Is a short-term bottom near? Weekly market outlook Feb. 26th - Mar. 1st

Narrator: Thank you for listening to the Weekly Market Outlook.

Chris

Barron: It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business.

Narrator: Please reach out anytime by emailing cbarron@agviewsolutions.com.

Chris

Barron: Welcome everyone to the Ag View Pitch. This is the Weekly Market Outlook. And today I am joined by Jim McCormick from— is it AgMarketNet or what? What's, what's the correct title?

Narrator: Jim? Officially, it's just like the website, AgMarket.net. That's the official name.

Chris

Barron: Well, then it's just like Amazon.com, you know, so we got to AgMarket.net. So, and you're based in Illinois, correct?

Narrator: I'm in Illinois, correct. I have an office in Barrington, Illinois. I live in McHenry, Illinois to kind of put that in perspective, Paul, I'm the second county over from the lake, about 10 miles from the Wisconsin border.

Chris

Barron: Oh, so you're, you're, you're in that northeast part of Illinois.

Narrator: So we're the northeast of Illinois. When you hear people talk about the northwest suburbs of Chicago, I'm in the furthest northwest suburbs where I'm at. Where you go east of our county, you're getting into more industrial, you know, metropolitan. You go to the western part of the country— county, excuse me— we— there's still a lot of farming here in McHenry. Yeah, we are. We're a little bit more rural than people think when they hear Northwest Chicago.

Chris

Barron: Well, yeah, because my memory of looking at— because I am an anal CPA, I've looked at like the counties in Illinois as far as corn production, and it seems like McHenry County has a decent amount of corn production. So now, our claim for fame out in my neck of the woods where I grew up, Washington State, and I'm not there anymore, is that Whitman County, Washington State grows the most amount of wheat of any county in the United States because it's a decent-sized county and averages about 90-95 bushels to the acre. So that's enough of that. Let's, let's talk about— although for a lot of our listeners out there, maybe they'd rather hear us talk about Chicago and Washington than to talk about the markets. So let's just lead off, you know, we've had a, what, a 2-3 week of just every day, it seems like it just, it just comes down another 2 cents, 5 cents.

You know, today it was down another nickel, plus or minus, depending on which contract you're looking at. When is this thing going to bottom out, Jim?

Narrator: All right. Well, I mean, you're right. I mean, if you look at where the market really kind of stalled out, a lot of these markets, especially the corn, kind of tested that moving average resistance right at the beginning of the month of February. When it failed at it, it is— we've just seen some relentless selling ever since. And Folks, it's kind of a combination. The good news is I think we're near the bottom of it. We may not be there yet, Paul. There's a couple of things that we're looking at, groups looking at that kind of exasperated the problem. Firstly, plain and simple, there was a lot of producers that did basis contracts this year. Some did it in December. They didn't market the grain. They rolled it out to March. That added $0.25 to the basis. Now they've got it ahead and make a decision.

These basis contracts, a lot of them were coming due here the next couple of days. Some are coming due on Friday here as we wrapped up trading week on Friday. A couple will lag into Monday, Tuesday, Wednesday because first notice day is on Thursday. So producers had to make a decision. Either they had to sell the grain or roll the basis. Well, if they rolled to May and they already rolled from March, from these to March, all of a sudden your basis instead of 35 under the— or 25 under the March, let's say, is now going to push to 40 under the May. So a lot of producers just kind of threw in the towel. That was part of the problem. The other part of the problem was it was option expiration on this past Friday. And what happens is a lot of producers turn around and they buy puts or speculators will buy puts and then a professional seller will sell them the put.

For every buyer, there's a seller. Yeah. So you have a lot of puts. I did the math here on Friday. There is roughly 40,000 open interest just in the March puts from $4.25 to $4 puts, over 40,000 contracts. Okay, so Paul, when a producer was buying those puts, somebody was selling them that put. And traditionally those option traders, what they do as that put starts working against them, they'll essentially sell futures to offset that put risk. So as this market was going down, it was exacerbating pressure on the put sellers, not just in corn and all these commodities, which forces those put sellers to turn around and start selling futures, which just exasperated and pushed the next leg down. And then you throw in the farmer who's now feeling pressure because his crop's devaluing in the bin and he's running out of time.

And it just all felt like it's building as we wrap up in this option expiration and first notice day. Now we're a little bit optimistic that once we get through first notice day, we are maybe set up for at least a dead cat bounce. If you look what happened when the December corn went off the board, the first notice day, that put the low in. Then we had about a $0.20, $0.25 rally in the March contract. So we're anticipating the same type of situation, but it may be a few more days before we actually bottom it. The other thing we're keeping an eye on is the fund position. They are pushing dang near record short position, not for this time of year, forever. Yeah. So they are really pushing this hard. And, you know, and they've been essentially gaining on the pain of the producer, the pain of the option premium seller.

Well, if that pain, you know, those sellers that have to sell dry up now that we're past first notice date and option expiration, hopefully we're at a point where those funds say, you know what, enough's enough. I'm going to go ahead and lighten up because there still is a lot of uncertainty on the size of the crop down in South America. As well as the United States.

Chris

Barron: Yeah, I mean, we, you know, if there's been any corn planted, it'd probably be what, Louisiana or Texas, you know, way down south where they can get started in, you know, February time period. But for the key Corn Belt states, we're still a minimum of what, month, month and a half away before we really get anything into the ground. A lot of things can happen between now and then.

Narrator: Well, exactly. You've got to debate, there's a, there's going to be a debate about the acres, you know, the Outlook Forum earlier in February said, hey, we're losing 3 million 3 million acres of corn, we're going to pick up 3 million acres of beans. I'm not sure we're going to pick up 3— I think we're going to lose 3 million acres of corn and maybe more. We'll see. But let's just talk to the beans first. Are we going to pick up those bean acres? We're going to pick up some. But that cotton market's really kind of caught a little bit of a bid here. So the cotton is going to make an argument for maybe some of those lost corn acres. The other thing on the corn acres, is it going to be more than 3? It's going to be an interesting situation because economically, several producers have told us, hey, I'm looking at maybe going to beans. Try to save some input costs.

Yeah, but the big but about this is, is what happened last fall. You might remember the price of fertilizer dropped quite a bit from summer to fall. So in the fall time, fertilizer looked really cheap comparatively and we had a phenomenally mild fall. A lot of that got spread. So we may be locked into more acres than we normally would be, but there's going to be some debate on those acres. The safrinha crop in South America, guys, it's just getting planted.

Chris

Barron: Yeah.

Narrator: Now they're getting plenty of moisture. They're off to a decent start from what I can say. But the real question for the safrinha crop is, does it run out of water? They— what feeds that water is the monsoon season. That monsoon season usually runs into the middle to the latter part of April. If for some reason the weather patterns change and all of a sudden they're not getting that monsoon rain, and it shuts off at the wrong time. We know how that is here in the Midwest. If the rain stops in late July, August, you can still shrink that corn crop back. So that's still up in the air. And then lastly, Argentina, they all look pretty good right now, but they still haven't pollinated their crop. They saw some incredible heat just a few months back. If that heat would come back as well, that could have a detrimental impact.

So there are some reasons, I think, for the market to eventually put some weather premium or some what-if premium back in. Hopefully, like I said, we might have put it in here on Friday. I wouldn't be surprised if a few more days of pressure, but, you know, maybe we got a little bit of history on our side that says maybe once we're past that first notice day, we at least get somewhat of a temporary bounce.

Chris

Barron: So if we have some farmers out there that still have quite a bit of their '23 crop that's not been marketed, what is some of the advice? Hold tight to see if we get a little bit of a bounce and then start feeding crop into a 20, 25, 30, 40-cent rally potentially, or wait for the weather scare, or what's, what's that farmer, you know, and again, that's a crystal ball, but what's some of the advice for them?

Narrator: That's definitely a tough question. I mean, it could go lower. We got to, we got to be honest. I mean, you know, the argument within the industry, well, the funds can't stay short forever. And that's true. But they can stay short longer than we want them to. I believe in 2019, '20, when we were in the midst of that trade war with the Chinese, the funds got short and they were short for dang near a year. Yeah. So they don't have to get out of this short. We've got to be cognizant of it. So if you're a producer and you're nervous about it, you might consider buying some puts, buy some May puts to get you a little bit of coverage. But if you don't have to do it, I am looking for a little bit of a rebound here.

Like I said, when the March— when the December contract bottomed on first notice day, when it was in delivery, the March contract, which is now spot month, it rallied $0.20, $0.25. So I think you can get a decent little rally. But I think we got to be realistic. You're, you know, without a major weather problem, we have too much grain and not enough demand. So a relief rally is what we're going to get. And you probably want to get a little bit aggressive selling into it. The other thing you might consider is just make sure you figure out the cost of your storage. If it's on farm, you're still paying $0.03, $0.03.5 a month for corn, $0.07, $0.08 for beans. It may be cheaper to come in there, sell the grain, and buy like a vertical call spread or something that's a little bit cheaper than racking up storage costs.

If you haven't rolled your corn and you're one of these producers, unfortunately, that are stuck in a March basis contract, you know, that roll is going to cost you $0.14. You might consider just not rolling it, cashing the grain out, and then maybe do a vertical call spread. You can do roughly a $0.50 vertical call spread near the money on the July corn by a near-the-money call. So call $0.50 above it for roughly $0.14, the same cost. You limit your downward risk and you actually buy yourself a little bit more time. So there's, there's plays that you might look at to try to, to cut it. But I think what you got to be honest with yourself, look at your chart, talk to your advisor and get orders working. Because the one thing I would, would believe, unfortunately, is if we do get a rally, history will tell me it's going to be relatively short-lived.

Chris

Barron: Well, if we look at Dec corn, it's down to $4.49 and a half at the close today. That means the insurance price is going to be what, $4.68, maybe $4.60, probably the final. If we do have a little bit weaker week next week, you know, we're in that $4.67, $4.68, $4.69, whatever it might be. We know we're a buck, what, a buck 20 under last year. Nobody's locking in a profit at $4.69. You know, what's, what's some of the advice for the '24 crop? And then, and then we'll go ahead and probably end the call today.

Narrator: Okay. Here's what I've been recommending on the '24 crop, Paul. And for anybody out there, you got to be aggressive, I believe, and it's going to cost you money. The reality is we don't have much crop insurance this year. We've been telling our clients, unfortunately, you're not buying crop insurance, you're buying catastrophe insurance. Yeah, it is not going to make you whole. Now, if you look at the stocks to use right now, they're around 16, 17%. Okay. If you look back 2013, '14, '15, that 5-year span from 2013 to roughly 2018, '19, the stocks to use bounced between 14, 15, 16%. Okay. Unfortunately, if you look at it, price of corn is around $3.50 those years. So I think unfortunately there's a very— that is our downward target when it's all said and done. So we're looking for a dead cat rally. Dec '24 corn's around $4.50.

If it gets up near $4.75, I'm going to say, Paul, you need to make catch-up sales. But on top of that, for every bushel of corn that you sell, either on an HTA you sell with a futures broker or even as a cash market, I'm going to encourage you to come in and maybe buy a $4 or $3.90 put below the market. Okay. In essence, and you're going to spend probably 5 to 10 cents, but you've got to identify yourself. You've got to essentially buy your own, your own revenue insurance. So if this market does go down to where the historic suggests, $3.50, that $4.50, that $4 put, might net you $0.35, $0.40. Yeah, that onto maybe a $4.75 hedge and all of a sudden you got your $5 corn you're shooting for. So I think there's ways to get the $5 corn, but you're going to have to risk a little bit to try to bend the arc to get it. But I think there's chances. But it's one of those arguments.

You got to spend money to make money this year, at least protect your revenue.

Chris

Barron: And of course, I hear a lot of farmers say, hey, we've had all this inflation and to some degree the market doesn't care. I mean, it's a supply and demand. There's more supply than we have demand right now. So, you know, that's just the reality that we're dealing with now. That's assuming USDA projections on the crop, you know, 181, you know, is accurate. Don't know if it is. We won't know until, you know, later on. So we'll just have to see what happens.

Narrator: You're right. I mean, exactly. I mean, $3.50 is going to go there if you're talking to stocks, you somewhere around 15 to 17%. If we get a wet situation, either the acres aren't there, folks, or the yield's not there, then we're probably not going to go that low. But if you just— if you go with trendline yields with the current acreage number losing 3 million acres, the calculus unfortunately is a little bit negative. We're trying to protect that revenue. My biggest fear in the long run is, is you look at that long-term chart, Paul, once we got to $3.50 corn in 2013, it was a slog for 5 years.

Chris

Barron: Yeah.

Narrator: And I don't know what's going to happen. There's going to be a lot of uncertainty this fall. You've got a presidential election. You know, if you look at the polls, it's a toss-up depending on which poll you look at. So, you know, our argument is going to be maybe err on the side of hedging and try to protect as much revenue as you can. You know, if we have this opportunity to lay off risk, don't be afraid to take— don't be afraid to take it.

Chris

Barron: Totally agree. Well, again, this is the Ag View Pitch, the weekly market outlook. And this is Paul Yeager signing off.