Weekly market outlook, July 11-15: crazy train market ride

Grant

Shimek: looked at $6.30 plus or minus a dime. Well, we're kind of— we're getting into the neighborhood there. The upper bound is probably that June 5th low on East Corn was $6.82, and then we have like $6.89 as a 618 retracement of the sell-off we just had. Well, if you're going to get there, or definitely anything higher, you need some gas on the fire. I don't know if weather's enough for that type of thing. You're going to need like China's talking about doing a $200 billion stimulus. That was a positive late this week. But if the administration drops some tariffs in a big way off China, they were talking about doing it this week, I didn't see any completion on that. Maybe that's how you get it, like big shutdown on those Chinese tariffs, and then we can see some exuberance, and that combined with the weather could get us up there.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week, July 11th through the 15th, middle of the month of July, um, turning the heat up again, it sounds like, maybe, or maybe not. Depending on what the weather thinks. We are lucky enough to have with us Grant Schimake, Black Oak Financial. Grant, how's it going?

Grant

Shimek: Great, Chris, you?

Chris

Barron: Doing good, doing good. I was in Illinois this past week working with farmers, and they're needing some rain over in that neck of the woods, in places anyway. Some of them are getting some of it, and then I, I came home and couple weeks ago we had like 5.7, and then we got an inch last week, and then this week we got another almost 3 inches. In some areas there was 4 inches. So I don't know, it's interesting. There's a haves and have-nots, isn't there?

Grant

Shimek: Yeah, exactly, haves and have-nots. And it's, uh, a lot of Iowa's got good rains. I mean, there's parts of Minnesota that missed it, and like you said parts of Illinois and Indiana that, that missed it, and some of them that got, you know, 5+ inches. And so hard to come to an exact number on the impact on that one.

Chris

Barron: But yeah, for sure, the weather is crazy. And then, you know, you, you look at the market response from it. I mean, you know, last year we were super dry during the year, for us anyway in particular, and we were concerned about it all year and thought that it was really going to impact our yields. And we had record yields last year in a quote-unquote drought. And I was jokingly telling people, boy, I hope we have another drought again this year. So hopefully the areas that are drier, you know, going to catch some rain in time, you know, as we get close to pollination and stuff. And, and a little closer here where the market may be watching it some more as we head towards pollination. I guess that's, that's where I'm going to start out with my question.

How much of the market moves as we go forward, do you think are going to be driven by weather, or do you think it's— there's a whole bunch of other things that are going to be as important or more important?

Grant

Shimek: I think there will be a whole bunch of other things that will be as important and maybe overwhelming. And that's the, the challenging part of this, because you're looking at production and And then the macro, it's a big deal, but some of the things that are happening in the world, at least for a while, could be more important. And that's the challenging part when you look at the economics of it, that can— what I really perceive that where we're at is we have a worldwide liquidity crisis. It's more akin to 2008 than anything, though I don't want to say it is 2008 because that was -driven by the crisis in the housing industry and subprime mortgages, but the likeness to it is that you had a liquidation that started in one sector of the economy and just bled into everything else. And I think that is how it is similar.

And so you can have your fundamentals where something shouldn't move in the context of what you see,, but it does because of cross currents.

Chris

Barron: Okay, interesting. So we're going to come back to some of these fundamentals and technicals here in a minute, but I want to ask you a question that, that I've been getting, and maybe you've been getting it, maybe not. But it's like, um, I don't know how many text messages or emails I've gotten on, um, yeah, I've got 10%, I've got 20%, I got 30%, whatever the number is left of old crop, I need to get that out hear, oh man, I feel like I missed it. Should I be selling it now? Should I wait? What should I do? You know, how do you answer those, those questions?

Grant

Shimek: Well, it's tough, but we all— and anybody who's been farming for very long knows that that, that old rule of thumb holds many times, and it sure did this year, where you get to that third Thursday in June and you have any old crop account consequence, you really got to assess things. Mm-hmm. That's— and sometimes it's been irrelevant in the past, but many times that's where we're at. We're in this key window between the 4th of July and the 15th of July where bizarre things can happen. And right now, with the strong basis we have, you You're going to be inclined to see what happens, but you got to be— watch it day to day. And I would be more inclined to let it go because once the end users are going to be focused as much as they possibly can on getting to the new crop, and it's basically a game where one day the music's over and it's done.

So I would be inclined to— every time we can, you know, obviously yesterday was a big rip back to the upside. Don't wait for one, one data to move it, especially if it's Benny Buschel, the consequence. Better be jabbing at it.

Chris

Barron: Mm-hmm. Gotcha. So, um, from a technical standpoint, you know, you're, you're kind of the For me, you're the go-to on, on technicals and, and kind of looking at a lot of these things of, you know, we could go this high, we could go, you know, down to these levels, we got to watch this, watch that. Talk, talk a little bit, and let's hit corn first, but talk about kind of where we've been here in the last couple of weeks. We've, we've trimmed so much of this off, and, you know, what does that mean from a technical standpoint? What, what are some of the parameters that you're watching, um, that we could, we could see up.

Grant

Shimek: Well, when Dec corn broke its June lows and we kind of had a waterfall event, so to speak, we actually had a number of gap-downs on openings. Like, that would have been right there on the 21st. We opened and we had a gap lower, and that's From there on, the floodgates opened, so to speak, on corn, and beans also gapped down. So the main thing I see is that the trend turned down. What I consider the trend, the 15-period exponential moving average, went below the 30. Well, right now those moving averages are right around $6.40 to $6.68 respectively. We can go up and check into that zone, and we haven't turned weekly trends down yet, but I think we're— it's not a good position to be in at this stage. The best thing that we can see is that we can get our head above water and you can close to a new high after the 15th of July. Historically, that's a game changer.

So as bearish as I am about how things appear in the market, in the world right now. If that happens, then I've got to cover sales up and I got to look to the upside because typically if that happens, your probabilities of then ramping into August are high. It's just that how many times do you close to new highs after July 15th? Well, it's not, you know, of itself, that's not a probable thing to happen. So you really got to be cognizant of this, this period between here and say the 12th into the middle of next week. Hmm. Because if it turns down after that, I think it could very well easily erode into August. Well, when you look at the, the 6 to 10 day forecast, I know this on people's minds, wow, that some of these model runs were, were hot and dry. So true. But even the weather itself, these model runs have a tendency to then flip and so forth.

And I think that is— when I look at this, boy, it sure feels like a typical July 4th to 15th, probably on steroids this year, but emotion-wise. But I think at best here we have— we're retesting and retracing, and if the pressure comes back on, I think we'll go right back down and make new lows for the move on the new crop.

Chris

Barron: Mm-hmm. Um, as far as, you know, assuming that, you know, a grower dumps the rest of the old crop, gets rid of that, and they've got enough '22 sold that they can, you know, put the rest of the stuff in the bin, you know, hopefully they've, you know, looked at, you know, their, their typical overrun with bushels that they can't store or whatever. Hopefully those are priced. Those unpriced bushels, you know, or that percent that they've done nothing with yet, what's your longer-term prospects? You know, again, from a technical, you know, you look at that, a lot of that longer-term stuff too.

Grant

Shimek: What's, what's your, your take, you know, out a little further, out, out longer, prognosticating that even though the short run looks, looks, uh bad or even could look horrendous because of things happening in outside markets, and that big window could be as late as, you know, from here to February. Now there's— that's a— to a degree, that's a guess because who knows what will happen, but worst-case scenario, yeah, you could come under pressure and shake things down as late as that. But the long-term cycles are very bullish. We just came off a 25, 26-month run from the COVID washout lows of April, March, April, May of 2020 to the highs this year. And that's pretty much the case with 8 out of 10, 9 out of 10 markets.

Well, you can have one heck of a tree shaking that lasts for 6 to 8 months, and as a relative of the time we spent rallying, Yeah, that's, that's not very unusual, and then we take off again. If we just look at the grain market, look at corn market, what typically happens in years that end in 3? Well, if you look at from about 1963 through 2013, 2013 wasn't bullish, but we had a big run in 2012, so you could say, well, that's this year could be because we had a big run, perhaps, but I don't think we broke to new ground relative to where we had been in '08, '10, '11, '12. So I don't look at it that way. But you look at '93, '83, '03, they end up being bullish, but typically bullish mid-year and into the end of the year. So what's the What kind of timing do you need?

Well, it may take until the middle of next year if we really break this market now to get back to prices like we've seen here or better. Do I think we could get that high? Yeah. I mean, you're— the agriculture production cycle that Lewis M. Thompson developed, you know, we're going into the decline phase next year. This is still the last year of the uncertainty phase, as he called it, and then you go into decline and then shortages. So I think in general, we're going to step into times where it's going to be hard to produce the big crops like we had been in the prior, say, 6, 7 years. So should be up, but in the short run could be nasty to the downside. So you gotta, you have to weigh that. So what if it got real nasty? Well, this is one of those things I'd look at longer-term reownership. I want to give myself some time.

In the last 2 years, these markets kind of saved themselves and rallied into the fall and in that first quarter. So panicking and doing anything late summer, fall didn't pay. I don't know about this year. I mean, it could take a lot longer. Rebuild this time.

Chris

Barron: There's, there's a lot of issues or variables, I guess. I don't know how to say it other than that, to watch though too, right? You've got, you know, and, you know, potential heading into some recessionary, or maybe we are in a recession now. Get your take on that in a second. But then, you know, that's being created by higher interest rates And then my— I guess what I'm getting to is a question really around the funds. How much has— have they affected the moves we've seen here recently? How much of that is, is the funds, do you think? And how much impact will the funds have moving forward to want to be in the, in the commodity markets depending on what the general economy is doing and all that? Is there, you know, talk about that for a minute.

Grant

Shimek: Oh, definitely there's been a lot of liquidation, and a lot of the funds are trend following, and if the trends are down, they're going to continue to liquidate. And when the general economy— or when, not the general economy, but the equity markets and some of the other big plays that they've had unwind, It'll just cause liquidation across the whole complex. And so I think it's more likely to be an unwind. Will they come back? Sure. When we turn the trends back, you know, turn trends up, they'll pile back in. And not to say that, you know, some markets that are still relatively strong, but they'll be there. It has been interesting to see the decline in overall open interest in commodities. It's been dropping significantly. So there is money flow. We are not— we are lacking money flow compared to where we were that first quarter.

We had a lot of money flowing commodities as far as Wall Street is concerned, not the general community that typically in the CTA community generally invests in commodities. But Wall Street, using ETFs and other ways to get exposure to commodities, to my recollection, they had the largest net long exposure to the commodity sector that they'd ever had. That was their heaviest weighting. So, stock market comes under pressure, who's got the positions? Well, Wall Street's got more positions on, comparably, than the traditional CTA did. So that's going to be not a positive because they're going to run for the hills. As far as the Fed goes, yeah, they've said that employment could turn down. That would be the expectation. They're going to try to get a couple lower readings on inflation, so they're going to keep pushing it is what the expectation is.

If they have some other event happen while they're doing that, hopefully it doesn't get out of control for them. You can go from into a mild recession to huge, huge drops, and then panic ensues. And I think we're at a big risk of that, because it's really the Fed. The Federal Reserve is the central bank to the world now, because the other— Europe is in shambles. They ruined their bond market. And if you look at the price of German electricity, for example, I believe it was late last year, somewhere around €48 per megawatt-hour, and I think now that's somewhere around €340 per megawatt-hour. There'll be industries that are decimated by that. And those things are rippling around the world, right?

Chris

Barron: Let's, um, it's, it's all interesting, all things that are, um, those outside issues or variables that we gotta unfortunately get to pay attention to a whole bunch of stuff anymore, it seems like. Let's shift gears over to soybeans for a minute, and then I want to talk a little bit about '23 before we wrap up, but On the soybean side, real quick here, um, talk a little bit about that. Same questions I had on the corn. What are you seeing, you know, both short-term and long-term technically, and what are some of the issues we're watching for?

Grant

Shimek: It's very similar as far as production and so forth. We had that, the Acres and Stocks Report. We— and it's probably the challenging part of this game is that we had such fewer acres than was expected. And those are real positives long run. But given that we had run so far, I don't, I don't think that's an issue now. But it's going to probably mean— what it means to me is when we do turn the ship to the upside in a big way again, beans are probably the leader. And with the kind of build out we've had and expected build out and crushing in the U.S., beans are probably going to be the lead horse in a major way over the next couple years. So I look at the same way, we're just rebounding back to resistance. There's lots of clusters of moving averages in that $14.10 to $14.40 zone.

Obviously crop insurance guarantee number was $14.33, that plays into, into a people's psychology with selling, right? I would say there's probably not a lot of up in it now. There probably is still some up, and they can always surprise you what beans can do in a 24-hour period. But I think they're going to be met with some resistance here after this recovery that we've had on—

Chris

Barron: on— well, go ahead.

Grant

Shimek: I was just going to mention too that probably the one thing— that people may not have seen is that Argentina is in a real serious economic and political crisis. And at the point where this year they're expected to have like 80% inflation. Sí. And they've had a 23% drop in their wheat seedings, which is about 400,000 hectares, which was a big— they were expected to drop, but like by 10%, about 13% more than the expectation. I bring, bring up this because the Argentine farmers, you know, they use that grain as a bank account. They're really going to be reluctant to price into the world market on soybeans or any, any of the grains. So that, that's kind of a probably one of the— that's one of the hot spots this, this next couple weeks. There's major problems there.

Chris

Barron: Interesting. So yeah, a lot, a lot of things to watch there. I'm gonna go to a couple other questions real quick that I just thought of when we were talking there too on, on the soybean side of things. You know, you talk about that maybe being the leader, and we were talking about storage earlier. You know, for those who have typically always hauled the beans off the combine as kind of the cash crop, when you look at the lack of carry or whatever, and, you know, and basis into the equation and all that stuff. But there's been the last year or two, you know, where it's kind of paid to store beans too, you know, just because of the price increase.

And, and, and, and per bushel in your facilities, it's, you know, when we start looking at the economic side of it, you know, as the margins and, and stuff, as kind of from our perspective from Ag View as we look at it, the— it pays, it has paid pretty good. What's your perspective on, you know, if you gotta decide to put some beans in the bin or corn in the bin, what are you putting in the bin if, if you could, you know, you got X amount of room?

Grant

Shimek: Well, if what you've found is what is the case historically, that the price rebound has been significant enough, and in many cases more significant than the rebound that you see in corn if you store it. But you gotta— for a lot of people, it's the hand— it's the handling they don't want to deal with, right? And shrink, as long as you're taking in the context of those things, yes. I mean, I think bean storage could very well end up being, you know, over the longer term, have a better return on investment than corn.

Chris

Barron: I hate storing soybeans. I mean, I just had that conversation with my nephew. He's like, you know, the beans we don't have sold, we probably should put in the bin. He's probably right, but I can't stand it from a, from a work standpoint. It's frustrating. Yeah.

Grant

Shimek: And we've done pretty good with the corn, but, you know, I think, I think it's depending on where the spreads are, you know, in time and so forth, it's probably more so a market to reown on paper than, than corn, relatively. Yeah.

Chris

Barron: And that's a, and that's, you know, a practical and realistic reason for some reownership. I know there's Some we work with that aren't fans of the reownership, and, and I get that, but that could be a scenario where, you know, I, I'm in that camp. I'd rather than, than shoveling soybeans and dealing with shrink and all the other fun stuff about how they're kind of harder to move than corn. It's easier to deal with corn, uh, it's not that hard to own it on paper, and you just got to have that discipline though, right? I mean, you, you need to have a plan when you do that.

Grant

Shimek: Right.

Chris

Barron: So, okay, so the last part of the conversation here is, um, I'm also hearing some questions, you know, people feel like they've been marketing '22 but they're looking at where, let's say, the '23 prices were. Some did a little, some did nothing. I have a few operations I spoke with recently that were, that were approaching $25. I got one guy at at 30%, sold on '23. What's your take on '23 now that we've settled back? I mean, I think there was probably some reason as we looked at margin potential for '23, there was some pretty good profit margins there, whereas now I think we're back down to single-digit profit margins in our projections for '23. So it's less enticing to make some sales there for '23. But what's your outlook on, on '23? What's your strategy?

Grant

Shimek: Well, at this stage, you know, if someone is at zero, it's hard to say. I wouldn't want to lock in single digits, sub-10% ROIs just for the sake of doing it. If you do it and you did it on paper, maybe, so there's no commitment, right? You can walk away from it. Or if it's If you're at zero, you can look at some of these pricing strategies with an elevator or some kind of other entity where it's a small commitment of something like 10% and you're getting a premium with an extra commitment to sell another 5-10% at a price that has a good ROI. Something like that, sure. But I don't want to force anything down here because my long-run perspective is very positive.

Chris

Barron: But it's a long ways out there too.

Grant

Shimek: It's a long ways out. I mean, I would assume that most people aren't going to be today in a position where they've got to have something sold for, you know, as far as banking covenants or anything like that, given the kind of year we've had on the '22. I— so, boy, I wouldn't want to force it. And I mean, there's some other things you could do if you really needed to, if you're really concerned as far as using short— there's short-dated options on the '23 now. So I mean, if you just wanted to get some coverage through that expired in November, December this year on the '23, so you had something, okay. But large percentages or major panic about it, I don't— I mean, I'd rather worry about the '22 crop and be more aggressive there. And numbers, I— we're more confident of, have better ROIs.

And you think about it, you have all the way till, at least for most people, spring of '24 to market. So, right, I don't want to force that.

Chris

Barron: There's a lot of time. Yeah, I guess I, you know, my— what we've tried to been encouraging people to do is, is take their '22 cash flow, their, their cost of production, you know, tool, whatever it is they're using, whether it's Profit Manager or something else, and, and roll that 2023 and, and run the numbers. We're, we're seeing, you know, a cost increase projection based on fertilizer and stuff just from some of the surveys we've done of about 8% on soybeans and about 10% increase on corn versus last year. Are you hearing anything on any of the input side or anything, or has it been pretty quiet for the You know, the '23?

Grant

Shimek: Not like that. Not where somebody waited out and they're overall up X percent. Outside of the breaks we've had in some of the fertilizer products, though, a lot of people haven't went out and got prices, or they haven't been available.

Chris

Barron: Yeah, haven't been able to get them yet, right? Yeah.

Grant

Shimek: I mean, we might see, you know, we saw Diesel break over a dollar off its highs. We have a nice— we have a market where we have discounts on the deferreds. Hopefully we can, you know, see some of this come in more. So if we do get a shakedown based on a recession and the Fed keeps tightening, maybe we can get the ball rolling and break these things down more than a lot of people in the industry would expect now.

Chris

Barron: Mm-hmm.

Grant

Shimek: Yeah, I think huge percentages, and probably not.

Chris

Barron: Yeah, I think the big watch out, or what we're seeing, is probably one of the leading cost increase, uh, line items going into '23 is, is starting to show up as land. There's definitely some land rent increases. That's where, you know, I look at, you know, the price decline now going into September as a good thing because it's going to tamper you know, the, the land rental conversations a little bit back down to reality. Whereas, you know, if we're sitting there with 7+ corn or something at land rent renewals and, and having those conversations, we got to be cognizant of making sure we have conversations that are practical, pragmatic about what, you know, what our margins really are and And when, when the news is out there that, you know, those prices are that high, they don't stay there. So, right, it's something that we got to be aware of.

Any other things that if you had to, as we wrap up here, any other things that you would say, you know, hey, pay attention to this in the next week or two, this is something to kind of be watching?

Grant

Shimek: No, that's, uh, no, nothing specific. The laundry list, just lots going on.

Chris

Barron: Yeah, every— basically watch everything.

Grant

Shimek: Well, you gotta pick the things that matter. Yeah, next week's an important week. Your— how you close— well, we have a WASDE report, I believe Tuesday, but that, that Friday close, that, you know, you can stay strong there, or if we have some kind of big bullish move, that'd be— that's your best case scenario., and that's a follow-through. But, uh, you're weaker after that, it's not, not good historically.

Chris

Barron: Yeah, yeah, we might be heading for, heading for a different place for sure. And so, well, hey, um, this has been a great conversation. Um, I told you at the beginning we were going to use crazy terrain as an intro here. We've had kind of a crazy market. So, uh, really appreciate your time, Grant. If people want to get a hold of you, have a conversation with you, or reach out for a conversation, what's the best way to reach you?

Grant

Shimek: I can just go to blackoakfinancial.com and you can find my contact info there.

Chris

Barron: Awesome, sounds good. Hey Grant, thank you very much for your time, really appreciate it.

Grant

Shimek: Yep, thanks, Jeff.

Chris

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