Weekly market outlook: Mar. 28 - Apr. 1st - rollercoaster ride without rails

Chris: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week, that final week of March, uh, 28th through April 1st. And in there we're going to see an interesting report probably on Thursday the 31st. And so with that said, we have Jared Creed with us today. Jared, how's it going?

Jerod

Creed: Well, it's going well, and I just had to chuckle when you say we're going into a new week and it's only March still, and it certainly feels like it's a lot later in the year than that, doesn't it?

Chris: Yeah, there's just been a little bit going on, that's for sure. It's been, you know, you think of all the stuff that's going on geopolitically, the financial concerns, inputs, prices where they're at, we're just in totally uncharted territory, aren't we?

Jerod

Creed: Yeah, I think you can lean on the opinion of some of the elders in the industry that really cut their teeth in the '80s, and then some, you know, some problems in the '90s, and then obviously they went through 2008. And the general consensus from that crowd is, you know, there's nothing wrong with, you know, admitting that we are in uncharted territories right now because we've pretty much surpassed any type of uncertainty we've ever had in more than just the agricultural markets, all financial markets, so on, so on. The world that we're in today is absolutely insane.

Chris: Uh, I'll second that. So, uh, with that being said, let's start off with the less insane things, the more expected things, and we'll get to the insane things here in a bit. But, uh, Thursday, um, of this week, we're going to have a report. Talk a little bit about that. What are you, what are you seeing? What are you expecting? And, and maybe more importantly, what's the reaction potentially going to be, do you think?

Jerod

Creed: That's a big question, Chris. I'm going to back up just a second to first think about the makeup of the market right now. We're not necessarily at record long positions in managed money, but what we have seen is the natural buyer and seller of the market is relatively absent. They're still there, but we've seen a dramatic decrease in your day-in, day-out trading, you know, trading houses. When you think about the market being as long as it is, it's going to have to be, you know, continue to be fed bullish news given their current position. You know, the exact opposite is true when they're incredibly short, they have to be, continue to be fed bearish news. Does this March 31st planting intentions report provide any type of uncertainty, additional uncertainty from what we have? In years past, yeah, it's a big report.

This year, given the recent volatility we've had, it almost just feels like another day considering there's still a significant amount of time between now and the June final plantings. Plenty of acres still have the ability to flip-flop back and forth between rice, cotton, corn, soybeans, spring wheat, so on and so on, sunflowers, a whole bunch of different moving pieces that I think Mother Nature will have somewhat of a final say. You know, a couple months ago it felt like supply of fertilizer was going to be the bigger deal rather than price. Price is obviously sky high right now, comparative to recent years, but it doesn't really seem from what I see in here that we're going to have a supply issue on that front. So back to your original question, you know, does it provide, uh, additional market movement from where we're at today?

I, I don't know if I'm really willing to go out there and say that it matters that much. We know We have a supply issue today from geopolitical situations. Demand still relatively strong coming off of, you know, another drought in South America, albeit their safrinha corn crop appears to be off to a pretty good start, but it's not going to make up for the issues that we have. I guess the surprise, you know, the unknown is we can't afford to go plant 98, 98, 98 to 99 million acres of corn because that will leave beans at way too low of a number. And vice versa, we can't afford to plant more beans than we can corn. In my opinion, I don't think that that number looks a heck of a lot different than last year from total corn and bean acres, uh, and, you know, with a million acres of wiggle room on either one of them.

So I'm not sure that a 50 to 100 million bushel production range in beans and 150 to 250 million bushel production range in corn this early in the game I don't know if that necessarily reinforces any type of current ideas. I think it's a known fact that we're just not going to be able to, in the here and now, what we know, we're not going to be able to just dig ourselves out of supply hole in one year. That'd be pretty special if we did. You're talking monster, monster, monster yields well above record to maybe put a little bit of a wet blanket, a little bit of comfort in the market. But I just don't think that that's, uh,, you know, really relevant here in the March report this year.

Chris: Yeah, and some of the other global stuff that we'll get to here in a little bit too is gonna, gonna have an impact on that. Let's stay on this for a minute. One of the other things too is that we see, you know, we're in that what, $6.70 range as we record this on the Dec '22 corn and like close to $15, $14.96 or whatever on the Nov beans for the '22 crop. And you look at the corn-bean ratio and there I've heard some chatter on you know, just various places on, you know, well, that's— is that going to lead to more corn or whatever? And, you know, and we've got guys that are growing cotton and rice and different things in different parts of the country and wheat. And, you know, some of those things are gonna, gonna and have already pulled acres.

In our observation, we just don't see many producers probably changing very much, even, even though, you know, I would tell you, and it'll be interesting to see what you're seeing with your clients, but We have in our data, we're showing about a $50 to $70 an acre on average, and this average is bouncing around as we get data in a little bit, but more revenue potential for corn even though, you know, nitrogen's up 50 cents a bushel and everybody's talking fuel and blah blah blah. But, you know, you look at that in comparison to soybeans in most operations and it's there's a significant profit advantage sticking with the corn. Do you see any changes that are going to impact anything, or could there be any surprises in that report? Because I just don't see the farmers changing much.

Jerod

Creed: First, I think the last time I was on with you was right before the insurance averaging period started. Yeah, we were talking about the ratio, and I spent the month of December on the road giving presentations for different farmer organizations, and we spent a fair clip of time just identifying year, years prior average ratio on the insurance price, you know, the bean price divided by the corn price, and the 10-year average— excuse me, the average back to 2013 since the '12 drought. Uh, that average was, uh, uh, I should know this off the top of my head, but I think it was 2.38, and we went right to a 2.38 final ratio on this year's insurance, right? 14, 14 and change versus 5.33. Yep, yep. That ratio ended up being right along the lines of the average of years prior. Since then, that ratio went back to 2.2, and prior to the insurance averaging period, it was at 2.2.

And perhaps it's as simple as saying the drought in South America relative to soybeans in Brazil And to a certain extent, Argentina is what pushed the envelope to get that bean ratio back in check. Now, does that matter again in this year? Probably not. I'm a— I know I'm going to admit right here for all your listeners, I'm bullheaded and hardheaded on this concept that a pet peeve of mine is the idea of, oh, I'm putting less risk on the table in soybeans than I am corn. No, you're not.

Chris: I echo that. That's awesome.

Jerod

Creed: That's completely, uh, illogical type of thought process, right? I was just— so I have to give a presentation on Monday for a bank, and West Central Iowa, East Central Nebraska, as kind of the dust settles on the big ticket items, you know, our average corn cost production all in, most of this including family living too, is going to be about $935 in corn. And about $740 an acre in beans. Okay, so when you start to think about the profit potential associated with each crop, and then you look on the other side of the loss potential, a $50 an acre loss regardless of what was planted or not planted is still a $50 an acre loss. And it's a heck of a lot easier to lose that money in beans than it is corn. And, you know, on that comment about the bean cost production, uh, I'm sure you've seen this time in, time out, and it's easy to make the assumption.

It certainly doesn't feel like you would spend $700 an acre in the state of Iowa to grow a soybean crop, right? It just— how do you get there? Well, it's all those sunken costs. It's all those things that add up. It's still a cost per acre no matter if it's planted the corn or soybeans. And I just, I just don't see the logic behind pushing the needle on soybeans based upon lower exposure. I think it's still going to happen at a, to a certain extent. Within the group of producers that we work with, there was a few that have a small uptick in beans, primarily because of corn rootworm pressure. But for the most part, when it came down to picking, you know, the 1, 2, 3 farms in the operation that had some flexibility of going to corn or beans, corn was the winner. And corn was the winner even when that insurance ratio was at 2.38. Yeah. And now it's even more of a suggested winner.

Chris: We've seen that with a lot of farms, even corn on corn. And I know that's different, you know, you get in Missouri in different areas or in the Dakotas or whatever, but you know, you're getting that, that hard, that, you know, the I states or whatever, kind of in that hot zone there where there's a lot of corn productivity. That's, that's an area where, you know, we were even seeing a lot of corn on corn that was, that was still the, the winner in terms of revenue.

Jerod

Creed: And maybe, Chris, real quick, it's worthwhile just walking through a very quick example. 200 bushel corn at $6 is obviously $1,200 of revenue, right? In today's world, A, I know that $6 cash corn is a cheaper price than what we can market for new crop corn right now. I think anybody that has done forward marketing, they're sitting around the opportunity to average $6 or higher on the entire crop, obviously below the market a little bit. But $1,200 versus $950 cost, $250 of profitability. So if I'm going to spend $740 in beans, I basically need to gross $1,000 an acre in beans. And $1,000 an acre, even at a $15 cash price, which cannot be sold yet It's a 67-bushel yield. That's, that's not easy. No, right? A 67-bushel farm average, for that matter, right? And we don't have, uh, I bet not even 10%, maybe not even 5% of the producers you work with have an APH of above 65.

Chris: Yeah, and that's, that's kind of what we see too. It's— there's exceptions to that rule, you know, where the beans might might win out, um, depending on APH and everything. The other thing I would say, you mentioned the insurance too, you know, you look at what your level of coverage is based on that APH times these prices, and you're guaranteeing, you know, if you talk, we'll talk about taking more risk off the table. Sometimes you take more risk off the table with corn if your APH is higher on the corn to start with relative to the beans, because you're guaranteeing more, more bushels of, of, of risk mitigation there too.

Jerod

Creed: And I know this is probably chump change in the big picture, but when you think about worst case on a poor crop in corn or beans, you are going to see generally a faster drop in cost of production relative to corn than you are soybeans, right? Yeah, primarily because of handling, drying, all those other pieces that, you know, add up big picture. I mean, it's not that It's not that unfathomable to think about a $25, $30 an acre expense drop in corn on a shorter crop.

Chris: Yeah, well, and the other thing too, you know, like, and I mentioned to you offline before we started, we were talking about, you know, on the input side, and the big news right now is, is energy costs and oil price and all that. And, and it's almost can be a distraction a little bit, you know, on, you know, for the corn growers and stuff. You know, when you're looking at tillage and all those different things, I mean, I just, you know, I texted my fuel supplier this morning and said, what's fuel cost right off the truck? You know, it was $4.19. Well, that, geez, that is really high. That's a high fuel cost price. But, you know, the reality of it is, you know, when you calculate that out, I did it for our trucking, it was going to cost us 2 cents a bushel to finish hauling our old crop corn off the farm. Well, that's not that much.

I mean, it— yeah, you don't want to pay more for fuel. We look at what we write the check for, but look at, you know, what is that on a cost per bushel? And then same thing with the machinery and equipment, you know, that's the, the thing I always hang my hat on is know what your costs are on a per bushel basis. And you look at the fuel cost increase versus last year, you know, we're talking maybe 6 or 7 cents a bushel more.

Jerod

Creed: Exactly.

Chris: A lot of the guys, in terms of cost per fuel, you, you know, for your fuel, even if you screwed up and haven't bought it, you know. And if you did buy it, you know, well, you know, 5, 6 cents here and there saving cost does add up, and it is important. Not saying it's not important, but I'm saying make sure you, you keep your eye on the big ticket things like, like what you were just talking about, you know. The bigger, the bigger ticket items are, are way more important to pay attention to.

Jerod

Creed: Fuel, most of the time Contracting fuel ends up being a feel-good situation. Yeah. Or ends up being a, you know, a feel-bad situation. Oh my gosh, I contracted my fuel for $3 and now it's $2.50. In this environment, all I'm telling anybody that doesn't have any fuel bought, um, this sounds bad to say, I quite frankly don't care. I think it's just better served to be hand-to-mouth, you know, $110, $120 crude in an ongoing war. Is obviously not a norm. And if there's any type of correlation to energy prices and the commodity that we are producing, corn and beans, it does not take but a mere couple cents a bushel to make up for darn near a double fuel price year on year.

Chris: Yeah, exactly. So let's, um, while we're kind of on this, let's, let's go to the old crop and we'll get to the crazy stuff. And I'm just kind of working backwards on what I was gonna gonna quiz you on, but, you know, there's still some old crop sitting around in the, in the bins yet. And a lot of operations, a little more than, than some and others, basis kind of got away from us for a while there. And now it's kind of starting to come back. I think, you know, when that price was going up and we were getting, you know, heading towards March and rents are due and the cash price was there, the basis was actually pretty good. Everybody, a lot of people started selling it. It started to get really hard on the basis. Now it's kind of coming back. What, what's a producer to pay attention to with those remaining bushels in the bins as far as managing basis, do you think?

Jerod

Creed: I think the producer needs to remember that the paper demand for that commodity right now is greater than that of the physical demand. And I mean that in terms that there is still enough supply around the U.S. to get us to the doorstep of new crop, right? And if we haven't learned anything twice now, you know, this inverse that we just got smoked on here in the last month was pretty significant, but it was absolutely nothing to the inverse that fell out of bed late last summer. Inverses are made to die. Inverses are there to entice grain movement. However, this year it's not being enticed from the cash market necessarily. It's being enticed by a whole bunch of speculative money chasing paper, buying front month contracts that ultimately puts the pinch on the user, the handler of the grain down the pipeline from the farmer.

We just flat out had too much grain come to market in too short of a time. That will work itself out. As you mentioned, it is— I was just glancing here this morning at, you know, average basis movements from week on week. Gosh, I think about 75% of the processor market across the Western Corn Belt was higher week on week. And it wouldn't really surprise me to see that continue to uptick through planting. As those who didn't get all of their needs covered, you know, on that comment, there are some outfits that they've covered all of their April-May needs in the last 30 days. The farmer was such a willing seller. Now those users might have a little regret of buying it in the fashion that they did. That's the other, you know, that's the double-edged sword to all this. Some of those users might have overstepped what they actually had to do from an opportunity perspective.

It's no different than the farmer looking at it, why did I sell $5 corn if the market's at $6? They bought it too expensive. Now the world doesn't need, I shouldn't say the world, The domestic market in the U.S. doesn't need, uh, your historical consistent average monthly movement that we would typically see. You know, if we're going to use, you know, just call it we raise 15 billion bushels and we use 14 for simple math. You take 14 off of 12 months and you know what your average grain movement needs to be per month. That's not the case right now. We overran the system. And in the event we do have, you know, let's just say that we get to July 4th and it's become pretty evident that maybe our domestic stocks were overstated. The cash market will tell us at that point, but the cash market's only going to do it to the extent of what it takes for them to get to the doorstep of new crop.

And the inverse will eventually die again. Um, it might be a little exasperated with what's going on in Ukraine this year. Maybe an inverse can stick around for a little bit longer. But right now the expectation is obviously 90-some million acres of corn and a trend yield of 180. We're going to replenish the pipeline in, uh, in a short 7 months, right?

Chris: Yeah. Well, it's kind of a segue. You mentioned Ukraine there. Let's, let's hit on that for a minute. You know, that's going to affect new and old crop pretty directly depending on what's going on, and it already has to a large extent. So I'll ask you first, to what extent? And then I want to make one other comment, and then I'll turn you loose here. But, you know, I've, I've been working with some seed company talking a lot about the idea that, you know, they, they have 300 employees in Ukraine that are Ukrainian employees that are no longer in the country. And some of them went back to fight in the army, but they're not there doing any work. They're not there to deliver seed. There's, you know, so you talk about supply chain disruption, that's like, that's like the definition of there is no movement.

And so I'm not quite sure how they're going to plant a crop when, you know, you're hearing these, you know, when I was hearing a direct report of the people are not there, they are not going to deliver the product. I'm not sure how you plant something that you don't have. And I hear reports of, you know, well, there's bushel, there's some of the seed is there, but a lot of the seed isn't. So, and that's just the seed, not to mention fuel and fertilizer and all the other stuff and all the other supply chain disruptions. So with all that said, talk to me a little bit, or us as listeners, a little bit about the impact on Ukraine. What's that? How much of the market is that supporting right now? And, and if that changes, how's that? What things do we need to be watching?

Jerod

Creed: First, you and I probably have similar contacts. I'm guessing we're talking about the same seed company. We'll choose to leave their name out. You know, in the last couple years, they've spent an enormous amount of money to restructure their business in that part of the world. Yep. The result was them having a very large percentage of the market share in Ukraine. 30 days ago, the estimate was that there was roughly two-thirds of the fertilizer and seed needs in country for basically corn, wheat, and sunflowers. However, as this war has you know, drug on, it's become pretty evident that we're, we're on the doorstep of are we going to get anything planted or not. One side of the aisle wants to start from zero, and I understand it. They want to start from zero and work their way up.

The other side of the aisle, you could say that maybe they're a little bit more in a glass half full, a little bit of optimism. You know, there was just a headline Thursday, I think, that the Ukraine Ag Minister said that as soon as the war stops, they can get their agricultural supply line back up and running in a matter of 2 weeks. I'm not a Ukraine expert. I know none of your listeners are obviously a Ukraine expert. I'm not going to pretend to be one. But that's quite a statement. That's quite a statement of, you know, do we know what's happened there? Do we know what kind of damage has been done to the rail industry, to the, you know, to your export facilities. You know, you only seen one or two headlines about that stuff of having, you know, major damage done at various export facilities. So I think that's a coin flip right now, Chris.

I think that's as far as I can go to say, if we really do need to start from zero, What are we going to, you know, what are we going to be looking at? We can't forget that if we don't get anything planted, we're not exporting anything, that ultimately does mean that they have supply that's getting carried over there. Yeah, you could go down a rabbit hole and say maybe that supply gets ruined because of infrastructure damage and such. But nonetheless, you drop Ukrainian exports, that means that last year's record corn and wheat crop is going to sit in country, the balance of what was left to ship. And in the last, you know, month, you've had a fair clip of business sold from the U.S. to various countries that would have been sourced from Ukraine.

And I think the best estimate is probably 6 to 7 million tons of corn, you know, a quarter billion bushels, was basically left to ship out of Ukraine that didn't happen and probably not going to happen anytime soon. If you really want to go the opposite side of the aisle of the extreme, they don't plant a darn thing. It scares me to read some of these articles about, you know, world hunger. There are some eccentric— oh, I don't know how you want to classify their type of personality, but they're not necessarily trying to spread fear. But if you look at their track record, right, wrong, or indifferent, they're pretty known for spreading fear. And when you start talking about 500 million to a billion people dying from starvation in the US in the next couple of years, that seems a little overboard to me. Yeah.

If that's the real situation, uh, you know, we've got a lot bigger problems than you and I talking, uh, right here on a podcast about what's going on in front of us today. Yeah. So look, The uncertainty, you know, the risk in the market, uh, I've said this many times with you, that the risk in the market is not meant to say that a farmer needs to think about, oh, my risk is that the market goes down. No, the risk is change. Change is the only constant. The risk of Ukraine not planting a crop, the risk of Ukraine not being able to export a crop, the risk of high fertilizer prices impacting U.S. acres, The risk of inflation, the risk of all these various pieces that is ultimately having an impact on the commodity price, the risk of change in any of those, and the attitude of market participants is the, the, the biggest unknown.

And right now, that risk is enticing individuals to chase the market, basically get their coverage. Be long, whether it's paper or physical. They don't want to be the last man standing with an empty pail at the soup line, right?

Chris: Okay, that's, uh, it's like you said, this, this is kind of a roller coaster ride here, you know, with this geopolitical stuff. And, and one day it's one thing, the next day it's something else, and, and we just don't know how, how bad this could get. The other thing that, you know, that's being affected by all this that I want to hit on as we get closer to wrapping up is inflation, you know, and, you know, I told you this last time we had you on, I mean, we were seeing, you know, close to 15, 16%. We're at 20% inflation now when we look at our overhead cost expenses for our clients. And, you know, I was just at the grocery store the other day and it was way more than 20% more than what we would've spent last year at the same time.

And, you know, so when you look at that stuff and the impact that that's going to have in subsequent years even, you know, and what that looks like and what needs to happen probably with interest rates, and we finally saw our first incremental increase, talk a little bit about that. Is there any impact or things we need to be watching on the markets, or do we just need to be really cognizant on the input side and managing that looking forward?

Jerod

Creed: I'm gonna go twofold on this answer. If you think back about 18 months ago when interest rates more or less bottomed, mm-hmm, the conversation was hot and heavy about getting things refinanced that you had existing debt in place. Just this last week, some 30,000-foot conversations started to develop after the Fed has made their first move, after these banks are estimating, you know, half a point increases from every Fed meeting for the inevitable future here. We started kicking around the idea, and I'm not suggesting that this is the right move. We got a lot more research to do here. But Chris, in your opinion, is this the time where we ought to be starting to look at, you know, paid-for assets, specifically land?

You know, if a guy's got 1,000 acres of land, or let's say 500 acres of land, and he's paying on 250 of it, and the other 250 is free and clear, Is this when you go leverage some of that ground? You go leverage it at still a very cheap interest rate as a little bit of a hedge for the future? Because I think the common logic is that interest rates will climb. It will impact the ability for participants to stay in high-risk markets. I mean, in my head constantly, it's from your meeting in Arizona here a month and a half ago. Joe Bakalik laid it out just absolutely perfect about just how high risk the commodity market is. And the fact that all this money is parked in the commodity market is partially tied to inflation because they've got nowhere else to go get a return. If they're enticed to go elsewhere, how does that impact the commodity market?

And, you know, I think it was just— it was Citibank just this week more or less laid out that they think that the commodities will be under pressure for the next 2 years and expect them as well as expect a half a point rate hike increase every Fed meeting for the inevitable future. And so you, you start to think about a stress test for the farm. Who's to say that in one year operating money for the 2023 crop isn't 7.5 to 8%? That might not sound that bad to some of the age group that listens, uh, to your podcast here, Chris, but that's a significant chunk of change considering the input costs of today as well. And I don't think everything just moves in tandem. We're not going to see, you know, an all-in fertilizer program go from $300 an acre to $125 in a 12-month span while interest rates go up 3%. It's going to have a lag, right? Equipment, land, all these pieces.

And that gets back to my question, just kind of an open-ended question or answer. I kind of wonder if now's the time that we ought to be willing to take on a little bit of debt, be disciplined, don't go borrow money on land and spend it. Park it on the sideline and look at a little bit of an interest cost, uh, for the next 12-24 months, uh, to have a little bit of a, you know, have a, oh, you know, an ace up your sleeve perhaps in the event things do get pretty hairy in the next 24 months.

Chris: I'll answer that with a couple of things, and that's a great question, phenomenal thought process, and I, and I think that, you know, you have and, and we have probably some mutual clients and, and other clients that I think would have the ability to be able to do that because they're in a good debt-to-asset ratio position to start with. There's, you know, obviously that's going to be operation by operation, but you made, you made one comment, or you said a word, and that word was discipline.

And I think that's the huge thing because What you're saying is absolutely functionally probably going to be a very intelligent move, but it's counterintuitive, and a lot of lenders are going to look at that and be a little nervous and say, okay, what's the, what's the repayment capacity and the guarantee of the discipline to use that money in the right areas in the right way to manage the business through this potential trough that you're talking about because of the lag of, of, you know, the commodity prices going down, the input costs staying up. Not to mention, you know, we were talking about fuel not being that big a deal. It is a big deal because in '23, '24 and beyond, it's going to affect the input cost of everything else because that inflates everything else.

And then the last thing I would say about that too is, you know, when you look at the, you know, you look at the cost of production It's not gonna go down very fast. It's gonna take, it's gonna take a couple of years. And you look at land rents and all the big-ticket items like we talked about earlier, those big-ticket items are gonna be, you know, an issue in '20, more so probably in '24. There's gonna be spillover effect. There's gonna be a lot of money made in '22, and a lot of that money isn't gonna be brought into the equation until you know, going into '23. '23 probably won't look that terrible, at least from a national farm income perspective, but by the time we get to '24, the hangover is going to start to kick in and it's not going to be very pretty.

And you look at the other big ticket item, which is machinery, you know, if you look in, in where machinery is going to be from what we're hearing from the big manufacturers, we're hearing, you know, another 10% price increase this year. Well, between last year and this year just in that 2-year span, that's a 24% price increase, um, over, you know, over 24 months. That's a massive increase, and that doesn't go down, you know. The, the equipment cost is the second largest line item expense and stays there. And whether you pay me now or pay me later on equipment, you know, you can run something for a long time, but at some point you have to replace it, and you will, you will have to recoup the inflationary impact. And so I agree 100%. That's in theory, that's a great thought process. I just think that the, the hurdles would be if you're in a position to be able to do it.

Hopefully people have bulletproofed their balance sheets in the last couple of years, which means that you have an okay amount of liquidity now and you've, you've already reduced some debt, so you have a good debt-to-asset ratio. Pulling some of that out, absolutely. Yeah, that's a great idea. I think in my own operation I'd have to arm wrestle my nephew a little bit on that one because we're trying to pay down debt, and that's counterintuitive, right?

Jerod

Creed: You know, it's like good debt and bad debt, right? Exactly. For every $100 grand right now, that'd be about $5,000 in interest a year, right? That's real money, don't get me wrong. Yep. But in the event that operating money's higher in the next 2 years and inputs are still higher, that $5,000 might actually turn into a positive hedge, right? Right.

Chris: Yeah, especially, you know, we know interest rates are going to go up and we know inflation is going to continue for a period yet unless they really jack interest rates, and you're going to pay one or the other. So, you know, that, that, that's a good thought. I mean, I hadn't really thought about that a lot. It's— I think there's some operations, it might be something you scratch your head on a little bit.

Jerod

Creed: Yep.

Chris: So good question, man. Yeah, I mean, I'm the one supposed to be asking the questions. That was a really good question. Good thought too.

Jerod

Creed: Well, like I said, that just sparked, uh, in a random conversation conversation here till the end of the week when, you know, it's nice to be able to hear a producer talk about long-term plans. Yeah, what do they want to achieve? What's their 10-year deal here? Yeah, and his concern is that a monster increase in interest rates long term slows down his ability to execute his 10-year plan, right?

Chris: Yeah, that's a visionary's perspective for sure. That's not something that the average person is going to come up with, that thought, that idea. That's really good. So, all right, well, I think that's all I wanted to, you know, I wanted to hit on the interest rates and inputs, and we talked about a lot of things. I guess just to wrap up, anything I didn't ask or anything that I should ask?

Jerod

Creed: Can we, can we briefly touch on margin protection? I know I've talked about it. Yeah, yeah, that's great. This year, perfect. So twofold, uh, first off, I want to touch base on 2023, you know, a little birdie to be thinking about. As soon as probably the third week of April or so, uh, you'll probably have access to a tool that's predominantly called M-PowerD. Fancy name, fancy acronym, but all it does is it allows a producer to lock in a minimum price for margin protection in 2023, and then that actual average of Dec '23 corn will take place August 15th to September 15th. I cannot stress enough that yes, margin protection is expensive. It's going to be more expensive this next year. But when you compare that to other tools that you have access to and the expense, and at-the-money D23 put for next year, a $6 put more or less is 74 cents a bushel.

Basically $150 an acre and 200 bushel corn to protect price and price only. No input cost coverage, no yield coverage, just price, right? So something to think on there. And to build off of that, on this year's stuff, uh, let's see, after this upcoming week we're going to be into the, you know, quote-unquote harvest averaging period for the inputs. Urea and DAP has been the huge movers. Obviously fuel up a touch, interest rate, uh, I think is up about a point and a half from last fall relative to margin protection. Uh, you think about the term again, a good review here, margin protection. The government was looking at what is the margin on a table for the farmer last August, September using input prices at that point, interest rates, fuel price,, and the corn price coupled with the county's yield.

Fast forward to today, given the world that we are in, you know, when we were signing up for margin protection last year, did we have any idea in our mind that it was going to be somewhat tied to a war? No, absolutely not. But in the here and now, uh, as of yesterday's urea and DAP closes, counties more or less have to yield 110, 111% of their expected county yield. I have a sizable client base in Crawford County that— Crawford County, west central Iowa— so I know these numbers off the top of my head. 219.6 is the expected county yield with what inputs have done And the market being higher than the spring price, looking at that program on a day-by-day mark-to-market value versus just buying and forgetting about it. The yield requirement right now is 241. Wow. The county record is 227. I'm not— I, I'm telling you that it's hard not to get excited.

It does not take that many acres to all of a sudden start talking about the potential of 7-digit scenario from margin protection, right? And I mean this a little bit— again, I'm maybe a little too blunt— anybody, any agent that said, 'No, you're not interested, it's too expensive,' whoo, you, uh, you ought to be getting an update on what margin protection looks like right now. It can still change, don't get me wrong, but if inputs stay at these prices for the next 30 days There is a 1% chance— I will put a 1% chance at best— that any county will raise what they have to, to not trigger a margin protection payment. It might not end up being a monster moneymaker, but it might pay for your margin protection policy and your multi-peril insurance versus the other side of the aisle not carrying it. You're going to be subject to just paying for your insurance if you don't have a claim. Right.

I, I, and one other example here, a— everybody's a little bit concerned about dryness, high prices. There is— I walked through the math yesterday of a producer with like a 220 APH in Crawford County, a 220 yield requirement. If both the county and the farmer average 176 which would be 80% of those yield requirements, that'd be a pretty bad situation. And the farmer averaged $7 across every bushel that they raised, and the market's at $8. Everybody's concerned, oh my gosh, the market's a dollar higher than where I sold it, we're at $8. The gross revenue is over $1,900 an acre.

Chris: Wow.

Jerod

Creed: Yeah, that's $1,800.

Chris: Yeah, that, that's nuts. And that's the thing that I think You know, the one thing you hit on, and I'll shut up again in case you get more stuff you want to, but make sure you have an agent that understands this. And I know there's certain areas, there's listeners on here that they can't buy margin protection. So, you know, whatever we need to do to get it so you can in those areas. But, you know, in the areas of those who are listening that can, if the agents said, you know, like you said, if they say, wow, it's too expensive, or, you know, I would just pass on it, that's probably code for I don't understand it. Very well, or I'm not interested in selling it, you probably want to find somebody that does understand it. Um, just in my experience as well. I'll shut up for a second.

Jerod

Creed: And my last comment on is, you've heard me say before, right tool, right time, right? Exactly. That is the tool in my mind that is right for this year and for next year. Yep. Because quite frankly, as inputs go up and the market goes up, the potential payout goes higher and higher as the market goes up. At 120% factor, what that's doing is it's acting as a hedge. A farmer might not look at it in that fashion, but my revenue is going higher. I don't have to go out there and be aggressive selling grain. In fact, we have been mostly absent in the corn market since we eclipsed $6, and that's been hard for me to do. I've told several clients that at this point, if this was a typical supply, uh, you know, weather concern we would be about— said some bad words there that I shouldn't have said— we would be a lot of grain sold for this year and 50% sold in 2023. But I don't have to, right?

Because I spent $60 an acre on a program last fall that's potentially paying out 4x.

Chris: Yeah, and that— and, and you said another thing I'm going to hit on real quick. Uh, we bought margin protection. I'll just— I'll say that's whatever, you know. We, we spent 21 cents a bushel, and I'm gonna screw my marketing up more than 21 cents a bushel this year. And for 21 cents a bushel, I just got all the protection you just described. Yep. I mean, that's, that's the— that's why it's important that we get this message out there and make sure that, again, you know, I'm not an insurance agent. You're not a certified agent either, are you?

Jerod

Creed: Nope. Um, nope.

Chris: So we're not selling it.

Jerod

Creed: Friendly quiz that I lied, Chris. I said I was done. That was my last comment. But now since you talk about that and screwing up marketing and having margin protection, corn goes to $7 or $7.50 between now and August. You think back to 2012, we took December corn to $8.49 and our harvest price was like $6.50 in the month of October, dropped $2. Whether you are looking at a crop coming your way or not, what is your risk from price if we are at $7.50 versus $6? A little bit of a pop quiz, and now I won't expect you just to have to answer off top of your head, but if our harvest insurance price is $6, margin protection and federal crop is going to pay $6 on federal crop on any bushel you don't raise, but your margin protection is going to pay 6 times 120%, $7.20.

Vice versa, when the market's at $7.50 and you think about opportunity costs, whether the crop's coming to you or not, you're not carrying margin protection, you're still guaranteed bushels. That at a $7.50 level with your guaranteed bushels, that's a ridiculous profitability, right? Let alone the fact, what's 120% of $7.50? That's $9 corn. Wow. $9 corn versus $7.20 with most counties and margin protections. Likely looking at like a 15 to 20 bushel shortfall as of this point unless they go set good new records, which can happen. Yeah, but that's— you're talking hundreds of dollars of additional good price risk that has to be managed accordingly between now and basically the middle of October. So now I promise you I'll stop. It's an emotional subject when it comes to margins.

Well, yeah, our, I know that our, I do not think that there was too many farms that carried it this year from a national perspective. But if you're in Illinois, Minnesota, Indiana, Iowa, Nebraska, South Dakota, North Dakota for that matter, anywhere basically north of I-80 and you didn't look at it. It's, it's definitely an opportunity cost, uh, big one right now.

Chris: Yeah, yeah, for, for the value it brings and the risk protection that it provides. And again, I go back to just being real careful not to look at what you're writing the check out for. Look at, look at the value, look at the cost per bushel, look at the peace of mind, look at what it does to mitigate risk. And, and no, like you said, nobody knew all the geopolitical issues, some of the policy things that are occurring, just things that are going on now. None of us could have predicted any of that, but that's why the insurance products are available. Yep. So hey, this has been probably, I don't know, I'm gonna probably rank this at maybe one of our best conversations ever, and maybe for all of our Market Outlooks. You know, great job, great information, really appreciate the conversation, Jared. It was awesome.

Jerod

Creed: Absolutely. As always, I appreciate the invitation.

Chris: Yeah, you bet. Well, we'll definitely be back in touch with you again real soon and And same for everybody here. We really appreciate you listening, and we will catch you again next time on the IGU Coach.