Pearson: This is the Friday, July 11, 2014 version of the Market Plus segment. Joining us now is Darin Newsom. Darin, welcome back.
Newsom: Thank you, Mike.
Pearson: I'd like to start this by circling back to soybeans. Let's get into the new crop soybeans. We've got record acreage, potential record yield and beans are still north of $10. How long will they stay there?
Newsom: They're not going to stay that far north of $10 very long. In Friday's USDA report they pegged production at 3.8 billion bushels I believe it was. They left average yield at 45.3 but they multiplied it times their new acreage number that they came out with on June 30th. So, even though we didn't change yield, now we're looking at larger production, demand is expected to pick up in the '14-'15 marketing year pushing -- the bottom line is ending stocks are expected now or projected now to climb up to 415 million bushels, which is some of the largest that we've seen in quite some time. The problem that I have, and it's what we discussed on the show, is that in that mix is the old crop ending stocks of 140 million bushels that is now being carried over into beginning stocks. I don't think it's there. I think through the magic of a negative residual use number for old crop we were able to bump up our ending stocks number of '13-'14. So, if we have any problems in the '14-'15 crop or if demand is actually stronger than expected, you know, that 415 million bushel ending stock starts to erode. And we shouldn't be as tight as we are in '13-'14 but we could be far tighter than what it looks like here at the end of this week.
Pearson: So, advice to producers? Do you wait and see if something happens on the off chance that we will begin to incorporate that negative residual or do you book some sales here where they're at?
Newsom: Beans are a tough call because they haven't sold off like corn and wheat have. The old crop situation has held both old and new crop up so that we're not in the lower levels of the price range like we are in corn and beans. If you want to make some sales, I think we were down something like 18 cents on Friday, you can probably still get some on the books. There is a possibility that the soybean market collapses from here. If weather stays perfect from July into August and in the August report we see yields bumped up beyond this 45.3 then yes, the market is going to continue to go lower, it's going to follow what has happened in corn, it's going to follow what is going to happen in wheat. So, producers can look at making some sales in here. I wouldn't get overloaded. But certainly you're going to want to have something on the books because there is a real threat to the soybean market here of following in the footsteps of what has happened in corn and wheat.
Pearson: Now, one of the issues you mentioned on the show on the corn side, not only are we looking at big yield, big acres, we're looking at reduced demand. On the bean side, do we see a similar reduction in demand?
Newsom: We're looking at increased year-to-year demand, which is a must in this type of situation because if we did see a reduction, if for some reason China stopped buying as many U.S. beans as they have in the past, we would be looking at a very similar supply and demand situation that we're faced now with the corn. So, I think the underlying supply and demand, fundamental situation in beans is still stronger than it is in corn and so it doesn't have as much reason to sell off. But, again, we don't know how large this crop could ultimately be if USDA starts upping its yield potential.
Pearson: Okay. Well, let's jump down, let's take a look at cotton. We’re on another week of declines in cotton. Strictly related to seasonals?
Newsom: It is to me. We've had a lot of fundamental pressure in the cotton market. We’ve seen investors selling this market willingly and they're not afraid of this market. Seasonally we do sell off from about late February through late July, about mid-July, so right in this timeframe. At that point we start to stabilize and then the December contract, which is the lead contract up through the end of the year now, basically starts to move higher. So, what is the fundamental reason? What is going to be the catalyst to get this buyer, get the buyers back in? Possibly just being oversold. Possibly just being so low in comparison to where it has been past years because there's not a lot of fundamental change in the cotton market. But we have seen the Dec/March spread tighten up a little bit. That could be enough to start to spark a little bit of buying. It's going to be tough. This is a market that everyone, again, seems willing to sell but maybe it'll be enough to get this thing moving back up a little bit.
Pearson: Okay. Well, now we do have a lot of great questions this week from our followers on Twitter and Facebook. I'd like to start out with Phil in Ontario, Canada. He is curious, what past year best mimics the situation we see this year in 2014? What would be our analog year for where we're at today?
Newsom: If we look at the corn and the soybean markets and if we take NAS weekly crop condition reports for what they're worth, flawed, but it's the only comparison that we have that we can use back to past years, it's the same situation, it's the same set of numbers. The ones that look the most similar is 2009 and 2013. In the corn market, those are the two years with the highest yields, which is what is strange because we've got our crop conditions basically trending sideways right now but above what we saw in 2009. So, what it's saying is, if we believe or if we make any type of correlation with these numbers, is that we should see, if things hold together as they are right now, higher yield than what we saw in 2009. Well, that is what is being projected right now. Now, USDA does not use NAS numbers in its estimation of yield, doesn't even take them into account. Why should they? It's only all government numbers. But, at this point, that's the one that is mimicked the closest. 2013 stayed sideways near its highs for quite some time and then backed off at the end of the season. But, again, we're dealing in both corn and soybeans, the two years that had the highest yields with soybeans only coming up fractionally short, so they'd be like in third place for 2013. But still, dealing with two very strong yielding years as far as what looks like some sort of analogous situation.
Pearson: Okay. Alright. So any parallels drawn pricewise for producers to act on as we look to the future? I mean, one of the things that I've heard from producers if we're looking at 2013, a lot of those folks are wishing they'd went ahead and sold Dec '14 corn in Dec '13. Should we be making some sales a year ahead, two years ahead?
Newsom: Yeah. Right now in the corn market we've got, again, we've got the Dec corn price, Dec '14 corn priced in something like the lower 18% of where we've been over the last five years. We’ve got the cash market in the lower, something like the lower 20-23% or something like that and we go out to the December 2015 and '16 contracts, they're also in this lower 25%. It's hard to sell in the lower 25%. The market is sharply oversold. The problem is, what is going to be out there to spark a rally. Why would the market rally? Well, the number one reason is if investment traders get tired of selling or if there's some sort of weather scare here in July or August that trims back this potential for a huge crop. That could be the only reasons why this market may rally. I might sit back and not get a lot more on the books for '15-'16 right now. But if the market moves and moves up a little bit you're going to have to be willing to take it and jump on at least a little bit looking ahead.
Pearson: You bet. That idea of a 2 billion bushel carryout come August 15 is --
Newsom: It's pretty scary.
Pearson: It's a big number.
Newsom: Because as we talked about, if we keep hitting year after year where we're seeing these 13.8 to 14 billion bushel crops and demand is struggling to increase, it's not out of the imagination to push corn $1.50, $2 lower from where we are now, cash price, futures price, basis could be a wreck. So, I hate to, you know, throw that dark cloud over everything. But we start having that type of supply and demand situation it's not out of the realm of possibility.
Pearson: Alright. Well, one final question before you go. M.U. in northwest Iowa is curious, and I think you raised this issue on the show with regard to wheat in particular, but she asks, where do you see acres dropping out first around the world? And is it going to be the farmer or the banker driving it?
Newsom: That's a great question. I think we could continue to see some wheat acres come out because if we sit back and we really analyze it, why does the U.S. even -- I'm saying this from a Kansan, it's hard to say this -- but why does the U.S. grow as much wheat as it does? The world has plenty of wheat. So, we could continue to see acreage loss. The problem is, you know, what are we going to move it into? Are we going to move it into more corn? We've already got, even though we reduced corn this year we're still looking at a 14 billion bushel crop if Mother Nature decides to play nice. Are we going to move it into soybeans? At some point we're going to get to a cumbersome supply level there because how much further can Chinese demand go? So, I think we're going to continue to see acreage shifts. We always do. I think the initial loser could very easily be wheat and then see those acres possibly split up among the other crops. The other issue that is going to help make that decision is water, you know. Is the western U.S., western Midwest going to continue to see rains like it has here over the last 30, 45 days? Or is it going to go back to a drought? If it's going to go back to a drought it's hard to plant more corn and soybeans.
Pearson: So, it will be a changing face most likely over the course of especially in the western U.S.?
Pearson: Alright. Well, Darin, thank you for taking the time to come and talk to us this weekend and hope you have a great one.
Newsom: Thank you, Mike.
Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter. Please continue to do so and we will continue to get expert analysis right to you. Thanks for watching and have a great week.