Are you ready for market volatility? - weekly market outlook: Feb. 8-12

Narrator: And it all comes down to this.

Chris: Two on, two out, bottom of the ninth. The Farmers lead by one, full count.

Narrator: Here comes the play at the plate, and it's the Ag View Pitch! Welcome everybody to another episode of the Ag View Pitch. We're heading into a new marketing week. We've got Brian Splitt with us, partner at agmarket.net. How's it going, Brian?

Chris: Goin' good, Chris. How are you today?

Narrator: Oh, pretty good. Still trying to wake up and get the new day and the new week heading our way. And we are looking at a report coming up here on Tuesday, and we're talking here on Monday morning. So just wondering, as we get towards this report, what should we be thinking about? What should we be watching? And then we'll, we'll talk about what to do with what we see here in a bit too. So I'll just kind of be quiet for a minute here and kind of what, what are you seeing with that report?

Chris: Well, I think, uh, let's backtrack to the January report real quick just so we can kind of see what's led us up to where we are now. So the January report for both corn and soybeans reduced ending stocks. Um, we are down to 140 million bushels of soybeans as our expected carryout for this crop year. And, uh, 1.552 billion bushels of corn. And the expectation is that we will see carryout drop for both products on this report. So this is going to be the February WASDE report. And the reason the trade is, is confident that we're going to see ending stocks drop again is because of the pace of export sales that we have. So when you look at the amount of corn and the amount of soybeans that we've sold and especially with the change that the USDA did in January for corn in order to accommodate a lower production.

So we— they reduced the yield on the per bushel base, or I should say, you— they just yield lower on the per acre basis. They had to accommodate that with a reduction in demand, and so one of those reductions was in the corn for export category of 100 million bushels. Since then, and we've seen some really tremendous export sales, especially to China— China purchased nearly 4 million tons in one week a couple weeks ago— so it really does not make that adjustment lower on the January report on export demand look like it's going to stick. So we should see the USDA raise export demand back on the report, and even if they just give us those 100 million bushels back, we're now back down to 1.4 4.52.

Internally at AgMarket.net, we believe that we're pushing closer to a 1.3 type of a carryout and that exports over the next several months are going to be strong enough to get us closer to the 5.7 billion bushel total export number. We're going to start seeing the soybean export program wind down. We've been shipping a lot of soybeans. The corn export program is going to become the, the high priority, and we're gonna start shipping corn in earnest. So that's gonna have the basis markets gonna be extremely important to get corn moved to where it needs to move to get into the export channel. Soybeans, we have sold such a high percentage of the whole year goal for the USDA again that the trade is looking at the USDA reducing carryout through additional exports on the balance sheet there. I believe the lowest estimate for this report is just over 100 million bushels.

So just for perspective, when we had the drought in 2012, we had a period of time between August of 2012, which is really the apex of the drought, all the way through the following summer in 2013, where our ending stocks of soybeans were expected to be roughly 125 million bushels. And so if the USDA does reduce ending stocks as anticipated, we're walking in the direction of putting our ending stocks at levels that would rival 2012. And these are time frames when we are trading $15, $16, $17 soybeans. So does the USDA have to make that adjustment? No. But do we have enough evidence to suggest that they should?

Narrator: Absolutely. Interesting. So you're talking— this sounds pretty bullish. I mean, what's the farmer to think about from their perspective, you know, in this, in this week and watching what this happens, what are some things producers should be thinking about, or is there any action that we should be taking here?

Chris: Well, any action is going to be done in, to me, one of two directions, and the direction will be dictated by really your cash position moving forward. So Again, this is what is expected by the trade when we talk about these reports. The USDA does not always behave like we expect that they should, and so they can do things to, to top the market, they can do things to bottom the market. Let's not forget that we've seen bearish reports turn into the market bottom in August, for example. You can see a bullish report turn into a market top. Because frankly at some point you just get to a price where, you know, the market has priced in what's been expected.

So I think at this stage what the producer needs to be trying to figure out is what is your method of marketing moving forward, because I think the last 5 to 6 years have really trained us that, you know, you look at new crop corn at $4.50 right now You look at new crop soybeans at $11.65. These are levels that in the last 5 to 6 years the market has trained us that we should be taking advantage of these price levels, but we also have balance sheets right now that are unlike the last 5 to 6 years, right? And so as we get closer to spring and we're starting to think about what type of potential weather events we might have, Have we cured any of this dryness that we're seeing in the greater Midwest, or are we still going into spring and summer with a low moisture profile that could become an issue during summer?

And if that's the case, then things could still be extremely explosive this summer. So what we're working on is trying to find a way— essentially philosophically, how are we going to be marketing this year?? Because in previous years we may have said, hey, let's, you know, go ahead and buy a put and sell a call, and we'll have a floor under the market, and we'll have a ceiling above the market that we're okay with. You know, that type of position is marginable. So do we do the types of things that we've done in previous years knowing how explosive things could be this year? But on top of that, can we afford to ignore the current price levels that we're seeing? Right now?

And I think the answer to that is no, but we also have to find a way to allow yourself to participate in the market if we do see a really exciting market this summer, and also do it in a fashion that is not going to stress you out with margin calls. You know, if you're heavily positioned and the market's going higher and you're getting emails or phone calls every morning, hey, we need $5,000, hey, we need $10,000, hey, we need $20,000 to margin this, That can get old too. Yep. So we've been trying to figure out ways to allow the producer to feel protected, uh, have the upside open, and be in a position where if you're throwing more money at the market in your hedge account, that you're in control of when you do that. You're not at the mercy of the market just going higher. And so I think in order to do that, there's a couple different ways that you can go about it without marginability.

The first is just simply using puts. A put is the the product that will put a floor under the market and give you a worst-case scenario. Something like buying a, a $4.20 put under December corn, that will give you a floor at $4.20, but you are paying for the right to have that floor. So when you think about a $4.20 put, maybe you're paying 25 cents for it with the current market, that gives you a true net floor at $3.95 a bushel. And that's the futures level. So then you have to take into account your basis, and that would give you your cash price.

Another alternative that I think some marketers are looking at is the idea of, okay, well, I've got a good futures price, I've got some basis even for new crop that is stronger than typically what we would see at this time of year, and so just talking through producers over the years, a number that a lot of producers want to start at and shoot for for their beginning beginning of their corn marketing program is at $4.20 a bushel level. And so if you've been patient thus far, you could actually come in and do a hedge-to-arrive or a forward contract at your commercial facility that you deal with, and we're currently at $4.52.5. Well, you could spend, let's say, $0.29, $0.30 on a $5 call right now.

If you were to just go ahead and sell a little bit of cash at $4.50 plus and then buy that $5 call— this is a December $5 call, it's there all the way until next November, so you have almost 300 days with it— the net position after making a sale and buying that call still allows you above $4.20 for futures. So if you automatically assume that that $5 call is going to expire worthless and take that 30 cents of cost off of your sale, that still gives you a net sale above $4.20, and now you're able to participate if this market does march higher during summer. And I'm not so worried about selling $4.50 and going to $4.60 or $4.80 or $4.90. What I don't want to miss is if we sell $4.50 and the market goes to $6 or $7 or $8 like we've seen in previous years. Mm-hmm.

So being able to make that sale and have a worst-case scenario of $4.20 basis the board, but then being able to have 100% participation in a move above $5 on paper. Now you're in a non-marginable position, the margin call risk is at the elevator, so you don't have to worry about it. You've got a good revenue level locked in, and if the market wants to get really exciting this summer, you can participate on the board that way and just manage your call without any kind of margin potential on the way higher. So these are the things in the conversations that we're having with our clients right now, not necessarily about, you know, where we think the market could or should go.

And of course we talk about that, but a lot of it's the philosophical discussion of how do we want to go about marketing this year so that you're comfortable through the whole marketing year and you don't feel like you're under pressure for margin calls, but also so that we're not ignoring the opportunities that are in front of us currently.

Narrator: Right. And that's, that's— you know, something that, you know, when we look at where the insurance level probably is going to end up being this year, that's a good opportunity or a play for some of these bushels too that, you know, that are in the gap of the insurance area too, to where you can kind of, you know, have an absolute or a known number on some of those bushels too. Anything else that you guys should be watching out? We're going to keep this one kind of short, but anything else you think in this next week people should be watching out for and thinking about as we go through this marketing week?

Chris: Well, you had mentioned the crop insurance, and we are in the period right now where we are over the course of the month of February, we're going to be dictating that crop insurance floor. If a producer wanted to take control of that scenario over the course of the next few weeks, it's actually a very cheap proposition. You can come in and use a short-dated put that is priced off of the new crop contract but will expire later this month. And so effectively you could come in and let's say buy a $4.50 put, and something like that might cost, I don't know, let's say 6 cents. And so for the next week and a half, you're going to effectively guarantee yourself that this market is going to be protected during the, the first chunk of February where we're making our average.

So that's another very simple strategy that you can do if you want to make sure that your crop insurance floor is established for the worst-case scenario. And once you know your crop insurance floor, that might make it a little bit easier for you mentally to try to be patient with some of your actual physical marketing, knowing exactly where your crop insurance floor is. So that would be another thing to consider if you didn't want to go all the way out and do the long-term marketing, just focus on the short term with your crop insurance levels. As far as other things to be watching for, you know, we're going to be watching for something that I think is going to happen over the next 30 to 60 days, and we may already be seeing it here, but I think the export program in the United States is really going to shift drastically from shipping soybeans to corn.

And so we've seen the, the bean shipment program very aggressive. We've sold a lot of beans, we've been shipping a lot of beans, but we need to because our major competitor is going to be coming online with their crop. They're going to become the world's bean shipper. And so what's going to happen is we're going to see our bean exports really drop off dramatically, and we're going to start to see see corn exports become the priority at our domestic ports. And so I would expect that some of these premiums— we've got a slightly inverted bean market right now where the March contract is trading about a penny above May, but we're trading, you know, nearly 20 cents above the July contract. I think that those inversions are going to start to ease up a little bit.

We might see these bean spreads soften up, but we're probably going to see the exact opposite continue to happen in corn, where we're going to see March corn continue to trade strong versus May and July, even stronger versus new crop. And so I think what's going to happen is we're going to really put some pressure. The basis is going to become extremely important because we need to get corn moved from wherever it is to where it needs to be to get into the domestic export channel. And so as we move into spring, we're going to really be working on our corn shipments. So The corn sales have been very strong, but we need to be shipping more of what's sold to hit the USDA target. So I think you're gonna start to see the soybean market become less of an issue.

The basis is gonna have to do some work there just because we have to keep the, the crushers— we can't have a ton of domestic demand winding down our stocks. We still need to see prices strong enough and basis strong enough to to ration demand domestically, but I do think a lot of the export demand is going to be moving to our South American competitors. So over the next couple weeks, one of the things that I've been looking at is, and we put a study out that we sent to our clients a couple weeks ago, but corn and soybeans have been tracking the 2008 futures in, in what I could only say is an uncanny relationship, and I'll explain that to you, Chris. We had a limit-up settlement on the January report. Mm-hmm. And we had a limit-up settlement on corn in 2008 as well on the January report. In 2008, the July contract settled limit-up on the January report at $5.16 a bushel, $5.16.

This year we were limit-up. The July corn settlement was $5.16 and a quarter. Both years, the night of the January WASDE report, we had gapped higher. Uh, we then made a short-term peak. This year that short-term peak was $5.40 and a quarter. In 2008 it was $5.42 and a quarter. And then you'll remember that we had broke really aggressively off of that peak. The low this year was $4.90 on the dot. The low in 2008 was $4.90 on the dot. We're talking the same time frame of these moves as well. So what that would suggest, if we maintain this relationship with 2008 moving forward, that would suggest actually both corn and soybeans are going to be going up and making some new contract highs and will continue to stay strong through the month of February until we get to the very beginning of March. So I currently have clients that are speculating the market.

We are long with calls, and we focus mainly on soybean calls that will be expiring at the later part of March. So we want to be long with options going into the very beginning part of March, and then assuming that we continue the pattern with 2008, that is when we're going to be coming in, taking profit on those positions, and then being aggressive put buyers. And now some of the volatility that we've seen is not the type of volatility that we've been used to over the last 5 or 6 years, but I think this volatility is here to stay, and the volatility is going to be in both directions. So in 2008, we actually had a very strong move that took this market up to about 1575, and we did that by the very beginning of March, and this was on front-month soybeans, and we're starting— that rally started from the same level that we're sitting at right now coming into this report.

So again, if USDA does reduce stocks, I imagine this market could see a several-dollar rally over the course of the next month. But to put that in perspective, from the beginning of March to the beginning of April in 2008, the soybean market made a $4.80 drop to the downside into the very beginning of April, and that was going into the end of the quarter, right? So March is the last month of the first quarter. We're gonna have— if we have a rally to the upside, we have a very long fund participant with a lot of profit going into the end of the quarter. We're gonna see the conversation shift to what type of acres we're gonna be planting for new crop So we could go very quickly from the bullish sensation of this report to then the bearishness of end of the month, end of the quarter profit taking and the expectation of large acres.

Now in 2008, that move from beginning of March to beginning of April, again, was a very large correction to the downside, but it was a big picture buying opportunity going into summer that year. So I think you have to be mindful of the size of the moves that we could see And I would say that maybe this is a message for the speculator out there, that if you've been trading futures and these moves have been a little bit larger than what you like to handle, or you've been using stops and getting stopped out, but you've been right about the move in the big picture, these moves are going to be big enough moving forward where you could probably just use options, point yourself in the direction you want to be pointing it. If you think beans are going up, use a call. If you think they're going to go down, use a put.

You don't have to be in futures using stops, you know, risking 10 cents and getting stopped out and chopped up. I think you can use a call that's there for 30 to 45 days, spend 20 to 30 cents on it, point yourself in the right direction, and the moves, if we're correct, are going to be big enough where you can still do very well in the option position, but without the risk of the stop and without the risk of getting stopped out and being right the market but wrong on your timing.

Narrator: Yeah. Well, I think this is a good place to wrap up. And I think, you know, the key message I just got from you is the volatility is there and pay attention to the opportunities. Options are going to be a really good tool. And I think for a lot of farmers, I think that's a really good message and managing the volatility and just paying attention to things. If people want to get ahold of you, Brian, how, how do they do that? If they want to, want to talk through some strategies and stuff with you, what's the best way to reach you?

Chris: You can reach me directly at 815-665-0463. You can reach anybody at the AgMarket.net team at 844-4-AG-MARKET, so 844-424-6758. And shoot me a message online on Twitter if you're there, that's @BJSplit.

Narrator: Awesome. Yeah, that's why we like having you on, Brian. You, you are one of the guys that can think of about 15 different ways to manage risk and, and really appreciate your, your time and your expertise in the market. And good luck this week, and we will be in touch again here real soon. Appreciate your time.

Chris: Okay, sounds great, Chris. Thank you for having me.

Narrator: You bet. That was Brian Split, and I would like to thank everybody for being on here today, and we will catch you next time on the Ag View Pitch.