Pearson: This is the Friday, August 29, 2014 version of the Market Plus segment. Joining us now is Darin Newsom. Darin, welcome back.
Newsom: Thank you, Mike.
Pearson: We've got a great question here. You alluded to it briefly on the show. Garrett in Spink County, South Dakota wants to get us started. Talk about some option strategies for producers who are undersold in corn and soy heading into this harvest.
Newsom: Yeah, the options are a little bit tough right now because when you buy an option basically all you're doing is establishing a floor price and both corn and soybeans are relatively low. Now, if you're trying to cover some old crop, you could probably throw an option on there with the idea, okay, maybe the market is going to go up, I'm taking a beating on the crop anyway. So, you could step in and you can buy some shorter term options, maybe to ride through the, maybe to ride through the September 11th crop report, maybe to take you up to the end of September, something along that line. Then after that wait and see what the market is going to do. So, you could step in, not spend a lot of money on time value by looking at some shorter timeframe options if that is what your concern is.
Pearson: And today really options would be the only play you'd be looking at making. You wouldn't be looking at any outright buys or sells on the futures side today?
Newsom: I'd be a little nervous in the futures. On old crop I'd want to pick and choose my cash sales and just make cash and be done with it. On the new crop, yeah, it would be difficult unless we get a very sizeable rally and either, for whatever reason, weather related, whatever it might be in corn and soybeans, it'd be a little bit risky getting in, stepping in and doing futures because it could really start to run. But, again, maybe some short-dated options might be a better play.
Pearson: Okay. You ended there with an interesting comment. A little nervous getting into futures because they could really start to run. That leads right into Phil in Ontario has got a question. He says, with corn prices down, when will non-commercial investment capital find its way into this market? Is that what you're anticipating when you talk about them running?
Newsom: Maybe a little bit. I don't see non-commercial money coming back to the grains in any way, shape or form like it was in three or four, five years ago. I just think it has gone away. We've got equities running, we've got the U.S. Dollar Index going up, there's no fear of inflation. I just don't see commodities gaining back that same interest that they had. Fundamentally we could see some money come back in. If the crops come back, start to look like they're go ng to be a little smaller than anticipated, demand is going to be a little stronger than anticipated, that'll bring some of the investment money back in and it'll bring some commercial buying into the market. So, if it's going to turn it's going to have to come, it's going to have to start from the commercial side, it's going to have to be tied to some change in this '14-'15 outlook for supply and demand.
Pearson: Now, we've got a lot of producers up in North Dakota, South Dakota, Minnesota who are really watching this rail situation with a lot of trepidation. Does the rail situation up there constitute a basis risk only in that neck of the woods? Or could it have spillover effects on the futures?
Newsom: Eventually it may have a spillover effect on the futures. Right now it's a basis play and we've seen it all summer long. I mean, there was times, there were parts, there was different times over the course of the summer, there was some locations up in that area, South Dakota, North Dakota that actually saw the cash corn market go below $2. And it was just a horrible basis situation. No fault of their own. They couldn't buy corn. They didn't want to buy corn. What it really implies to me is a dangerous situation similar to 2005 for the rest of the U.S. Midwest. If we have a lot of old crop corn coming into the market at the same time harvest is kicking up, we could see merchandisers back out of this market, to a certain degree. Ethanol plants and feeders are going to still use it. But we could see them stepping out of this market and watching the basis really start to come down. So, there is a risk in the corn market that maybe the situation in the northern plains doesn't hit the futures market right now but it could have a ripple effect on basis that could eventually get to the entire futures market.
Pearson: Alright. Do you get long trucking looking at the situation up there with the railroads?
Newsom: You know, that would have been a good situation basically going back to last winter but then you face the winter and using highways, interstates and everything was almost as tough as rail. So, it would make sense maybe you try to get long trucking but I'm not going to say it would be a great play over the winter.
Pearson: Don't go buy a truck --
Newsom: I'm not going to go buy a truck for the winter, no.
Pearson: Okay. Now, Matt in Nebraska has a question and we've also got Gayle in Remsen with a question looking at input costs. Gayle is curious about cash rents, particularly as we, she is referring to Iowa's new taxes might have some differences. And Matt is just curious, broader picture input prices, what are we seeing? I know some seed companies made announcements recently. Anything changing?
Newsom: Yeah, not as far as the seed goes. That seemed to be one of the answers I guess to that question coming out of the Farm Progress Show. Now, as for the other input costs, as I look at the energy markets, crude oil, heating oil or distillates, which is also diesel, as I look at the natural gas markets and even the LP markets, they all seem to be at a low right now, possibly getting ready to establish an earlier than normal seasonal low moving into a fall/winter uptrend. So, something we're going to have to watch very closely is getting those inputs locked in, removing them from the variable cost ledger, moving them over into the set costs so that we know what we have to do then on the grain side. It looks like we're coming up on that opportunity very soon to start getting as many of those costs as we can covered.
Pearson: Now, as you talk about that, as we head into harvest there's been a lot of chatter this year, again, like last year about propane, the need to lock in propane. Does it still look like that's going to be a major risk heading into fall and winter?
Newsom: You know, last spring's fiasco in the propane market, it's still hard to really pinpoint what exactly happened. Right now as I look at the Conway price, it's back below $1. If producers are worried that we could see, or users are worried that we could see a similar move next spring, you know, lock it in. Make sure you're with a supplier who can, I can't say they're going to guarantee the availability of propane later, but you have a better chance then of just being out and trying to buy it on the open market. So, if it's one of those things where you need to lock it in, we may be facing more drying costs this year, maybe we want to start pricing some of that in.
Pearson: Okay. Now, Patrick has a question, you talked about this briefly on the show but maybe you could expand a little bit. What do you see as the range for cash grain bids, corn and soy as we look into the next year, maybe taking out the rail situation we discussed earlier?
Newsom: Yeah, initially I think we could see both corn and beans go to new lows. I think the corn market may want to dip down, the Dec corn futures market could want to, could dip down, say into the $3.20, $3.25 range. November beans possibly $9.90, maybe to $9.30. Normal basis in corn could take it right down to that $3 mark, maybe just a shade below, I hate to say that, depending on if harvest is as big as what is anticipated. Soybeans could see 30, 40 under basis, something like that. So, again, we'd be looking at some relatively low cash prices. At that point, it's going to have to do everything with is the crop as large as expected? If not, market start to come back because we still have incredible demand pegged for the soybean market and we're dealing with a very tight situation. Corn I think demand is still questionable. But, if it starts to look like it's going to be better than projected right now, that's going to bring some buyers back to the market. We're at very low price levels as it is and it could start to be attractive to end users. So, once we go to those new lows, by the end of September we could start to see some buying come back. How high can we go? I think the upside is a little bit limited in the corn market. Number one, again, the dollar is going up. Overall there's going to be plenty of corn. So, I think upside is going to be limited in corn. I think we're going to see a longer term sideways trend, but beans could really start to lead a rally higher again.
Pearson: You mentioned the upside being limited. On the corn side, is there any technicals up high that you think could prove to be a pretty decent ceiling?
Newsom: You know, if we somehow, somehow get corn back up into the $4.10, $4.20, $4.25 range, there will be so much selling. But I think there is an opportunity to get the market back up, maybe up into the $4.10, maybe up into the teens. Once we get through the winter we're all of a sudden going to be talking about fewer corn acres again. And so this is where the bulk of the rally could come from, very similar to what we saw play out in 2014.
Pearson: Alright, Darin, well you've given us a lot to think about as we head into Labor Day weekend. Thanks for taking the time to be with us.
Newsom: Thank you, Mike.
Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter. We really appreciate it. Please continue to do so and we will get expert analysis right to you. Have a safe and fun Labor Day weekend. Thanks for watching.