Weekly market outlook, June 1-4th: volatility continues

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. We are heading into a new month, the month of June, and a lot of times we get to see some excitement in that month. And today we have with us Clark Neuber. Clark, how's it going?

Clark

Neighbors: I'm doing very well, Chris. Happy Memorial Day weekend to you.

Chris

Barron: Yeah, same to you. We, uh, we appreciate all the, all the efforts from our military and, and, uh, the sacrifices and the things that, that a lot of people do for our freedom.

Clark

Neighbors: Absolutely, absolutely. Sometimes we take those things a little bit for granted, which is, which is bad, but it Definitely the things we've been through in the last 14 months, if you will. We need to remember what those folks have done when we think things are bad right now.

Chris

Barron: So that's for sure. There's a lot of, a lot of people that have done a lot of stuff for us to be able to get to do the fun things we get to do in our careers. That's right. So, hey, let's get into discussing the markets here. Speaking of fun things, or I don't know if that's a fun thing or not, we're going to find out here from you today, I guess. Uh, um, I wanted to start out with China. You know, we've seen a lot in the last couple of weeks discussion about what's going on, you know, these excess purchases and, you know, and then the fear of cancellations and all that. I'm just gonna, you know, throw the word China out there in demand, and then I'm gonna back up and have you give us your two cents on kind of what's going on there and what, what we need to be as farmers, what, what's the perspective we need to have, what do we need to be watching.

Clark

Neighbors: Sure, and that's been the headline since basically last July to some degree as we've changed the whole dynamics of the ag sector and the demand sector and the tight stocks. That's been the driving force, this demand-pull market, again, as you mentioned, led by China. So, you know, the bean purchases, first of all, pretty dramatic, you know, record bean exports this year. We've executed most of those beans in regard to moving them overseas as far as an old crop scenario. And we're more used to that, I guess, is what I'm trying to say from the standpoint of the market. Where on corn, you know, this current year old crop, if you will, the million tons, you know, you're kind of getting in that 22 to 24 million metric ton exports to China in corn this year. Keep in mind, Chris, the most we've ever done previous to that, like 5. Okay, so it's a dramatic shift in that.

So, so in reference in corn, what you're talking about over the last couple of weeks, 3 weeks if you will, we've seen a big spike in purchases, record pace for new crop corn, which is approximately 12 to 14 million metric tons already on the books books for next year, uh, which is encouraging going forward and something that the USDA is going to have to be cognizant of when they put their S&Ds together. So I think big picture, obviously China is always kind of a mystery, and so was this past year a one-off thing on corn and we go back to normal or not? And what we've seen the last couple, 3 weeks, I think that's encouraging going forward, that this isn't a short-term scenario. Now, you could argue, is this part of the Phase 1 or the trade agreements wrapped up into all that? That's obviously a possibility of trying to meet some of those standards.

Um, we've also seen record beef and pork exports in the last year or so into China. Um, the pork exports have slowed down some. As their herds build back up, but the beef exports have been impressive. Uh, we've seen some ethanol purchases over the last several months. China continues to be the driving force. Now, you mentioned, you know, cancellations or rolling of some old crop into new crop. We may see some of that. Uh, the folks we talked to that have good contacts in China don't feel we'll see much in regard to cancellations. If it is, it's small privately owned feed mills, etc., that may cancel some purchases possibly. Uh, Sinograin, Kofco, your big government arms, uh, trying to rebuild the stocks, most feel they are not going to see any cancellations. Now in regards to rolling some of these purchases into new crop. That's always a possibility.

A lot of that depends on logistics, the ability to get all this shipped. We're on a very extensive program right now in the export sector to get that stuff moved out. We're seeing at or near, um, a record pace, I should say, for the balance of the summer to meet the USDA projections. But, uh, So far so good generally. We've had a few hiccups in regards to movement on the river and access and so on, or rail, but all in all it seems to be going fairly well. So bottom line, the China story is still supportive, still positive. You always just kind of hold your breath thinking, you know, something going to change, but at this point things have progressed really well, especially on these new crop corn purchases. New crop bean purchases so far are good, but not to the extent from a percentage standpoint that the corn has been at this point.

But keep in mind, their, their focus right now in the world marketplace as far as supply of beans is out of Brazil.

Chris

Barron: On the soybean side of it, it's more of a stay tuned, right?

Clark

Neighbors: Yes, absolutely.

Chris

Barron: Yeah, because it's Like you said, the, the noise and, and the excitement's been in the corn, but, you know, with South America and everything, it's, it's, uh, soybeans will get its turn.

Clark

Neighbors: Um, yeah, we, we're not really competitive in the world market until you get out in that late fall or winter time frame again in that regard.

Chris

Barron: So, um, the last time we talked, the market conditions were significantly different than they are now. We've settled back quite a bit since last time I spoke with you and you were on the Ag View Pitch here. Talk a little bit about May versus now and kind of some of the things that we're seeing and what's that mean as we move forward?

Clark

Neighbors: Well, I think the big thing is we went through in most of April, well, all of April I should say, and the first week plus of May, one of the most unprecedented rallies we've ever seen. The markets, especially corn, for that time of year. Very unprecedented. When you look typically back at seasonalities, and we can touch base with this as we get talking a little more specifically on new crop, we always in our mindset think, you know, June or maybe July is kind of a key time for market seasonalities or topping action. So during the month of May, believe it or not, Corn's actually down a little bit for the entire month. The high earlier this month, we're probably 75 to 90 cents off the highs in corn from early this month. Beans virtually unchanged on the month on the old crop. New crop's up maybe 30 cents, and you're 90 cents to $1.20 off those earlier highs in May.

So Going forward from a perspective of the board, both old crop and new crop, can we go achieve those new highs or test those highs again at some point? The answer to that obviously is what's the weather going to do in the next 45 days. But getting back to what's changed, I think, uh, in the last 30 days specifically is the bean market. So, uh, basis levels since the first of the month, and I just like using 3 locations as benchmarks for basis. Uh, here in Cedar Rapids or Eastern Iowa, we're down roughly 45 cents in bean basis since the beginning of the month. Uh, Decatur, Illinois, uh, more of an Eastern, uh, crusher market, is down 50+ cents on bean basis the last 30 days. Even the river, uh, based off of St. Louis is down roughly 30 cents, so we've seen a pretty substantial break in bean basis over the last 30 days. So what's behind that?

Uh, as mentioned earlier, the export program is winding down, so we're not seeing as much activity on the river. As far as the pressure, uh, the fear 60 days ago, 90 days ago, we are we going to be able to get to new crop with the supply needs we have? All of a sudden it feels like the crusher or the market is a lot more comfortable with the potential supply going forward at this point. Not to say things still could get tight late summer, but that basis is telling us something. You know, the talk of importing beans has diminished a lot, uh, to some degree in the last 30 days. We're going to see some going to the East Coast, but The key things is bean basis dropped a lot on old crop, but I think that's kind of a driving force looking forward if you're looking at demand being the key driver. And we've also seen the spread soften some.

So, and in the, uh, we do a little thing each week called the Bumperport. We put some scenarios in there with, uh, potential bean supply going forward into the '21-'22 crop. You can kind of come up with scenarios, especially with this early planted bean crop, assuming, you know, yield situations where maybe you get 250+ carryout on beans going forward. If that's the case, I'm not saying that's super bearish going forward, but it's something to watch that may keep, you know, hesitancy from the bean market to rally much and/or looking at basis levels as we go through the through the balance of the summer into fall. Quickly on corn, on the other side of the coin, last 30 days, the one thing that's kind of changed is ethanol margins continue to improve. We're seeing, oh gosh, best levels we've seen in 5+ years. Some of that's consumption of gas as the economy opens back up.

Vegetable oil demand, which throws into corn oil, has been really good. So that's scenarios strong. So corn basis is steady if not better, especially in the Western Belt where a lot of the ethanol producers are. You get the Eastern Corn Belt indicator, we're down maybe 10-15 cents in the last month in basis, but not substantial. And the river market is pretty flat because it just continues to need to have that pull. So, so corn demand is still very strong. Bean demand is starting to show some signs of, of some softness over the last 30 days.

Narrator: This is Alyssa with the Ag View Solutions team. Here at Ag View Solutions, we work with farms and ag businesses all across the country on cost of production, business decision making, collaboration opportunities, farm and ag business structuring, and transition planning. We work with operations of all sizes to help you with the important decisions that need to be made in your business. If you have questions or would like to learn more about how we can help your farm and business, please email us at cbarron@agviewsolutions.com, and thank you for listening.

Chris

Barron: Okay, so let's carry that information into new crop, and we talked offline a little bit, we just don't have very many clients left that have enough to really spend much time on talking old crop. Other than, you know, the basis. And, you know, so as we look forward into new crop sales, what does this all mean for new crop? And if we do see some price strength here in the next few weeks or something, or you get something to feed the bull a little bit here, on the basis side of things, what should we be watching for Should we be locking any basis at any point? Should we just be, you know, continuing with some hedge to arise, which I know a lot of people have been doing that, or a little bit of, you know, setting a floor with several different, you know, strategies.

But, you know, what's your thought as we move forward here, taking advantage of some opportunities and keeping an eye on basis?

Clark

Neighbors: Sure, so just kind of as a benchmark, we talked to a lot of commercial elevators in the Midwest, and I would say as of, as of right now, percentage sales, and this is kind of a broad, broad number, Chris, both corn and beans with a slightly bigger percentage to beans, 20-25% of the new crop has been priced. Most of that was sold, believe it or not, as we look back at hedges when the commercials put this in place, uh, most of that new crop was sold probably back in January and February. Since then, new crop sales have kind of diminished a little bit as we got in that big steep part of the rally. Farmers kind of slowed things down. Okay, so now you go into this important June timeframe. Of course, seasonal, you look at highs.

I mean, you look at a 15-year, 30-year seasonality chart, typically, you know, and these are always round numbers, the high in the corn market tends to be middle of June, the high in the bean market tends to be late June, early July, so we're definitely in that big window from a seasonality standpoint. And again, we just got back from, you know, we've sold off of this pretty unprecedented rally in April and May. So going forward in the new crop, just from a board perspective initially, I think, you know, as far as adding sales, you know, you work with guys in regard to the returns. I think that's important to watch, to keep that discipline and just pick some spots, maybe pick pick some dates or pick some price goals, have those offers in place, whether it's a hedge or a hedge to arrive or whatever product you're trying to do to lock futures in, have those in stone, in place.

When you have a market that moves like this last week where you're limit up and limit down the same week on corn, if you don't have those offers in place you could very easily miss that opportunity. From a price perspective on corn, December corn has spent an entirety of 6 days above $6. We closed 5 days, so earlier this month. I know that's probably a goal guys have in their mind, and that's fine, but I think there's some selling points between here and there, especially with the kind of returns we're looking at. So set some date goals, maybe it's the 10th and the 20th and kind of step into these sales. It's an important time of year, especially as the crop starts to mature and have some hopefully better feel on what kind of bushels are out in the country or out in the field as far as adding the return.

So corn, I would be more apt to say at this point, locking in hedges or hedge-to-arrives or whatever works, using some puts possibly in the option market to set a floor, especially on bushels that producers may be uncomfortable to sell based on production. Beans on the other side of the coin, we have some pretty, I would call them decent basis levels in harvest for what we typically see, better than corn at this point. If I had to move bushels at harvest time because of space needs, on-farm needs, etc., I'd be more apt to lock in beans just in the cash market because the basis levels are pretty decent, especially in the export trade.

So I think that is where I would lean right now as far as had to make cash sales, just outright cash sales, I would think I'd look at cash on beans at this point just based on where the basis levels are and what they're telling us today from a historical standpoint. Corn on the other side, I think there's opportunities down the road on basis, especially with this export trade we've seen on the books from China here over the last couple, 3 weeks.

Chris

Barron: There's no carry in, in the soybeans either that kind of makes it tough to put stuff away and not get paid for it.

Clark

Neighbors: Correct. You have a tiny bit of carry in the corn market. It's nothing, uh, that jumps out at a person. But yeah, you're still inverted in beans. We saw this same scenario last summer on the beans, you know, with an inverted market. But again, you gotta— you kind of have to look and say, all right, what's the market telling me to do, you know? I said So cash beans, if I need to make that adjustment as far as on farm needs and space, beans seem to make more sense to move to town at harvest time as we speak here today.

Chris

Barron: So one of the things before I ask you a final question that is a takeaway for me for that, and see if you have any comments on that real quick here, but you know, it's as basic as what I'm going to say here, and this is what we preach all the time and what we, you know, we get a phone call, and, you know, somebody's on the fence, you know, wondering, you know, should I plug some more sales in on a rally and that kind of thing. And it really does come down to the way we look at it. There's 3 key things. The first one is do your math, right? Sit down. This is a great time of year, you know, you're settled on seed expenses, you should be wrapping up eventually here as you kind of figure out where your crop protection expenses are.

Dial some of those expenses in a little bit closer and your fertility and everything, we really have a really good handle on what we've spent on this crop and what we may have yet to. And so we can set a margin target, right? We can say, okay, this is where we want to be on a profitability standpoint. The next thing is, is the timing of those sales is figuring out from a cash flow perspective, okay, I may need money here, here, and here. And, you know, look at that timing and see if you can align some of those things with the market. If you can't, maybe the money comes in a little sooner. It never hurts to have cash, right? And then the, the last thing is what you said, Clark, I think is awesome. And I think we need to be saying it more often is put some offers in because like you said, this thing moves around here.

You know, historically, June and July have been the time to make sales, and usually you have about 5 minutes to do it. And, um, and so, you know, I think those are kind of our 3 key things that we look at. And then the last thing I would say too, and I had mentioned this on another podcast, and then I'll shut up for a second and get your take on these 3 things. And then this last thing, though, comment on Making sure that you look at your contracts for your supplier, where, where stuff's going. Align those contracts. Make sure you document those things on your own spreadsheet or on your own system. With Profit Manager, we have that system where you plug in every sale so you can see what it is as a percent, what it is on bushels, so that you can look at the contract number, make sure your contract numbers and your totals align with where you're making your sales.

So there's not any surprises when, when you get busy. So I'm gonna be quiet for a second. Any other things besides those kind of 3 key things that, that you guys are watching or that you would throw out there for perspective, Clark?

Clark

Neighbors: Well, I think, I think those are really good. Uh, one thing I always over the years have used is kind of the 3 Rs of marketing is, uh, risk, reward, and responsibility. So Your risk-reward is self-explanatory to some degree. That's where your math and knowing your targets and your prices and again having those offers in place. And also the timing kind of ties in with that. Responsibility is, you know, take responsibility for your decisions. I mean using your profit manager or whatever. To help make those decisions, but it's still your responsibility to pull the trigger and know what's going to work and stay disciplined with that. The other thing I would say, and again getting back to having these offers in place, I think that's really important because we're going to run into a time— I'm not sure we've seen all the volatility max that we're going to see.

As we progress through the summer. I mean, I'm just looking at, for example, I'm looking at the 7-day precip maps this morning, and the Upper Midwest and the Northern Plains look fairly dry, and the temperatures are starting to warm up. I guess it's getting summertime, right? So that's gonna add to the volatility, you know, as we go back and forth on each weather forecast. So again, have those offers in place. The other thing, what we've been doing in our office to some degree too is looking at— it just puts on new crop, whether it's corn or beans. Instead of going all the way out to December and November respectively in corn and beans with puts, there's these short-dated puts that you can use that have a shorter window through the end of July or into June or however you want to tie those in. To get you through key time frames and making decisions.

I think that's important to kind of sometimes keep those decisions a little more in front of you versus having puts long term and I don't want to go into detail on that but I think those are good tools also especially in bushels that maybe a guy's a little uncomfortable selling cash or maybe doing an HTA on just from a production concern. Standpoint at some point once they get to a level, you know, percentage-wise of sales, don't want to breach much above that. Those are good tools to have in place too. So again, it's just— I think what you do, Chris, with the 3 things you talked about and just kind of putting the risk-reward and all those factors is really key, and we're in a critical time of year to make those decisions.

Chris

Barron: Yeah, a lot of times we have to continually recalibrate our thinking too because, you know, that volatility can kind of mess with your mind a little bit. And then I think too, you talked about a lot of sales being made back in January and February, and, uh, I think there were— there's still a lot of sales, you know, for quite a while there. Every sale we made looked like a bad sale when the market continued to go higher. And then we got, uh, well, we got to be awakened or whatever, you know, the, the market adjusted. And, and, you know, like I said, we came back down and you, you take a knock a bunch off the market again. Then again, gives you an opportunity to recalibrate and say, okay, these, these are still really good prices. There's a lot of things we can do and still we have a really good margin.

And so it's a good problem to have, but sometimes it's just hard to to make decisions here. One, okay, so my last question for you is on '22. If we see strength coming in the '21 and we have some targets that are getting hit there, do you see, you know, because we've rolled some '22 ahead, we're, you know, and before I'll have you answer this, I'll just throw out there right now we're seeing about a 50-cent per bushel price increase on our early, and, and this, this obviously will ebb and flow, but currently right now we're seeing about a 50-cent cost of production price increase, both a little bit estimated and a little bit actual on corn. We're seeing about a dollar per bushel price cost increase on soybeans. What's your thought on '22? Do you, do you dip your toe a little bit? I know we've got some clients that are that are already 10% sold on '22.

You know, when we were kind of at those high levels, I was getting a few phone calls of guys making sales. So last question, '22, what's your thought on a rally?

Clark

Neighbors: You know, I think your folks that have 10% sold, you know, i.e., dipping your toe in the water, I think probably a good idea. Especially if the values work and running through the numbers you're talking about, this kind of impressive increases on production, but I think we all know and assume that's going to take place. I probably wouldn't get, you know, very aggressive getting much more than 20% sold out in that, you know, '22 crop. Historically, I'm not one that likes to get carried away making multi-year sales, a lot of times those can be, even in these kind of an inverted market, can be kind of tough to ride through from time to time.

The key though, I would say, is this: even though, you know, you look at corn, for example, '22 December corn is about a 60-cent discount to the December of '21, even though that's that much of a discount, make sure, make sure you're making sales against the '22 and not the '21 and trying to, you know, well, I'll sell '21 on the idea that'll be a '22. That's kind of a dangerous mode, especially the type of market we're in right now. So stay very disciplined.

Chris

Barron: Don't get fancy.

Clark

Neighbors: Yes, stay very disciplined. That is the key thing I would I've been doing this business a long time, and I've seen times in the past where somebody, as you say, gets fancy or gets a little cute with the market, and those things can come back and haunt you. I.e., Hedge 2 arrives back in 1996 and those kind of things. So, yeah, I think that makes sense. I think it's good you have guys looking that far out, seeing where the goals are, and the dollars match up, it sure doesn't hurt to start locking some of that in.

Chris

Barron: You bet. So Clark, I think this is a good place to wrap up. I think we, we kind of hit most of the spokes in the wheel. And if somebody wants to get a hold of you because they are thinking of a question we didn't hit on or whatever and want to, want to give you a call and just kind of talk with you one-on-one, what's the best way to reach you?

Clark

Neighbors: Or they can call the office, and it's 319-362-2325. Email is clark@biscommodities.com, or the website is just biscommodities.com. And yeah, if anybody wants to call and visit, we'd be more than happy to, myself or one of us in the office, to chat. So that'd be great.

Chris

Barron: That'd be good. Hey Clark, I really appreciate your time today. Thanks a lot for participating.

Clark

Neighbors: Thank you, Chris. Have a great weekend.

Chris

Barron: Yeah, we will. And again, Clark Neuber at BIS Commodities in Cedar Rapids, Iowa. If you've got questions, feel free to reach out to him. And everybody, we really want to thank you for listening and If you got questions or any crop updates or anything, again, reach out to us if you'd like to be on and give us an update so the listeners can kind of hear what's going on. And we want to get a few more of those out here in the next week or two. And then also we'll be coming with some podcasts on the economy too. Got a couple of those lined up for the next couple of weeks. So again, everybody, thanks for listening. We will catch you again next time on the Ag View Pitch.