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Transcript

Spread Action · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_00: Welcome to the Professional Ag Marketing Podcast.
• 0:04
  SPEAKER_00: If you want a deep dive into the ag markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_00: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_00: This is your host, Mike Minor.
• 0:22
  SPEAKER_00: Let's get started.
• 0:23
  SPEAKER_00: Today is October 18th.
• 0:25
  SPEAKER_00: I've got Pat with us today.
• 0:26
  SPEAKER_00: How's it going?
• 0:27
  SPEAKER_01: Good, Mike.
• 0:28
  SPEAKER_01: How are you today?
• 0:29
  SPEAKER_00: Doing very good.
• 0:30
  SPEAKER_00: We've got an interesting day today, Pat.
• 0:32
  SPEAKER_00: We uh just before the show here, we're talking about how we haven't broke down a whole lot of uh the merchandising your space discussion, and and we've been seeing some interesting signs this week, I think, which is worth talking about with basis and spreads.
• 0:47
  SPEAKER_00: And uh I just want you to kind of break down using your experience and in that industry and few things that have stood out to you this past week.
• 0:56
  SPEAKER_01: Yeah, that's a good timely discussion point here as we um aggressively race towards uh the end of harvest all across the Corn Belt with some incredibly uh um favorable harvest uh progress conditions, but quite concerning as it relates to uh uh how dry it is out there, Mike, and the you know the threat of what you hear everyone really concerned and the risk of and some real issues as it relates to combine fires and all those sorts of things.
• 1:24
  SPEAKER_01: And I think I I think I I read earlier today that uh you know over eighty percent of the corn belt is uh is in some type of a drought status um um right now.
• 1:34
  SPEAKER_01: So um incredibly wet spring and and uh and uh then uh I dried off considerably here in in in the last uh third of harvest and and uh and yet it appears as though, um supported by uh last week's uh Wazdi report uh that uh you know the U.S.
• 1:53
  SPEAKER_01: corn crop at this point projected to be uh six bushels or so higher than last year's record, and uh um and a and a very solid bean crop as well.
• 2:02
  SPEAKER_01: And and so you know, we're we talk a lot about and as does uh everyone pay a lot of attention to what impact that's having on flat price, what the futures market is doing.
• 2:13
  SPEAKER_01: But what we don't talk a lot about is is uh is what's going on with basis in different parts of of um of the country and and uh and spreads and then what impact that that could potentially have on the futures market as we go forward here.
• 2:28
  SPEAKER_00: Now this is really interesting because typically if you would tell me most years that you have a a record crop six bushels above record, and you have an incredibly fast harvest pace, um I would typically say that should be bearish on things like spreads or basis levels.
• 2:47
  SPEAKER_00: And now we're gonna have to widen where we're looking at a little bit here in the United States, probably than just out our back door pat, but that's not really what we're experiencing here in this area particularly, isn't it?
• 2:58
  SPEAKER_01: That's exactly right.
• 2:59
  SPEAKER_01: So from a spread perspective, uh first of all, the D Smarch corn spread as we speak here around noon central time is trading uh at 14 and a quarter cents, um, was wider uh than that over 18 cents um uh um on uh the 25th of September.
• 3:18
  SPEAKER_01: And so and so we're seeing spreads narrow as we work through a record harvest, as you mentioned, um kind of odd.
• 3:26
  SPEAKER_01: And going through gut slot doesn't make a lot of sense, does it?
• 3:28
  SPEAKER_01: And so and so that is uh that's certainly a real question mark.
• 3:33
  SPEAKER_01: And actually what prompted this discussion, we're talking uh we just referenced corn, but we're seeing the same phenomenon take take place in the soybean complex, that the the no jan spread, uh the relationship between November soybeans and January soybeans is has narrowed up uh again as we speak this morning around noon central time at 11 and a half cents.
• 3:55
  SPEAKER_01: Um actually traded as narrow as seven cents um at what at one point today, and that's a pretty significant erroring from the 18 or 19 cents that it was trading at um in at the end of September there.
• 4:06
  SPEAKER_00: So I mean that's only happened in like the last ten days, exactly.
• 4:10
  SPEAKER_01: Yeah, very dramatic.
• 4:11
  SPEAKER_01: And and we've we've also seen now back to we've talked about spreads here for a second.
• 4:16
  SPEAKER_01: Now let's talk about basis for a second, at least delivered the gulf, SIF basis also is um appreciating consider considerably here.
• 4:25
  SPEAKER_01: And so um, you know, we've we've uh we've lost a lot of flat price um um prices here.
• 4:34
  SPEAKER_01: The futures market has broken significantly, in part because of concern about demand, specifically.
• 4:41
  SPEAKER_01: Um, you know, U.S.
• 4:42
  SPEAKER_01: uh soybean sales into China um had been for the longest time lagging behind normal and uh pretty uh lethargic to say the least.
• 4:51
  SPEAKER_01: And so um we've recently uh become more competitive in that market, particularly with this futures market break, and now we're seeing a pretty significant appreciation in basis levels of trading in Center Gulf down there, and so and so those two things work in tangent with one another.
• 5:09
  SPEAKER_01: Um we're seeing narrower basis levels in that export market, which is tied to the delivery system, narrowing spreads.
• 5:17
  SPEAKER_01: And uh um part in part because of um the observation that we were making at the beginning of this conversation, which is that uh you know, we are, you know, the the uh extreme dry conditions that were that that the the corn belt has has seen here over the last couple three months has had a major impact on on Mississippi River levels and uh it is hampering uh movement today.
• 5:41
  SPEAKER_01: And so while you might have and do have in a lot of uh regions of the corn belt here, a glut of soybeans, as we just went through um um gut slot harvest here, uh there is a a void, a bit of an issue as it relates to logistics, uh getting getting those delivered down into uh uh into the Gulf and out for export.
• 6:01
  SPEAKER_01: And so um that's a reason why we're seeing uh uh potentially a reason why we're seeing tightening uh spreads uh here on on uh on at least the the NOVE JAN on soybeans.
• 6:13
  SPEAKER_01: Um possibly could be the case here on corn too, but there's there's also likely some more short-term effects going on, like maybe someone's a little bit short against some logistics or against a vessel showing up or two um in center gulf, could be providing for this extra little bump here, Mike.
• 6:32
  SPEAKER_01: And then there's also a longer term, maybe more of a bigger macro issue at play here, which is you know, the U.S.
• 6:40
  SPEAKER_01: producer, um, while he's harvesting in some areas of the country um a record crop, he's also um developed a significant amount of infrastructure space through the years where he's he's he's better able to hold that crop off the market.
• 6:56
  SPEAKER_01: And so um when we look at these markets and these spreads, um, you know, we we've uh uh have a a tendency to to uh compare to historics and and to to try to make some conclusions on and and and looking at historical ranges isn't doing a a whole lot of good in this in this uh in this new environment of of uh of a producer that generally uh um has more more on farm space and what he's had in the past relative to the size of his crop, coupled with ever increasing domestic demand, has a um has an interesting impact on what these spreads trade at and also what basis levels are doing across the country.
• 7:38
  SPEAKER_01: And so when we so so that's a little bit about spreads.
• 7:42
  SPEAKER_01: And then the next thing to talk about is it as it relates to to basis levels.
• 7:46
  SPEAKER_01: We talked about delivered basis basis levels, uh particularly in the in on the export side in the Gulf here.
• 7:53
  SPEAKER_01: Um but domestically, I mean we have, and and and you and I sit here in the Northwest Corn Belt, and you know, we're seeing 20, 30, in some cases 40 and 50 bushel yields on corn that are less than trend, less than expectations, in spite of a national average that's that's projected to be six bushels over, and some producers in in the central part of the belt into the eastern corn belt experiencing record yields for sure.
• 8:23
  SPEAKER_01: And so, and so we're we're seeing basis need to do an awful lot of work to deal with some pretty odd variances from one region of the country um um to the other.
• 8:36
  SPEAKER_01: And we're in and and while there's there's some areas today that are that are um you know waiting for corn to get piled on the ground or in some cases waiting for corn to get used or waiting for a barge to load up just to finish harvesting their crop.
• 8:49
  SPEAKER_01: And then there'll be other parts of the region, like like up here in the Northwest Corn Belt, where where we likely don't get full.
• 8:56
  SPEAKER_01: We likely don't get uh um all of the space um um filled up because of of uh of a more deficit crop here.
• 9:03
  SPEAKER_00: The other thing to take into account here too is uh any comments about you know the farmer selling going into this harvest was pretty minimal prior to that.
• 9:13
  SPEAKER_00: So the impact that's gonna have on space as well, Pat, or uh pressure harvest pressure as we near the end of uh corn here, you know, that might have a little bit of an impact on things too.
• 9:24
  SPEAKER_01: Absolutely right.
• 9:25
  SPEAKER_01: And and then also uh the flat price offering, especially for those um producers that that are unfortunately experiencing a uh a shorter crop, um the the the lower flat price levels are certainly a disincentive to transfer ownership, and and so that's gonna impact basis andor spreads as well.
• 9:45
  SPEAKER_00: It's just I find it very interesting that normally spreads and market direction seem to go in a very similar pattern, and we've narrowed up these spreads significantly.
• 9:55
  SPEAKER_00: They've got a lot stronger over the past ten days for corn and soybeans.
• 9:59
  SPEAKER_00: Meanwhile, the futures markets are putting in new lows on the move.
• 10:03
  SPEAKER_00: We're below four bucks on these corn and below ten on November soybeans, you know, getting near the the old contract lows.
• 10:10
  SPEAKER_00: I I'm very curious to see what we're gonna do the next coming weeks.
• 10:13
  SPEAKER_01: Well, it's it's certainly bears watching, and that's the without saying it, that's the reason why we're talking about it today.
• 10:19
  SPEAKER_01: Um it's not uncommon for us to at least believe that um first you see basis levels narrow, then you see spreads narrow, um, and then you might end up seeing a a change in the futures market.
• 10:33
  SPEAKER_01: And we're certainly not um forecasting anything uh we're not forecasting anything today on this on this uh on this podcast, but but it you you're right, Mike.
• 10:43
  SPEAKER_01: That those are the right things to look at.
• 10:45
  SPEAKER_01: We're seeing um basis levels narrow up in some areas that are finishing up harvest and and uh at in at some major delivery points, uh we're also seeing spreads narrow and and that could be an indication of of some pretty decent demand.
• 10:59
  SPEAKER_00: All right.
• 11:00
  SPEAKER_00: Thank you for your time today, Pat.
• 11:01
  SPEAKER_00: Thank you.
• 11:02
  SPEAKER_00: And thank you to all our listeners.
• 11:04
  SPEAKER_00: Please reach out to us at professional eggmarketing.com.
• 11:07
  SPEAKER_00: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 11:12
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 11:18
  SPEAKER_00: See you next time.