we're looking at gasoline and all these things going together I'm not sure why GM and Ford and so on would be cutting back on those productions are this point.

Howell: How does it hurt then, to answer his second question, how does that hurt future ethanol production?

Newsom: If they're just say cutting back on their 8 cylinders but yet they're going to downside the engine size probably not much at all because I think we're going to see ethanol demand going down anyway as fuel, not fuel consumption, but mileage for these vehicles continues to go higher and a lot of this seems to be geared towards that, getting towards more fuel efficient, there's the word I was looking for, vehicles. That is going to start to slow demand for ethanol. Do I see this big push for electronic vehicles? Someday, maybe that 10 to 20 years that you were talking about earlier. But for right now I think if anything this is more of a move just towards more fuel efficiency and yes that could slow ethanol demand a bit.

Howell: Okay, Darin, final thing you made sure to mention that we wanted to talk about in Market Plus was crude oil and heating oil has kind of been in flux here since the end of December. Why do producers need to care about that or people watching Market to Market?

Newsom: At the end of December we saw heating oil, distillates, whatever you want to call it, we saw crude oil come down and start to bounce up at the end of December. Distillates or heating oil, diesel fuel and jet fuel and all those things, came down to long-term support at about 165. Now farmers are usually are looking to cover some of their expenses at the end of the year. This was their opportunity to cover all of their diesel fuel needs for 2019, getting it locked in at what is seasonally a good time of year to do it. Now, we've rallied about 25 cents since late December. It pulled back a couple of cents I think on Friday but by and large it looks like the market may want to go up, it looks like we're seeing some sort of shift in the energy complex as a whole, crude oil may want to go up. If so, look for heating oil, distillates to go up, look for RBOB gasoline to go up as well. We could be looking at some higher energy prices here over the next couple of months.

Howell: So definitely if you haven't locked in fuel needs yet now would probably be the time to do it rather than later?

Newsom: I still think now is a good time. Like I said, it has rallied 25 cents off of its low, off of its spike low. You get a little bit of a pullback, maybe they think it was overdone a little bit, yeah I would certainly be looking in here to get my 2019 needs covered.

Howell: All right, Darin Newsom, thank you so much. Always a pleasure.

Newsom: Thank you, Delaney.

Howell: Join us again next week when we'll look at expanding East Coast oyster farms looking to rake up new markets in the Midwest and Elaine Kub will join me at the Market to Market table. Until then, thanks for watching, listening or reading. I'm Delaney Howell: Have a great week.

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