Weekly market outlook 05-24/05-29

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Jared Creed. And Jared, as I sit down here drinking my first few sips of coffee this morning on the week of May 24th, can't help but wonder, you know, what are we going to see this week? It seems like every week's been different here over the last couple months, so I was hoping we can kind of have a conversation on what our market outlook is here for this week and some of the factors that you have in mind.

Jarod

Creed: Absolutely, Shay. I appreciate you having me on again. Great. I would say the biggest leader is probably no surprise. We're going to continue to see amplified volatility. It's obviously been a very wild run the last 60 to 90 days, and I would not be surprised to see us not even halfway through that period yet, considering we're still in May. Crops all— not all the way planted, not really a concern there. A lot of summer weather ahead of us. Balance sheets that continue to be construed as too tight with a lot of question marks on new crop acres that we'll receive here in another 30-some days. Um, you've got a monster, uh, one for the ages buying spree of new crop corn from China. Uh, meanwhile, you've got a record bean crop finishing up out of Brazil.

All in the same timeframe that you have an inflationary trade environment that perhaps has softened a little bit in the last couple weeks, has probably aided a little bit of pressure in the commodity space. But nonetheless, it's at least my expectation that this thing is far from over when it comes to volatility. It should not be much of a surprise to see plenty of double-digit trading ranges for the next several weeks. Um, at the end of the day, we've got a long ways to go until you really give this commodity market and corn, soybeans, wheat in general something to, uh, really slow it down. And again, I don't mean that necessarily to slow it down that we can't go higher or lower. It's just a matter of we're going to stay very volatile for an extended period of time here.

Shay

Foulk: Now, are you thinking that, you know, kind of through that middle part of June, end of June, or what are we looking at when you talk about this extended period of time?

Jarod

Creed: Well, you know, I've, I've laid out a game plan to my clients here for a couple months now that by the middle of June, we probably better have that, you know, that rubber meets the road conversation on where do I want to be? How do I want to be positioned? What risk am I willing to take? What risk am I willing to leave on the table? And that's a self-imposed date, but there's a lot of different pieces to come at us after that. So if you rewind the calendar here for 60 days and then look 60 days forward, we've had an incredible planting pace. I think I saw a stat that between South Dakota, Minnesota, Iowa, Nebraska, collectively those states are almost 7 days ahead of normal planting pace. Now at the same time, you've got moisture concerns from too wet in some places too dry in some places, and then a lot are just in between.

At this point, you're looking at a weather forecast that does not necessarily look threatening to crop development, rather benign. You have some of your, you know, just analytical yield models out there that don't have any human touch, just weighing weather anomalies and actual forecasts that have come to fruition. Some of those yield models are really starting to, you know, just catch their hair on fire. Yields are going up and up and up. There are a few models out there, Shay, that suggest we could be tracking towards a record yield somewhere 182 to 185. Now I guarantee you, your listener listens to that comment right there and is probably shaking their head and chuckling, and I don't blame you. It's the third, fourth week of May here. We got a long ways to go until this crop is realized.

Nonetheless, with that fast planting pace coupled with benign weather, it does open the door when you start looking at the next 60 days. It does open the door for some type of yield changes in July and for sure out into August. Uh, and at this point, you think about your next 60 days, we've got a June WASDE, we've got the June acreage report and stocks report that's going to be a monster. Then obviously you have your July WASDE. You continue to have different types of headlines from the Fed and the government, almost like they're thinking about, thinking about doing something about hyperinflation, not necessarily laying out a direct course of action yet. But anytime you have some of that news come around pertinent to interest rates, for example, it definitely has kept the commodity market and equities on edge.

So that June, you know, June 15th through 20th date, you know, I just think that by that timeframe, most producers will have a little bit more confidence in what they believe their crop potential can be. Still a long ways to go from that point, I fully understand, but I would hope that by the third week of June, we're going to understand at least at bare principle if we have risk of yielding above or below our insurance guaranteed bushels. That definitely changes the direction of the conversation long term. Obviously we hope that we are yielding above our insurance guaranteed bushels, but nonetheless between now and then you have that guaranteed bushel from the crop insurance. It's just math at the end of the day here.

The current prices on the board and where we have been, so where we could go back, uh, it definitely represents probably one of the top-end revenue per acre situations that we've seen, uh, in— it will obviously in years, but maybe ever, from just simply taking one guaranteed bushel times these current prices. And again, when it's just math, it does present the opportunity for the farmer to lock in that revenue more or less risk-free. There are ways to go about that. I had the joke last week with a producer that, you know, they brought up the old, the old phrase of a president many, many years ago, you know, farming is awfully easy when your farm is what, the pen and the paper, the pencil and the paper from 1,000 miles away, however that comment goes.

Well, I don't think that we can get sucked into that between the tools that are available in the option market between crop insurance and guaranteed bushels. Again, it's just math, and you have to understand that math. And in these volatile times that we're in, you know, what do we do if corn goes below $5, or what do we do if corn goes back above $6? And what do you do when you're looking at your crop, uh, being challenged or looking to be average or above average? You have to be willing to you know, manage and leverage these various tools that are available in the, in the space. Yeah. And that's all by that middle of June, in my opinion. Doesn't mean the guy has to go 100% sold, doesn't mean a guy has to do anything, but you are making a choice by that timeframe to potentially face the music of whatever else can come our way between now and harvest.

And then obviously we still have a long time before the balance of this crop that we just planted has to really be fully marketed. I mean, you still have a 12-14 month period from today to finalize all that. But from a seasonality perspective, you know, perhaps our best time from a historical standpoint, our best time, that door is closing rather quickly here. And just again, have to face the music or whatever's to come afterwards.

Shay

Foulk: So as far as actionables go, I mean, on top of just looking at what that insurance revenue guarantee is, you know, like you said, it's just math. And making sure that we're closely evaluating that as producers. There's some other ways that we can look at, you know, protecting what we have on the table right now. And I think when it gets into some of the options out there, it can be a little confusing, especially when we're in these volatile markets. So I was wondering if you can kind of just give us an overview of maybe some considerations that we should be thinking about at the farmer level as we move into the next, you know, 25, 30 days here.

Jarod

Creed: Sure. So kind of a 3-phase deal here. Number 1 is, is willing to admit, stating the obvious, that everybody has different risk tolerances, different knowledge, and certain things that they're comfortable with or just flat out not comfortable with. So it's still about finding what tool is the right fit for your farm. And at the end of the day, what are we trying to do? We're trying to remove as much risk as we possibly can with leaving as much opportunity as possible on the table. And I think that is key in the environment that we we are in, that with the current price levels that we have seen, I think a producer needs to be willing to leverage a little bit of option premium in the space. Now that leads to a very challenging piece for the average American producer. When you look at option premiums, they look expensive. I fully understand that.

But let's just rewind the calendar here a couple years. We have figured out a way to basically grow $3.50 cash corn and make money. We've had opportunities to market above $3.50, don't get me wrong, but in general, $3.50 cash corn has somewhat become a benchmark in the last handful of years in a different environment. Now, why do I bring up $3.50 cash corn? 200 bushels of corn at $3.50 is $700. You fast forward to today, there are producers that are looking anywhere from $1,200 to potentially $1,400 of revenue per acre based upon where price has been, still where it is, and what their yield expectations can be. So $700 to $1,300, let's just call it on average $1,300, almost double. Yes, option premiums are obviously more expensive in that type of environment. The uncertainty is most definitely higher. However, We're talking $1,200, $1,300, $1,400 of revenue an acre, Shay.

Show me a business anywhere in America that basically has the ability of a backstop of guaranteed bushels and has access to tools in the marketplace such as options to do just that, to give me the option to be short corn if the market is lower but not have to be short corn if the market is higher long term. Talking about locking in worst-case mathematical situations of $1,200, $1,300, $1,400 an acre. So many different ways to go about it. I'll tell you, not to get too deep in strategy, but one of my favorite, uh, strategies here as of late is to actually leverage that high option premium by looking at the calendar again, willing to put out a risk of, you know, 5 or 10% of the crop at a certain price via selling a call option, selling a call option and taking those proceeds and buying out-of-the-money short-dated puts. Now in the last 2 weeks we've obviously seen a dramatic setback.

Sometimes it's better to be lucky than good. We obviously would still welcome higher prices, but, you know, a real-life situation had many producers that we were selling $6 to $6.20 to $6.30 December calls and taking that premium and buying June, July, and August short-dated puts at a $6 strike. I still think that that strategy right there can come around again. Personal opinion here, just one man's opinion, work the paper that it's written on. I still think that we have a fair crack at seeing December corn get back closer to that $5.90 to $6 area. It's a well-advertised number. It's about a 50% retracement of our move from the high to the low. Again, considering It's May. We have a lot of different information still to come at us, uh, really before I think we can put a kibosh on this market for any rhyme or reason.

So, you know, looking at various types of option strategies, whether it's leveraging the expensive premium that is out there, uh, by being a seller of some of it and establishing a floor on more bushels than what you're willing to sell, or just the old-fashioned minimum price strategy. Let's just say that we can get December corn back to, you know, $5.75 and an individual can go buy a $6.50 or $7 call for, you know, 25 to 35 cents a bushel. Yeah, that's a lot of premium, but that premium is not going to go away just overnight. And what that should hopefully do is give the producer the ability to take the big dollars off the table by making the sale, knowing that they still have some type of an offset behind them should the market continue to go higher. And I think that's very important as well, uh, when you start thinking about the long-term plan going into 2022.

Myself, I've been unwilling to be aggressive on 2022. In fact, only a very select few producers have marketed anything in 2022, primarily because they're not as exposed to higher input costs as maybe the average producer is from the land, in bulk chemical and fertilizer programs. But when you think about the risk of going into 2022 and the potential collapse in margin because of higher input costs, I think that that means the producer needs to be willing to pull as much money off the table on this year's corn crop as they possibly can while leaving the door open for 2022. And I believe that it's opposite on the bean side. I think, personal opinion again here, if I'm willing to pull all these chips off the table in corn, I'm a big believer that profitability in beans is almost 100% driven by yield, not price.

If we can pull money off the table in corn and stay a little patient on beans, but then consider next year maybe willing to take a little bit of money off the table, but for marketing some 2022 beans and leaving corn open, you know, that's just kind of where my mind is at right now. And I, again, in. I still think that I got a 4 to 5, maybe 6-week period here, uh, to do a few things there. Hopefully we can get another market bounce to reposition things accordingly, um, but I really don't want to run the risk, Shay, of all of a sudden stumbling upon a 93 to 95 million acre crop on the June acreage report and a yield that is seen as steady to higher Uh, question marks around our continued demand to China. Yeah, it's great we've been selling all this new crop corn, but we still run the risk of seeing some old crop cancellations.

Uh, obviously have a monster book still, um, that needs to be shipped to them for old crop. So all I'm doing is stacking up these couple variables: more acres, a good— a better yield, demand that is relatively stagnant to slightly better. And then maybe the big question mark is what happens if you all of a sudden top throw off a wet blanket on this inflation environment. And you're looking at a monstrous long fund position. You know, our good friend Peter Meyer, his old saying just continues to stick in my mind that you wanted expanded position limits, you got them. I'm not talking about more price range daily, but I'm talking about the amount of positions that your outside money can hold in our space. You wanted the bigger position limits, you got them, and ultimately what that could present is higher highs, which we've experienced, and potentially lower lows.

So it's not that far out of question that you stack up 2 or 3 out of 4 of those pieces, and then all of a sudden you create that old elevator down shaft move in the grain markets based upon a risk-off from a fundamental standpoint and commodities not being a safe haven for your, you know, quote unquote, smart money anymore because of, uh, you know, Fed monetary policy changes.

Shay

Foulk: Absolutely. Looking at those option premiums, I just wanted to make a comment. You know, you were talking on your different levels of protection and say you're spending 25 to 30 cents on those options. Talking dollars per acre, going back to, you know, potentially looking at, uh, $600 to $700 more revenue per acre that some producers are in that position right now. At that option premium, you're looking at spending anywhere from $45 to $60 an acre, uh, on that 200-bushel crop. And so for a 1,000-acre producer, uh, you know, if they have 1,000 acres of corn or whatever it is that you're putting the position on, it's big dollars. You know, you're looking at writing a, writing a check, uh, figuratively for $60,000.

And you talk about different levels of comfort, and, and what I would encourage people to think about is, of that revenue what you're spending as a protection amount is 8 to 10% of cost, you know, 8 to 10% of that revenue protection for 80 to 90%, you know, you're protecting a huge amount of dollars there on those option premiums. So again, as with anything on cost of production, just make sure that you're evaluating what the risk versus the reward is. Obviously Jared has a really good pulse on this. If you wanna reach out to him, Jared with Chasey Marketing Services, You know, I think, I think we've had a really, really good conversation here looking at options and strategies. And of course, this is all just a, you know, a conversation here.

But when I think about all the variables that we have at play here, you know, we had a podcast in 2020 that was looking at the USDA projections and the wild swings that we were seeing there. And it's titled, you know, NUM, an American farmer play sponsored by the USDA. Well, now as producers, it almost feels like we can be numb to the amount of information that's coming at us. I mean, we're looking at China buying, the South American crop, uh, what we have for yield projections, good planting season. There's a lot going on right now. So let's just recap and look at some of the options that we have here, Jared.

So, you know, looking at the insurance, uh, levels and making sure that we understand the basic math, making sure that if you have an opportunity and a comfort level with protecting some of the pricing strategies that you have out there that you're taking advantage of, of those options, and then also just looking into that 2022 crop and evaluating what position am I in as a producer. Am I able to take advantage of some of this, like you mentioned, with maybe some reduced input cost? And what should I be protecting? Anything else that I'm not covering there from our conversation here today, Jared?

Jarod

Creed: No, I think you covered it all, Shea. I wanted to add one more piece on that option conversation. Yes, I think most of the time a producer and I'm making an assumption here, so I apologize about this, but most of the time a producer views options negative because they're oftentimes used incorrectly. What we're trying to do here is not necessarily protect long-term price. Let's just call a spade a spade, that if corn is anywhere between $5 and $6 cash corn come the middle of August, and you have an average to above average crop coming your way, you don't need the option anymore. If you're comfortable with your crop size, you gotta transition back to old school marketing, right? Uh, taking an average yield or above average yield at much above average prices and get back to the old-fashioned making your money that way.

Well, so what I mean by that is just because you buy an option for X amount of premium today does not mean that you have to write it off all the way to zero right away. Most producers, they unfortunately probably get their hands on an option, they watch it for a little bit, they forget about it, oh, they check in on it, they forget about it, and all of a sudden you're knocking on the doorstep of option expiration and the market has moved and they lose the entire value of that option premium. Now in a minimum price type of strategy, one should be, you know, in a hindsight perspective, oh well, I didn't need the option, I should have just sold the grain. Yeah, that's true, but would have you sold the grain without leveraging that option in the first place? So again, main takeaway there is you have to monitor the value of an option. Like, you know, call it livestock on the farm.

That head of livestock has a shelf life before it can go to potentially zero value. So you're monitoring the value of that day in, day out. Incorporating that into the rest of the marketing strategy, all while you are monitoring what your crop development and crop potential is. And again, if corn prices are anywhere near where we're at now or higher, I would certainly hope that the yields are attainable from average or above average and just let the stuff go. Let it go, move on to 2022, and chalk up 2021 as a very, very good year.

Shay

Foulk: Absolutely. A lot of opportunities ahead of us, a lot to be thinking about. Again, if you want to get a hold of Jared, JC Marketing Services. Jared, thank you so much for taking the time on today's Weekly Market Outlook. We really appreciate it.

Jarod

Creed: Absolutely, Shay, appreciate it.

Shay

Foulk: And thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.