About This Episode
Asked what percentage sold makes him comfortable, Creed says he does not work from a percentage at all. The number he wants is how many bushels have to be priced for the farm to make money. Price those, measure what downside is left from that point, then handle the balance with something else, a minimum-price structure being his example. New crop orders were already filling in small increments through late December, which is the mechanism: sell into strength in pieces rather than waiting for a level.
Strong basis and slow farmer selling ran together, for different reasons in each crop. Soybean crush margins kept firming through the rally, so domestic demand bid hard for ownership. In corn, local shortages plus a western Corn Belt export program pushed basis in Minnesota, the Dakotas and parts of Nebraska to levels not seen in years, and ethanol plants carrying debt found it cheaper to run at a loss than to shut the doors. Meanwhile PLC and two rounds of CFAP removed the cash flow pressure that normally forces grain out.
One number explains the selling habit. At a large Central Plains cooperative, more than 77 percent of the corn bought between 2016 and 2020 came in under 3.75 futures. On acres, December corn at 4.20 to 4.30 would have bought close to 100 million corn acres in the last three or four years, and beans need a ratio nearer 2.8 to 3.0 to compete. The next 30 to 45 days belong to insurance, he says, naming SCO, ECO and the move from ARC County to PLC on beans.
“I don't even know if I have a goal of what percent we need to be. I want to just know how many bushels do I need to sell to make sure I'm going to make money.”
— Jarod Creed
Key Takeaways
Do not start with a percentage sold. Start with the number of bushels that must be priced for the farm to make money, and price those.
Once profit is secured, measure the downside that remains from that point and switch tools for the balance, such as a minimum-price structure.
Basis strength has a different cause in each crop. Firming crush margins drove beans; export flow and ethanol plants that could not afford to shut down drove corn.
Government payments delay selling by removing the cash flow pressure that usually moves grain in the first quarter.
More than 77 percent of one large cooperative's corn purchases over five years came in under 3.75 futures. Waiting is the norm, and it is expensive.
Spend the next 30 to 45 days on insurance rather than price forecasts. Ask your agent about SCO, ECO and moving beans from ARC County to PLC, and call someone else if the answers are thin.
Full Transcript
Jarod
Creed: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. 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, and we are heading into another week, actually the final week of 2020. Thank God we've got Jared Creed with us, JC Marketing Service out of Hudson, Iowa. How's it going today?
Jarod
Creed: I'm doing well, Chris. Merry Christmas to you and your family.
Chris
Barron: Yeah, Merry Christmas to you guys too. It, it, uh, got here finally, and I think a lot of people are ready to get rid of this year. You know, hopefully everybody's been safe and having a good time with family and kind of wrapping this year up. And, and one of the things that I think has been interesting as we kind of start talking markets here is just the crazy strength that we've seen in, in these commodity markets as we get toward the end of the year. What's your thought there? What should, what should we as producers be thinking about going into this last segment of the year?
Jarod
Creed: Well, you hit the nail on the head. Crazy is right. I can't tell you how many years that being in the grain industry, it seemed like you had a mini vacation the last couple weeks of December. Into the first week of January, but that's far from the exception this year. Obviously corn and beans both moving to new highs in the tail end of this month with not a lot of different change of a story or not a new story, not a new input to the market really. You still have some continued focus on South America weather. Just a quick opinion there, I don't think Brazil is really an issue. I think Argentina is something that has to be watched in the future. Obviously the U.S., we're getting closer to the next spring planting. We're obviously dry here, but outside of weather, it's a pretty, it's a pretty mundane type of year that we don't really have a lot of issues to be circling.
But probably the biggest picture is you still have— continue to have a weaker U.S. dollar and it continues to put an inflationary type of a feel in the commodity market, not just grains, not just what we're near and dear to, but the commodity markets in general. And the Bloomberg Commodity Index, you know, overlaid with a U.S. dollar index chart continues to show step-by-step direction. As the dollar gets weaker, commodities get stronger. So if that wants to continue to happen going into 2021, I mean, I think we've maybe talked about this briefly last time, but I think there is a little bit of a need for some cautious optimism and a little bit of a pragmatic approach about next year. And that I think is your answer to your question right there of what does a producer need to be thinking about.
Well, they need to be taking a solid look at what their opportunities are to close the books on the 2020 crop year and be taking a solid look at what 2021 looks like. Just in the last week, started having several new crop orders filled, not getting out of hand here, but just basically taking little steps at a time as the market continues to rally. It doesn't really matter what— how small that increment is of new crop sales. What I'm trying to accomplish is get to price levels that I can actually make up to a certain level of sales and measure what my downside risk is at that point from a profitability perspective for the entire farm and go about marketing the balance of the bushels in an entirely different fashion than what we've been able to do the last couple years.
Just basically looking at setting the price on X amount of bushels to guarantee myself a profit and then come in with the balance of the crop in some type of a strategy, you know, a lookalike of a minimum price type of a strategy. So this, just look, I mean, that's, I think, the answer right now. The doldrums of the winter, nobody typically gets too interested in marketing. Just look at your numbers, look at what the opportunities are. We're talking about rare air with December corn above $4.20 at this time of year, and obviously soybeans being at multi-year highs.
Chris
Barron: So I'm going to come back to, uh, amounts here, and I'm going to pick on you on, you know, kind of levels that people might need to be considering and where they should be. But I want to back up for a second. You know, when we look at this price strength, and we'll focus on old crop both on corn, soybeans, I don't care what crop, wheat, you know, you look at basis levels in certain areas and we see not only strong prices but pretty strong basis levels in a lot of cases. What's driving that? I mean, you know, you hear a couple of different arguments on, well, the government payments are slowing farmer sales down, but on the other hand, I talked to plenty of producers where it actually may accelerate sales because you know, you add those government payments on, on a per bushel basis, and it, and it actually makes it, makes it work even quicker. And so maybe that accelerates sales.
So what's your thought process on, you know, with where basis is at and what producers need to be thinking about there?
Jarod
Creed: Well, I'm glad you brought that up, and I think you got to separate in two different buckets in corn and beans. Beans, no doubt we have a very, very strong export program. That export program for at least the U.S. Is somewhat coming to a close, but nonetheless crush margins, even though we've seen a significant price rally, crush margins have continued to firm. So your domestic consumption, your domestic demand of the U.S. soybean crop is, is rocking and rolling, no complaints there. It's definitely creating a situation that they're able to bid up to get control of that grain, the soybeans in particular. Now when you jump over to corn, it's a little bit more of a tricky situation, but I think you could put in a numerous amount of variables at play that's creating strong basis environments. So obviously in local places we had shortage of supply, no doubt about that.
But then you have a very strong corn export program out of the western Corn Belt. You're seeing basis levels in Minnesota, South Dakota, North Dakota, parts of Nebraska that we haven't seen in several years. That's creating just that extra competition for the ethanol plant. And it depends on what the business structure is of particular ethanol plants. But, you know, a facility that's not paid for and has a lot of overhead debt, they're not enjoying life right now. Corn is too expensive for them. It's making it hard on their margins. However, things are not bad enough for them to shut down. In essence, it's cheaper for them to continue to operate at a loss than shut down. And then lastly, you know, the government programs.
I don't know if I would really believe from— I think in a certain segment of producers, and I guess I'm not trying to be favorable to one operation, not favorable to another, but the individual that looks at the total dollars is probably making sales faster because they're seeing the added money. But the general U.S. producer, the general behavior that we've seen over the years, They're not. The money that they're receiving continues to keep them at bay. And I got to just share this here for a second, just as a reminder for everybody from a proactive standpoint. An outfit that I work with in the Central Plains, a very large co-op, we did some research dating back to 2016 until present date. Over 77% of the corn purchases that they've made over the course of those 5 years was sub-$3.75 corn futures.
So we're still in that camp today, as in we're still seeing sluggish farmers selling because they don't need the cash. They're flush with 3 different programs from PLC, CFAP 1, and CFAP 2 in 2020, and here we are probably talking about another CFAP program in the beginning of 2021. And that's definitely having an impact on the flow of grain, especially in larger quantities. Now I would say that after the first of the year, time will start to become a factor, and I would expect to see some decent grain movement first quarter and third quarter of 2022, with obviously the, the seasonal slowdown during planting. So I think there's still some good opportunities out there in basis if a producer has some exposure in that space. But, um, all in all, you got a lot of different reasons the farmers slow up moving the crop, from demand, from needing to keep the plants running, to government money.
Chris
Barron: Well, I think there's a lot of people, as you said, that sit there, and maybe less of our listeners or our clients are a little more aggressive at moving these bushels and looking at that cost of production and looking at that that, you know, price objective that they had, but that it's more important to figure out kind of what that margin objective is of the profitability they were looking for. And once that goal is achieved, you know, it's— we see a lot of our clients pulling the triggers at the levels. But with these bushels that are still out here yet, I mean, what kind of risk do you think there is there, price risk? And, you know, as we move forward, as we get into that January February, March timeframe when sales do need to be made for cash rents and cash flow and other things at a certain point here.
And then, you know, are there other things that are at risk, or are these operations that are sitting there doing nothing, sitting on their hands, know something that maybe some of the rest of us don't know?
Jarod
Creed: Well, two different answers to that. The operations that aren't doing anything, obviously it's pretty easy to identify their risk, and it's more of an opportunity risk than anything. Producers that have been doing something, you know, I've actually taken a shift of a focus to some operators I work with that can store the overwhelming majority of the crop, or for the majority of the crop we are forward marketed, we are waiting on basis levels, different types of strategies there. But we still have a little bit of old crop to sell, but I'm kind of taking the stance now that my risk has shifted from 2020 to 2021, no doubt. And I'm willing to absorb a little bit more risk as long as I don't have dire cash flow needs and start to take a little bit closer look at 2021 and overlook 2020 for a period of time here.
So I would say that at this point, Chris, I mean, the money that we've had come to us— we've talked about this before on the show— a lot of operators are going to be profitable this year regardless of what Mother Nature threw their way. The— it's probably more of an opportunity risk on this year's crop versus 2021 is more of a risk of actually losing money on the farm. I think that's kind of where we're at in today's marketplace and what has been sold and the money that's been received.
Chris
Barron: Yeah, and I think we can debate on 2020, uh, old crop corn, soybeans, wheat, whatever, you know, sell or not sell. Farmers got to make their own individual decisions, and as you said, there's a lot a lot of operations out there. There's, there's, you can find exceptions to this, but there's a lot of operations out there that are going to do just fine if they sold the rest of the bushels at current prices, even though a lot of people are frustrated that, that sales were made at levels lower than they wanted to. And so I think there's a lot of people out there wanting higher prices to offset some of that frustration. But with that said, as we look at 2021, You know, we, we can't forget about, you know, we are going to grow a crop again next year.
Talk a little bit about, you know, soybeans and how they've kind of been driving, it seems like, you know, driving this market, especially on, you know, on the nearbys here. But, but as you look out to '21, what do you, what are you seeing there between corn, soybeans, and wheat?
Jarod
Creed: Well, wheat unfortunately still needs another couple more bucks to make its way back into rotation for some of the Western western corn belt producers that I work with. Now you got an agronomic standpoint here, an agronomic argument for a switch from corn on corn to corn on beans, or excuse me, beans following corn next year. And then you got a financial argument. And with where the prices continue to move from a holistic approach here for a second, $4.20 to $4.30 December corn futures at this time of year, the last 3 or 4 years would have darn near probably got us close to 100 million acres of corn. So we got to be thankful that we got a heck of a bean situation behind us. But never say never. That's maybe a little concern that I have. I don't think it's the, it's the possibility this year. But if we're at $4.25 to $4.30 spring insurance price in February, watch out.
We had an open fall. We're going into this spring with a, you know, a drier tone. It's nothing to say that we can't push corn acres in a big, big, big, big way. Right. Now, with all that said, from a financial standpoint, I still think we need to expand the ratio of new crop beans to corn closer to a 2.8 to 3.0, and that is what really would financially buy some of these acres rather than just making the switches on agronomic cases. Across my client base, we're seeing maybe as much as a 10% shift from corn on corn to bean, but nothing near maybe what the emotions that this market has created that would lead a person to believe that we're making some monumental switches. So that's a little testing for beans as well, that the price of the corn is definitely asking for the corn acres. The prices of beans, it looks like it's trying to buy the bean acres, but it's not enough at this point.
And I think that could ultimately be a little bit of a slingshot. The more corn rallies at this point in the game, potentially the bigger of a slingshot it creates for new crop beans next spring and summer.
Chris
Barron: Okay, as we get close to wrapping up here, you know, is there anything that you think is something that people need to be thinking about going into '21? And just with that said, I just want to ask You know, as a producer, what are you, what are you telling your clients? Where are you at, um, percent sold on corn and beans? What makes you feel comfortable?
Jarod
Creed: Well, I don't know if there is an exact percentage, Chris, uh, and I've spent— I feel like I talked about that all last week, uh, that I don't even know if I have a goal of what percent we need to be. I want to just know how many bushels do I need to sell to make sure I'm going to make money, right? And really the focus for the next 4 to 6 weeks is going to be a deep dive discovery on what type of insurance strategies we have available to us next year. We briefly discussed that last time I was on. Some of these add-on programs are going to guarantee me the ability, net of cost and net of basis exposure, to be profitable no matter what. And I do, uh, maybe I'm a little too, uh, hard on some of the insurance agents space from an expectation standpoint.
But if your agent hasn't talked to you about some of the add-on programs that you have available to you and they haven't talked about SCO or ECO and switching your beans away from ARC County to PLC and all these things, you better be asking those questions. And if they— if you feel that they're a little off, call somebody that you know knows that space. I'm not an agent, but I understand it all. That's probably one of the most important things for the farm in conjunction with looking at their opportunities. But Understanding what types of mechanisms they have, what levers they can pull in the next 30 to 45 days to guarantee them a profitable 2021 from just an insurance perspective. We're leveraging all the operational success that farms have had over the course of the last 5 years in a very uncertain time, a dry period of time.
Make sure you know what you got available to you from a crop insurance perspective. I can't reiterate that enough.
Chris
Barron: Yeah, that's excellent advice because, you know, the best way to manage profitability is to manage that risk going into 2021. And as you said, you know, there's really some sweet, amazing opportunities out there on the insurance side, and we plan on doing some more discussions on that and would like to have you involved in some of those conversations down the road here as we get a little closer to, to that time frame when we can start getting some of these growers looking at this more. But I think that's great advice. If people haven't already talked to their agents, or their agents haven't got a hold of them, they better be getting a hold of the agents and get this stuff, start thinking about it for sure.
Jarod
Creed: Yep, absolutely.
Chris
Barron: Anything else I didn't, I didn't ask? I think we'll wrap things up. Any other bits of wisdom before we wrap up here?
Jarod
Creed: No, I don't think so. Just repeat that. Just take a look. That's all we can ask for, guys, right now. Everybody gets in a rut. Take a look at your opportunities here for a minute. Uh, ask the questions that you don't know. A lot of different moving variables in a, in a typical very quiet time frame of the year.
Chris
Barron: You bet. Hey, if anybody wants to get a hold of you, what's the best way to reach you if they got some questions or want to talk to you one-on-one?
Jarod
Creed: Sure, phone number is area code 402 680-1744.
Chris
Barron: Awesome. Hey, I really appreciate your, uh, time, Jared. You guys have a great week here and a happy New Year. Looking forward to a new one. I bet you are too.
Jarod
Creed: Absolutely. You, you do the same. Thanks, Chris.
Chris
Barron: Yep, thanks a lot, Jared. And thanks everybody for listening. Uh, have a happy New Year, everybody, and we look forward to 2021 coming in. And we will catch you next time on on the Ag View Pitch.