Basis, volatility

Narrator: 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.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week, December 5th, the 9th, and we have Clark Neuber with us, BIS Commodities, Cedar Rapids, Iowa. How's it going, Clark?

Clark

Neighbors: Good morning, Chris, doing well. How are you?

Chris

Barron: Uh, doing good, uh, doing good. We've, uh, had some nice weather and we've had some super cold weather, and we've had a lot of farm operations getting pretty well wrapped up with the harvest and getting a lot of field work and stuff done. And hopefully guys are getting a chance to get back to the office and start crunching some numbers. What are you hearing from a lot of your clients?

Clark

Neighbors: I think that wraps things up pretty well. Um, kind of that post-harvest, uh, exhale, if you will. Um, looking at year-end issues with their accountants, etc., and, uh, plans for, you know, moving grain, livestock, etc., through the balance of the year, trying to enjoy the holidays that are coming up, etc. Etc. So yeah, generally a fairly good harvest weather and didn't tag on too long. Weather was good. We may see some dryness issues going down the road that people want to talk about from time to time, but yeah, generally pretty good fall, I would say.

Chris

Barron: Yeah, speaking of the dry issues, there's pockets where there's a lot of corn and there's pockets in those dry areas you just mentioned where there isn't any corn hardly to speak of. And stuff's got to get where it's got to go. I know there's even, you know, there's cattle operations moving livestock even to where some of the feed's at, and a lot of the feed's moving on rail and that kind of stuff. What are you hearing? You know, the potential rail strikes been news and all kinds of things. But really, the big news is just basis, right? It's like, okay, this stuff's got to get where it's got to go. Talk a little bit about what you're seeing. You're one of the guys that we always go to that kind of seems to know a lot of that stuff. Talk a little bit about what, what your thoughts are with basis and things that we need to know on the farm.

Clark

Neighbors: Well, the first thing I would say is I've been doing this a long time, and I have I've never seen a situation where the basis volatility is so big. I mean, we just went through a 90-day window during harvest, and the corn market up until late this week has basically been in a 20-cent trading range in the futures. Basis has had way more volatility than that. Uh, the consistency by the buyer, in my opinion, has been not very good, especially here more in the interior areas. And so I kind of look at it as a, in a way, like a doughnut, Chris. And what I mean by that, the whole of the doughnut over the years has been your general processing markets, you know, the Decatur, the Cedar Rapids, etc. It's changed to some degree over the years and moved to some degree with the ethanol build, especially in the western Corn Belt.

But having said that, that pocket has always been the driver or the leader in basis. And as you mentioned, this year the outside of the donut, as I would look at it, or the fringe areas, the Midwest, or I should say the Southern Plains, the Southeast market, etc. Because of the droughts and so on, that's where the crops were smaller, especially Nebraska, Kansas, Southern Plains, and also the Southeast. We put some numbers together in the office just to kind of compare that fact, and corn production in that Southwest market, again, in the Southern Plains, if you will. Corn production is down about 15% from a year ago. In the Southeast U.S., you have, you know, the Carolinas and Georgia and those areas that's a big poultry and pork area, down almost 25%.

So focusing on that sector first, Southeast, we probably from some contacts I talked to, fed out 50 million bushels of wheat this summer just to get the corn harvest. So you have this fringe area that's the driver of basis this year, I guess is what I'm trying to say. That's the tail wagging the dog. If you go in the Southwest market, anybody that's tributary to Burlington Northern Rail, Going into the Southwest, those basis levels have been historically very, very high. You know, you get cattle feeders in Texas, Kansas, Oklahoma that in the last 60-90 days have basically cash market paying $9 for corn. So that scenario I think continues. I'm talking contacts in that part of the world a few days ago.

Sounds like many of the cattle feeders in the Southwest probably have some coverage on through December, January, possibly on out to February and March, because they just have to get coverage. And they're very reliant on the railroads, as you mentioned. Now, it seems like railroad strikes are going to get alleviated as it went through Congress, but the Point being is you still have to execute that need. So we have seen basis out west back off some, but it's still very historic high basis levels, and I think that will be the driver. So then you pull that back into the middle of the donut again in the areas where typically the driver of basis is. They have to be reactionary to make sure not too much of that product gets away, and in the middle of that donut we mentioned is where the crop's been good too.

So, it's kind of a reverse role of the movement of grain to some degree for the next 12 months. So, as you said, the bushels have to get to where they need to get, and that's the job of the market, that's the job of basis. I think that's created a lot of the volatility. But I guess the last thing I would mention to producers is depending on where you're at, don't be afraid to ask for packages, better basis levels, etc., because again, consistency of the buyers has been, in my opinion, in my career, I've never seen it like this where it's just kind of helter skelter. Doesn't seem to have consistency when you see a market that goes from 50 over to 50 under, and you know, that's kind of crazy to see those kind of moves.

But again, I guess the bottom line is we've seen more volatility in the basis than we have seen in the futures market in the last 90 days, which I'm not sure I've ever seen that before.

Chris

Barron: Mm-hmm.

Clark

Neighbors: Interesting.

Chris

Barron: Uh, you know, I mean, you're talking about, you know, you talk about the volatility, you talk about the spread between how, you know, you said $9 corn. I won't even use that as a title. I'm like, geez, that'd be, you know, everybody like click on that, you know, clickbait there, I guess. But, uh, you know, $9 corn, and, and, you know, you can, you can drive, you know, if you happen to be close enough with some corn, you can drive quite a ways. I mean, we We did that in Iowa. I mean, we drove in our own farm operation. We've been, instead of doing a 1-hour round trip drive, we can do a 4-hour round trip drive and, you know, gain 50 to 80 cents. Well worth the time doing that. And I think there's a lot of people that can do that. But you mentioned too, the volatility of that. And you can go for 2 days and all of a sudden there's a dollar different bid.

Within reach inside that donut you're talking about. I mean, people are going to have to start looking in different areas. It almost doesn't matter where you're at. I mean, you start looking around and see where there's some opportunities. I know there's, there's rail going out of Illinois heading to Nebraska. There's all kinds of things that I think farmers need to pay attention to on basis. But with that said, there's also flat price, right? So there's— you know, when you look at, you know, okay, you need the income in this year, you don't need the income in this year, everybody's got their own deal going on. But one thing that I would say that's pretty consistent is not 100% of the '22 crop is sold for most everybody. So I'm going to ask Clark here now, for you, Clark the farmer, to put your hat on. And what are you doing with the rest of your bushels that are unsold?

Are you are you watching basis? And I know it's, you know, you can speak to a couple different areas even of, you know, are you, are you locking in flat price? Are you, are you hanging out here for, for maybe we break out of this, this range we've been in for almost ever? Or what's your thought?

Clark

Neighbors: Interesting thoughts you mentioned there, Chris. I, we talked to quite a few commercial elevators in the Midwest, and I would say as a general rule, just verbiage I hear from them, okay? Farmers have sold whatever they sell at harvest time, etc. Margins are really good. I think when that happens, then we tend to get kind of fat and sassy and lackadaisical in the marketing going forward. Part of that is don't let the margin or the cash flow dictate when and where and how you should move your grain. I still think it ought to be, you know, when that opportunity arises, let it fly. And I think right now there's a lot of unprotected grain in the Midwest. Partly because things have been good. Markets are solid. They've been pretty resilient. We haven't had what I would call much of a corrective move in the market to spook things out.

Now granted, I say that, and corn in the last few days went to levels we haven't seen since like September. So we kind of broke a little bit out of this range. Wheat has done the same. Same. So as far as unpriced bushels, I think, I guess what I'm getting at is I feel the market's fairly well supported of what we know today. Obviously something weird could happen, the macro side of things or etc., but I think a person needs to be a little cautionary, know where their numbers are at, make some pattern sales. And I think it's getting back to what you mentioned, the basis and knowing your markets and keeping your eyes out on what's going on elsewhere.

And the part of that equation I think is key is when I talk to producers and, you know, whatever market they may be looking at, or they may say, well, keep your eye on market XYZ because they're a BN shipper that goes into or for Texas or Mexico, that's maybe a market you need to look at versus the river, etc., as an example. It gets down to can they get their hands on trucks or availability to move those bushels. You know, and like you said, it might be further than they normally go. The turnaround time may be different. It may be a market they're not comfortable or used to going to, but I think those type of things are the key. So You know, from a board perspective, it's been fairly flat. Corn's at the bottom end of the recent range. Beans have been very resilient, in my opinion, in the last—

Chris

Barron: yeah, for sure—

Clark

Neighbors: 30 to 60 days. Uh, I think you got to be a little cautionary with that because if Brazil has a big crop, which right now it looks like they very well could— got a ways to go.

Chris

Barron: I would throw in there too, while you're talking— not to interrupt, but while you're talking on that, you know, the The soybeans are, you know, at least in enough clients that I talk to, there's a few more soybeans on the farm than maybe we have in some other years too, for whatever reason, logistical, and there's other reasons. But, you know, that's the other side of it too. It's not just corn sitting there, but it's also soybeans. And it's the, you know, I'm gonna wait till, you know, the new year because I don't need the income this year and various other reasons. But it's like Okay, you know, are there any threats there? I mean, you just mentioned South America, the same thing on soybeans too, right, is the question I asked on the corn.

Clark

Neighbors: Sure, sure. So, you know, Brazil's in very good shape. Most market people are talking 150, 155 million metric tons, which is by far a record. Now, we're not to the finish line or not close to the finish line, and that could change. There are some issues in Argentina, so what does the market want to focus on. I mean, right now things are generally, big picture, pretty good. Now, if the weather turns sideways, you could see some reaction to the upside of the market, but I'm kind of like you. If you look at a comparative standpoint of corn versus beans over the last 30 to 60 days, you know, from a return standpoint, I would assume beans look quite a bit better. I'm wondering if it's starting to have some impact on acres for next year too, to some degree, looking at the new crop, how that ratio has changed.

But having said that, I think, you know, we're at good values no matter what you do, and I think the key is to, again, look at these markets where the basis has opportunities or is strong, and don't be bashful to ask for extra bushel, or excuse me, extra basis for a bigger bushel quantity. Secondly, make sure you can have your logistics so you can execute it. And because the cost of carrying grain now is a big deal. It's becoming more expensive at levels we've never seen in the ag industry. And I think that's a point producers need to look at too, because there will be a day again where margins aren't so good. You know, that's just the general cycle of capitalism and the economy, etc. And better understanding of interest cost or interest income is really, really key going forward when you look at cost to carry, especially on-farm bushels, uh, just keeping an inventory in place.

Chris

Barron: Yeah, that's just it, you know. And I'll— I mentioned it to you offline, we have a tool that if anybody wants it, where, you know, it's, it's, uh, something we just send out to people if they email either Shay or I. But, um, where we plug in your bushels, you can— and you can also use it just to plug in your line of credit because, you know, it's really what it comes down to, it's the dollars and cents, right? You know, it's, it's—

Clark

Neighbors: sure.

Chris

Barron: And my, my, uh, partner, one of my one of my farming partners always jokingly says it's easier to stack $100 bills than it is corn. And sometimes we like corn better, but it's just, it's a lot easier to stack the cash. And, you know, I, I think there's a lot of truth to that. Ironically and funny is, you know, when you look at exactly what you just said, there's a lot of expense there. And I think we think of it in terms of, well, it's a couple cents, it's 3 cents a month, it's 4 cents a month, you know. When we were dealing with 3% interest or 3-something versus 7-something or 8, you know, I mean, it, it really starts to add up fast to the point where, you know, in our calculator that we, we send out shows cost per day and cost per month. That's an eye-opener if you're sitting on 150,000 bushel of corn and it's costing you a couple hundred bucks a month or whatever, you know.

Or, or another way to think about it, it would illustrate is, you know, for a lot of operations sitting on what they're sitting on right now, it's pretty normal to see, you know, the average producer spending $10 an acre just to be sitting on that corn. It's costing them $10 an acre still on that prior crop every month, $10 an acre, you know. And it's like, that starts to add up. You sit on that stuff for 5 or for 4 months, there's $40 an acre you just invested in that crop, you know, after the fact, after all the knowns. So that's— yeah, I wholeheartedly agree on that one. That's a— obviously that's a soapbox of mine too, so I agree.

Clark

Neighbors: Yeah, I mean, that sounds like a great tool because, uh, it is, you know, we, we went, you know, pick your industry, pick, uh, housing market, whatever you want to look at. I mean, US has went through 15 years of free money basically. Cheap money, if you will, and call that a generation, if you will, and I don't care who you are, you kind of get used to that, and all of a sudden it's reversed, and now you look at fairly pricey commodities, if you will, historically, and with interest rates obviously having a big impact, I think your tool's great because a good way to look at it, just rough, rough numbers, it's probably 3 cents a bushel to hang on to a bushel of corn per month right now. Now that may not sound like a lot, but if you stick it in the bin and wait until next summer, now you're talking. That's 25, 30 cents to hold on to that.

7 cents a bushel roughly on beans, rule of thumb, and now you're talking 50, 60, 70 cents to hold on-farm bushels to next summer.— that becomes a big deal. So, even if you have that level locked in with a hedge or an HTA, whatever, I mean basis has to get that much better during that timeframe or you're better off moving it today. So, you know, the last thing I would say in that regard too as far as getting back to the marketing is there's not much carry in the corn market. Um, we've built a little bit in the last couple of days or taken some of this inversion away, but because of the high basis levels in certain parts of the Midwest or on these fringes we've talked about, the corn market is really not giving you cost to carry to hold on to stuff.

Beans, a little different, have some carry in the futures market out to May and maybe July, not a lot but some, but these markets aren't just, uh, flashing a big sign, "Hang on, hang on, hang on." It's kind of saying, "We need it today, not tomorrow." So I think that's a key to look at. And that doesn't mean you got to move everything today. That realistically isn't going to happen logistically, but you probably want to start executing, spacing out sales, not only for logistical reasons, but for cash flow, pricing reasons, etc.

Chris

Barron: Gotcha. A couple of last things real quick here. One thing I, I wanted— you'd mentioned the '23, and so I want to hit '23 for a second here, but I want to make a comment and then get your take on a question. But, you know, what you made, uh, a comment about, you know, the, the corn-soybean ratio getting better. And one of the, one of the things that we're struggling with, with a lot of the profit managers we're starting to look at now, and, and there's there's, um, this isn't the case 100% of the time. A lot of the time what we're seeing in the Midwest and even the Dakotas to a large degree is soybean, the price ratio between corn soybeans isn't even close on the soybeans to what the corn income can do.

If you take $6 corn versus say $14 soybeans, and I'll just use, you know, like the I-State numbers, let's just use 200 bushel corn and 60 bushel soybeans, that's generating you $1,200 an acre gross on corn and $840 an acre gross on soybeans. And the thing that we're seeing is a lot of, a lot of people are paying higher rents. Machinery and equipment's gone up about 24%. I'm going to have a podcast out this week on machinery and equipment. And, you know, as you look at those two largest line item expenses and, you you know, we're still seeing these inflationary impacts. So I guess what I'm getting at is you need that gross income. And soybeans in a lot of, a lot of operations as we look at it, it's kind of like they're just not quite getting anywhere close to where the corn is.

And, you know, if you use, you know, $840 an acre on soybeans at 60 bushel at $14, there's a $360 an acre gap there between the soybeans and corn if those are your yields and those are your prices that you're, you know, and I'm just throwing, you know, some basic numbers there and everybody's got to do their own and see what, you know, what is the— is there or what is the income gap between the crops in that crop rotation decision for '23 so that, you know, when you do start making sales, you know what 10% of something is because you don't know if you don't know exactly what those acres are, or you think you know what you're going to do, and you do the math, and then you got to scratch your head.

Because, you know, like on the soybean side of things, just to get the soybeans up to where the, the corn is at 200 bushel at $6, if soybeans are $14, you need 85 bushel beans, or you need $17, you know, for the beans. You need some— something's got to give. The other threat that I want to say, and then I'm going to shut up for a minute and I'll let you answer and we'll, and we'll wrap it up. But the last part of that is, I think a lot of times though too, when we all get paralyzed, we're sitting here thinking, you know, the market's gotta stay up here. You know, you said there's a lot of support for where we're at. We've been in this range forever. It's kind of lulled everybody to sleep. That price ratio between corn and soybeans doesn't necessarily mean that soybeans have to go up in price to bring that ratio together.

It could also be that corn, or, you know, it could also be that the price goes down and they come together., you know, to equal out. Sure. So that's, that's the threat that sometimes concerns me, um, because I think we can, we can still lock in some pretty darn good prices for '23. So with that said, I'm gonna, I'm gonna shut up, have you talk a little bit about '23, and we'll wrap it up.

Clark

Neighbors: Well, those are some pretty lightning numbers, Chris. I mean, I, I knew the corn was a better quote-unquote value versus beans, but I didn't know it was those kind of values. So, you know, you're your system or products you put together, kind of put more light on that, depending on where a person's at and their expenses, etc. So even though that ratio has improved some, lightly in the last—

Chris

Barron: It's got a ways to go.

Clark

Neighbors: Yeah, and that creates a lot of decision-making, and I assume that's what people are going to be doing in the next 90 to 120 days, obviously, before spring. Yeah, that's kind of interesting. And, you know, I think the age-old drama, if you will, in the markets once you get post-January 1st and you get past that January crop report, it's always to me that's where you kind of wave the checkered flag on the old crop and the new crop kind of starts to become more and more of an issue in most people's eyes. Some look at it earlier, some look at it much later, but to me that's always kind of where that transition takes place. Mm-hmm. And then the quote-unquote battle for acres, you know, and like you said, a lot of times people feel, you know, both have to rally to create that ratio to, you know, have the acres that work, etc., etc. And you bring up a very good point.

Do you see, you know, a bean market that stabilizes or goes higher, a corn market that potentially loses some of its value? I mean, that could be a situation to look at. I mean, the other part of that equation, the Corn Belt has moved, you know, the last 10 to 20 years further to the west and maybe arguably further to the north. Northwest, look what we've done in the wheat here recently. The funds are short wheat, the funds are long beans, the funds are somewhat long corn. Point being, some of this acreage change continues in the West, in the Dakotas and in the Plains. I mean, the guy I was talking to in Southwest Kansas earlier in the week, I mean, he's Wheat crop is absolutely the worst he's seen for this time of year, and he's been out there 25 years.

Doesn't mean it's going to be a bad wheat crop, obviously things could change over the winter, but as they go into dormancy here short-term, he feels you could see potentially next spring a huge switch and throw corn and milo in that part of the world. So, you know, do we see some of that because of price ratios in the Dakotas because of that too. So a lot of moving parts, uh, and how these acreages all transpire as you get into next spring. So yeah, interesting conversation. I don't think there's an exact answer on it, but, um, I think the producers are using your product and run their numbers. It helps them make better decisions, obviously.

Chris

Barron: Yeah, they're just going to be a lot of things to watch going into '23 and We'll keep in touch with you too. Like I said, you know, really appreciate your knowledge. You pay attention to what's going on in basis in a lot of areas, and you've got some good relationships with the end users and processor side of things. And that's what we want to get at. We need to know what they're thinking on the farm side. So we really, really appreciate your time today and your conversation a lot. Thanks a lot.

Clark

Neighbors: Appreciate it, Chris. I always enjoy the conversation.

Chris

Barron: Yeah, you bet. Well, we'll get you back again here real soon. Like you said, we get closer January and get in the front part of January, we're gonna have to make sure we got our thinking caps on good and working on some decision-making there for sure. So again, thank you very much, and I want to thank everybody for listening. And again, just a quick reminder, if you're not registered for the conference we have in St. Petersburg, Florida, January 25th, 26th, and 27th, want to throw that back out there. There's still time to get registered. We still have Some spaces left for that, and if you want to go check it out on our Ag View Solutions website, just click on conference and all the information's there. So with that said, again, thanks Clark, and thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.