A new paradigm: weekly market outlook Jan. 8-12th

Chris

Barron: Thank you for listening to the Weekly Market Outlook. It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business. Please reach out anytime by emailing cbarron@agviewsolutions.com. Welcome everybody to another episode of the Ag View Pitch. We're heading into a new marketing week, January 8th through the 12th. We have a new guest with us today, Jeff Fichtelman. Jeff, how's it going?

Jeff

Fichtelman: It's going really well. Yeah. Thanks for having me, Chris.

Chris

Barron: Yeah. Yeah. It's great to have you on. You are in Ohio and Interactive Ag is your, is your company and work with producers in the commodity markets and stuff. So we're excited to have you on here and we're going to pick at your brain a little bit here, if that's okay.

Jeff

Fichtelman: Yeah, absolutely. I appreciate it. And I would say most of my growers are out east. So if you're talking to a lot of growers out west, I mean, some of the yields we saw this year were just incredible in corn. And maybe I don't know if that was felt in the West, but I know we're going to dig into all this stuff, so I'll let you get started.

Chris

Barron: Yeah. Yeah. Well, yeah. When you, when you talk yields, it's a little of everything, right? You know, the— you guys, you guys were in kind of God's country in the East and in the West was kind of speckled with some areas of good and some areas of really bad and a little bit in between. So But with that said, I think because of the threats and stuff, and that's kind of where I guess we'll start is with some of the threats during the growing season. I think that among a few other things kind of caused us as producers to maybe be a little bit more conservative on making sales than probably we should have been. Hindsight is always 20/20, so it's easy to look back and say, well, we should have, would have, could have. But consequently, then we're sitting on a lot of bushels. I mean, there's a lot of, a lot of carryover there. There's a lot of producers.

And I think the market's quite aware of the fact that we all are— all, almost all of us anyway, are sitting on quite a few bushels of grain. And when that starts to move, that's going to limit upside potential quite a bit to anything that you guys are seeing or things that you're trying to do to help your producers with just kind of navigating the old crop bushels, primarily corn. Most of the soybeans are sold, thankfully, for a lot of our clients. But what's your thoughts there?

Jeff

Fichtelman: Yeah, I mean, a couple of thoughts. One, I mean, I've been in this market trading it for— since 2007. I've thought a lot about what moves the markets and also what gets in the way of farmers when it comes to marketing. The one thing that we don't talk about enough is the psychology, the psychological hurdles. And this year in particular was probably one of the most difficult years to market grain, mainly in the fact that pretty much all we did was go down. So every sale that would have been made would have been made at contract lows, which psychologically is really tough to do. And I remember vividly, pretty much this time last year, corn was around $5.95 to $6, talking to a lot of guys and I said, hey, we should probably be forward selling. We're seeing demand destruction.

A lot of you guys already put fall fertilizer on and very few of them wanted to sell because they said, hey, spot price is $7. And that's one of those psychological hurdles where it's like, hey, $6 doesn't look good. So I don't really want to be a forward seller. I see $7 in the current market. And then once the market dropped to $5.50, a lot of those guys felt a bit of remorse and geez, I missed $6. If we can get back there, I don't want to sell $5.50. And a lot of it is kind of almost like an admission of defeat to the market. If, if I sell those lows, then I'm admitting that I could have easily just called my local elevator and sold previously at better values. So I'd rather just kind of stick my head in the sand. And of course, the last 3 years you were bailed out by that move.

And it did create an environment where we had an incredible amount of unpriced grain all year and we had that last little run-up from 5, low 5s to 630 and back down. And I kind of joke with the growers I work with, I was like, the most expensive thing you said to me all year is let me think about it. Because it feels like the time that we had to make decisions were hours or days, not weeks and even months like the previous few years. And, that's just all of those create big hurdles. And even today, We have a lot of guys who were holding out hope that maybe we'll get a rally, maybe we'll get a rally, got all this unpriced corn in the bin. And it's almost just viscerally difficult to want to sell $4.60 corn when we could have sold $4.80 2 weeks ago. We could have sold $5 a month ago. Gosh, nobody wants to be the one to sell the low.

So my big strategy, my big kind of way I talk to the growers is a couple of thoughts. One, let's— you're running a business, your business is making profits. And it doesn't matter if one widget makes more profit than another. It's all about the total of all your farm operation revenue versus expenses. And beans bailed us out this year, no doubt, we were able to sell for most guys, pretty good levels, 13-something and all had pretty good yields. Corn, the guys who did have some sales on that obviously helped. If you have no sales on, it's much more difficult. But if you had some sales on, And if you happen to have good yields, and even if you didn't, if you had crop insurance, we have a lot of guys who had decent yields and get a crop insurance check. And if you had bad yields, you're probably going to get a much bigger crop insurance check.

So I almost feel like now it's kind of a take a step back and look at it from a net revenue and a net profit perspective, not a price per bushel perspective, because that's what gets guys frozen when they say, I don't want to sell $4.60. And Then to maybe even get nuanced, I would say the biggest fear of locking in the current market is simply the fear of missing out. And I most— I've traded options my whole life, but I don't recommend them very often because I understand most farmers either don't understand, have had a bad experience, or don't want to babysit the position. But I would say right now, if, if the, the way to get over the ledge is to sell grain is to buy a little upside. Calls are probably some of the cheapest they've ever been. So if you have to pull the trigger, you could buy a March call or a May call.

I'm not going to give exact strikes because I don't know when this will come out, but you can buy them for pretty cheap, uh, to at least give you a taste of upside. And I tell guys on that, I say if you're going to sell 50,000 bushels out of the bin, buy 15,000 or 20,000 bushels of upside calls. Because don't spend premium on all of it because you don't need a win on all those bushels. You probably have a lot of '24 that would benefit from upside as well. So I think a lot of what I'm trying to help guys understand is we're just— it's kind of like 2010 to 2012. We saw just nothing but straight up. In 2012, we obviously had the mega drought. The big key moment there is we created demand destruction. And then 2013, we bought a ton of acres. Well, really in '12 and '13, we bought a ton of acres going to corn. So we at the same time shot supply up, and we also shot demand down.

And that created the environment in 2013 where corn was started at $6.50 and ended at $4.20. And in 2014, we essentially started around $5 and ended at $3.50. And then a lot of farmers know what the 2010s were like. It was 350 to 450 type environment, it was not enjoyable at all. And I do worry that we're kind of going into that world. And I know we can talk about other stuff of 2024 and beyond. But I would say when it comes to bin bushels, there is an element of ripping the Band-Aid off. So if you take a step back and really calculate the all-encompassing profitability of '23, it might not be as bad as you realize, even if you do sell this current market. And if you really must, buying upside calls are at least cheap at this moment.

Chris

Barron: Mm-hmm. And taking that into account, you know, there, there's carry in the market. I think for a lot of guys, the difficult part is, you know, if, if you are getting to a position where you've already prepaid some '24 stuff, cash is getting tight again. Bringing some of that income in would, would help too. But on the same token, you just, you know, I think the challenge for some people is do I sell the carry and then wait a little bit, or do I, you know, or do I just rip the Band-Aid off like you said and bring some cash in now? And probably a blend of the two might, might be advisable. It just kind of depends, like you said, on where people are at. Anything you're seeing there?

Jeff

Fichtelman: Yeah, I would say to— so if you, if you multiply $4.50 corn times 7% cost of money, it's about 3 cents a month of just interest burn alone. And the current carry, depending on where you are, like the cash carry, so spot price of corn in January delivery, if we're talking January today versus February, March, April, May, especially April, May, you're going to pick up maybe 6, 7, 8 cents a month even. Obviously basis plays a big part of that. And this is a big country, so it depends on where you are. But there is a trade-off to say, to really get optimal. Yeah, you could say my cost of money, my interest burn is this. The key though, I think the banker is going to have a much bigger influence this year than most years because of that tightness.

And I don't know when guys are— it's all kind of all over the board and when they're going to go sit with the bank and when that operating line renews and how tight the cash flows are. But this feels like an environment where I think it's super useful to think about picking up each penny when you can. But at the same time, a lot of guys are a little frozen when they maybe overthink things. And we've seen $0.40, $0.50 fall off the board here in the last month. So sometimes the best decision is just the cleanest, simplest just sell it and lock in and make sure that you're okay from a cash flow perspective. And I don't think there's anything wrong with— normally I'm not a fan of saying based on cash flow needs, sell grain, because usually that means you're probably not doing the best job forward selling or thinking about market opportunities.

But at this moment, there really are no great market opportunities. So if you feel like you must sell again, if you're going to lose sleep locking it in here because you got to pay bills, that never hurts to buy a few upside calls. I mean, and that's something that normally I don't like just generalizing advice because most people don't know when to get out. And I would say just be, be moderate about what you spend, $0.07 to $0.15 at most. Think about the exit profit that you would like to make. I mean, A lot of guys always say if you buy 5 or 6 calls at $0.10, put an offer to sell half of them at $0.20. And if it gets filled, you've paid for the cost of those calls and then you're playing with house money.

Chris

Barron: So yeah, the other thing too, I think, is, you know, keeping that basis open if you do sell out a ways, hopefully. I mean, and it kind of like you said, it depends on where you're at. Like in my area where the yields were way off the pace by the tune of 50 bushel an acre. We have a little bit of a hole here in our geography where I think, you know, there's going to be some opportunities, and they might not happen until planting season when everybody's planting. That's what I always tell people is, you know, one way to, to, uh, you know, take advantage of an opportunity is wait until all the farmers are super busy planting and doing stuff, and then that's when you want to haul. Um, that's, that's where you go find some truck drivers or whatever, because usually the elevators won't do it, but go directly to the processor and get some trucks lined up.

And, you know, we're going to have to get creative, I think. And like you said, and pull in some extra pennies and some extra revenue out of this equation for sure. You know, we are heading this week into a pretty major report that almost historically all the time tends to be a pretty big market mover one way or the other. You know, the market is so negative right now. And we've continually just seen this slide, you know, and even this last week in soybeans as well. What, what are you, what are you guys watching for that report? You know, I mean, if we see some, some rallies, you know, this week, a little bit of up from time to time, are those selling opportunities or do we sit on our hands on these remaining bushels and '24 for that matter? And wait for this report to, to materialize and see what happens afterwards.

Jeff

Fichtelman: Yeah, I mean, I would say from a pure trader perspective, because that for most of my career that's how I manage these USDA reports, the one overwhelming truth I had was anytime market sentiment is heavily leaning one way, the odds of a surprise the other way are actually pretty good. And it's mainly because if Everybody is so incredibly bearish. The report needs to almost print a super bearish report just to satisfy all the traders and the big spec funds. The CFTC Commitment of Traders report tracks the big managed money. I mean, they're leaning short about 200,000 contracts. Historically, they peak around 250,000 to 300,000 short, 250,000 to 300,000 short in terms of corn. So, I mean, the fact that they're already short 200,000 means they've probably already put a lot of their chips on the table betting that the market's going down.

Now, the counter to that is there's a lot of farmers that also need to sell, and they're just starting that kind of process in this Jan, Feb, March window. So as much as like from a trader perspective, I actually am a contrarian bull on this report because the sentiment is so bad. The tough thing is a rally of $0.20 to $0.40, you would have just a flood of farmers coming out to sell it. So I think the rallies will be a little tough. The key things to watch, I mean, January reports the final production estimate. Obviously yields, it's largely assumed that we're going to see a slight uptick. They did uptick yields last month. We're now about a bushel and a half better than last year. And I mean, man, if I looked at the silo of the eastern Corn Belt, I feel like we're hitting records, but I know the Western has struggled a little bit.

I don't think the yields are going to surprise us too much. I think the 175 to 175.5 is a pretty realistic collective number. And then obviously, nobody really talks about acres. But the USDA does have a tendency to adjust harvested acres. In the last 20 years, they've touched up or down harvested acres, well over half of them. Those years. And the one thing I would say that was really unique this year was on the June USDA report, the June 30th stocks and acreage update, we saw a huge uptick in corn. That was a major surprise. And that was one of the big bearish events of this year. And that was such an unusual surprise that I do kind of wonder if maybe there was a miscalculation that, like, if there were some bullish setups, it would be maybe a shock around the acreage number. Also, December 1st is when they take stocks on hand for this January report.

There's so many, there's so many important numbers, which is why this report creates a lot of volatility. I mean, it's final production. So yield matters, acres matter. But we can't forget about stocks on hand. And the one unique setup this year, and I don't know about out west, you probably can help educate me more on that, Chris. But out east, it was probably the slowest harvest we've had in over a decade.. And the kind of northeastern Corn Belt, there was a lot of corn still in the field on December 1st. And it does make things interesting because if the USDA takes stocks on hand as of Dec 1st, and I mean, a lot of farmers that we work with up in the Michigan area still had over half their corn crop in the field on December 1st. So I don't know how the USDA really calculates or makes assumptions for that.

Because there was so much corn maybe still in the field, there's maybe a a bullish risk that stocks come in light. So there's, there's definitely some setups. And the fact that the market is so convinced that there's nothing bullish is maybe a little bit of a contrarian play. But obviously, if we do get a pop, farmers probably have to jump on that. And I think the best way for a farmer to take advantage of this is not to wait and see, is to start putting offers in. And I'd say 10 cents above the market, sell some, and then 15, 20. And One thing I've learned watching enough farmers with marketing, don't put all your eggs in one offer basket. Don't say, hey, I'm, I'm only going to sell at $4.95. Because we might get to $4.92 and you feel nothing. Rather break it into 3 or 4 chunks and work on the way up because you're almost far more likely to get filled in at least a couple of them.

And but yeah, the January report's a big one, beans. People are kind of asleep on soybeans. Sentiment has turned massively negative recently, not because of USDA, but because of the, the huge improved weather in Brazil. They got about 3 to 4 inches in the driest area. The equivalent kind of time of year, though, is call it mid to late August if you want to compare to the US. So those rains may be too little too late, but they're certainly valuable in some parts. It's less a South American story, though, and more a China story. The Chinese crush margins are really negative. The Chinese economy is struggling. So I think this recent break in beans is certainly some to do with improved weather in Brazil, but more to do with China just kind of slowing way down on imports.

Chris

Barron: Mm-hmm. Yeah. So, you know, as we head to the report, we end up eventually find that out and stuff. A lot of times what happens is no matter even how big a report is, it can be a flash in the pan for a few days. I like your comment and the perspective on getting some, some targets in play and having those offers there working for you. And so, because it never fails, usually opportunities last about 10 seconds, especially in this kind of environment. Yes. And you can't, you can't react quick enough. There's too many computers that are way faster than we are. And things happen at night when we're sleeping sometimes too. And so I think that's, that's super important perspective. The other thing that I think we need to hit on for a second here too is, is the demand, you know, you brought up China and stuff. And, and, you know, you talk about demand destruction.

But the converse can be true as well. When the price gets low enough, you can create demand. And I know it takes longer to create it does to wreck it. But if you think about, you know, where China's at, and, and everybody's just so down on any demand, but at some point when the price gets low enough, it creates opportunities on the other side of the equation, whether it's, you know, livestock, or, or it's, you know, processors and all kinds of new ideas and things. And some of those take a bit. Talk a little bit about the demand picture. What do you know from a big picture perspective? Is there anything that you see as we head you know, into 2024 that might relieve some of the pressure? Or is there just no hope there too?

Jeff

Fichtelman: No, I mean, I think there's definitely reasons to be optimistic on '24 corn. I mean, from a demand perspective, the real destruction happened in '22. '21 was kind of peak demand. By the time we got to '22, when you finalize '22's demand, we lost over a billion bushels of demand. And on top of that, in '23, we added about 1.6 billion in production. So, but '23, we also saw of that billion bushel demand loss, we picked up half of it back. The issue is we added 1.5 billion on the supply side. That was the big conundrum. We went from a 1.2 or 1.3 carryout to 2.3 or 2.2, depending on what the USDA tells us next Friday. So yeah, it's We are at least seeing healthy demand. China ebbs and flows because their economy is not great. But you look at export sales year over year and we're well ahead of pace, not only of last year but also of the USDA estimates.

I mean, we are seeing at least healthy demand. The tough thing is when you add that much supply, demand just doesn't rebound that quick. So that's— that was the conundrum we created with '23 is We shifted 6 million acres and had a pretty reasonable yield, and that was just too much corn. That created the environment we're in now. I would say looking ahead to '24, though, there is a very interesting setup. And I don't know for you, Chris, out west, but I tell you, we work with a lot of guys in what you would probably call the fringe areas. I mean, Indiana is more corn country, but there's definitely some parts that aren't yielding over 200 consistently. So they're much more willing to plant beans if it's profitable. Michigan clearly is a swing state. Ohio could be a swing state. Kentucky. Now we have growers all over there.

And it feels like about in the last 6 to 10 days, the amount of conversations I've been having about guys putting pencil to paper and realizing beans, at least when they were $12.75, made a heck of a lot more than corn at $5 or $4.95. And also, I think sub-$5 corn there's almost a, a frustration for farmers. So I think there's a decent chance we could swing that pendulum right back to soybeans in '24 if we stay here, if we don't somehow rally in the next 30 days on '24 corn. So from a contrarian perspective, I would actually be a little patient on '24 corn here. I don't think you need to necessarily jump out and sell a whole bunch, but '24 beans are a bit more of a concern. We have a tight carryout in '23 soybeans. And Brazil was a story, it's less so now. But if we swing 4 million acres to beans next year, and have any kind of reasonable yield, I mean, demand is okay.

It's not off the charts bad or off the charts good, it's just okay, but that could swing our carryout back to 500 million. And that's far lower than $12 beans. So I have a lot of guys who are looking at the math. I mean, that's really what you guys do at Ag View is help them really understand margin. The most common hurdle I have is like, okay, well, if it makes more money to plant beans, we better be selling the beans here. And I've just had too many encounters in my career where guys will swing acres because of profit at a moment in time and not sell enough., and then everybody sees that same thing and we suddenly swing a bunch of acres.

Chris

Barron: So, yeah, that's a good, good perspective too, because we, we see that, you know, there's the plan and then there's the Plan B, and then, uh, you know, and the acres get moved and then they, you know, a lot of times we, we see that, you know, maybe it's they're moving a farm or two and it's almost advantageous typically when they do that, just to sell 100% of the production that they expect off of those acres because it's still maybe only 20% of the total or something. You know, it kind of depends on the scenario. But yeah, that's super, super important perspective. And, and I think too, you know, as you say, it's interesting to me because, you know, we see— we've, we've got profit managers from about 18 states, and so we're kind of east to east to west and a little bit north and south.

And it's interesting because we are still seeing that corn is slightly more profitable, but it's based on the expected prices right now. So like when we're looking at it, it's like, what, what is their estimated final price cash on the farm? And so that, that point that you made, I think is real important, is, is producers really got to watch that corn-bean ratio relative to their production. Individually on their farm because, you know, one, one producer can grow 200 bushel corn and is going to grow 80 bushel soybeans that, you know, they may be more inclined to, to grow the soybeans. But if they're in an area where they can only grow 50 bushel soybeans and 200 bushel corn, it changes the scenario. And then the price component is an important piece of that too. Any other things on '24 as we get close to wrapping up here that guys need to be watching or thinking about?

Because You know, one important thing, obviously we got to get '23 wrapped up and sold. And I love when we can get one year done completely because then you can, you can really focus on the next year. And so I'm anxious to— it'd be nice if we could get this glut of corn the hell out of here somehow or another. But yes, but, you know, as you look at '24, what are some of the things that producers need to think about? And we'll wrap this up.

Jeff

Fichtelman: Yeah, I mean, I would reemphasize to guys on '23 of like, just take a step back and count all your revenue versus your expenses. And I think they'll quickly realize that even selling corn here is not as detrimental as you may think. It might not be enjoyable on those bushels, but overall '23, I think we'll survive and do okay. '24, '24, obviously it's still very early. There's, there's always going to be some story that everybody gets spooked on and markets have a chance of rallying. The one big shift, though, that we saw in '23 that I think is kind of here to stay is that the carry structure, the ability for futures carry or how much higher the back month is from the front month, is it just reached new levels, 7, 8 cents a month versus your standard 5 cents a month kind of cap. And I think most farmers have been building storage for, geez, the past 20 years.

I mean, we have more on-farm storage obviously now than we ever have. And it's a huge percent of overall storage in the US, which means farmers have effective grain elevators on farm. And I think most of those bins have predominantly been used to put unpriced bushels in. And I think we have to rethink that. I think we're entering a world where it's not unreasonable to plug in the potential to make 7, 8 cents of potential carry just in futures, let alone basis improvement. But the only way to accomplish that is to start with a decent hedge. And then when you get down to putting those bushels in the bin, you roll to the March. And one thing that there's a strong tendency of, when do those spreads kind of peak? And that's usually about as little as 3 days before first notice day to about 3 weeks. And that's, that's usually when spreads kind of hit their max level.

So you do have to be a little patient on it. But beans, November to January hit $0.25. Of carry. Dec to March had 25 cents a carry. Sept to Dec of '23 had about 25 cents a carry, and that's 3 months. So that's over 8 cents a month. And a big part of that is obviously big crops, but big interest rates. And as long as interest rates stay high, economics mean they almost have to get to wider levels. Otherwise, the commercials of the world will just deliver that crop out and get the cash in hand because it makes more sense to have cash in hand than bushels in the bin. So I think we're entering a world where just because you sell $5 corn today doesn't mean it's $5. It could be $5.25 or $5.35 if you put in the bin and roll it to the March or May.

So I think there's going to be a world where you got to be more smart about picking up dimes and quarters when you get it and kind of go back and think about how you approached the 20-teens from 20— call it late 2013 to 2019, where it was a world of just small opportunities. You had to jump on them when they came. Uh, it was not fun, uh, but I think we might enter that world. So the quicker you could shift mindset into taking advantage of smaller rallies, being more of a forward seller, trying to capture carry more— we'll get through it, we'll do okay.

Chris

Barron: Yeah, uh, it's really good perspective, and I think that's 100% Right on. With respect to we're in a different world, I always tell producers that we become better business people when times are difficult. When it's easy, we all suck, kind of, right? You know, we— if all we got to do is wake up and we're making money, we do not get better at being business people and making good executive business decisions for our for our operations. And so I think that's really good perspective that we need to— it's time to, you know, sit down and make sure the computer's hot and running and stuff. And we're paying attention to the numbers and things. So now I really appreciate the conversation today. I think we covered a lot of really good stuff and definitely like to have you back again. I really appreciate your perspective.

And I think that it's really good to with you being in the East, what I would say is if people want to get a hold of you, um, you know, and get some perspective if they are way out in the, in the West or different areas and want to get some perspective to, to mitigate backyarditis, because that's one of the things that I think we struggle with a lot as producers is sometimes, you know, we're, we're in our, in our section of the world and sometimes we have opinions that maybe aren't accurate as much as they could be because we aren't seeing as big a picture as maybe we should. But if people want to get a hold of you, what's the best way to, to reach you?

Jeff

Fichtelman: Yeah, the easiest, just shoot me an email, jeff@interactiveag.com, or just go to interactiveag.com and you could do a little contact us. But yeah, I'd love to help and I would love to get some farmer contacts out west because obviously, yes, the backyarditis is a very real phenomenon no matter where you're at. So that would be quite beneficial.

Chris

Barron: So you bet. You bet. All right. Well, Jeff, really appreciate your time today and look forward to having you back again sometime real soon. And we're going to find out this week what this report brings to us. So it's going to be an interesting and dynamic week, probably.

Jeff

Fichtelman: No doubt. I appreciate it.

Chris

Barron: Yeah, thanks a lot. And thanks, everybody, for listening. We'll catch you again next time on the Agri-Pitch.