Risk management season

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're heading into a new marketing week, February 5th through the 9th. It is price discovery period. And so I thought it would be very appropriate to get Jared Creed on here who is is kind of our in-house insurance expert that can kind of talk about risk management as it relates to marketing. And so Jared, how's it going today?

Jarod

Creed: It's going good as always. I appreciate the invitation to be on with you.

Chris

Barron: Yeah, well, you're, you're a key person in this, and, uh, first question I want to ask is, uh, we've had a whopping— as we record this, we've only so far had 2 days of price discovery last week. Uh, where, where's the price at right now for corn and soybeans?

Jarod

Creed: Well, right around $4.77, $4.78 in corn. And I mean, right now, I think you just got to call it $11.70 to $11.75 in soybeans. Obviously substantially lower than last year, a buck 20, give or take, on corn, and about $2 a bushel cheaper on soybeans. And that obviously proposes or creates a lot of financial risk versus what we were able to do last year. You know, Chris, if I thought about this before we jumped on, I don't know if you have the ability to share a visual, which you'll live with your listeners at some time. But I went back across the last 20 years and tracked just from Iowa State cost production data of a breakeven per bushel relative to the spring insurance price. And it was no secret that the years from 2008 to 2013, we saw numerous years of above breakeven insurance prices. And following that stretch all the way through 2019, below breakeven insurance prices.

And it seems like that's the path that we're going down right now. But it gets a little bit more risky. We talk about on here quite a bit about understanding truly where your price support kicks in on insurance. If we have a $4.77 insurance price and you elect whatever level of insurance policy you decide to carry, you have to quantify that correctly. So if we have a $4.77 insurance price and you carry an 80% policy, if you yield your APH, your price protection doesn't kick in until $3.80. And the odds are pretty high that the producer is going to raise somewhere around an APH. My point being, bringing that up is I didn't stop at just looking at cost of production versus insurance price. I went ahead and took that insurance price times the multi-peril coverage of just say 85%..

And even back in those years, from 2008 to 2013, there were still plenty of years that saw insurance prices above breakeven. It's no secret that sometimes costs are slow to react to higher markets. But on the downside, costs are slow to react to lower markets. And if you overlay that with farm income across the US, and you compare the 85% of the spring insurance price, it'll scare the heck out of you. Quite frankly, 2024 projected across the last 20 years has the widest percentage gap from 85% of the spring insurance price to an estimated cost production. And again, if you take even $477 times 0.85, 85%, that's $405 board price. And I think you and I would agree right now that give or take $5 cash is a breakeven for most producers on the corn side. And that means you're probably talking about $5.20, $5.25 December corn futures. That's over— it's about a buck and a quarter spread.

That's a significant amount of revenue risk, cost of production versus a guarantee. There's just a lot of different ways to compare what that guarantee possibly ends up being. But you have to identify what that risk ratio or risk parameter is from cost down to that revenue guarantee.

Chris

Barron: Mm-hmm. Yeah. Interesting. I want to circle back to some more conversation on the risk management side of the equation. But as we head through the price discovery period, what do you— what, what specific things do you see on the outside? So in other words, fundamentally, technically, probably not a lot of hope to see any, any much movement from where we're at. Or is there anything you're seeing that could potentially create some movement sometime during the course of this price discovery period?

Jarod

Creed: I would say that mainstream media in agriculture has focused a lot on the speculative short fund position.. And it feels like every week there is a new round of optimism that they can't get any shorter, they can't get any shorter. And this last Friday's Commitment of Traders showed that the non-commercial managed money position between corn, soybeans, wheat, and other grains are at a record short, especially for the time of the year. The only time they have been shorter would have been June of 2019, actually May of 2019. And I hate to try to draw comparisons to that, but that is the wild year that we had in 2019. As an example, corn went from $4 in February to $3.60 in May, and we rallied from $3.60 to $4.70 by July 4th. It was a huge move on a percentage in dollars. I don't necessarily think that's at play today. There's going to have to be a catalyst.

I don't think you really find a catalyst in the month of February given no interest rate change this last month. That was kind of a little— what do you want to call it— taking the wind out of the sails for maybe creating a little bit more volatility in the commodity markets. And it certainly seems that outside money is willing to entrench themselves in a big speculative short position almost going toe to toe, head to head with a farmer who is willing to entrench themselves in— call it what it is— a big long position. One of those parties has to blink. If the funds don't blink in the next 60 days, I am genuinely concerned that the farmer is not going to win that standoff. You're going to have to have a big crop problem for the farmer, in essence, to, in hindsight, get paid for the decisions of waiting for the last 3 months.

If the funds want to do a big short covering rally, yeah, Chris, we will rally. I don't know where that starts from. I don't know what kind of legs that has. But in the moment in time, both on the corn and soybean side, this isn't necessarily advice. But it's more of a mentality in the market. We are currently in a market that is meant to sell rallies over and over and over again because we've seen these small pops and we come right back. And I'll throw out one other piece for the month of February. I won't, I won't lie. The weekly corn chart gives you a little dose of optimism. But I have looked back on that weekly corn chart and said, oh, hey, $0.50 ago we had a little optimism. Oh, hey, $1.20 ago we had a little optimism. So you really have to start stacking up many different reasons to create a good enough catalyst to change the trend that we're seeing right now in the grain markets.

Chris

Barron: Yeah, a couple of the hurdles that I see that I would mention here is— and get your take on this— but, you know, you talk about you know, a little bit of hope there and just to sell these rallies. And if these short positions start to, you know, they start to unwind and go the other way, we start to get some strength. It's going to be met with all this— I won't use a bad adjective— and then all this old crop '23 corn sales, you know, it's just there. It's like there's a blanket over this thing and you can only go so up so much. You can only get so much. And then at the same time, in concert, there's going to be basis erosion at the same time when everybody starts trying to pull the trigger because we're all going to get to the door at the same time and we're all going to try to go through the door at the same time and it's just going to bunch us all up.

It, you know, you want to be the first one through the door or do you want to wait and let a bunch of people bunch up and let it back off and then go through the door? You see what I'm saying?

Jarod

Creed: This might be an easy way for the grower to consider, and I hate to use corn as an example again, but 60% of last year's crop is still probably in the farmer's hands. So that's around 9 billion bushels. And we have 7 months until new crop supply comes online. And we're going to use probably 1.2 billion bushels every single month. So let's just say that that's 8.4 billion bushels between now and September 1. Meanwhile, you have a, you have a limited timeframe here that all of this old crop supply and catch-up selling on new crop has to happen. And that's just a sign that if the market pops, we're only going to use a billion, billion and a half bushel a month. And if the market moves to a substantial point to entice the farmer to say, I want to sell 4 billion bushels in the next 60 days, the market can't sustain that.

That just gets back into the point of every transaction has to buyer to seller. At an agreed-upon price. So right now, the farmer long is, like I said, just call it 7-8 billion bushel, and the speculative fund short is only a billion and a half. So if they wanted to go from a billion and a half short to a billion and a half long and buy 3 billion bushel, that's not even going to cover half of what the farmer has to sell. That's, that's just kind of a 30,000-foot view math of the buyer and seller transaction that would have to happen if the funds want to come. And I really think, Chris, I feel guilty for bringing it up. I think it's the popular story. I think it's the, it's the one that gives the most opium and—

Chris

Barron: opium. I like that word.

Jarod

Creed: It's not going to— it's not going to play out, in my opinion, how folks want to think it might.

Chris

Barron: Gotcha. Anything else on, on the markets? I want to circle back to how the conversation started in this discussion. Anything on soybeans, anything on corn that we need to hit on today? And then I want to circle back to risk management as we finish up the conversation on that topic.

Jarod

Creed: Every week goes by, Chris, you want to actually have some legitimate optimism that we're going to regain our footing in the export space. It's just not happening. Eventually, yeah, I do feel that's going to happen, but we haven't had the catalyst to get our foot back in the door, and that is detrimental beyond belief. Mm-hmm. Sometime it will happen. I'll say that it will happen. We just don't know. Is it in 2024? Is it in 2025, spurred by other worldwide events?

Chris

Barron: Mm-hmm. Yeah. Okay. Well, we can, we can— there's plenty of market talk going on right now everywhere in the world. I want to hit on— I want to wrap up and come back full circle from where the conversation started for this upcoming week. We're in the price discovery period. Producers need to be thinking about risk mitigation. Not only do they need to get rid of this '23 crop, but we also need to be thinking about '24. That's why it's In my opinion, it's good to have the '23 crop the hell out of here as quick as possible so you can focus on what we need to focus on, which is the '24 crop.

When you look at risk management, one of the things last week I was fortunate enough to get to speak to a bunch of crop insurance agents in Illinois, and one of the things I showed them on the last slide, and I want your take on this, and you can be critical of it, you can tell me I'm full of it and I don't know what I'm talking about, tell me whatever you think, but I showed them a slide of last year. We had a $5.91 and we dropped almost a dollar in anybody that had 85% coverage in those areas where you have a decent APH and you can go to that 85% RP optional or enterprise, whatever. There was significant amount of growers that received an indemnity payment yielding their APH because of the drop in price. During, during the fall. So now let's say that we end up at $4.80— just pick a number, $4.80.

If we end up at $3.80, we're going to have a similar scenario yet in '24 that we had in '25, just at a different price range, price level. And theoretically could very easily mitigate a significant amount of risk. You still— and the only way you eliminate the risk is you got to make sales. You buy the insurance so you can make sales. And that's one of the issues that I saw last year and one of lessons of last year is that we bought insurance and then didn't sell anything. Well, why the hell do we buy the insurance if we don't sell anything? I'm not being critical, I'm just saying, you know, we got to look at this and, and it's a lesson. So if '24 presents a similar scenario, it's very easy that could happen. What are your two cents on that thought process?

Jarod

Creed: Let's put a parameter around that for a second. If you have an 85% policy and we do in fact drop from a $4.80 spring price down to a $3.80 spring price, that means you have to yield 107% of your APH. This is on corn. So if you have a 200-bushel APH, you have to yield 214. And if you do yield 214 and the market is at $3.80, the insurance premium you put on the table for that product, it didn't do you any good. Which makes an imperative, something imperative to understand is that is not your— it's not your scapegoat in today's market.

Chris

Barron: Right.

Jarod

Creed: It still requires some type of price mitigation strategy.

Chris

Barron: Right.

Jarod

Creed: And maybe that price mitigation strategy is combined with doing an 85% policy and seeking out higher level of coverages of 90% or 95% from the variety of products that are available in the space. However, on the flip side, so we identified that price drops a buck from a 480 spring price on an 85% policy. You have to yield 107% of your APH. If you carry an 80% policy, it's not going to do squat for you. It's still going to be a tough situation.

Chris

Barron: It won't do anything.

Jarod

Creed: Why I think this is an important year to carry a greater amount of coverage is not necessarily tied to downside price risk. It's more about understanding we have been in a volatile market for the last 2 or 3 years. And it's anybody's guess to suggest that that run is over. The more bushels you have guaranteed to you, the greater you have in control of locking in more dollars safely. And you know, the conversation I brought up in Arizona at your meeting last week, The fear of a producer for marketing or hedging something that they might not raise has to be erased from their mind. It's like Men in Black. I want to get that flash out and I want to put it in somebody's eyes and boom, erase that from somebody's mind. Because it's flat out not true.

It's just a calculation that if we have a $4.80 price, I would estimate that somewhere around $6 a bushel on December corn, on an 85% policy, a producer could sell 100% of their guaranteed bushels at or around $6 to break even. Worst case, their insurance policy, no matter what happens, will be worth enough to offset all their expenses. And then if you happen to raise above and beyond your APH, now you're talking a profit. Right? You raise 107% of your APH versus 85% of it, that extra 22%, that 40-some bushel an acre on 200 bushel corn is going to be your profit. And that's obviously a pretty fancy situation. If you're at $6 corn, you do that same type of concept in soybeans. Don't even get me started on how bad it can be on a lower market just from our cost.. But I would just, you know, real math here. Let's just say a producer has a 60-bushel APH, 85% policy.

They're going to be guaranteed 51 bushels an acre. And I'm going to make an argument that I'll just call it a $700 cost. $700 divided by 51 means I would need to sell 100% of my guaranteed bushels around $13.70. Now, first off, I'm certainly not implying or suggesting that somebody needs to wait for $6 corn and $13.70, $13.70 beans to start doing anything. That's a slippery slope. But when you consider averaging into something, that's what your goal is. And quite frankly, I think that that is probably too high of prices to aspire for today. Rather, maybe an individual has to take a step back and say, What do I have to do to lose a minimum of $50 an acre? Or maybe it's $75 an acre. What can my balance sheet 1 year from now withstand for a loss on this crop? Knowing that we always have the ability to yield above and beyond.

But back to the higher level policy, that's more guaranteed bushels. Knock on wood, we have some type of volatility in the next 6 months during the growing season. And once you elect your insurance policy and you get that crop put in the ground, you're now guaranteed those bushels. By all means, do not get your insurance policy from your agent, stuff it away in the drawer. You have to monetize that policy on a daily basis, especially if the market's moving up and up and up and up. And you get to start thinking about, I spent $20, $30, $40 an acre on this insurance product, and it started off being worth $800 an acre, and now it's possibly worth $1,050 an acre. What do I have in my control to manage that? And the farmer has a huge toolbox to be able to manage that.

So again, I think my takeaway on that, Chris, is from a risk management standpoint, number one piece is understand the spread cost to guarantee, understand what price has to be on just your guaranteed bushels to get you up close to your cost. And then most importantly, I still say don't buy it and forget about it. Do you buy a tractor and forget about it and just leave it in the shed? No, I don't do that. Why would we do this? Why would we do that on crop insurance? Can't do it.

Chris

Barron: Yeah. Yeah. And if the agent's not getting a hold of it, you should probably find an agent that does reach out.

Jarod

Creed: You know, I've been on that soapbox for a long time, Chris. That's why we got into insurance ourselves. I hate to bad talk on individuals in the industry. But let's face it, sometimes the farmer knows more about the product than the actual agent.

Chris

Barron: Yeah, yeah, that's what we got to be cautious of. And, and I also think too, you know, to your point, back to your point of, of, you know, stress testing— I'll, I'll frame it that way— is stress testing your, your yield and price as it relates to your crop insurance, uh, offering, and, and that you were able to achieve in your system. And when we stress test— and we've been doing a little of that with the estimates of where we think the insurance is going to be— and, and in a lot of cases soybeans are a train wreck when you, when you stress test the soybeans.

So I think that's one thing people need to be careful of if they do have some acres in flux, of looking at, you know, what if I stress test corn and I stress test soybeans, what are the loss parameters that are acceptable Because to your point, I mean, I go back to years ago, Tommy Grassaffi giving me a bad time about Profit Manager. He's like, you know, we went through a few years there where he's like, you need to rename this thing to Least Loss Manager and figure out which crop's going to lose you the least amount of money. And, and there will be some years like that. We're not giving any advice here, we're just— perspective is that there are some years when the cost of production is just higher than those opportunities. And the last thing I want to say, and get your take on this and we can wrap it up, but During what you were talking about, I buy in 100%.

But the only other thing I would add to that is putting offers in at those numbers that you just said that we need to identify so that when you're planting corn or you're planting soybeans, you're, you're combining wheat, you know, whatever, during the, during the middle of the season, sometimes those opportunities last for about 5 minutes and they happen overnight when you're sleeping. Yep. It happens at midnight and you're like, shit, I should have did that, and it doesn't get done. You have to put those offers in on a year like this. They're just— again, not advice, don't do it, but see how it works for you, because this is one of the years you got to figure out those numbers ahead of time exactly like you just said. But then you have to put those offers in so that— and they need to be a big enough swing too.

A lot of times I think we take these little dinky swings, we sell $5,000 or $10,000, it doesn't mean shit in the big grand scheme of things. And I don't mean to be blunt about it, but I see it all the time. And it— and we got to take advantage of this. We got to look at a 30% swing or a 35% swing at a time here. I think a lot of times when we're in this kind of environment, again, it's not advice. Do what you want. You're the executive of your business. But be careful because these opportunities are short-lived a lot of times.

Jarod

Creed: I think this would be worthwhile real quick, and I'll give your listeners just a second. If you're hearing me talk about this, you might look at what minute this recording is in. Or you might pull over on the side of the road and get your notepad out. There's a handful of programs that I think you at least need to know the name of to research in the next 30-some days before your final election. Start with the RMA programs. Enhanced Coverage Option, often called ECO. That's a 95 to 86% program. That's a sister to Supplemental Coverage Option. SCO. Again, those are RMA county-based programs. Let's take it to the private side. And I'll rattle off a couple that most of these are giving the farmer the ability to carry a 75%, 80%, 85% policy on their own operation, but then stack on coverage up to 90% or 95%.

Some of those would be with Great American Insurance, it would be GAP, With Farmers Mutual Hail, it would be called RAMP with RAMP coverage. And with RCIS, it would be called RPP. They all have a little bit different a tweak. There is plenty more. Remember, there's 13 insurance companies out there, and not a disrespect comment to any of them intended here, but there's about 6 really, really good products out there, in my opinion. That producers have the ability to stack on top of their multi-peril coverage. Private products are not going to be as cheap as government products. I would make an argument in the here and now that there are plenty of operations that probably have a greater necessity to insure their own farm this year and not as much dependency on the county. Take that possibility off the table.

Area-based programs, when the market was 10-15% higher than where we are today, served a little bit different of a purpose. But there's still abilities to add in above and beyond multi-peril coverage with those names I just rattled off: ECO, SCO, GAP, RPP, and RAMP, giving you the ability to insure to a higher level, guarantee extra bushels. If market moves lower, you're indemnified sooner. And quite frankly, if you're indemnified sooner with some marketing strategy in place, you have to understand there is a price point that your revenue stops going down and it starts going back up. The lower the market goes. And this, this is maybe something individuals have to understand. With the right programs and a few marketing decisions, $4 corn has a higher gross revenue per acre than $5 corn does.

$4 corn is worth more to the farm than $5 corn for the crop year 2024 based upon a couple simple elections. And that is not gross. I'm talking about net profitability, adding more expense to the bottom line because of these insurance programs. But if you're fearful of $4 corn, another $0.70, $0.75 slide, it's going to hurt if that happens without ample insurance and ample marketing strategy in place. Or you just wish it goes to $5.50 and $6. And you, you maybe you wasted the money in your mind on a higher level of coverage. Personally, Chris, I won't work with a farmer if they're going to have that opinion. I wasted that money. No, you did not. You hedged something at a high level of revenue. And if we end up grossing more than that revenue and you went forward on the farm, we accomplished our job.

Chris

Barron: And if the yield is quite a bit higher, let's say you, you were insured at 180 bushel and you yield $2.20, your cost of insurance just went down by $0.15 a bushel or whatever. I mean, your insurance was extremely low cost then. If you outyield it, the idea is not to collect. The idea is to outproduce it and outprice it. You can budget $30, $40, even $100 an acre. It's really damn hard to budget $400 an acre loss. Yeah, you can. If you budget it on the front end, you can kind of manage it, but you can't manage it on the back end. I have one other thing I want to ask you about too, real quick. In my observation, from what I've seen this year, there were a lot of people that went with enterprise units instead of optional units, and there was a reason for that because of cost, I think, in a lot of people's minds.

And another thing sometimes that causes that is they're like, well, most of my stuff's fairly close, it's within 15 miles or something, and it rained on this side of the highway and not on the other side of the highway, or you had this incident in this field and not on that farm. And so they consequently, a lot of the enterprise unit operations I work with left a lot of money on the table, and that was last year. So I'm not saying that that's the case all the time. What's your opinion on optional versus enterprise units for those that need to be thinking about that?

Jarod

Creed: There's extreme amount of variability. I will tell you that we always stack those up side by side of understanding what our enterprise claim is. Versus what our optional claim would have been, and then compare that to what our cost difference would have been. Not trying to squeeze pennies, but most of the time willing to get the producer to insure more total dollars regardless of where it comes from.

Chris

Barron: Right.

Jarod

Creed: Because they might have the fear of that higher price tag on an optional unit policy at the same level, at least in our, in our book, Chris. It's probably less than 10% of individuals who left some money on the table from enterprise versus optional. But that's variable, right? That, that can differ farm by farm. Everybody has different risks that change those optional unit coverage values. It might be hail and wind, it might be quality of dirt, it might be just a long list of different items. Looking forward, I want to step back on some of these add-on products as well. I should have mentioned this. You can go out there and carry your enterprise-level coverage at an 80 or 85%, and you can go purchase these add-on products on an optional unit basis.

Shallow loss coverage per optional unit, say from 95 to 85% per farm, but then the rest of the farm is all grouped together from 85 and lower.. And oftentimes, you know, at least from a yield perspective, I don't think you find a lot of situations in a widespread area that yields are bombing by 20-25% without consistently happening across the entire farm. You have your one-off events in my mind. And those one-off events can then be covered from that optional unit standpoint of that top 10 or 15% coverage. Using some of those private products, not the RMA, ECO, SEO. And I'd say the takeaway there, Chris, is exhaust your options. You are not tied to an insurance company. Your insurance information, your yields is associated with your Social Security number. They go with you anywhere you do your insurance business.

So in essence, you have to seek out what products are the best fit for your farm and not just be satisfied with what this menu is from this particular insurance company. Or even worse, pet peeve of mine, I'll just say it briefly, that insurance says no, you won't be interested, it costs too much. Relative to what? Yeah. So be careful on that conversation.

Chris

Barron: It's not a cost, it's an investment. It's just a decision of whether or not that investment makes sense for your business or not. That's the— yeah, I'm with you 100%. Anything we didn't hit on? I mean, this was a lot on risk management, but it's risk management season and we have to make sure that we're thinking about this throughout the month of February so that when the decision is made, to your point, we've done our due diligence. And this is one of those years just like last year was that we better have this figured out so we make, you know, the most prudent decisions for the bottom line.

Jarod

Creed: No, I would just say there'd be value in following up on this conversation a month from now. Not trying to weasel my way back in with you, but I think if we can record this over YouTube and I can just put together some examples on Excel spreadsheet so individuals know where those true parameters sit on each level of policy, and price protection and yield aspect. And almost you're making a dartboard, but you're going to understand what the result is if the dartboard ends up there.

Chris

Barron: Right, exactly. Now I think we definitely need to do that. Probably a touch point somewhere, a latter part of February, and then, and then some practical applications when we get into the first part of March, because decisions have to be made by the 15th of March.

Jarod

Creed: And yeah, that's a good point, Chris. Don't wait until March 1st to start exploring these add-on products because that's a lot more difficult. Yeah.

Chris

Barron: So I think, you know, we'll skip a week and then we— and we'll have a little bit better handle on where that price is at and run some scenarios. And I think that'd be great. So let's plan on that and really appreciate your time today. I think this is a great conversation. It's just the whole idea is to prime the pump, get people thinking, get your risk management hat on and start planning for a successful 2024 is the plan. So perfect. All right. Well, thanks a lot, Jared. Really appreciate it. And hopefully everybody got a lot out of this conversation. We stayed on the risk management side and a little less on the markets, but it's that type of season. And with that said, we appreciate you and we will catch you again next time on the IV Pitch.

Jarod

Creed: Thanks, Chris.