Risky business: store and ignore - weekly market outlook: Oct. 23-27th

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: Welcome everybody to another episode of the Ag View Kit. We are heading into a new marketing week and we have a new guest with us. This week, founding partner of AgMarket.net, Jim McCormick. How's it going?

Jim

McCormick: I'm doing well, thank you for having me on, Chris. I appreciate it.

Chris: Yeah, it's great to have you on. We're heading into, um, almost the last week of October, the 23rd through the 27th, um, getting wrapped up with, uh, this week here now with the price discovery for crop insurance. We're As we record this, I'm pretty sure we're in that $4.90 range. And as you said, you know, before we got recording here, probably not going to move a lot from that $4.90 on corn and $12.74. But we do have this week yet, and it looks like the 30th and 31st, you know, last couple of days of the month. But I don't anticipate that changing very much. Any, anything, any thoughts on your, your mind if we'd see much of a change on that, or it'd have to move a lot to move it much, wouldn't it?

Jim

McCormick: I think you nailed it. I mean, the reality is I think, you know, the die's cast. I mean, even if we broke the corn market, you know, another 10, 15 cents hard down next week, just the way the averages work, it's just not going to move it. So I mean, if you're a producer right now trying to figure out are you going to have an insurance indemnity claim, you can probably start running these numbers using those numbers Chris just gave out as a pretty good indicator of will you, will you not. Have a claim based on whatever your yields end up being this year. For sure.

Chris: Before we get really super rolling here, harvest pace, give you my two cents and then get your two cents here on that. But it's interesting in our area, the beans are pretty well done in our, you know, northeast Iowa, north central, central Iowa. There's a spotty field here and there yet, but there's quite a bit of corn yet to go. We're in that deep red zone of the, you know, where we had the most severe portion of the drought, really no rain in August. But it's amazing how good the yields really are even with no rain. I mean, we're under APH, corn on corn is running under APH in a lot of cases, 30 to 50 bushel. So there's gonna be some pretty big insurance claims, I think. On some of those fields, especially for those guys who bought optional units. And, and corn on beans though, really pretty darn close to APH. What are you seeing?

What are you hearing from a lot of your clients in, in different areas?

Jim

McCormick: Overall, where I'm at, just real quick, I'm in northern Illinois. I'm literally 10 miles from the Wisconsin border and about, you know, second county over from the lake. Stuff around here is still a little bit later than normal. We had a lot of rain here recently. It's kind of gummed everything up right now. We got a short window next couple days and then we got more rain coming in. So harvest here is definitely slow. Our client base runs all across the country. In general, I would say it's kind of a little bit of the east versus west. A little bit further east you go, the yields are definitely a lot better, some record yields in parts of Indiana and Ohio. Definitely a little bit more problems like you just mentioned as you went a little bit further west.

The one thing I'll mention also kind of the clients are fighting in the far— in the eastern part of Indiana, excuse me, in even Michigan and Ohio, it's the corn, it's just not drying down. It is just, uh, they're really fighting the moisture, so it's kind of a slow go. But when you look at the yields that the USDA is using here in October, Chris, I would argue that we're pretty accurate to where they're going to be, and I would not look for any major revisions over the next couple months. There is a little bit historical bias that when they do lower the crop in September and October, it tends to get a little bit smaller in November and then again in January, but the yields I'm hearing suggest that the government's pretty close on its numbers.

Chris: Yeah, I would argue that too based on— I've said for pretty much all summer we're same thing, you know, we travel kind of about 18 states or so and, and just driving all over this summer, the crop, you know, there was a lot of areas that didn't look so great, but there was more areas that did look pretty darn good. And so Um, yeah, I bet you they're not too far off. We'll find out anyway. They'll, they'll tell us. They always do. So, um, volatility last week, we saw some strength. Uh, what was it, Thursday of last week? Um, we got some strength. Basis was starting to improve. There was like a, like probably about a 5-minute window if person was paying attention to capture basis and a little up on the market there, and then we, we came right back down on Friday.

Talk a little bit about the volatility, harvest low, anything that you think farmers that are listening to this should be thinking about when you see a bump like that, and, and if we see another one, or kind of what you're anticipating here as we continue into harvest or the latter part of harvest. Great.

Jim

McCormick: Well, let's break up into two— excuse me— let's break up into two crops first. Let's talk about the beans and the meal first. I think part of this run-up No doubt about it, Chris, was definitely driven by the meal. If you look at that meal chart, it just went astronomically up, like just stratospheric run-up. But it's kind of stalled out at the $425 region. And if you look at it, we've done this several times in, you know, we did it in the summer multiple times where you got over $400 and it stalled out. And I think that run in the meal was probably pulled into the beans and helped pull the beans up. So we need to keep an eye on this meal because we're at levels that may be at resistance levels. We are hearing reports that we're now priced out of the meal market.

Distillers grains are starting to move out of our country as buyers are trying to shy away from expensive meal and are essentially looking at DDGs. So that may be a little bit of a red flag for the beans. The other thing we're watching for the meal is what's going on in South America. Now the weather's the headline story, but what we need to watch is this Argentina presidential election that's going to be held here on Sunday. The first round, the candidate's got to get at least 45%. And then if they don't, if somebody does, then it's over with. If not, they got to do a runoff here on November 19th. And then whoever gets sworn in, it'll happen December 10th. And what's important about it is there is one of the presidential candidates that is running is very, very pro-business at this point. And there's a lot of optimism. He does get elected, they'll make some currency plays.

As well as maybe make some tax adjustments that will essentially help out the agricultural sector in Argentina. So some of those exporters and producers are holding back selling product right now, waiting to see if they're going to have an economic change depending on who gets elected president. So we've got a little bit of a window here that's allowing us maybe to sell some extra meal onto the world market, and I think that's why the market responded. This guy gets elected, combined with technical resistance, historical near-term resistance on the meal, that may be a signal that this bean market run at least is over with temporarily. On the corn side of the equation, a lot of people want to argue, Chris, the low's in.

Technically, we went right up to heart resistance right around that 100-day moving average, but there's something we're a little bit concerned about is the fact that if you look historically, we are increasing our production over consumption. We're essentially going to have a build-out year. With this crop we're anticipating. And in years that we do that, but in about 20 years that's happened since 1990, excuse me, about half the time those year— in those years you did not put the fall low of the December corn until after the October WASDE report. And some of those years it didn't even happen until late November, December.

So even though I'd like to be like everybody else thinking the fall lows in, the spreads are suggesting it, there is about a 50/50 shot that unfortunately that we could see this market go down one more time and maybe potentially test those fall lows that were scored here just a few months ago.

Chris: Interesting. Yeah, just, just because we're putting it in the bin and planning for the market to go up, it can go one of two ways, either up or down, right?

Jim

McCormick: Exactly. And the market— I think producers who are putting it in, you got to be a little bit cautious about what's going on. Producers out there, let's face it, Chris, you know, putting in the bin in general And holding onto it and then letting it go throughout the winters the last couple years has worked very, very well. No doubt about it. But when you're starting to build stocks like we are at this point in time, and you're seeing big carries in the market, those are signals that you've got to be very cautious about that we're moving to a bear market. And in a bear market, what the market will do is it'll entice you to put the grain in the bin. Hey, on Friday they're giving you $4.95 and a half for December corn. March, I'm giving you $5.09, but hey, you store that corn out to July, I'm gonna give you $5.21.

So there's that enticement where the producer says, well, look, they're paying me to do it. But the key is you've gotta either you gotta forward sell it or protect that carry, because in a traditional bear market year, what happens is that spot market ends up falling back to where the previous stop spot market went off the board. In this year's case, potentially worst case scenario, I believe is September corn went off the board around $4.65. Okay, what happens is if that seasonal effect where half the time the market goes down and puts fall lows in years that were increasing production over consumption, that would argue going down to $4.65. Well, if you look at the September low, it was actually $4.67 and 3/4. So that may be a worst-case downside projection. But what then happens, Chris, is if diesel goes off the board in the low $4.60s, what's going to happen?

History would suggest March will do the same thing unless we have some kind of an economic shift in demand or something to offset that paradigm. But if all things are equal, that carry just gets eroded. The producer puts the grain in the bin, and by the time he gets to spring, he's getting the same price in the spring as he would have gotten in the fall, but he had a lot more expense due to interest cost and shrink and everything else.

Chris: Mm-hmm. One of the things I think that producers are hoping for, and I'll have you talk to this, and I'll actually throw out what I've been saying the last few weeks is an algebra equation. I always wondered in math when the hell I'd ever use this stuff, and there's, there's some algebra to do now when you think about, okay, what, what's the plan for capitalizing on income from, from this crop? And you've got basis and to consider for those unpriced bushels moving forward. You've got that— you just talked about carry, you have that. The other big one are interest rates, and most of the clients that we work with, you know, are larger producers, and it's, you know, you've got a line of credit and you may, you may want to think about, okay, the quicker we can move some of this stuff, the faster we get that line of credit paid down and turn that interest off, and.

But at the same time, like I said, the carry entices you and you've got the bin space. Maybe there's some logistical issues, those kind of things. What, as you put your farmer hat on and say, okay, here's how I'm doing that algebra with all of those things mentioned, what are some things that producers should be thinking about in that algebra equation?

Jim

McCormick: Right now, if you're looking at where it's at, I would guess on the basis, if you're a producer and you have the on-farm storage, in general, I would I guess the basis will improve a little bit right now. Exports have been running quite well overall. I mean, we're right around sales right where we need to be to hit the target. Now there's a couple red flags about it because the bulk of those sales are going to Mexico, and that's something we need to keep an eye on. But I would anticipate the basis to start to firm up a little bit as harvest progresses and producer finishes getting, you know, puts it in the bin. Traditionally you get that rebound in basis, so I think you've got to look for that basis to improve a little bit. But like I said, I am worried the carry will eventually erode the cost of money. I think you've got to look at it.

And the other thing I think, Chris, is producers got to look at, depending on where they are financially, like you said, they could pay down that loan. But the other thing, just look what a money market is doing right now. You can get almost 5% for just putting money in the money market. So, I mean, the difference of having that money in the bin, you may stop your interest payment, but if you actually have a good crop year, you actually have a surplus of cash. You can literally put, you know, it is a huge penalty to hold on to some of this grain per se where you might get an actual better return of just selling it and then maybe using the board as a way to risk management. So like I said, because I am very worried in the long run that you put it in the bin, you kind of get lulled to sleep, I guess is what it is.

You know, once we get into the bin, the producer can say, well, let's wait till after the new tax year. And then it's like, let's wait to see what the January crop report's going to say. And then we're going to wait and see if South America's weather— you know, you're always going to keep pushing it back, and that cost of storing is really going to add up, especially now compared to recent history. I mean, if you have been farming for the last 15 years and you're a relatively young producer, you're farming in a dynamic that you've never seen before with these interest rates where they're at. I mean, your cost of storage and interest on corn is somewhere between 4.5 and 5 cents a month is what some people guesstimate. And bean interest is somewhere around 10, 11 cents per month on bean interest. That is a huge fee that you gotta, you know, you gotta put into that calculation.

Like you said, the algebraic calculation that you didn't have to the last 15 years.

Chris: Yeah, yeah, and that, and that cost per bushel, if you think of it per acre, you know, just to kind of make sure everybody has proper perspective, is, you know, you're talking $10 an acre a month. And so if you're November, December, January, February, March, $50 an acre. So do you want to spend $50? You know, if you had to write a check for $50 an acre to put it in the bin, would you write a check? Or, you know, I mean, if you think about it in those terms—

Jim

McCormick: well, well, exactly. I mean, and you know, a lot of our clients will move some stuff. You know, Chris, I'm sure your clients have moved some stuff. They've sold it. You know, that's where the board is out there. I mean, you can, you know, you can use the futures. You want to reown it, some clients just use an option play. What I have found— I've been doing this for almost 30 years— In general, Chris, I think the producers can handle missing a little bit of the move. They just don't want to miss a big move, per se. And I think that, you know, could we have a big move? Weather in South America is far from ideal. They're too dry in northern Brazil, they're too wet in Argentina. The patterns in Argentina look like they could be changing. We'll see. But a dry northern Brazil delays the bean planting.

You delay the bean planting, you delay the harvest, you delay the safrinha crop getting planted. Which potentially could cause a problem if they run out of water, because you're looking 6 months out before you might even know that. Like you just mentioned, that bill to store corn 6, 7 months gets really expensive this year because of interest. So the producer might consider selling the grain and then maybe using an option strategy where they can say, look, if it goes up a little bit, it's fine, but I'm going to maintain some ownership in case this safrinha crop does stumble, but I'm not— I'm stopping that interest payment, in essence. Mm-hmm.

Chris: Yeah, for sure. I didn't bring up the river levels. You know, that has an impact on basis more so, and probably even— it probably affects my area even a little bit, and your area. And basis is very localized and stuff, but this river thing is a big deal, isn't it?

Jim

McCormick: It's a huge problem. I mean, if you look at where we're at, You know, the competitiveness of the world market is so much more than it was even 10 years ago with the competition out of Brazil. We've got a low river level. You can't get your product down as efficiently. They charge you more money to do it. So that makes it more expensive to get to the Gulf. But that's not the only problem. You still have those low river problems down there at the Panama Canal. So to get the product out to the Asian markets, it's really expensive, which is now what's happened, Chris. In general, if China is going to buy corn or beans, they're going to buy it off of P&W, simply because the transportation costs. And that becomes a logistical issue into the P&W, is how much product can you actually get into that, into that marketplace.

Now, right now, what we're hearing from the customers who deal with the freight market, they're saying they really have not seen any major bid-up in freight right now. So there's a lot of hope, like we mentioned earlier in the conversation, that China was out buying maybe some corn as well as some soft red wheat. But at this point in time, you know, the freight market suggesting that demand's not there. You get this river fill up, it makes us much more price competitive. That'll help get the demand, you know, keep demand back at, you know, our competition at bay and get more products off our shores. Yep.

Chris: Kind of a key thing there. As we get closer to wrapping up, quick question for you. Well, let me also ask, I mean, the river, you go both ways too. So as we head into 2024, kind of last thing I want to hit on. We'll start on the input side. What should producers be paying attention to? I know a lot of guys bought fertilizer and some other input. Some made sales, some didn't. I think that's dangerous to not maybe consider at least going one-to-one on some of those early purchases of stuff. Talk a little bit about '24 input side and then, you know, and some sales as well.

Jim

McCormick: The inputs as a whole, I think, Chris, are down quite a bit from a year ago. A lot of people are locking it in. Talking to some dealers that, you know, in the fertilizer as well as implement dealers that spread fertilizer, they're seeing a lot of demand for it. If I'm a producer out there, I think, you know, I'm going to recommend you, for your producer out there, you've bought that fertilizer, I would lay off that risk either via options, cash, something. I think, you know, you've put a huge bill out there, you need to make sure that bill is covered. You know, would I go ahead and lock some of them? I lean to say yes. I think energy needs are going to be very, very tricky this next 6 months with what's going on, not just in Ukraine conflict, but this Israel conflict.

If it would spin out of control, you know, and you got Iran involved into it, and for some reason you stop getting, you know, crude oil out of the Suez, you know, out of the Suez Canal, you could see a major spike in energy around the world. So the cost of getting your product planted, as well as finishing harvest this year, could get really, really expensive. And when that happens, there's no doubt about it, the fertilizer prices are going to start rallying, going right back up again. So it may not be a bad time to lock in the price, but like I said, if you're locking it in, I agree with you, Chris, I think you've got to start laying that risk off and, you know, try to make sure that cost is covered as we go into 2020. 'cause like I said, you know, we are building stocks right now. There is a cumbersome world supply of beans, you know, US bean supply, of course, are very tight.

If Brazil ends up with a crop the government thinks, a normal crop, we'll have more than a surplus in beans in the world right now. And unfortunately, that is a recipe for overall bearish markets. We haven't seen it for a while, but if you farm long enough, you know, there is a cyclical nature to farming. We've had some pretty good years right now, and I think our fear is that we have turned that corner, we're over the Goodyear Hills, we're going to see a little bit of a correction.

Chris: We might be back to reality for those that are— that remember '13, 2013 to 2019. It doesn't take a lot to get back into that cycle for sure.

Jim

McCormick: We've— well, you mentioned that, Chris, the '13 through '19, especially on the corn. You know, the government's got the average price of corn for this year projected around $4.95, but you're looking at a stocks-to-use around 14.5-15%. If you go back from 2013 through 2019, the stocks used those years bounced, you know, the low end was 10%, the high end is around 15%, but the average cash price in '13, '14 was $445, but in '15, '16, '17, '18, '19, the average farm price was between $335 and $365. So, you know, if we go back to the good old days, which isn't that far away, You know, this corn market, that's kind of your downward target. Now, do I think we're going to go that low? I don't think we'll go that low because the inflationary value of life, I think that low won't be taken out.

But, you know, just to kind of wake producers up, I mean, by historical standards, by recent standards, we are still high priced based on historical stocks-to-use. Mm-hmm.

Chris: Yeah, it's going to be real important. I mean, we work with a lot of people on getting cost of production figured out, and it's going to be You know, last year was the most expensive crop we ever put in, and it made it super important. Now this year, we may— we're not going to have the most expensive crop, but we're going to have maybe a significant amount of risk with maintaining a margin that's acceptable, right? You know, and that's, that's where I think this year is just as important as every— every year is that way, but I mean, it's doing the math. What, what, um, As we wrap up here, what other things— is there any other key things as guys wrap up harvest here in the next couple of weeks that they need to be thinking about and getting shored up as, as we kind of try to wrap up this harvest season?

Jim

McCormick: Well, I think what you got to look at is one thing I'm going to tell people is just look at the volatility of what happened last week. It was a very, very quick, short-lived run that looks like we backed it off on Friday. I'm going to— like, I'm going to encourage producers, we do all the time here, get what your orders— if there's a price that you like make sure you've got the order work in. If it's even with the cash market, we are seeing opportunities at different elevators around the country, different pushes. I mean, I've had some clients here in Northern Illinois get some pushes for both beans and corn on Thursday that they weren't expecting. I think in general there's going to be a little bit of opportunity in the next couple of months for producers to maybe make a, you know, a cash deal that maybe they weren't thinking about.

I mean, right now I think a lot of producers, Chris, say this is what I'm going to do. I'm going to sell what I can't. I'm going to put it in a bin. But what it seems like as a whole, the industry, the producers probably were a little bit undersold compared to historical numbers. The end user is a little bit unbought, under— didn't get all their needs covered. So you're seeing pushes in basis here and there as the harvest firms up. Make sure you, you know, you have an ear to the ground as to get these opportunities. And I would encourage you, if you get spikes in basis, run up in the board price, like I said, economy, basis not moving against it too quick, don't be afraid to take advantage of it. Profit is going to be the key this year.

Chris: Yeah, for sure. Well, I think that's a good place to wrap this baby up. We've covered some pretty good ground. Really appreciate your time today and definitely got to get you back. Appreciate you for your first time on here, and we'll definitely, if that works out for you, we'll get you back again here real soon and get harvest wrapped up and see what's cooking at that point.

Jim

McCormick: I appreciate the opportunity, Chris, to talk to you and your clients, and, you know, have a safe harvest group out there as you finish up.

Chris: Yeah, will do. And again, Jim McCormick, people want to get a hold of you. What's the best, best way to reach out to you and your team?

Jim

McCormick: You know, the best way to go is just go to our team, go to our website, agmarket.net. You can subscribe for some more free research. So go to the website.

Chris: Sounds good. We will do that. Well, with that said, Jim McCormick, agmarket.net. And everybody out there still kind of trying to wrap up harvest and dodging some of these rainstorms. In between times, get some rest, be safe, and with that said, we will catch you again next time on the Ag View Pitch.