Inflation, USDA report, and volatility

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. We are heading into a new week, January 10th through the 14th, and as we head into a new week, we're lucky enough to have with us Grant Schimmick. Grant, how's it going?

Grant

Shimek: Great, you, Chris?

Chris: Oh, hanging in there. Just, uh, like I was telling you offline a little bit ago, walking out to, uh, the office here to record, got kind of got hit by the wind. It's been a little chilly this last week or so, hasn't it?

Grant

Shimek: Oh yeah, you can feel it, that's for sure.

Chris: Kind of cuts right through. Uh, yeah, so I guess what I would like to do, um, with you, Grant, to start out, you're a pretty good student of the overall economy, pay attention to what's going on with everything. Let's start out with the inflation, uh, conversation and have you kind of give us some perspective and what you're seeing in the economy and some of the things that we need to be paying attention to and watching with regard to that.

Grant

Shimek: Well, I think the, the one number one thing we see is that I think the general, general populace continues to wake up to the inflation situation. Everybody sees it in their day-to-day life with food costs, so forth. Obviously, the big driver here is energy, and you can see just the huge disparity between Europe and the rest of the world. And a lot of this is obviously policy-driven because we're shutting down energy nuclear plants in Europe and so forth. And at the same time, that there's not enough of all sources. So if you take a compare, say natural gas, US versus Europe, we got up to a point where we are 15 times higher in Europe than the US. I believe that, you know, some of those numbers were probably around 30, like for a thermal unit of natural gas, we got around $32 to $34 a therm. In, in Europe while we were probably 3.5 to 4 in the U.S.

China was probably still in the upper 30s at the same time. So some of these things that are driving food inflation don't appear like they're going to go away. So like, are we going to get just a one-off event here? And as we look a year or two out, are we going to see fertilizer come in a lot, if we can see energy come in a lot, and I guess anything's possible. But that's one of the big drivers here that I don't think is going to go away. We can see it abate and correct, but those are those things that people are waking up to as far as food security and how do you quantify that. It's very tough to. So, you deal with our grain buyers and so forth and fertilizer suppliers. And a lot of these things aren't 1 1 2 answers. It's how emotional are people going to be as we go into spring and these issues continue to develop.

Chris: One thing that's been interesting, we've been doing, you know, some farm meetings, getting numbers, cash flows put together for loan renewals, all that kind of fun stuff, and looking at cost of production going into 2022. And we've been forecasting expenses in what we call our category for return to management, which is essentially all those overhead things, right? So you're looking at food, fuel, electric bills, all those kinds of things. And, you know, I don't have a scientific number, but I'm coming up with closer to, you know, 14 to 17% inflation when we compare it to last year. What's your take on that?

Grant

Shimek: Absolutely. You know, we've been in double digits for some time now. It's how deep are we in the double digits, and that's where the, the government numbers on inflation, we all know, are not anywhere near where they should be. So in reality, things are running very high.

Chris: Gotcha. So when you look at inflation and you think about commodity prices as it relates to inflation, and you look at some of the other sectors like you're talking about— and by commodities I'm talking corn, soybeans, the grains primarily, and, and, or just any of the commodities I guess you can touch on— but are we, are they underpriced relative to some of the other stuff, or what's your thought there? I mean, as far as where the money flow is going.

Grant

Shimek: We can all point to certain products like the meats are probably still underpriced and what it costs to really produce them, especially cattle. Does that matter? Well, it hasn't. Uh, we've seen some big percentage increases in grains overall, but if we do get the energies to run more than they are, I think we're going to keep marching to the upside. So I don't have a metric to throw out to say that, well, you know, we should see X, Y, or Z up a certain percentage point. I think that this comes back to a lot to expectation and we'll, you know, things like meats and so forth, get a ramp to them and we're going to keep feeding everything else.

Chris: So as we look at 2021 remaining bushels yet to market, what's your crystal ball telling you? What are you looking at? What are you thinking about with remaining old crop bushels? What should producers be thinking about as we've seen a, you know, pretty good opportunity here as of late? And I know there's a report coming, we'll talk about that in a second, but what's your thought with with these bushels?

Grant

Shimek: Well, obviously most of the people I work with had very, very good yields, some, you know, their top 2 crops ever. And that is, that in and of itself means that the return on gross dollar invested is tremendously high, lots of 40-50% return on gross dollar invested. In that context, I don't really want to own a lot of it. But, uh, do I want to be out of it? No, I do not, because I do think that going into as late as April, early May, we can still be on an upswing. After that, do I want to be owner of a row crop? Not at all. Right now I'm comfortable, depending on the individual, being 80% price given where we're at. Do I think that we're at some kind of wall where we're going to stop and implode? No, not really. I do think that we definitely can see seasonal— the seasonals come into play and have some softness going into February.

And obviously we've got the WASDE report coming up next week on the 12th, and things can change and we can get cold water thrown on us even if it doesn't make sense today. So, you know, based on returns, it's hard not to be aggressively covered if you're going to want to take risk. I I'd rather take it out in time on the new crop and swing for the fences there than on this, on the, on the '21 crop.

Chris: What's your comment? It's been interesting to me as we look at, uh, the '22 crop with regard to the corn-soybean ratio. We've seen last week, we saw the beans kind of closing that gap? Is that an indication that the beans maybe have— the corn may be comfortable where it's at? Or, you know, you're the, you're the technical expert here. Any, you know, what do you see in there? What's, what's causing that? Or is that a sign or anything we should be paying attention to?

Grant

Shimek: Fundamentally, what's causing it is the expectations out of South America. If we looked at 3, 4 weeks ago, the consultant I use was— we're looking at massive numbers out of Brazil, probably like 148 million metric ton crop. And as we went on, the attitude was, well, we can— you know, we have areas in the northern part of Brazil that are too wet, there's some damage there. And then if you go further south, obviously we've gotten drier. But even with that, we maybe will lop off 5 million metric tons, we're back to 143 for Brazil. Which is at the upper end of the range of expectations of what we are, the high end for last year. So no big deal. In the last 5, 7 days, the attitude has went from some panic, a lot of, "Hold on a second, is the government lying to us?" I mean, the Brazilian government in this case, in trying to temper inflation.

Expectations, it's going to be a lot— the crop is actually worse. That psychology has bled into this, and that— and if it's reality, it's going to change the world S&D numbers, and we don't have enough beans. What I have looked at in trying to put a forecast together for the year is that to me it appears as though we're going to actually see stronger bean prices relative to corn than we would have expected given the situation, given the fertilizer and so forth. So for the patterns I'm looking at, we're probably gonna actually gonna hang a lot stronger on soybean prices than you would have expected given people shifting acres and so forth.

Chris: You mentioned the acres. Do you, do you feel like there's anything, uh, there with with acre shift that we need to be paying attention to, or is that a talking point?

Grant

Shimek: I think it's a talking point. Definitely, if you're, if you're going to increase, you know, ramp your bean acres, you gotta, you gotta do more coverage and have, you know, not to say that though I think we're given what I said, we're going to see stronger bean price than we expected. That's not to say that, oh, don't worry about it, it's going to be stronger and you don't have to Worry about that extra production. For my own clientele, I'm seeing more of a willingness to shift to beans in the eastern Corn Belt than I am in the western. And that just might be my clientele and people who are more enthused about growing corn in any given year than they are soybeans. But I am seeing that. So it just depends on the area.

Chris: Right. What, um, let's go back. I want to hit something that I didn't mention on when we were talking inflation, and then we'll come back to some '22 stuff. Not to jump around, but with the supply chain issues and on the supply side, the cost side inflation on the inputs, on the energy side, nitrogen, fertilizer, what we're seeing, we're seeing some pretty big price increases in a lot of areas on the crop protection side of things too, not to mention availability issues with a lot of different products. What are you seeing there and how does that affect anything you're watching or you're dealing with with your clients?

Grant

Shimek: Well, for the most part, with— from the information I'm getting from people is that they're not— every week that goes by, people are less and less worried about having products. It's definitely not gonna necessarily be the products we've been using, but availability is there in a, in a, using a different plant, so forth. That, so the fear of both on inputs, whether it's fertilizer and, and chemicals, I think those are going to be there. I don't think that's as that big of an issue as we had maybe in our mind a month or two ago. And I think that goes back to My own life experience with markets is those crises people see coming 6 months out or more, once you get there on a crisis, everything gets moved into place and it's not, you know, and I'm going to speak to more availability there. Long-term, I don't think that's changing.

And if you just focus on energy, you say, "Well, why is there a structural reason why that's not going to change as far as—" cost and just having the product. We have a tremendous lack of investment in fossil fuels, and the replacements to that are underdeveloped or don't exist. We have some of the least amount of new drilling and exploration in like 75 years. You have a, say, Wall Street investment banking is not— is basically due to political correctness or a more of a social movement, not investing in fossil fuels. That can't be. If you look at fossil fuels itself, it's not just transportation. A good 25% of fossil fuel production goes into petrochemicals, plastics, and pharmaceuticals. So we have a real problem here.

That isn't going to be solved with the passing of the year, because those investments just can't be ramped up fast enough from other outside funding sources if you don't have investment capital and lending playing the role that they used to. Mm-hmm. So, as the year ebbs and flows, you know, we get into the spring, summer. And if we can see this, some of these prices and energies pull back in the seasonal lows mid-summer, so forth, it's obviously that's an eternity away now. But I would always be looking at getting product, fertilizer, chemical for the next season as soon as there is any opportunity, because next year is going to be just as hard.

Chris: So you're seeing these, uh, inputs as a multi-year thing, what do you, what do you say to the producer that still has a fair amount of inputs to buy yet? I mean, is there still risk to the upside yet? Do you just go ahead and bite the bullet, get stuff secured no matter what, even if it, no matter how uncomfortable it is, you know?

Grant

Shimek: We're, we're going to come to that point every week that goes by. I think we have and we have some seasonal weakness that can come into play in a lot of commodity markets. And you would expect that to have the wind blow, so to speak, in the input side into, let's say, you know, that January 15th to February 15th. I think that's your window. Now, some people listening to this in the South, well, they're at the point where they're going to be putting on fertilizer and getting going here in the next 30 days. So that's kind of an irrelevant point. But for the northern, for the Corn Belt, I think you got to make those moves by February 15th, in my opinion, because I don't think the prices are going to change from your suppliers anyway, whether, whether some of those cost structures to manufacture or so forth do anyway.

And if you, if you can take a risk on some nitrogen products and, and do some side dressing, so forth, and hope that some of those liquid products come down, maybe on the nitrogen side, late season, yeah. But as far as betting that's going to be a big break, I don't think so.

Chris: Okay, um, we're recording this in front of the USDA report, and so those who are listening to this after the report, we can see how smart you were, right, Grant? So, uh, what is your, uh, what is your, uh, thought? Or, you know, not, not predicting anything necessarily unless you feel like it, but as far as, you know, what you think this this report sets the tone for, or what are some of the takeaways typically from this report in January?

Grant

Shimek: Obviously any significant change in those final numbers on last year's yields would be a surprise. The other one being, and especially the South American numbers, are there big changes there? Hence, we changed the big gorilla, which to me is always the world supply and demand numbers. So if we get surprise or much bigger changes in South American production, because it's possible that that takes, uh, takes place, then the world numbers change. Obviously, some of these calculations and ideas were done, uh, in the last couple weeks. So the South American situation has developed a lot over the last 10 days anyway. But that's where I think the surprises are going to be if we're going to see them.

Chris: Okay. And the last thing I want to hit you with here then is back to the '22. I said I'd circle back to that when we hit the supply chain and the increased cost and inputs. What makes you comfortable? I mean, a lot of the numbers we're seeing are showing still a pretty decent ROI, you know, when you look at even where all the energy prices are and, and inflation and the return to management and nitrogen and fertilizer and everything's up some, some stuff's not as much as others, but, but everything is up, but we still are seeing a decent margin. Where is a comfortable level for you, or what are some of the things that you think producers really need to pay attention to? Do you feel like there's some risk there that needs to be covered? Are you What, you know, what's your thought on, on just risk management going into the next, you know, couple of weeks here at least?

Grant

Shimek: Well, here we are with no beans now, $13 plus, these corn in the $5.50 zone. We have, depending on where people have their inputs priced, we have a lot of probably 15% to 20% return on gross dollar invested. Per acre. So to say that you don't, you don't need it, this thing's inflationary, some people are going to take that approach. But I guess I'm comfortable in that 10 to 20% with a committed sale coverage type thing for most operations, or some kind of floor, you know, kind of back to those things. Well, if you can't bring yourself to sell anything, short-dated options, getting some coverage. And I know this is in front of crop insurance pricing season, so some people are going to wait and wait for that. But I think you want to have some coverage just because the sheer number of dollars we're going to have this crop.

Because if Murphy shows up and we're down, down, down, and we can all look at each other and say, well, we were— what were we thinking? You still got to have risk management in place, even if your inflation expectations and price all look higher.

Chris: I have a few operations I've seen here as of late that are looking at, you know, what they've already spent, you know, written checks out for, and, um, and also considering in that, you know, the land increase percentage. So you add those dollars in, you add in the increased costs, and then you add in the nitrogen, and that's getting some of these guys to, you know, 40 to 45%, um, you know, HTA type sales, or, you know, a chunk of that sold? Is that too much, or are they, you know, or is that a one-on-one type deal? What's your thought there?

Grant

Shimek: Well, it's both. You could say that, oh, don't they— they shouldn't be doing that. Well, that's obviously their comfort level. In the long run, I would want to have the upside open on this. Now, between here and spring, I think we're— we could stay elevated, and the ebb and flows can be pretty extreme even within that. But we get to spring, I'd want— I'd want to be, you know, at least 40% floored. So I— the, the big picture with where we are with the agricultural production cycle, the grand solar minimum the structural inflation issues with energy. I don't think they're going away. So I think there is a lot of upside, but it's going to be gut-wrenching to ride the ups and downs of it. So I'd like to stay— to be able to carry a fair amount of exposure, whether or not it's crop or not, I guess that depends on the individual, into next year.

I don't think this is a crop that we're just going to want to— this '21 crop prices and and be done with it, I think there's gonna be a lot of opportunity over the next couple years. Gotcha.

Chris: All right, well Grant, I think that was good. Anything else I didn't hit on last year? I don't think so, Chris. Okay. That sounds really good. So Grant, if somebody wants to get ahold of you, reach out to you and just have a conversation one-on-one and stuff with Black Oak Financial, what's the best way to get ahold of you?

Grant

Shimek: I can just go on my website, blackoakfinancial.com. My number's on there, just give me a call.

Chris: Okay, that sounds good. Grant, as always, you're full of a lot of really good knowledge and a lot of experience paying attention to the markets for a long time. We really appreciate your being on here today. Thanks a lot. No problem, thank you. You bet. And thanks everybody for listening, and We we will catch you again next time on the Ag View Pitch.