Weekly market outlook Aug. 2-6th: new month, new market

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Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we're going to have a little conversation about the markets as we go into the first week of August. And so, uh, we are lucky enough to have with us Ryan Moe, who is a broker regional director with StoneX. How's it going today, Ryan?

Ryan

Moe: Pretty good. Hard to believe that July's over. You know, summer is wrapping up rapidly as it always does.

Chris

Barron: Yeah, for sure. And interestingly too, you know, as, as July brought a lot of heat, um, Shay and I went to North Dakota last week, drove through Minnesota, drove through a big chunk of Iowa, and then a pretty decent-sized chunk of North Dakota. And it was pretty ugly in a lot of areas. And to the extent that when we got chat to one of our clients' locations near Steele, North Dakota, which is kind of in the middle part of the state. And everything from there to the west is, is even uglier. And so he was going to start chopping silage last Tuesday, last week. And so, you know, he's like, I don't think I'm gonna have any grain, so we're gonna start, you know, start chopping silage. And in North Dakota, that doesn't give you a lot of a lot of tonnage or anything. It's pretty sad.

And yeah, and we drove back through North Dakota, it looked pretty good around the Fargo area, around certain areas of Minnesota, far southern Minnesota, there was a range in there that looked really good. So it's crazy because it looked like, you know, some areas really good, some areas not so good. From a crop condition standpoint, what are you hearing? Is that something that the market is, you know, really going to be hanging their hat on and watching super close here?

Ryan

Moe: Well, the, the crop conditions in that part of the country, it's been a well-noted story for a very long time as to just how, how bad it is out there. And it's really sad, it's really unfortunate that, you know, big chunk of our deck trades in that area and a big chunk of our clients are out in that area. And unfortunately Chicago trades the entire Corn Belt and the the world marketplace. And so how, how poor things are out there might not truly be reflected in the Chicago Board of Trade prices. Now we're going to see some very, I almost want to say scary things when it comes to basis out that far west. I mean, what's going to happen with, you know, rail, what's going to happen with ethanol plant bids, what's going to happen with, you know, soybean processors. It's, I mean, it's going to be a very, it's going to be a really wild year.

And I can't say that's going to be a wild year, and I'm not going to use wild in a good way, right? There's a lot of challenges that are going to face that group for the next year. And it's, and, you know, with these droughts being the way that they are, who's to say that it doesn't carry on into more years. So very sad state of affairs out west. Out west. But something that is, you know, going to be reflected more in the Chicago Board of Trade price, in my opinion, is the crop conditions in Illinois that have improved rather significantly. Yeah, things out west aren't good, and that's very well publicized, but Illinois has crept its way up pretty strongly in the last month as far as their crop.

So the crop in some extremely key Counties has improved in July, and those of us in, you know, Iowa and west, you know, there's quite a few places in Iowa that I don't think I've ever heard the term, the phrase, well, it looks pretty good for as little rain as we've had. I've heard that more this year than I have at any other time in my career.

Chris

Barron: I would phrase it in Iowa as the fuel tank is empty right now. And so we're running on fumes.

Ryan

Moe: Yeah, we've been running on fumes this entire growing season though. But that, you know, but hats off to our agronomists and hats off to the seed geneticists that have been able to put us as a farm culture in that position, right? I mean, I think that's the technology is really worth its weight in gold right now because yeah, that crop in some very, very dry areas looks surprisingly good. Now it's not in the bin yet and it can win the beauty contest from the highway and not yield out, but I mean, we're just too early to tell on that yet. But I mean, I'd have to say though, as a whole, I— it probably won't be popular on this podcast, but I think the crop as a whole in the US did improve in July more so than decline. There's going to be some very hard areas.

Chris

Barron: And the question is going to be what, what's it do in August? You know, how much is the— are the funds and the trade watching these weather forecasts throughout August? Is that, you know, it's going to drive the bean market, but does that help the corn market bring it along and stuff one way or the other?

Ryan

Moe: Well, I mean, it's, it's still, it's, it's recognized that, I mean, August is bean month, right? And so the weather forecast for August, I mean, that's, we are, I mean, we are about to, that is of the most critical importance for our bean yields, right? And if you look at the S&Ds on beans, I mean, we could, we could speak an hour on how important it's going to be for a giant bean crop here in the U.S. just because our carryout to use is so small. But so we're, we're at that stage here, but the one issue that I've taken all season with forecasts is that they've been extremely difficult to, you know, the 11 to 15 days aren't very accurate at all. The 6 to 10 days are borderline accurate.

The 1 to 5 days do okay, But the extreme differences between farms that are north of a town and south of a town, I mean, you'll have the farm north of town that got, you know, 1.2, and then you'll have the farm south of town that got 0.6, right? The variability from one side of the— one side of town to the next has been very extreme this year. So saying that we've got a reliable a general rain coming across the Upper Midwest at any point. That's just not held true this year. So we've got variability across the Corn Belt, but heck, we even have variability amongst the townships. So yeah, weather is going to be important. We need it. We, I mean, we just need rain. We've been running on fumes all year. And, you know, we need, we need these temps to cool down too. And that's, we'll see, because if we happen to have a a cooler August, I bet we can pile on some yield on these beans yet.

Chris

Barron: So, oh yeah, yeah. And, and the corn for that matter, to your earlier point. So, so, you know, let's shift gears a little bit. You know, the, the trade watching the, the weather thing and the funds are and everything, but, you know, we do have to have demand on the other side of the equation too. And so as we look at China, um, they haven't bought anything for a long time. They've been they're expected to take delivery of a lot of stuff. Is there any concern there, things that as producers that we need to be aware of or then we need to be careful of with the expectation of that demand follow-through? Anything you're watching there, any concerns?

Ryan

Moe: Oh, for sure. I mean, that's the phase one is the— I mean, that's the— what is it, the elephant in the room? Is that the term that they use? Is that just a 1 or 2 year deal that we're just going to kind of push on as other political issues come about? No, I mean, China is noticeably absent in this marketplace right now. And it was about this time last year that that bigger export program, it started to get going, you know, and so are, are they coming in and buying? Yeah, but then you see export sales here released yesterday, they were negative. I mean, that's not good. And if you're the Chinese buyers, you're at a spot to where it's— it's no— they're noticeably absent, and they say, well, as long as I don't call, the market goes down. So what do they do? They wait, right? So that, I mean, that seems to be a pretty logical move from their standpoint.

And yeah, and until they get into buying in a major way, that's what's That's what it's going to take to bust us out of this consolidation period that we've seen, especially in the corn market. We're going to, we're going to need them to come in and buy and buy in a major way if they want to break out of that consolidation to the upside. And they are just noticeably absent right now. But it is early, right? So is there time for them to come back? Absolutely. I, you know, our contacts down in Brazil, namely a broker down there named Jonas Pizzatto. He's telling us that this Brazilian corn crop, it's bad. I mean, things are really bad down there, so they are, they're all, they're out of the export market. Argentina, from that group there, they have a government down there that I've been very vocal in my opposition to them.

They, uh, those clowns down there, they look at Venezuela as the model that they want to follow. I mean, and they say that that's the direction that they want to take their government. Well, with that being the case and with things already tough in Argentina, Argentina is going to become less and less of a force in the export market. So where does that leave China? If they are going to import corn, how many, how many people do they have left to buy from? They got us and the Black Sea. And if the hog herd in China is as large as what Chinese propaganda says it is, there's— they're going to need corn, they're going to need feed ingredients. And the US is going to be one of the only guys to dance.

So whether we're good looking or not, or whether we're too expensive or not, That's, that's if they're, if they need it, it's going to have to come from somewhere, and that looks like it's going to be us.

Chris

Barron: Yeah, well, that's interesting. I, you know, just a little perspective there is always good because I think as producers we sit there and we wonder, and we, there's always a lot of noise in the, in the marketing environment, and as farmers we get to step back and, you know, muddle through some of the noise we're hearing. And, you know, is it an issue, isn't it an issue, and And so that leads me to, um, we have a report coming on the 12th, is that right? And so, you know, that's going to give us, uh, or give the market, I should say, some guidance moving forward. And then as farmers, we either need to plan ahead or react afterwards. And so what's, what's your outlook? What do you see in anything, any expectations there, any, anything that farmers should be thinking about or doing in front of that?

Ryan

Moe: So I'm not a day trader. In fact, I've tried it before. I'm terrible at it. So that's why I'm a broker, not a trader. So I take orders, not, you know, so I— so from a day trading standpoint between now and the 12th, I mean, that's a tough one to peg because I think it's going to be very much weather-based on how much rainfall we get on these beans that need a drink. So that's gonna, that's gonna be the big swing factor. You know, if, if we are looking at a trade to make, and where I still look at the soybean market as being structurally quite bullish, and, and that's not so much in the next 14 trading days, that has more to do with the fundamentals and the political winds that renewable diesel fuel has at its back. This veg oil thing is a very, very strong market. There's a lot of opportunity there that's yet to be untapped.

So I want to say that the soybean and the soy complex is bullish. I want to stay neutral corn until we know more about what the crop tours are saying the yield is going to be. So is the absolutely terrible scenario out in the Dakotas. Are the good areas of eastern Iowa, Illinois, Indiana, and south of there, are they good enough to make up for those losses there? And I think those crop tours will tell us that. So, you know, to trade this thing one way, I guess I would probably run a spread. Between, you know, long beans, short corn. That would be the— I would go, I would go there because I guess I don't have the guts to sit there and just say naked long corn or naked long beans, right? So I would, I would, I would prefer to trade that spread. And today that spread closed at, you know, $2.47 against the NovDeez.

You know, and where that thing can go here is, I mean, I think we could see some appreciation in that trade just because of the fundamental wins at the soybeans back.

Chris

Barron: From a risk management standpoint, we see a lot of producers when you look at, you know, risk management and coverage on expected production levels, we're seeing corn much more heavily covered or sold or whatever. HTAs, you know, option strategies and things, a lot more heavily covered on the corn side. So it sounds like the farmers are probably echoing, at least in their action, what you're saying there as it relates to that. On, on, as we look at 2021, as I say that though, I mean, what, what makes you guys comfortable, you know, from your perspective with farmers, if you're working with a producer— as far as being covered from a risk management standpoint on the corn and soybeans, what's your stance there? What would you say to a producer that says, I'm 60% sold on corn and I'm 45% sold on beans?

Ryan

Moe: Congratulations, because they got probably $5+ for all those bushels, right?

Chris

Barron: So— Well, some. A lot of people started selling at $4 too, though, you know.

Ryan

Moe: I understand. And, you know, it's a— Still a long-term profit game. And I know there's some people that are frustrated with the prior sales, but that was absolutely, positively the right thing to do. I think we should all laugh at the analyst that said that they saw this raging bull market coming. What did he say? I don't think anybody did, but of course there's always the people that are out there trying to sell you a new subscription. There's really no loss. And some of these guys have no pride. So it's not like they'll say, oh yeah, we saw this coming. It's like, no, you didn't. Or maybe you put it in one, but did you actually trade it? And, well, no, I don't. And they write a newsletter, they don't trade. So I don't want people to kick themselves for selling too early because that was absolutely the right thing to do. At the time.

I totally believe in portfolio management for when it comes to grain risk management. You don't see the wealthiest stock traders in the world, they don't call themselves the guy that picked one stock, right? They refer to themselves as portfolio managers. So when you're looking at 60% sold, I think that's very fair in this market because At this point, you still don't know how much you're going to raise, right? Are you looking at a record crop? Maybe you're 60, closer to 80%, or if this thing burns up, or 130%, sadly, in some areas. So that's, that's, that's a, that's enough sold for right now, don't you think, Chris?

Chris

Barron: I think, I think so. That's why I was just curious to see kind of your perspective. And, and with that said, as you look at '22, We see a few people that have dipped their toe there, and we've done a lot of data analysis on cost of production in '22 as we've put '21 cost analysis together and kind of looked at where people are at with current marketing. And we're seeing about a 20% return on investment on average, maybe a little above that, 20-25%, which is awesome because we haven't seen that in the past. It's been, you know, we've been fighting to get just a 2, 3, 4, 5% rate of return on the farm. And as we look at cost of production, that's paying yourself, that's paying, you know, all those overhead expenses too, as we look at cost of production.

So with that said, when we roll into '22, and if you plug in, you know, current prices on the '22 market for Dec corn and, and— no, soybeans, what we're seeing is a reduction because of the input cost increases. We're seeing a reduction in that ROI of only about 7%, which— and I say only, that's a lot. But we also though are still seeing a pretty good profit margin that's better than what we've seen in the past 5 years. So to make some sales in, in that '22 year currently right now, and it's different for everybody because some operations have their land locked in and they're not exposed to land rent increases as much as some others might be. And some have machinery and equipment locked in. If you got equipment and machinery locked in, that's about 48% of your total cost of production, right? Probably warrants for some of those operations to be seriously looking at that '22.

So with all that said, you know, what's your take on '22? You know, especially during August, if we start to see some kind of a price strength come because of weather, or whatever, some kind of a demand picture, or the report in August, you know, who knows?

Ryan

Moe: Well, I think that bigger— yeah, so I mean, I think bigger than those short-term factors is the, the big word inflation. Right? Like, what, what do you— I mean, raise your hand if you think input costs are going to go down in '22. So maybe one of the things that you can do is start locking some of that stuff in to protect from inflation on the cost side.

Chris

Barron: Yeah. The nitrogen is really a hard one though, because we're seeing 100% price increase.

Ryan

Moe: Oh, I mean, but yeah. So I mean, these are, these are things that, you know, a guy sitting in an office building in Minneapolis can tell you, right? You know, so understanding that, but I mean, like, I look at the I look at the cost side of everything, whether you own a restaurant, whether you need a new car, whether you— I mean, whether you're trying to buy a house, whether you're farming, just running any business. I look at the inflation aspect. I look at the cost side of stuff as being far more scary to me than the revenue side from that margin perspective.

Chris

Barron: Yeah. Well, it's going to really suck if the nitrogen goes up 150%. You know, it feels like it's gone up massive amount now as it is. And then, you know, fertilizer and things. And so there's a lot of number crunching going on right now. We got about another month and a half of that front of harvest where we're working with producers trying to get '21 dialed in as close as we can. Roll that out to '22, and it starts to— it's starting to show us a picture though, I think, of some opportunities that we didn't even have 5 years ago, you know, that we do yet have. You know, like you said, locking in both sides of that equation in some of these categories is probably the right thing to do, but Anything else I didn't hit on that, you know, you want to comment on, you know, as we head into this, you know, first part of August?

Ryan

Moe: Yeah, I mean, there's, there's a lot of uncertainty in the weather market. Weather is, it's going to create a lot of strain here in the next 25 days. But, you know, also looking at some of these old crop sales opportunities for people that do have anything left. I hear from one grain originator, and I think this is one of the most true statements I've ever heard, which is it's amazing how many times you'll buy that farmer's last 10%.

Chris

Barron: Hey, you know, I'm gonna— I'm gonna— he's gonna have to cut that part out because you, you cut out. He'll chop that in there, but okay, it said something about internet connection unsustainable and then you cut out. But that part over on that when I asked you, you know, kind of what, you know, what— when I ask the question, basically, what do you— anything you want to leave the producers with?

Ryan

Moe: Yeah, so, um, yeah, anything I want to leave the producer with, I guess I would say that looking at some of these old crop values, some of these big basis pushes that are being paid at certain areas, really be looking at selling out of those. I mean, I heard one grain originator tell it to me, and I think it's one of the best statements in grain trading, which is it's amazing how many times you'll buy that farmer's last 10%. But to expect basis values to improve too much more from here, I mean, I think that's pure speculation and gambling. I think these are some tremendous values to be getting yourself cleaned out at and, you know, taking some of that grain home and putting that money in the bank. They're not grain home. Take the— take the grain out of your home and take the cash home. Right. And I mean, that's a And these are some tremendous values.

And to expect basis to get much stronger from here, as soon as those end users get the last bushel bought that they need before harvest, they're gonna, they're just gonna exit the marketplace, right? Yeah. So it's gonna happen all of a sudden. You don't want to be the last person at that party.

Chris

Barron: Yeah. And I think a lot of the listeners, or at least a lot of the majority of our clients I think are pretty well, well out of, out of that old crop scenario. But I do think there's a lot of people from a basis perspective that you bring up as a good point is, you know, watching that basis on these hedge-to-arrives that you know you're going to deliver off the combine or whatever, and be on the ball because there's a lot of those sitting there right now that the basis is not yet locked in. And we're gonna have to watch that super close here in the, in the next weeks ahead, it looks like. Yep.

Ryan

Moe: Yep. Because there's going to be a tremendous amount of volatility there.

Chris

Barron: Yep, for sure. Hey, Ryan, really appreciate the conversation. This is an excellent discussion. If anybody wants to get a hold of you or reach out to you with a question, what's the best way to reach you?

Ryan

Moe: Yeah. So email is going to be the best way to reach me, ryan.mo@stonex.com. I'm not super busy on Twitter and all the other social media things. I— the marketing department tells me I need to get better at that, but I'm still kind of old school from an email standpoint. So that's, uh, and you'll find me on all the other stuff, but email is the easiest way to get a hold of us here.

Chris

Barron: And yeah, sounds good. Well, hey, um, Ryan Moe with, uh, Stone Egg Broker and Regional Director up in Minneapolis. So appreciate it. Thanks a lot, Ryan.

Ryan

Moe: Hey, thanks, Chris. Appreciate the time.

Chris

Barron: You bet. And thanks everybody for listening and watching here on YouTube. And, uh, if you're not subscribed, please go ahead and do that. That helps us out a lot. And we look forward to talking to you next time. We'll catch you again on the Ag View Pitch.