Demand improvement: weekly market outlook Dec. 11-15th

Garret

Brown: 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're heading into a new marketing week. December 11th through the 15th, and we have with us today Garret Brown with Kodak Risk Advisory and Lakefront Futures. How's it going today, Garret?

Garret

Brown: Pretty good, Chris.

Chris

Barron: That's good, that's good. So a lot to talk about here, um, not exactly sure where to start, but I think where I will start is last week we had a, um, a report, WASDE. What did you take out of that? Is there anything people need to be aware of and pay attention to from had. It seemed like a bit of a sleeper, but it sounds like there's a few things in there people need to be aware of.

Garret

Brown: Yeah, it was, it was definitely a sleeper, which is typically expected. We don't usually get a whole lot of adjustments typically to the row crop yields in December. So I mean, just from a headlining perspective, I mean, corn was slightly reduced versus expectation in the prior month on carryout, beans were left unchanged, wheat was reduced a little bit. We did see some changes on the global scene a little bit. I think Black Sea wheat may have been raised a little bit. They started to reduce Brazil soybeans, but they left Brazil corn alone and left Argentina crops alone as well.

Chris

Barron: Okay. Beforehand, you were talking on some things with wheat. Talk a little bit about what you're looking at there.

Garret

Brown: Yeah. So, you know, up in my country, spring wheat's king on the wheat front.

Chris

Barron: But in your country, is it North Dakota?

Garret

Brown: Northern Plains? Yeah. Yeah. So over the last couple of weeks, you know, week or so, we've seen a lot of sales of soft red winter to China. But I think dating back to, I don't know, prior on the 1st of October, I think there's been 7 or 8 different daily sales reported. And so I think by Wednesday this week, total commitments, if you took the prior week export sales, plus the sales that were reported to China, I think we have pretty much hit USDA's projection of 145 million bushels of export sales, obviously not shipped yet. And then we've had one or two sales since then. And then we saw yesterday that USDA increased exports from that 145 number to 175 million bushels. Um, that took carryout down to around, I think, 27% when I was just looking at the numbers here.

Um, and I think there's potential that number is going to get smaller yet, uh, or that carryout figure due to the increases of exports, as long as China continues to purchase, which, you know, obviously that it's really hard to tell at this point. So I guess, you know, how much are they going to import? We do know those things. It's however much it takes them to get comfortable. But then the next question that we also know is, is how much of the US are they going to buy? And it's going to be as much US wheat as they can get that's cheaper than somewhere else.

Chris

Barron: So, so on the, on the wheat side of things, you know, we've seen some pretty good strength here in the last week or so. Obviously it's the China purchasing and stuff. Is there any spillover on that to the sister commodities? Is corn and beans going to get anything out of that? Or is it just kind of a wheat thing for now with respect to the exports and stuff?

Garret

Brown: You know, I think we're getting it a little bit in corn, although we've seen a tonal switch in the wheat exports again. You know, we're not seeing the shipments so much by the PNW just because I think most of that capacity is taken up by soybeans at this point. So we'll probably see a kick in gear of that here as we head into this winter. But, you know, export sales outside of the SRW class have been decent, but kind of ho-hum, nothing just absolutely crazy. On the corn side, we've also seen an uptick in demand here. I think 2 weeks ago we saw Unknown come in and buy 700,000 tons. This week again, we saw China and Japan as major buyers and Mexico stepping back. Um, so yeah, I think there's potential. I think there's a chance that the tone is switching here. It just kind of depends on, you know, are we going to continue to see strength?

Um, one, I guess, is the fund crowd gonna, you know, continue to short cover, or are they going to reinitiate shorts? Is the farmer going to, you know, because it looks like by the COT report, which is as of last Tuesday, you know, Tuesday this past week here, are they going to continue to engage at these prices? Or are they going to get their fill now that we've kind of passed the time period when some of these storage, you know, 15 days of free storage or etc. runs out? Or perhaps they were basically, hey, you got to roll this basis, you got to price it, you know, maybe that's out of here or, you know, initial cash flow, things like that that needs to happen. Maybe that's already taken place too.

But one thing I want to mention on exports though, and I don't have the data pulled up, but Mexico has bought an inor— an extremely odd amount of their overall typical percentage of purchases up to this point. And now the big question is going to be, is there a reason to suggest that they're going to increase their purchases dramatically from prior years, or have they just been front-running this program and now they're starting to slow down a little bit? I think they had purchased over half of the total U.S. export program so far. And, you know, we typically get that business every year. We have such a logistical advantage into Mexico. So I think from, from that perspective, the corn story is kind of improving just a little bit from the export, you know, situation because we're actually seeing demand here now.

But beyond that, I think most of that story is, you know, late winter, early spring when we start to get a little more information on how much saffron is getting planted in Brazil and the US planting campaign.

Chris

Barron: The funds had a lot to do with that short covering. Does that type of situation spill over into the corn and soybeans? If there's something that gives the funds an idea that they, they want to switch positions or want to start changing, or do you see them staying pretty, pretty solid where they're at?

Garret

Brown: I think it's— so wheat and corn, yes. Beans, no. I mean, we've seen a lot of ownership of the funds of things like soy meal, which they've started to liquidate, and soybeans, which they've started to liquidate. And they, you know, we did see a little bit of liquidation of some short positions here when we saw the bean market kind of react a little bit positively there at times. But, you know, on the wheat side, I'm just looking at managed money. They liquidated 22,000 contracts of short positions in soft red winter. They liquidated, uh, 11,000 contracts in HRW, and they liquidated a very small amount of contracts in Hard Red Spring. So, um, in general, they're still very, very short. There's still a lot of, uh, meat on the bone there yet if we're gonna— if they're gonna get out of those positions.

And we were seeing, according to the producer, merchant, processor, user side, the short positions increase, particularly in SRW. So it would seem that the farmer was pretty active and selling against that. Um, and obviously prices eventually did stop, particularly when China's purchases were starting to slow down a little bit.

Chris

Barron: Yeah. So I want to hit on a couple more of the sort of the macro stuff, and then I want to get into some kind of what to think about, what to watch, what to do more specifically from the farmer's perspective. Before I get to that, um, you know, you have the energy market, you have currencies, you have South American weather, there's a bunch of other like noise-making things going on in the environment that I think sometimes gives us as producers hope, and then we sit on our hands and maybe don't make some decisions, or we don't maybe put those targets in or whatever, because there's all these other things going on.

Of those things, and maybe there's something I'm not mentioning that we haven't already talked about between the funds and, and exports and those kind of things, but, you know, currencies, uh, energy market in South America, is there, you know, anything in concert that has any hope for us, or are those all standalone things that we got to pay attention to?

Garret

Brown: You know, I, I think there's some things we can draw from that. I don't know that I would say currency has been the driver necessarily because there's been so much noise, like you said. However, I'm definitely not— this is probably controversial as heck, but I'm really not in the camp that everything's all hunky-dory. You know, we have OPEC that's supposedly continuing to cut production, and we have crude oil at— what did we close at? $71 here, where we have a war going on in the Middle East. We have a potential dispute, or we have a dispute that's going on with Venezuela down south here, a major oil producer. And I guess as a producer, has the market rallied and sustained a rally?

Has it been positive for corn in particular when the crude oil market is in a longer, you know, on a, we'll call it an intermediate-term downtrend, which has been the case basically since it peaked in October here again. I guess I have some concerns about that. Then going back to some of the macros with these wheat exports, What makes some of these events so hard to trade, particularly for a farmer, is we expect a lot of times for something to happen immediately, especially if something is a futures market. And we never really saw any type of— I don't know, maybe we need to go back and look. But if you asked a farmer or a lot of us, you probably would say we didn't see much price response from, quote, those 700 million bushels of wheat in China that had heavy rainfall, went out of spec. Were going to be probably fit for human consumption. And, you know, what was that, like 6 months ago?

And they're just finally now starting to buy US wheat. Now, they— I'm sure they're always in the market for wheat. They're a very, very large consumer, also the largest producer, I believe. But, um, they can change balance sheets, and we knew that. However, if you're waiting for that, that was 6 months ago, so it's really hard to build a marketing plan based on these news events, especially if that party— we'll call them China— isn't necessarily as price sensitive. I mean, they can buy when it's high and they can sit when it's cheap, you know, particularly the government buyers. Um, so I think we just have to be a little bit careful about what we hope could happen and what we expect to happen, because it doesn't always make sense You know, another example of that is, is China buying US beans when they're not at all competitive versus, say, Brazil supplies.

Um, you know, and, and that, that's one of the things that they've been doing, and that's why shipments, you know, haven't been all that great while sales look absolutely phenomenal, or look phenomenal enough to, you know, kind of push things forward, keep things lofty. So, um, yeah, I guess those are just, I guess, a couple things that that I'm thinking about here.

Chris

Barron: As we look at, you know, a lot of these fundamental factors and things, there's also the technical side of the equation here too. Let's, let's kind of, you know, we can include wheat, corn, and soybeans in this conversation. But what are you looking at from a technical standpoint? And my question is, And it's probably the largest with corn, because I think the biggest problem lies with unsold bushels of that crop in particular. What, what things should these producers be thinking about? I mean, this is not advice, this is perspective. So, you know, what, what perspective or what things should they be watching in order to make some effective decisions with respect to trying to offload what in many cases is a fairly large percentage of the '23 crop.

Garret

Brown: Absolutely. So I think first and foremost, what, you know, we probably need to look at, you know, no particular order, but when are we going to need cash? When is the average farmer probably going to need cash? What is sold? What's the average price sold on that? Obviously yields came in better than expected. There was a very strong narrative, you know, and it might still be out there that this crop was going to go down in the 160s. And now we've reversed course on that. And so with those extra bushels, so, you know, the breakevens go down. And what kind of an impact does that have, you know, over the next 30 cents versus, you know, up versus the next 30 cents down? We know that historically when we have a stocks-to-use percentage domestically like we do right now, that we typically value corn over a dollar lower.

We know that global stocks are tighter, which is probably why, partially why prices remain elevated. But looking at the chart, you know, there's, there's some support here on the March contract around, around $4.80. It looks like there potentially could be an inverted head and shoulders pattern, which is where you find some support then you break through that and you go back up, you break through that prior support and you find support there again. Now, who knows if that'll continue, but if that does happen, you know, it may project something in that $5.10 to $5.15 area maybe. Now, that's an area that I personally would want to watch. Now, on the daily chart, it does look like there are some conditions that maybe look a little bit overbought, which maybe is why we're seeing some of that consolidation to kind of get rid of some of that on the chart from a technical perspective.

But I think going back to it is we just, we have to reset our expectations a little bit based on these higher yields. And, you know, until we know whether or not this price floor has increased, you know, maybe $1.50 from pre-COVID, which we don't know, I think we have to think more about what kind of opportunities would stir additional buying and short covering here. And You know, we have demand, but where else are we, you know, where are we going to have a supply side concern on corn right now? I think we kind of lack a clear driver in the here and now. And if, you know, if you're thinking that over the next month or two that you need a bunch of cash and corn is how it's going to happen, we may have to revise our expectations. Yeah, and a lot, but we have to have a reason for these funds to get out when you see such large carries, they can just continue to roll those positions forward.

Chris

Barron: That and the other threat here, I think too, is, you know, that, that $5.10 area is going to get a lot of guys close enough to $5 cash numbers. That's going to be the, probably the magic number. I mean, I've talked to a lot of farmers in the last couple of weeks and like, what number is gonna, you know, where are you gonna start making sales? And they're in, and pretty much everybody's at that number, you know, to to offload some and then hope for more. But, you know, that's as soon as everybody kind of starts doing the same thing, you got a pretty limiting offset on the other side of the equation, I think is the threat and something that I think we all need to be cognizant of that there's two sides of the equation. There's the seller and there's the buyer and there's, and you gotta get both to make it work.

As far as soybeans goes to, it looks to me like the remaining inventory and some of the producers we work with, the soybeans have a pretty decent margin yet with respect to where they're at. So it looked to me like, you know, some of the guys that are sitting on that soybean inventory, again, not recommendation, but, you know, you can offload those and if cash flow is the, is the concern. But, you know, one other thing, and maybe you mentioned it and I didn't hear it when I was writing something down, but you know, interest rates and the carry has to be part of that equation too. And I think, you know, if you look, the carry is just barely enough to cover the cost of interest. And I think the reason people are, you know, maybe rolled those Ds, those '23 Ds out to, you know, hoping for the price to come up.

And I think we're going to have to start, like you said, maybe recalibrate our expectations and. And you probably won't sell everything and maybe you'll be wrong, but hopefully you are wrong. Hopefully there is something that's a, you know, that's a white swan instead of a black swan that comes out of the sky and gives us some hope. Any other comments on the '23 before I finish up with some questions on the '24 crop?

Garret

Brown: I think just on beans in the short run, you know, while we're seeing some oversold conditions, potentially on that daily chart, we'll just use January. You know, they're still in a downtrend, you know, and so I think trendline resistance, as I would have it, and we broke through it, but it's probably up around that $13.50, $13.60. And I don't know if we're gonna get there. I think at this point with South America weather, I think the general idea is that they're going to have enough beans. Less rain doesn't necessarily mean no rain. And the funds are already long. So they don't necessarily have to rally, but can they rally? Sure. You know, it's hard to— hard to keep a bean down at times.

Chris

Barron: But yeah, and that cost of carry for most of our clients with interest rates in that 8.5% to 10% ranges that we are seeing now, which is kind of crazy.

Garret

Brown: Well, and just an offhand comment, Chris, 9 cents a month. If, if let's just say you went out and bought a futures contract, you could, and you could take the cash if you got on a basis, or you could just deliver those beans. All of a sudden you've eliminated that 9 cents a month and you've given yourself a 9-cent risk range that you could trade within a month. Or say you were going to risk 2 months worth of that, you know, 18 cents on a buy stop. Um, one way of looking at it is, are you willing to go out there and buy a futures contract or 2 you know, against every bushel that you decide to sell. And if the answer is no, I'm not comfortable holding paper, and maybe we're wondering why we're holding beans on cash.

Chris

Barron: Because you don't have to write a check.

Garret

Brown: Well, you know, it's psychological. Yeah, but it's an easy way to think about it. It's, it's not to be derogatory or anything like that. It's just reality.

Chris

Barron: It is. Yeah, it's—

Garret

Brown: it—

Chris

Barron: yeah, it— there's really no difference if it's— if you own it on paper, if you own it in the bin, other than the margin call, right?

Garret

Brown: Well, there's not a margin call and you're not paying, you know, you're, you're using maybe 10% of the capital to hold the same position.

Chris

Barron: Yeah.

Garret

Brown: Depending on if you have your basis locked or not.

Chris

Barron: Yeah. You're having a value erosion without being able to see it. Is the issue. Um, let's, let's wrap up with the '24 crop. Um, since we're talking about such happy stuff here, let's, uh, let's talk about '24. Um, there is a bright spot there though. Um, I'll tend to be smarter in the next couple of months, and as Shay and I— and Shay's been doing a really good job, he's getting, um, getting more profit managers kind of in the box here than I have been. And, and, but what we're starting to see is there's still a decent margin for corn and soybeans with where these price levels are at. Wheat's a little iffy, but what we're seeing is, is some, some potential there. And a lot of these guys are selling a tiny bit, you know, I think we're at like, we're seeing guys at about 7% sold, 7-8% sold on corn on average.

So there's guys that have zero sold, and there's a few out there that are, you know, pushing 30-40%. Any comments on the '24 crop? I mean, what do you, what are you watching there? What, what should producers— again, not advice, but just some perspective on what, what people need to keep in mind as they, as they look at this '24 crop?

Garret

Brown: Well, I think, you know, if we're seeing costs come down a little bit, that should recalibrate expectation for what price should do for profitability. If we've seen yields come up, that should maybe recalibrate things a little bit too. But just to go back for a sec, because obviously I tend to want to look at the market as having it tell me a little bit of what to do, guiding me as a market, an uptrend, downtrend, or we're getting, you know, is the market kind of pushing too far one way or another, looking at it from a value perspective. But If you look at a continuous chart just back to, say, you know, the, uh, let's just say since 2006, there's two price points on the chart to me that really stand out that are, um, kind of like either trade higher than this or you trade lower than this.

There's really not anything in between, is just strictly a transitional phase, and it's $440 and about $550. And this is, you know, pretty easy to look up, but I can share this with you, Chris. But I think once we're looking out to Dec 2024, we're looking at prices that have stagnated for the last, you know, we're working on 5 months where we've only traded outside of the $5 to $5.20 range, really about 8 or 9 times, period. And if we could look out there and say, okay, you know, we closed at $5.13, $5.13.5, And I was, you know, you're to get sold up, say you're a farmer that has, you know, not a lot of storage, you're actually in a tighter spot because what happens if price goes down in that situation, you're, you have fewer options. But let's say you do have storage and you're at $5.13, what might you do?

Well, if you're holding these hedges on paper or hedge derive, figuratively, you should be able to roll those contracts. So if if let's just say that this balance sheet remains heavy, which is kind of what the forward projection looks like. You know, there's things that can change between now and then, obviously. But let's just say what's the current carry? We're like $0.20. Let's just say we're at $0.15. So $5.13 D looks like $5.28 in March of '25. Let's say you can get a 30-35% carry out to July from D, that's $5.48. Is that $5 cash? You know, if we're looking at a national average of— let's see here. Let's just say it's $175 next. You know, that's, that's $959 an acre. I think my math is right. So I guess those are some of the things that I'm looking at.

I'm looking at where is my point of contentment, just given that it's kind of like, what do we wish we would have done back in 2013, 2014? You know, things are still trending fairly similarly.

Chris

Barron: Well, that's, that's just it. And I think part of it too, like you said, it depends on whether or not a person has storage. It depends on where their line of credit's at at the beginning of harvest. Is it, is it a big line of credit? Is, are you not really into the line of credit very much? What is your interest rate? What are your cash flow needs and other principal and interest payments. So there's, there's all these factors. That's, that's where Profit Manager is nice with us, with our clients, because we can kind of figure that out. And then, and then they can go and do that marketing plan in accordance with, you know, like you said, the cash flow, you know, their interest rate, what they have on line of credit, their storage or logistics, all that.

I mean, that was something that we were really pushing people in 2023 as we were in that August, September, October timeframe is, is doing that algebra, right, doing that plan. And I think to your point here, it's like, do that now for the '24 crop, because your opportunities are, are in the black right now yet for most of the producers. I mean, we're just looking it up here, we're at $4.74 for our currently, and this number is going to change, but currently with the crop manager we have right now, or that I have in my system, $474. So that— so there's margin there. I mean, there's a 5-6% return on investment for a producer. That's not a 20% ROI, which is what we, we were starting to get used to. That's where, you know, recalibrating our mindset on that.

Garret

Brown: Well, if we can kind of fill in these lows and not experience those lows, then, you know, it's all about trying to figure out how we can open ourselves up. And, you know, we've been in a, you know, sideways trend for the past 5 months. We can kind of get complacent here a little bit. But, you know, if you're sitting there as a producer, and again, not any advice or anything, but you're, you know, yeah, for a brief moment there, which coincidentally those highs came in very similar to last year. And remember last year in the fall, you know, like late September, middle of October, like the first day of January or something, we kind of hit 3 highs in there, and then that was the high for the rest of the year. So it's very possible we saw something again, and I'm talking on old crop at the time, actually.

But if we're literally 7 cents from $5.20 or $6.50 here, what is— are we really missing much? If you're a farmer that hasn't done anything yet, then, you know, from an opportunistic standpoint, yeah.

Chris

Barron: And I think the big thing is, is having targets in too., you know, just have— because it seems like you got about 3 seconds and it happens at night when you're sleeping, and then you get up and it's like, well, I would sell that, but it's back off the high for the day now, or, you know, for the trading range to react.

Garret

Brown: It's— you pretty much have to know ahead of time and with absolute certainty that you're going to do it.

Chris

Barron: So, right, exactly. Well, it's been a great conversation. I think, you know, we kind of hit the the, some of the macro things, some of the fundamentals. We talked a little bit on the technicals and then kind of the things that farmers need to be thinking about with both that '23 and '24 crop. Anything you want to leave producers with going into the next couple weeks or into the next month or so?

Garret

Brown: Um, you know, not that I can think of. I think we pretty well covered it.

Chris

Barron: Yeah, got it. Well, again, I really appreciate it. It's been a good conversation and And we'll have you back again. If people want to reach out to you and kind of, kind of see what you guys do, Kodak Risk Management, Risk Advisory, what, what, how do they best get a hold of you?

Garret

Brown: I guess they could just reach out through the website. It's kodakgroup.com.

Chris

Barron: All right, that sounds good. Thanks a lot, Derek. Appreciate it.

Garret

Brown: Yeah, thanks for having me on.

Chris

Barron: Yeah, you bet. Thanks, everybody. Everybody for listening, and we will catch you again next time on the Ag View page.