Market Plus: Darin Newsom (October 20, 2017)

Oct 20, 2017  | 11 min  | Ep4309 | Podcast


Pearson: This is the Friday, October 20, 2017 version of the Market Plus segment. Joining us now is Darin Newsom. Darin, welcome back.

Newsom: Thank you, Mike.

Pearson: Now, well we've got a number of great questions but I need to circle back to something we missed on the show which was the cotton market. We saw it drop $1.70 and change this week. What's going on? From a technical perspective what are you watching here in cotton?

Newsom: The cotton market from a technical perspective just doesn't look good. Its charts are breaking down. We've seen some commercial pressure come into that market and that really seems to be what is stumping most of the folks who are actually in the cotton market is where is this bearishness coming from because we know USDA is bearish but that doesn't really make, in the grand scheme of things that doesn't make any difference. But the reality is we had so many hurricanes move through, the crop was damaged, we've had decent exports. Unless this is a miracle crop and we're actually going to see the huge production and we're not going to see the type of demand that folks are anticipating right now. That would be the only real reason why we're seeing such pressure on the cotton market. I don't look for it to end any time soon because once you get a market on the run it's hard to get it to stop. So I would anticipate the next few weeks going to continue to see some pressure from both sides of the market.

Pearson: Alright. Now, our first question from one of our Twitter followers, this is from Nathan in Inwood, Iowa @nieuwendorp_n. He wants to know, are there days ahead when I will be able to get excited about more than half a cent higher in the corn market?

Newsom: Well, not for a while. It's just hard, the volatility in the corn market just continues to come down and there's just nobody interested in this market. And we finally see a day like Friday and going into today you could kind of see that we were going to get a bigger move. We had increased overnight volume in the December contract and so that kind of hinted at we were going to see more activity on Friday, came down, volatility bumped up a little bit, but still volatility is so very low. Honestly, as ridiculous as it is, the only day when we see, outside of an occasional Friday, the only time we ever see a sizeable move is with the USDA report. So they're not good for anything else but if you want volatility and if you want an actual price range that might cause it.

Pearson: And that leads us right into our next question. This is from Ben in Jesup, Iowa @BenRiensche on Twitter. Ben wants to know, you refer to the electronic traders, the computer traders as Watson and he says, the speculative traders are a miss with so little volatility to trade in the grains. In your words, Darin, will Watson leave the market?

Newsom: In my words, Watson has left the building. And that is why we have such low volatility.

Pearson: So we're looking at it backwards, Ben and I, we're going well there's no volatility, they won't trade it. They're not trading it, that's why there's no volatility.

Newsom: Exactly. And it comes back to what we talked about during the show, funds need, and even the computer funds, need a fundamental reason to get into a market and we can go across sectors, we can go across the softs, we can look at the grains, we can look at the livestock to a certain degree, metals, energies, there isn't one market that really just jumps out and says this is a tight supply and demand situation. And so for that reason they're watching the stock market, you mentioned it in the show, go across 23,000. Why move your money into commodities when you can put it over into the equity markets, and it's not just U.S. equities, it's global equities are all screaming higher, and play there? And so there's no reason, and now the dollar is starting to heat up again, we've got Congressmen and Senators saying that we're going to see some sort of work on the taxes. I don't know, we'll see. But all this boosted up the dollar and that's not going to be good for commodities and there's just really no reason for funds to get interested.

Pearson: Is there, given the carryouts published by the USDA, or even, Darin, just given the bearishness in the spreads in the market, indicate that we've got plenty of grain on hand across the board. Is there anything that can spark this story? Are we at a point in 2018 where we just might not even see a planting rally due to weather concerns because what are we worried about? We saw so many old crop corn bushels come in August 1st, excuse me, September 1st through September 15th, we're still sitting on a pile of grain.

Newsom: If these crops, corn and soybeans, turn out to be as big as what some are projecting them to be, why would we ever see a planting rally again? We had nothing but wet weather all spring in 2017. Why would we get a dry weather scare because we had that all summer long? And if we're still looking at the possibility of record production in soybeans and still one of the five largest, I think it's actually the second or third largest crop of corn, we're not going to get those types of moves. Again, we're not going to get the money coming into these markets to push them higher. It's going to have to be proven that there is actual damage down there. We've actually got a supply and demand situation that is tightening up and all you've got to do is look at the spreads and see that's not happening any time soon.

Pearson: Alright. Now, our production team is going to hate me because I'm changing up the order of the questions. I want to jump down to Roger's question next. And so Roger, I'm going to lay this out. He's written an essay for us, Roger, we appreciate it. This is Roger in Kokomo, Indiana from Facebook. He says, I've made the decision to get off the DP, delayed pricing, train and get on the futures train to retain my ownership of my bushels I can't store on the farm this year. I look at it this way, it costs me 18 cents to put corn on DP, the basis at his local elevator is 16 under and it costs a penny to execute the futures contract. He figures he has reowned his corn at zero basis. My question is, should I buy December and roll to March or just buy in March? Will the spread pay enough to fool with that?

Newsom: Well, if he has narrowed it down to the Dec and March, you're probably going to have, if you buy in the December you've only got about a month left before you're going to have to roll the contract and you're going to have to roll the contract at a pretty large carry. Now, that carry is only going to get wider because that spread is in a downtrend. So it would say you probably want to buy the March. Again, if you're looking at a situation where you’re going to reown your cash on futures that's it, probably going out to the March. There's not a lot of time there seasonally for the market to move. We don't see the bigger part of the move until say we get into the April to June timeframe is when we usually see the bulk of the rally in corn. Again, that planting early summer season. So, you're kind of rolling the dice here a little bit. You're not going to be able to take advantage of any basis appreciation by reowning in futures. But if you want to reown, you're looking at a couple of factors here, corn is about as low as it has been over the last five years, we talked about how it's pressing its lows and holding them right now. There's the opportunity that this market could turn around just because it's so cheap.

Pearson: If you're looking just December or March is your two options, if that is when you typically sell the cash that you would have put on DP, would you look at futures or given the low volatility and the shorter timeframe, would you look at an option?

Newsom: You could look at the options because, again, volatility is very low and the short timeframe means you're not going to pay a lot of time value at all. The problem would be is if you get a 30 cent rally in the futures market you might get 16, 20 cents out of it in the futures, minus what you had to pay in option premium. So that turns a lot of folks off the options. Probably not a bad play because, again, volatility is so incredibly cheap, a little less risky from a margin point of view. I say you can get out there and buy three or four cents, four or five cents worth of options going out through March might not be that bad a play. But, again, if we're just looking at reowning we have to keep in mind we're not going to get any of the basis appreciation that we might see in either futures or options.

Pearson: Alright. Our next question taking us over into the wheat market. Dan in Grantville, Kansas on Twitter @DanBigham wants to know, what are you more bearish going forward, Darin? What or the Royals?

Newsom: Well, quite honestly probably has to be the Royals. We talked about wheat in the show, how it has flattened out in here and it looks like it could try to, could try to find some buying interest for whatever reason. As for the Royals, their core players, they've got a group of about four to six players, some of the core group that are all up for free agency and the Royals aren't a big market team. They're probably going to lose some of those players. So it could be a little bleak going into, or a little unknown going into 2018. But wheat, I still think we've put in a long-term low. I think the market wants to try to go up. Again, for whatever reason it looks like we've got some demand coming in. If we can keep that going, if the dollar doesn't kill the wheat market then I think wheat has got a chance.

Pearson: Okay. Final question for you, Paul in Iowa @NeIowaFarmer on Twitter says, I'm storing corn and selling carry to July. With low volatility is now the time to be buying July calls to cover the upside?

Newsom: That’s not a bad play. Basically what that is, is it creates a synthetic put. And, again, because of low volatility could work out very well. You've got it hedges out in the July, you're taking advantage of the carry all the way out through there. If the market does decide to rally like we've seen the last three years your call is going to appreciate, not all like we talked about with the previous question, but it's going to appreciate. So, again, you're basically putting on a synthetic put, using the carry in the market, low volatility in the market, the idea that we could be about as low as we're going to go for a while, not a bad strategy.

Pearson: Alright. Well, Darin Newsom, thank you so much for taking the time to answer our questions.

Newsom: I appreciate it. Thanks, Mike.

Pearson: And folks, our drought continues, but hopefully we've got some rock stars at Hawkeye Community College that are going to help us out and send us in some questions they've got but we want more. If you've got questions on the basics of trading or trends in the marketplace send us an email at or direct message us on Twitter and we'll get you the details as to how you can get your questions featured on Market Plus. Now, Darin, thanks again for joining us this week, always appreciate it. And join us again next week when we'll look in on farmers facing a deadline over buffer strips and Ted Seifried will sit across from me at the Market to Market table. Until then, thanks for watching or listening. I'm Mike Pearson. Have a great week. 

Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa Public Television or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa Public Television which is solely responsible for its content.

Grinnell Mutual Insurance