Macro markets drive volatility

Chris: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week, first full week of December, and as we get towards the end of the year here, we're lucky enough to have with us Chris Wilson with Atland Babler. And you are, you are in southwest Wisconsin. We've had you on several times. How's it going, Chris?

Chris

Wilson: Good. How are you this morning, Chris?

Chris: Hanging in there so far anyway. We kind of Kind of getting things wrapped up, I guess, from harvest, starting to clean some equipment up. And I know we got a lot of, a lot of operations still out there putting some fertilizer on, nitrogen still going on in parts of the, parts of the country and stuff. How are things going in, in, you know, your neck of the woods in that southwest Wisconsin area? And also, I know you got a lot of stuff in that, that northwest Illinois area too.

Chris

Wilson: Yeah, I mean, we've had Awesome conditions for, for fall work, um, getting them— I mean, a lot of guys done, um, applying nitrogen, anhydrous. A lot of anhydrous went on this fall, uh, in our area. Um, you know, at this point I don't see a whole lot of activity in the fields. I think guys are pretty much wrapping up, and like you said, maybe cleaning equipment up, getting through some of this stuff through the shop early while it's still nice out. Stuff like that.

Chris: And starting to make sure you start to accumulate the parts you might need in the spring too, as the supply chain disruption continues and probably will for a long time.

Chris

Wilson: Yeah, yeah, no, I think that's certainly going to be a continuing narrative and unfortunately don't see, you know, a real soon end on the horizon for all that supply logistics constraints that we're seeing across everything.

Chris: Right. So I guess what I want to do is start, and you do a lot of analysis of what's going on in the macro market and kind of see some of the things that, that's happening there. What are, what are some of the key things from a producer's perspective that we need to be fully aware of that's really going on? You know, you talk energy and, and just the money flow and all of the potential outside macro things that are going on? What do we need to be paying attention to?

Chris

Wilson: Yeah, so I think the main thing for the producer side, the ag side, is just being aware that of how much money flow is in assets right now. And that's across the spectrum, whether it's equities, bonds, commodities, and how that can create very rapid movements, um, in markets that may fundamentally be well supported, but with the liquidity event, you can see, you know, 10, 15, 20% moves within a week. And we've seen that in oil here over the last week, um, where that market went from $80 down to all the way into the low 60s within 5 or 6 trading sessions. And then, and that includes a couple of days where we did bounce back and we're up. So, and I believe, you know, oil is fairly well fundamentally supported, but a couple triggers, and you saw it, that when you move through certain levels, it happens very rapidly.

And I think as we look at, say, the corn market or the bean market, to be aware of what some of those trigger levels may be where the market may move 20 cents on corn just like that. Um, and, and make sure that our strategies are designed around that in both directions as well, because we have seen markets in both directions move sharply up or sharply lower off of certain strike levels that, that tend to get a lot of positioning in it. And then when it does push through Creates, you know, pretty volatile price action up and down.

Chris: From a direct correlation, let's say, for example, corn, you know, we saw that, you know, things kind of trend the same direction volatility-wise. We finished the week pretty strong last week. Talk a little bit about that. I mean, how much of a direct correlation is there? Is it pretty, pretty instantaneous on the commodity side, you think, or does it take some time?

Chris

Wilson: Yeah, I mean, corn, corn, I mean, corn probably even more so than beans. Um, corn is very much, I think, a yin and yang market right now. Uh, I, I think in a certain way the, the logistic constraints mean maybe to a certain degree creating some upward lift as ethanol plants, for example, or scrambling to try to get every bushel they can in, um, the— and the economics on those ethanol plants is the best maybe we've ever seen. And so I think that that is certainly a good supporting factor in the market. Uh, on the flip side, um, you know, we export a lot, a lot of our, a lot of our crops, and We are moving product. It's more expensive to move it, um, and we are definitely seeing pretty, pretty lagging sales on the export side and, and, and that end of it.

So I think that fundamentally there's, there's, there's pulls on both sides when we look at corn, um, and I've been, I've been impressed with this week of how well corn's been able to kind of navigate some of that broader volatility and basically close out the week towards the higher end of its range. And I think that's been, been good to see. I think in many ways too, we're seeing a wheat market that's still trying to figure out, you know, has it topped? Has it, has it kind of run through its fruition in the market? Or we just, we're kind of testing a level down and we're going to make a new run higher. And I think that does have some impact on corn as well when we look at kind of the fundamental side.

Chris: On the other side of that, you know, that's the commodity side of, you know, the energies moving. What about the expense side? So from our operations, and, you know, you farm as well, and it's like, okay, you look at these input costs, obviously it, you know, oil price goes down, Nitrogen price isn't going to go down instantly either, but you know, what, you know, what's your crystal ball say timing-wise as we head towards spring, as we look at inputs with the volatility in the market? Any watchouts there, any concerns, anything that, you know, farmers should be paying attention to there on the input side as it relates to this macro scenario?

Chris

Wilson: Yeah, I think specifically on the input side, I think that we're starting to see— it's a little bit like the wheat market. We're starting to see some signs of that market, maybe especially internationally, has maybe started to show some signs that, you know, we've stopped going up 10% every 2 weeks, every week in some of those energy markets or some of those fertilizer markets, especially on the nitrogen side. We've had some some price decline when we're looking out into the curve into Q2 on some of our, we'll call it wholesale markets. And I think that that's probably when we look at kind of those liquidity movements and we've seen that with oil down, that maybe is feeding psychologically at least into some of those markets as well, which as you pointed out are fairly energy dependent. On the processing side. We've seen that gas make a pretty significant shift lower.

And so I think that market is maybe— we have a wholesale market that's here. We have a retail market that I think logistics-wise and everything else, we could see that those spreads be significant in areas where you still see, even if that wholesale market shifts lower into Q2, it doesn't mean you're gonna be able to have it and you're, you know, have it and have access to it at those prices necessarily. So I think that there's challenges there. And, you know, I think the biggest thing I would say on the input side is that even with these higher inputs, there's still, you know, there's still a margin there. We have 550 futures on Dec '22. As you lock in those inputs, you know, make sure that you are protecting, you know, that revenue side with something.

Because this is a year, and we've seen this, you know, we've seen this throughout, throughout, you know, throughout the decades really, where it reminds me of '08 where we had exceptionally high prices, exceptionally high inputs, and we settled that year out, you know, obviously at very low levels on, on our crop side. So I think it's important as we get our costs in, um, that we are managing the risk on that backside. And that's probably the critical component to that. I think it's going to be challenging to, you know, pick value in that fertilizer market It's fairly opaque. There's a lot of drivers there. And a lot of international players that are playing in large scale. I do think the one thing that's helping, especially on the nitrogen side, is we've had a great fall. So I think that you are seeing a lot of anhydrous get put in. And I think that that's usually your cheaper end.

And I think that that maybe helps as we, on the demand side, and again, in the spring in some areas. Yeah, sure. And I think everybody's got to kind of evaluate their own situation too. I mean, you guys always talk about putting paper to pencil and really figuring out what is my cost production for that next bushel and trying to figure out what that application rate needs to be so that you're optimizing profits.

Chris: Right. And as you look at '22, one of the things we're seeing is still in almost every operation, you know, when you look at corn, soybeans, and wheat as kind of the primaries, and we've got guys with cotton and rice and all kinds of other stuff. And I think some of those crops are going to pull away from corn and soybeans to a degree, at least from what we're initially seeing. I'll be smarter on that in another couple of months as we really drill into the numbers more. But what are you guys thinking or seeing?

Because it, you know, as, as we've gotten just kind of a good start on looking at cash flows, loan renewals, and all that kind of stuff as it relates to crop rotation, corn still is showing a pretty significant profit advantage even with the higher input costs in almost— and there's a couple of exceptions we've seen— but in almost every case, corn is the king in terms of profitability? Are you guys seeing anything different? And do you think, you know, because some are saying these— some of the corn acres are going to be lower, but every time we sit down and run the numbers with people, corn is, is slightly better. And, and that's even tough in my own operation. I'm sitting there looking at it, it's like, well, geez, do I plant another farm or two to corn? But, you know, you look at those input costs, and it's not just the cost, but it's the availability.

So I guess my question is, what are you guys seeing from your client base? Any kind of a big shift or pretty much the same stuff going into '22?

Chris

Wilson: Yeah, I think, I mean, I think in general, a lot of guys are kind of sticking to core rotations. It doesn't feel yet like there's a good pulse on which direction maybe some of those those swing acres are leaning. Um, you know, I, I think there's, there's certainly a lot of frustrations with the cost, the inputs on the corn side, but as you laid out, I, I do think when you, when you look at it with, you know, these futures trading $5.50, um, no beans trading, uh, $12.35, um, it, it does lean to corn on that, on that rotation. We're in the middle of where we're located. Probably part of our customers are fairly, uh, you know, in that Corn Belt region. I'm not as familiar as much with like the cotton and rice markets. I have, you know, I kind of heard the same things, looked at surveys. That does look like there will be some acres pulled towards those, those southern crops.

Um, so I, I do— the other thing I, I do think maybe there'd be a few more wheat acres. It just seems like we've had— and we're not, we're not wheat, wheat country by any means, so this is just kind of driving through Iowa, Wisconsin, Illinois mainly. But I am seeing a few more wheat acres out there, and I think, you know, following beans typically. So maybe, maybe that's something that sucks some acres away from corn. Um, uh, You know, I, I think that, that, that would be interesting to see, especially as we get kind of that winter wheat survey that comes out here in about a month on acres there.

Chris: So the third segment, or the, the last third of kind of what I wanted to quiz you on a little bit, is with regard to, you know, finishing up '21, marketing. There's producers sitting there with various percentages left anywhere from, you know, quite a bit left to virtually hardly anything left. What do you tell these producers for wrapping up sales? You know, for, you know, just in most cases, there are a lot of people are sitting there with record profits, and then in some cases they're not. So they're waiting for a better price, or they're frustrated that they started selling too soon, and they want to hit a home run on that last third or whatever. What's your, your guys' thought on, on wrapping up the '21, um, marketing? Any tools, thoughts, ideas there?

Chris

Wilson: Yeah, I think, um, I, I think that on any old crop, we're at this point, you need to have your bottom side covered on virtually all your bushels. So, uh, and that can be as simple as if you've got You know, if you've got a chunk of bushels that are, they're open that you want to try to swing for the fences on, go buy a March put. You know, it's, it's short-dated, but at least it gets us through most of that South American crop season. Um, it navigates what looks to be a fairly turbulent, uh, broader market here in equities and bonds and those, those macro markets. Um, it's still fairly cheap. I know vols picked up a little bit this week, but It, it compared to a lot of other markets, you know, March $3.60 put is $0.14. It's, it's cheap insurance and it, or $5.60, $5.60 put is about $0.14 on the March.

That's been kind of my go-to for, for any guys that have especially a lot of open bushels on that downside and they just don't want to sell it or put themselves in a marginal position. I think that if you're willing to take, if depending on how many bushels you have open, if you, if you want to make some sales here, you know, I think it's a good level to be, to be adding sales in this $5.80 area, $5.90 area. It's been pretty stiff resistance, and, you know, if we get through it, like I alluded to earlier, it could, it could be some fireworks up in into that 630 area, 620, 630. But we've seen it, we keep testing that 560, 565 area. There's pretty good levels of support underneath of that, down to about 535, 530. But you get below that and it starts to be a trapdoor.

So I think that in this type of market and what we're seeing, You have to be careful that you don't get stuck in an environment where for no reason necessarily outside of liquidity, and we've maybe haven't touched on the fund position, but we are seeing a pretty good-sized fund position that if we start to liquidate that due to whatever reason, I mean, the margin calls this weekend on the stock market and that side are going to be huge. And it's gonna be interesting to see on Monday how that impacts the broader market. So, you know, that's what I think you gotta be careful of on the downside. I think, you know, we are up on the top side of that range. Technically, I think it's a good area to add sales or, you know, or add something that's a vanilla option on the bottom side.

Chris: As far as '22 thoughts there, I mean, what do you see a lot of your clients doing or, you know, What are some of the watchouts there? Because it's the same kind of thing, like I said, we run the numbers and we plug in current prices less basis, and we, we are seeing profitable opportunities. And I have not, as a, you know, a person that sits down and, and drills down to accurate cost of production farm by farm, I have not seen this much consistent opportunity for profitability going into a new year almost forever. And that's, that's in the face of these high input costs. So, you know, what are you telling your clients and what things should we be paying attention to as we work toward '22?

Chris

Wilson: Yeah, I mean, $5.50 these corn, I think you have to be active on your marketing plan. You know, if you're, if you lean towards sales, I think you need to get some sales on the book. Up to levels that you, that you would typically target within that plan. So I, you know, I see a lot of producers that are half sold at these levels that have basically between $5.10 and $5.50 made, made those sales through that stretch. Um, for guys that are leaning towards a little bit more options, which I like right now, uh, you know, I, I think that there's some nice, uh, put spread with the sold call strategies that give you that give you good, that give you good, uh, downside coverage on, on the, on a chunk, um, down to some major levels. So an example would be buying a $5.40 floor, uh, giving yourself room down to $4.40.

So $5.40, $4.40 put spread, selling a $6.40 call gives yourself room up to what we saw on the new crop highs basically last year, um, for the contract. You can do that for 11 cents. So that, that strategy I like for anybody that's willing to put a marginal position in their account and do it because of the flexibility and, and the yin and the yang on that corn market.

Chris: So sounds good. Well, Chris, I think this has been a good conversation. Anything I didn't hit on that, uh, that you're like, you should ask this question?

Chris

Wilson: Anything? Yeah, so I think Um, just kind of touching the beans because sometimes we don't spend enough time on that. I do think, uh, and corn gets a lot of our attention, I do think that bean market is one, um, to be very, very cautious on this year. I know, you know, $12 prices, $12.30 doesn't seem like a home run, but, um, if South America's crop can get through, like— and we got some dryness in certain regions, but if it can get the rains, they're going to grow a massive crop down there. And we're already seeing Chinese sales basically flatline, and we are, we are starting to lag pretty hard on bean exports.

So that balance sheet, if we, if we, if we grow a huge crop down there, it could be a concern as we as we head out into '22, and, and I think that you really have to defend that $12 level with some form of strategy on your old crop beans, or just make some sales here at $12.80 and look for some reownership on those, or on your new crop, try to find some strategies that, that defend $11.60 to $12 at the floor and give yourself protection to $10 because It is a market that I think presents a lot of, you know, a lot, a lot of risk out there in the '22 if we have a couple good crops.

Chris: That, and, and also if the, the acre mix leans heavy into the beans too, and we, we pick up additional acres, and then the weather's good during the course of the year, uh, it could be a lot of pressure.

Chris

Wilson: Yeah, and I think, I mean You know, the weather, you never know. It's always the big variable at the end of the day. But I think you kind of gotta, you gotta look at what you would expect from an average crop. Um, if we get average yields in the U.S. right now, South America's got what looks to be a big crop coming if they can catch a few more rains. So I think that, that beans probably scare me more than corn does heading into '22, just from a from a downside risk standpoint and the overall fundamentals.

Chris: Awesome. Great place to wrap up. Hey, Chris, really appreciate your insight, wisdom. If somebody wants to get ahold of you, just to have kind of like have a one-on-one conversation, what's the best way to reach you?

Chris

Wilson: Yeah, so our office is in Gleaner, Illinois. You can reach out to us anytime. Our number is 800-884-8290.

Chris: Awesome. Thanks a lot. Really appreciate you being on here today.

Chris

Wilson: Sounds great. Thanks for having me, Chris.

Chris: You bet. And thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.