Weekly market outlook: Dec. 14-18th

Grant

Shimek: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week, and today we have with us Grant Schemick with Black Oak Financial. Grant, how's it going?

Grant

Shimek: Good, good. You?

Chris

Barron: Hanging in there good. Excited to have a conversation with you. You're one of the people that I lean on a lot just to kind of get a little perspective on what's going on in the technical side of the market. And we've seen some kind of movement, a little bit of gyration here. So what's, what's your outlook here for the next couple of weeks as we move through the remainder of December from a technical perspective?

Grant

Shimek: Well, we've been trying to correct, you know, markets correct in time and price and usually some combination thereof. And my opinion has been that we'd go down and test 45-day moving averages on both corn and beans, depending if you look at contract-specific months. The March probably has done that just barely. The beans have not. That would be something probably just under $11.20 on soybeans. I still think we have time to do that, maybe as late as the 5th of January. That could wind out though, you know, from that November 30th we turned down, we, we may not keep correcting just because we're— there's lots of willing buyers in the market, but I do think we could— it's possible that it takes until the 5th of January. When I count the number of weeks of rally, I think the— on the corn specifically, it started to turn up on the week of August 3rd.

If you count 25 weeks out from that, you're going to come to the week of January 25th. So many cases markets run out of gas if they rally or sell off for 25 consecutive weeks, and if that's the case, if we're making new highs then, and I think we'll be running out of gas. He would— it would probably— it would be too early just from an opinion standpoint for it to just take off and run. I think we probably need to spend some more time in the least chopping sideways, if not pulling back a little.

Chris

Barron: Mm-hmm. What other things are you looking at as market drivers moving forward the next couple of weeks? You know, I think we talked just briefly for a second on, on drought, uh, currently, you know, lack of moisture, I guess, uh, or any— are there any other kind of things that you're kind of watching?

Grant

Shimek: Well, definitely my clients in the western Corn Belt are, are concerned about the dryness in the southwest, and to a lesser degree in some of the western parts of the Corn Belt itself. There are some dry areas in the eastern Corn Belt, northern Indiana, believe it's fairly dry, but it's really early yet, and I really don't think we can have a drought quite yet, but that's in the back of everybody's mind. It's interesting that there's notable weather forecasters, one in particular who's pointed out this week that he thought that the extreme drought in the Southwest would move east about 700 to 800 miles in each of the next 2 years. Really, that would mean that the heart of the Corn Belt would see that in 2022. That's not typically the way Elwynn Taylor, to my understanding, has always put it, is droughts in the Midwest come out of the Southeast.

They really need to be in South Carolina or Georgia or Florida to start, then they move into the Midwest. It's possible if you ponder it that they could both be right if we look out to 2022. But as far as even in the context of both of them, I don't know if you can say that even yet today it looks like we're going to be dry based on history anyway next summer.

Chris

Barron: Yeah, and personally I like it when it's dry in the winter. It's a little less, yeah, a little less snow, at least for the corn and soybean crops, you know. And also, you know, it seems like every Every year we plant in a dry spring, usually that's— that equals a pretty big crop. But, um, from another—

Grant

Shimek: typically the moisture does average out, right? So for right now, and you typically get your average moisture annually, and then the drier we stay in the spring, to me, the more likely it is that we're going to end up being compensated back for that right during summer, right?

Chris

Barron: And sometimes the funds are those investing in the market kind of look at these things maybe different than we do as farmers. So speaking of the funds and their current positions and things, is there anything you're watching there with the investment community and, and how they're looking at commodities right now relative to, say, the stock market and other opportunities from, from an investment standpoint?

Grant

Shimek: There's definitely a lot of capital rotation in the commodities. There's been some very notable large funds that have made huge returns in commodities this year. Mm-hmm. And, and they all— they're a herd, they move together, so they're watching each other's actions. You can take a look at the, the traditional CRB index, the Continuous Commodity Index. It hasn't broken out of the consolidation rectangle it's been in since 2014, but it's darn close. And if we can decisively break out of that, the trend following programs are going to be there. I think you continue to see more capital come into the market, especially when we look at the long-term interest rate trends. Are you going to tend to be up? Then the capital, in my opinion, is going to pour out of the government bond sector.

That's going to need to go— it's going to— and that amount of money is so massive, that government debt sector, that it's going to go into everything. Not much.

Chris

Barron: So what other things are you watching? I guess what I would bring up is, you know, we hear a lot of talk about, you know, this being a demand market. China has been obviously very active along the way to strengthen, you know, and give us a lot of this price strength. And then there's been the threat of South American weather. Of those two components, how do you see those things affecting things as we move forward in the next few weeks, or do you?

Grant

Shimek: They're interchangeably number one or number two. You can flip a coin on that. I think the South American weather situation is intense, and it's not— I don't believe it's completely priced in the market. The USDA still has South America something around 133 million metric tons on the bean crop, and I think the best prognosticators who are boots-on-the-ground types are more like 129. So that's not in the numbers. The adjustments we had this week were very slight. I think there'll be big adjustments that will tighten up world stocks here again. So the weather in South America to me is the most logical— what's, what's going to really ramp this next. Brazil and Argentina's weather. And many cases that's right, right around mid-December on in other years that it becomes an issue. So some anytime now would be my guess. I think that's going to be the leader of the narrative.

The Chinese situation, hey, they've bought so much already from domestically for the US, we don't technically have more bushels to sell them. It's a matter of pricing out the next marginal, the incremental demand out as we push the market higher. We've got to make sure we have enough to get to the new, to the new marketing year. Now that being said, I think they are the greatest risk. The assumption is China is in dire need of food products. Or appears as though, and they're backed in the corner and they're going to have to buy from us and the rest of the world. That is the most dangerous assumption we have in the grain markets today. Mm-hmm. So I'm not saying that they won't perform or they won't— they will back away from the market. We just don't know that. But would I be surprised that something happens and they do? No, I would not.

And then all of a sudden all your, your metrics get turned on their head. So I'm open-minded to that. From a just prognosticating standpoint, I don't know the patterns and cyclical analysis. I think we're going to be strong into maybe the first 4 months. It could be as early as that January 25th to February 20th for a high. So if we ramp into that in corn and beans, I'm going to be aggressive protector of prices for '21. I don't think it'll turn out well in the end. We're gonna, we're gonna bid these markets up. We're gonna bring a lot of acres into production. We're still below the peak acreage level of that 2006 to 2010 timeframe. Now obviously those are marginal acres. It won't be for the people who are listening to this who are in the Corn Belt.

It's not probably coming from your neighborhood, more acres of eat a corn or beans than they had this year, but marginal areas of the country are probably going to grow a lot of soybeans this year. Mm-hmm. And by the time we get to the end of the year, I think it'll look very different. So I would encourage everybody to keep a focus on ROIs because we've had this 6 years where it was hard to eke out any gains, and it— as we can get these Nov '21 beans knocking on $11, we're going to be in some really good ROIs per acre. And I would focus on protecting that instead of worrying about droughts that may or may not happen or so forth. And if you can structure it to where you can keep the upside open, you can have, to a degree, both ways. But just don't run with the herd and get too bold up on this. That's my opinion.

Chris

Barron: Yeah, and I think that's good advice. And what I want to do with your comments there is, and maybe we'll start with wheat. I want to go through wheat, corn, and soybeans briefly and quickly here. But as far as, you know, you mentioned ROI and some of these opportunities here as we look to finishing up marketing the 2020, the ROI is really easy because we know what the yield was, we know what our government payments were, we know what the profitability is. I've been asking our guests the last several weeks here, what are some reasons to not finish up sales on 2020, or is there a reason to not just finish up 2020 so we can start focusing on '21?

Grant

Shimek: Well, it's quite early for a lot of people to finish up. Yep. And sometimes missing out is more painful than losing. So, right, that's probably— that's the most honest answer. Not that it Now, just from a business standpoint, you can say you just look at the numbers and that's true. I think it's early enough that I think there's some opportunities here that I wouldn't personally want to liquidate entirely. But in the context of an operation's debt load and other things like that, if you're hitting it— if you're in that 20 to 30% ROI zone, it's pretty— it's a pretty easily defended decision to just walk.

Chris

Barron: Mm-hmm.

Grant

Shimek: Yeah, yeah.

Chris

Barron: And that's kind of what we're seeing. Like, our client base is pretty heavily sold probably now, and partially because some of those early sales. And then, you know, but on conversely, I think there's people kind of waiting to try to, to make up for those early sales. And I think there's probably caution there, isn't there, to, to try to wait too long?

Grant

Shimek: Oh, absolutely. Trying to, trying to average up in some way, somehow, or reown. And that absolutely is.

Chris

Barron: So from a practical standpoint then, Grant, what would you, you know, on the wheat side first, you know, what, what are some, some tactics to use, or, or where might we be pulling the trigger again on just kind of some hard prices from what your perspective is? And again, not advice, but just kind of where you see this thing shaking out on wheat, and then we'll hit corn and soybeans.

Grant

Shimek: I think the wheat, as the marketing year goes on, could have a lot of upside, maybe even more so than on corn and beans as far as time. So I would— I'm going to focus on that first 50% of the crop to be scaling it in every time you're gaining 5%. On price to be just scaling into it. There's no, no magic to that for me. Time-wise, I think we're a good deal of time away from a significant high, so the magnitude of the move could be pretty significant. And over the next couple years, I think we're going to see wheat prices at some point get a lot higher than we are now. And so I'm gonna go back to just to scale in selling, and if you have numbers you can protect, then, then look at some kind of option strategy, put-call spread, or just outright puts, and to get a floor in.

Chris

Barron: The scary—

Grant

Shimek: nothing complicated, right?

Chris

Barron: The scary thing on the wheat side, and, and we've just kind of getting rolling here with working on profit managers and figuring out kind of some, some real cost of production and, and kind of seeing where people's outlooks might be by crop and the wheat relative to corn and soybeans, as you said, you know, the, the opportunity and the margin, it looks definitely a little stronger on the corn and soybeans, and that's going to add to acres, at least in my opinion, on the corn and soybean side of things, just because there's more profit opportunity there. And I think it's going to be that way with cotton and stuff too. But back to corn now then, so that's kind of what your thoughts are on, on the wheats, just kind of scale in maybe up to 50%, every 5% or so. What's your thought on corn?

Grant

Shimek: The corn market, it— for me, it's about time. So I am, I am trying to prognosticate and, and guess the market here, but outside of just getting sales on based on initiating, you know, that small percentage is 10-15%, I'm looking more for time. I think it's gonna— it's not gonna be this calendar year yet. I know it's just days left now, but I want to see something on, on the new crop in that 430 to 455 zone would be a base case scenario for me for that, for a high water mark. And then the next boundary is probably going to be somewhere in that, uh, 455 to 475 zone. And a lot of this is ultimately to me going to be determined by the emotion of the narrative of South America. I think that's my preferred driver of the next move to the upside is how emotional that gets. If it's a little emotional, then we're probably in the base case scenario for both corn and beans.

If it's really emotional, then we can hit some big numbers on soybeans. I think the— looking at the old crop, getting into that upper $12, low $13 for a high watermark is possible. And then the new crop is going to be, and I'm looking for that $10.70 to $11.20 zone. Question being, in my own mind, are we going to be able to breach that even number, that $11? And that's just going to go back, in my opinion, to the narrative and how emotional the South American situation can get if we can do that.

Chris

Barron: But that, that's the zone that I want to protect on new beans, that $10.70 to $11.20 Yeah, and where we're at right now, as we've been looking at numbers with growers on, on both corn and soybeans, it's got the majority of people sort of just in the black without any government assistance. And this is the first time in a long time that at the beginning of the year when we start calculating out a budget and figuring out where the cost of production is and, and kind of where some price entry could be on just getting started on some sales. This is the first year in a long time we've seen black ink on the bottom of the page on startup anyway.

Grant

Shimek: Yeah, so if we, if we do ramp into that late January, early or late Jan to early to late February timeframe, it's going to play into the hand of crop insurance. But I think that also means that a lot of big moves will be made in the context of crop insurance, which means we'll get acres, lots of acres out of the whole deal.

Chris

Barron: So basically, if I understand you right, the message I'm getting from your perspective then has a lot to do with, you know, just kind of watching this with wheat, maybe stepping in a little bit at a time on the corn, maybe being a little bit patient, having some sales on, but that being patient and looking for that $4.30 to $4.55 range to plug in and maybe a heavier amount.

Grant

Shimek: What—

Chris

Barron: and then with soybeans, what we're seeing is a lot of people are profitable already on the soybean side of things, right? Somewhere in that $12 range to reach for some more sales there. Anything, anything else that, that we haven't really touched on that you think growers need to be cognizant of here in the next couple of weeks?

Grant

Shimek: I think the overall economy is something to be cognizant of, maybe not in the next few weeks, but as we work into 2021, the issues that we've dealt with in 2020 with COVID and the impact of the overall economy, to me, points to a significant economic contraction late '21, '22. And you can say that, hey, that doesn't necessarily mean it's bad for agricultural prices. You can find plenty of times where the overall economy is not doing well and ag is doing okay. I'm going to come down on this in the context of I don't want to take that bet. And that would be, you know, focus on these ROIs on '21 especially. And I'm going to be an aggressive hedger because I think that's a big risk. As time goes on into next year.

Chris

Barron: One last question. Oh, I'm sorry, go ahead. No, no, well, one last question I have is, um, as you look at that ROI and you start locking these things in, um, basis obviously factors into this, and it looks like we could maybe see a really strong basis on some of these crops early in the season, especially in the Midwest where the derecho occurred and stuff. That there could be some really strong basis yet, especially on the 2021 early on. But if a person's going to be selling later on, what vehicles of sales or of getting some of these prices do you think might work best? Is it an HTA? Is it actually locking in the basis with that price? Or what's your thought there?

Grant

Shimek: Given that you like the basis, that it's reasonable, that's not on the high side, of what your territory usually experiences, then I don't see anything wrong with having cash sales right out of the gate. Okay. Otherwise, you're going to have to shift to hedge to rise. And, you know, right now, some of these spreads, like take, for example, Dec '21 corn versus July '22 corn, it's 6.25 cents or thereabouts. And typically we're going to be 17 to 21 cents at some point in the vast majority of years. Maybe this is going to be one that isn't. But that's not— the odds don't favor that given history.

So what I'm saying is that that's definitely— if you do hedge to rise for the '21 crop on, on both corn and beans, you keep them in the traditional these and November slots because as time goes on, those spreads probably will widen out at some point, which will give you an opportunity to roll them to further out in time. Given, given you have the storage and the ability to do that. But, but even if you, even though, even if you don't have storage, it's still going to make sense to be selling against the DEEZ and the NOLS right now, right?

Chris

Barron: Awesome. Well, hey, I think this was a good conversation. I think we hit everything. The only last, last, and I get to a last, last a lot of times, but on the Any prognostications on the stock market?

Grant

Shimek: Stock market? Yeah, I think the— how we close is important. I don't have the numbers in front of me, but if we pull back, you know, we had a relatively strong correction at the end of the year, it might not bode well. If we can go out strong the last week of the year, that typically bodes very well, right, for how we are going to go into the beginning of it. I think the greatest risk probably comes after it, given we set— given we go out this year well, then it's probably sometime after May that things get, get really risky for the stock market, if that's what we're going to experience. So I have to watch how we finish the year out.

Chris

Barron: Yeah, I think this whole thing with COVID and, and kind of all of the bumps we ran into in 2020, 2021 could still be yet be interesting with a little bit of a hangover and some issues carried over from 2020, right?

Grant

Shimek: The main thing about the stock market that has been the case for some time and is definitely the case is that Europe is— to me, it's really falling apart. And we continue to see capital flight out of Europe and other parts of the world into the U.S. market. Now, so if you look at these stock prices, it's completely unjustified. Perhaps it is. But it's more about capital flow than it is about earnings and business model, right?

Chris

Barron: The money moving, right? So sounds good. Hey Grant, this is a great conversation, really appreciate it. Thanks a lot.

Grant

Shimek: Sounds good.

Chris

Barron: All right, again, Grant Schimick with Black Oak Financial. You can take a look, look him up online. If anybody has any questions, uh, give us a shout, and we appreciate you joining us and we And we will catch you again next time on the Ag View Pitch.