Weekly market outlook Feb. 14-18th: record price levels for crop insurance?

Chris: 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. We are kind of in the middle of February, that 14th through the 18th timeframe. We've got Pete Meyer with us again. Pete, how's it going?

Peter

Meyer: It's going well, Chris. Thanks. Just, uh, you know, uh, we had, we had the February WASI this week and it just seems like a, like a distant memory already, even though it didn't really offer us, didn't really offer us anything, anything new.

Chris: So, well, this last week sure was, uh, an exciting week. What's your, what's your perspective on what we were seeing last week and, and what's your take on, on what we're seeing?

Peter

Meyer: Well, it might have been excited, but I think it's extremely unhealthy. I think it's awful. I think the market action is awful. And the reason for that is that what we have now is we have money chasing this market on an inflation trade. Of course, you know, they can point to the CPI being up 7.5%, which is the highest since the early '80s when interest rates were 10%, 11%, 12%. But You know, the action is just, it's, it's just one way, it's just being driven one way. And it's, uh, there's some FOMO trade in there being done by the funds, fear of missing out, and they're pushing the market around. And, uh, yeah, I think it's, I think that the market action is extremely unhealthy.

I was, I was talking to a good friend of mine who's a, who's a known ag economist with one of the major seed companies, and he said to me, if he was walking down the street, somebody pulled a gun on him and said Where's corn going to be at harvest? He could make a fundamental case for $6, and then he could walk 10 feet down or 10 blocks down, another guy pulls a gun on him. So where's corn going to be at harvest? I can make a fundamental case for $4. So that's really the issue, right? You don't— it's extremely, uh, stressful, and I— but I don't, I don't like the action at all. And, and, you know, by that I mean I don't like the market structure. The action, that's great. And I can appreciate that there are people out there that say, oh yeah, we're going to $17, $18, $20, go here.

Yeah, well, you better have your balance sheet ready because I would guess that you'll probably see about a 3 to 3.5% interest rate hike this year as well. So you better be ready for the ramifications of that further on. I mean, Goldman Sachs was out yesterday, said they expect 7 increases this year in interest rates. So I would imagine they're not talking half percent, they're talking quarters. So that's, uh, 3 and change, let's, let's call it. Uh, yeah, you know, I, I don't— well, that's 7, 7 increases at, at a, at a half a point would be, would be 3 and change. Uh, so I don't know. Um, yeah, I— no, 20 up one day, 20 down the next. No, no thanks.

Chris: Do you really think we could see that much? That's kind of, you know, 7 increases. I think a lot of the common, you know, what a lot of people have been hearing is 3 increases, but they're anticipating more just because of the inflation. I mean, let's hit on that for a second, then you can address that. You know, what we see is with our clients, and when we look at the category of return to management, I talked about that last week, just with what we're seeing for the cost of production for our producers. And what we're seeing now is inflation on return to management. In other words, all the expenses we have to write checks out for, like healthcare and stuff like that, food, fuel, all the— all those things that doesn't, doesn't appear to go into their 7.5% inflation number. We're seeing about a 17% inflation number according to my data. Comments on that?

Because to me, that looks like hyperinflation, not just inflation. Is that what's warranting the thought process of more interest rate hikes or what?

Peter

Meyer:

David

Collum: Well, I think what's happened here is that I don't necessarily know that that would be prompting it. I think what's happened is that it has moved at a much— and whether you call it hyperinflation or not, whatever you want to term it, It has certainly moved a lot faster than the Fed had hoped, right? But anybody that's paying attention to any commodity market since January knows that, yeah, it's going on behind the scenes. But the problem you have at the moment with these markets, in my opinion, is that there's too much risk premium being built into it. I get it. I get why crude oil traded at at $95 Friday on the close. I get why the stock market's crashing yet. Any sort of conflict in the world between Russia and Ukraine is certainly going to exasperate things.

But there's a lot of risk premium already built into what looks like a 125 crop in Brazil as far as soybeans is concerned. There's an inordinate amount of risk premium built into corn, uh, based on the possibility that the second season crop doesn't come out well. I mean, yeah, it's, it's just— I, I really, I really think that a lot of this money is just blindly flowing in here. And, you know, it's going to take— but, and I think that the reason it's blindly flowing in there is even if we were to increase rates by 3.5%, that's not necessarily— the money doesn't think that slows down inflation.

Chris: So if we think about it from a farmer's perspective, and, you know, right now we're during the month of February during the price discovery, and as we record this currently, and, you know, like I said, we're in that week, the 14th through the 18th. Starting the 14th, there's 10 trading days left as we enter this this week we're in now. We're at $5.79 in the price discovery for corn and $14.07 on the price discovery for soybeans. Have you ever seen anything like that? I mean, to me, this is the first I've seen numbers this high. And it's really going to give the producers some pretty high levels of coverage. What— any comments on that from a, from a risk management standpoint?

Peter

Meyer: No, the beans, the beans are definitely a record. I, I can't speak to the corn in the order. I don't— we don't keep track of that sort of stuff, but I believe that the bean number is going to be a record regardless. Anything, anything over, uh, I think the high 13s is going to be a record. So given the fact that half the month is, is down already, yeah, because I won't change very much at this point now.

Chris: I mean, unless the market really moves one way or the other a lot.

Peter

Meyer: Right. So no, I mean, I don't know. It's, you know, yet, you know, we talk about beans. I just talked about corn, corn at harvest. I mean, I can, I can make a fundamental story for, you know, let's say $15, $16 beans, and I can make a fundamental story for $12 beans or $11 beans. So I mean, it's just, this is really, I mean, the money, the money that's in there has a good price that they, they started to buy it. They really started to buy it in earnest after the first of the year. So your risk is going to be where prices were the first of the year because that's where they would probably bail. So that's really where you're, where you're, where your risk is, in my opinion, is where we started the year at those prices. But even then, I don't—

Chris: like I said, I It's hard to know what to think with when you're in these uncharted territories a little bit.

Peter

Meyer: The problem we always have in commodities, right? Everybody says, "Oh, all that equity money when the market crashes, all that money from the stock market's coming into commodities." It's like pushing through a keyhole, right? I mean, you're just not used to fund managers. And look, I worked at the Wall Street banks. Yeah, buy me $100 million worth of the stock market, worth of the S&P. Buy me $50 million of this, $100 million, $200 million into that. You can't do that commodities. And that's the thing is that it feels like we've had some managers that are just kind of treating soybeans as if it were a share of IBM. And, you know, so I don't, I don't, I don't know. I, like I said, I mean, look, these pundits that are out there saying beans can go to $17, $18, they may be right. I just don't know.

All I do know is that If that happens and we have 2 or 3% increases in, uh, in, um, in interest rates, you better be ready for a couple of 3 years of very tough sledding. Because as we all know, the price of the end product always goes down way before the price of your inputs.

Chris: Yeah. And that's just it. You know, the inputs are the big deal as we, as we look into '22 and '23. And, and so with that said, I wanna talk a little bit here about, um, and I'm going to kind of skip '21 crop. I'm just going to make the assumption that, that, uh, people are, are in a pretty high profit level and what amount is left there they can clean house on their own. But let's focus on '22 for a minute. I'm going to pose a question this way to you. I've, I've been at some farm operation, a lot of farm operations the last several weeks, and I see marketing all over the board, everywhere from I have nothing sold to I'm about 70% protected, and a couple of guys even 100% with a floor. What is— what does Pete Meyer, the Farmer, do if you're sitting there? And you can answer both of these.

If you're at 0% sold, and if you're at, let's say, you know, 50% priced, what's your opinion for those producers that, you know— and I'm talking corn and beans and probably wheat too, for that matter. What's Pete Meyer the farmer do? Where's Pete Meyer comfortable with, with sales at these levels?

Peter

Meyer: 50% at a minimum. That's where, that's where I would be. That's where I would be at this point. Because like we mentioned a little bit earlier, how do you, how do you, how do you pass by a record soybean insurance price? I mean, it's telling us something, right?

Chris: Yeah, I think—

Peter

Meyer: is there going to be fear of missing out, Chris? Yeah, there's going to be fear of missing out. And You know what, but it's one of those things that, you know, we say this, we say this quite often. I mean, it's, it's going to be, it's going to be another year where we really, we really have to— it's not going to be easy, right? There are a lot of very, very difficult questions that the farmer is struggling with at the moment. It's not, you know, all the, all the pundits that don't have any skin in the game on the farming side are just pointing at the prices and saying, look, isn't that great? I told you it was going higher. Yeah, well, the farmer, the farmer is looking at higher interest rates, $95 crude oil, the possibility that the inputs, no matter what the cost, don't show up at the farm in time, weather issues.

It's— yeah, so I think that there's enough risk premium being put in this market unnecessarily that I would be at least 50% hedged. Yeah, and probably probably a little bit higher than that, but I think maybe, maybe two-thirds.

Chris: Yeah, I think what's hard for some of the producers that are already at maybe 50%, they started at 4-something and their average price is quite a bit lower. How do you, how do you handle that psychology for these guys and tell them it's okay, you know, you're, you're a risk manager? Because the risk managers have been, um, have been violated, you know. In other words, I mean, the, the do-nothing people have been rewarded and the risk managers producers, how do you, how do you tell the producers to, that, that, that's okay. You know, that the, psychologically, how do you tell 'em to handle that?

Peter

Meyer: Well, I think that the way that, the way that I would handle it is that if you have a, if you have a, a, a producer like that, that has been disciplined and, and stuck to his or her guns for years now and it's worked, you just have to do that. I mean, you rewarded the market at a price where you thought or you knew you could make some money and you obviously are not selling anything unless you have locked in input costs and this and that. Yeah, you have some floating input costs, but the fact of the matter is that these Johnny-come-lately or flybys, whatever, they're going to have the big year every once in a while, but then they're going to wait a few more years. I mean, look, I've got farmer friends of mine that wait till harvest every year, and they absolutely freaking— they love me when the price is high. They want to talk to me and see what I think.

When the price is low, they don't want to talk to me anymore. And meanwhile, they're not even clients. I just send them the stuff for free. It's one of those things where it's like, I get it, but you still have that mentality. And that's my whole point, Chris, what I started the conversation with. You put a gun to my head and I'm with, I'm with this economist at the Seed Company. I can make an argument for $6 corn. I can make an argument for $4 corn come November. So you tell me what you want to do in there. I'm not a farmer's manager and I don't offer advice to farmers, but I'm looking at the overall picture of it and I think it's extremely unhealthy. I think that we can trade We could trade a lot higher, we could trade a lot lower. But if we trade a lot higher, that's unhealthy for '23, '24, and '25.

Chris: So you've mentioned 2023. Talk a little bit about, you know, producers that are risk managers and '23 is a long ways out there. But historically, looking at those prices as well, they're pretty high. Is inflation a concern for you? That would cause you to not be pulling the trigger on some '23, or what's your thought on the '23 stuff?

Peter

Meyer: I'm absolutely scared to death of a continued supply chain issue throughout this country. I'm scared to death of inflation. I'm scared to death of— but then I'm also scared to death of a recession. It's a very, very delicate balance between the Fed having to raise rates high enough and calm things down. I mean, look, I started in the commodity business in the 1980s when Paul Volcker was the chairman of the Fed. He would raise interest rates every other week. I started in the business, interest rates were at 11%, the Fed funds rate. We went up to 20%. My first house I bought at 18.5% 3-1 arm. I know what this looks like. A lot of people don't know what this looks like. It's not the end of the world, but what happened with Volcker was that he knew he had to cool this thing in a hurry. If the Fed follows that playbook and cools it real early, we're in a recession by '23.

Chris: How does the US government handle that though with the national debt now? That's different than it was.

Peter

Meyer: I'm not worried about the national debt. I'm worried about the balance sheet. The balance sheet Right. And now you have money supply. Money supply is 40% higher than it was before the pandemic. The only way you cool that is by raising rates. This balance sheet is what, $2 trillion? Yeah. Volcker didn't have to worry about a balance sheet like that. Volcker had a place to start. Volcker started at 11% when he increased it. The whole idea behind increasing interest rates is People spend less money and put it in the bank and try to accumulate a little bit more wealth. But the problem now is you're starting at zero. So how does the Fed do that? I don't know.

Chris:

Preston

Pysh: So I'm going to be asking you about threats here in a second, but the first one I want to talk about here before we stay on the commodity side, but is on this interest rate thing. We have a number of clients that have been locking in their line of credit rates for, you know, 1, 2, or even up to 3 years, locking, doing a line of credit interest rate lock. And they raise the rates on it when they go out further. But what's your thought on, on that, doing that?

Peter

Meyer: They're not going lower for 10 years.

Chris: So you think if you get as long a term of a line of credit lock as you can get, to the degree you can get it, and you think that's—

Peter

Meyer: Yeah, I don't, I don't see Again, it's not advice, it's just perspective. But, you know, getting my perspective, I don't, I don't think interest rates are going, going lower for the next— well, at least the next 8 years. All right, well, let's see, you're halfway through this presidency, and then 6— I would say at least 6 or 7 years. But it also depends in the interim, in those 6 years, are going to go a lot higher. So I mean, if, if today is your base, oh no, no, we're not going to be this low for 10 years. No. You'll never— it'll be hard to see these rates again.

Chris: Okay, so on the commodity prices and looking at where we're at right now, what are the opportunities to the upside? First, what can continue to drive this higher? What, what, what things do you see in the near term that are positives to drive it higher from where I, I don't—

Peter

Meyer: I, I My fear is that I don't really see much on the demand side that's positive. Right. You saw that all the ethanol guys had a great fourth quarter, and now the first quarter, some of these guys are already negative margins. You see China's canceling corn, even though the market this week said, oh, China bought 2 to 3 million metric tons. And then on Thursday, we see that they canceled 300,000 metric tons, which may just be a freight arbitrage with Ukraine. I get that. So, you know, they quite— the USDA quietly lowered China's soybean demand from 100 to 97 or 98 million tons. You know, nobody's— nope, in soybeans, everybody says, well, the reason they're doing that is because there's not enough supply. You know, to me, 125 million tons, which is, which is the number that's floating around for Brazil, has been in the market for 2 weeks.

The USDA comes out at 132 or something like that, nobody believes it, right? Because everybody knows it's at $125. My point here, Chris, is that I think we're at the bottom of that range. And I think that people that, that are thinking that, uh, you know, we can see the same reaction in corn once the safrinha crop gets planted, I don't see it going into the spring. What's your risk? Your risk is for higher corn demand and not enough acres. I think at these prices I would certainly, you know, we took a stab at it back in November and said 90 million corn, 90 million beans. We went up, we went up a million corn to 89 million, uh, corn and 91 million beans. I'm sorry, 89 million beans, 91 million corn a while ago. We're still at that 90 and 90 level. Um, you know, your risk is that, you know, you flood the market with soybeans and you don't have enough corn. In case oil goes to $125.

But the thing is, with oil at $125, not everybody's going to be driving. And as we all know, the price of ethanol is not driven by the price of oil. The price of ethanol is driven by the price of corn. And the other thing you have is that the situation is going to remain extremely cloudy and fuzzy because at the end of this month— I'm trying to see when the exact date is— So at the end of this month, uh, the 24th and 25th, the USDA has their Outlook Forum in Washington, DC, where they will give their outlook about what we, what we see is coming up, you know, or what they think is coming up for the coming year. The problem is that, that, that data and those, and, and those estimates are based off the February WASDE. In no, um, short order the Brazilian number, and the Brazilian number is easily 8 million metric tons too high, 7 or 8 million metric tons too high.

So we're not going to learn anything from the Outlook Forum because they're going to be using 132 or 133 million metric tons when the whole market knows it's 125. So, you know, what does this mean? And then at the end of April or whatever, we get the prospective plantings number, which is the worst number that the USDA puts out. And when you talk to the guys at NAS, they wish they could They wish they didn't put it out. And then we have to wait until the May WASDE before— yeah, there's a lot of space here. My point here, Chris, is that there's a lot of space in here for the money flow to ebb in and out of the market, and that's going to make it extremely difficult.

Chris: It's interesting, the way I asked the question was, what could make the market go better? And you started out almost with negative things right away. Is there anything positive that could continue to give it strength? Because, you know, it's—

Peter

Meyer: Look, Chris, it's hard for me to be bullish this stuff in the middle of— I mean, how bullish can I be? You know, $16 soybeans in the middle of Brazilian harvest when it's going to be the second, even though it's only 125, It'll still be the third largest crop they ever produced. Somebody tell me, in the face of shrinking Chinese demand, somebody tell me how I can be more bullish. I mean, yeah, okay, if CPI next month is 12%, okay, then I guess I'm more bullish. But which is the dog and which is the tail at this point, right? I mean, are they buying commodities because CPI is high? And then it becomes— you know how these funds work, Chris. You know how they work. They become a self-fulfilling prophecy after a while. Until they have to get out, then it's not a self-fulfilling prophecy anymore. And look, they're a long way from getting out.

Don't get me wrong, but I mean, fresh inputs. The only fresh input I see is fresh money coming into the market. I don't have any fresh inputs.

Chris: So when you make those comments, that just justifies from a perspective standpoint, that producer that I mentioned that's maybe sitting there at 0% sold or 10% sold. These are some pretty big opportunities right now, wouldn't you say, going into this year?

Peter

Meyer: Yeah, I do, but I also understand, as you were saying earlier, that this is a white-knuckle time for the farmer. The farmer still has a tremendous amount of uncertainty here. I get it that every farmer wants to sell the high. Shit, as a trader, I wanted to sell the high, but you just can't do it. It's white-knuckle time.

Chris: So it's risk management. It's, it's, it's setting out with the producer yesterday, and we, we drew out the picture of what his margin target is. You know, I, you know, in that situation, I think there was like $1.60 profit right now in corn, and it was like $2.11 profit on soybeans, right? And when you have known expenses for this year, you know, for, for 2022, You know, I think we all have to be really cognizant of, of what, where we're at and what the profit opportunities are. To me, the concern is '23. That's why I asked that question, because a lot of our clients can lock in some really good numbers for '22. And, you know, and so I think the risk is '23. And as you talked earlier, you look at the insurance number.

If right now we've been running the numbers, if a producer yields their APH and they purchase insurance and we end up in that $5.80 range, and your $4— let's just say $4.50— your $4.50 situation, if you buy crop insurance at the 85% level— and I'm not a crop insurance salesman here, but I'm just saying that if you buy crop insurance at the 85% level, You— excuse me— you yield your APH, you're going to have about an $80 an acre indemnity payment just on the revenue change alone if that price comes down. So the level of coverage, the opportunity we have to protect the risk with this high of an insurance number is a blessing, like a big-time blessing this year. Even though the inputs are higher and everything, we have a lot of good things here. That really make '22 look like a phenomenal year potentially, you know, '23 is, you know, where the real unknowns are.

That's kind of why I was asking you, like, you know, do we start a little bit on '23? Or, you know, because if you think back to 2012, when we went into 2013, nobody, you know, when corn was $7.50, nobody wanted to sell $6.25 corn.

Peter

Meyer: No, no, no, I understand that. Here's what I would say, Chris. If we get to June and the planting seems to go okay and we've already seen 2 interest rate hikes by June, I'd start looking at '23.

Chris: Okay.

Peter

Meyer: Because I think that the interest rate becomes a negative then further down the line. But I would wait and see. Who knows? The Fed does— we really don't know. I think if you see 2 hikes, you know, March and May, April and May, see 3, as soon as you see 2 hikes, I would start looking at it.

Chris: Sounds good. Well, I think that's about all I had. I appreciate the conversation. Is there anything I didn't bring up or anything that's going— I mean, we didn't talk about Ukraine and Russia or any of that stuff.

Peter

Meyer: Is there any— No, I don't, you know, and I've done interviews this week with CNN and a whole bunch of people by Ukraine. The issue with Ukraine is I worry about the '22 crop not getting planted if this thing does break out. Farmers focused on saving their lives and not necessarily planting their crop, any sort of disruption. Certainly China's buying all of Ukraine's crops. So if Xi and Putin are friends, they're not going to create a blockade there. That's it. That's a very strange situation, but certainly has has underpinned some support in both wheat and corn. And the only other thing is that, uh, you know, if you're a top producer this week down in Nashville, please come and tell me I'm full of shit and that I'm wrong and I'm full of— I'm full of myself.

And please argue with my points because my dad always used to say if everybody in the world had the same opinion, it'd be a boring place. So I love to hear the opinion of the, uh, of the producer. And I will be on a stay on the stage with, uh, I think Tuesday afternoon around midday to talk about the, uh, the biofuels revolution, which you and I have talked about, Chris, and what that means to oilseeds and stuff going forward. So please come, come educate me, tell me I'm wrong on this stuff. I always, uh, and I'm dead serious, Chris, Chris knows this because I don't take myself that seriously and I try to learn something new every day. So I appreciate the input from all the producers.

Chris: Yeah, well, AP, we really appreciate your input too. And like you said, you know, we appreciate your candor and You've got a lot of experience. So that's what is really valuable to, to us as producers. Speaking as a producer myself, we, we've got to have that, that outside perspective and that clarity. Because as you said, there's a lot of challenges that we face here in the next, the next few years, the way it looks. And so, again, thank you so much for being on here. It's really, it's a privilege to have you on and a pleasure to visit with you every time. And we learn something every time. So thanks a lot. Really appreciate it.

Peter

Meyer: You're welcome.

Chris: All right, well, thanks everybody, and we will be back again next week, and we will catch you next time on the Ag View Pitch.