How low do we go? Weekly market outlook: Feb. 19-23

Chris: 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 heading into a new marketing week. Middle part of February, the 19th through the 23rd, still in that price discovery period for crop insurance. And we're not seeing a real pretty picture, at least so far this month. And we're lucky enough to have with us Jeff Owen. I forgot to ask you how to pronounce your last name, so I'm going to have you say your last name.

Jeff

Fichtelman: It's Fichtelman, but—

Chris: Fichtelman. Okay. Because we've had you on one other time. And so I meant to ask you before we started recording, how do I pronounce your last name again?

Jeff

Fichtelman: Yeah. You know, on that, I got 4 little girls and, and one's only 8 years old. And it's funny because like you only ever think of when you have a, a tough to pronounce last name, you see it from your perspective. And she came home the other day and she said, Dad, nobody could pronounce our last name. They, they, they go by the standard, like Fichtelmann or, or something like that. And it's, it's kind of funny to, to see it from your kid's point of view.

Chris: But, um, oh, that's awesome. Yeah.

Jeff

Fichtelman: It's.

Chris: It's a, it's a long name with a lot of letters in it. And so I wasn't thinking about asking that ahead of time, but I appreciate it. So, well, we talked for a minute or so ahead of time here, I guess, and I was showing you some of the numbers and things that we're seeing with our clients in terms of cost of production and stuff. And I guess that's where I would start with 2023. In a lot of cases, I think, you know, it's a situation of sitting on too much old inventory currently, unfortunately, and nobody has, you know, has a crystal ball, or at least I haven't found anybody with one yet that would have known, you know, hey, we should have just sold off the combine even though that didn't feel like a good price because we've done nothing but go down since then.

And so what I wanted to chat with you a little bit about here this afternoon is, or as we kick this out here for this upcoming week is what, what are some of the things that guys should be thinking about or how do we get our minds straight? Because it doesn't matter if you have 5% of your old crop left or 50% of it or 80% of it left, it's too much. So, so what are some of the things that you're helping some of your clients do and think about?

Jeff

Fichtelman: Yeah, I mean, '23 is a very different scenario than '24. '24, we still have a lot of time. The crop's not even in the ground. There's plenty of things that can go wrong that can get this market to potentially rally. '23 is tough because our timeline of— for a lot of guys, they want to have that corn out by March 31st. Maybe they're willing to kick the can down the road. I've heard more comments of maybe April or May will have good basis and bail me out. I know probably gonna have a long tail dealing with corn all the way through the summer. Guys that probably never held corn into the summer probably will. '23 is tough because we know the production, we know the cost, and now it's just a matter of waiting and hoping we can sell good values.

And the things I've been challenging my guys with really all year, and especially right now, is we all create this psychological block that we don't want to be the one to sell the low. And it's almost like I can't admit that I could have just called in and sold any other day. And I have this conversation, I probably had it 3 times today with the same guys who I've probably been talking to a lot over the last year. And I said, you realize every time we've had a conversation about selling some corn, it's been the low of the year. And you've said, I don't want to do that because I don't want to sell low of the year. And of course, now we look back and at any point in time you would have love to have those sales on the books. The underlying story has not changed. We still have an absolute too many, too much unpriced '23 corn.

We've maybe started to chip away at that, but I feel like we still have at least 5 weeks, maybe even 10 weeks of reckoning. And I just challenge guys to think about it differently. Everybody's so afraid to sell the low. We should be begging to sell 10% or 20% of our '23 at the low, because I want to challenge you guys. Everybody thinks of that sale would be terrible. Is that the worst thing can happen to your farm if you sell 20% of your '23 crop or just pick whatever's left in the bin, sell a quarter of that, even half of that, and you peg the low and the market rips a dollar? Yes, you can look back at that sale and say, man, I should have waited. But the reality is the rest of your unsold corn is far better and your '24 which is a very scary picture right now, again, would be saved. Like, the worst-case scenario is continuing to do nothing.

I keep telling guys, like, look, I mean, now that we're at this time of year, February, we really kind of are long two crops. We got '23 in the bin and '24. And there's a high correlation from the guys who didn't sell enough '23 probably have very little, if not if no '24 corn sold, I think we need to completely shift our mind and almost beg to sell the low. But continuing just to rateably sell here, there's obviously the big spec short. What I've noticed, I've listened both to your podcast and many others. Everybody is very aware of this situation. It seems like everyone in the market knows there's a lot of unpriced grain and everybody knows there's a huge spec short. And it is always interesting when everybody's on one side of the boat that tends to predict lows. But I just don't think this is a similar scenario.

I think there's just too much corn that needs to move in the next 2 months. I think we're going lower before we go higher. But the spec shorts, interesting. And I know we talked briefly a little bit about it and we can go there, but I think maybe a question for you, Chris, if you don't mind, before we jump to the funds. And this is a conversation I've been having with a lot of guys about '24. And I know we briefly talked about cost of production and we're probably— we're definitely below cost of production for the majority of farmers in the country on corn right now. Of all the line items, looking at where they are today, fertilizer has come down year over year. Interest rates gone way up. Everything else is maybe similar year over year. Rents on flex leases are maybe down a little bit. But it feels like with all the guys I talked to, there's not a lot left on the bone to cut.

Like we've spent money, we bought new equipment, can't easily return that. Like, do you feel like there's a lot of room to shave on costs or where would you target from your perspective?

Chris: My answer is just going to, going to pressure the market more. My answer is the fastest way to lower your cost of production is increase bushels. And if we all do that, we're going to pressure the market more, right? But, but that is the fact of the matter, is the fastest way to lower that is to increase production. And so where we got to be really careful, the thing that always scares me is being really careful not to cut anything that enhances or protects yield. And then on the converse side, and I'm going to pick on Bankers, and I know we got a bunch of Bankers that listen to this, and, and I'll apologize up front, One of the frustrating things to me a lot of times is you got to cut your family living costs. Well, that's easier said than done. Or— and we look at it as return to management.

That return to management category is a very difficult one to cut because it's paying the payroll for your employees. You know, you give an employee a certain amount of money for 2 years in a row and then try to pay them 10% less, you're probably not going to have very good retention. And, you know, and labor is hard enough to find as it is. And so there's, there's a lot of sticky numbers in that category and that family living return to management line item that's got all those inflationary impact and things that have impacted that category. So I don't know that there's anything else to cut either from what I can tell that makes sense. I think we just got to be really cognizant about where we're spending money and, you know, watch every dime we can. But I also agree with you 100% is, you know, we have to continue to market because there's another expense there.

And I kind of answered your question, but I want to say one other thing. You know, you had commented about the, you know, selling some of that corn, even 10%, and hopefully that is the low. And I agree with that 100% because the other side of that is, is if you're borrowing any money there's interest, there's, there's land rents that are going to be due soon. There's all kinds of other payments that come up as we get into the spring timeframe. And interest cost is a real deal. You know, I hear a lot of people say 4 or 5 cents. To me, it's about 7 cents on corn and about 11 to 12 cents on soybeans. If you're sitting on anything, that's a real number too. So it's not what you sell it for, it's, it's what you net. For it too. So now if I answered your question, I kind of rambled.

Jeff

Fichtelman: Sorry, but no, you're right. I mean, I've challenged guys too recently, the ones who maybe have an understanding of buying upside calls, that it— to stay on price to the summertime, as you kind of said with interest rates. I mean, I just took $4.20 corn times 8% interest rate. That's about just shy of $0.03 a month. And we got maybe 5 months roughly to summer. That's about $0.15. So you're going to burn $0.15 in interest by staying unpriced and have really nothing to gain for it. You can buy a decent upside call for $0.15. So sell your grain today, buy a call against July corn for $0.15. Net-net, it's the same amount, but what you've created now is guaranteed cash in hand because you're selling your corn. If we do keep breaking, Lord help us, you've got that floor in place.

Yes, your call won't work, but if for whatever reason we bottom and rally, it's just a far more efficient way to protect yourself but still be in the market. And I still challenge guys with, do you even need to buy calls? I, for most of them, are really on price. The answer is no. If you're in your last 25% and you're trying to play the markets a little bit, and you still fear that we could keep going down. Yeah. Then you can sell and buy calls one for one. But I just— calls have gotten quite cheap. And I know personally I've been eyeing— there's eventually going to be a time where the market bottoms and I don't know when it's going to be. As you say, nobody has a crystal ball, but it does feel maybe late March into April you're going to get a lot of forced selling pressure. Funds have always covered.

There's never been a time where they haven't, but sometimes it could take 8 weeks to 3, 4 months. But it does feel like we'll probably have some kind of story to tell at some point. So these kind of last leg downs usually are the most violent and we'll see. But there is something in that, not to lead the question a little bit, but I know we talked ahead of time. This is— I want to educate farmers a little bit on the spec funds. I get the chance to talk to a few of them on a regular basis, and they think altogether different than the average farmer, really almost polar opposite. I start with this. The average fund probably has more than $100 million to manage, and for them, they don't care if they make money being long or short. They're just trying to be profitable.

And you think about if you had $100 million to manage, there's an easy expectation that you better earn more than 10% because that's pretty much what the S&P 500 can give you. Well, $10 million, you're effectively on a $0.50 move. Let's say you're right on $0.50 move in corn. You got to have a 20 million bushel position. So these guys almost are obligated to trade big because they have so much money to manage. Trading small for them makes no dent. The other major concept for these guys is they love pushing a trending market and they know independently they can't push a market. I'm not saying it that way, but when the markets are going down, they actually like selling new lows because it tells them they're on the right side of the trend.

Chris: The trend is your friend.

Jeff

Fichtelman: Trend is your friend. And I've never met a farmer who loves to sell new lows, but I've never met a fund or a big trader that hates to sell. They all, they all love selling new lows or new highs. They buy new highs, sell new lows. It's— and I think it confounds farmers why the market's broken so sharply when no farmers sell it, has sold it recently. And these funds are quite in a good position right now, and I think they know it. And it's going to be a tough, tough way out of here, I think.

Chris: Oh, yeah. And, and as farmers, we hate the funds when they drive the market down. We love them when they're— when it's going up. Oh, where are the— we need the funds in here. Well, we need them to get the hell out. And so like right now, you know, even if they do start to, to, to lighten up on all these short positions, what's that going to do? It's going to be met with a whole bunch of sales because we're all sitting on so dang much corn that it's going to limit that. Which leads me to a question, a practical thought for you for a second here. And I mentioned this, I think last week, whoever I was last week and was having the same conversation. But, you know, if you look at the July and you look at the carry and you price the July, so at least you capture that carry, which isn't very much, but it's better than nothing.

And, and then plan on, you know, depending on where you're, you're selling that grain,, you know, do an HTA or something and then look at the idea of, okay, well, I'm going to let basis come to me and at least capture better basis. But I also would say I think the same risk occurs there is when this market starts to take off and go up, basis is going to go away too. So that's a really, that's a tight wire walk, right? It's, you know, there's all kinds of strategies that people can consider, like you talked about, you know, just getting rid of it and having the call and, and, you know, shutting the interest off and that kind of thing. You know, there's, there's algebra that you can run about 5 different scenarios that all have merit. It's just each individual farmer has really got to think about it.

What's your thought on the, on, you know, maybe pricing, taking at least taking what little bit of carry is there and then trying to navigate some basis opportunity?

Jeff

Fichtelman: I think A couple of thoughts. I mean, obviously there's a lot of things we could do now. Not a lot. There's things that we can do to try and tightrope walk this scenario. But you're right, they both create more risk because I do believe if you sell July corn and then suddenly we rip higher, basis will absolutely tank. So there is definitely a risk there. At the same token, though, if you sell July corn and you're right and the market goes down, basis will probably have to do the work. So I mean, It's kind of no different than just being unsold, just less risk because basis doesn't move as much as futures usually. The one thing I would say though, I feel like probably 5 years ago in my career I just had an awakening that as difficult as this market is, we make it harder with our own psychological blocks.

The one thing I tell guys who have a hard enough time making a decision, don't create more decisions than than you have to. There's this concept, I believe, called decision fatigue. So they're having a hard enough time selling '23. And then if they create an environment where they lock in futures and then will have to set basis, you've now doubled your decisions. And there's a lot of guys who I get the chance to work with that, for example, let's just say they grow 300,000 or 400,000 bushels of corn and sell 5,000 or 10,000 bushels at a time. I mean, they got to make 20+ decisions just to get rid of that. On the futures. And then if they set futures first and basis later, now you got 40 decisions. You're pretty much needing to make a decision every week, and most guys don't do that.

And so I'm, I'm a big fan of try and simplify your life and also look at the market in a different way, saying, am I creating artificial blocks? I mean, I just think we're living in an environment where people are so scared to sell low out of almost a hurt to the ego. But really, as a farm operation, if we sell here and it rips, rips higher tomorrow, that is a very good outcome. A very bad outcome is continuing to do nothing and we keep going down. And there was a slide— I've done a lot of market outlooks recently and I put the slide up there not to inflict fear, but it's something I've relied a lot on in my trading career. Which is I always look at post-ethanol era for corn, look at the past times that USDA has printed a similar carryout, and then where was the corn price trading at that time.

And there were 3 years, '16, '17, and '18, that USDA had a 2.2 billion carryout, pretty much identical to where we're at now. And then all through 3 of those years, we were $3.18, $3.30, and $3.40 on the corn price. And I'm not saying we're going back there, because we very well might have, with hyperinflation, created a new price paradigm where the old highs of $4 are the new lows. I'm hoping that's the case, but there's the laws of supply and demand sometimes might push us back to a 3 in front of corn. So I just still warn that we got to be careful saying I can't sell because I don't want to sell new lows when we should almost hope that we do. Yeah.

Chris: The problem is we don't know what new lows are. I mean, what—

Jeff

Fichtelman: what—

Chris: where is it? I mean, you don't— we don't know where the floor is at yet. That's the problem.

Jeff

Fichtelman: Well, my, my thought is if you sold today, if you sold a third of your remaining old crop today at $4.17 and three quarters, and I get it, that was the lowest level of the last 3 months. And then immediately the market rallies $0.70 and you have a $4.17 sale on that will look terrible. I get it. But your rest of your crop is far better. So I'm not necessarily trying to say guess the lows. I'm just saying we got to stop with every new low being afraid to sell it. And I do think we'll see better values on '24. I absolutely do there. I would be patient on '24, but '23 is a real predicament for guys who have a timeline of weeks, not months or even years.

Chris: The other thing I would say too is just keeping track of where your average price is and stop looking at each individual price. Don't, don't look at that high you sold and don't look at that low you sold. Look at the average and just understand that, you know, nobody knows. I don't care if you're the smartest person in the world, you don't know where it's— where the high is or where the low is. It's, it's all about managing the margin and that's really a key thing. One of the last things I want to hit on, we haven't really touched on soybeans or wheat or anything. Is there anything else you're watching in the other markets that can influence either that market or, or corn or whatever? I mean, between, you know, kind of the three sisters there?

Jeff

Fichtelman: Yeah, I think a new thing we probably have to respect with soybeans is the South American harvest is now very similar to the US harvest. I think it's common wisdom that you tend to see lows in August, September, maybe into October. Generally speaking, in the US, I know every year is a little different, but you get a lot of harvest selling pressure. Well, January and February is pretty much the harvest window for South America. And South America is predominantly soybeans in terms of their total crop sizes, and they're main bean producers. So we're getting incredible selling pressure down there. The tough thing right now is China can buy South American beans for about 50 cents a bushel cheaper than the US, even with this market decline. Because South America uses the Chicago prices to price. Now they have different basis levels.

But when the board price goes down, that doesn't necessarily mean the US is cheaper. It's all about US basis versus South American basis. And. But I think generally speaking, we just have a new wave of selling pressure. I mean, South American production is, I believe, bigger than the US in terms of soybean production in the world. So now when they go into harvest, as farmers, we got to understand, appreciate there's going to be a lot of selling pressure down there, just like there is up in the US during our gutslotted harvest. So it's One thing I've learned, and to give a glimmer of hope, I mean, I would say old crop, we have to be far more focused on pricing at least a quarter, a third of what you have unsold and hope that slows. New crop, you could probably be a little patient here. For guys who can wait, beans have historically provided a good opportunity in the summertime.

So it's— I would maybe do that on 10 or 20% of my old crop, not 50 or more. But I haven't, I haven't met many farmers who've got more than half of their beans unsold in '23. Most of them use beans as a means to pay the bills for corn, right?

Chris: Yeah, that's kind of what we're seeing. I think our clients, at least on Profit Manager, at 92% sold on soybeans. So that's kind of nice to see. Yeah, I think we're about 62% sold on corn as a as a, you know, kind of an average and stuff. So, you know, there's still a pretty good size chunk of, of grain. And I think, you know, the— what I'm seeing from our clients, I think the average producer's got quite a bit more than that yet on hand too, the way it sounds from, from some of the other people we chat with too. But is there anything you'd like to— any final thoughts, final thing, anything I didn't ask you as we wrap up here? Um, as far as, you know, what guys should be thinking about, I think you had some really good advice there and, and, uh, kind of managed the, the mindset a little bit. I think there's a lot going on, uh, up in our minds a little bit.

I think there's, there's a just frustration. I guess I was trying to think of a good adjective there. You know, there's just a lot of frustration and people are trying to deal with it and still be happy, and it's just you know, we're just in that transition year, I think, where, you know, we are transitioning some things and we're going to have to recalibrate stuff to, to kind of move forward. But I'll leave you with the last words here.

Jeff

Fichtelman: Yeah, I mean, the last thing I'll say is I had a really good conversation with the young farmer. We discussed the very question I asked you is, is there anything left to cut on the cost side? I think you had a really good point trying to outgrow it. Of course, implications on the market is net bearish. I was talking to this young farmer. He said he and his dad went in. They have combines that are about 5 years old, and 5 years ago they bought them for $250 grand. And to buy a new one today is about $700 grand. But the tough thing is there's a lot of service cost to repair the equipment. So from a how much you're paying in repairs to buying a new one, you can almost make the payments on a new one.

But obviously you have way more debt and there comes into interest expense., but we had this long conversation and came back to, he's like, you know, I went to school to be a mechanic to try and save costs. Why don't I just try to figure out how to repair it? And I was like, that's the right mindset for '24. Not figure out how to repair your own equipment, but try to find value where you can. Um, a series of small wins go a long way and can really add up. Uh, and also head in the sand is, is probably not the right mindset for '24. We're entering a period of time that's probably going to be very similar to 2014 and 2019. So as farmers go back to that era, and think about how did I think about grain marketing, most guys were far more inclined to sell small rallies, and really did a good job kind of managing costs and trying to farm for small profits and wait for much better years to come.

Chris: So yeah, that's great advice. I think, you know, it's, it's the small wins. And it's recalibrating our mindset, because I think we learned some bad habits the last couple of years. And I I think we're gonna have to get back to reality is the theme probably. So hey Jeff, Jeff Fickleman, I said your name right, right? So I wanna make sure I end, did I pronounce it right?

Jeff

Fichtelman: No, Fickleman, but I've got so many errors.

Chris: I gotta get the T in there, dang it. Fickleman. There, I'm gonna keep saying it till I get it right. We'll get you back the next time and I'll say it right the next time.

Jeff

Fichtelman: All right, sounds good, Chris.

Chris: I appreciate it. All right, yeah, thanks Jeff. And thanks everybody for listening and we will catch you again next time on the Ivy Pitch.