Weekly market outlook, Dec. 13-17: navigating market opportunities

Chris: Welcome everybody to another episode of the Ag View Pitch, and we are heading into another week in the middle part of December. A lot of action going on, or maybe not as much action, but we've got Ryan Moe with us today with StoneX. How's it going, Ryan?

Ryan

Moe: Not too bad on a pretty snowy Friday up here in Minnesota.

Chris: Yeah, it looks like I can see out the window there, it looks like you're getting a little snow there. We're getting some rain here as we record and head into this new week, and it's that time of year where, uh, The market activity hasn't been super violent or a lot of volatility or anything going on too much there, but I think there's a lot of farmers maybe sitting on their hands a little bit as we get toward the end of the year in terms of marketing. I think there's a lot of tax planning, and as I think we talked offline, you said something about, well, maybe we're doing a little more spending than we are, you know, cashing in on stuff right now as we do the tax planning and get that stuff wrapped up. So with that said, you know, there are bushels still in the bin, '21 stuff that's not completely all priced, at least for a lot of people yet.

What's your thoughts on this '21 stuff that's still in the bin?

Ryan

Moe: '21 is soon behind us and, you know, prices are still at these levels that are real strong. And I mean, when you look at, you know, March corn, it's done a really nice job of clipping higher here over the last couple of weeks. Giving folks another opportunity. If people have a target price and price set on the board, I mean, let's go ahead and say $6, for example, if that happens to fit into their needs and desires, seems like a really good level to me to be, start to think about what to do with the rest of it. I don't, I don't hold the hopes and the dreams of $8 corn on this old crop like some others do. But yeah, I mean, I think just having a target out there for your next 5% can't hurt you, right? At least it keeps you engaged 'cause that's what we're certainly seeing right now is just a complete lack of engagement, which oftentimes leads to scary things.

Chris: Mm-hmm, yeah, it easily could. And this past week, I know we had a couple of guys that did get some $6 corn. You know, when you start looking at that basis opportunity there, some, you know, making some sales and/or maybe there's some hedge-to-arrives there that are those March ones that, you know, you can engage. What's your thought on basis too? Because there's probably some opportunities as we move into and around that holiday time frame too, don't you think? Or what's your thought there?

Ryan

Moe: Yeah, typically there is. I mean, typically there's just transportation logistics headaches come up, you in and around Christmas. And if you have the ability to deliver at those times, that does get to be— there's been opportunities that have been presented there in the past. I mean, nobody can predict the future to tell you exactly what the weather is going to be like or what logistics situations are going to be like here in the next 21 days. But typically there is an opportunity that shows up in and around or a little bit before Christmas to make sure that these buyers have enough or slightly more than enough to get them into January 1st when I think a giant yellow wave of corn and soybeans is going to come at them after the tax planning year is over. So, well, yeah, go ahead.

Chris: Well, I was going to say, you know, the— they're always— the basis opportunity always occurs when nobody wants to be in a truck. Right. You know, it seems like in the spring and during holiday seasons and when there's a snowstorm or whatever, you know, and those are the, those are the times or the opportunities, I guess it always seems like.

Ryan

Moe: So yeah, if you have the ability to do the opposite of what everyone else wants to do, you're usually, uh, sitting in the catbird seat on that one, right? But you know, something to think about here too, as you are talking to the grain buyer, um, Try to help them solve a problem too, you know, because think about package deals on basis. This is what we help our commercial grain elevators with, is starting to think a little bit outside the box. Don't just think about December 2021 here, think about what problems that, that grain buyer is going to have here for December. January, there's usually not a lot of problems, uh, buying grain just because of, uh, just because of tax purposes. But what about February and March logistics?

So if you can, you know, work with your grain buyer today, get somewhat of a push here for the rest of the year to get some grain off your books, but then help him or her solve a problem for Feb/March and maybe couple that in with your deal. Maybe you can get some better bids from them in the Feb/March timeframe, get a little push on those months as well so they can get some more flow headed their way. They'll be more open to talking about things that work for them strategically as well.

Chris: Well, and I think part of that too is, you know, we talk about the opportunity for basis between now and the end of the year, and then you're gonna probably start talking about the threat on basis after that.

Ryan

Moe: And so— Right. Well, exactly. And so parlay their need right now into a benefit for you later. Right.

Chris: Right? Exactly. So I guess with that, let's shift gears a little bit. As far as kind of what you're seeing on the demand side of the equation. You know, we've, we've produced a pretty good-sized crop here, obviously, and there's a lot of bushels, there's a lot of corn sitting here, and, and we've got some pretty strong prices, but we need to have the demand. Talk a little bit about what, what you see there and what the opportunities or challenges are.

Ryan

Moe: So you have to be very optimistic about the local demand, I, I feel that feed is going to be strong. Ethanol business I think is going to be very strong here in the future, as in the short term, in the midterm as well. I mean, who knows what's going to happen long term with that, but ethanol has been the big driver for these really strong basis levels here recently, and it looks like they're going to continue to be the driver. The recovery off of the Omicron scare from in the oil industry, I think is something that's very important for those of us with ties to the energy industry, which if you're producing corn, you are tied into the energy industry much more than what we probably want to give credit to.

But when you look at how Omicron really dumped on energy markets, and now the crude oil market is back up to trading at that $72 level, I'm looking at my RBOB gas gasoline screen right now, we're at $2.13 and a half. Granted, we're not at the $2.40s area that we were on RBOB back in October, but we're still— we recovered very nicely from that big drop due to demand fears from Omicron. That's going to bleed into a stronger price paid for ethanol, which is going to be beneficial to the corn farmers here in America. So demand from that standpoint, I have a lot of optimism around. I have a lot of pessimism around our demand on an international scale. Relations between the US and China, they're not great right now. The diplomatic ban on the Beijing Olympics is a— that's not a good thing for relations between us. I don't understand how all that works, and Chris, maybe you can help me out.

I think only Chinese citizens were going to be in attendance in the Olympics anyway. At least that's what I thought their COVID rules were going to be, and I'm not— I could be wrong on that, so if I'm wrong, I apologize. So I don't understand what a diplomatic ban— it's not like we're going to have a bunch of people not show up because they weren't going to show up anyway. But there's— there's— I think that's rather— I think that's rather embarrassing to the Chinese leadership, and so I don't think that's going to bode well for our relations with China. And we're in a spot where in corn, we've got a lot of export sales on the books, but we don't have as many export inspections as we'd like to see at this time.

And so that tells us that we want to make sure that all of these sales that we have on the books, both in corn and soybeans with China, that we get the— get those bushels and those tons shipped.

Chris: What about— talk about soybeans then too, because we've been talking corn, you know, the soybean side of the equation. You know, and we'll get to '22 in a minute, but when we think of, of, uh, where we're at with soybeans and the need for demand in that category is pretty significant. So talk about that a bit.

Ryan

Moe: Yeah, so the— so Hurricane Ida was a big problem for us. It created a setback for the U.S. soybean export program at exactly the wrong time. Because that window closes very quickly as soon as Brazil has their crop available. And last year we were able to extend that window out that we shipped soybeans because Brazil was delayed in their planting due to a drought. So they have the exact— Brazil has the exact opposite issue that we do where they don't want to plant if it's too dry, whereas in Iowa, we don't want to plant when it's too wet, right? So it's the exact opposite. Now this year they'd had absolutely perfect planting conditions, so they got that soybean crop in early. Early plantings are going to lead to early harvest, which closes that window that China would use the U.S. as their main export partner. It closes it faster than it closed last year.

So as soon as Brazil has soybeans ready, look for prices to really, really get hit as far as as far as basis is concerned, just simply because the Brazilians are going to want to move as much of that soybean crop as they can. So that's a big risk for the US, for the US exporter here.

Chris: So we're going to come back to that on the '22 discussion. But before we get to that, just real quick on the supply chain issues, inflation, inputs, all that stuff as we go into '22. There's like a whole bunch of You know, used to kind of watch out for a black swan. In the last couple years, we've had like a flock of them hit our way, right? What, right, what, what black swans, or what are we not seeing in this supply chain thing, this, this inflation thing, this input thing? Are, is there too much ado, or are we, you know, probably hitting the top on the inputs and stuff? What's your thoughts there?

Ryan

Moe: I mean, calling tops is very dangerous business, um, but I What I wanna say though is I have a tremendous amount of confidence in the American farmer to solve their way out of this. I say the American farmer because where there's a will, there's a way. And this group of producers has proven year in and year out that any trial and tribulation you throw their way, they have a wonderful way of managing through. I mean, it's one of the— it's the greatest production class in history and in the world today. Now, I can't say the same thing about what's taking place down in Argentina. They're right there would be maybe be a little bit of a sleeper story. If you look at the charts on Argentina's corn planting progress, their planting progress is way behind.

And here in America, if we're way behind on planting progress, well, you know, that's too bad, but we plant this stuff 24, 36, and 48 rows at a time anymore. And so we can plant a lot of corn and a lot of soybeans really, really quickly. Well, that's a very capital-intensive job, is to plant a crop. And when you're looking at a credit situation the way Argentina is looking at it, they don't have the same strong credit profile that the U.S. producer does. And so supply chain disruptions in a third world country are much different— second and third world country are much different than the supply chain disruptions here in the first world, because the farmers down there might have the will to get the crop in, but the government is such a gong show down there that they might be preventing these people, and they might have these.

And so the supply chain disruptions because of the government influence down there in Argentina is amplified several times over. So we might see Argentina show up short on corn acres, just because of the real true expense of planting it in the, in these types of troubled conditions. So I don't really worry about us as the US producer. But look out for those areas of the world that don't have quite as strong a credit as the U.S. producer does.

Chris: So to get to the third and final segment, I guess, of kind of the discussion here on the '22 crop, as we look at, you know, the crop rotation expectations, and not to pick on people that analyze, uh, geez, how many acres are we going to get of this and how many acres are we going to get of that and everything,— but it's, but you know, you have to do that analysis to kind of figure out what, what way are things going. But from a farmer's perspective, you know, they're looking at it like, you know, probably most operations aren't going to change a lot. You know, there's, you know, probably 60% of the operations are probably going to stay with their same rotation. Those that are going to make some changes are probably talking a percentage of the operation, maybe a third of it going one way or the other potentially.

So that acre swing from a farmer's perspective, you know, what we see— and then I'm going to throw a question at you— but what we see is, is still on average, we're still seeing more profitability on the corn side of the equation than we are the soybean side of the equation, yet in most cases. There are some exceptions to that in certain areas. So, but in most cases, if we're seeing more profitability on the corn, what, what are your guys' take and what you're seeing as far as some of the crop rotation expectations and, and how does that fit into the, some of the marketing decisions?

Ryan

Moe: Yeah, I'll agree with you on crop rotations and what we're seeing. We're also seeing some psychology around application of fertilizer this fall where, you know, there's a lot of fear based in that. Yet the customers that we talked to— now granted, I don't, I don't do the analysis with the, in the surgical precision using the scalpels that some other academics do. I talk to people that know people is kind of how I do it. So I'd probably do surgery with a hatchet more likely. And we're hearing exactly what you said. The profit margins still favor the corn acre, and so they are less likely to switch out of their rotation because of that. And then also seeing how, how far along we are because of the nice weather that is just starting to end right now in, you know, fall fertilizer applications. I see us, I see us planting 93.5 to 94 million acres of corn next year. It could happen.

It doesn't— it seems like that just blows everybody away. But it really could happen because the market psychology on farmers is if they think nobody else is going to plant corn, they want to be the one that plants corn. And so they think other people aren't going to plant corn because of the high input costs. So what are they going to do? They're actually going to increase the amount of corn acres that they plant. And so that is a— that's counter to what a lot of people want to represent at this time. And maybe some people can present some fertilizer Is there scenarios where this just absolutely isn't humanly possible because, you know, the deliveries will never happen? I'm interested in hearing those arguments. But the psychology from the farmer right now is stick to the rotation and then maybe sneak a few extra corn acres in there because they don't think anybody else is going to.

Chris: I think there's going to be a wheat pull a little bit too.

Ryan

Moe: We—

Chris: and I mentioned that to you offline— and probably some cotton in the South. Other crops, generally speaking, just because of where the commodity prices are, assuming that those price levels stay strong, right? I mean, because there are a lot of those people in those areas to the north and to the south will shift, you know, more so than you're going to see the shifting in the center part. Absolutely. So, but that's good. I think, you know, I just want to ask one last thing, you know, And, and I know you don't have a crystal ball, but as far as like, um, what makes you comfortable, uh, if you're a farmer, you're sitting there looking at this '22 crop, what makes you comfortable, uh, with a percent of coverage protection risk management in terms of percent covered on corn, soybeans, wheat, some of these crops that, you know, there is a threat that, you know, the price could go lower.

We don't have to go higher, we don't have to stay the same, we could go lower. What makes you comfortable with protection, either, you know, some options or some HTAs or whatever?

Ryan

Moe: What—

Chris: to what degree do you feel comfortable protected at right now?

Ryan

Moe: Yeah, so I mean, and statistics prove this out, that your risks are actually higher in high price environments than they are in low price environments. When you're at $3.50 corn, you know, if you go from $3 $3.30 or $3.70, that's only 20 cents one way or the other from $3.50. 20 cents in a $5.50, $5.90 type market, I mean, that's really not that much, but it's still 20 cents, right? So your risks are higher in higher-priced environments than they are in lower-priced environments, and that's just statistics. Being 25 to 30% covered right now for 2022, I think, is very reasonable. I mean, there's a word that we were whispering before we jumped online here, Chris, and that word was record revenue. Yeah, especially looking at record— still looking at record revenues. I mean, that's a really strong statement for how can you go wrong locking in a little bit more record revenue.

Chris: Right. You know, obviously that's there much stronger in the '21 than it is the '22, but as far as this '22 crop, you can, in almost every case we've ran the numbers so far, again, there's always exceptions, but we've seen a reasonably good margin in almost every case too. So, right.

Ryan

Moe: So I mean, locking some of that stuff up and just, and, and taking some of that risk away, and then also with the high price and higher price environment And with the higher margin environment and taking some, you know, leftover cash flow that you did, leftover cash that you have from this year, applying options in purchasing options, I think is a really solid idea. Because if you have anybody that can tell me what the price of corn is going to be between now and Valentine's Day within 20 cents, I mean, I would love to meet that person, right? Right. So go and spend 20 cents on some type of an option strategy to give yourself some downside protection. I mean, how can you go wrong with that, right?

Chris: What, um, as far as, you know, you're talking 30%, last, last question real quick, uh, between corn and soybeans, what has more threat to the downside? Good question, making you think.

Ryan

Moe: Yeah, it's Friday afternoon, this is tough. Yeah, uh, I'd like to say, I'd like to mention, mention, I stayed out past curfew last night because I was at the Iowa State game. Yeah. Yeah, I would say that I have more of a concern on corn.

Chris: Okay.

Ryan

Moe: And that would— and I would say that because if for some reason things get really wonky here with the broader economy, because things are just going so hot right now in the, in the broader economy, if something were to cause a flash recession of some kind, and I, and I don't know what that would be. I don't think it will be another COVID scare like a Delta or an Omicron variant. I think it would be something deeper than that. And gas prices plummet. That's our, that's our big demand story. And if we lose, and if we lose that high gas price story, that's a, that's a very major risk to the demand profile of the, of, of the corn book right now. So I would say corn has more downside than beans.

Chris: Okay. All right, that's interesting because with that soybean-corn-bean price ratio, we need to see the bean price go a little higher is what is the thought process. And that doesn't mean the beans have to go higher to improve that corn-bean ratio. It might be that corn goes lower to improve the corn bean ratio too. So sometimes— that's correct— sometimes an acreage battle doesn't mean the price has to go higher to do that battle. Sometimes one of them goes lower to, to enhance one decision over another.

Ryan

Moe: So absolutely. And you would probably notice throughout our careers, it's the one that moves lower faster is the one that's the influencer. I mean, so yeah, exactly.

Chris: So hey, thanks a lot. This was, uh, Really good conversation, really appreciate it, Ryan.

Ryan

Moe: Yeah, thank you, and, uh, looking forward to seeing you guys in Arizona here in a little bit.

Chris: I'm glad you bring that up, the Ag View Executive Business Conference, uh, January 26th, 27th, and 28th. Um, gonna be excited to have you there, and, uh, a lot of farm operations. I think we're at like 14, uh, 14 different states represented now, and about, uh, just shy of 50 operations. We'll be blowing through that. We got a lot of people starting to, or continuing to sign up. So the early registration is still available, and I hope if people listening are planning on it, looking forward to seeing everybody in Phoenix.

Ryan

Moe: Yeah, lock that one in because there's a really, really good group of speakers there, and you're gonna get your money's worth out of this one. So we're looking forward to it.

Chris: Sounds good. Hey, Ryan, thanks a lot. We'll see you again soon.

Ryan

Moe: Hey, thank you.

Chris: Yep, take care everybody, and we will catch you again next time on the Ag View Pitch. Hey everybody, just a quick reminder of the Ag View Executive Business Conference. If you are not signed up yet, registrations are rolling in. We still do have the early registration available, and we'd like you to try to make it to the Ag View Executive Business Conference January 26th, 27th, 28th.