Sunday market outlook: market movers to watch in the week ahead

Brian

Splitt: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count. Here comes the play at the plate.

Chris: And it's the Ag View Pitch. Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week and you've got Chris Barron here and Brian Split, partner of AgMarket.net. How's it going, Brian?

Brian

Splitt: Going great, Chris. Thank you for having me on.

Chris: Yeah, you bet. It's great to have you on here, uh, today as we head into a new week. And hey, one thing I got to say is, uh, today is my wife's birthday. So if I don't give a call out to my wife, the person that makes all this stuff in the background, uh, possible, I want to thank her and say happy birthday, Alyssa. So, uh, with that, Brian, we can get to some business. We've been, we've been seeing kind of a crazy market here. You know, a lot of us on the farm have not, or have been very surprised, I guess, at the strength that we've seen in these markets. A lot of us started making sales a long time ago. There's a lot of people that have some emotion out there thinking, well, geez, I made some sales and this thing just keeps going. Where's this thing going?

Brian

Splitt: Well, we have to remember just the sheer volatility of this year, and it's, it's a natural occurrence to sell too low when the market is just starting to rebound from extremely low levels. And I think we saw some of that this year. We had obviously COVID take hold domestically, we had shutdowns, we had energy demand plummet, we had crude oil trade to negative $40 a barrel, and when all those things are happening, that definitely sets the stage for that fear-type-based marketing. So when we started to rebound in August, and traditionally that is a time of year where we have been putting in some late summer, early fall lows, but not seeing the scale of rally that we've seen this year.

So it felt at first like it may have been, hey, this is an opportunity to get some catch-up sales I think a lot of producers had done some marketing this time last year and in early January this year where December '20 corn was around $4. So that at least gave a place to start an average from. But you're absolutely right, the amount of demand that we're seeing, plus we're seeing the fund involvement right now, and that's pushed this market a lot higher than I'll admit, than I thought myself that this market could go at this time of year.

Chris: Right. Hey, talk a little bit about what we're seeing, what the market is asking us as producers right now. I mean, there's just no carry in this market. Talk a little bit about that. What should we be thinking? What should we be looking at, paying attention to there?

Brian

Splitt: So right now, and this is as of the, the weekly settlements from Friday's close, December '20 corn settled at $4.19 and a quarter. So it is up against that very strong $4.20 resistance, the contract high is $4.23.50. The carry from Dec to March is 1 cent, from March to May is 1 cent, and from May to July is actually inverted a penny. So when you look at the carry between December '20 corn and July of '21, there is— the market is paying you 1 penny to put your grain in the bin and store it all the way until next July. That is not— the market does not want you to put your corn in the bin. What the market wants you to do is to sell your corn out of the field, and we're seeing all that also indicative in the basis. We've got unseasonably strong basis levels right now.

So the tough thing with the basis, and this is my opinion of kind of how that works, but it seems to be almost a game of chicken between a producer and the other producers in their area. I had a producer in Arkansas that I had talked to last week and he had a phone call from his elevator where he would deliver soybeans and they were paying $35 over for October delivery next year. So it's one of those things where he locked in $35, a couple other producers in the area got $35 over, and then once the Once the end user got the bushels that they wanted, which was apparently 1.5 million bushels, then the basis immediately dropped to 20 over. And so when you see these hard pushes, you have to take advantage of it, because if you don't, most likely someone around you will.

Chris: Yeah, yep, yep, that's for sure.

Brian

Splitt: So I'll go ahead with With the lack of carry, you have to also think about what type of opportunity that allows you, um, from a reownership perspective, because we are in a bull market right now. Uh, one of the things I've been looking at is, is the value of 1 corn plus 1 soybean plus 1 wheat. And if you track the value of that on the front month contracts since the beginning of the third quarter, so that would be essentially from the close on June 30th to Friday's close, corn plus soybean plus wheat is up 24.7%. The Dow in the same timeframe is up 9.7%. The S&P is up 11.7%, and the NASDAQ is up 14.9%. So even the best equity market right now, the tech stocks, the NASDAQ, um, we're seeing the value of corn and soybeans and wheat outpaced that by about 10%.

So I think when you're in an environment where money has been chasing money, we've seen how Tesla has become almost a vehicle just for volatility and for investment money. I think this is really gaining attention from the fund managers. So the tough thing is the market is in this structure for a reason. Could it be because it's a bull market? I think that's one part of it, but I think we also have to kind of dive into what the producer has been doing in the last couple of weeks as we've got into harvest. The producer has been aggressively harvesting soybeans first, selling soybeans out of the field, getting cash flow. We've been recommending, as you've been selling the cash soybeans, to use options to reown that, and the market has continued to go higher. And we have a lot of government money that has hit producer checking accounts.

So I think cash flow is not a problem right now for most producers. And now you look at corn and the producer wants to put the corn in the bin. That is typically what they'll do. And the market has to come up with ways to disincentivize the producer of putting the corn in the bin when the market needs it. So it's taking the carry out of the market. and the cash market is on fire with the strong basis. So I would challenge a lot of the listeners to look at their cash price for delivery out of the field, delivery in December, delivery in February, delivery sometime in spring, and then delivery in June. And I would venture to say that in some instances the cash price is the exact same all the way through the whole curve. So at At what point do you say, why should I put my corn in the bin to get the same price 8 months down the road that I could get right now?

And so if you're still bullish on the futures side, I think the thing to do is consider selling cash, taking advantage of the extremely strong basis that we have right now, and then using the lack of carry in the market to establish some kind of paper ownership. You could go all the way out to July. July is trading a penny over December. And buy a call or buy a call spread, you're at that point eliminating the downside risk of the futures, and now your downside risk on, on your position is now your paper position, is the price that you pay for your options. And in most cases, that type of strategy is going to still be less than what it would cost you to commercially store those bushels.

So if you didn't have storage on your own operation, A lot of producers may haul the corn in and just start incurring storage fees, and I would challenge you to compare apples to apples of how much it would just cost you commercially to store corn until, let's say, February, and how much it would cost you to buy an at-the-money call in July corn, and compare the amount of time that you're going to have paper ownership versus the commercial cost of carrying the position.

Chris: Yeah, the hold and hope strategy's never really ever a very good opportunity or an option. But, uh, you know, what do you say to the people that are fairly heavily sold, or at least in their own mind they're heavily sold? We talk to a lot of producers, and, and, you know, there's, there's a number of producers out there that feel like they've sold some a little too low and, and maybe hoping that there's an opportunity for a higher price here. What percent do you, do you, of your production, let's say, from your perspective, do you, do you look at trying to, to reach for a little better price for? And what kind of opportunity do you think is out there to to give us more than where we're at right now? I mean, how much further can this thing possibly go, do you think?

Brian

Splitt: Well, so there's a couple questions in that question, and I'll start by saying that as a team, AgMarket.net has advised clients to be 40% sold on corn at this point. We did our first 30% at $4.04. We did a small 10% catch-up sale at $3.60. When the market did start to recover. We felt like, hey, we gotta probably get a little bit more sold if we wanted to see what happened at that area. When we got the quarterly stock report that took us and used $360 and the 200-day moving average as a strong base, we saw the market really take off from there. We have not added any sales since then, so we're still trying to be patient, see how these areas near contract highs hold. To answer your question of what do you do if you feel like you sold some too low.

I guess the first thing you have to understand is that if you do wish to have some kind of reownership of those bushels and, and have a position on paper, you have to realize that if you are going to buy an option, and let's say that you spend 15 cents on that option, to me you have to automatically take that 15 cents off of the sale that you've already made and reduce it by that 15 cents because it is potentially that option that you buy could potentially expire worthless, right, and actually decrease the value of your sale. So you have to be very aware of that, and if you're not okay taking that risk and you feel like you may have enough unpriced bushels to really bring your average up if the market does see another leg higher, then I would say maybe just leave it alone and focus on the bushels that are unpriced. If you really have a desire to have some kind of ownership on paper.

The very tough thing about this market is that we have not had any kind of a good pullback in corn once we had that quarterly stock report at the end of September. So this market has just been a grind higher. You know, our pullbacks may be, hey, we make a high one day, the next day we're, you know, a little bit off that high, and then we advance again. They're more of a sideways consolidation instead of making a high, seeing 3 to 5 days of a setback to test support, and then advancing again. So it's been a very difficult market if you're waiting for a pullback to get in. Uh, and if you've been waiting for a pullback, you're still waiting. Uh, so we haven't had that opportunity.

So, uh, I think what you want to set yourself up for if you're going to put a position on is again use the lack of carry in the market, go out to July, Because I think if you're gonna spend option premium, you want to do it once. You don't want to do it in March and, oh man, that didn't work, so now I gotta do it again in May. Oh, that didn't work. Alright, let's try it again in July. I think because the fact that there is not carry in the market, go all the way out to July, spend the premium one time. Don't keep throwing money at this thing, because if you put yourself in that position, you're gonna get all of South America's growing season. Then you're also going to get a very good look at our own domestic growing season because these options won't expire until the end of next June.

When you look at what month out of the calendar year typically has the highest amount of marketing year highs, it's the month of June and then the month of July. So by the end of June, we should have a pretty good idea of obviously how the South American crop came to fruition. Did we have a record crop? Did they have problems? We'll see what our planting weather is like. We're going to get an idea of how strong the demand has stayed. Or did China back off and really start going to South America? And the nice thing is, and then for example, I'll give you an example of what you could potentially do. July corn settled on Friday at $4.20 and a quarter. So just a position that may give you a dollar of upside potential, an at-the-money call, would be buying a $4.20 call and selling a $5.20 call. If you did that, that's a dollar spread. That settled at 23 cents on Friday.

So that's something where now if you do that, you have a maximum risk of 23 cents. The most that position can be worth at expiration is $1. So the most you can make is the 77 cents. It's the dollar minus your 23 cents of cost. Mm-hmm. Now that type of position gives you some manageability because if we do back off in the short term, we can use that as an opportunity to buy back that sold call at $5.20. $420, take the profit out of that, and now you're going to have that $420 call uncapped until the end of June in 2021. So I think you do something like that. It's not marginable. And then if we do have a healthy setback in the short term and you're an individual that's okay with some margin exposure, then maybe you look at selling a put back down at support, you know, out of the money, to help capture some of the the rest of that cost, the rest of that 23 cents.

But again, once you sell that put, it becomes a marginable position. So don't do that if you're, if you're margin adverse.

Chris: Right, right. Yeah. And, and I would also say, you know, there's a lot of people that are going to look at it and going to probably need to do some management strategy similar to what you're talking about. On the other hand, we see a lot of people that with the government aid and with where the cash prices are at right now, I think people need to look in the mirror and say, okay, if I'm not happy here, what price would I be happy at? Having some targets in, just even some cash targets in to get some more sales on the books and quit worrying about, oh gee, I wish I wouldn't have sold, you know, these bushels at that price or whatever. And look at the average price, add in, you know, CFAP 1 and 2 and a couple of the other things that, that increase our price and say, okay, did we make money? Now maybe we start looking at 2021, which I'll get to that in a minute with you.

But I think those are some really good comments you got there, Brian. One other quick thing I want to ask you though too is on the inflation, um, as we move forward. Obviously there's the election coming up here in the next, uh, you know, next week, uh, coming up, and the value of the dollar. Hit, hit those topics for a minute if you would.

Brian

Splitt: Right, so we do have the major event of the US election on November 3rd, so it'll be a week from this upcoming Tuesday. And so something to mention about the dollar— the dollar index has been trending higher. It's been a very steady uptrend, and it's actually been trending higher for the, the last roughly 9 years. So we've got a very clear upward trending channel, and the month of October, the month going back to September, and then the month of August— these 3 months have kind of just been consolidating right at what would be the uptrend from the 2011 lows. And so something that we definitely want to be watching for is if this Dollar Index violates the uptrend and breaks down from here. And if we do that, I think that that is going to be a clear signal to the funds that we have an inflationary environment coming.

So going back to that, that comment about the value of one contract of corn plus a soybean plus a wheat, when you look at that chart, that has built a very strong base, and we are kind of at the upper end of what the last 5 to 6 years of values have had in store. So I think if we do see the dollar break down below that level, then I think what would probably be— what's going to happen if it does is we're going to immediately test the 2018 lows in the dollar. That's in the area just above 88, so right around 88.25. I think if you see the other side of 88, you get below 88 on the dollar index, and we're going to be in a hyperinflationary environment. And so then some of the targets on the combined value of corn and soybeans and wheat are going to be up in the $22.50 to $25 area, with that currently trading at about $21.50.

So I think you could see that the 3 combined tack on a buck, buck and a half, or maybe $3.50, and that's probably going to be more of a longer-term play. For all we know, that could be on next year's crop. So generally, these inflationary environments are not just a 6-month or a 9-month deal. This may take, you know, a year, year and a half to 2 years to shake out, make the high, and then come back down from those highs. So I think as we get into the election, who wins the election, what does that mean for additional economic stimulus. That's definitely something that we're going to be watching very closely over the next 2 weeks to come here.

Chris: Yeah, that's for sure. So we haven't spent much time here on soybeans. Anything comment-worthy on soybeans that producers need to be paying attention to? Like you said, I think the majority of the listeners with the exception of a few, but a lot of people did, you know, kind of roll the beans out of the field and into the market right off the combine. Any comments on soybeans? And also, as we look into 2021 and, you know, Chinese demand, any of the— anything there, South America, any comments on soybeans?

Brian

Splitt: Yeah, so the soybean market, we talked about the lack of carry in corn, and it's even more so in the soybeans. November settled Friday at $10.83 and three-quarters. July settled at $10.59 and 3/4, so you've got a 24-cent inverse. And so again, if you are holding soybeans that you haven't sold yet, it does offer the opportunity to sell cash, and if you want to replace with some kind of paper ownership, I would again look at some kind of a call position, go out to July. Looking at a continuous chart, and we've only done it once in the last 6 years, but there's been one time where we got through $11, When we did that, we went to $12 the same month, and then the very next month we were right back down below $11 and actually below $10. So the market made that peak and then backed off very quickly.

So I think if one is going to establish some kind of paper ownership, it's probably buying a call that might be at the money, maybe a $10.60, sell a $12 call to help pay for it. I'm very, again, reluctant to sell puts. With the— as strong as the market's been near the highs. So if you are going to sell a put, you may want to wait for some kind of a good correction to let some of these out-of-the-money puts pick up some value before you sell them. As far as what do we see in old crop soybeans, it's going to be a very South American weather-dependent market, and, you know, how much continued demand do we see from China. I think a lot of the market's been trying to figure out how much China is going to buy. Have we already gotten very close to that, or do they have a lot more to buy yet? The delayed planting in Brazil did create a little bit more of a window for China to come to the U.S.

As they delay their plantings, that makes their crop available a little bit later, so end users in the world need to come to the U.S. for a little bit longer because that window just opened up a bit more. We got some rain in South America, so they are planting aggressively right now, so I don't know that we're going to see the concern about the timing of the crop really become an issue. So now it's more about, hey, we've got a La Niña bias right now. Does that mean we're going to stay on a drier bias in South America? We're, we're seeing all of this activity right now in soybeans assuming a record soybean crop in Brazil. So if we do start to see some dry weather down there impact the yield perceptions, I think that's going to provide obviously some more underlying support. Most likely bring the market to some new highs.

But on the flip side of that, if, if the dryness is— yeah, it's drier, but we're getting timely rains and they do end up having this record crop— the soybean market could very well be near highs right now, in which case having that paper ownership in a conservative manner would be managed the same way that we talked about corn, where you would use that downturn as an opportunity to buy back that sold $12 call and then maintain your call position in July until next summer as we figure out what we're going into for our own growing season. Now looking at new crop, it's interesting because new crop soybeans and new crop corn for that matter are both really staged against the highs that we had on the nearby, you know, so the Dec '20 and the Nov '20 beans. The Dec '20 had the contract, the high earlier in the year was $4.04 and three-quarters.

And then when you look at November '20 beans, the high early in the year was up against that $9.80 area. So now you've got next year's products primed in the same area. Dec '21 had a high last week of what, $4.01 and a half. We had the November '21 soybean contract making highs up at $9.86 and three-quarters. We had a high a couple weeks ago at $9.86 and 3/4 as well. So the market for next year's crop is poised up against where this year's crop had failed early in the year. And so I think it's going to require some additional bullishness on the old crop. So if we do see Dec '20 corn make new contract highs, if we do see November '20 beans get through $11, I think that would then potentially be something that could take the new crop level through these major areas that we're stalled out at.

And I think that's also something to be mindful of, is that if we do see these new crop contracts get through $4 on corn and through this $9.85 on, on November beans, that tells me that the market is concerned enough about our potential carryout going into next year that they want to buy more acres for the new crop products. We haven't seen that yet. That's that has not come to fruition. So I think at the very least right now, we've been really looking at, hey, should we have at least 10%, 15% of next year's crop hedged or sold in one way, shape, or form? And again, I hate to say the old standby phrases, but if $9.85 and if $4 is your, if your first sale is your worst sale, 2021 is going to be a very good year.

Chris: Right, and you, you did a great job of answering my question before I got to it there on the new crop '21, because when we look at cost production analysis and roll the 2020 numbers over to 2021, it puts a lot of our clients in the black, uh, it at these current levels. And so that was really my question is, you know, if, if this, you know, old crop market continues to move forward and continues to drive this this new crop stuff kind of where we should be. It sounds like you guys are in that 15% range. I have a lot of people saying, well, geez, I haven't sold any '21 yet, should we be, or whatever. And so there's a lot of people on the fence thinking about making some sales there.

But one of the things I like to see is just having some people put some targets in there that work for you, because some people— everybody's cost of production is different, everybody's margin opportunity is different. And so I think a person really needs to sit down and kind of figure out what that number is and at least have some targets in play to try to get something started there. Any other things on new crop or any questions that I haven't asked that you think you need to hit on?

Brian

Splitt: Well, I think I want to talk about what you just said just briefly, that idea of having those targets. I think we really encourage that very strongly, having those open orders out there And so even if it's just a 1-lot contract, because I kind of refer to that as an alarm clock order, you know, if you're thinking, you know what, I probably should be selling some corn if it gets to this price, I don't know how much I want to sell, well, it's going to kind of be put on the back burner and you're going to get back to your day-to-day thing. But if you have, let's say, you know, you feel like I should sell some Dec '21 if we get up to $4.10, I don't know how much I want to sell there yet though. Well, put an order to sell one contract because what's going to happen is when it fills, your broker is going to call you. He's going to say, hey, you got that contract sold.

This was an alarm clock. Do you want to sell more here? Do you want to, you know, stand by and see what we do? But I will tell you that when I have clients that say call me if it gets there, who do I have to call first? And I'm obligated to do this. I have to call the clients that actually got to fill there, right, before I start to call clients that said, call me if it gets there. So I may have a handful of clients or half my deck that actually took some action there, and then now I'm going to call them back and say, hey, this is what we got done, what do we do now? Those conversations take time. I'm going to have to go through a bunch of those conversations. The market may be closed by the time I try to get to the individuals that said, call me if it gets there. So I really would encourage those wish orders, the alarm clock orders, and like you said, you know, do your figuring.

$4 corn is not the same for everybody. So put orders in basis the levels that make sense for you.

Chris: Yeah, well, and that's just it. We, we see a lot of, a lot of times where, you know, the best time to make sales is when you're distracted doing something else, you're in the shop or you're wherever. On vacation or your hands are greasy and you're laying under a piece of equipment and you hear the markets and you think, I should be doing something. And sometimes these opportunities are— they last about 10 minutes, don't they?

Brian

Splitt: They do. Something else I think when you're looking at new crop, and we talked about how these spreads are very strong, and so you look crop year to crop year, there's an extreme amount of inverted market there. So you've got Dec '20 currently trading 25.25 cents above the Dec '21. You've got the November '20 contract of soybeans trading right now, what, about $1.01 over November '21. So when you have the market with spreads this strong, and this is just something to keep an eye out for because the concern for next year is, well, what if the nearbys all of a sudden fall apart, something happens, and it starts to look like the market has topped? Um, when you see the market start to top, what happens is these spreads will unwind, and so they'll be selling the nearby December, buying the Dec '21.

They'll be selling the nearby November beans, buying November '21, And so if you wake up one morning and you have the nearby corn lower, the nearby beans lower, yet new crop for next year is higher on the day and they're unwinding these spreads, that is probably also a very good indicator that the market may be, at least in the short term, rolling over. And so when the nearbys are down and the backend is up, that is your opportunity to get some backend coverage. Right.

Chris: All good stuff, Brian. Um, any, any one last thing? Any last words of wisdom?

Brian

Splitt: You know, I think it's one of those things where in life you cannot focus on decisions you've already made. You have to focus on things that you can control moving forward. So I know that it's, you know, it can be very frustrating to say, gosh, if I'd have just held on to that corn or those soybeans a little bit longer. But think about what this rally means for the health of production agriculture moving forward. Uh, we're looking at new crop values right now that just a couple months ago we had December '21 corn at $3.60. And so now that we're approaching $4, uh, focus on the health of your operation moving forward and not some of these choices that you feel like you could have done better, uh, you know, a month or two or three months ago.

Chris: Yeah. It's amazing how hindsight's 20/20 all the time. So, hey, Brian, thank you very much. Really appreciate the conversation. I think this was good stuff. Brian, if people want to get ahold of you or have questions or want to talk to you one-on-one, what's the best way to get ahold of you?

Brian

Splitt: You can, first of all, you can check us out online on our website, www.agmarket.net. You can reach me directly at 815-665-5555. 5-0-4-6-3. I can reach anybody at the AgMarket.net team at 844-4-AG-MARKET. So 844-424-6758.

Chris: Awesome. Hey, Brian, this was a great conversation. Really appreciate your time and all you do to help us producers out here during some of these difficult decision-making times. And really great conversation. And again, Brian Split with AgMarket.net. Thanks everybody for listening, and we will catch you next time on the Ag View Pitch.