Weekly market outlook: Aug 30th - Sep 3rd, pre-harvest market strategies

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, and we are heading into a new marketing week, actually the first week of September, so we're pretty, pretty excited to see what happens with the markets. We're lucky enough to have Grant Schimmick with us, Black Oak Financial. Grant, how's it going?

Grant

Shimek: Great, great.

Chris

Barron: You good? Doing really good. And then also we have another person on board here today to help us, uh, pick on you. Uh, we've got Paul Niefer. How's it going, Paul?

Paul

Neiffer: I'm doing really good.

Chris

Barron: Good, good. We've got— so we got Paul here with us. So I don't know, we're ganging up on the market advisor here today. We got 2 question askers and, and 1 person with the answers. So we'll see how you do with the answers, Grant. Okay, sounds good. So I guess what I want to do, I'll start out with the first question and then I think Paul's got a few questions here he wants to throw at you too, Grant. But, you know, just watching what we've seen with the market, a little bit of volatility here lately, you know, a little pressure a week or so ago, and just kind of what we're seeing in the market. What are some of the key drivers that you're watching as we head towards harvest and some things for producers to be watching?

Grant

Shimek: I think number one, given the calendar basis, if we're going to stay open, I think staying open on basis into, uh, into harvest is not, not a good idea if you're going to plan on moving it off the combine. It's probably another question if you're, if you can carry something into at the very least late November, if not December, then this, this invariably are usually good basis opportunities then. But we're in a situation where basis in most locales is not bad for harvest. So that's not a risk I personally want to take. Not everywhere, but definitely we've seen some significant basis erosion in the last 2, 3 weeks. Soybeans more so than corn in some of the eastern areas. Basis was— wow, narrowed up quite a bit. And then they realized there was a little bit shorter availability of old crop stocks.

And then the basis, you know, I know in Indiana locations had a firm ride back up again to keep the 2020 crop grain still flowing in. But when it comes to the new crop, that's not a risk I personally want to take.

Chris

Barron: Mm-hmm. You're speaking to basically both corn and soybeans. I mean, as far as, um, and you're basically— I think what you're saying is we start getting the combines rolling in any given area, basis is going to erode extremely fast, basically is what you're telling us, right?

Grant

Shimek: Yeah, I believe so. I mean, to say that it's gonna— I don't want to use the word implode or anything, it's just that if we look at something that, you know, historically in your area, you're— you know, the harvest basis of $25, $30 under, and today you're looking at $10 or $15 under. Can we go out to $20 or $23? Absolutely. So I don't make it seem like it's gonna fall apart, but it's probably not going to hold together. It's that time of year where if you don't have a plan going into that, it's time for the entities to buy grain and widen out and see who doesn't have a plan and make some extra coin out of it.

Chris

Barron: And, you know, the other thing I think too, just, I know a lot of people have taking the time to actually call where the grain is going to go. And sometimes you can negotiate a little better in posted numbers too if you do have a plan, right, rather than just making the decision at the last minute too. So that's good. What, what about on the price side of that? So that's the basis piece of it. What about the unpriced bushels that, you know, some of these areas that have caught some rains and maybe the yield is going to be a little better than they thought it was going to be? You know, we're seeing the opposite in the east. You know, their crop's kind of going backwards now. It's been over there the last few weeks, and I've watched, watched kind of a trading places occur.

You know, to the east they've been dry, and then the west has been catching rain now, and it's kind of, you know, it's kind of saved the crops in some areas, or at least stopped the loss anyway. And then, you know, in the east it's taken some bushels off the top. So what do you say to those producers that are sitting there, well, maybe this crop's a little better than I thought? You know, I was thinking 'You know, X number of bushels, now it's, you know, maybe it's 20% better. I don't have room for those bushels.' What's your price timing and what are you looking for there, both on corn and soybeans?

Grant

Shimek: I'm still a believer that given the cost production for the '20 crop, or '21 crop, excuse me, that the gross ROIs are high enough and given us a strong basis that I would be pricing it, moving it off the combine. Now, to say that I think that we're gonna just fall apart and there's no reason to stay up, not at all. You can find lots of reasons to be bullish. I'm not willing to be very bullish. I definitely wouldn't personally want to carry more than half unpriced into the fourth quarter, given the return on investment I see.

Chris

Barron: And you're saying half unpriced of the bushels that that got to go off the combine?

Grant

Shimek: Well, actually, I'm saying half on price of what? Of the whole crop. Of a conservative estimate of what, you know, which you're confident you have today. Okay. No, I'm— I think the ROI is justified, let alone if you have to move it off the combine, then that's, you know, depending on storage. If you're an individual that doesn't have a large percentage of storage, no, I don't think it justifies it carrying it out. Now, If you want to have some gambling bushels to see, you can easily make the case that we should see a $6 cash price on corn and a firm bean price at some point in that first, second quarter and have an opportunity. I'm probably on the— I'm probably not as aggressive on that because the returns I see, I'd rather take the risk on next year's crop, which we, you know, definitely on the corn, the budgets aren't as enticing.

So I'd rather swing for the fences there if I'm going to do that type of thing than look at this year's crop with what appears to me to be a kind of bird in the hand, two in the bush guessing game.

Chris

Barron: Paul, you got any questions?

Paul

Neiffer: Yeah, you know, again, we're talking corn and soybeans. Since I'm out on the West Coast and grew up on a wheat farm, I'm just curious, Grant, you know, pricing has really been very, very strong for what we grow out there, which is soft white. We're almost $11 per bushel. On, on wheat out there. You know, hard red, soft red, it's all in that $7, $8, $9 range. Is there— you think there's much more upside, or should farmers be thinking to be fairly aggressive about if they haven't marketed their wheat, go ahead and get that wheat marketed? I'm just curious what your thoughts are.

Grant

Shimek: The spring wheat can be a maverick when you look at some of these patterns. I, I wouldn't, I wouldn't want to walk away from everything on spring wheat. The other crops, probably a different story. And we may see a fair amount of wheat acres for next year on the other, on the other two. But as far as spring wheat, I would not want to run away from that market. I'd want to keep some, something there. And this year, of course, it's hard to have a lot to sell and there's, um, from what I understand of some commentaries, people I've talked to in spring wheat country, there is, I think, a realization in the merchandising community that, wow, it's not there because they're not able to get the bushels. And we keep seeing these pushes to just get things flowing and keep it moving.

Paul

Neiffer: Yeah, yeah. And then over on the, on the hog side, you know, we've seen, um, you know, a report that came out that China is estimated to have a little bit smaller herd next year. And some of the commentators are saying, okay, that's going to be a reduction in exports of either corn or beans by the U.S. to China. But I guess my thoughts are potentially that that means there might be more hog or pig exports from the U.S. to China, and we're going to have to grow that or consume that feed that might have been exported. Is that a valid thought? Or is that really something that's already been priced into the market?

Grant

Shimek: I think putting a number on that price is tough. And I would assume that the, the exports of hogs are going to be— it's going to be breeding stock to be a build— more of a build-out issue. And yeah, there's, there's going to be demand for, for soy meal and so forth and corn, but might not be looking at something that is going to take some time to build out. So I guess I don't necessarily disagree, but on the front end it might be hard to grasp that, those numbers.

Chris

Barron: Gotcha. Hey, um, Chris here again. I was just thinking as you guys were talking there, coming back to where you started with on basis a little bit, and another question that just kind of popped into my head that I know a lot of people are thinking about when it comes to storage too is not only do you have excess bushels, but, you know, when you look at the carry in the market, or the lack of carry probably is maybe a better way to put it, but are you a fan of storing, you know, just sticking with the corn and trying to get all the beans off out of there and not messing around storing the beans, or what, what's your thought there?

Grant

Shimek: I'm probably biased to that because I assume and this is going to feed into the corn also, is we're going to see another very big crop, or at least the— they're going to try their darndest to get as many acres in as possible in the southern hemisphere. And when we look at the basis, you know, corn, corn for one, should you— if you're going to store it, absolutely roll it out to March. But there's not much there to work with right now if you're going to try to get out to May or July. Right. And if you do have a big South American crop, that may just end up hindering the carry that we do see in both corn and beans to roll into, you know, rolling, rolling November hedges out to, uh, Jan. Absolutely. And I think there's some basis improvement to be typically seen there, but you're going to have a lot of opportunity to roll beans March to May. Things like that, probably not.

Chris

Barron: And right, so get rid of the beans anyway if you can.

Grant

Shimek: That's probably, probably historically this is typically the way it is. It's typically more return. Yeah, at this time of year, looking at the market for corn storage, typically not less so this year, and in many years because of the large South American production, there's not a lot of carry. January on futures, on the board anyway. But if you look back historically, it's many times the futures appreciation opportunity has been better for storing soybeans. If you take basis and that out, many times it does pay. So I don't want to say historically the odds are in your favor for soybeans. You know, it's not that bad of an idea. I'm just not on board with it this year. I think what we have are risks, the unknown risks are greatest when profitability is this high.

Whether it be a geopolitical black swan, so forth, we can imagine with the events of the last week that those aren't good signs of stability. Now one could, you can talk at length about these the risk to the market, and some of these things might actually be inflationary risks, and it could, could be positive surprise anyway. And that's true, but I, I guess I'm always cautious of Murphy showing up and being a negative and not a positive.

Chris

Barron: Yeah, when you talk about, you know, maybe rolling those— that Dec corn out to the March, um, you know, that's managing some of those bushels. And then when you look at cash flows, I mean, I'm always looking at this stuff from the expense side, but you know, you look at cash flows and the income that needs to come in, what price— I mean, from— and you're about the one of the best technical analysts that I know. So as far as looking at the market from a technical standpoint, are there some price points that you're shooting for from a technical perspective between now and then that, you know, those unsold bushels are some target areas that we should be looking at, or what's your thought there?

Grant

Shimek: As of right now, like with corn, you would— you definitely would need to fade the recent highs of the last report. We came off two very bullish WASDE reports and we spiked and then we've— we have just not gotten anywhere. So we got to $5.94 and I believe a half on the last day of the last WASDE report. You probably would need to fade that. I mean, if you get into even the $5.72 or $5.87 zone on December futures, there's probably a way up point to be doing that also. And then on November beans, if we, if we can get any kind of spike, I'd say like $13, anywhere in the $13.60s to the low $13.80s and is going to be the most I would reach for at this point. In the context of what we know today, we're going to need some kind of gas on the fire or something to boost it here.

Otherwise, we're coming up into that point seasonally where you take soybeans, for example, the average seasonal load dates the last 5 years on soybeans are probably right in this last few days of August. And then we'll have 1 to 3 weeks of rebound seasonally. But then into early October, you tend to to take a hit, and that's logical with the harvest pressure, so forth. So I mean, we pretty much have a week or two left to where a normal window is open for something positive to happen.

Chris

Barron: What's the downside risk on both corn and beans? And if we got that $5.72, $5.82-ish, maybe to kind of reach for the stars and the $13.60 or $13.80, what's the You know, if we go the other way, what's— where's the, where's the risk? Because, you know, you look at even $5 corn or $13 beans with basis considered, you know, cash on farm, it's given us ROI numbers that are pretty spectacular even with those price levels. So, you know, is there anything to the downside that's a threat that you're concerned at that you would be, you know, be trying to be in front of that?

Grant

Shimek: Right. So as we come into the next WASDE report, if by chance we do find a bushel or, you know, 1 to 3 bushels of yield, right, USDA does, you know, that's— USDA is always trading. You're trading the USDA or trading reality, and those could be two different things, I understand, from an individual's perspective. But if they would lap on, you know, 1 to 3 bushels, we're taking, in my opinion, this market, the wheat market drops a dollar easy. And it's, it's been very lethargic price action. It's probably wanted to go down, but the weather complications have held it up. And as we've mitigated, at least in the western Corn Belt, a lot with moisture, we're getting to the point where the calendar, with the calendar here that we're getting pretty locked in on this crop to where weather is getting to be a dying issue also.

So beans, solid dollar, I'd tell you I think that $11.80 to $12.10 is a logical breakdown point. And on soybeans and on corn, if I'm confident that beans have a shot at breaking that far, well, corn would— what I would assume if that's the case, then be in that $5.20 to $4.90 zone. And if we have some other outlier events, we can corn in particular, look how much time corn spent the preceding 6.5 years with its highs in that $4.37 to $4.45 zone. So we can get right on top of that. And I know that's hard to believe. And if you look at the numbers, that's not justified. But, you know, maybe the numbers we got to on the upside were justified. So we can swing it that far. To the downside, I think, as we go into harvest.

Paul

Neiffer: Grant, this is Paul. What about, you know, we're basically talking about 2021 crop. What about the 2022 crop? Would you be advising locking in some of those prices now and getting some of that crop sold?

Grant

Shimek: It's definitely on the corn side. If you've gone out and you've, you've pointed up the money to get these inputs, especially the nitrogen, is, is lofty. Is a, in my opinion, you've got to cover some of that risk. Now, whether it be with getting a percent, 15% or something like that covered, depending on how much your inputs you've covered, or doing some kind of option strategy, like a put-call spread to give yourself some upside, given you may not be locking in a lot of margin even at average yields. Even at APH. Soybeans is a little bit different. I think you could be upwards of 20% sold, in my opinion, because a lot of these budgets that— I mean, when I've walked through this with a few people, costs of producing beans are up and not nearly as dramatically as much as corn. Probably could produce an acre of beans for many people just above $600 an acre.

So there's a lot more worth protecting there where you could just sell it and not play any options games or so forth when it comes to beans. Beans. And there's not too many years I think that we're going to have back-to-back massive ROIs. So we have one solid one, it appears, to in front of us. And if we can have some 12-15% starting points for gross ROIs for next year on soybeans, for example, I think that's worth it.

Chris

Barron: I, I love what you said there, Grant, on, uh, if you're buying the inputs, maybe you should think about, you know, because that's, that's like a like an everyday conversation I'm having with clients right now as we roll the '21 budget over into '22 and you start looking at it. And, you know, we're seeing opportunities aggregated on average on corn of still of, you know, about a 9% ROI on average aggregated with our clients and versus, you know, a 25% this year is sort of the average projected right now. And so, you know, it's, it's just one of those things where You know, if you're locking in one side, we better be careful because I think that happened, wasn't it, Grant, back in like 2008 going into 2009? The inputs went up, a lot of people bought the inputs, and then they didn't sell anything on the other side of it.

And so, you know, and what we're looking at is a lot of our clients are, you know, probably have 50 to 60% of their, their costs locked in. You know, possibly some of the operations that are going to have some land rent increases, it looks like You know, obviously, but you know, if you're a producer that's got land pretty well locked in and you've got your rents locked in and/or your principal and interest payments and you've got your machinery and equipment locked in and you purchase your fertilizer and lock your seed in, all of a sudden, you know, you're 60-65% of your total cost production's locked in. So, right, you know, not selling anything is, is a You know, it—

Grant

Shimek: I think it's putting a lot of risk for another.

Paul

Neiffer: Exactly. Especially since you have the volatility to wait all the way until next spring to lock in your, your insurance price. You know, right now you just don't know what that's going to be.

Chris

Barron: Yeah. What do you tell a Pedersen-Grant that says, well, that all sounds great, but I don't have any clue what my, my yield's going to be? And so, you know, we plug in, you know, a 5-year average is how we're doing that to come up with these costs. You know, what strategy do you tell somebody that doesn't want to, that doesn't want to, you know, make a sale or whatever?

Grant

Shimek: Well, I'm not gonna— they don't see the appeal to it. It's not in there, not something they want to do. But otherwise, the only answer is to create a floor, and so they, they have a choice. They've managed risk, but then they're still wide open. —right? And they don't, you know, they're not as— feel as though they're trapped in a decision. Got to give as much flexibility as possible. Yeah. I mean, the worst part about the current markets is, is they're going nowhere, and it makes everybody complacent. And typically, this price action, this basically since second week of July, reminds me a lot of the first probably 10 years I was in the business, and that late 1990s, early 2000s were once you got to the June crop report, the game is over and it typically is over and has been for most years at that point.

But we have had very little volatility and it usually would pick up historically right around September in most markets. In the financial, financial trading realm, the B team are running the trading desk in in August, and once we get past Labor Day, the A-team is back in place and things start to happen. And I, I would assume that we will see that type of thing take place as we, as we go into September. So meaning it's, it's not going to be completely this quiet, and hopefully it's, it's good surprises, but you know, that's the risk we take, right?

Chris

Barron: Yeah, the other One of the final things I had, unless Paul's got some other stuff too, but as we have these meetings, and I'll send you our spreadsheet, and if anybody listening to this wants this spreadsheet and wants to look at our aggregated data, I'll send it to you. But the big thing that we're starting to see, and we've talked to some bankers in the last week about this that's going on too, is we're noticing that, you know, the cost production on corn is going to be up about $150 an acre. Actually, it's $147 an acre right now is what we're seeing. So the capital requirement, if, if you're running the same acres, is significantly more. On 1,000 acres, you know, you're going to need just on your corn crop, you're going to need another $150,000 of working capital to, to manage the business. And then on soybeans, we're seeing about a $63 an acre increase.

And so, you know, on, on 1,000 acres, you know, your soybeans, you know, or 1,500 acres of soybeans, you're going to be looking at maybe another $80,000 of, of working capital. You add all that up, It just comes down to it's going to take some more money, so it'll be interesting to see how people look at these crop rotations and stuff. I still think you got to look at it, you know, based on your individual situation, your own agronomics. But, uh, I don't know, any comments on that, Grant, at all?

Grant

Shimek: Or— well, if when it comes down to that, given where milo 22 beans are, I would much rather swing more acres that way. If you're logistically and agronomically inclined to. Some people are not going to do that, they're not going to change rotation, and that's just fine. I have had clients who swung aggressively in ways I would never even imagined, uh, a number of times over the years, and it's, it's surprisingly so it worked out. And if so, I'd rather do that than push the limits with financially. If corn is looking expensive, I'd rather go heavier beans. And if you did it the right way, you probably could, you know, especially if you use future sales or options and you're not committed. If this ratio or this mix changes over the next 6 months before we get to planting, it doesn't mean you can't go back to beans. Mm-hmm. If some of these import prices swing back.

But of course, that will take money to do also, won't it? So I mean, some of these challenges are going to be there, you just come at it a different way, right? Right.

Chris

Barron: Well, I think, you know, this is a conversation that will continue for a while on the '22, but I think this is— these are good conversations to have. And, you know, the whole thing we're always trying to do is bring some perspective to our listeners and make sure that, you know, everybody's thinking through these things to the best of their ability and their individual operation. And so I think this has been a great conversation, Grant and Paul. Really appreciate you guys joining us today on the Ag View Pitch. Really appreciate it.

Paul

Neiffer: Thanks, guys. No problem.

Grant

Shimek: Thanks a lot. Yeah, great to be here.

Chris

Barron: Yeah, it's good having you guys. And again, thanks everybody for listening. If anybody wants this spreadsheet, you can email either me or Shay, and we can get this to you, and it'll give you an idea of kind of what we're seeing that's aggregated. And then also you could plug your own numbers in it, and it's pretty interesting to kind of look at what we're seeing here. And if you want any questions on that, also, if you're a client, give us a call and we'll talk through these things. So again, we had Paul Niefer with us and Grant Schemick with Black Oak Financial. Thanks everybody for listening. We'll catch you again next time on the Ag View Pitch.