Market to Market (October 2, 2020)

Oct 2, 2020  | 27 min  | Ep4607

Coming up on Market to Market -- As combines roll, USDA tallies what is left in the bin. The bulls feed on the September surprise sending the market higher in the heat of harvest. A panel discussion with Naomi Blohm, Matthew Bennett, Elaine Kub and Ted Seifried, next.


What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.


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Hello, I’m Paul Yeager. Health news about President Trump and the First Lady testing positive for COVID-19 overshadowed much of the economic news Friday morning. Overnight futures and foreign stock markets moved lower initially as other economic data was released. The Labor Department found 661,000 new jobs were added in September. However, it was the third straight month of slower hiring. The unemployment rate improved to 7.9 percent from 8.4 in August and is down from April’s 14.7 percent reading. The Commerce Department reported consumer spending increased one percent in August following the expiration of the $600 jobless stipend. The Mid-America Business Conditions Index rose for the fourth straight month hitting 65.1, the best result in more than two years. The bulls ran away with the market following USDA’s Grain Stocks and Small Grains summary revealed less grain remains in the bins. For the week, December wheat regained most of last week’s losses with a 29 cent weekly gain while the nearby corn contract improved 15 cents. The soy complex also jumped higher on the report as combines rolled across the country. The November soybean contract gained 18 cents. December soybean meal strengthened $13.30 per ton.  December cotton shrank 13 cents per hundredweight. Over in the dairy parlor, November Class III milk futures increased 70. A down week in the livestock sector. December cattle shed 30 cents. November feeders dropped 27 cents. And the December lean hog contract followed lower by $1.93. In the currency markets, the U.S. Dollar index fell 76 ticks. November crude oil fell $3.30 per barrel. COMEX Gold rose $40.10 per ounce. And the Goldman Sachs Commodity Index declined 6 points to finish at 340.40.

Yeager: Joining us now to give us some insight is a panel of our regular market analysts, Ted Seifried, Elaine Kub, Naomi Blohm and Matthew Bennett. To the four of you, welcome.

Thanks for having us, Paul.

Thank you.

Yeager: Good to see you all. So let's start with you, Naomi, I want to get your take on this report from Wednesday. What was the biggest surprise in your mind?

Blohm: There were two coming in from the quarterly stocks perspective, soybeans and corn. Soybean quarterly stocks now 523 million bushels, much, much below expectations and the corn quarterly stocks coming in at 1.995 billion bushels also substantially below expectations with revisions going back into the June report. The market was not expecting this news. Prices had been sitting on major support levels going into the report. And the bullish news that was so unexpected was enough to get prices to turn around, bounce off of those support levels and work higher.

Yeager: So, Elaine, there's a winner, or there was a surprise, but was there a big winner in that report that's different than what Naomi just said?

Kub: No, just to build on exactly what she said, the market responded to that. On the percentage basis you'd say the increase in corn prices this week was probably the number one price winner for the bulls there. If you want to say maybe sort of an emotional winner, like if it makes you feel better to have thought all through 2019 that the USDA was wrong about corn production numbers or soybean production numbers you might say that this finally we're starting to get to a point where they can measure what's in the bins and see that maybe the 2019 crop was never there to begin with. But I don't think that's entirely the whole story. I think a lot of the usage categories, the fact that we're feeding more straight corn rather than DDG's is probably one of the biggest reasons behind that movement. But nevertheless, we can make that case as sort of an emotional winner.

Yeager: All right, Matt Bennett, you're the new guy on this type of panel situation. You get to answer the other question. So was there a loser in this report?

Bennett: Yeah, I think there was probably a couple of losers. We talked a little bit before but definitely the USDA a couple of years in a row now we've had quite a surprise on this quarterly stocks report. We come in here and the trade is caught off guard, we end up with a heck of a lot less corn than what we thought. And so I think it certainly calls into question whenever you go back and you revise June stocks, for instance, why was that revision made? It makes people kind of question whether we need to be leaning so heavily on these reports earlier in the year if we're going to come in two years in a row and drop the. The other people that I think felt like a bit of a loser on the Wednesday, for instance, is going to be a producer who has hedged a fair amount of soybeans. They're like, what in the world did I do earlier this year? And what I try to tell people is if you were selling at a profitable price because you knew what your soybeans were going to make or selling some corn on the way up, you know what, be happy because you probably have more to sell still.

Yeager: All right. Ted, I could let you cherry pick whatever you want but I want to ask a question instead that relates to the next report we're going to get a little bit. Glen in Bryan, Ohio, is asking us, have we established a harvest low in the grains? And can we assume the downside is very limited considering the basis strength this early in the marketing year? And so to tie it to moving forward, will the stock numbers continue to slide lower in future USDA reports?

Seifried: Okay. Yeah, so the way that we interpret this quarterly grain stocks report and then move it over to the WASDE report that we're going to see next Friday, that is going to be the question. We know that beginning stocks are going to be less for corn and soybeans, that is a given. That is not something where the USDA can temper that. Those are the numbers that are going to be used. So we know that means less supply coming in. The question is what happens on the demand side of the equation? I have to argue that there is no downside potential for demand on the soybean balance sheet whatsoever. You cannot reduce crush, you cannot reduce exports. I think it is reckless of the USDA not to increase exports by at least 50 if not 100 million bushels and I would even be fine with them justifying 150 million bushels. So then we're going to look at the yield. So there's going to be a lot of moving parts on this report. We know what beginning stocks are. Estimates for demand and yield are going to be the next big ones. So we tend to have this thing where we get a really bullish stocks report and then we follow up with really bullish expectations for a WASDE report but we tend to get a little bit disappointed. I like the fact that this one is going to be on a Friday because even if these numbers don't hit the bullish expectations that he market is going to have, I think we've got the weekend to think about it and then come back on Monday and say, well maybe the carryover for soybeans wasn't quite as bullish as we hoped for, it's still a really bullish number, and it's getting more and more bullish by the day.

Yeager: Naomi, you were shaking your head the most while Ted was talking. What did you want to add?

Blohm: I agree with Ted and if the USDA does increase the export demand by 100 million bushels on top of this lower carryout number that we're going to see then you've got carryout numbers coming in closer to 300 million bushels and that's without even adjusting yield. So what it does is it keeps the soybean prices in a very firm sideways trading pattern and now all of the market is going to be continuing to eye demand, it's going to be watching South American weather and now South America has the hard pressure of producing a perfect crop and there can be no weather issues because if there are then you have another reason for markets to get through that $10.50 resistance level on the monthly charts and we're on the way to higher prices.

Yeager: Matt, we'll stick with soybeans then. Let's dive into this contract. You have a lot playing into this. I know Naomi has written about it, you've talked about it. What other factors are playing in that is going to help get to that $10.50 or higher level? Or maybe you don't agree that that's where we're headed?

Bennett: To be honest it's really hard to know for sure. I do feel like the Chinese are still going to be buying more soybeans. You look at the dryness in Argentina, you look at issues we've had in Brazil, there's no doubt that you could be looking at a long time, late February maybe, before we see a lot of exports coming out of that part of the world. And so if the Chinese are buying soybeans, and nobody knows exactly what they're going to do but we feel pretty strong that they're going to be, in my opinion, there's no doubt. What's the other thing that could do so? I agree with Ted and the bottom line for me, if this yield comes in a half bushel or a bushel below last month, Katy bar the door, it's going to start getting really interesting. So our official estimate was closer to 300 million than 400 million bushel, I'll tell you that right now. And I know that whenever you put that estimate out, to me you don't know what the USDA is going to say. You're trying to figure out where they're going to come in. But bottom line is we're trying to throw out the number that we feel is going to be closest to what we think we're going to end up at and I think we're going to end up closer to 300 than 400 for sure.

Yeager: Elaine, put your mind in the middle of these rooms that are trying to look at these numbers and put them ahead. What does half a bushel, a bushel, maybe two mean? And is it possible that things can change so quickly in soybeans?

Kub: Sure. And the number that keeps in my mind when I think about these ending stocks that we're forward projecting here is the 10% stocks to use ratio. That tends to be sort of the rule of thumb where if the market has more than 10% leftover inventory the grain industry tends to feel like that's okay, we can get by. But if you start to get less than 10% leftover in the system, all of a sudden the industry starts to get really nervous about having enough supply and then you do start to have price rationing. And with soybeans we're very close to there already and with all of these changes that Ted and Naomi and Matt have suggested, it's very likely that they could get below that when we go forward into the next supply and demand table. So soybeans have a really interesting bullish prospect. And contrast that with corn which has the exact opposite thing going on where you have sufficient stocks to use ratio still and prospects for bearish changes in the usage categories going forward.

Yeager: Ted, I know you're twitching about this because there was this guy that was on this show not too long ago that said, $10 soybeans, and I think people thought he was crazy. So that guy, let's call him Red Reifried or something like that, is this what you were thinking about when you were talking about we were headed this high? Or are there other factors at play here in soybeans that have come to light since you last made that prediction?

Seifried: First of all, it was $10.25. And secondly, I'm physically hurt you didn't start with me on this question.

Yeager: I couldn't. How could I start with the guy that wanted -- it's the anticipation of what you were going to say. I wanted to see you twitch.

Seifried: Fair enough. So I've been talking about the need for price rationing soybeans since about January. I see China having a need, not only to fill what they need for this year, they want to stockpile. There's a number of reasons for that. I've thrown some conspiracy theories out there, i.e. they have intentions for expansion in the South China Sea, Taiwan and Hong Kong, they know the rest of the world is not going to like that, so just like Russia did in the early '70s with wheat they're trying to stockpile was much as they possible can before they're the bad guys and nobody wants to do business with them. That's just a theory. I don't care why they're buying. The other theory is that their hog herd is much bigger than what the reality is or what most people think it is. Doesn't matter, I don't care why they're buying. They're going to continue to buy, in my opinion. Again, we didn't plant enough soybeans last year. We're still looking at a record national average yield even if we take it down a bushel an acre. And that's not going to be enough for our domestic demand and our export demand on top of that. So the need for price rationing has kind of been loud and clear for months now but the trade has been so pessimistic and not wanting to respond to that because we don't think these Chinese purchases are real, we think they're going to cancel because they want to make Trump look bad before the election, which by the way that would do the opposite thing and it would be the silliest thing that they could do and it's a very silly theory that I've heard. They want the soybeans. They need the soybeans. Think about where they are priced on most of them. Their average price is probably $9.15. Gosh that's profitable. They're not going to cancel anything. They're going to continue to buy. I really do feel like we're going to run out of soybeans. My balance sheet right now says 295. That's what I'm estimating for this USDA report. But in reality I think we're a lot closer to pipeline which is 180 or at least that's what it was back in 2012. The pipeline now is probably a lot closer to 210.I think we're below that. I think we're technically going to be out of soybeans and the market needs to respond to that and start to price ration and find that price that slows Chinese buying down.

Yeager: Matt, the wheat market, kind of in the shadow of everything else. We've got dry conditions, we've got all sorts of things playing into this. But is there much steam left in this rally?

Bennett: I think a lot of it is going to depend on what the corn and bean markets do quite frankly. It's that time of year where I think the wheat market is going to need a little bit of help. You drop stocks just a little bit but let's face it, as far as world stocks go, as far as U.S. stocks go, I don't remember the last time we had what you would call a tight situation in the wheat market, so I guess at this stage of the game I would have to think that looking at July wheat out to next summer 20 cents shy of $6 it looks like a pretty darn good level to at least hedge some risk off. I know a lot of producers have asked me, do you think I'll get $6? You know what, you might get $6 but if you hold out for $6 for all of your wheat I've seen times before when you wish you would have sold some $5.80 wheat.

Yeager: So you're saying maybe sell on the way up is what you're saying there. Elaine, corn market. This one was another would you call it fireworks? You gave it a nice label early on.

Kub: Yeah, so I think it's interesting to think of it in relative terms. so all of the grain markets have sort of been moving together, as Matt alluded to, particularly corn and soybeans, which is what we expect to see. But when you start thinking next year, and Matt has got me thinking next year already, you've got to keep in mind that the 2021 corn price is quite normal compared to the 2021 soybean price. That price ratio is a very normal 2.4 to 1. So all of this excitement that we have built into the soybean market right now is not carrying over into the next year and you're looking at just more normal opportunities for 2021 and looking at selling corn in 2021 actually looks pretty good right now just from a price perspective.

Yeager: Ted, there is a little bit of an ethanol story developing possibly. We talk about feed in this corn market. Is ethanol playing maybe a negative role because of the decline in oil? Or what is ethanol's role right now in that corn market going forward?

Seifried: So, crude oil has been rather heavy at the end of this week. We've got a lot of crude oil supplies. And honestly I feel like crude oil has been overpriced for a while now, speculators have been keeping it up. So that is going to be a little bit of a problem for ethanol. But listen, from a blend standpoint if prices get cheaper, which they normally do going into the fall season, that could bring on a little bit more demand or hold on to some of the summer driving demand and that could be a beneficiary for ethanol. I think ethanol is going to stay fairly strong. Ethanol has rebounded very well from the April low production and prices. I don't see ethanol being a big drag on the balance sheet but it's not like exports that have a lot of upside potential. So we'll see. It's a crazy world we live in. Who knows what it's going to be like here throughout the fall and winter months and next spring. But if things don't get into a big shutdown again I think ethanol is going to stay fairly strong.

Yeager: Naomi, corn still pushed up against $3.80 today on Friday. What would be something that would push us higher in corn on December?

Blohm: We need the USDA to give us confirmation of new export demand on next Friday's USDA report. We also need the yield numbers to come down just a little bit more. And we need the ethanol number to stay unchanged. So it would have to be a combination of a perfect recipe in order to get prices through that major $4 resistance area that the December contract is maybe facing. But as we were talking about earlier in the show it ultimately falls on soybeans. Soybeans are the leader in this whole complex and if soybeans continue to have friendly news the corn market is going to follow. The funds are long just over 100,000 contracts now and at the record of when they've been long historically they have been long closer to 250,000 contracts if not more. So there is room for this market to work higher. But you do absolutely need to have the fresh fundamental news to justify it.

Yeager: Fresh news to feed the bears. Speaking of feed, Matt Bennett, let's move over to cattle. Last week a bearish cattle on feed report. The market shook it off early but then we had a sell off late in the week. Consumers, we only talked about them going up one percent in their spending, some have less money to spend at the grocery store. Are you in the camp on live cattle about the consumer driving this market or is there something else?

Bennett: I definitely think the consumer has been driving it to a point. You look at the cattle market, it's pretty healthy. You've got carryout out to April, we're pushing $117. Whenever I look at the cattle market I've said all along that I was a little more friendly long-term than what I was in the short run. I think I'm not the only one that feels that way. Whenever you look at the way that the market is set up it's in the healthy position. I don't look for any sort of major rally movement forward and I think if I was a cattle producer I see a fair amount of profit in that $115 to $117 range, whenever you get farther out I think I'd be latching onto it because at this stage of the game I struggle to see reasons why we would rally sharply because I think you're going to have plenty of cattle available for slaughter in the first and second quarter of this next year.

Yeager: Forgive me, we had a little issue earlier and so Elaine, I don't remember if it was you that said this, but I think it was. Corn feeding as an issue when it comes to the feeders and the feed source as an issue. If we go higher on corn we're going to have to trade out something to keep these cattle feeders profitable, right? Or what is going to be the alternative for a cattle producer?

Kub: There's actually a lot of interesting alternatives that I think are influencing calf prices this fall. For instance, you hear rumblings from Iowa all of the silage that has been cut because of the derecho damage or folks who just are expecting to put calves out on the stocks here this fall. I don't know how reasonable it is to expect that in large degrees because if you don't have the facilities to be feeding these cows in the first place, it's probably not something that is going to be done in a wide scale. But for those who do and who are willing I think we are going to see good demand for the calves that are coming to market now and the big fall runs this month headed to Iowa, headed to the derecho damaged areas. So that is a real positive for feeder calf prices along with what Matt said about the live cattle markets being generally positive, or certainly stable, and that should keep the whole sector sort of moving in a good direction.

Yeager: Ted, do you agree? I couldn't quite tell. It looked like you were maybe not agreeing with that?

Seifried: I do agree from the standpoint that we do have a lot of silage this year, a lot more than normal, so that helps feeder cattle prices stay somewhat strong. But I'm worried about the chart and I think seasonally we're sort of in a little bit of a timeframe where we could see a little bit of a slide to the downside, especially in live cattle. We saw $108 trade this week. I don't know, I feel like there's weakness there. I could see that coming down to the $102 area or so and we could be in store for a deeper correction in cattle. I think producers should be looking at pricing here or at least getting some sort of downside protection. I am waving that flag of caution right now saying okay, we are struggling to get up and over new highs and fundamentally I'm not sure we have that rationale here at the moment. Maybe we will further on down the road but not right here.

Yeager: Naomi, in the dairy stage of Wisconsin we saw some liquidation months ago. We're not seeing that now but we are seeing prices rally. Where is dairy headed right now?

Blohm: We actually have some possible continued upside for the milk prices. It's really exciting right now in dairy country because we have really fantastic, strong cheese demand. Part of it is because of the government buying program that has been going on, that pushed the market up earlier this summer and we had a correction lower, now round two of the government program buying is happening. But it's not just the cheese that is pushing prices higher, we have strong exports and from January through July of this year exports up nearly 10% and our July exports were the best July exports that we've ever had on record. So we have strong dairy demand, strong cheese demand here at home that is leading the Class III prices higher and the October Class III price today was even able to close above the $20 level which is significant. We've got barrel prices working higher on the cheese which is supportive for Class III and if we can continue to see this going into next week, technically speaking if that cheese price can keep moving higher technical upside takes up back up closer to $23 or $24 milk for October/November prices which would actually match the higher prices that we saw back in July and August. So the outlook for milk now still continues to be fantastic. I would caution production is fierce. Production was up over 1.8% on the last milk production report so we are producing ample supplies. If there's any sign that the demand starts to linger, prices are going to fall quick. So I would caution you to look at maybe using some type of put mechanism under the marketplace, it leaves your upside open, but to protect $20 milk is a very important thing to be considering.

Yeager: Matt Bennett, lastly in the hog market, last year in China the Lunar New Year was not much of a celebration, there wasn't much pork being eaten. This week it was reported that China is aiming to produce 95% of its pork at home. So there's not quite, the two are not necessarily lined up. There seems to be room for the U.S. pork. Is that the case in your eyes?

Bennett: There has been, we've had pretty good export sales, no doubt. When you look at some of the issues we've had in the EU and obviously the U.S. has been a place to come and buy some pork. And I think you look at the market, you've got a little bit of an inverted market our front and then you get past the first of the year and you get into a healthier carry market again. But there has definitely been enough demand to support price up here. But if I was an independent hog producer, which are kind of hard to come by nowadays, $75 hogs to me looks like an awfully rich area to be at. I'm not saying they can't go up more but gee whiz, if you haven't done anything from a risk perspective I think a fair amount of profit resides right there.

Yeager: Ted, you look like you wanted to disagree in 30 seconds.

Seifried: December hogs are at 63 and I think they should be at 74 by the time December is off the board. So I am being patient before I get really aggressive with pricing out hogs. I do think that China needs to buy some in the near-term. Longer term I think they have done a much better job rebuilding that hog herd, it's longer term I get a little worried. But I think December will get a chance to pop its head over 70 before all is said and done.

Yeager: Elaine, 15 seconds, did you enjoy yourself today?

Kub: Absolutely, it is sincerely a pleasure to be on the panel with these three analysts.

Yeager: All right. Elaine Kub, I appreciate your time there. Also Naomi Blohm is with us today. Naomi, good to see you. Matt Bennett, thank you. I hope it was okay, I hope they were nice to you, it seemed like they were. And Ted Seifried, as always, good to see you. Thank you so very much.

Seifried: I had a great time, Paul, thanks for having me. Although next time I think we should have Naomi's band.

Yeager: Sounds like a plan. That will do it for this installment of Market to Market. We will talk more in Market Plus where more jocularity like this will ensure. You can find it on our website at Facebook is still a place where we still share our behind-the-scenes and also our stories around our program. Give us a like at MarketToMarketShow. Next week, we'll see how the sheep industry is navigating challenging economic waters. Until then, thank you so very much for watching. and have a great week.



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What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.


Tomorrow. For over 100 year we have worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell Mutual agent today.


Grinnell Mutual Insurance