Market Analysis: Fall Roundtable

Market Analysis: Fall Roundtable

Oct 4, 2019  | 23 min  | Ep4507 | Podcast


Hello, I’m Delaney Howell. The USDA has been the subject of scorn and mockery over the 2019 crop but, at the end of the day, the commodity market still chews on the information the government provides. We’ve assembled our Fall Roundtable to breakdown the most recent numbers. Joining me is Naomi Blohm with Total Farm Marketing. Elaine Kub, author of Mastering the Grain Markets. Ted Seifried of the Zaner Group. And Darin Newsom of Darin Newsom Analysis. Everyone, welcome. But before we get to that, let's look at what happened this week.

Howell: The global economy is slowing down and U.S. analysts are waiting to see if the domestic economy will follow suit. Last month, 136,000 jobs were created as the unemployment rate fell to 3.5 percent, a 50 year low. New orders for manufactured goods slipped last month. Shipment of those goods has declined for the past two months. The trade gap is now $430 billion, 7 percent larger than 2018. The economic news put pressure on the commodity market rally that started with Monday’s quarterly stocks report. For the week, December wheat gained 3 cents while the nearby corn contract jumped 13 cents. Fund buyers worried about a slowing U.S. economy went up against bullish USDA data as the November soybean contract rocketed 33 cents. December meal bumped up $8.60 per ton. December cotton gained 77 cents per hundredweight. Over in the dairy parlor, November Class III milk futures lost a nickel. Livestock was mixed as December cattle added 20 cents. November feeders cut $1.60. And the December lean hog contract dropped $2.60. In the currency markets, the U.S. Dollar index lost 26 ticks. November crude oil shed $3.13 per barrel. COMEX Gold gained $7.30 per ounce. And the Goldman Sachs Commodity Index plummeted more than 12 points to finish at 398.50. Ladies and gentlemen, on that background we start our discussion. Darin, you are not going to be allowed to answer this question. But I want your quick tweets as we use sometimes on the show of this week's quarterly stocks report. Naomi, I'll start with you.

Blohm: The quarterly stocks report was friendly as far as corn and soybeans go, nice surprises there. And as far as the wheat number not a big surprise. Overall the market is supportive.

Howell: Ted?

Seifried: Yeah, we lost some corn or there was some corn that wasn't there I suppose. That's not a big surprise. We talk about tightness in the cash market. That goes some way to explaining that. There's a lot of corn that is still stored on-farm, there's a lot of soybeans that are still stored on-farm so that is a little bit of a headwind in the next couple of weeks as we get into the bulk of harvest. But longer term this does improve our new crop balance sheets just a little bit. So we'll see that reflected on the WASDE hopefully next week.

Howell: Elaine?

Kub: Yeah, it has been nice the timing of it, it's interesting to see that we've been talking about there's going to be this harvest rally, harvest rally, it's coming, it's coming and maybe this was the kickoff to it. It was very nice to see this pop up this week.

Howell: Okay, Darin, do you have anything to add? I know the quarterly stocks report, I know you're not a big fan of the USDA reports, that comes as no surprise to anybody, but this report you maybe hold with a little more weight than some of the others?

Newsom: It's a little less stupid than the others. So you take that for what it is. It's not supportive, it's not bullish, that's crazy. We still have 913 million bushels supposedly on hand. We still have over 2 billion bushels of corn. Like Ted said, we just lost somewhere half a billion bushels of corn. It wasn't what pushed soybeans higher this week, there's a lot of other things going on. So it was a report, it's not what everyone makes it out to be, we move on.

Seifried: So there are a lot of things going on for soybeans right now. However, you've got to say when you have a smaller supply than what we had before the narrative starts to change a little bit especially when you start questioning yield and production numbers and you have dryness in South America and  --

Newsom: That's the story.

Seifried: It's all kind of coming together at the same time. What we're talking about right now is very different than what we were talking about in July.

Newsom: We have no idea what acres are, we have no idea what yield is going to be, we don't know what production is going to be, we don't know what demand is going to be. Right now it looks dismal. China is doing this -- no one is surprised that they're in buying a little bit at a time here at the end of the year. So they're buying a little bit of soybeans and everybody gets all excited about it, 5, 6,7 million bushels here and there. We've still got 900 million bushels carried over. The big thing is it's still dry in Brazil. We don't know what we have here because we may not get harvest done this fall. It may go into next spring. So there's a lot of things going on and it has nothing to do with the quarterly stocks report which still, again, I will say it showed 900 and some odd million bushels still out there.

Howell: I want to talk about that. But I have one question first. Maybe Naomi and Elaine can jump in here too. Talking about where those bushels went in the corn markets because the trade estimates were extremely off. We've got a question here from Phil in Dresden, Ontario, Canada. I know some of you interact with him on Twitter. But he said, where did the old crop corn go, like 500 million bushels worth?

Blohm: I think part of it was my guess is that as we did the recounts for acres and things like that I think it stirred up old pots and old information. So we have a fresh start with data, some of it is in terms of the yield I don't think being as high as it was last year based on producers I talked to. Going forward this does set the stage for the market to turn around because the market perception is that when ending stocks start to get smaller prices go higher. Yes, Darin, there's a lot of grain out there right now. However, when we look at this upcoming USDA report on Thursday we're going to come in with carryout numbers that are a little bit smaller than last month and then as we start to put in the pieces of acreage and more pieces of yield, which is from the people I'm talking to 10% lower on corn consistently, anywhere from 10% to 50% lower on soybeans. It was the starting point to turn the market higher.

Howell: Elaine, do you have something to add there?

Kub: Just to Naomi's point about going back to last year's yields even being reflected in this most recent grain stocks report. Think about how long it will take for the official data to reflect what could be going on right now in the harvest that we're seeing now and the acres that we're seeing now. It could be a very long time before these supply and demand tables fully reflect the information that the market is trading right now.

Howell: Okay, Darin, I see you scoffing over there.

Newsom: What the heck. It seems like everyone is going to try to take these supply and demand reports seriously next week. Think about it, if you just step back and think about it for a second, what are they going to do? They're going to change all the numbers with make believe fabricated numbers now equal these new ending stocks. That's all it is, it's made up numbers now and this really highlights that. But yet we're sitting around here talking about this is going to be so serious and so important. They're all fabricated numbers and they've got to do that to make these numbers come out now to their new bottom line.

Blohm: That is a strong statement to say.

Newsom: But that's as dumb as anything that is possible.

Blohm: What we need to do is help the producers navigate numbers --

Newsom: Okay, so let's do that by talking about what is really going on and it has nothing to do with the numbers. Let's talk about what is going on in the markets and not with what USDA always is making up and wanting everybody to believe and everybody here promoting. Let's talk about what the farmers really need to be paying attention to and that is what is going on in the markets.

Howell: Well let's talk about that.

Blohm: Absolutely.

Seifried: The markets follow, whether you like it or not it dictates --

Newsom: No it does not. If you think that the USDA is completely in charge of what goes on in the markets you're sadly mistaken.

Seifried: Nobody said completely. You're making up words now.

Newsom: That's what you just said, that's wat you just said is that the USDA sets the tone and directs what the market does.

Seifried: To what these balance sheets say. Sure, it is a piece of information that the market takes very seriously.

Howell: I said on Twitter this was going to be a cage match and I guess I'm right this week. But I know that maybe a report we all can agree holds some weight in the marketplace is the export sales that come out each week. I want to talk first of all starting with the wheat export sales this week because they had really positive numbers. Does that change the outlook for the wheat markets? Is it showing that globally there's maybe a reduction in production elsewhere?

Kub: I don't necessarily think that this week's export sales number for wheat, which was good, upwards of 300,000 metric tons, that's fine but I think pricewise wheat already had that rally in the past couple of weeks and is now going to pull back because the rally wasn't necessarily related to reality. If you have quality problems or protein problems that shouldn't necessarily be reflected in the futures price on the charts. That should be reflected in your premiums and your discounts when you go to the actual scale. So I believe that the futures chart is going to have to pull back regardless of that nice bullish export sales report.

Blohm: And we also had a sale to China, 130,000 metric tons of the white wheat. That was really supportive in general to get the marketplace to work a little bit higher. The funds are starting to exit those short positions. If you look at a Chicago daily chart of wheat there is an inverted head and shoulders formation. If we can get some additional friendly news this upcoming week from any facet of life, perhaps how delayed the harvest is going still in Montana and North Dakota and how delayed it is still in parts of Canada, my opinion the inverted head and shoulders formation points to a 50 cent rally on futures for the Chicago wheat market. So there will be some pricing opportunities for the producers and that's what we're here to discuss.

Newsom: But that would be the spring wheat.

Kub: It's more likely to show up, like I mentioned, in the premiums and discounts rather than the futures necessarily because if the milling market has to come in and get the spring wheat necessarily and the white wheat that's where they're going to buy it, not necessarily off of the futures price in my opinion.

Seifried: Right, and as long as the U.S. dollar is strong, which it is very strong, it's going to be an upward headwind for the wheat and that is going to, I don't see any weakness in the dollar coming any time soon.

Kub: And potentially some really explosive upwardness if you have Brexit problems, if you have lots of international things could come on and --

Seifried: The stock market looks shaky as it is right now, absolutely agree.

Howell: So, Naomi, I want to go back, and Ted I think you've mentioned it too, and that is the Chinese purchases. I think it's somewhere upwards of 2 million bushels plus of U.S. grains here since September when we started to pick trade talks back up. Do you see those sales to China as an olive branch? Or do you think there's something else the Chinese government is planning?

Seifried: I absolutely think that this is a cover for them to come in and buy cheap soybeans because I think they feel like this soybean crop that we have is smaller than what the USDA is currently saying. I feel like they're a little bit worried about some dryness down in Brazil and that might be an issue. So they're figuring hey, the price of soybeans is really good, we haven't really seen the price react to what the reality might actually be yet so we're going to get in front of that and it's so easy to say hey, we're doing this because of a trade deal we're trying to facilitate these talks. But in reality it's like hey, let's take those beans, we know we're going to need them. That's my thought.

Blohm: I think they understand how the crop is struggling here in our country and how delayed this harvest is going to be and absolutely, it's on sale, so they should be buying.

Kub: To put a line under how cheap it is necessarily you're looking at basis prices in the western part of the Corn Belt, so any of these soybeans that would move by rail to the Pacific Northwest you're still looking at a sub-$8 cash price so it's absolutely on sale to China.

Howell: Darin, do you want me to let you out of the penalty box now?

Newsom: Since we're talking about export sales, when you talk about export sales it's like getting a really nice ice cream cone and talking about the cone and just kind of dumping the ice cream because what really matters, we can sit here and talk about export sales, these are great, everybody gets excited about them every Thursday. They don't make any difference, these can be canceled, they can be rolled over. What are shipments doing? Are we moving anything?

Blohm: Actually two cargos left the Pacific Northwest, one to China, one to Bangladesh.

Newsom: We did see some decent export shipments this past week. We actually saw some pretty decent movement over the last quarter which is one of the reasons why we saw a smaller quarterly stocks number in soybeans. Corn has been abysmal. We know that. Wheat doesn't hardly even exist, I don't care what the sales are, shipments aren't going anywhere. So yeah, is China a little bit nervous? Of course they are over the Brazilian situation. But what I find interesting is Vlad, President Trump's buddy Vlad is out there saying the very same things that he is, that China is offering to buy all the soybeans that Russia and the Black Sea region can produce.

Seifried: They produce about two weeks’ worth of Chinese demand.

Newsom: Exactly, it's not a lot. So they're in there buying. Yeah, let's get all excited about that.

Howell: Let's talk about the soybean market because we've seen a lot of producers getting excited now back above $9 in the new crop in November and January is now at $9.30 I think roughly. Is this a time to start rewarding those sales? Or do you think, reports aside, the crop is not out of the ground yet. There's still maybe the potential for another rally. Is now a time to start rewarding those rallies or wait?

Seifried: No, I'm waiting. I'm watching the Brazilian situation. If they continue to stay dry I think there's more upside potential. I still think the production number is going to come down for soybeans. We just saw them lower production, we just saw them lower yield on the quarterly grain stocks report from last year and if we were at a 50.6 last year I find it hard to believe we're at a 48 this year going out and all the crop tours that I've done this year I just don't see it out there. So I think that production number will continue to come down. The business that we're doing with China, albeit maybe not what we were doing years ago, it's more than what we were really expecting so that is increasing our exports. I think the soybean situation could actually get really rather tight. I think we've got a dollar rally in soybeans potentially.

Blohm: Let me add onto what he's saying mathematically wise in terms of reports and what to be watching for next week. So our last USDA report had carryout at 640 million bushels and now if we take the 92 off that we saw from the quarterly stocks report we're coming into the marketplace with close to 548 million bushel carryout. So then we're going to see soybean yield being taken off as we go forward. And again it's the perception that the ending stocks are getting smaller. And there's going to be twists and turns along the way. But we will most likely see a nice post-harvest rally continue. Technically speaking the next target higher for the November futures, $9.25, if it can march through there $9.50 is the upside which would match the summer high and then we'll probably take a good pause. So as we continue to see prices increase reward it as we go higher but I do agree that there is just probably a little bit more upside first in the short-term.

Kub: On the subject of selling though I'd like to direct attention even farther down the road to 2020. If you look at November 2020 you've got futures above $9.60 so assume that we're still going to have pretty weak basis but 60 under, but a lot of folks can make money, you can lock in a profit growing $9 beans. So it's pretty early to be thinking about that. Most people would rather harvest this crop rather than worry about marketing the next crop but keep that in mind when you do start making sales.

Howell: Darin, what are your, I know you're a spreads guy, tell me what your spreads are saying.

Newsom: I was just going to ask, everybody here is so interested in the farmers paying attention to what the market is doing but yet all you're talking about is headlines. What are the markets telling them to do? Which crop is more bullish, corn or soybeans according to what the markets is telling us?

Blohm: Well, I think the soybean market --

Newsom: No, way off, way off. You had a 50% chance and you missed. It's corn. Corn has a very narrow, has a very weak carry in its forward curve. You're less than 33% and yes this is using the new storage rates by the CME, but still you have a very, very small carry. There's a great deal of concern out there about corn, soybeans it's still pretty wide, it's still sitting around 45%, 50% and that's with the 8 cents per bushel per month.

Seifried: That's a reflection of what is happening in the cash market.

Newsom: That's a reflection of the long-term view of supply and demand.

Seifried: There's a lot of corn being held on --

Blohm: Corn and soybeans are becoming quite friendly.

Seifried: There's a lot of corn that is being held on-farm and that's the problem.

Newsom: Bullish and bearish, friendly and not friendly are two different terms. Bullish and bearish, corn is more bullish than soybeans right now. Yes I agree with you that I think the U.S. production is going to continue to come down and as we've seen it can come down next year at this point they can reduce it again. So I do think that is out there. But I think the real question is how much tighter is the corn situation going to get and that is what the market is telling us, that is where the market is really concerned is how tight is this U.S. corn situation going to be?

Seifried: Again, it's the tightness in the cash market that we're seeing right now because we're very, very tight holding on because we're expecting to see this big rally.

Newsom: If you look historically which one is stronger historically versus what it normally is?

Blohm: Corn right now.

Newsom: Okay, so corn basis is stronger, corn spreads are stronger, but soybeans are more bullish right?

Blohm: I think the picture is going to turn to be more bullish. The story coming down the road and that is what the futures market is indicative of, the future.

Seifried: And we had the huge narrative for corn in the spring with the delayed planting and we weren't going to get the acreage in and so on and so forth. And you see some of that is still reflected and guys are holding on very tightly to on-farm stocks. This is what the cash market is reflecting. It's what spreads are reflecting. But spreads aren't necessarily indicative of what's going to happen, they're indicative of what has and is happening.

Newsom: They're indicative of what the picture is right now.

Blohm: And guys aren't selling because they don't know what they're going to grow.

Seifried: What we're talking about is where we could be going from here.

Newsom: Okay, so if we're going to talk about what's going to happen in the future it's too bad that Angie isn't here because we could talk about the Lions winning the Super Bowl or the Bears, the Bears winning the Super Bowl, I'll bring up the Bears, they could win the Super Bowl. If we're going to talk about far out things in the future let's talk about that because it makes just as much sense.

Seifried: Just because the Chiefs are having a good year doesn't mean we can start talking football.

Howell: Darin, if you are so friendly the corn market we've got a question here, I think you saw it on Twitter, it's one I wanted to make sure we wove into today's discussion from Scott in Illinois. The years 2014, 2015, 2016, 2017 and 2018 Dec corn has gone off the board under $4. Is there any reason not to think that the 2019 contract does the same?

Newsom: Yeah, I think we could see Dec 2019 corn go off above $4 namely because again you've got a very strong basis right now. You've got huge questions about production. How much are we even going to get harvested this year? I think if you've got some money and you had the non-commercial side, I didn't see today's CFTC report but up until the previous week they were still short, they started covering, they may look to rebuild a position because again of the fundamentals. This could push Dec corn back above $4.

Seifried: Yeah I think it's possible but I don't know if there's a whole lot of upside potential beyond that. There's at least the bullish narrative out there of people that are really wanting to cut production aggressively and if you look at some of the guesses for ending stocks numbers for this WASDE and I'm assuming that these are their final ending stocks numbers, but under 1.4, 1.3 billion bushels for corn coming down from a 2.1. So there is that bullish sentiment still out there for corn. I don't think it ends up anywhere that low, anywhere near that low. But yeah, can Dec corn go off of $4? We're not far away from it. This is the timeframe of the year where this is usually our second biggest rally of the year, yeah I think it's certainly possible.

Howell: Naomi, since we have you on the show we did have one dairy question and anybody else can feel free to jump in too but I know that's maybe a little more of your sweet spot. From Adam in Wisconsin, he said what about the dairy markets? We've had up limit, down limit, terrible conditions for forage harvest, questionable feed quality going forward. What's going on?

Blohm: Three particular items. First, the nearby contracts have had a nice rally primarily over the past couple of weeks due to cheese demand. That has been a strong factor and cheese disappearance has been pushing the October contract, we got up to $19.80, we were just at really, really strong prices. Then the reality sets in that milk production overall is down in a sense from where we were a year ago but still quite strong in general. So that is why the deferred contracts are still in the $16 to $17 price point area. Then we have the reality coming that our forage situation in Wisconsin was horrific, beyond horrific. And so when you have an animal that is used to getting ultimate nutrition she's not going to be able to produce as much milk when she is going to have to start eating this lesser quality. So going into first quarter and second quarter of next year I think there is still upside for the milk market because production I feel is going to be coming down because of the lack of quality feed that is going to be happening.

Kub: And this has been hidden, we've seen wonderful pasture and range conditions all throughout cattle country most of the summer, only now are we starting to see this drought building in Kentucky and Texas. But that hides the fact that if you can't get out to the meadows to create the hay, yeah, the availability is just not going to be there to go out and buy that in.

Howell: So since you led us into the cattle discussion let's go ahead and open that one up as well. We've seen now kind of a recovery since the Kansas fires. Where do we head from here?

Seifried: Yeah, we had a job to do when we had the Tyson plant fire we lost a decent chunk of production. So then we had to find that production somewhere else. So to do that we made packers margins as good as we possibly could. We pushed the board down, we pushed cash down, boxed beef prices stayed okay for a little while. Margins were good, that production came back, that allowed us to bounce off the lows on futures, let cash move higher, but now we're starting to get into levels that we're going to start questioning is the shrinking packers margins going to start taking that production back out or not? And so the market is kind of testing the area right now to see if that's the case. Now we did see cash cattle advance slightly here this week. Cash is going to be the key. If cash continues to advance that is saying that okay, packers are fine, they're going to continue to pay up, production is going to stay up there and we have room to move higher. But I'm very skeptical that's going to be the case. I'm worried that we're going to start pulling some of that production back out of the market if cash cattle continues to advance, if the board continues to advance, so I'm worried that we might see a bit of a correction here sometime fairly soon.

Kub: I'm much more optimistic than you, Ted. I think the cash market this week was great, we had $5 gains, $107 sort of basis Nebraska live basis. So that is a big jump and it's a much bigger jump than the futures market made and I think that could continue because it suggests that the feedlots have found their numbers where they want it to be. And $107, that's not something that is going to challenge the packers especially when you've got a good economy and folks going out to eat and good retail sales. So I think there's more room for --

Seifried: Why is the board not following then?

Kub: Well, you get into a big topic there about people not happy about the futures market reflecting the reality of the cash market to begin with but it kind of doesn't matter, it kind of doesn't matter if you have the reality of being able to go out there and get those prices from the packers.

Blohm: The funds had also been record short as far as cattle goes and so they're just starting to ease up on those positions as well. I would agree with your assessment down the road. I think there's further upside yet for the cattle market.

Newsom: I'm going to throw you a curve ball here and I'm going to quote the USDA report, latest cattle on feed, the September number was the smallest September number that they've had on record.

Kub: It's not because the cattle weren't there.

Newsom: Just not on feed.

Kub: Right.

Newsom: Right. So there was, that was helpful to the market early this week or whenever that thing came out, the last couple of weeks. That did bring some buying back in. As Naomi said, funds had been short buying into the headlines, they were able to push the market up a little bit.

Howell: Ted Seifried, Naomi Blohm, each of you get one answer. Hogs, deferred contract heading up or down from here?

Seifried: Tell me if China is going to buy more pork or not.

Blohm: Exactly.

Kub: How deferred?

Seifried: We keep thinking that China is going to come in and buy and we're expressing that in the deferred contracts and we keep pushing it back, pushing it back because we're not seeing it happen on our export sales reports. So until that happens it's really tough to get terribly bullish hogs. I will say this, we are having decent export sales on a weekly basis despite China --

Howell: Ted, I'm going to cut you off there. We're going to save this for Market Plus. I hate to do it but that wraps up our discussion. We will continue this in Market Plus which you can catch online at our website, Watch this week's program again and check out some online exclusives via our YouTube channel of Market to Market. Join us again next week when we'll explore how one coalition continues to push back against wind energy expansion. So until then, thanks for watching. I'm Delaney Howell. Have a great week.

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