Episode 15: Reactions to USDA July Report

Rodney and Gabe talk through the USDA's "sharply unchanged" July WASDE report.

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TRANSCRIPT.

Gabe: Rodney.

Rodney: How are we doing, sir?

Gabe: All right. Report today. Huh?

Rodney: Big report. Did you catch it live in the Zoom hallways of Indigo? I think we were on a call together when it came out.

Gabe: I think so. And I did have the market open. I saw the price action. So I was surprised, after I saw the market action, to go look and see what the report actually was.

Rodney: Yeah. So the report is what I like to call, a coworker of mine calls it sharply unchanged. Sharply unchanged on yield.

Gabe: Aggressively neutral.

Rodney: For sure a surprise to the market thought. Man, the market was just looking for a little bullish news.

Gabe: I guess it doesn't... Maybe the analysts' actual views trended differently after they submitted them. But when you go look at the averages, that stuff was squarely in the middle. It was-

Rodney: Right in line. Right. I'm looking at it right now. Average trade guesses. Just dead. Not on what we have. Yeah. So I think maybe the one surprise was probably ending stocks for soybeans, so that for old crop, so that may be a little surprising. But corn was the leader today. I mean, clearly they looking for some bullish news out of corn, and we didn't get it.

Gabe: Yeah. I mean, well, we're down 15, or probably almost not quite 20, from the high yesterday.

Rodney: Right.

Gabe: Right. That's a pretty big swing.

Rodney: Yeah. Volatility. I like volatility. It's been a fun couple of weeks of work.

Gabe: It's been a lot more interesting. And it's obviously more fun when it's going up.

Rodney: Yeah. Right. So I want to talk a little bit about our Atlas yield data. It comes out in tandem kind of what these USDA reports. And I would say our core number, for sure, is a little more bullish than what we saw out of the USDA today. Did you see, you know the number we're working with here?

Gabe: I forget the number off the top of my head, but I know, I think thinking at least based on current weather models and everything else, it's looking a little light. Or we're expecting it to come in later, the yield.

Rodney: Yeah. So we're 173.9 right now is our corn number versus USDA released 178.5 again, sharply unchanged there. And then soybeans we're 49.2. Pretty close to USDA at 49.8. I'd say this time of year, that's pretty typical.

Gabe: It's enough. Yeah.

Rodney: So I re-

Gabe: Official spread is pretty big though.

Rodney: Five bushels is a big deal. So you're talking about, I mean, it's like rounding error, 500 million bushels is what we're talking. So I think USDA, we're probably using about a 2.3 billion bushel carryout based on the numbers here. So that puts Indigo's... I should say this. We don't have any real thoughts on how exports are going to change, but our yield number would imply something closer to a 1.8 billion bushel carryout in corn. How's your trader hat feel about a 1.8 billion bushel carryout in corn?

Gabe: Well, when I think about harvest timing, unfortunately I think we go back to that COVID story with kind of a lot of reopening going on ice, I worry about those feed markets. I worry about the energy markets continuing to stagnate. I think the real story will be until, you were talking yesterday, what'd you get? Four tenths of an inch? And it felt like a foot of rain.

Rodney: It felt like a foot of rain. It just felt so good. My wife's like, why are you standing in the rain outside? It's as good as it gets.

Gabe: Because it's July 9th. What do you want from me?

Rodney: I drove, so we played softball last night before the rain. I purposely drove my convertible there with, not a convertible by the way, a car that has no top.

Gabe: Corvair.

Rodney: Well, no top on it. So just daring it to rain. And we finally got it. So that was good.

Gabe: You're tempting fate as much as possible.

Rodney: Exactly right. Yeah.

Gabe: I think that's the story right now is whether or not we get enough to push back to push to whether USDA is saying, or are we going to see those yields closer to 174?

Rodney: Yeah. So I reached out to our Atlas group to really try to understand. Five bushel difference this early in the season is pretty significant. So I said, hey, are we really on to something? Are we seeing five bushel difference this early in the season? And they said, yeah, we're definitely seeing some roughness, specifically in Illinois, some parts of Iowa. And it's pretty plain to see where that sits on the map. The important thing to understand here is our model, we use this trend line model to start. Okay? So the Atlas team, what they were telling me is our model starts with a pretty average starting trend line yield.

Gabe: An on trend yield.

Rodney: Exactly.

Gabe: It's worth noting, at any given point, the yield number that we show is with our modeling, our best prediction. There isn't optimism in our model.

Rodney: Exactly.

Gabe: It is the model.

Rodney: I think the other thing to point out here is this USDA data is kind of dated by the time it comes out. So the Atlas yield data, we use remote sensing. It's a live... They always talk about how this is a live version of the crop. I think this data is from Tuesday is the last picture they took.

Gabe: Yeah. That we used to feed the models to. Yep. Yep.

Rodney: Yes. So, I told you I stood out in the rain last night on my back porch like a crazy person. That was because in the last three weeks, it hadn't rained a whole heck of a lot. So I know for a fact, we get to see this number at a higher frequency than most of the users. We've seen our number coming down due to some stress in the crop over the last three weeks. So it's also hard to compare USDA data versus our data. We release them on the same day. They're based on a day that's maybe three weeks apart. You know what the process for figuring local basis or a local supply around a grain elevator tends to be?

Gabe: You hire a bunch of college kids to go out and count some kernels?

Rodney: Drive around in a truck, pick a few fields and tell me what the yield is. I don't know if you've heard this, but coming in a few weeks, the Atlas team is taking their first stab at actual production. So we've done yield in the past, up until now they've only done yield. They're taking their first pass at actual planted acres at the field level. So I think they'll report maybe at the county level. So they would have a county level, hey, we have a stab at an actual production at the county level using satellites to determine what fields are corn, what fields are beans, and then saying, hey, this is the yield on this field, merge them together and report at the county level. That's going to be cool, man. That changes. So I don't have a lot of interns to send into corn fields all over the country. You haven't budgeted for that yet.

Gabe: I did not. I did not.

Rodney: So until then, I think I'm going to use the Atlas guys with real time.

Gabe: See what they have to say.

Rodney: Yeah. Yeah. So I was just looking here. Actually, we released five states already. So that was a part of that report that they released today. I was joking with them yesterday. I was like, they're not probably the biggest corn producing states. So no slight to anybody from the South. It's important. But I was like, I'm looking for 5 million missing acres of corn. So I don't think those are in Kansas or Tennessee, or maybe they are.

Gabe: But it could be. They switched all over to peanuts in Tennessee.

Rodney: Yeah. So we did see Kansas lost, I think it was a half a million acres of corn. So we found a few, oh, a million acres of corn Kansas loss. So that plays part of a role. And then the other thing is, I'm interest... So that is the problem with the data we get out of USDA from a local level. From a macro level, it makes sense. I want to know what the US carryout is, and that's going to drive what I think about futures. But from a local level, I want to know, especially at this stage, we lost 5 million acres of corn, it makes a big difference to me if we lost that 5 million acres from western Nebraska versus central Illinois.

Gabe: When we talk about losing 5 million acres, we're talking about losing 5 million between intentions and the recent report.

Rodney: Correct.

Gabe: Okay. So I think it's worth noting, we won't have a view on intended acres. Right?

Rodney: Nope.

Gabe: We have our modeling in terms of what we would have expected based on rotations and things like that in those places. And so I would assume we'll have some benchmarking to be able to talk about like, hey, we thought this was going to be 10 million acres, and it's only seven.

Rodney: That's a really good call out. We don't really guess it too much stuff. We only say what we see. I can think of those acres benefit from two standpoints. One, as a farmer, I'm generally worried about total production. That's a super reasonable way to start pricing my grain. But especially right now, when I'm talking about really tactical decisions I could make on my farm, or at my facility if I'm a buyer, I want to know my really hyperlocal supply. And hey, the things I'm asking today is, is storage is going to be really tight come this fall? Right. Because I know kind of on average what my place can handle or what my local facilities can handle. So if storage is going to be really tight, I might start to think about logging in some basis or making some cash sales or negotiating warehousing, something like that.

Rodney: But if storage, if I see my local supply is scarce, more scarce than I'm used to, even though global supplies were really big or whatever, from a local standpoint, I could say, hey, I think I'm going to sit tight on basis a little bit and see if things firm up. Or even really modify my marketing strategy where maybe I would normally sell cash, but I think basis could get better, so I'll use a different route.

Gabe: So how relevant to an individual farmer is knowing what the state acreage is? Or you said, you think we're going to do it down to county.

Rodney: Yep.

Gabe: So when you go talk to that farmer you know in Northern Illinois, and we put out our data, are you going to use that to drive some of those decisions?

Rodney: Yeah. So I don't think I would focus too much on the actual production number. I'm not too concerned with 1.6 million bushels of corn were raised in Livingston County. It's going to be more like, how do we compare versus last year? Right. Are we up 10%? Are we down 5%? That's going to tell me more about what space is going to look like in the country. It's all about supply and demand.

Rodney: And then it gets a little harder... I know you're shocked by that statement. It gets a little harder if you're in an area where maybe your ethanol grind has changed significantly since last year. Now, all of a sudden compare last year's production to this year production, it takes a whole more math. This is more beneficial for these guys that just are in an area that's pretty stable.

Gabe: So is there a resource for people to go plug that stuff in? I mean, so when we start talking about the impact on grind, the impact on feed demand and whatever else comes into play, certainly dollar value relative to other currencies, interest rates, do you know of anywhere where someone can go plug that stuff in and kind of figure it out? I haven't seen it. That's why I'm asking.

Rodney: I don't. I mean, that's what I love about what I get to do today. I get to play with some of that stuff. But a lot of that stuff is just really hard to come by just as individual data points, let alone modeled out to mean anything to anybody.

Gabe: But I could see where I am. I bet I have, if somebody dialed back their grind, I probably have some kind of idea what that is. And that's kind of what I'm thinking about.

Rodney: Yeah. I just don't think the average person, or even above average person that pays a lot of attention to it, has taken the time to really model it out the way we think about it. I think it's more about, hey, we're generally better or worse than last year. How does that affect me?

Gabe: But I worked for a guy for a long time who I learned a lot about portfolio management from him. And one of the things, when you're making a risk decision, there's always more questions you can ask. There's one, there's always a reason not to do something. And two, there's always more questions you can ask. But you get to a point where he'd say like, well, okay, I understand you want to know that. What kind of answer would you see that would change your mind about what you're doing? So there are always important questions to ask. And then at some point, it's kind of like, even if I knew that, would I do something different? Probably not. And so I think you're kind of driving towards like, hey, directionally is enough.

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