Literally an ABC soup of issues driving markets: weekly market outlook Apr. 11-15

Chris

Barron: 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. Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week, middle part of April. So we're 11th through the 15th of April, kind of in our market outlook here. One thing I want to mention before we get rolling here is the Ag View Executive Business Conference scheduled for January 25th, 26th, and 27th. Make sure you mark your calendar down for those dates. We've got an announcement coming here in another week or so, some pretty exciting stuff, some great speakers, and we'll announce the location and some of that stuff.

So again, save the date, January 25th, 26th, and 27th for the Ag View Executive Business Conference. With that said, we are lucky enough today to have with us Grant Schimick with Black Oak Financial. Grant, how's it going?

Grant

Shimek: Good, Chris, yourself?

Chris

Barron: Doing really good. Excited to have you on here. We haven't had you on for a while, and in full disclosure, we work with you and you do a great job of kind of paying attention to a lot of things. And I guess, you know, we finished last week pretty strong at the end there. I guess just from a— I'm going to start out with the technical side, I guess. I didn't exactly know where we'd start with you, but you are probably one of the foremost experts understanding kind of what's going on from a technical standpoint. What are you seeing with some of the volatility we've had? What are you watching?

Grant

Shimek: Oh, well, in the big picture, and I think this goes for a lot of almost every market, and that is that we are 24 to 25 months from the extremes of the COVID panic of that March, April of 2020. And my experience has been when you are 25 bars, whether it's daily, weekly, monthly, quarterly, from an extreme up or down, it's time to pay attention. So the corn market, for example, had an its low was April of 2020. So here we are 24 months out. I think that, yeah, we can keep, we can keep pushing, possible. But I think that we're close to a major turn. I'm not convinced that we're going to be higher into June. I think we could see this culminate before mid-May. And that's not typical in the sense of we are Lots of times we're going to go into June and find an extreme in the grain market. I think given where things are at, we're closer than that.

The tough part is finding the, the price per bushel or the extreme, what that is. That's much different to say I'm not confident that, oh, we're gonna— we're within X many cents of it. I think we're very close in time, and unfortunately in a week you can traverse such a wild range that we'll have to just roll with it. As far as some bigger picture things, and one thing I want to make sure I mention, it was a Bank of America piece that was out in the last few weeks, and it was just talking about how extreme the move has been in the CRB index, total return, total return index, compared to prior extremes that we've had. So what they've seen is that in this past year to date, we've had the largest percentage increase in that CRB index total return fund ever. So a bigger percentage increase than World War I, the New Deal, World War II, Yom Kippur War, 1970s oil shocks.

What that says to me is, is not that everything's gonna revert and we're gonna go into bear markets, but we are at a great risk of a reversion to the mean event that really shakes the tree. When we look at macro cycles like the agricultural production cycle and the cooling of the Earth with the ice age, mini ice age cycle type thing, we can have— I think we're gonna be much more bullish over the next few years in general, especially for food production. But with these kind of percentage increases, the reversion to the mean can shake the tree pretty hard to the downside. So that's what, you know, the big thing that I see in front of us in the next few months.

Chris

Barron: So pay attention to that. You know, you're looking at it from a technical perspective. So I'm kind of paraphrasing here. Look out, we might have seen the high then, you're saying?

Grant

Shimek: I think we're close in time. Yes, I think we're very close.

Chris

Barron: So let me ask this then too. So, you know, we've kind of had the perfect storm to push prices higher. Throw a couple other elements into the discussion here now. The Russian-Ukraine war. Um, you can throw all these other things in there too, and I'm just going to throw them out there, and then you, you pick and choose or blend in what you think is significant. But we've got the war going on, you've got massive inflation, food insecurity threats or concerns at the least, you've got the dollar, the value of the dollar, you've got interest rates, and you've got the funds all playing in the middle of this. Is that, you know, talk a little bit about that, pick and choose, I guess, because there, there is like an alphabet soup of stuff to pay attention to right now.

Grant

Shimek: Absolutely. Well, there's a number of people who are good at, very, very good at timing events and so forth. They have models that can predict these significant turning points. And one is, one date that comes up a lot, it's been significant for this, would be like April 18th. And obviously it's a major holiday. You have Passover and Easter this year coinciding, I believe, on the same weekend. And that could be very well kind of a flashpoint, or it could be something where we calm down. Probably the main kind of going back to the spirit of the moment anyway, the one problem I have with this, with the high being in as far as right now, is that I haven't had anybody really call me with their hair on fire. There's no panic. Yeah.

And so that's probably the one thing we lack, and that I don't have anybody calling me convinced that there's a whole nother $2, $3 a bushel that's just got to happen. Or whatever the amount is. As far as the situation with Ukraine and Russia, it's been a global sea change event. I mean, it's been the death of globalism. And just to review how important the last, you know, since February 28th has been for the world that we live in, where we're going, is that In the early '70s, '71, Nixon took us off the gold standard, but simultaneously, Henry Kissinger had basically negotiated with Saudi Arabia to peg the dollar to oil. All purchases in the world had to take place in U.S. dollars. Well, what's happened in the last couple months is that's effectively started to— you can't say it's over. But you have Russia demanding to be paid in rubles.

And on a side note, yes, there's been extreme sanctions on Russia, the ruble tanked, but lo and behold, this week it traded higher than it did before the invasion relative to the dollar. And we've also had China now be buying oil from Saudi Arabia in yuan. And I'm sure a lot of people listening to this are aware that the administration, the U.S. presidential administration called Saudi Arabia in the past 40 days, wanting to ramp up oil production, and they didn't take the call. So we have— that is a major event that's going to affect all our lives over the next 5 to 10 years, and it's very inflationary. But the thing about this inflation is it's not going to go on a straight line. It's not just up, up, up. There's going to be violent corrections, and then yes, we'll take off again.

But the, the big part of this war has been that, for the— that'll be— the impacts of it are going to take years to unfold.

Chris

Barron: So what does that mean? I mean, what do you— you're talking about, you know, watch the threat of the near term, you know, what this market could do. We're sitting at some really strong prices right now. We're looking at, you know, when I look at this from our perspective, and it's a pretty simple vantage point or a simple look, is our cross-section of our clients, Basically where these prices are at, a lot of our guys are our average sales, just basically looking at Profit Manager, is just short of 40% sold both on corn and beans, pretty close to the same percentage with a wide variety from, you know, I can, I could find a few people that have very little sold, and I can show you some people that are 100% protected, sold covered, and everywhere in between. What makes you comfortable with all of the, everything you just discussed?

You know, what, what's the, what are the things we should be doing as producers from your perspective? You know, I know you farm some too, and you know, what, what should we be doing as producers and legitimately paying attention to, to make sure we protect ourselves?

Grant

Shimek: From my personal opinion, based on the return on gross dollar invested, most operations that I deal with are going to be in excess or well in excess of 30% return on a gross dollar invested in corn, or somewhere in the 20% plus in beans at today's prices. So in that context, I'm comfortable being— and probably this, since we got up to this 7, 10 zone plus on corn, I'm comfortable being 40%. And I can envision that we could, we could spike this thing to You know, it's possible to go to $7.90, $8.10 on Dec corn. Why not? Who knows what's possible inside of a 2-week window. But I'm willing to be for at least $40 is where I'd want to be, and with a committed sale, maybe, maybe to $50.

The difference is that that individual— some people will just spiral at those kind of levels, and But I think you've got to look at protecting it because if we do get a reversion to the mean event, we're going to shake everything down, including input prices to a degree. And the big long-term picture is still very inflationary. So if you don't have some revenue booked at what are historically, I don't know, top 10% of historical returns, and we do get a reversion to the mean, and now it's time to step out there and start buying inputs for the next year, it's going to be tough psychologically to say, well, hey, I'm only 20, I'm less than 15% or whatever the number is, and now I've got to spend huge dollars. And then, you know, it takes some intestinal fortitude.

So maybe you, maybe that individual can handle it, but you better kind of use your imagination on how you would react given those opportunities.

Chris

Barron: What do you say to the, to the people, and I guarantee you there's people listening to this that are in this situation, I'm in it, you know, We, you know, there's people who started their sales in the low $4 range, and now you've got over $7 for Dease 22, for example, and they sit there and beat themselves up on that 10% or 15% or 20% even, maybe that they sold it quote unquote too low of a price. So then what happens is you become paralyzed and you don't continue doing what you need to do. Do you have any advice for people to manage that? Emotion, because that's one of the things that I think a lot of us need to get over. I was talking to a broker the other day that said he had his butt chewed a few times because they had been buying puts along the way and rolling them up, and, and there was a couple producers, you know, mad about it. Well, welcome to risk management, you know.

Nobody knew this was coming. Nobody, you know, how do you, how do you tell people to kind of manage that emotion? And, and because this is a risk management margin business, right? You know, how do you— yeah, how do you talk through that?

Grant

Shimek: And well, number one, it's always a matter of degree. If you bought— if you covered everything up, then you've spent a lot of money with those strategies, and that is tough. But I think you have to focus on the average, right? Because you start focusing on the worst sale and what do I got to do to make that better? Well, Lots of times these guys who have done, even if they started that early, a lot of them still have averages somewhere between $590 to $650 yet with where we're at. So I'd caution on that. And in this, think back when we do get big shakedowns like 2008 when we were at similar price levels.

If you woke up every day and you bought a put option from January 1st to end of June of 2008 that was within 50 cents of where the market was trading at, any day, not just— any day, I believe, if memory serves me right, every single strike price would have been in the money by the time we got to fall of that year. Is that possible this year? I wouldn't rule it out. Now, do I— I obviously don't think it's sustainable. But that's what can happen. So I think you just got to focus on returns and not get hooked on those absolute dollar— no, 10% sale or whatever it was. And right now it's hard to, without spending a lot of money or putting even more money at risk, to reown, right? You almost have to go out and and look for some bigger opportunities in time. And there will be corrections that come. It doesn't feel like it today, but they will come.

Chris

Barron: Yeah, well, and then like I always tell people, it's way, way better to have a margin target knowing your cost and then having that margin target than it is a price target, because price targets are about impossible. And, you know, you can manage the risk, but to, to pick the high or the low is impossible. I want to go back real quick though to something you said. You know, you mentioned corn, and then I'd like you to hit it on soybeans too. Back to the technical for a minute. You mentioned, you know, $7.90 to $8.10 potentially, and that's probably just you with your technical vision and seeing everything. What's, what's the downside to that on corn? If, you know, $7.90 to $8.10 is, is the possible technical numbers, what's the downside? And then also, what's that kind of range for soybeans in the near term?

Grant

Shimek: On corn, exactly, where do I— I'm just glancing at a Dec corn continuation chart. So if you go out to— well, if you look at the highs of, in this case, '08, because the all-time high was August of 2012, we got up to the, you know, $7.99 area. The high in 2012 was $8.49. And partially a couple things have happened this week with corn. So the rollover gap that took place when the Dec '12 went off the board and Dec '13 became the lead Dec contract, we closed that gap this week when we got up to $7.10, $7.12. The other thing that you'll notice on the Dec 2012 contract was, is that we hit that high on the 10th of August of 2012 at 849, and then we dropped into early September 2012, and, and the low was probably like 705 and some change, and it basically traversed from there and set to about 770 until it went off the board.

That in 2012, it'd go up to that 760, 770 zone, dropped to 709, 710, and then back up. My point is, as of yesterday, we've closed it back within that range. So maybe the big next big hurdle instead of $8.00 is probably going to be $7.60, $7.70 if we could get there. But of course that those prior highs, everybody's going to be looking at them. And as far as what's possible to come back, I don't see why we can't go back to the $5 handle at some point in the mid to late year. And that's, that's a lot, but that's not catastrophic. It's compared to where we've come from, come from. And then other times when we've been into this price zone, we've fallen a lot further.

Now, I don't think we're— my guess is we're not doing that this time, meaning in the '08 timeframe, you went from a high on Dec corn in June of that year, $7.99 on a quarter, to a low of $295 by the time— of $290 by the time we got to December. I don't think we're doing that. And the same can be said for, you know, in 2012, we within a little bit longer timeframe, we ground down to those levels. But we can go back and check crop insurance guarantee. And the same thing could be said with beans. I think, why can't we get back in, you know, something under $13, maybe even check $12 at some point in the year. On the upper side on the beans, we've been to $15.55 on no beans. We did it in the month of February.

Well, history says you probably can jab that, but I like, you know, if you don't— if someone doesn't have anything done here and we're in the $14.90 to $15.10 zone, I'd do some defense because if we stall out here and then turn down Well, that's not a positive. And I should, I should mention, going back to corn, I believe, you know, we're right upon the average seasonal high dates in corn. On beans, we, we tend to have some tests seasonally in early, early May. So the point is we're close on those.

Chris

Barron: And yeah, sounds good.

Grant

Shimek: Yeah.

Chris

Barron: And, and You know, one of the best things that I think a lot of us can do just from a practical perspective is, you know, we're— the weather's been cold. We'll talk about that in a second. But, you know, the weather's been cold, it's been crappy in a lot of areas. Soil temperatures aren't where we're going to be able to plant probably even for another week in most areas yet, except with the exception of the South. So, you know, one of the things is sit down, figure out kind of where you're at truly, where your percentage is, where is your margin. Stop looking at the, the low sales and look at that margin. And then, you know, maybe put some offers in because, you know, what happens is we all get busy, right? And when, when the planters are rolling, sometimes that's the time to be making some sales or doing some things, and it's the time we look at what's going on the least.

And so, I mean, talking to people like yourself, getting those offers in and having that plan right now is probably more important than any other time of the year, maybe, isn't it?

Grant

Shimek: Yeah. I mean, put some wish orders in, whether they're on sales. And if you're typically making 10% sales and you can't bring yourself to do it, well, make a 5% sale. Do something. If it's options and you look at it and you think, oh, they're expensive, well, look at the strike price levels you prefer and put a wish order in. And if you don't get it, no loss. But if you do get it, it might end up being one of your, you know, your— basically, if you like the net dollar it protects, then it's probably worth shooting for.

Chris

Barron: And I think last year, for those that have always historically done that and have been putting in targets, every single target a person put in got hit. So it's starting to train some people to not do that. But I think, right, you know, if you start changing your, your marketing, how you market, I guess, and you change that, you're chasing something that you'll never catch then, probably too, right?

Grant

Shimek: You know, be consistent. That changing your strategy when, when the emotion is high is typically a bad idea.

Chris

Barron: Yeah, exactly.

Grant

Shimek: So that, or you've got to make a compromise between the two. So you walk, you don't do committed sales if you feel like it's all bad, but have some kind of worst-case scenario strategy in place so you don't feel like you— it's easy to Monday morning quarterback after everything is done and then say, well, I should have done this and I wasn't managing risk. And that's, yeah, true.

Chris

Barron: Is there anything that we're not seeing, um, you know, in from, from 2019, 2020, and even the first part of this year? We've had just like this massive amount of black swans. I mean, we used to talk about a black swan and we've had a a freaking whole, um, like flock of them for 2 and a half years now. Is there anything that we're not seeing that you're looking at, or that is a good thing, bad thing, threat that we haven't talked about here? I mean, you know, inputs.

Grant

Shimek: Oh, I mean, we can all— especially the world we're living in, you start to sound just so negative when you think about— use your imagination to think of all the negatives. The negatives can, as far as price goes, can be both directions. I— the structural nature of the energy market is the most bullish factor that we have for all things, for inflation across the world economy, right? And it does not appear to be better because we— the main thing that's happened is we lack structural investment in oil exploration because the powers that be currently, academically, socially, a lot of the loudest voices perceive it as environmentally negative. So at all costs they don't want to do that, but we don't have a viable replacement for those things. But the truth is we have the lowest oil exploration in 75 years, and the prices going up haven't really accelerated like it has in the past.

So even though I really— I doubt we've seen major highs in energies, I think in the next year, year and a half, we're going to see much higher energy prices. So when we— and right now, you know, if you look at, we're well off of those highs and the deferreds are cheaper. So keep your eyes on these deferred, these long-term prices for especially 2023 and do what it takes. You know, I know some of the people listening, especially in the Eastern Corn Belt, some people have a hard time getting, you know, fuel contracted to any length of time, right, in certain pockets. Do what you can, get, get storage. And get these products on farm when you can. Because I think that's going to be a long-term theme, not just get it high enough and all of a sudden we're flooded with production. I don't think so.

Chris

Barron: Yeah, that leads me—

Grant

Shimek: oh, go ahead. No, I was going to say even some of the things like what the administration did in the last couple weeks with opening up the SPR, they opened up so much that it's at risk of actually forcing shutdown of some production because so much is coming out of the SPR. So it's actually going to compound the situation even in the short run. Once the SPR release is over, we're going to— we may have actually even had a forced shutdown of some production for that.

Chris

Barron: It's amazing how unintended consequences sometimes kind of really can screw up a strategy or whatever, you know.

Grant

Shimek: Right, right.

Chris

Barron: So this kind of leads me to my last kind of question here, and you, you started into it, so it's a good segue on the input side for 2023. We've been rolling our 2022 profit manager plan, financial plan, from '22 to '23 in a number of operations. And when we do that, it's interesting, you know, there's a lot of fixed costs that are pretty much set for '23. '23. And so we have a pretty good idea on, you know, in some operations as much as, you know, 70-75% of the cost of production is pretty well known for '23. If you've got a producer that can sit down and really dial in those numbers pretty close and there's not a lot of land rental price increase that's going to be significant or you know, any of these other things, you know, machinery equipment, if they, if they can have a known for a lot of those. What, what makes you comfortable with '23 sales, or are you?

Because, you know, you look at, you know, if we're approaching $6.50, you know, nitrogen's up this year from last year on average in our database about 52 cents a bushel in terms of cost of production. You know, we look at You know, we all think about it in terms of cost per ton or cost per acre or whatever, but I like to go back to per bushel and then relate that right back to your marketing decision. And when we look at that, it looks to me like there's some pretty good opportunities in '23 to lock in some pretty major opportunity. What's your thought there?

Grant

Shimek: Given you can drill down that number and you're making it, making it based on returns, And, and so, you know, the risk you're taking by, in many cases, probably not having nitrogen covered, uh, that's fine. And, you know, as far as in that 10 to 20% zone, the difference being just the individual, the long-run picture to me, I think will, will be much higher than this in, in the next couple years.

Chris

Barron: You say you think it will be where we are?

Grant

Shimek: I believe, I believe it will be. Okay, but yeah, and that might sound conflicting because I'm, I'm really cautious here as far as this crop year for this moment we're in here over the next, say, 2 to 4 weeks. But in the long run, I'm not sure. I'm cautious on committing to those things because I don't— because the things that have gotten us here, the, the inflation driven by supply chains and lack of confidence in government, and that's probably the big one. I don't think people are going to wake up in 6 months and be more confident in the elites making good decisions for, for us, especially in the Western world. So, um, I'm not— I definitely would do some, but, you know, make sure you're, you know, the risk you're taking.

Chris

Barron: Yeah, manage that carefully. And it is a long ways out yet too, you know, you you, you look out there and look how much stuff's happened in the last, you know, 2 months. What's going to happen in the next, you know, 20 months or whatever, you know, or 12 months? Exactly. So, um, I guess that's, that's really all I had. I think that's kind of a great place to wrap it up. Um, any, any other final comments that you have and, and things that we didn't hit on?

Grant

Shimek: Well, the only thing that has changed this week and It's something that you rarely see because we always get— everybody gets their ducks in a row well before this, and usually by the end of February, people's acreage mix is pretty well set. I have had a couple people this week talk about shifting acres out of beans over to corn because the profitability now is getting so, so extreme that they were just willing to go aggressively into corn because it made sense. It did end up maybe in some cases shifting them to a high percentage gold. On the beans they did have, but the profitability per acre on corn was getting so high that they were going to now start swapping out and going back to corn.

Chris

Barron: Yeah, that, that report, back to that, didn't surprise me a huge amount. We've been working with a lot of Seed Sales reps this winter too, and almost every single one of them was telling us that, you know, our bean sales are up quite a bit. But yeah, I've heard the same thing, that there's a little bit. Do you think that's going to be enough to matter though? Because I think there's a lot of people that aren't going to change anything too. Do you think that's enough that'll do anything to the market?

Grant

Shimek: I think we'll— the wind will blow and we'll have, we'll have some shift over to corn. Yeah, now that's a big statement to make here. It's April 9th and there's not a part of the Corn Belt that's had anything of consequence done. So if we get to second week of May and we're— we haven't made a lot of progress, well, probably it's a moot point then.

Chris

Barron: And that, that might be the thing that drives your technical number back up to that you were talking, you know, that $7.90, that $8.10, is— or is it— or do you feel like the weather market's already built in? I mean, it seems like something's built in here.

Grant

Shimek: Well, planning delays may not be, you know, built in here yet. Weather, going back to the weather, nothing for the summer is necessarily built in. I mean, you could end up having— and this can be said at any point this early in the season, who knows what the weather is. We have what some weather forecasters are talking about, very dire weather scenario for production this summer. That's different, isn't it? But that can be said any year. But yeah, I don't think a lot of that weather premium is yet built in, but we also, you know, what if we did have some kind of ceasefire of consequence in Ukraine, how much of that is in this market right now? I think at this stage, isn't it a good 80, 90 cents a bushel on corn and probably all that on beans. Probably. I mean, the grain that is in the Ukraine that hasn't been shipped is still there.

Yes, it's not, it's not able to move, but it's not gone, right? And some of those things look bad now, but things can change.

Chris

Barron: Hey, Grant, I think this is a great conversation, good place to wrap up. Really appreciate your, your input and your expertise in so many of these areas. Really appreciate it. Thanks a lot.

Grant

Shimek: Yep, thanks, Chris.

Chris

Barron: You bet. And really appreciate everybody listening also, and we will catch you again next time on the Ag View Pitch.