Weekly market outlook: Jul. 5-9th - will the fireworks continue?

Narrator: 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.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we're heading into a new week and into a new month, and we're coming off the firecracker Fourth of July and fireworks and wondering what we're going to see here in the next week or two as we head forward into the market. We've got Jared Creed with us with JC Marketing out of Hudson, Iowa. How's it going, Jared?

Jarod

Creed: It's going well, as always. I appreciate the invite to be on your show here.

Chris

Barron: Well, it's great to have you. You always have some great insight. You always bring up some questions from listeners and, and really enjoy your perspective and your insight. You work with a lot of producers, not only with regard to understanding the markets, but it's also, you know, taking advantage of, of managing the margins. And you really look at this stuff close. I love having you on because you have a perspective that's near and dear to my heart as far as, you know, we've got to be managing profitability and taking advantage of, of these opportunities when they present themselves and be thinking about strategies and things. And so with that said, let's get started. Let's dive into it. One thing I want to ask you right away is, you know, we've seen wetness to the east, we've seen dry to the north and west.

Talk a little bit about what you're hearing from your clients and what things are you watching, and we'll get to weather in a minute, but what things are you watching here with regard to what crop conditions are looking like?

Jarod

Creed: Sure, so a little bit of background. I have clients spread out from North Dakota, South Dakota, Nebraska, Kansas, Missouri, Iowa, Minnesota. That is the overwhelming majority, so a heavy eccentric focus on the western Corn Belt. And I tell you, if I went state by state, on a scale of 1 to 10, with 1 being a disaster, 10 being APH yields, I think if we walk through state by state, Iowa, even up to today, most guys will still say 8 to 9 and maybe even sneakily roll in a 9.5 to 10 in there. It certainly seems like the optimism has returned for crop potential with some recent moisture on the crop. You know, I think a large area of Iowa, I'm not going to pretend to be the agronomist here whatsoever, but in all the travels that I have made for years, I don't think I've seen a consistent standing dark green, no drownout looking type of a corn crop.

With that said, I think there's probably a little bit more concern about the bean crop from some individuals, uh, just from the pure lack of growth that we had, for an extended period in June. And so, you know, skipping out of Iowa, you know, don't have enormous amount of concerns at this point. Now granted, I don't have any, uh, particular clients in far northwest Iowa, and I think that's probably some of the most challenged area. Uh, when you jump into Minnesota, kind of on the I-90 corridor, uh, Mankato area heavy, uh, on up into the cities. and kind of over to Worthington area. They were dry for a very extended period of time, and I think they got dinged just enough at the beginning from, you know, just inhibition, cooling, loss of stands. The dry situations that they had on their hands, I think, probably to this point taking a little bit of top end off.

When we look through most of the crop potentials and the estimates that they put together, You know, we're looking anywhere from 80 to 100% of yield potential. And obviously here just in the last— let's see, that would have been last weekend when you had a fairly substantial moisture event roll through southern Minnesota that definitely helped their crop prospects long term. North Dakota, South Dakota, a whole nother situation. Mm-hmm. Just flat out, you know, again, that scale of 1 to 10 from being very concerned, I think that's kind of snuck up to 6 to 7. And it's interesting, you know, timing is everything. Uh, on Friday, midday weather runs made quite the dramatic shift day-on-day runs of putting in a fairly sizable moisture event on GFS and European models through North Dakota and South Dakota.

So I would tell you and your listeners that there is the potential that some of these crop concerns can shift rather quickly if that event would materialize or not materialize. Long ways away from being out of the woods, obviously, but unfortunately, I think right now we've definitely started to walk back some of our yield potential. And I'd say overall, South Dakota, North Dakota, we're probably looking, you know, somewhere between a 6 to 7 on a 1 to 10 scale. Nebraska, very, very easy. It's fine, it's good, guys aren't concerned. It's 9 to 10 crop ratings. It seems like Nebraska has been blessed with timely rains, just don't have much issues there. The group of producers I work with in Missouri unfortunately were impacted by too much water, so now you've kind of went the entire circle from good to bad.

Lost some acres to drown out on river bottoms, I would like to believe that at this moment in time, the overall moisture situation in Missouri— I don't want to call it a net positive, Chris, but it's definitely a long-term boost to crop potential. You know, Missouri, Kansas, parts of Nebraska, it's kind of hard to talk about being too wet in a certain period of June. So all in all, across my client base, I don't really have— I don't have the attitude that we're talking about walking down on a weighted average basis. I don't think we're really walking our yields down more than 5% at this point, and arguably could be coming back up to— excuse me— to near APH levels.

Chris

Barron: So a lot of these pockets are sitting here with a different scenario. You know, you talk about the, the rain, you can find these slivers where, where, you know, the rains kind of did miss, and then you can find these slivers where the rains never quit, it seems like. And so it's a little bit managing that emotion too, isn't it? I was having a conversation with another guy the other day about just managing the backyarditis is really tough. And so that's why I think getting some good perspective from you and and some of those who look around the whole entire area to make sure that, you know, you manage that backyarditis. And with that said, talk a little bit about the weather. You know, that's probably going to be the big thing as we head into here the front part of the week as the weather, you know, develops here.

You know, you see the first forecast on Tuesday morning and then there'll be adjustments to that throughout the next week or two, and that's where the eyes of the market's going to be, be at. Talk a little bit about, you know, what you think that might hold for us.

Jarod

Creed: Well, I would say what is interesting is some of these computer-driven yield models without any type of human bias and just measuring billions of data points per day from historical weather events, verification of forecast models, and then incorporating future forecast models the yield really hasn't moved to the extent that perhaps one would want to believe, uh, that we experienced in June. Yeah, are you seeing some struggles in the Northwest Corn Belt? Absolutely. And this isn't to, you know, just dismiss the acres that are in the Northwest, but in general across the entire U.S. The weather has probably been a little bit more favorable across the entire belt than we're willing to give it credit for. You know, you get a lot of attention when you have a warm and dry June, especially in the state of Iowa. Crop conditions showed that.

We've seen crop conditions jumping all over the place. Started out coming out of the gate with a ridiculously high crop rating, one of the highest on record at that point in time and have seen it slip with quite a sizable rebound as of this last Monday. So, you know, to your point from weather and the impact on each farm's yields, some of the conversation this week, as soon as I have a producer that the emotions are evident that we're looking at a potential yield below our APH or even closer to our insurance guarantee, We quickly shift the focus to their schedule of insurance and quickly look at just, this is what you're guaranteed. You know, I know we talked about this last time I was on the show, and it's funny that, you know, dollar-plus corn range that we have traded, it's still a very pertinent conversation. Spring price at $4.58, current futures $5.80-ish.

Um, you know, there's a significant amount of dollars right there on the bushels that the farmer paid to be guaranteed. So I, I believe that, you know, stripping out the emotion like you said is key, but you have rock-solid numbers to work with. Call your insurance agent, get your schedule of insurance, and identify exactly where your yield guarantee is at, total bushels, and identify the dollars at risk. And risk is good and bad, right? Identify the risk that you have from the spring price to today's price. And I'll tell you, some of these South Dakota producers that have watched their yields, um, and yield prospects, I should say, drop quite dramatically. It's probably against the common logic, but as soon as those yields stop below, drop below insurance guarantee, All we're doing is selling or hedging those bushels on the board and we're buying a call.

Most guys would say, why am I selling something I'm not going to raise? Well, you're selling something to protect the harvest price between now and October. And if you have a call option in place against that short position and the market goes higher and you still don't raise the crop, you are going to participate at a higher harvest price, and your call option is going to help offset the short sale today. I think an individual will be sick to their stomach with a smaller crop and a lower price from where we are today. And I, I generally still think, Chris, that, um, it's been a little bit tougher to see a market sustain a higher price 3 times now above $6 with quite miserable failures. Um, I think an individual would be sick with a lower harvest price and a poor yield. So the bushels that you're guaranteed, you still got price risk between now and then.

And that's about— I think that's the right conversation when it comes to weather, rather than, well, if it rains, I might do this. If it doesn't rain, I might only do this. Well, guess what? Rock solid information. You're guaranteed these bushels. And your revenue per acre is dramatically impacted by what price of December corn and November beans do between now and the month of October.

Chris

Barron: So that's a pretty good management consideration if you're in an area where you're, you're suspecting that your yield's going down and, and that price risk might, or probably is, to the downside. I mean, we'll find out, but What about these areas where the crops look good and they're catching the rains and stuff? You know, what, in any particular strategy there to—

Jarod

Creed: you know, I should have looked the last time we were on together, Chris, so I'm not repeating myself here, but for anybody that can stomach it, we took a pretty darn aggressive stab at corn the last trip above $6. And I tell you what, with the recent moves back to $6, yeah, it puts the stress on somebody to be thinking about, I'm sold on my insurance guarantee or potentially even higher. What happens if the market continues to go higher? Well, you got to be disciplined to be able to, you know, just get out of the way on something you're not guaranteed. But, you know, to comment on what I mentioned a minute ago of the failure of the market, and I hate to spend all the focus on corn, beans have tried to separate themselves from corn, but haven't done it very well so far. You know, the first time we went above $6, we went to $6.38 December corn, and we retraced all the way to $5.25.

Next time, we go back to $6.18, $6.19 on an overnight high on a Thursday night, Friday morning, and we find ourselves at $5.17, $5.18 within a week's time. Now you get your acreage surprise from last week, uh, to put another run in the market. We traded to a $6.11 high on Thursday AM just to be below $5.80 again by Friday's close. And I think that's important to identify that trend at this time of year. It's getting tougher for market participants to have the conviction to stay long above $6 corn. And that's a here and now comment. Things can obviously change. You can create some different enticement for people to come into this market. But history would say, how many times— I mean, here's an honest question, Chris. How many times have you ever got to sell $6+ corn? Gone in your farming career?

Chris

Barron: Once or twice that I can remember.

Jarod

Creed: You know, once, twice, three times, whatever it may be. It's, you know, law of averages say that it's going to be tough to sustain this, right? You know, who's the buyer at these type of prices? Yeah, it's certainly not the user. It may be the importer long term. You know, there's a lurking monster behind the scenes still from a China perspective and what they need to actually buy. But at the same time, they've been barking about trying to curb higher commodity prices. So why does— why is that conversation important to the farm? Is that that door for new crop marketing pertinent to the crop that's in the field is closing day by day. You know, I often think that the 50% plant date, that door for new crop marketing is already 50% closed. Can it be a rare event such as a '12? I don't think it's a '12 situation whatsoever right now, so please don't take that comment in that fashion.

But can you have an event that, you know, July, August is just enough unfavorable weather across the entire Corn Belt to drop our yields substantially and see higher prices? Absolutely. But guess what, we got the tools in place to be able to manage that appropriately. You're guaranteed bushels, you got options available in the market. I just think you got to be thinking again, big picture P&L. What is my absolute worst case if I can sell my insurance guaranteed bushels, have some options in place if I can't stomach it? Even if you end up with $5.50 corn or an APH yield, it's still going to be one of the better years that the farm has ever had. If you end up with $13 to $14 beans, worst case, and an APH yield, gonna be one of the better years the farm has ever had, right? And my biggest concern about doing something on this year is the massive uncertainty of next year.

I have a very, very hard time of being able to pencil in too much of a good situation for next year.

Chris

Barron: That leads me to, to that. I mean, we're kind of covering '21 both on the You know, a lot of what you're saying with the corn kind of holds true with the beans to a large extent. As we look at '22, before I ask this question, I just want to say that, you know, we, as we, and I know you do a lot of this too, as we've been looking at projections and sort of average where we're at with some of these guys, you know, some of their costs really don't change very much, and then we have a few that their costs change quite a bit. When we aggregate them and look at it, we're seeing With our, our customer base, we're seeing about a 40-cent price per bushel increase with their expected yields relative from one farm to the next of about a 40-cent per bushel increase on corn and about a dollar on soybeans. And again, that's just with what we know now.

And like I said, some of the guys have their land rents and land costs locked in and some don't, and there's a lot of volatility there. And, uh, fertilizer, machinery, some of those things. So it's different for everybody. But having said that, I mean, at what point, if we see some price strength in the summer yet to come, does it make sense to be pulling the trigger? And what's your, what's your limiting factor there, or what makes you comfortable there? I guess talk a little bit about that.

Jarod

Creed: You know, just in the last couple weeks, I think there's been a little bit more visibility available from an NPK perspective. I think we're maybe getting a little bit more comfortable with potential rent prospects. So for most, I hate to use round numbers here, but I think for most, a $5 cash price for 2022 probably is just good enough on a right around an APH yield to be looking at somewhere between a 5% to 10% return. The trick is if yield starts to suffer, right? The trick is if our commodity prices in general stay higher and an inflation-type trade would happen to continue to impact those inputs. I can't stress enough that I don't think this is the environment where you do one without doing the other. You know, I think if you're gonna book fertilizer, you might as well cover those dollars with how many bushels it takes to sell at a certain price.

I think if you're going to sell grain, you better be buying the fertilizer. Outside of that, I think it's maybe a little tougher to identify what those other long-term costs are, you know, even down to something that can sneak up on us pretty quick is, you know, what's interest rate 12 months from now? We've spooked the market a couple times with the comments of higher interest rates. We're probably going to be borrowing more money, obviously more overhead to grow next year's crop. And all of a sudden you tack on a little bit higher interest rate, you know, things get sneaky high pretty quick. So I think I made mention of this last time I was on with you. I think that individuals need to be asking their insurance agent about margin protection.

I continue to look at that as probably being the best tool in the toolbox to manage the big picture, you know, ensuring 95% of the county yield at hopefully a price $5 or higher in 2022, you know, that price gets established August 15th to September 15th. We're not that far away from that, uh, and all of a sudden you've got some county-based guarantees that in the event a market would happen to go back to $4.50 or $4 in Dec '22, you know, the yield requirement for the county, let alone before monitoring the cost of inputs that impact that policy as well, the yield requirement becomes unattainable. Just not gonna happen.

Chris

Barron: Yeah.

Jarod

Creed: And that really covers probably more risk for the average guy, right, than it does trying to go out there and sell 15, 20% of a crop 18 months early with a heck of a lot of uncertainty around if it will even make us money.

Chris

Barron: Yeah. I had a couple of comments and I'll get your take on this. So I love that you bring up the margin protection, you know, All— everybody listening needs to be communicating with your insurance agent so that you can be getting, you know, be on the docket or be on the list for a call on the margin protection and making sure that we, we watch that as an opportunity and understand that, you know, that, that investment in the risk management portfolio for 2022 is going to be huge. And then to your point, I think the 2022 crop. As we look at land and equipment with a lot of our clients, that, that covers about 45 to 50% of the total cost of production. And so if some of those are static numbers or they're absolutes, that helps a little bit.

Like you said, you know, to— if you're gonna, if you're gonna do something on one side of the equation, you probably better be watching the other side of the equation. So that's independent from one producer to the next. So that's, that's the whole reason for getting these numbers dialed in, you know, getting your '21 dialed in and getting that rolled into '22 and making sure those numbers are Accurate. Any, any additional comments on that?

Jarod

Creed: No, I think that's, uh, that's spot on. Only other piece that I'd add in there is, you know, if a guy sells grain today for 2022, it's no different than the risk we always run, or what happens if the market is higher. Okay, the flip side to compare to margin protection is you're basically buying a very salty good put across your entire operation, right? And if the market then goes higher, you know, you're talking about a 10 to 15 cent breakeven to pay for your margin protection policy, and anything above that is additional revenue opportunity. And I have producers that we've already locked in the price for margin protection, right? Wrong and different. And it's not an ex— a cheap process. Tell you, some guys just roll their eyes big time just to lock in the price and margin protection ahead of the averaging period.

Cost anywhere from $50 to $60 an acre, you know, 20, 30 cents a bushel, right? Well, that right there gives me the ability that if the market— the lower the market is between now and next planting, the more corn acres I'm willing to plant, right? The higher the market goes, well, what's the flip side? I have that much more opportunity across the entire farm. I get to be diverse. I don't think margin protection is that great of a strategy, personal opinion, for beans. I think it's a better strategy for corn. Yeah, but so for when you talk about beans in 2022, you know, I, I do think that when you talk about some of these costs, um, you know, again, round number, apologize, but I think $13 cash, $13.50 cash for something out in 2022 beans actually gives us a little bit of flexibility for acre decisions this fall.

And furthermore, the long ways out, but there's a looming monster in the marketplace of what exactly are the intentions of the Brazilian farmer for bean crop this next year. You can't rule out that they could raise 150 million ton bean crop. That is 6 billion bushels. U.S. never gets close to that, right? So you can make the argument that a little bit of complacency in the bean market is warranted regardless of what our situation is here, because we could probably afford to trim as much as— I'm just being hypothetical here— we could trim half a billion bushel of exports off our books quickly if we needed to. Yeah, because USDA has their work cut out from, from this last acreage report on these future WASDEs before they even change yields. I don't know how they're going to be able to manage keeping a carryout at pipeline or higher.

I mean, they're going to have to print 100 million bushel carryout, and I think the only way they can do that is start to reduce crush and probably start to slash new crop export commitments.

Chris

Barron: Okay, so I want to shift gears here. These are all great comments, and we're talking '22 and stuff. I want to back up Now, as we finish up the conversation to the '21 sales and not forget about basis, because we have a lot of people sitting here with, at least from my observation, and, and tell me if you're seeing something different, but a lot of people that are sitting here with either futures, options, or HTAs, or all of the above in most cases. And so As you sit there with no basis locked and trying to decide, do we roll some of this stuff, or, you know, and it's going to depend on the size of the crop, what the, you know, what basis opportunities are there. But at some point we got to start transitioning some of this stuff over to actual cash sales.

And there's cash sales out there with already basis locked in some areas depending on where, what region of the country you're talking. But like in our area, for example, we had the derecho last year, and, and the basis levels we're seeing are pretty extreme right now. I mean, they're $1 to $1.20 on corn, higher than normal. And the basis extreme in soybeans isn't quite as good, but there's also some carry in the corn and there's really no carry in the soybeans. And so it's looking to me like a lot of, a lot of operations, and that's pretty much widespread on the soybeans with there not being any carry, that, you know, a lot of the beans are going to need to go off the combine. So how do we manage basis on both corn and soybeans, or what do we need to be watching over the course of the next few weeks and be thinking about with regard to basis?

Jarod

Creed: So I think it's a little bit of a 3-phase deal here, Chris, and this goes for both corn and beans, um, maybe even 4-phase. Let's just say the first one is don't let your bins stop you from doing what the market's telling you to do, right? All right, now odds are high that there is going to be some pretty decent early premium for both corn and beans off the combine. So if a producer is logistically set up to either deliver wet corn or, well, not delivering wet beans obviously, but wet corn or early harvested beans, there's going to be some premium there. You're most likely going to see a gut slot harvest value that at this point in time I've I gotta believe that, I don't know, regionally 5 to 15 cents better than maybe what we're used to.

Uh, but from the early premium to gut slot to first quarter of 2022, I do have a hard time believing that on the day you make your decision, do I take this to town or do I put it in a bin? Am I rolling a hedge to arrive? Am I rolling a futures position? Whatever it may be. I got a hard time thinking that we're going to be able to make up that inverse long term, and not just from a price perspective, but the expense that it takes to, you know, keep that market or keep that crop off the market for a, you know, 120-day window. So what we're kind of gearing up to do here, and this is probably a conversation that's going to pick up in speed the last half of July, you know, start identifying the fields and potential production that we think we can hit the market early on the front end of harvest. Do not, do not, do not, do not overcommit what you can accomplish in a quick ship environment.

These inverses will eat you alive. Do not overcommit what you can do. But I'll tell you, When you start thinking about 30, 40, 50 cent bushel premiums on both corn and beans, maybe more than that in beans, that makes a monumental difference to the underlying P&L of the farm if that first 15, 20, 25% of the crop can go to town early. Monumental difference, especially just from an average price per bushel that you're going to be looking at. Historical basis, let's just say your part of the world, Chris, let's say we're talking about a 10 under to Cedar Rapids, got flat harvest, maybe even 20 under, versus being able to ship that first chunk of corn at 20 to 30, maybe even 50 over. Then you got to identify a cash off the combine is X, cash out of the bin in January is Y. Am I really going to be able to make up that inverse? Especially on a, you know, hedged or hedge-to-arrive bushel.

And I'll further comment on the hedge-to-arrive and hedges. If you know you have bushels that are hedged and they're just not going to be able to go to town and be applied to a December futures price, I think that in the environment we're in, those hedges need to be moved to at least March. Is there a lot of carry there? No.

Chris

Barron: So you're thinking— not to interrupt, but you're thinking now was a— you need to be watching that pretty close right now if you are going to roll some of those HTAs.

Jarod

Creed: Yeah, I'm just looking at what's happened in these recent spreads. Um, there has been people that have gotten eaten alive from a May-July corn spread, the July-September corn spread. The September-December spread was like down to 9 cents the other day, and I think it's back out to 14 or 15. And like I said, you got a Dec-March spread, 6, 7 cents. And if we run into an early harvest because of drier conditions, whatever it may be, in a subpar crop, uh, your historical activity of Dec-March corn spread is not going to be the same this year. I just don't think that the average producer needs to be holding the risk of what can this March corn do between now and the time I need to decide to roll. I don't think that that 5, 6, 7, 8 cents— I get it, it's real money on a per acre basis— I don't think that's worth the risk for the farmer.

I would rather have it hedged out in March or May or July, probably not that far out, but just March. And in the event we have a steep inverse this fall, you always have the ability to roll that contract back and then deliver it early versus being stuck in a situation that I'm looking at a steep inverse, I have to roll it, I— now I'm talking about is basis going to make up for it. Just too dangerous of a situation in the current environment. Gotcha.

Chris

Barron: Okay, any, any final thoughts as we head into, uh, you know, the essentially the month of July, which is, you know, watch the, watch the corn market, and eventually, you know, August is the, they say, is the bean thing. Any final thoughts as we, as we wrap up here?

Jarod

Creed: Um, I know you didn't mean it this way, but you know, the old comment about, well, I'm gonna, I guess we'll just wait and watch and see what happens. Can't do that in this environment. Can't. Use the tools that are there. And this is probably a little rude, Chris, and it's not meant as disrespect to anybody, but you know, suck it up. This is a big boy business. This is a lot of dollars on the table. And you better be willing to leverage whatever tools you have access to and make sure that whatever you're doing, you know what the end result is. And that's the key in all this. A lot of money on the table. Take that money off the table. Be a participant in the market if things go your way higher for the farmer, but also understand what those impacts are potentially for next year. Be ready to do something for next year. You know, a quick comment on that.

I had somebody tell me, why would I sell $5 December '22 corn when we're near $6 in Dec '21? So the very best sale opportunity that you have ever had in your life to sell something almost a year and a half out was when Dec '12 was $2.25 higher than 2013 corn, right? And until this year, there hasn't been any corn price that's high as what 2013 corn was able to be sold for when things were the most uncertain.

Chris

Barron: And '14, for that matter, if I remember right, it was pretty close.

Jarod

Creed: Uh, yeah, I can't remember exactly what that 2-year spread was. But nonetheless, a lot of money on the table for this year. And what I don't want to have happen is all of a sudden be stuck in a higher price input environment for next year. With lower prices, with unpriced 2021 as well. And I, again, I don't care what the concern is on yield because the average individual is able to still look at probably triple-digit profits just on their insurance bushels right now. So you gotta belly up to the bar and make sure you understand what your opportunity is and do something about it. Don't just, I guess I'll wait and see. Don't.

Chris

Barron: Right, right. So if people want to get a hold of you and, and have a deeper conversation one-on-one as far as, you know, like what their situation is or whatever, what's the best way to reach out to you?

Jarod

Creed: Uh, cell phone would be best, Chris. The area code is 402-680-1744. And as I mentioned to you before, I'm not trying to pitch anything, Chris. Never will, never have. I just think that the math is the math, and this is what every single producer in the U.S. has to be looking at right now. Because at the end of the day, we're all spending money to make money, right? It's no different.

Chris

Barron: So it's a margin business. We gotta, we gotta pay attention. So hey, uh, great conversation. Jared Creed, JC Marketing, Hudson, Iowa. Thanks a lot, Jared. Really appreciate it.

Jarod

Creed: You bet. Thanks, Chris.

Chris

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