Weekly market outlook Aug. 9-13th: August 12th USDA report on the way

Narrator: 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.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we are going into another week. We got a report coming up and lots of interesting things, and so we're lucky enough to have Jared Creed with us, J.C. Marketing. Jared, what's cooking?

Jarod

Creed: Oh, another day hoping we get some rain this weekend. How about that?

Chris

Barron: Uh, that's what I'm hoping too. So I was traveling all week in Indiana and Illinois, saw a lot of really good crops, a lot of green yards, a lot of lawn mowers going. Usually if you're mowing lawn in August, you're going to have a pretty darn good crop both in corn and soybeans. And get home and I see a brown yard and a lot of corn that looks like it's really thirsty, and we're starting to see a lot of tip back and So I guess with that said, you know, you get to the, you get to the river, everything to the east looks pretty darn good, and, and even come across the Mississippi and look at that, it's, there's, there's some good stuff on this side too. What's your thought? What are you seeing condition-wise, and what's your perspective on how the crop's shaking out?

Jarod

Creed: Well, first off, from like a 30,000-foot view, I think if you look across the I-80 corridor, Illinois, Iowa, Nebraska, and then go ahead and lump in southern Minnesota. I still think that the collection between those 4 big states has every bit of potential to be trend, if not higher. And remember, I'm saying the collect— the collection of all 4, not individual state. I think Iowa has a lot of question marks. Iowa can certainly be the swing state this year, and it's no secret that you have plenty of have-nots in the state of Minnesota. When you think about, you know, just the corn, I think we're kind of getting to the point in the season that it's looked okay from the road for a significant period of time.

But as we get further into crop development, I think you're starting to find some problematic areas, whether that was fertility issues or more often than not is just lack of water. Starting to see a little bit of tip back here and there. I don't want to get too excited about that at this point. I still believe that from the word of all of my clients, the one thing that provides probably a pretty good cushion this year is they're coming away with some of the better stand counts that they've had for years upon years. You know, we've been in a wetter environment for 3, if not 4 years. You know, 2019 being the wettest and a significant problem planting the crop. This year, I think that it's easy to forget just how good the spring planting conditions were and how fast we got that crop planted.

And I still wonder if there's just a little bit of buffer there from final stand counts being stronger in years past. Doesn't seem, you know, at least in my client base— again, I'm not speaking for the entire Corn Belt— I think there's a lot of fear in the month of June as we were starting to develop kernels around on the ear size that we were going to see that stung significantly. And to this point, I don't think that that really was an issue. I think you probably got more 16s and 18s and not a lot of 14 to 16 type of stuff out in the countryside. And even with that said, you know, what's our weather from here forward for both corn and beans? You know, today's August 7th.

If we can, if we can have, you know, okay temperatures and some sunlight and a rain or two, I think you can salvage a lot of stuff in a hurry and pack on a lot of weight on what a crop might not look very good from a visibility standpoint. But the good thing is the farmer doesn't get paid by looks, right? You get paid by pounds.

Chris

Barron: Yeah.

Jarod

Creed: And that's— go ahead. And just, you know, on the bean side, I think that you've, you've definitely seen some stress start to develop in the last couple weeks. But you start to look across some of the more challenging areas of the Corn Belt at this point, you know, the Dakotas and Minnesota, parts of Nebraska, parts of Iowa, they've had okay rainfall. In the last couple weeks. And in fact, you know, July rainfall and July temps for the state of Iowa, for example, the rainfall was like 2 or 3 tenths less than normal on a production-weighted average, and temperatures were actually below normal. So again, I'm just thinking of the devil's advocate side from a production standpoint as we go into August 12th and the expectations from any yield changes. I think we've had a lot of okay things go for us to this point. We got a long ways to go to still finish the crop.

I think it's important to remember that the August 12th report will not have any objective yield plot data. It's solely tied to satellite imagery and farmer survey. So hopefully, you know, hopefully we have a decent return of surveys from the farmer base. I think we've seen those continue to slip over the years, which is a little problematic. And then out into September is when we'll get a first look at objective yield plot data, stand counts, etc., and projected ear weights back into a yield. Um, I, I just— one last comment on corn and the August 12th report. We have been— I don't want to say duped, it's probably a bad word to say, but how many times have we thought that yield's got to go down, it's got to go down, yield's got to go down, and in August we always trended higher?

I shouldn't say always, but the, the historical standpoint for what you see from the initial trend yield published to the August report, uh, it's, it's more often than not we see that yields stay static or higher. And I don't know exactly what the market's going to think about that. I don't think that they can make much changes to the bean front at this point. That's more of a September number. But I'm just, from a farmer profitability standpoint and thinking about markets and what the farmer's risk is, the risk isn't seeing a lower yield. The risk is seeing a yield that doesn't get adjusted enough that changes the attitude of all of your market participants. Does not matter what that number is that they publish. What matters is how market participants want to position themselves from there forward.

Chris

Barron: With that said, you know, we've talked about kind of what we're seeing with the weather brings a lot of emotion to the, to the producer, because if you're in the area where it's super dry, it's got to be, you know, this thing's got to go down, and you're in the area of where things are really good. Nobody takes a picture of that and sends that out or anything. And it's like, this is really good. And unless you get out and you see all that, to your point, the perspective is it's a big picture, right? It's the whole thing. With that said, how's the market looking at this post-report for August going toward the September timeframe? Do the funds, are they still watching the weather purely just on the bean side? Is, you know, if we see a change in in yield and those kind of things in that report? How's the funds handle that and what's your perspective there?

Jarod

Creed: Well, I'll try not to ramble on too long about this, but this year is different considering the inflation environment that we're in. We have a monster long from the index fund. And the index fund is typically a passive investor. You don't see them change positions at the blink of an eye. And at the same time, the managed money, your day-in, day-out speculators, Have continued to be a little gun-shy, I'd say, since May, not really willing to pile into positions. They've trimmed their position quite dramatically. They've definitely added some back in recent time, but nowhere near the long position that we had.

So from a perspective of what's our downside risk or upside risk from a yield standpoint in dramatic yield changes, well, if yield goes low enough that it creates the, uh, it creates an environment that, that managed money wants to be long corn, soybeans again in a sizable way. The good thing is they have plenty of bullets to do so. It's not like they're stretched out to a big long position. But the same, same time, um, you know, maybe we should be thanking the inflation environment. Perhaps that's stopping them from going short commodities, especially the managed money. I mean, this is the time of the year where you typically see them crossing the line from a net long to a net short, just seasonal sell-off. And oftentimes that money can move a market faster than a farmer can react to.

And they obviously don't have the same overhead risks or necessities on marketing a crop like a farmer does. They just see pure dollars and cents and momentum and they run after it in a big, big way. So If you create an environment that, you know, wants to add $100,000 or take off $100,000 long-short in either corn or beans, you know, corn could easily go back to its highs. It could easily be below $5. Same with beans. Beans go right back to their highs. I think we're, what, $1.50 off our highs in beans, and we're, you know, 80 cents off of our highs in corn. So we're still— you start to take all those yield changes and bring it into a balance sheet perspective.

I think the corn balance sheet has a little bit more wiggle room than the soybean balance sheet does from both a, you know, just a carryover and a demand segment that has seemed to be, you know, sputtering a little bit here lately. The bean side, one quick comment that to me it seems like we've become pretty comfortable with the idea of a 145, 150 million ton crop potential out of Brazil next year. You know, just to put that in perspective, that's a 6 billion bushel bean crop. The U.S. is going to raise 4 to 4.2 this year, and it wasn't that long ago that Brazil first crossed 4 billion bushel mark. So it makes you wonder if the U.S. soybean crop is at risk of becoming to look like a U.S. wheat crop, that we need to raise what we need to use domestically, uh, and less dependency on exportable quantity to the rest of the world when you have all the crop coming out of South America.

I mean, a combination of Argentina and Brazil, you know, you could be talking about a 200 million ton bean crop next year. It's not out of question. That would be a long-term problem for soybeans regardless of what happens here in the U.S.

Chris

Barron: It's all interesting. And as, as you pointed out, one of the things you, you kind of just described here, and from a farmer's perspective, I'd like to ask the question around, you know, you're talking about probably more of a wider range on the corn after the report due to weather and some other variables with funds and things. And on the soybean side, maybe a little less. So let's get into some practical discussion around the idea of what farmers need to do. And I want to start out with basis. We see, and I'm sure you're, you're dealing with this some, or interested in hearing your perspective on basis, because we see a lot of HTAs, we see a lot of, a fair amount of some stuff sold on the board, some, some option strategies, and people sitting there legitimately without basis locked in, in a lot of cases yet.

And it depends on the area, so that there's exceptions to that depending on where people are located. But, you know, what's your perspection— or your perspective, I should say— on, on basis first, and then some strategies that you think producers need to really pay close attention to as we inch toward harvest?

Jarod

Creed: Well, first and foremost, if a producer has the ability to execute early sales, early harvest, there's going to be some sizable premiums available for both corn and soybeans. Have been active in that conversation the last couple weeks. In fact, I'll tell you, a farmer in South Dakota, a larger scale operation, has the capacity to pump out a lot of bushels per day. You know, we made a sizable, sizable sale to an ethanol plant for a full month September delivery that was $1.30 premium to gutshot harvest. You know, that size of quantity and the direction that we were going actually sparked that producer to go buy a new combine. I mean, that's how big the dollars are and to get this executed. So I think from a, you know, I guess it's going to be interesting to see how these beans mature right up to the doorstep of harvest.

Uh, perhaps I got some guys telling me that beans seem to be progressing faster than they thought they would, uh, at that point. It It does create a little bit of a bottleneck and a logistical challenge of being able to execute early corn sales. Uh, there's going to be a premium available for both, and I think in a perfect world, uh, what the producer needs to be looking at on basis is try to go after as much early premium as you possibly can, but do it knowing what you are doing. Know the risks, know the potential penalties if you cannot execute in those time frames. Make sure you're logistically capable of executing such time frames. I think that those premiums will go away once harvest is here, obviously. So the person that's going to get paid is the one that's willing to take a step out there and go ahead and start selling some of that premium.

And we've been slowly but surely doing that, making a full— or full month, or last half September basis sales, or just additional cash sales, you know, setting basis on hedge-derivatives. Or liquidating hedge account positions and selling cash, uh, then I think there's still probably going to be some opportunities in the first couple weeks of October. And you're going to see your traditional harvest pressure, and you probably run back into, you know, heightened levels of basis at the tail end of harvest again. That all means on both the corn and soybean front, uh, I don't have any intent on anybody having any grain left in their bin by March 1st. If they want to remain a participant in the market, that's great, we can do it different ways. But you're looking at putting bushels in a bin at a cost. And I don't mean just what's my overhead cost to do it.

No, it's costing you money because you're talking some of your big processors. I mean, you're 50 cents a bushel better than in the front end of harvest than you are all the way out to July, August next year. There's no character. Uh, now it doesn't mean that it can't come around, but then you're betting on the cut. And then furthermore, that, you know, getting all that cash in hand in a heightened input environment for next year, the fastest way, in my opinion, to keep some of our costs in check is to avoid higher interest costs for next year. Excuse me. And all of these more expensive inputs, what we don't want to be doing is just carrying this year's grain at these prices and elevated basis levels and inverted markets, just because, you know, get that stuff turned to cash. If you want to stay in the market, go back and do it on paper.

But turn this stuff into cash as fast as you possibly can to put yourself, you know, in better shape going into next year.

Chris

Barron: As you, you carry that logic going into 2022, then, you know, I like all of those, all of that perspective and things that we need to be doing to take action on to kind of manage those margins. As we look at '22, one of the things we're seeing is we have a tool where we're looking at, you know, the percent of increase on all of the categories. And we're seeing things like nitrogen as much as 100% price increase, and, and return to management, you know, in that 10, 15, 20% depending on the operation. And just like you said, inflation is affecting these things. But the interesting thing is, when you look at where the price of '22 corn is at, and even beans for that matter, the margin opportunity is still there for '22, like we haven't seen in the past 6 years, still even with these price increases.

And so I guess what I'd like to do is ask you to talk a little bit about '22 and some action items or some things that people may want to consider as they look at '22 crop production as well. Because, you know, as you, as you just said, and I want to make this comment because I'm thinking about it for one thing, but we look at how many more dollars does it take to operate next year versus last year, and our average client is going to have to fork over about another $200,000 of operating cash to operate business versus last year. And that number is different for everybody, but you better know what that number is so that, you know, like you said, if you got the '21 cashed out and you got that cash in there, and that working capital is going to be huge going into 2022.

So I'm going to ask, you know, re-ask that question, you know, what strategic options do you think that producers need to be considering for 2022?

Jarod

Creed: Yeah, and I hate to keep using corn as an example, but I think it's the best way to explain it. We've hung out around $5.50 December '21 corn for an extended period of time here. I think there's a stretch there out of 16 days, 13 out of those 16 days we traded $5.50 at some point. But in the meanwhile, you started to see that spread or that inverse between Dec '21 and Dec '22 collapse. And it actually on Friday made a very sizable move into the close. It traded a 10-cent range on Friday anyways. Dec '22 up to $5.17, $5.18. In years past, Chris, at this point in August and maybe even in July, I probably would have had guys 30%, 40%, 50% sold on next year. Well, and, you know, not even looking at expenses and just focusing on what could happen in the market, you know, that might be the best thing to do, just sell it and who knows what the market does.

But we need to take a, you know, at least an educated view at that approach. And I will echo what you're saying, a lot of these guys' costs, um, right now we're just basically operating on a premise of, hey, we want to be a conservative $100 an acre profitable, you know, that's returning 10 to 12% depending on the operation. Well, $5 cash happens to be right around that ballpark. And what we've started with, uh, you know, Dec '22 corn is 40 cents off its lows from a couple weeks ago, starting to present some opportunities there. We've yet to book much of an input cost, but I'm very hopeful that's beginning of this next week We're able to at least look at our NP&K expenses for next year, add up those dollars, and just flat out sell that amount of dollars at these 22 corn. Yeah, simple as that.

And then obviously we're right around the corner from having more rent discussions from a land perspective. You know, we get to do that again in the next 30-40 days before September 15th. I, I think what's important— I just, uh, with the commercial group that I work with in Kansas, shot them an email here this morning kind of talking about this strategy, that everybody's focus is on '21 right now. There could still be a little bit of focus on the balance of '20's crop, but I'm not really concerned about '21 right now. We've had the opportunity to sell high enough prices, the yield's going to be okay to a point, or even our insurance— we're going to make money no matter what. What I'm excited about is I can mathematically present a scenario that if we can get to, you know, just 20, 30, 40% sold— different every operation— on next year's crop with a $5 cash base, give or take.

I'm not just pulling a $5 cash number out of my hat, right? It's what works for profitability, for return. And yeah, and take that a step forward of locking up margin protection here, uh, in the, uh, by the 1st of September. I, I can literally present a case that, Mr. Farmer, you're not going to lose any money next year. You're, you're just not. It's not going to happen. It's mathematically impossible for that to happen. And that's entirely different than what our concern was 60 days ago. Hey, we're going to make great money this year, but is my goal to break even next year, or is my goal to mitigate risk, mitigate loss? And I think what that's created is just focus on making as much darn money as you possibly can this year and be a little patient on next year of letting the margin create itself.

Right, letting the input costs get more transparent, letting the price kind of just— I don't want to just say wait on marketing grain, but wait on the margin to come around instead of just doing something to do something. So I'm very optimistic right now that I, I mean, I'm serious, it's like I think about the decisions that get to get made once or twice or maybe 3 times a year. We're getting ready to make a decision here in August hopefully that pushes the farm forward in a profitable manner clear out to, you know, August of 2023, in essence, right? We're just, oh, we're locked in, we're 2 years profits, we got nothing to worry about. So just, you know, uh, the, the strategy— I don't think a guy needs to be too creative. Just look at selling cash corn. Don't worry about hedge-to-rise and basis and all that stuff. Just get the firm price established. And know that that's locked up.

Know that you got that cash off the combine next year. And then furthermore, I think I've talked about this a couple times on, on your podcast with you here, make sure you talk about margin protection with your insurance agent. If you don't, you're missing out on probably one of the best opportunities you've ever had in your farming career to mitigate an enormous amount of risk for next year.

Chris

Barron: Yeah, that's a, that's a great, uh, way to kind of wrap things up. We're planning on having Steve Johnson on here to kind of talk through that. Any, any comments on that as far as what you're seeing as we finish up here with regard to the margin protection? Anything you're seeing with guys and any, any nuts and bolts of that you want to, want to mention?

Jarod

Creed: Well, I just think you got to walk through the simple math. If let's just say it's a 200-bushel corn producer and you can have $5 cash on the first 100 bushels, you got $500 of revenue. Let's say the market's at $4 on the other 100 bushel an acre at that point. Now you got another $400 for revenue, so now you're up to $900. That's not so bad. However, if we drop down to, you know, $4.25 futures to create $4 cash next harvest, the yield requirements to margin protection on a county-by-county basis is just borderline impossible, as in like it's just not going to happen. I mean, and then it's going to get paid out at 120%. That all of a sudden potentially creates another $200, $250 of revenue per acre.

You know, if a county misses the yield expectation by 40 bushel an acre— or not misses the yield expectation, but the yield trigger in a lower price— if the yield trigger is not there and 40 bushel less, it's going to get paid at the spring price of hopefully $5 that's established here in 5 weeks. All of a sudden, $5 times 120%, that's $6 a bushel, times $4 or 40 bushel Boom, there's another $240 of revenue coming your way. That— and that, that's again, that's just the math. If the market's higher, great, you got another 100 bushel an acre to sell at a higher price.

Chris

Barron: You know, I think the message here is get a hold of your crop insurance agent and be having these conversations now.

Jarod

Creed: Not just that, but make sure you're linking it towards a marketing plan because margin protection, uh, I will stress this and I will take this to my grave, it's not an insurance program, it's a marketing tool. And it's the best marketing tool that the farmer has access to right now.

Chris

Barron: Right. Yeah. And, and to your point, you know, you, you get to that 20-30% depending on the producer. It's a risk mitigation tool that we have not seen for how many years? I mean, we just— so that's awesome. Any final thoughts as we wrap up?

Jarod

Creed: No, just a real quick timeline for a farmer to keep in their mind. August 12th, WASDE. Yield updates, survey, satellite data. September, you're going to have a stocks report as well. You're going to have objective yield plot data. And at the same time in September, you're going to have a stocks report that is ultimately going to put the crosshairs on old crop demand on both corn and beans out into the October WASDE. So again, we're just at the timeline here that it's, it's typically hard to have the wind at our back. We typically have more headwind to fight right now. And I do think that there's a legitimate possibility that we see old crop corn exports get cut by over 100 million bushels. That's additional carryover into new crop, and that's going to create a pretty interesting situation if we see China stay absent on additional corn purchases for an extended period of time here.

You know, USDA is going to have their hands full of, you know, I don't want to say justifying, but that's— I guess that's the word to use— justifying the current new crop export number that's in place. Um, we just got to be a little mindful. Again, headwinds, that's just the time of the year that we're in.

Chris

Barron: Yeah, exactly. Jared, thank you very much. This was very informative. I think gives everybody a lot to think about. Really appreciate your time. Thank you very much.

Jarod

Creed: Absolutely. As always, thanks for having me on, Chris.

Chris

Barron: You bet. And, uh, that's, uh, Jared Creed with JC Marketing, and we really appreciate it. Thank you everybody for listening and for watching on YouTube. If you If you get a chance, take a check— check this out on YouTube, and we will catch you again next time on the Ag View Pitch.