Keep eyes open for opportunities: weekly market outlook, Mar 18-22

Shay

Foulk: Welcome everybody to the Ag View Pitch weekly market outlook. Today you have Andy Ruby with Peatmire. Pete, how's it going?

Andy

Ruby: Andy, it's going okay. How about yourself? You all right?

Shay

Foulk: Yeah, going great. So I'm here in the northeast corner of Indiana and we got an inch of rain over yesterday and it's much needed. Sun shining, 60 degrees today. So Spring's coming faster than we want, probably.

Andy

Ruby: And everybody's chomping at the bit to get in the field.

Shay

Foulk: Yeah, yep. Hey, we were talking before we started, and you spent the last few weeks meeting with ethanol plants and different people regarding this carbon credit thing. So I thought it'd be a good place to start if you want to kind of talk about conversations you had and what you're seeing out there around carbon scores.

Andy

Ruby: Sure. So You know, really what some of the conversations were with two of the largest ethanol producers in the country, and really, it was just a fact-finding mission for us regarding, you know, what are you guys thinking on the 45Z tax credit? And how much of that money do you think will end up in the farmers' pockets? Well, as you can well imagine, Andy, The answers were pretty diverse. You know, one of the larger ethanol companies we talked to has a very large parent. It's the Andersons with Marathon. And that gentleman said, well, you know, I'm sure our parent is going to want 50% of the credit. I said, yeah, no, I get that. I said, but, you know, how does this work when you have to compete against Poet down the street or something like that? And, you know, there's still a lot of uncertainty. They're still trying to feel this whole thing out. Which I totally get.

So, uh, POET, on the other hand, we met with them as well. Um, you know, they also said that they're kind of waiting for corporate guidance. Um, but by and large, Andy, what we hear from them, and we also hear from feed operations, and, and, uh, had a conversation with one of the largest pork producers in the country and in the world, for that matter, uh, you can easily guess who that is. They're very worried about once this 45Z tax credit comes to fruition, that there will be two-tiered cash markets. There'll be a cash market for high carbon intensity corn and a cash market for low carbon intensity corn. And as such, you know, the consumer packaging goods companies are also very, very concerned about that because they obviously rely on it as well through, you know, through a pork producer or pork processor, whatever.

So, you know, it really was, um, it was— I don't think we expected to hear a lot of clarity around it. But, you know, it's really kind of a wait and see. So in our opinion, the farmer has to be ready for this. But, you know, I don't necessarily know that we're going to we're going to get much clarity. And, and speaking of clarity, I just want to, I just want to touch on a few things here. So we've already heard, Andy, that, you know, we were expecting this modified GREEP model to come out on March 1st. It did not. That is really the first domino that has to fall before everything starts to, to fall into place with the 45Z. So why are people excited about this? Well, the, the blending credit on a gallon of sustainable aviation fuel is somewhere between $1.25 and $1.75.

And that's much higher, or 25 to 75% higher, a matter of fact, than the credit for a gallon of renewable diesel or biodiesel, which is $1. So that's why, you know, everybody's waiting for it. So the question is, which model are they going to take? Now, it's a dueling model. So the Greed model, everybody's heard a lot about. That's a model that's much more favorable to— and excuse me for looking down, but I'm reading through my notes here at the same time— much more favorable to crops, crop-based feedstocks. It compares fossil fuel to crop-based feedstocks. But the IRS and the Treasury back in November, December said, "No, we don't like the GREET model. We don't think that that covers it well enough for us." So then you have the CORSIA model. The CORSIA model is also known as the European model, right? It's a global model.

It's a model that was adopted by the United Nations Civil Aviation Authority. And basically what that covers is a life cycle analysis of, in this instance, corn from seed, from field seed, all the way to your airplane or your car, right? This is typically an unfavorable model when it comes to crop-based feedstocks because it takes in the land usage component. So, you know, what are we waiting for? Well, you know, what we're waiting for is how the model is going to measure these feedstocks right now. We know that food feedstock predominantly, especially in Europe, it's very different in the US, but in Europe, the food feedstock doesn't really get favorable treatment. They obviously want to convert waste into fuel. We all do. We want to convert used cooking oil and fats and tallows into this. The fact of the matter, though, is there's just not enough of it, right?

So there has to be some give and take there. The assessment of ethanol and soybean oil, the Corsia model, you know, will absolutely tell us if they adopt the Corsia model. We think it's going to be some sort of hybrid, or I think it's going to be some sort of hybrid. It'll actually absolutely tell you that ethanol needs a change in cultivation practices. We've already talked about this, right? The way to reduce your carbon intensity score is going to be strip-till or no-till, cover crops, less synthetic fertilizer and more natural fertilizer, hog manure, chicken litter, you know, that sort of thing. But the other thing is that there's a lot of uncertainty on the recognition policy. So how is this model going to recognize those 3 things that I talked about? No-till, cover crops, and less sustainable— I'm sorry, less synthetic fertilizer. So there's a lot of questions.

So now this brings me to the next question I get all the time, Andy. Should I have my acres CI certified? Yeah, it's a tough question. Yeah, it's a tough question for me to answer because I'll be very honest with you and very honest with the audience, is that the And we know that there are third-party providers out there and I'm not in that business. So I've got no dog in this fight. But the fact of the matter is that the ethanol plants don't even know what they're going to accept yet, right? So POET has a deal with FBN on their app. They have an app with FBN and FBN kind of tracks, but it's up to the farmer to put it in, kind of tracks the distance traveled from, let's say storage to the ethanol plant. I've talked to farmers to put in 1 mile. I've talked to farmers to put in 500 miles just to see what would happen. And nothing really happens, right?

But, you know, so, so it sounds like POET might be going the FBN route. They will have FBN somehow, and I don't know how, have to verify your CI score, right? So, but then the question becomes as well, is that, is a verifiable score at POET also a good score at ADM or at the Andersons or at Louis Dreyfus at LDC. You don't know. You know, as much as I am— as much as I'm not a huge fan of more government intervention, this almost seems to me like an FSA type deal, right? That they would be able to, you know, take your— but then again, they're not going to certify your, your CI score. But so I get this question all the time, like you Like you said, Andy, I saw you shaking your head up and down. We get it all the time about, you know, should I have my CI score taken?

You know, I don't have an easy answer for that, but I can tell you that it's not as if one or two of these CI verifiers out there have been just universally accepted by the ethanol business. So I would be a little bit cautious here.

Shay

Foulk: Yeah, and that's, you know, I think that's kind of the general consensus of a lot of producers is, You need to be ready to do something and be able to react quickly. But we don't know exactly what we need to do yet or exactly what this is going to look like to know what direction and what things we need to make sure we're getting done in the near future. Because I mean, I guess I'm kind of understanding of it. If that credit takes place January 1st, is it a good possibility that there'll be some premiums this fall because they'll have to be crushing CI-scored product, won't they, to be able to get that product January 1st?

Andy

Ruby: Yeah, no matter who you talk to, I mean, the ethanol producers, they have to lower their CI scores, right? I mean, most, the average CI score of an ethanol plant in the US is like 56, 57. They all want to get them down 30 points. Now, if the carbon pipeline is put in, that's a quick 30 points right there, right? But then the race is to zero., right? Can I get to zero then and become carbon neutral? The only way they would be able to get to carbon neutral would be then with zero— with corn with a CI score of zero, right? That's— those two can work together. You can only get— you only go so far with the pipeline. So, you know, that's really the question, is, you know, how far can they go? And, you know, regarding the credit, I mean, I have a farmer friend of mine was in Grand Junction, Iowa, a couple weeks ago, and there's an ethanol plant there.

And the lady that ran the ethanol plant got up in front of a group of 40 farmers and said, we think you deserve the entire $1.59 or $1.60, whatever it is, based if you have a zero carbon intensity score, because I need to get the plant score down by 30. So, you know, reading between the lines, she doesn't think she's going to get into the carbon pipeline right now. You know, Andy, I mean, ethanol can survive without the carbon pipeline for sure, but it will not You won't get to this expansion that we need for sustainable aviation fuel without a pipeline. And I understand, you know, let's just say it's very— the pipeline is a very emotional topic. So, right. And I'm not here, I'm not here to promote the pipeline or disparage it at all. That's, that's above my pay grade. I'm just, I'm just here to try to bring some information to your listeners, Andy. That's all.

Shay

Foulk: Yeah, no. And I think that's, that's great insight and a great update on, on where the progress is on that. And what the watchouts are. So I guess as we kind of transition in what these markets have done this past week, I mean, it's been pretty quiet. Is there, is there anything you're seeing that's going to kind of wake this market up or things that growers should be keeping an eye on as we, as we look at that 28th planting intentions report?

Andy

Ruby: Where, you know, we're, we're in one of those periods where the, the lack of news really causes a lot of consternation, right? I mean, we started off, let's talk about corn. Started off Monday and Tuesday really good. Wednesday and Thursday were bad days. Today were kind of, kind of middle of the road. Beans, you know, everybody thought, okay, we get over to $12, we're never going, we're never turning back. And here we are closing with an $11 handle again. It's just a void in the market, Andy. And unfortunately that void is, is going to be filled here. Uh, well, let's see, what's today, the 15th? So the 29th is a holiday. So the 28th, I guess, is when we see the Prospective Plantings Report.

Now, I will caution everybody that the prospective plantings report is a report that if you ask NAS or the USDA, and specifically Lance Honig, who a lot of you know, and you've seen him on stuff, it's a report they hate because they don't see the value in it. You know, and this year might be different than others. But really, I mean, prices can change, farmers are changing acres on the fly. And it really is one of those reports that is required by law, but if they had their druthers about them, they would say, "Nah, we're not really gonna do anything with it." So, you know, we had a WASDE last week, and to be honest with you, I forgot that we were even having it. I mean, it's just, there's nothing going on, right, Andy? I mean, it's just one of those things where we're really starved for information.

Yeah, we're gonna sit here for 9 trading days and then head into the Easter weekend with the prospective plantings for which I'm sure will have an impact. You know, and the general consensus is we're gonna see a fairly noticeable drop in corn acres and a rise in soybean acres. I think that may be possible for this report, but looking forward to the June acreage report, which is the report that's gonna have the biggest impact, I would not be surprised to see more corn acres sneak into the, sneak into the sheet because given, given the cost of production, I should say sneak, sneak into the rotation. Given the cost of production and stuff, I mean, we're in a low price environment. Everybody's suffering here. They're trying to make the best out of, out of a bad situation.

And, you know, farmers have to choose the crop that unfortunately for, for some, if not many, is going to lose them the least amount of money. Yeah, a lot, and a lot of places corn is that crop, Andy.

Shay

Foulk: Yeah, I think it'll be really interesting to see how this all plays out too. I mean, I think generally the American farmer wants to plant as much corn as they possibly can. And if the weather allows it, they're going to pound a bunch of corn in. Now you can say that, wow, these, these early soybeans are eating up acres and guys are getting yield responses planting beans early. So is that going to fill the itch of getting out in the field and and getting going is let's get some beans in the ground and allows beans to buy some acres. I think it's kind of a teeter-totter on which direction that can go. But that kind of leads into my last question too, though, of the spring planting pace. What's your opinion on it? And, and if it does stay dry and warm like it has been here recently?

Andy

Ruby: Be a very, very negative, very negative impact on the market. Yeah, I, I don't really know. I know everybody's anxious and everybody wants to get out there. And as you pointed out, Andy, the early, the early planted soybean gets the, gets the, uh, gets the winner, right? So that's, it's, it's one of those things, you know. And I've also talked to crop insurance agents that say they've seen a lot of interest in some of these products where you pay a couple extra dollars and you can, you can plant early, right? It opens up the window where they're already getting interest on that. So we can tell how how guys are being anxious. And I understand why guys are anxious and ready to go, because the earlier planted crop typically yields more, right?

And in this market, sometimes the only way you're going to get back to even or whatever is to outproduce last year, even though it's a lower price, right? You're going to, you're going to use all the practices that you did last year and years past. And you're just going to do everything you can to yield the most per acre, because that may be, you know, The only way you get out of the 24-hole, unfortunately, it may create a hole in 25, but that's a conversation for another time. So certainly a quick planning pace. What I've seen from the longer-term weather, and you notice, I don't know, maybe in Indiana, the longer-term weather is better than it is in some other spots for some of these guys, the predictions, but it does seem like it's gonna be a little bit dry and then it's gonna get wet in the spring and then it's gonna dry out in the summer again. You know, who knows?

I mean, it's, it's, but it's, I think the market is very cautious about killing a crop. No matter how dry it's going to get this summer, the market's going to be cautious about killing a crop after what happened last year, right? We all heard how bad it was. And oh my God, it's just a disaster, this and that. We had record production. Granted, it was not a record yield. But, you know, it's, yeah, fool me once, fool me twice, right? So I think there's going to be a lot of interesting things going on. I mean, you know, the hedge fund short has kind of loosened its grip on the market, so to speak. We certainly, the last couple of weeks, have seen some games being played. You know, one day down, one day up, one day down, one day up. When you look at the open interest, it just looks like the funds were trying to, let's say, sell 10,000 corn one day and buy 20,000 the next, right?

They're trying to push the market in the direction they want. And they did, they reduced, they reduced their short. So, you know, I hear a lot of conversations that from people that I, that I admire, and they say that, you know, the funds are not going to go into planting short. Well, if they are this short, I should say not necessarily short, but this short. And I, you know, I always take that with a bit of caution because if it is dry and the planting pace, you know, let's say we get to 50% by May 10th or something like that, boy, there's gonna be no positive information for the market for a while after that. So yeah.

Shay

Foulk: When do you think the market starts paying attention to the weather?

Andy

Ruby: Probably around tax day, I would think, you know, mid-April. That's when they start to kind of look at it, right? When's your planting date there in Indiana? What's your first planting date?

Shay

Foulk: Yeah, you know, I'd say commonly we're the tail end of April and of course full swing the first part of May.

Andy

Ruby: Right. Yeah. We all know, right, that planting's a sprint and combine and harvest is a marathon. But yeah, yeah, that's right. And certainly the equipment providers certainly make it, seem to make it easier to plant it faster and faster every year, so.

Shay

Foulk: Yep, yep. Well, Pete, is there anything else you'd like to add?

Andy

Ruby: No, not really. I just, uh, you know, I probably won't talk to anybody between now and Easter, so I wish everybody a nice Easter. But I also, um, wish them a safe, safe planting season. I, I realize that this, uh, podcast makes its way from north to south and whatever, and guys in the north are like, what's he talking about? I'm still a month away, or 6 weeks, or 8 weeks away. But You know, I know that there are folks out there planning. So I just want to wish everybody a safe season. You know, at the end of the day, that's what we aspire to is just to be safe out there, right?

Shay

Foulk: Absolutely. Well, Pete, thank you for your time. And thank you everybody for listening to this week's Weekly Market Outlook with the Ag View Pitch.