Ep. 10 Market Impacts of the Acreage Report and Update on Crop Progress

[00:01] Introduction: Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence. Presenting conversations and Analysis about Risk and Risk Management for food and agriculture, supply chain decision makers. From farmers to consumers and everyone in between. This is Relevant Risk.

[00:19] John Anderson: This is John Anderson, director of the Fryar Price Risk Management Center of Excellence at the University of Arkansas. Here with another Relevant Risk podcast; the podcast of the Fryar Center. And with me today is a guest that we’ve had before, Scott Stiles. Scott Stiles, an extension economist with the University of Arkansas Cooperative Extension Service, based out of Jonesboro. Scott, how are you doing today?

[00:42] Scott Stiles: Just fine, John. It’s great to be with you again.

[00:46] John Anderson: So, Scott, today we want to talk about, as we sit here recording this, it’s July 6th. We are a few days removed from, I think, fair to say, one of the biggest USDA National Ag Statistics Service reports of the year, the final acreage report that comes out on June 30th, and always a highly anticipated report. What do you think were the highlights of the acreage report this year?

[01:21] Scott Stiles: I think likely the market reaction to it is one of the things, John, that really surprised me as we got a bullish soybean acreage number. The trade going into the report was looking for bean acreage close- I would say at a record level, about 90 and a half million acres. And it got- in fact, a survey revealed a US bean acreage number, 88.3 million. So it came in just a little bit short of 2.7 million below the trade expectations.

John Anderson: Yeah.

Scott Stiles: After the report was released, you saw bean prices turned higher immediately following the report and then later closed lower. The day of the report, we saw November beans go up almost to $15.08. And oddly enough, today we were trading almost $2 a bushel below that, below that price level.

John Anderson: Yeah.

Scott Stiles: So it’s, it’s hard to comprehend.

[02:32] John Anderson: Yeah, so I wanted to talk to you about that. You know, I saw the briefing slides that NASS puts out when they put these reports out, they do a briefing and they put out some slides. I get those through Livestock Marketing Information Center, and they had a slide showing where their numbers came in for the major crops relative to the pre-report expectations, and that soybean acreage was below even the lowest pre-report estimates. I mean, it’s not just that, you know, we were kind of off from the average. I mean we were really outside the range of the pre-reports on soybean acreage.

[03:12] Scott Stiles: That’s true. The bottom end of the range was 88.7 and we came in at 88.3. So yes, and like I said, the market reaction initially was favorable and then turned lower into the close, so-

[03:30] John Anderson: Yeah, so one of the things that I- that really gets my attention as I’ve watched markets over the years, and this goes back to probably before a lot of people listening to this were born. There was a guy, Jack Swagger, wrote a book called Market Wizards and they interviewed all these guys who had made fortunes trading commodities. And one of the things that I remember, I read that book actually as a young college student, and I remember one of the things that stuck with me out of that book, one of the analysts or one of the traders that that was interviewed for that book said, listen, one of the most important signals you can look for in a market, one of the surest indicators you can look for in a market is a divergence between what ought to happen and what does happen. And so if something really bullish happens and the market has a bearish reaction or vice versa, that’s a big deal. And so I always think of that when I see a market do what the soybean market did in the wake of that acreage report, that’s a divergence. I mean, there’s a really bullish signal there and the market has retreated. And I think there’s some understandable reasons for that. So let’s talk about that a second. So what’s your explanation for that behavior? Because it is striking behavior when that happens.

[04:43] Scott Stiles: Well, first, the market’s not trading fundamentals. And when we look at, you know, what is driving the market, whether it’s fundamentals or technicals. And so, I mean, I’d say it’s not trading fundamentals. It’s probably, it’s trading something else. And it’s probably if I was guessing, I would say it’s tied to the exodus of managed money or speculative money that’s been behind the commodity market really going back to 2020.

[05:18] John Anderson: Okay. So that money’s going somewhere else, is what I hear you saying?

[05:23] Scott Stiles: It’s- that’s a theory, and it’s hard to say where it’s going. It’s not truly, you know, it’s not really showing up over in the equity market side, yet. But that yeah, there are some that think we may- we may see some equity market recovery later this year, but if there’s, you know if there’s money moving out of commodities, which it is, where is that going? I don’t- I don’t know where that is today.

[05:54] John Anderson: Well, I think you’re making a good point. I think there is a- there is always a broader context. It’s, and again, I mean, as a market analyst, I tend to have to fight the habit of focusing too narrowly on a single market because soybeans don’t trade in a vacuum. Nothing trades in a vacuum. There are all these outside market factors at work. And we do have- we have had a broad decline in equities. I think more where I immediately went when I saw the soybean reaction was energy markets. A lot of times the broader commodity space will trade in sympathy with energy generally and specifically with crude oil. And crude oil has been down pretty hard lately.

[06:42] Scott Stiles: Right. So crude’s below $100 now. Diesel is today, it’s, you know, a dollar a gallon off it’s highs. So, you know, there’s no spillover support from the energy markets.

John Anderson: Right.

Scott Stiles: So there’s- so I don’t know- this gets back to you know, we’ve always historically thought that money goes into commodities as an inflation hedge. So, now I think the concern is less about inflation and more about recession. So maybe that’s why the money’s, you know, moving out of the commodity markets because it’s more concerned about recession rather than inflation now.

[07:29] John Anderson: I think that’s a great point. And, you know, when we- if- maybe I should be optimistic and say if- if we do transition to a recessionary environment, that tends to have a pretty strong negative effect on basic commodities. And so I do think we see these things like the ag commodities, the energy commodities react pretty strongly to recession expectations. And if you look at things like the tip spread that the spread between inflation protected securities and- or treasuries- and the nominal treasuries, that spread has narrowed quite a bit, which means expect inflation expectations are being sucked out of those treasury prices. You know, you go back several days, I haven’t looked at it in in a week or two, but not too long back we had an inversion in the yield curve, the spread between short-term rates and long-term rates, which is a pretty strong indicator of recession. So- and not trying to forecast recession here, but that- expectations have moved in much more in the direction of recession over the last couple of weeks, I would say.

[08:45] Scott Stiles: Right. I think so. And you’ve got other factors. The dollar is incredibly strong. Dollar’s the highest- or strongest we’ve seen in almost 20 years. So that’s another thing. That’s always a negative factor toward ags that- especially export-dependent ag commodities.

[09:06] John Anderson: Yeah. I was going to say particularly if you think about soybeans and where we are on the calendar with South America moving into their big export time of year, a time of year when they typically do pick up exports from us anyway.

[09:18] Scott Stiles: Right. So we’re seeing some of that show up in the market news this week that China is canceling some previous orders they had placed for US soybeans to be delivered in August and they’re switching, canceling those and switching to Brazilian soybeans for that time period. And in the dollar strength, as you know, that is a factor in their decision.

[09:43] John Anderson: Yeah, that’s a good point. So, you know, I guess the bottom line of that is the fairly strong divergence between the information that was in the Acreage report and the market reaction to it, at least with soybeans, was pretty striking. I think in hindsight, there- there’s a pretty good story to tell that justifies that or at least explains that reaction. I won’t say it justifies it, but at least explains how the market could move in that way. I guess the million dollar question is, what does that imply for the market moving forward? Any thoughts on that? And I know I’m kind of putting you on the spot there.

[10:24] Scott Stiles: I guess, with this type of correction in the market and it has been fairly, fairly significant. I was looking at this point today, you know, corn’s 23% off the high it made in mid-May. Soybeans are 17% off that they made in mid-June. So you’d think with that type of a correction … uncover some demand at some point, you’d have to think that the end-users are going to step in and say, okay, we’ve had a, you know, a fairly deep correction in these markets, let’s get some inventory covered or take the long position in this market. So maybe, you know, maybe, you know, we’ve seen a, you know, a deep enough cleanse in the market that we may uncover some demand, well-

John Anderson: Yeah.

Scott Stiles: -that’s yet to be seen.

[11:16] John Anderson: Yeah. that’s a really good point. And I want to think about that from the other side of the coin. From the supplier side of the coin, Scott. I mean, I think we had farmers pricing pretty aggressively early, early, relatively early in the season because there were good, good pricing opportunities available. What’s your sense of where farmers stand right now with respect to having their production covered?

[11:44] Scott Stiles: I think a lot of them are in the 40% sold of as much as 50% sold. And I think for this time of year, that’s a good place to be. And I’m sure that they regret maybe not selling a little bit more, but I think now we’ve entered a period of yield uncertainty about, you know, what the weather impact is going to be on yields. So-

John Anderson: Yeah.

Scott Stiles: -you know, if they’re at 40 or 50% sold, they’re probably comfortable at that level just because of, you know, we don’t know how much longer you know, these hot, dry conditions are going to persist.

[12:27] John Anderson: So that’s a really good transition to the next issue I wanted to talk about, and that’s crop progress and condition. We get weekly updates on that and as I said a few minutes ago, we’re recording this on July 6th. We have been kind of knocking on the door of 100 degrees just about every day since I think last Friday. And looking ahead, a little, little bit of relief over the weekend, but not much. Looking ahead for the rest of the week, you know, we’re going to be in that close to 100 degrees and heat indexes in, you know, 110, 112 range. Not a- I guess there’s never a good time of year for that kind of heat. But certainly with where we are in the production cycle on several of our crops, and I’m thinking specifically of corn here, this heat’s a real challenge, isn’t it?

[13:16] Scott Stiles: It is. And, you know, it can’t obviously, it’s, you know, corn is at a critical reproductive stage. And, you know, this type of is not good- and that, you know, corn and, you know, and cotton is starting to bloom and, you know, you think cotton’s a, you know, a heat tolerant, hot climate crop, but it can be too hot for it.

John Anderson: Yeah.

Scott Stiles: You know, at 10:00 last night, it was 91 degrees still here in Jonesboro. And cotton needs, you know, it needs, you know, the temperatures need to drop below 80, you know, into the 70s would be great at night. And, but I mean it’s 80 first thing this morning, 6:00, it’s already 80 degrees. So it’s not good for any crop and-

John Anderson: Right.

Scott Stiles: -cotton either, but you were talking about crop conditions. Our crop conditions in Arkansas peaked on June 13th. At that- for the weekend and June 30th our soybeans are rated 83% good to excellent. And yesterday’s report, they’re 69% good to excellent.

John Anderson: Hm.

Scott Stiles: Corn is slipped from 78 to 65% good to excellent. So this heat that you- and dryness that you’ve talked about over the last three weeks, is having an impact on the crop and it’s showing up in the condition ratings.

[14:47] John Anderson: Yeah. And to your point, that’s- that is a big factor in the decisions that farmers have to make about how aggressively to price crops. You don’t-

Scott Stiles: Yep.

John Anderson: -know for sure how much you’re going to have. And this is a good example of how that production uncertainty- in an environment where you really would have liked to have pulled the trigger- that production uncertainty makes it hard to do that.

[15:11] Scott Stiles: Yep. Yep. So, then you start thinking about what can you do to manage price risk and, of course, you know, you’re, you’re forward contracting- that bullet seems to be one, or that arrow, maybe one you have to remove is- you may have to start managing more on the futures or options side rather than trying to price physical bushels and commit yourself to delivery, you know, you need to manage through-

John Anderson: Right.

Scott Stiles: -through futures and options.

[15:44] John Anderson: Yeah. Yeah, that’s a good point. It’s easier to get out of those positions if you’re short.

[15:48] Scott Stiles: That’s right.

[15:49] John Anderson: If you’re short of crop.

[15:51] Scott Stiles: Yep, that’s true. So you don’t want to commit yourself to physical delivery. So, with this kind of uncertainty. We’ve gone- if we miss a rain today, we’ve gone 27 days here in Jonesboro without rain.

John Anderson: Okay.

Scott Stiles: We got three-quarters of an inch the entire month of June. I got in my notes- that was for the whole month. Three-quarters of an inch-

John Anderson: Hm.

Scott Stiles: 25% of normal.

[16:18] John Anderson: Now, and I’ll use that point to the kind of return to something that we talked about back during the planning season. You know, we really have focused a lot this year on the cost of production because input prices are through the roof. Obviously, the way that we’re mitigating the dry conditions, you can’t do a lot about the heat. But what we can do is pump water. And I know we got a lot of folks in the Delta pumping water, which is great to be able to do in response to the lack of rain, but it comes at a cost.

[16:57] Scott Stiles: We were already looking at an expensive year anyway. And then if you have to start irrigating by mid-June and you know, I’m sure the corn acres were already being irrigated before

John Anderson: Yeah

Scott Stiles: -mid-June, but every crop needed irrigation by mid-June. So you took an expensive year and then you made it more expensive. And at the time irrigation started, diesel at that time was, you know, the futures were four fourty to four sixty on futures. And then- so the grower price was pushing $5.

[17:35] John Anderson: Yeah. And you’re talking about off-road diesel there, right?

[17:37] Scott Stiles: Right, right. The dyed diesel.

[17:40] John Anderson: Yeah- untaxed- yeah.

[17:41] Scott Stiles: Yeah, and so that’s more than, you know, a 100% increase in diesel cost over the past year. One other side note to that- a grower was telling me yesterday is- a cost per roll of pipe’s up almost 25% over last year, for the flexible-

[18:03] John Anderson: Oh wow- you’re talking- the poly-pipe?

[18:04] Scott Stiles: Poly-pipe. So it’s up about a fourth at least over last year so, got added- you know anything with a petroleum component to it. And you, you know, we’ve talked about supply chain issues and things like that that add cost, cost of fuel to transfer, you know, transport anything, all of that’s adding cost to the pipe as well as, you know, just the cost of the fuel to pump the water.

[18:33] John Anderson: So, you know, added together, not a great reaction to the acreage report in terms of market reaction, pretty challenging production year, both in terms of the physical production issues and the cost of production issues. So a tough management environment for our farmers, I think it’s fair to say. Scott, looking ahead from here, let’s talk a little bit about the calendar moving forward. When are we going to start to get a clearer picture on these yield numbers? Because I think that’s the thing that- that’s the next step I think that we’ll really be focusing pretty heavily on, is how’s the crop coming out?

[19:13] Scott Stiles: I think USDA would, you know, begin to, you know, give us some better insight on that. I would say August, but, you know, August is the key yield determining month for the Corn Belt beans, so maybe September, John-

John Anderson: Right.

Scott Stiles: -might be a better month to get some assessment of the US crop as a whole. But-

John Anderson: Yeah.

Scott Stiles: August, you know, August, we may, you know, we’ll start to see some numbers from FSA on Certified Acres or may see a few, you know, a little bit of tweaking on acreage, maybe as soon as August. But yield-wise, I’d- you know, September, we may have a better feel for U.S. yields.

[20:03] John Anderson: And then in October, we’ll start to get a quite a bit of objective data worked into the estimates?

[20:09] Scott Stiles: That’s right. So we’ll have some harvest. You know, actually have some harvesting ongoing by then, so.

[20:17] John Anderson: Yep. Well, certainly an interesting year to be observing this and a challenging year, I think, to be managing in it. Scott, as always, I appreciate your input and insight. Any last comments you want to share?

[20:35] Scott Stiles: You know, I think that you know, once we see this huge exodus of speculative money move out of commodities, maybe the markets can begin to trade fundamentals, which I don’t think they are right now. But-

John Anderson: Yeah.

Scott Stiles: -at that point, you know, when the markets can trade fundamentals and assess things like weather and crop size, and then, you know, maybe we put a floor in it and begin to see some recovery.

[21:05] John Anderson: And maybe some improvement in opportunities to price that remaining portion of the crop once we’ve got- at that point, a better handle on size.

[21:15] Scott Stiles: That’s true.

[21:17] John Anderson: All right, Scott, thanks a lot. Good talking to you.

[21:19] Scott Stiles: Great talking to you. Enjoyed this, John.

[21:22] John Anderson: All right. We’ll be in touch. This is John Anderson with the Relevant Risk podcast. Thanks for joining us.

[21:29] Conclusion: Thanks for listening to the Relevant Risk podcast. A production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas System. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville and Research and Extension Activities through the University of Arkansas System Division of Agriculture. Visit fryar-risk-center.uada.edu for more information. Thanks for listening.