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Export Problems · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_01: Welcome to the Professional Ag Marketing Podcast.
• 0:04
  SPEAKER_01: If you want a deep dive into the ag markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_01: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_01: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_01: This is your host, Mike Miner.
• 0:22
  SPEAKER_01: Let's get started.
• 0:24
  SPEAKER_01: Today is October 7th.
• 0:25
  SPEAKER_01: I've got Pat with us here this week.
• 0:27
  SPEAKER_01: How's it going, Pat?
• 0:28
  SPEAKER_00: Good Mike.
• 0:29
  SPEAKER_00: How are you this afternoon?
• 0:30
  SPEAKER_01: We are doing pretty good here.
• 0:32
  SPEAKER_01: We're going to talk a little bit about demand for corn and soybeans.
• 0:35
  SPEAKER_01: There's been some talk of destruction going on in that category over the past week.
• 0:40
  SPEAKER_01: A few really major headlines here as uh we look at a situation at the river market that has uh hit both futures, basis, future spreads.
• 0:50
  SPEAKER_01: So kind of want to talk about that today and then uh talk about week over week week changes, Pat.
• 0:56
  SPEAKER_00: Sounds like exciting stuff, Mike.
• 0:57
  SPEAKER_01: It is kind of exciting stuff.
• 0:59
  SPEAKER_01: I mean, if you're an end user, I would say it's probably sounds a little bit more exciting than if you're a grain guy uh producing, but at the same time, hopefully you've got some better yields out there than you're expecting to, Pat.
• 1:11
  SPEAKER_00: Yeah, exactly.
• 1:11
  SPEAKER_00: Exactly.
• 1:12
  SPEAKER_00: And so as we're getting into uh further into harvest here, it's uh definitely a timely topic.
• 1:18
  SPEAKER_00: So let's get started.
• 1:19
  SPEAKER_01: Awesome.
• 1:20
  SPEAKER_01: Well, let's talk about the big topic this week, which would be the river market.
• 1:24
  SPEAKER_01: Can you explain a little bit about what's going on there and how it uh impacts all of us here, even into Minnesota, South Dakota?
• 1:31
  SPEAKER_00: Yeah, interesting uh question.
• 1:33
  SPEAKER_00: And so maybe just try from a bit of a of a of a step back and up macro perspective, just a reminder that you know the futures market's um uh tie to what's going on in all of our cash markets all across the the country and and globally, one would argue, is tied to the delivery system, which is uh export focused, meaning that uh there's delivery houses on the Illinois River that uh if you're uh choose to either be delivered on or take delivery on a futures contract, um, that transaction, that physical transaction, can take place on a river house.
• 2:13
  SPEAKER_00: And so, and so the tie between what's going on in cash markets and what's happening in Chicago on the Board of Trade is uh there's a direct tie there, but it's it's it's export uh related, export tied, which makes sense from a historical long-term perspective, because our surplus would get exported, not uh not used uh domestically.
• 2:34
  SPEAKER_00: But so it's happening uh interestingly, I think, up front here now or this year in this transition from old crop to new crop, first of all, we have some pretty significant inverses that it that in and of itself is pretty interesting, particularly here in the Western Corn Belt.
• 2:50
  SPEAKER_00: Um but the Illinois and Mississippi River system is backed up here because it has some physical limitations as it relates to uh barge movement, low river levels is is impacting that.
• 3:01
  SPEAKER_00: And then on top of all of that, the economics of exporting grain out of this country are different than what they have been for a while as the US dollar trades on on uh 20 plus year highs.
• 3:12
  SPEAKER_00: So we have economic disincentives to export grain, we have physical limitations to be able to export grain, and it is impacting uh the the uh nearby uh futures markets and spreads and basis levels.
• 3:28
  SPEAKER_01: Interesting.
• 3:29
  SPEAKER_01: Very good.
• 3:30
  SPEAKER_01: I like how you took it all the way back to a macro perspective.
• 3:33
  SPEAKER_01: So right now you're looking at low water levels.
• 3:36
  SPEAKER_01: Uh there are a problem for the barge traffic.
• 3:39
  SPEAKER_01: USDA said barge grain movement was up 44% this past week from the week prior.
• 3:45
  SPEAKER_01: However, it's still down 36% from a year ago.
• 3:49
  SPEAKER_01: Uh light rains in the forecast, so not enough to really help down there.
• 3:53
  SPEAKER_01: And over 125 barges backed up, so they have to load them a little bit lighter, which means they need more of them to go, which means they're getting choked tighter.
• 4:03
  SPEAKER_01: So that's a problem going forward, and it also at a time frame where fob corn prices in Brazil for November going forward at the back end of harvest for the United States, their prices are 11% below the United States prices.
• 4:18
  SPEAKER_01: And their early planting conditions have been quite favorable for their first crop.
• 4:23
  SPEAKER_01: So you start to tie together some of these things with export activity problems up front here, how competitive are we?
• 4:31
  SPEAKER_01: It's not a very fantastic picture for grain prices here, is it?
• 4:35
  SPEAKER_00: It's an inter that's right.
• 4:37
  SPEAKER_00: And the backdrop again is a quarterly stocks report that uh showed more corn around than what we expected, right?
• 4:45
  SPEAKER_00: Pretty much, yeah.
• 4:46
  SPEAKER_00: And and also the September report that USD released um talked about a reduction in crop size, but also record uh a res a reduction in demand as well.
• 4:59
  SPEAKER_00: And many of us thought initially it was a corresponding drop in demand because production was smile was smaller.
• 5:07
  SPEAKER_00: But you might want to take a double look at that, right?
• 5:10
  SPEAKER_00: Yeah.
• 5:11
  SPEAKER_00: Because it's possible that those two things didn't have much to do with each other.
• 5:15
  SPEAKER_00: It's possible that the USDA needed to reduce the size of the crop because of deteriorating crop conditions in the latter part of the growing season, which by the way, the yield the earlier yield reports that we've that we we've seen filter in here since then would probably substantiate the USDA numbers as the reduction was warranted.
• 5:34
  SPEAKER_00: But it's it's perhaps coincidental that we also reduce demand or set up different way, demand was going to go down whether the crop size was going down or not, right?
• 5:43
  SPEAKER_00: And so I find that part uh I guess equally fascinating as it relates to all of these things, is that is that um you know those factors that you rattled off, the uh uh uh uh an early and relatively good start to the crop in South America, a strong U.S.
• 5:59
  SPEAKER_00: currency, ocean freight spreads changing, all of these things are suggesting that demand for corn, at least on the export front, is warranted to see some sort of reduction in that expectation as we go forward here.
• 6:13
  SPEAKER_00: And then on top of all of that, strong U.S.
• 6:15
  SPEAKER_00: currency drives down crude oil prices, and now corn is also being impacted potentially from a demand perspective in the ethanol sector uh because of strong US currency and and and lower um uh crude oil values as a result, not to mention the macro macro issues of uh of uh uh feds all across the planet trying to slow down economic activity, which traditionally isn't all that bullish for commodities either.
• 6:42
  SPEAKER_01: Yeah.
• 6:43
  SPEAKER_01: So it's been interesting because I think so far here, this river talk has mainly impacted the soybean market.
• 6:50
  SPEAKER_01: But it'll be interesting as harvest goes along.
• 6:53
  SPEAKER_01: If this remains a problem, you'll really start to see it hit the corn market as well.
• 6:56
  SPEAKER_01: And we've seen that in in the future spreads, probably a little bit more.
• 7:00
  SPEAKER_01: The soybean spreads have been a little bit more bearish than the corn ones, but they're moving right along with it, just like you said, they're futures markets, so they see a little bit of this coming at them in the future.
• 7:10
  SPEAKER_01: So when we go forward here, uh basis, we're still gonna use a lot of corn in south central United States, so basis levels are somewhat strong for corn there, but I was taking a look at basis levels in eastern Iowa on soybeans specifically, and this week from the 27th of September to today, we've pretty much backed off an average basis level on soybeans about 40 cents in eastern Iowa.
• 7:37
  SPEAKER_01: So it'll be and I know that you're going from an inverted market up front, you know, before harvest, to now harvest glut pretty much.
• 7:46
  SPEAKER_01: So that that naturally does that anyways, most years, but it happened pretty quick.
• 7:50
  SPEAKER_00: It did happen quick, and I anecdotally I had heard some of um in in individual locations, I had heard of some 70 cent basis changes day over day, so pretty amazing.
• 8:00
  SPEAKER_01: That is amazing.
• 8:01
  SPEAKER_01: And uh, as we look forward to uh a few other things coming up uh this next week, we got a WASDA report, and uh we talked about crop size a little bit already, Pat, but we uh we had some informal or IHS informal numbers come out.
• 8:15
  SPEAKER_01: They're expecting the corn crop to maybe be just under 172, uh soybean crop under 50.
• 8:21
  SPEAKER_01: So we're starting to see some average trade guesses come out for this next Wednesday's report.
• 8:26
  SPEAKER_01: Anything uh for guys going into next Wednesday, I guess, could be a big report.
• 8:30
  SPEAKER_01: It's right in the middle of harvest, so a lot of decisions are being made about selling grain, storing grain being open, stuff like that.
• 8:38
  SPEAKER_01: So uh something to keep them prepared for next week.
• 8:42
  SPEAKER_00: I'm not so sure of like specifically as it relates to the report for next week, Mike.
• 8:47
  SPEAKER_00: But but um I I mean what most producers are figuring out right now is uh is some pretty important information, which is you know, we've talked and talked and talked about what our cost of uh of of uh production is and all of those things, and and uh up until this point that's been divided by some budgeted yield number that was an estimate.
• 9:08
  SPEAKER_00: And for a lot of us, we're becoming increasingly clear as to uh what we're gonna be able to divide uh um our expenses by.
• 9:16
  SPEAKER_00: Pretty important uh number to understand.
• 9:18
  SPEAKER_00: And so we just um um would just submit to everyone that uh as we're working through harvest, let's make sure that we're uh dollaring up uh what what uh what our costs are and and making sure that we're we're determining as accurate as we can a cost of production number here that allows for us to start to make better decisions from a risk management perspective.
• 9:43
  SPEAKER_00: Because as we talk about these micro and macro issues of basis and spread and the impact that that could have on any individual producer's operation, they're significant and important to make those right decisions, but we have to be able to uh tie that back to what's going on in our farm and uh making good uh decisions as it relates to basis and spreads.
• 10:06
  SPEAKER_00: And and then so as you get more comfortable with your production size, yeah, interact with uh uh uh your grain merchandiser risk manager and make sure that we're making good decisions for your farm.
• 10:18
  SPEAKER_01: This was a great example of making sure you manage every single thing you can in your marketing because something exactly like this week can come out of nowhere.
• 10:27
  SPEAKER_01: You know, demand's been so strong for corn and soybeans over the past few months.
• 10:31
  SPEAKER_01: Uh from a lot of merchandiser perspectives, you know, you just can't find corn or gotta buy corn today.
• 10:37
  SPEAKER_01: Basis is incredibly bullish over the next year, and then something like this happens.
• 10:42
  SPEAKER_01: So it uh another humbling experience for people who think they got it figured out.
• 10:46
  SPEAKER_00: That's exactly right.
• 10:47
  SPEAKER_01: All right, any closing thoughts for our listeners this week?
• 10:50
  SPEAKER_00: I'll be safe out there.
• 10:51
  SPEAKER_00: Uh good luck with uh what appears to be another uh wide open uh week or so of harvest here.
• 10:56
  SPEAKER_00: So uh be safe and uh and uh pay attention to the details.
• 11:01
  SPEAKER_01: Three-day weekend here on the banks, but we do have markets open on Monday, so if you need anything, we'll be here at Professional Egg Marketing.
• 11:09
  SPEAKER_01: And thank you to all our listeners.
• 11:11
  SPEAKER_01: Please reach out to us from our website at professionaleggmarketing.com or check out our newly added hog specific podcast named Hog Market Talk that's released every Thursday.
• 11:22
  SPEAKER_01: Trading commodity futures and options involve substantial risk and loss that is not suitable for all investors.