Margin management marketing: weekly market outlook, Jan. 23-27

Narrator: 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.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week. We're heading into, uh, January 23rd through the 27th. We are going to have this podcast, I think, also on our YouTube channel as well. And so if you're listening to this on podcast, you want to watch it on YouTube, that's available there as well. We are welcoming a new guest on here with us, Matt Bennett with AgMarket.net. Matt, how's it going?

Matt

Bennett: Oh, it's going good. How are you doing, bud?

Chris

Barron: Well, doing great. Excited to have you on. This is your first time and we're gonna start calling on you occasionally and getting you on here and really appreciate you taking the time this morning and getting out and about. It sounds like you got some work going on in the house and we even had to get you out of the house and get you to your office this morning, huh?

Matt

Bennett: Yeah, pretty much. So, last few years my wife's been wanting to do a new kitchen project of some sort. Then she's been great about it, to be honest with you. Bought a couple of pieces of land since we started talking about this. Put the project off to the wayside. And she and I discussed this last year that, you know, we needed to do the project. And I got the picture that we really needed to do the project. So, you know what, $7 corn couldn't have come at a better time because this has been in the works. You know, we've saved up for it. But the remodel turned into an addition and it's turned into quite the situation. So, you know, it's a little stressful around home right now and it's just a lot easier to head get to my office and get work done.

Chris

Barron: So yeah, that's awesome. And so yeah, we, again, we're really excited to have you on, excited to have you be a contributor to the Ag View Pitch moving forward as well. So I guess what we'll want to do is kind of get right down to business. One thing I do want to mention too is if people are watching this on YouTube, start to subscribe and like too. We're going to start doing more of that stuff. We got a really good handle on, on the podcast. Everything on podcast going really good, but we do want to start getting a little bit more stuff on, on YouTube. So please subscribe and like that if you're, if you're on there, so, and haven't. So let's get going here. Matt, I guess what I want to start out with, with you being on here the first time, is just get a little bit of your marketing philosophy.

What, what makes you comfortable when you're looking at, at marketing from your perspective?

Matt

Bennett: Yeah, I'd say I've hung my hat, Chris, on, uh, over the years whenever I go out and speak, uh, you know, 15 years ago for instance, or I really got a good, good start. You know, I grew up in a family with grain elevators, so I've known markets my whole life, uh, farmed my whole life. But you know, I, I would go do like outlook panels, if you will, then hear people talk about prices and you need to do this strategy, you need to do that strategy. Then, and you know, some of those years, for instance, in the ethanol boom, I'm sitting here as a producer, as a marketer, thinking, do we need to reown a sale whenever we just sold $6 and $7 corn? And I'd never sold that in my life. And yeah, and so I wasn't always real popular on these panels because I wasn't saying, hey, we just need to do this strategy and that strategy.

Let's just do something that makes sense for us, you know, and, and lock in income. And so I started talking about managing profit margins, you know, what is your breakeven, for instance? And, uh, you know, what does a breakeven mean? Uh, You know, does it include paying yourself? You know, does it include this? Does it include that? So, you know, as I started talking about managing profit margins in that way, you know, I basically— I came up with a breakeven spreadsheet, started using it, built an app over the years. And quite frankly, going out and speaking not just about projecting prices, you know, but actually talking about what did today's prices mean to me, you know, what can I do with today's prices, has worked significantly better for my career because I believe it, you know, and I know how that That's how I manage my own farm.

And that's how I manage things for, you know, for the growers that I work with.

Chris

Barron: Yeah, that's one of the things that I've always thought too, is when, when you live what you're helping people do, it does, I think, add to credibility because you're, you're experiencing a lot of the same emotional impacts because I don't care how robotic you try to be in the markets, emotions come into the equation., and you have to be able to manage that. And really the only way, you know, one of our mottos at Ag View Solutions is, you know, in God we trust, everyone else bring numbers. And that, you know, gets, gets things kind of in the right perspective is utilizing the numbers for sure.

Matt

Bennett: Absolutely. You know, I think when it, when it gets right down to it and someone hears me sound maybe a little salty about fertilizer prices is probably because I just wrote a check for $120,000 or, you know, $200,000 or whatever, you name it, you pick the price. But I know what it's like, you know, I know how frustrating it is. And so, you know, when we talk about risk management, I don't just talk about managing risk whenever it comes to corn and bean prices or wheat or cattle or whatever it is we're talking about. Yeah, whenever we're talking specifically corn and beans especially, you know, we're trying to manage risk as far as diesel fuel goes, there goes, you know, timing of fertilizer purchases over the last 24 months has been paramount as far as how much money we've been able to make and, uh, or not be able to make.

And so, you know, we've got to look at risk management from a little bit different lens than what, uh, for, for far too long.

Chris

Barron: Right, right. Well, let's get into this here. I guess, um, you know, we got a little of your philosophy here for the first go-around, and, um, we're heading towards the February price discovery period. Um, you know, we're a week and a half away from that. It's getting close. What should farmers be thinking about as we get to that point? And then we'll talk about February here in a minute. But what, what are you paying attention to in the next week or so, a week and a half ahead of time here?

Matt

Bennett: Yeah, just to lay a little groundwork, you know, we, we looked last year, of course, we were $5.90 for a spring price. This year in the summertime frame, obviously, we had some really strong prices for Dec '23. We stepped in and managed a little risk there. What we wanted to do at different times was at least lock in as good or better crop insurance price than what we saw a year ago. We felt like we could live with something like that. Of course, this was before fertilizer prices went up you know, in the heart of harvest, we know fertilizer was extremely expensive. And so, you know, the way that I tried to handle it is, you know, if it's $6.25, $6.30 corn at the time and we're buying fertilizer, I think we're basing the high cost of fertilizer on the fact that we just think $6.25 corn is going to be around for us. And so we have managed a fair amount of risk.

That wasn't your question, though. But just to tell you where we're at, just so you understand my mindset. We have 50% of our coverage in place, you know, with a $6 put option. We did this a while ago and we did it for like a nickel. And how we did that was we actually sold a $7 call and these were March short-dated positions. You know, I don't want to get too far into the weeds, but why do we do that? Because we were okay with our crop insurance price being $7 for sure, you know, and, and, you know, $5.95 worst case scenario sounded good too. And so now what do we do here? I mean, that's where we're at. Around $5.95. We've had to, we have to take into account a couple of things, Chris.

We paid, most of us, if we're honest, paid a lot more for fertilizer than what we did for the '22 crop, because a lot of the folks, you know, prepaid their fertilizer in the fall of '21 before things got excessively high. And so as of Jan 1st this year versus last year, fertilizer is more expensive. Yes., or cheaper this year than what it was a year ago because fertilizer had skyrocketed by then. But '23, your inputs are going to be significantly more in most cases than what you saw for the '22 crop. So I can't afford as a producer, in my opinion, to let this crop insurance price dip much more than where we're currently at.

And I think that it's, it's high time for a producer to step in and, and take a strong look at what do they need to do to lock in the price is not falling apart even more because the margins I'm seeing, you know, are significantly tighter than what we saw, you know, for the '22 crop and '21 crop. And it could be catastrophic if you would see this December corn price erode further.

Chris

Barron: For sure. Yeah, we're seeing the same thing with, with Profit Manager. We're seeing, you know, as we aggregate those numbers, you know, it's pretty easy to see an operation spending another $90 an acre more for this year than they did last year. You know, the corn, corn on corn is in that $115 an acre range. You know, those numbers really add up. And then, and then that really amplifies what you just said. You know, the, the risk to the downside is pretty significant. We got to make sure there's floor here. And we're not quite to the insurance yet. So, so yeah, good, good. All good stuff. So What's your thought as, as we watch the difference between corn and soybeans here? It's been interesting to me, it seems like, you know, that corn-bean ratio, it's like beans just don't even seem to be wanting to buy any acres at all. And I'm not sure what's your take on that.

Because when we look at corn versus soybeans with our average client, now there's exceptions to this. There's always exceptions to everything. There's some people that are going to make more money on soybeans than they do corn. But the vast majority, there's a significant amount more profit on the corn side of the equation. What's your take on what the market's looking at here? What, what's that all mean?

Matt

Bennett: You know, the thing is, whenever you look, for instance, at soybeans, we've had multiple opportunities at $14 and above. And yeah, I mean, versus $6 corn, that's not necessarily a home run. But at the same time, historically, we've never had the chance to hedge $14 beans ahead of planting a crop. And so, you know, we've been talking talking to our folks about, you know, if you, if you know what your rotation is, step in and do something with it. But as far as what's the market saying, or are they trying to buy acres here, they're trying to buy acres there, I don't know. A lot of years we talk about an acreage battle. Okay, so this year, this January report, something that we really need to pay attention to is that the USDA had to extract about 185 million bushels of demand for corn.

Okay, that was also in relation to a couple different things that happened, which, you know, you saw yield go up. So yield went up on the '22 crop. But whenever I tell you yield went up and demand went down, you would think, holy cow, what a bearish report. But, you know, you take 1.6 million acres out of the mix because of this drought situation out west. I think a lot of those acres ended up in silage. You know, you have a lower carryout for old crop corn. You probably have a little more support for the old crop situation than you do the new. And part of the reason is because, Chris, you took 185 million bushels of demand away, and that isn't something that just naturally flows back in, uh, without cheaper prices of corn.

And so, quite frankly, um, whenever I look at this, I think that the market might be playing a little bit of hot potato with acres, to be honest, because we've already got awfully strong prices. And I know what people might say is, you know, Oh, input prices are so high. I don't think that we can take this market much lower. We just can't stand this. You know, I agree with you, but that does not mean the market can't go lower. And we got to be really careful with that type of thought process because the market could care less whether you and I make money this year. The market, the people playing the market, all they're worried about is whether they make money. And so, you know, if the money's to the downside because commodities are a little overcooked, be careful in that, in that process. So I'm not bearish, so to speak. It's just that I'm really cautious.

I look at a lot of the same stuff you guys do as far as what my producers' bottom line return on investment. I want to look at these things and make sure that we're at least locking in a worst-case scenario, right? Just in case the bottom falls out of this thing. So yeah, I think the market's just kind of up in the air right now and not totally sure it needs to buy a lot of acres on corn because demand's gone down. It doesn't need to buy soybean acres as well, because world balance sheets on soybeans are not tight by any stretch of the imagination.

Chris

Barron: We'll come back to the '23 here in a minute. I do want to ask you a quick question on what I call the, you know, the proverbial old crop that's sitting in the bin that, you know, people have like a number in their mind or they don't have a number in their mind and sitting on those, on those bushels. What's your take on that? You know, in the next few months, I mean, basis has kind of gone away in a lot of areas, but then on the same token, it seems like in the spring when everybody gets busy planting, that's usually when I clean the bins out, is, is in the spring when everybody's planting. I figure out how to get a couple of trucks on the road and then we clean house when we're, when we don't have time, but that's the time to do it.

Matt

Bennett: Yeah. Yeah. And so going into late harvest, for instance, you know, there's a lot of folks out west that were ordering shuttle loaders to go into Kansas, Nebraska area. And so we saw more corn leave Illinois going across the river and continue to than I think, you know, ever. As far as this year goes, it'll be more than we've ever seen for sure. And so they were paying up for these shuttle loaders. I had folks like, for instance, in southwest Kansas telling me that, hey, you know, our basis is running $1.90 over, you know, and of course these guys irrigate. Dry land wasn't anything. We all know that they were just too dry to have a crop. But as far as irrigated goes, you know, it's still a pretty darn good crop. And they're asking me during the heart of harvest, should I go ahead and sell? I'm like, well, what price can you get?

Chris

Barron: $9.

Matt

Bennett: You know, I'm like, oh, well, $9 times 2.25 corn isn't too bad income. So, you know, maybe, maybe you leave the bins empty. I don't know. And so, you know, it's— so when you think about that, as they were putting that corn in the bin, what you got to ask yourself is, do I think I'm going to get more than $9 for my corn? You know, and as the marketing year progresses, we have to understand that once these shuttle loaders and once these originators have gotten their needs met, getting this corn to where it needs to go, it's probably going to be out towards mid to late spring in that part of the world. But what that did was that, that basis being so strong was a rising tide that kind of lifted all boats. And we see people in northwest Iowa getting $50 over for corn lately. You know, I mean, just some really interesting numbers.

But those numbers have to back off in January when everyone's getting a payday, right? So we're hauling a lot of corn. We all know that there's a lot of January delivery corn. Corn is moving. Nobody needs to bid up for that corn. When's basis going to get better? You're right. Once you get into spring planting, I think some of this dries up.. But as far as do I get more for my corn than what I've already seen? That's a big question. I get that question all the time. I think 50/50 at best. Okay. There's a couple things that really need to fall into place for you to get, for me to get more out of my bin corn. And I've got some, I mean, heck, I'm, I'll be honest, you know, I've got some corn in the bin as well. What do I need to see happen? Well, the safrinha crop in Brazil doesn't need to be a bin buster. You know, we need to see corn exports.

Not only pick up now but stay strong for a while. And then, of course, we need to see the US, uh, not plant 93 or 94 million acres of corn. I don't think we will. My number right now is 91. But I do think that if you're asking for a wildly higher price than what we've already seen, you know, we may be asking for a little bit, I guess. Again, I don't want to sound bearish. It's just that the dynamics of the market have changed. High prices of corn did their job. We scared demand away. We've lost some demand. We're still pretty snug. So there is the opportunity that we could see a little bit better price down the road. I just think it's going to take some patience.

Chris

Barron: Mm-hmm. If you're 91 on corn, what are you on beans?

Matt

Bennett: 88, you know, and that's me. Okay. I, the guys on my team, Brian Split, Bill Biedermann, Jim McCormick, and then, you know, we've got a whole host of other folks. But we all talk about this regularly. And as far as an official estimate, we haven't come out with one. That's just what I'm using on presentations.

Chris

Barron: Yeah.

Matt

Bennett: Looking at fertilizer last fall, I got to think that in areas where people have had awfully good bean yields, you know, there's probably a lot of folks that are saying, I'm not going to go heavy corn, you know, because I'm still making good money there and I don't have to spend as much money to put a bean crop out. And they made 80 bushels last year. You know, I heard a lot of folks say things like that. So I think, you know, it's going to stay fairly close. But I think moving forward, Chris, I'll tell you, over the next couple, 3 years, You know, with all the crush plants popping up for renewable, it's going to be a different discussion. You know, we all like planting corn, I know. But I also enjoyed cutting some 85-bushel beans this last year and selling them for $14. I mean, good night. You know, you can't snub your nose at beans too much.

You know, when you look at some of the numbers now, in fairness, Illinois really has shined the last 3 or 4 years on soybean yields. And so you know, not everyone has been blessed with those types of yields, but we've had awfully consistent, really good bean yields. So Illinois is going to be a state where even though the corn yield was incredible, you're going to see a lot of bean acres this next year.

Chris

Barron: Yeah, I think you have a good point there. The yield, you know, we talk about this a lot and see this a lot, but, you know, the biggest component as much as or more so than that soybean to corn price ratio is yield, right? You know, you don't have to back the soybean yield off very much to all of a sudden give a pretty big advantage to the corn. You know, and you just have a little bit more volume with the corn. But like you said, there's a lot of people that look at, you know, geez, if I got to spend another $115 an acre, I'm not sure I've got enough working capital that I'm comfortable doing that. You start looking at logistics, you start looking at labor, you start looking at equipment. It is hard to shift if you're a 50/50 rotation or you're a two-thirds, one-third to get to all corn or a higher percentage of it other than a farmer here and there.

Matt

Bennett: So no, absolutely.

Chris

Barron: So, okay, let's wrap up. We'll go back to the '23 again for a minute. You said you're about 50% covered there with puts and you've— and you're pretty comfortable there. What makes you comfortable as we go into February? What, what are some strategies that farmers need to be thinking about that are less than that, like in my operation, I'm, I've got a lot of HTAs because I've got a good relationship with, you know, with the supplier that we go to and, and just got a really good program there. And we're, we're probably in that 38 to 40% covered right now. What are you telling producers that are kind of all over the board?

Matt

Bennett: Yep. Good question. And I would say that, you know, what we did whenever we decided to put some of these floors in is we said we want to go up to 50%. Is the language I use. And so what does that mean? Well, for instance, with my operation last summer, we HTA'd, oh, I don't know, I'm going to say around 15% of what I'm going to grow. And so, you know, we talk to growers about, hey, it's time to step in and manage some risk. Here's a couple of different ways we can do so. And so I like writing HTAs as well. If someone else wants to cover you know, the margin calls for the next year. I'm perfectly fine with that. I would just as soon that happened. You got to be careful with these HTA feeds moving forward because if I'm an elevator guy with interest rates, they're probably going to go up. I mean, that's just the long and short of it. But, you know, I'm like you.

I like HTA and some corn, but, and I don't mind HTA and $5.95 corn, quite frankly, Chris, if I'm looking at it being a profitable level for my farm personally. You know, you say, well, what happens if we get some sort of a rally? Well, hedge some corn, turn around and pick an entry point, you know, for a call option. Maybe it's, you want to buy a 6/30 March or a May short-dated call, you know, just, just to see what happens with the start of the safrinha crop and U.S. acres gets you through planting intentions. And it's cheap, you know, if you do something like that versus going all the way out to December. But that's what I would call an insulated hedge. For the time being, I have my hedge on. Plus I'm insulated to the point where if the market takes off on a bender higher, I'm actually going to participate at least in a portion of that.

And so the other way of looking at it is I'm going to set a floor in, into this market. You know, I like being pretty aggressive with my put option whenever I do something like this. So we've done a lot of these strategies, Chris, where we're buying like a $6 put. This is December full length. Selling a $5 put and then turn around and selling a $7, $7.20, $7.30 call, you know, to make the trade just a little bit cheaper. Now, what portion do I want to do on bushels like that? You know, I don't want to get super aggressive because I'm selling a call. Right. And the thing is, is if the market screams higher, it's probably screaming higher, as Murphy's Law would suggest, because my farm and a lot of folks around me aren't doing so hot. And so if my— if I did 20%, you know, and I have half a crop, then all of a sudden that turns into 40%.

And that's about as much pain as I think most people can stomach. I do like selling a call on a portion of bushels, especially if I'm expecting production and I have crop insurance. If I don't have crop insurance, I'm not selling calls. I'll just tell you that right now. But it is a really good strategy, you know, to be able to get your head wrapped around that, you know what, now I've got an extremely, I guess, good looking floor, you know, profitable floor. It's attractive, if you will. And worst case scenario is I got to sell some corn for $7 or $7.20. I don't mind that.

Chris

Barron: Yeah, right. I guess I'm going to give you a last, last question. I do that occasionally, so you'll get used to that. But when you were talking there, I thought of one other question I didn't bring up, but that is the general economy. Look at interest rates, look at what's going on and what we're all facing. And outside money. And I think— I don't remember if it was last week or the week before— I was asking Joe Vaklovic this. I get your take on it as well. Um, with all the things going on in general economy, how that affects, you know, money movement and the funds and that kind of thing, what are you guys watching there, um, from fundamentals and outside money?

Matt

Bennett: You know, Goldman Sachs, I believe, was talking about that they felt commodities could be the best investment or safest investment, if you will, you know, in '23. I think that's good news for us. But as far as the overall economy goes, I'm going to kind of mesh this with the farm economy. Chris, I'm a little concerned that, you know, interest rates are going to creep up, uh, you know, and become a bigger part of our, uh, our operations than what a lot of people want them to. Okay, so you go back to the '80s, and, uh, my dad and I have talked a lot about this. I mean, I was born in '74, I lived through the '80s, but I didn't know it was as bad as what it was because my parents did a great job of masking the stress that they were under. But, you know, my dad paid 18, 19%, but he's also borrowing $70,000 to put a crop in, you know.

And so let's just round it up to $100,000 just for ease of math. That's $18,000 for the year if he's borrowing that money for the whole year, you know. And right now it's pretty common for folks to have a million-dollar operating note, you know. And so it's 7, 8%, you know, you're talking $70,000, $80,000. And I know the, you know, the cost of money, if you will, has changed. I know that. But it's still a substantial line item as far as what we're spending. And so I think the overall economy concerns me. You know, I think the farm economy concerns me because the pendulum swift— whenever it shifts, whenever it happens, can be profound. And so overall economy, I will say it concerns me somewhat to see equities performing how they are. Housing starts are horrific. Go to the grocery store, you're spending more money. And so I think a lot of people are starting to feel the pinch.

You add on to that interest rates, and I think there's going to be a coming to Jesus moment for a lot of folks in '23. Yeah. Hey, my budget's going to have to change. And so when that happens, consumer confidence likely to erode a little bit. Yeah. And I think that it could provide problems. Now, what's that mean for investments? Commodities a lot of times are a safe haven. And so, you know, when you get in this stressful environment, commodities can be a safe haven. So I like it. But last thing I'm going to leave you with is this. As a producer, if we don't improve our balance sheets with extremely profitable times in '21 and '22 and aren't shored up, if you will, from a liquidity standpoint heading into '23, I think we're in for a rude awakening.

Chris

Barron: That is an awesome way to wrap up because that's, that's so true. I mean, there's just a lot of, a lot of discipline it's going to take, I think, you know, just to your point. The amount of working capital increase that it's going to take that we talked about at the beginning of the podcast is the same thing that we're going to have to deal with for the next couple of years. And we've been able to build up the working capital. Now we got to see if we can kind of hang on to as much of it as possible.

Matt

Bennett: Absolutely.

Chris

Barron: Absolutely. So if so, again, Matt, really appreciate you being on here. If people want to reach out to you and, you know, quiz you, ask some questions, look you up, see if there's some things that maybe you could help them with, what's the best way to reach out to you?

Matt

Bennett: Yeah, I mean, if they just go to agmarket.net, you know, they can see me and the guys I work with. But for me personally, just mbennett@agmarket.net. That's my email, best way to reach me. But on the website, you know, you get my phone number. Chief321 on Twitter, a lot of people go there, you know, to look me up. I'm not as active on there as I used to be, but you can still reach me there. So if you want to get a hold of me, you can find me, I can tell you that.

Chris

Barron: Yeah. Awesome. Well, again, Matt, really appreciate your time and appreciate your insight and everything. And we're going to definitely get you back on here a bunch more times in the future here. So thank you very much.

Matt

Bennett: Sounds good.

Chris

Barron: Appreciate it. You bet. And just want to thank everybody again for listening. And again, if you could, if you want to check us out on the YouTube channel, please do that. We're going to keep rolling them out. And with that said, thank you everybody. And we will Catch you again next time on the Ag View Pitch.