Labor Day 2022: pre-harvest outlook

Shay: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Garret Brown. And Garret, it's the 2nd of September here, headed into Memorial Day weekend. You got any plans this weekend?

Garret

Brown: Just to take a little time off, try to get some more projects done. And you know how that goes, it's like you get, get one done and you start two more and never actually get ahead, I guess. So Thankfully, I guess we'll have a, have a 3-day weekend with no markets on Monday and, and, uh, just kind of spend some time relaxing.

Shay: Hopefully a little time to rest. That's what I was going to say too. You know, a lot of guys are gearing up. I know some operations in our area here in northwest Illinois, uh, some of the sand ground will probably be rolling on corn here in the next week. You know, a little early getting some stuff going. We do have good moisture to keep pushing until black layer, but Kind of interesting conditions. Garret, we're recording here just after the noon hour on Friday. I think it'd be good if you could just give a little background on kind of what we've seen this week as we headed into September and where we're at here today on Friday.

Garret

Brown: Sure. Well, obviously this week markets have been generally weaker, led by crude oil. Just the general macro sentiment has been pretty negative with things around China and just general economic weakness. And I think the Fed was discussing this week and basically just trying to tell everybody, "This is coming. We're going to continue to hike rates, stop inflation in its tracks." And that's led to a pretty major sell-off in equities again. The US dollar's been surging. And so obviously with With the US dollar going higher, typically that's inversely related to commodities. And so I think I just have the chart of diesel fuel up here. We've had at least a 50-cent sell-off again. The October contract had traded up just over $4 and sold off. That's actually technically a lower high than the high that we saw in June, July. Then we recently traded down below $3.50.

We are seeing a bounce here today. Which is, I guess, good to see from a commodity perspective. Obviously margins on the farm tend to be better when energy costs are higher, so I guess if we're a farmer, um, we should be cheering for that. But seeing a minor recovery, we're up about 0.7, uh, percent here. It's about 65 cents for the front month contract. Um, corn's up about 8, beans 20 to 22. Uh, looks like Minneapolis wheat up about 12 to— yeah, I'll just call it 12, 13 cents. HRW 10, 12 cents, and, and, uh, soft red up about 15. Um, so I appreciate it. Actually all mostly higher.

Shay: Yeah, and I appreciate the perspective on that. You know, one thing you said before we got rolling here is, you know, maybe the markets are in a little bit of disarray. Could you elaborate on that and just kind of talk through listeners what your thoughts are there?

Garret

Brown: Well, sure. I mean, you know, we had been talking last night too about how You know, if you're just marketing based off of an S&D, it's really hard when you start thinking of all the different components of supply and demand that go into that carryout number. And you start thinking of the margin of error that go into all those estimates. How do you even really come up with a final carryout number? It's, I mean, corn, it could be half a billion bushels difference, it could be a billion bushels difference. You really don't know at this point. And the market's trying to price in you know, are we at a 168? Are we at a 170? Are we at a 175? I do not believe that we are pricing in, you know, 170 bushel corn yield at this point. I do think that there's certainly demand issues on the ethanol side of the business.

I'm sure there's a lot of, you know, those that are trying to feed cattle, probably not liking, you know, the move here. We're seeing basis elevated in a lot of regions that are feeding cattle. So, you know, we were down 12 cents yesterday in corn. You know, I think we're up 8 right now. At one point we were up about 10. You know, I erased a lot of that. You know, beans, you get, you know, also erasing a lot of the losses that took place yesterday. Although it's been a, it's been a pretty tough week for beans. Um, they're just, we just don't know where demand is going to be long term. We just don't know the economic strength globally. Um, so with that comes volatility.

Shay: Absolutely. You know, one thing we had talked about as well was a couple other private estimates coming out on yields. Of course, we saw the Pro Farmer tour last week, a little bit different than— well, significantly different than USDA, I would say. A couple of the other private estimates are maybe coming in somewhere between the two right now. You know, how do you, how do you think about that as these numbers continue to roll out, as, as combines start rolling here? And the impacts that that might have over the next couple weeks headed into harvest?

Garret

Brown: Well, like anything, I mean, whenever I hear somebody say, well, this crop's going to be absolutely massive, it's going to be a record, it's like, well, hold on, we'll see what happens. Obviously things could set up that way, but it's always with a healthy dose of skepticism. You know, I'm from North Dakota. Last year we had a generational drought. The wheat crop wasn't going to amount to diddly. You know, just like, well, is it going to be as bad as what we think? Probably not. We're always pessimistic. We don't want to go through a whole year and think we're going to have, you know, X yield, and it's, and it's less. So ended up being better than expected by probably 50% versus the estimates that we were being told prior. And I think this is an, in a, in a situation where we're probably going to see the inverse effect of that this year in areas that are good.

You know, it's probably not going to be quite as good, at least from some of these early yield estimates that we've been looking at here that's come across my desk from, you know, from Illinois. You know, even in North Dakota, some of these early yield estimates were pretty good, but, you know, just talking to some of the folks across North Dakota, that isn't necessarily the case for everybody. And there's actually been some pretty disappointing yields where, you know, we thought it was going to be like just an outstanding crop and it may just be average. In some cases, may not even be average. So it— I guess one of those things, it's just going to take time for the combines to roll and that realization to hit and to really back that up.

And we also have to remember that, I mean, December corn has already traded $1.20, $1.30 off the bottom, so it's not like we're not factoring in some of this tightness at this point. And now we're just trying to balance the demand side of the equation, which also doesn't look real rosy at the moment.

Shay: You know, Garret, you mentioned earlier we had a discussion last night. We had Garret out for a seed meeting and just kind of a pre-harvest kickoff for some growers in our community here. And one of the key questions that you had on one of your slides was, you know, have we hit the bottom and what does that look like moving forward? Can you, can you tell the listeners maybe just a condensed version of what some of your thoughts are around that, Garret, and why you pose that question?

Garret

Brown: Sure. Well, it was funny because I was just getting ready to head to a wedding when we had prepared the presentation. And like I mentioned, um, that was late July. And then when I was getting ready to kind of update things, I decided let's just leave this alone because obviously it's nice to have some sort of consistency when you look at the market. Things might change, but I guess I would just, you know, long story short, are we looking at a crop that appears to have gotten bigger or smaller? Now that could be very debatable, but at the time I was showing a map of the United States looking at the main production areas on July 21st. There's an awful lot of brown for soil moisture content. I mean, across the main production region. And we know that the last half of July, first half of August, there just really wasn't much rain west of the Mississippi.

So, I mean, that was a pretty huge area that you would think probably was getting downgraded at that point. So, I mean, that was just kind of one of those breadcrumbs, I guess you might say, as far as something that I'm kind of following. Then we were looking at basis. Well, basis is abnormally strong. There's another little nugget of information. Then we're looking at the forward curve, which for those that maybe don't know or just need a refresher, the forward curve is basically just futures prices as you go out into the future, whether today is September, then we have a December, then the March futures, May, July. So as you go out there, and if we're not covering cost to carry, if we're inverted, we still have a bullish market structure, which is the case for both corn and beans.

We have been finding support, or it looked like we could find some support, I should say, in some major retracement levels. And so far that has been the case for both corn and beans. And then you look at just general asset values over time, which is one of the tools I've been looking at here for a number of years. How much do we typically sell off from our seasonal high? And we did that within, you know, reason for both corn and for beans. So I guess one last thing I would say too is just look at them, you know, manage money. They're a big fund crowd that wants to spend a lot of money or invest a lot of money, but they don't really want to lose a lot of money. They want to make a lot of money. So what's their sentiment?

And if they're starting to see some of these things start to turn positive, where we're pricing a smaller crop, cash is continuing to stay extremely firm relative to normal. You know, is it possible they could front run like they have, it seems like, the last two cycles and start to buy again and accumulate ownership as the farmer starts to sell it as we enter into harvest? Whether they're— I don't want to say it, but puking bushels ahead of harvest for space or cash flow or whatever that is, fear of falling over the inverse., and then essentially riding over the seasonal bottom. So those are the things that I guess we were kind of looking at and saying, you know, what's the probability we're going to go higher or lower?

I mean, we just consider it— continue to consolidate and trade sideways, and, uh, at the time think that, hey, at some point in the future we're probably going to see some higher prices. Now the big question is, is, you know, a lot of the production risk, you know, the production risk itself health behind us. Now we might see smaller numbers, we might see bigger numbers, uh, depending on what camp you're in. But, um, now we got to say, okay, is the high in— where is that high actually going to be? And trying to use similar, uh, market indicators, similar breadcrumbs to try to find clues. Because at the end of the day, do we know for sure? Absolutely not. There's, there's no sure thing in marketing. But, uh, you know, we'll just These are some of those things that, you know, pretty much anybody can come up with, uh, in fairly short order just to get a quick read on the market.

Shay: One thing you didn't mention there that we hit on a little bit last night was, uh, you know, South America and maybe some of the implications that go into that with the, the crop that they could have there. Of course, there's a lot at play with the global markets. Uh, just, you know, 30 seconds here on, on that side of things. What are your thoughts there?

Garret

Brown: Well, right now everybody's— I shouldn't say everybody's penciling because you don't know what everybody else is doing, but The USDA, a lot of these private estimates are penciling some massive, uh, crops for Brazil, um, you know, both on corn and on soybeans. And I think the thing to remember is they only produced 126— suppose it's 126 million tons of beans this year. They're shipping into our window, so they're competitive now, and then they're going to be competitive again in January. So if they don't have production issues, we got— we have problems. Because they're going to fix this balance sheet. And if this demand base contracts, we could see some significant downside in pricing for soybeans. You know, corn is a little bit different in that they're not quite as big a player relative to, say, the United States.

And we just had some issues, the EU's had issues, China's going to have a little bit of issues, which is going to increase their import needs potentially. But Uh, that's kind of the big risk, and it's, it's coming here within the next 6 months.

Shay: One, one other question that you had there last night, Garret, was looking at wheat, and particular to Ukraine, maybe corn as well. But, you know, the question that was posed is, does Ukraine have any effect on this? And I think your short answer was, it sure doesn't feel like it anymore. Uh, any other thoughts there?

Garret

Brown: No, I think that's pretty much it. I think we've run prices down to pre-Black Sea invasion levels. And, uh, I mean, at this point there's been estimates come out anywhere between 30 to 60%. I think the official estimate's 30 to 40% of the wheat might not get planted over there. An official production estimate around 15 million tons of wheat. Um, I think, I think wheat broke yesterday and went from, you know, trading just a little bit lower to about 40 lower. You know, after that broke, you know, there's still parts of the U.S., you know, in HRW country that probably could use some shots of rain here to shore them up so we could get some stuff germinated here in the fall.

And, you know, and yet wheat still can't, you know, really struggles to build a rally here until we at least we get through, you know, the North Dakota, Montana, northern Minnesota, and Canadian small grains harvest. But yeah, as far as Ukraine, I mean, it just seems like such a wild card at this point. I think it's— we just kind of become numb to it.

Shay: Garret, we did a podcast a little while back, uh, talking about some of the, the principles and the long-term outlook that you have when it comes to marketing strategies. And I think as we head into the harvest season and continue to look at good pricing opportunities, uh, whether it's in this season or multi-year opportunities here There's 3 things that you talk about that are, you know, really important to every sale that's made out there, uh, you know, your method, your trigger, and the volume that's associated with sales. And if, if you would, could you just kind of repeat that? Because I think it's so important for those who listen to this podcast and for us as farmers to not get caught up in all the craziness and the complexity that can go on with marketing, especially when when you're busy doing other things.

If you could just give us a review, I think that'd be great after Labor Day here.

Garret

Brown: You bet, you bet. So I just— I'll just back up for just a second. Um, you know, everybody needs to have a goal in what you're actually trying to achieve, and it's got to be achievable. And you, you know, when you're putting your marketing plan together, it's got to be something you can really follow through with. So it doesn't matter how elaborate it is. I actually kind of believe the more elaborate your marketing plan is, the more apt it is to fail. So going back into it, every marketing plan, whether it's realized or not or thought of this way or not, has 3 things. The first one being a trigger, which is basically what's going to determine how, you know, the timing of your decisions. You know, is it farm-based profitability? And like I said last night, if it was, you know, chances are that farm is sold up to their insurance level back here in February.

Most people, that's not going to be the case, so it's going to be something else. For us, it's technical analysis with some fundamental, uh, just common sense, I guess you might say. Um, you know, and while that's gonna be a lot for just an old-school— I don't even want to say trader, but just a general farmer might struggle with that a little bit. But at the end of the day, the whole point of technical analysis is based on the understanding that all the fundamentals are distilled into that price. And when you— when I was talking earlier about the margin of error and all the different demand and supply components, you— I don't know how you necessarily try to throw that in there and actually say with any, you know, with a straight face that, that those estimates are accurate, because it just— it isn't. If it was, you wouldn't have the volatility we have from day to day.

Um, so like I said, for us, we're trying to find, you know, if we really struggle to make a sale knowing that the market could be higher tomorrow, you know, we're probably on the train for the long haul. And we're looking for something to say, hey, the high is it, buddy, you better go out and get something more at this point. And at that point, you can't just go out there and sell 10%, you need to get extremely aggressive, especially if it's hitting your profitability objectives, which you should already know that on the way up. Now, if you're one of those that, you know, the peak is in and you just can't sell and you're used to riding the bottom, then you need to find an indicator or something that's going to tell you that Hey, the market has run a long way.

It's time to start making some sales because this thing could turn around tomorrow, and you want to have something that's consistent. So the trigger, I think, is, is one of the most important things. But you also can't forget about your method, which is what tools are acceptable and that, you know, that you're comfortable with, um, to using on your operation. So if you're not comfortable with margin or don't understand strategies that involve, you know, special option 3-ways or collars or min-max type contracts, and you probably should just stay away with that or from that. And that's okay, but just knowing what tools that you're willing to use. And then of course the volume.

Shay: So yeah, and I think that's so crucial to break it down that simple, you know, what is it that's going to trigger that sale, what method are you going to use, whether it's super complex or whether it's not. And then, you know, I— what's really crucial is that volume. And I think I maybe have provided this example in the past, but A lot of farm operations out there, as they've grown over the last couple of decades or over a generation, say, you know, maybe a 1,000-bushel or 2,000-bushel sale used to be a significant sale. Maybe that was 5% of production or, or whatever that looked like 30 years ago. And now for an operation, that might be half a percent. And instead of looking at that numbers, you know, to to cover your basis and to make sure that you have some of your, uh, budgetary items.

You know, when you look at prepay, you look at pricing things like fertilizer, things like nitrogen. I think it's coming at us really early this year. We've seen it, and a lot of folks are locking that in already. Um, you know, to make those sales that cover a percent, you need to look at it from that perspective maybe and say, okay, 30% might be a 100,000-bushel sale. And am I comfortable with making that volume when that trigger hits and knowing whatever my method is, whatever the strategy is in place, that, that I can feel comfortable and that I can sleep well with that at night? Um, I have a thought process there other than— if you have any additional thoughts on that. I just think it's really interesting.

A lot of operations say, you know, they got a sales sheet that's maybe 50 or 60 sales long throughout the year and, and have traditionally just been, been cash sales, haven't been doing a lot of complex things.

Garret

Brown: And well, so I mean, just unpack that. I mean, what's the— what's one of the lowest— I shouldn't say lowest— the shortest, uh, in terms of capacity, uh, commodities that every farm has? Typically it's time. So if you're going to be out there making 50 or 60 sales, how much time did that take to study the market that 50 or 60 times? And what kind of a threshold did you have to get to make those? I mean, you can't make 50 or 60 good sales in a year. You know, it's just not possible. But it's like the analogy you used last night. If I give you 3 darts or 20 darts, can you, can you hit— like, if you sum up your, your shots on the dartboard, which one has the capacity to come up with the highest price?

It's going to be, you know, if you're using 3 to 5 darts, not 20, because it's just, it's more difficult and When we're talking about benchmarking, you know, taking an average price every day of the year, you know, you're very unlikely to be any, you know, stray too far above 50% of what your available range was. And oftentimes it's going to be, you know, it's going to be less, maybe significantly less. So.

Shay: Yeah, that's, that's great advice. I appreciate the thoughts on that. You know, I think as we move towards wrapping up here, Garret, do you just have, have any thoughts or any considerations for farm operations out there as they head into this harvest season? Um, you know, maybe thoughts on the guy that doesn't have as much sold as he wish he would have, or someone that did sell up to the insurance level. You know, just generally speaking, as we head into the season, what's your overall feel and thoughts here?

Garret

Brown: Uh, overall feel, I know what we're doing is just, okay, where are we at today? Just get out there, put on paper, uh, figure out what do I want out of this thing, you know. Am I going to be happy if this market takes off and I ended up making some more sales, or am I gonna be, you know, am I gonna be content if this market drops off here? And just kind of figure out, okay, what am I I gotta do if one or two of those things were to happen? Where do I want to set myself up for today? And kind of like you alluded to for 2023, you know, into this cycle, we— I would say the last two years we had a chance to buy inputs at relatively decent prices. You know, speaking more so perhaps on fertilizer, fertilizer is elevated already, so everybody's gonna be paying elevated costs, but you might be able to get some cheap for me last year if you were a late buyer last year.

Um, what happens if prices do collapse? And you're still left paying for these high prices. So I think this year you almost have to market in a little different way than last year, you know, depending on your financial situation. It might not be worth trying to take that risk to hit that home run this year versus just going out there knowing your numbers, looking at your margin, um, you know, trying to put yourself into a situation where you can have a really good floor. Because we do have some good floors out there right now, you know, for 2023. And, uh, give yourself some upside. At least try to cover, um, cover some of those variable expenses. Obviously fertilizer being more than likely the most variable, uh, and influential expense that you have, you know, on the farm.

Shay: Absolutely. Now that's great advice, you know, Garret. And if, if people are interested and maybe don't feel that they have their cost of production dialed in, of course you can reach out to myself and, and we can talk to you about Profit Manager. You know, how we arrive at that cost and the in-depth analysis. Garret, we have some farm operations that are working with you as well and the services that you and your team provide. Someone's listening to this, they're intrigued, they think they might want to get ahold of you. What's the best way for them to do that, Garret?

Garret

Brown: Well, they can certainly reach out to us through our website. You know, that's at www.kodakgroup.com or can certainly shoot us an email from the website there. Indirectly, or my number's, uh, 701-521-0055. Be happy to chat with them, and if we can't help them, try to point them in the right direction.

Shay: Yeah, absolutely. Garret, thank you so much for the time here headed into Labor Day weekend, and, uh, hope you get some rest and enjoy some downtime with family.

Garret

Brown: Sounds great, you too.

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