Weekly market outlook Mar. 1-5: Don't panic

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.

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Jody Lawrence. How's it going today, Jody?

Jody

Lawrence: I'm good, Shea. How are you?

Shay

Foulk: Well, I can't complain. Throughout the Midwest and really across the United States, we're actually seeing some pretty favorable mild temperatures here and, uh, you know, pretty consistent outlook for the week ahead. I'm not sure we can say that though for the markets. A lot of craziness going on as we wrap up the week of the 26th and, and move into the week ahead. Does that sound about right?

Jody

Lawrence: Uh, yeah, you kind of ended up with the, the, the, the triple threat today. You had the end of the month, you had First Notice Day, You had option expiration, it's kind of, you know, triple witching for— in the old days is what they called some of these factors. So you had a lot of stuff going on. And the, you know, just, which is becoming, you know, the volatility is becoming so normal anymore that you don't even look at it. I don't even— if beans don't have a 30-cent range, it's It seems to be boring, but I, you know, it's a lot going on today, and I think that when we get into March, we'll be in a different, different scenario, hopefully.

Shay

Foulk: Absolutely. So I want to take a quick step back here too. You're with RCM Ag Services, and you, you specialize kind of in risk management and crop marketing. Tell us a little bit more about yourself and, and what you do.

Jody

Lawrence: Well, I've been in the business for 30 years. And started out, my background really was my mom came off a family farm and a family of family farms in Ohio. And so I was, and even though we grew up in Memphis, Tennessee, even though we were around it and, you know, was visiting, I was always intrigued like, you know, all little kids, the animals and the big machines. Everything else just so different than growing up in the city. And then as I got older and I kind of found my potential professional path, I majored in accounting. And one of my teachers was just a really good graduate assistant. And he taught an elective that I took in the commodity business. And I figured in between, as I understood the nuts and bolts, profit and loss, and how that could equate, that I was able to do a lot of things.

And I fully embraced the madness that is, you know, where we are now that most people run away from. The more volatility, the better. And, you know, the more chaos is, you know, makes me happier. And I realize I'm one of the very weird people in that, but It, uh, it all came together. My wife's brother farms independently. My wife didn't grow up on a farm, but he got himself into a position like most farmers that he was great at growing it and great at being a steward of the land, but the business part of it and the marketing part of it was something that just really, uh, it, it It just, it scared him, you know, not that he wasn't smart enough to do it or anything.

It just, he needed somebody with a different set of eyes to not just say, hey, you know, it's always bullish that, you know, you've got $50,000, $75,000, $100,000 an acre made if you sell this little bit of corn or this little bit of beans or wheat or whatever right now. And he appreciated that. And then, Once I really enjoyed helping him, uh, obviously, you know, helping a new family member raised me in the eyes of my father-in-law, but also he then introduced me to a couple of his buddies in the same situation. And when I started helping them, I was like, hey, I could do this. And then we moved, had an opportunity. I did not have, uh, I was working on my Series 3 at the time. And then got my Series 3, we moved to Nashville, and that was in 1996, and started writing the newsletter that I write, became involved.

My biggest customer is Helena Chemical, was now Helena AgriService, and been working with them for 20 years. And in between the daily comment that I write that goes out to about 7,000, or excuse me, 7,500 Farmers, people in the ag industry, Helena makes up a big percentage of that. So it's been great because I was fortunate right at that late '90s, early 2000s, I had something that needed to be able to send out in a mass way other than owning 10 fax machines and putting them in and faxing them. I was very fortunate that the timing of everything and the technology came together, that I went from literally having 7 fax machines, 20 people at a time getting it out, to being able to, uh, you know, send it to people's smartphones and send it to rural areas that I would have had very little contact other than being able to call them on the phone before. So very fortunate and enjoy it.

Very much enjoy what I do.

Shay

Foulk: Absolutely. Well, and some of that delivery method today looks a little different. What we're doing here with the podcast is another way to really quickly get information out, and we appreciate the perspective on that. You mentioned your newsletter. I have a copy in front of me here. I really enjoy the newsletter. It's very concise, uh, good information day in and day out. If listeners are interested in being on this newsletter, how do they get involved with that?

Jody

Lawrence: They, if they are doing business with Helena, I encourage them to talk to their Helena rep. Have a little bit of an exclusive situation with them, but they should be able to find a local Helena dealer or a Helena wholesale customer. And we can always, you know, if somebody's got a trading account and seems to be scattered, in what they're putting together. Uh, Helena has been very, uh, been very flexible because obviously somebody that comes to me that's not a Helena customer becomes a prospect for them. So we, we can do, uh, anybody that would like to get it and, uh, you know, would like to talk to us at RCM Ag Services, we'd, we'd be very happy to talk to them.

Shay

Foulk: Absolutely. Uh, you caught my attention earlier when you talked about, uh, the chaos and, and not one to, uh, lament on the time that I spent in the military, but it's really interesting because we were drilled in our heads that controlled chaos is what you have to deal with in difficult situations. And controlled chaos is what we're seeing in market volatility right now. And volatility is a buzzword. You said it's become the new normal. The last 4 weeks we've done podcasts or reached out as a market outlook here, volatility has been at the center of that. So let's dive into some of those reasons of market volatility. You know, we saw some bean cancellations here yesterday and also taking a little bit longer on harvest in South America. What else do we have going on in the marketplace? And if you could expound on that for a couple minutes here.

Jody

Lawrence: Well, if you just look at— let's go back to August 15th because that really was kind of the or at least the August crop report on August 10th, was where everything, the whole landscape of the industry began to change. Because it's not, you know, every day it seems to have been something different. But when you go back where this whole thing started, makes it easier to explain what's going on now. Because we are, as the U.S., as the U.S. growing season ended very poorly, in a lot of areas as this flash drought spread over the Corn Belt and started peeling off yield in late July and through August, we began to realize that the yield wasn't out there. And what China was waiting for, like they always do, like a smart— like any smart consumer, you wait until there's a sale to buy something. And their sale times are always when they're doing their largest purchases are during U.S.

harvest and during South American harvest. And where they got caught, they painted themselves into a corner as their hog industry has come— exploded back online in what they're doing in a more sanitary way, changing feed rations and doing things like that so that the African swine fever does not come back and decimate their herd again. They have made massive changes in how they feed their hogs, and that feed has got to come through higher protein sources, and those sources are going to be corn, bean meal, feed wheat, high protein feed wheat, and, and things like that that historically were a much smaller percentage of their rations because they had so many small, uh, family farm hog operations that were run with no uh, phytosanitary overview, which is why ASF got its foothold.

And when China, uh, and they had intentionally not shown much of their hand that they were going to be in the market in the way that they have been since August. Once they realized that the U.S. crop was fading a little bit, they started a steady drumbeat of purchases nearly every day through from, let's just call it Labor Day, almost to Thanksgiving, where they were buying something from the U.S., whether it's beans, corn, uh, whatever the case may be. And that really started the whole thing because the way we figure it, and these aren't exact numbers, but they're, you know, they show you the price significance of why we've moved so far, is that the U.S. probably lost combined lost out of their yield in between, uh, in between, let's say, the drought in corn and beans, somewhere between 600 and 800 million bushels of production.

So you're talking about a— when you talk about ending stocks where they were, a very significant amount. Then when that happened, on top of the fact that China was going to come in and start these much larger purchases than the USDA thought they were going to do, than any private analyst, because everybody got caught flat-footed by the Chinese demand. But that's what China does. China is incredibly opaque in all of their governance and especially in their purchases, and the world lets them do it, so they do it. And then when they started coming in and really putting the hammer down on these sales, we realized something was wrong. They had either either their crop had come up shorter than they were telling us, or their demand for feed was exploding because of their, the difference in how they're refilling their hog pipeline.

So with that, you're talking about all of a sudden, the corn and bean markets had, oh, a billion to 1.2 billion difference in ending balance sheets in world stocks between what China was buying and what the US lost. And as that momentum grew, we ran into the situation of South America got off to kind of a spotty start, too wet in the north, which has continued to be the trend because of a very strong La Niña. And now Argentina and southern Brazil have been much drier than normal. So you have had, you know, let's just call it going back till the end of July, in gosh, 7 months, you've had what could be considered probably somewhere between about 1.5 billion bushels between corn and beans pulled out of the world stocks that everybody all of a sudden had to price in. How do we ration this? What do we do?

So, uh, and then you get the normal monthly stuff like this, whether it's option expiration last Friday, whether it's first notice day. And, you know, last time we saw this was for December corn and wheat, uh, in late November right after Thanksgiving. And then we had it for the January beans right before New Year's. Uh, these times are always, uh, you're never quite sure what you're going to get. But when you get into a situation now where people are having a lot of trouble sourcing— people being the Cargills and ADMs of the world— onto their end users that are having trouble sourcing beans in particular, uh, you know, you, you don't have any idea what could have shown up today.

And open interest changed dramatically yesterday in the markets, which, you know, indicates a, a transfer of ownership probably into the end user's hands because there, there were not, not a huge amount of deliveries that didn't, that didn't get taken up today. So yeah, all those things combined build to the, you know, every month we seem to have a tidal wave where they all come together. And it just happened to be yesterday and today.

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.

Shay

Foulk: So our production, Chinese production down, you know, we got caught with, with drought on our end. When we look at what we're seeing here today in today's market conditions, the, the price increase that we've seen over the last 8 to 12 months in particular, what other time in history can we point to where we've seen all of this come together, you know, especially the rebound after African swine fever? Is there any other time in history that we can look back on and compare this to that might give us some indication of what to expect moving forward, or are we pretty unique here?

Jody

Lawrence: Well, it's a unique situation, but anybody that's been around for a long time remembers— what everybody remembers about 2012 was the U.S. drought, that, you know, we had Dust Bowl, you know, once every 100 years type drought. But what really, that was also, you know, the building and a confluence of events because the growing season before that, the South America had not had a very good crop. And even going back to '09 and '10, there had been some, not really a demand drive, but that was when ethanol began to really start to get its foothold in to where, you know, now we're using a third of the corn crop. So you had some demand expansion going on that culminated entirely in the 2012 drought. And how this is different is the demand driver of China is falling in line with a, you know, and certainly not a 2012 type production problem in the US or in South America.

But when you all of a sudden jump back out of the COVID lockdown, driven miles, ethanol usage, crude oil, and you look at all the money from all of the governments being in, whether it's PPP or stimulus money, whatever you want to call it, across the world, you're in an enormous position that they're, what generally happens is, The dollar weakens because we keep piling on to our US debt, even though it has stabilized a little bit late this week. But you also have a lot of people with money, and when that happens, you always think inflation. And if you just look at the 10-year Treasury, yesterday was the largest one-day loss in price— and what that equates to, because it's an inverse relationship— gain in rates going up that we had, we hadn't seen that in 4 years. So you've got a lot of things going on.

And I think what we are looking forward to now is completely different to the aftermath of 2012. Because you have got more money chasing almost as few bushels as we had coming into '12-'13. And the good, you know, what the good stuff, the good things that happened You know, from a production agriculture standpoint after '12 was that South America had a good growing season, the U.S. expanded acres in '13 and '14. And we are getting to a point where the margin for error on what the world uses and what we're able to grow, it has shrunk significantly over the last 10 years. So what, you know, as the world continues to expand and, and use more, you know, high protein that's coming out of anything produced in the U.S., you're at— you're in a position that the world demands that South America and the U.S. have at least almost trendline yield crops every year.

And we know that Mother Nature is not going to allow that.

Shay

Foulk: I love that perspective. That's one that It's such a larger picture than what we're used to thinking about. It's not on our minds every day. So I appreciate the comments on that. Let's take the last few minutes here to focus on an outlook of next week for this beginning week to March here. We saw a fair amount of volatility yesterday and through today as well. As we look at March 1st through 5th, what are some of your thoughts there?

Jody

Lawrence: Well, I think, uh, the, uh, speculative investment community tipped their hand, uh, at the close today because you had significant losses overnight. You had beans, uh, down 20-25 cents in old crop, and you had corn down another 8 to 10 after yesterday's new contract high, kind of key reversal. So you had some speculative revert, you had some Chinese doing some things, you had a little bit of wet weather. Or a wetter weather forecast South America. But the way we rallied into the close with May beans and May corn both now in the, in the front month position, uh, finishing unchanged and fractionally higher today tells me that when we get to— when we get to Monday, you have got a huge amount of on-the-sideline speculative money ready to buy into this inflation play. The raw material inflation play.

And I think what you saw today were people sitting around going, might as well buy it now. It's like, it's 50 cents off where I wanted to buy it Thursday. So I might as well buy it now. And, and I, and I think largely that's what they did. And so I expect next week that we'll see if that— because the noon forecast took some of that rain away from southern Brazil and northern Argentina— if we come in dry Sunday night with the speculative community ready to reallocate out of Dow 31,000 and record highs, and the concern that you've got, you know, uh, that we're not going to see Dow 35,000 anytime soon. They, the speculative community, and just the investment, the regular investment community, sees better opportunities in the raw materials, which certainly our, our markets are included in.

And you can look at crude hitting $62, uh, this week, uh, as an example of a leadership role in the raw materials sector.

Shay

Foulk: Absolutely. So I want to close out here, and I'll give you an opportunity for final comment, but I want to close out here with something from yesterday's newsletter. You said, uh, the February revenue-based insurance averages are $4.58 and, uh, on corn and $11.85 on soybeans. Today set the final averages on that, so they might have been adjusted slightly, but they'll be the highest in 7 years and put almost every producer in the rare position to ensure profitability through your crop insurance. And I made a note to some people, this is my wife and I's first year financially farming and feel obviously a little blessed and fortunate. And, you know, it's better to be lucky than good sometimes at where we're at here with these crop prices.

But with that being said, any considerations for farmers out there that are looking at potentially very profitable 2021 and, and some of the marketing considerations that they make here going through spring into planting season?

Jody

Lawrence: Well, your, your question is incredibly timely because the revenue in insurance-based product, uh, in '13 and '14 we were in the same position that you could insure a price that should make everybody money. You hate to think that somebody can't make money at $4.60 corn, but we know that there are. But a huge majority of the farmers are going to be making money at $4.60 corn and, you know, near, you know, $11.50+ beans. But what I've been doing this week is calling the customers that I work with more in a hands-on you know, balance sheets, let's, let's talk about numbers, give me input costs and give me those things, is I didn't find anybody. And I talked to people in South Dakota, I talked to people in Illinois, I talked to people in Texas, talked to people all over the country.

Everybody, everybody's balance sheet and everybody's profit per acre that I went through was in a position that they were— crop insurance not, not even including that calculation, but they were at a minimum of pure profit per acre at $75. And then obviously, the more— the people in a better financial position, their margin was even higher. So, and I made a— especially a young farmer like you, where you clearly want to be farming in '22 and '23 and '30 and '35 and keep going. But yep, you also have to look at '22, at all the new crop '22 prices, because there are a variety of products.

And we've got, we've got a few that we are doing with StoneX, which is the old FC Stone, that allows some things where you can go all the way out to '22 for what would amount to a hedge-to-arrive fee and be able to book it in and say, I can go to your bank right now and guarantee that you're going to be making money this year, and in '22. 'Cause I know a lot of people are trying to get their taxes done at the end of February to get their operating lines and everything. But you could go in with a plan and with sales tickets and say, whether I hedged it on the board or whether I've already done some HTAs, I'm gonna make money. You know, unless I— and since I've got insurance, even if there's a 2012 catastrophic type situation, I've got that covered. So all I'm going to do is I'm going to sleep well at night and I'm going to enjoy farming for the first time in 5 years.

Shay

Foulk: No, I appreciate that. That's, uh, it's very interesting. I, I say a lot, what a time to be alive, you know. I appreciate the insight and perspective. Anything else here, Jody?

Jody

Lawrence: No, Shay, I really appreciate, uh, being invited in. Look forward to doing, uh, many more of these since this is our inaugural, uh, kickoff podcast. But, uh, wish everybody well and hope everybody made it through the snow and the cold. And when you turn it to March, it seems like the winter meeting season is over, and March 15th everybody starts itching to get out in the field, at least drive something around, whether they're planting something or not. They want to clean up and start getting the planters calibrated. So I'm looking forward to another good spring, and, you know, being able to go into it with this kind of optimism that you still have a lot of support potentially for the next you know, 12 to 24 months in the markets. Uh, it is, it's really a good time to be in agriculture.

Shay

Foulk: Thanks a lot, Jody. I appreciate it.

Jody

Lawrence: Okay, Shay, thank you. Everybody have a good weekend.

Shay

Foulk: And as always, thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.