It's not too late: market outlook August 1-5

Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Jared Creed. How's it going today, Jared?

Jarod

Creed: Going well, Shea. As always, I appreciate the invite.

Shay: Absolutely. We are recording here on July 29th, Friday, uh, before the week ahead as we move into August. And, uh, you know, we actually delayed putting this off a little bit just to make sure that we could see how things ended up here today. Jared, tell me a little bit and tell the listeners You know, what have we seen today? What's this last week look like? And, and how do you think about what happened here?

Jarod

Creed: I'll tell you what, the last week, especially from Friday morning last week to the close today, has been one of the more wild rides that anybody has ever experienced in the soybean market. Uh, we just experienced darn near a $2 rally in 5 trading sessions. Meanwhile, corn traded to a low of Friday last week to $5.62, I believe, on the very close and traded this week all the way up above $6.30, so almost a 70-cent rally in itself. I did see some data here today that that is the largest move we've had in the December corn contract to date for a week, and I believe that's got to be the similar— obvious— an obvious similar in the soybean contract as well. Even in the face of all this tumultuous marketplace that we have with multiple different, multiple different indicators or, you know, catalysts, I should say, that's moving this market all around.

But what's most intriguing is that you look back from June 30th, the last trading day of last month, today, and it's like what you said, we put off doing this for about 20 minutes just so I could see the close. Believe it or not, we actually closed today above last month's close. That is actually a small little win. Does it mean anything moving forward here? No, but we actually closed higher this month than we did on the close of last month in both corn and beans relative to the new crop contracts. I'm sure that's similar with old crop contracts and just did not look at those, but November beans and December corn did close higher today than we did on the last trading day of June, which definitely says something considering the roller coaster that we've had. And quite frankly, the last 4 weeks has just been almost demoralizing on price action.

Shay: Yeah, absolutely. You know, and just to clarify too, when you say this is the largest, you know, change that we've seen in this December contract, you're talking about ever, right?

Jarod

Creed: No, no, not ever. Just the life of the December '22 corn contract. Okay, the crop is planted in the field today.

Shay: It's the largest move we've seen it happen, which is significant, especially when people think about what's happened over the last 18 months. You know, I'm almost tired of using the word volatility. I'm not sure I want to use that anymore. But huge changes. I mean, there's a lot going on out there right now.

Jarod

Creed: There's a tremendous amount going on. And I think it's actually a little important to remember that it's more than just weather. The corn and soybean market and wheat market in general, I mean, they had the kitchen sink thrown at them on the way up and on the way down. And fundamentals were completely thrown out the window, it certainly seemed. Here in the last 30 days, you've had a tremendous amount of change in the narrative. You've had the idea that on a Tuesday we're in inflation, and on a Wednesday we're in recession. Well, I'm no economist, but that doesn't happen. We don't go from inflation to recession that quickly. And quite frankly, the stability that we have experienced in the energy market and equity market compared to months prior would suggest that the story of recession is, is maybe overblown and just not a reality at this point.

You could make an argument that there could be some inflation trade to come back into the marketplace. I don't know if it's fair to say that it can look anywhere near similar to what we experienced the last 90 days, but nonetheless, I think there's been plenty of confirmations that we're still in an inflation-driven market. The Fed raised interest rates 3/4 of a point this month. We do not get any more information from the Fed for 60 days. I think it's September 21st. That in itself could Could, could be, I guess you could almost view it as not necessarily supportive, but lack of bearish information, perhaps lack of a narrative that suggests that we're going to go from an inflation to a recession.

Personal opinion, I think that the government and the Fed is, is maybe more scared of a recessionary environment than they are of inflation because to this point it looks and feels like the US consumer has just absorbed higher prices. I'm not suggesting that it doesn't have a nasty tail to it, but for the most part, there's, there's not some bells and alarms and whistles ringing that suggest that the US consumer is in dire straits at this point. They have absorbed everything that has came their way, not quietly, don't get me wrong, Uh, but it just, it just feels to me, Shay, personal opinion, that we have taken on the worst of the worst. And quite frankly, I gotta give props to last week's guest. You had Duane on, uh, and Duane laid it out pretty much similar way. He thought that we had absorbed the worst of the worst.

And quite frankly, I think he nailed it from the idea of some type of a recovery bounce here. And what kind of legs can it have from here forward. Because again, I'm going to give credit where credit is due. I'm pretty sure he laid out $6.15 to $6.20 in December corn and upper $14s in November beans. So props to him.

Shay: Yeah, absolutely. You talked about lack of bearish information there. You know, what would strike a little bit more of a bearish narrative? Is there, is there anything that you can think of as we move, you know, into this next week, this first week of August here, that would maybe settle this back down or cause sentiment to go the other way? Just, just for thoughts.

Jarod

Creed: Oh, there's a long list of inputs there that could be viewed as bearish, uh, obviously starting with Ukraine and Russia. The, the pent-up belief of being able to move a bunch of grain out of Ukraine, uh, in a very short order of time, you know, as much as 5 million ton a month, that's unlikely to happen. I'm not going to get into any type of geopolitics, but the silliness in some of the narrative of of who's responsible for doing what, and if you don't do this, what does it do to our deal, and how do outside countries view it? That's a very, very murky situation. From my contacts in a commercial space, there will be grain moving from the ports of Ukraine.

That is primarily loaded boats from prior to the war breaking out and prior commitments that have been in place, almost grain inventory that is in silos there waiting to be loaded into boats to leave, but outside of that it has been very tough for any importer/exporter to, to come to a, a fair value of what that grain is worth to leave that part of the world. And to blame at the moment is high, high, high shipping costs, primarily tied to the insurance and the high risk associated with moving grain from that part of the world. So if we all of a sudden see a wave of grain start to leave that part of the world with no issues and some type of resolution to Ukraine and Russia, yeah, that would most definitely put a little bit of a softer tone to the world balance sheet. But that's only one piece of the puzzle. You've got a tremendous weather situation going on in Europe.

Quite frankly, what's happening there is, is, you know, the U.S. weather is nothing compared to what Europe has at this point. There's no secret that the next week in the central U.S. is forecasted to be well above normal temperatures and, you know, normal to below normal precipitation. What kind of impact does that have on grain? The old saying of, you know, buy the rumor, sell the fact, kind of probably holds some precedence in the current marketplace. You get through a hot spell and you get through an expected dry spell, if things are not as hot or not as dry as advertised, or you continue to bring in more moisture into the forecast. That's kind of what happened here today on this Friday. The middle of the day forecast did suggest that we're going to see some western Corn Belt moisture come into the forecast around August 8th, August 9th.

You know, are we going to do damage prior to then? Some will say absolutely, some will say hold on. Uh, and then outside of that, Shay, you know, maybe the biggest potential bearish type of an influence is just that we are going to continue to see our economy, uh, suffer and see the U.S. consumer be the victim of high prices, ultimately slowing their demand for products. And primarily to agriculture, the first pieces to, uh, you know, to feel the hurt would be the beef industry, uh, and obviously that would relate to what our on-feed demand is. That doesn't change overnight. Uh, that takes a long time to play out. And then obviously the ethanol space. Uh, but to this point, ethanol, for the most part, from a stocks perspective, we continue to produce more or stay steady on production, and our ethanol stocks continue to come a little bit lower.

Uh, and I'm sorry, I'm rambling here a little bit, but on the back end of all that, to counter that, It seems like the push into this renewable energy, clean energy space and the headlines this week, you know, we're going 100 miles an hour towards that. Announcements of a sustainable aviation fuel plant to be built in South Dakota by GEVO here this last week. And just the money that is tied to the renewable diesel space and seeing a tremendous change in price direction in the soybean oil market. Almost being an indicator that that story is not over, and it could be in a very youthful stage at this point.

Shay: Absolutely. Before we get too far away from Ukraine, Russia, Europe, anything else going on there that, uh, we need to take into consideration, or did you kind of hit what you wanted to there, Jared?

Jarod

Creed: It's just tough to get it out of there right now. It's not competitive in the world market, and at the same time, there's a lot of finger-pointing. Amongst Turkey, Ukraine, Russia, United Nations and such. I think I saw some headlines here today of basically Russia suggesting that, well, if the United Nations would just stop supplying Ukraine with military goods and equipment, that this would all go a lot smoother. And at the same time, United States— the United Nations says if you do not abide by some of these rules, there is just absolutely zero chance we're ever going to recognize any of your annexation type of efforts that's going on right now. So it's a, I don't even know if a fluid situation is the right way to put it, because to me it seems like a lot of high school drama. I don't want to make light of the situation going on over there.

Unfortunately, a lot of innocent civilians are victims in this conflict, but it's almost like the media is pulling the wool over our eyes. Shay, what do you believe? What should we believe? You know, who's who, who's right, who's wrong, and how does this all get rectified. It does not look like that's going to happen anytime soon.

Shay: Gotcha. So we covered weather there pretty well, but I wanted to go back to that. You know, could you maybe give a little bit perspective on, on what a weather market looks like? You know, if we, if we get more familiar with that again after all this craziness that we've seen here, talk to me a little bit about how this weather market plays out historically. And how that might compare to what we're looking at in today's space?

Jarod

Creed: Well, I'll tell you what, an old mentor of mine and friend of ours— I shouldn't say the word old, he's going to chew my butt for that— but Pete Meyer, you know, his whole saying is demand-led markets are meant to be respected and supply-concerned markets are meant to be sold. And you can make a solid case today that we are in a a normal North America supply scare, but that probably looks a little bit different given the world that we're in right now from a Russian-Ukraine perspective. And it's certainly not a demand-led type of a situation, albeit our demand has softened. We have some risks on corn exports, we have some risks in ethanol, we have some risks in soybean exports. What does China import? You know, we have some risk from any type of potential escalation between China and Taiwan, and it looks like Speaker Pelosi is going to be visiting Taiwan next week.

You know, perception versus reality, the perception being that China is highly against the idea of U.S. involvement in Taiwan. That's no secret, but that kind of all goes back to this idea of We have a tough weather situation right now. Is it more— is it different than years past? I would make a case that this year's weather is different than years past. In my mind, I kind of think about the western Corn Belt experiencing similar to a 2013 weather event right now. We got it planted late. It was a little wet. We were warm early. We cooled off. Then we got hot again. And then it was kind of just a bumpy road to harvest. And from that perspective, you know, we finished a couple to 2 to 3% below trend that year. Does that support $6 to $7 corn? Does that support $14 to $15 beans? In typical years, no, it would not support those.

In a year with the conflict in Russia and Ukraine and cutting off that much of world supply, for at least a short term, I think that does make it different this go-around. And I hate that old saying, this time it's different. Well, this time I think it actually very well may be different because you have outside influences that has nothing to do with Mother Nature.

Shay: Interesting. So, you know, um, we're headed into the first week of August here. You're the farmer sitting here wondering, you know, what do I do with new crop? Do I need to be looking at anything for 2023? How are you thinking about that? How are you, you know, advising, or, or what's your thought process as we head into August here?

Jarod

Creed: Well, let's start with '22, uh, and again, credit where credit is due. I think Duane hit the nail on the head that we have approached areas that, that likely suggest an area that the farmer has the ability to make a couple catch-up sales. And I'm not advocating that somebody needs to go out there and just get all crazy about the percentages that they're selling. But playing a little bit of a defense that if you want to have a certain stance, you want to be a participant in the market long term, I think you got to put yourself in position to accomplish that. And some of that means just taking some more dollars off the table, especially if you're in an area, you know, perhaps I-35 and east in the US as of today. I think a farmer in the eastern Corn Belt is probably more likely to reward this rally that we've experienced.

I know that the western Corn Belt farmer pertinent to the crop that's in the field, uh, is a little nervous based upon where they're located. Uh, it takes a little bit more of a conversation around what are we trying to accomplish. Some of that is, you know, identifying that we are now back above the spring insurance prices of $5.90 and $14.33. So even if you have a lack of production, you're still managing some price risk on guaranteed bushels between now and October. I, I, I just agree that this is probably a good area to make up some catch-up sales, uh, and I shouldn't even use the word probably, Shay. We know that at a normal yield these are profitable levels. We know we've seen higher, we know we have seen lower, but coming in in the middle of this range supports profitability.

It takes some more money off the table that if you want to take a swing at some higher prices into quarter one of next year, getting a few things done now probably puts you in a good enough position you can be patient. Now when you jump over to 2023, um, just today a lot of retail prices started to float out for like the anhydrous ammonia market. And that is the, you know, the fertilizer market, it seemed like it was the storyline this spring, then experienced a pretty solid slide. And now it's starting to get some attention again, given the issues with shipping natural gas from Russia into Europe. And a lot of your, you know, Bayer had an article here this week, actually. I believe it was Bayer. Don't quote me on that. But Bayer basically said that we're shutting off anhydrous ammonia production. I believe this was in Germany, just because of the high price of natural gas.

And natural gas darn near traded $10 on the Chicago Mercantile Exchange this week. I'm not sure where it closed today. I know we were back below $9 yesterday, but those type of prices— and I take a little bit of a look over like a CF Industries stock price, you know, they've had a pretty substantial bounce themselves. I know that from the beginning of the week to at least yesterday, you know, their share prices were up, I believe, about $12, maybe $13 on like a $90 stock price. That's a pretty substantial move, right? That, that makes me a little queasy about have we seen the bottoms in the fertilizer market? Should we expect to see that firm long-term at current price relationships of next year's corn and soybeans? I don't think there's anything wrong with making the assumption that we are going to go after 92 to 93 million acres of corn.

It's super early to have that discussion, but regardless, anywhere around us, let's just say it's 75 cents a unit for nitrogen. I think this is the math that individuals need to be doing. If it's 75 cents a unit for your nitrogen source and you're putting 200 pounds down, oh, that's $150 an acre cost. At $150 an acre cost and DEES 23 corn at 580, you know, you're sub 25 bushel an acre to cover that cost, right? Did I do that math? I might be a little light there. Probably closer to 27, 28 bushel an acre. You all of a sudden start inching that up closer to 6. I had a couple calls here just this morning actually, that some producers on the UAN side were looking all the way down closer to 21 bushel an acre to cover their nitrogen source for next year. That's a ridiculously favorable margin.

All of a sudden you peel off a normal 5 bushel an acre extra requirement to cover your nitrogen at a $5.50 to $6 commodity. That's an extra $25 to $30 an acre of, you know, pure profit opportunity that's typically not there. So in the face of these high fertilizer costs, I think that's probably the, the first piece that 2023 needs to be, you know, reviewed. I think there was a fair clip of 2023 corn sales made from $6 to $6.70 prior to the big break that we experienced. Anybody with those sales up and above the market are probably in a better position to go ahead and just lock up the fertilizer regardless of what the— well, not regardless what the price is, but the— a fair value of fertilizer, uh, at $6 plus corn is a crazy good margin return and arguably some of the best that the farmer has ever had an opportunity to do.

Quite frankly, I would take $1,000 a ton in hydrous and $6 corn every single year. Every year, and along with $5 diesel. Bring $6 diesel, I don't care. That's a tremendous margin amongst those relationships. So I think 2023, that's probably the first step right now, Shay. And obviously in the next 90 days there's going to be some other expenses that start to become a little bit more, uh, clear on next year's cost of production. And right now I don't think there's much more to do than some simple blocking and tackling of marrying up some expenses, marrying up how many bushels an acre it takes to cover it, and just keep chipping away in that fashion.

Shay: I almost want to end there because I love that note. I, I like that conversation. Um, but I, but I'll ask you one more question. You know, we, we've seen a couple years here pretty profitable across most operations. '22 shaping up to be that way. I think '23 is as well. Um, You know, and I'm not saying margins aren't going to get tighter. I think they probably will. Even with the nitrogen game that you're talking about here, we'll see what some of these other inputs do. I think one of the biggest things that producers can be mapping out right now— this is about a month earlier than what we would recommend— is you need to have those 2023 budgets in place, have your numbers in front of you, even with the best projections that you have available. In order to be protecting, doing some of that blocking and tackling that you're talking about.

And so just, you know, to the listeners out there, Chris and I have been encouraging people to really get that in order. I'm sure you've been working with people on that as well, Jared. Um, any other thoughts, I guess, on, on that idea or that outlook?

Jarod

Creed: Anything to add there? You bring up a very good point there, Shea, and maybe a little bit of a, you know, leading a horse to water here. Let's say there's producers listening to your podcast here that are you know, not working with myself or you and Chris or maybe some other firms similar. Let's just say that, you know, nothing against you the producer that's listening to this, but if you're typically the producer that goes and meets with the banker and the accountant at the end of the year to find out how you did, that's not going to give you a good look at what your exposure is in the current environment and being able to roll that exposure over into 2023 and making your big ticket adjustments.

That might be as simple as requesting a mid-year review with your accountant or your banker or whoever it may be, some type of, you know, party that is able to, you know, or maybe the producer can themselves. But oftentimes I think the producer is the victim of, you know, different type of messaging from the bank level and different type of messaging from the accountant level. Those two, those two, what's the word I'm looking for, those two people in the mix are looking at different things. Where you have to find a way to really take a good gander at a mid-year review and saying if I'm spending $1,000 an acre on my corn crop this year, well, how much of that $1,000 an acre is really going to be pretty solid going into 2023? I would argue that it's probably as much as 60% of that is going to carry over into 2023 relatively unchanged, you know, maybe within 5%.

That last $300 to $400 an acre is the stuff that has the potential of the bigger swings from a land perspective, perhaps a little bit in seed, and obviously in your N, P, and K, and, and the chemical game as well. And I guess the only other piece that has Potential, a fair amount of wiggle room might be your crop insurance expense on how you go about insuring yourself in 2023. But, you know, to your comment again, long-winded, long-winded comment. You're, you know, I think you just have to find the avenue of what can give you that mid-year look because not everybody has that. Just to be brutally honest, not everybody can tell somebody in a matter of minutes of my expense on a cash basis for the crop that is in the field is XYZ, and I can carry that over into 2023 and adjust my big ticket items and have a good look at what that budget actually is for 2023 in the month of August 2022.

And we started that process back in June just because of the environment we're in. Yeah. And it's been nice to see fertilizer steadily decline because our initial costs probably are $50 to $75 an acre higher than what it looks like reality is going to set in at.

Shay: Absolutely. 30 seconds, any final thoughts here, Jared?

Jarod

Creed: No, I don't, I don't believe so. I just remember you asked me a question about weather markets. Uh, it's a, it's a different weather market to perspective of North America and Europe. And world trade flows are still shifting beneath our feet. And eventually, uh, Dwayne commented on this again. I would just encourage any listener, if you didn't listen last week, listen to what Dwayne said last week. He has some very, very solid points. The focus eventually is going to shift to South America corn and soybean production. And quite frankly, if they're— to put this in perspective, there's a good chance that South America, Brazil raises 6 6 billion bushels of beans this next year. 6 billion. It was not that many years ago that they were producing 4 billion. Their increase in production in the last decade is more than what we export.

So I told somebody this earlier here today that the farmer oftentimes would look at the crop that you're getting ready to harvest, then turns into your old crop. Your old crop transitioning to new crop is actually probably not your new crop of 2023. Your new crop window is actually probably beginning when Brazil is harvesting. Mm-hmm. So you're really looking at a period of time here between, say, now and March, now and Valentine's Day of February. The old saying, you got two things to do on Valentine's Day, get your significant other a gift and make sure you're up to date on your marketing is where you want to be going into the summer because Brazil steals the spotlight from that point forward.

Shay: A romantic, romantic Valentine's Day ahead for everyone listening here today. Jared, thank you so much for taking the time. Exciting week ahead as we head into August here. And, you know, if they want to learn more about what you do, what you're all about, Jared, where can they find that information?

Jarod

Creed: Just old-fashioned phone number, the easiest, 402-680-1744.

Shay: Fantastic. Hey, have a great weekend, Jared.

Jarod

Creed: You too, Shay. Thank you.

Shay: And thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.