Marketing perspective for Jan 19-22nd and the weeks ahead

Clark

Neighbors: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week and we've got Clark Neiber with us. How is it going today, Clark?

Clark

Neighbors: I'm very good, Chris. How are you?

Chris

Barron: Well, doing really good. We got a little snow yesterday and this past week, and you are actually in Cedar Rapids. And there's, you know, you hear some news about some of the things going on with ethanol plants and Ingredient down there and just some of the dynamics and things that are changing. I kind of wanted to start out a little bit with the, conversation around the markets, just on some, some things you're seeing there locally.

Clark

Neighbors: Well, it's an interesting comment, Chris. I mean, between COVID, it has had some impact. One of the few negative impacts we've seen in the markets over the last several months in regards to ethanol production. You mentioned being greedy on, you know, halting ethanol production. They're still going to produce starch here in town. ADM's dry ethanol plant's been down since, I don't remember now for sure, probably April. And both are a function of driving consumption, unleaded gas consumption, etc. So here locally, I think that's had some impact, you know, on the daily usage, the local demand, if you will. But what has offset that, as you well know, is the derecho and weather. And, you know, the supply is also, at least locally, down pretty substantially, depending on what county you want to look at here in Iowa also.

And to some degree that may have been reflected to some degree locally and nationally on the yield numbers the USDA projected on the USDA report on Tuesday. But having said that, you know, the ethanol market, like I said, is the one negative, but the raw dynamics of this aggressive export program has been very vital to offset, and more than offset to some degree from a national perspective, on corn demand. So, you know, and that ethanol— or excuse me, that export program, or the meat of the movement of that export program is good, but it's going to start ramping up now as we go through that transition from heavy bean movement via exports out of corn.

Chris

Barron: Speaking of exports and stuff, let's back up for a minute. And, you know, last week we had that USDA report, and everybody kind of has had time to think about that. The dust is, I think, probably pretty well settled from that. Is there any takeaways from there that are pertinent going into the next couple of weeks from that, that, you know, that we need to pay attention to still yet?

Clark

Neighbors: Yeah, like you said, everybody's had kind of enough time to, to look through the numbers. Obviously the yield reduction on corn was a little more aggressive than what the trade was looking for. The other highlight I think was the stocks number, you know, the quarterly stocks. To me, that's an important number to watch because it gives you a good barometer what usage is for the first quarter, especially feed usage, and that number was well below what the trade was anticipating, roughly 600 million bushels. So that's going to be a number going forward as you build it into crop reports going forward, how that's going to impact that final carryout. And it's interesting, Chris, I mean, as I mentioned, if you look at the rally we've been through over the last several months The focus as a general has been on demand, but in hindsight, it's been a function of demand and supply.

If you go back and look at, you know, the initial supply and demand way back last May, the government had factored in 97 million acres of corn. We ended up planting a little less than 91. The yield was anticipated to be something around 179. We're closing at 172. So the raw production was actually down 1.7 billion bushels from what the initial projection was. So even though this has been a very dynamic export-led type market, kind of under the, under the weeds, so to speak, the supply side has been a big factor too. And I think you can say the same thing on beans. You know, we went from carryout on corn back last spring of well over 3 billion bushels to now roughly 1.5. The bean carryout when we started last spring was about 400 million. Now we're getting down in those tight pipeline scenarios of under 150. So huge changes. That's all you can say. Huge changes.

And most of that's been reflected since August.

Chris

Barron: So we've seen, seen these big changes and stuff, and we've seen the market reaction to it, which has been pretty intense. Are there any other years that kind of compare to this that, you know, give you some indication of what might some of the reaction be moving forward, or, or any, any common themes or anything that kind of rhymes with, with this year in the past?

Clark

Neighbors: Yeah, it's just kind of interesting, um, you know, when you look at what happened here recently, we're basically 7-year highs in corn and— and beans and wheat. You know, the last 30 days I think corn's up about $1 since the middle of December. Beans are up around $2.40. Wheat's up $0.75. So you kind of get into a mode and say, all right, what is— you know, I've been doing this a while. What years kind of reflect what's going on this year to some degree? And every year's different, don't get me wrong. But one that jumps out from a fundamental standpoint is 1996. 25 years ago. Um, that was a year when China was fairly aggressive buying corn, kind of for the first time coming out of harvest, and it was very much initially a demand-led market, and it rallied through the fall or post-fall into the winter and on into the spring and the summer.

Stock's got been aggressively tight, basis was very strong, we had to do some interesting dynamics just to get supply in certain parts of the US, barging corn north, etc., up the Mississippi River for— or excuse me, for processing plants. So a lot of similarities to that particular year, and the takeaway there is the front end of the market tends to be the leader, tends to be the driver when you get into demand-led markets. That's why we're seeing these huge inversions, especially, you know, July futures over December, old crop, new crop, both on corn and beans. So '96 is one that jumps out. The other one that's very interesting is 2008. Now 2008, that was kind of when the commodity started. Lehman back, that's when crude oil went over $150, so kind of one of those markets where rising tide raised all boats, all commodities took off.

And it's interesting, if you look at corn and beans this year versus 2008 and overlay each one on a chart, they're almost lockstep right now, price for price, what we did in '08. Which is kind of interesting. Now again, '08 was very investor-related. That was a year where the fundamentals weren't particularly tight. Basis levels were wide, especially as we got into the summer months, because there was supply. We just had a futures market that was more aggressive than in reality what was going on in the cash markets, and the carries or the spreads were not near as dynamic as what we're seeing this year or as in 1996. So it's kind of interesting, and I think we got a mix of both. I mean, we have some investment money in the market again. Talking to guys in Chicago, this is the first time they've seen the funds this aggressive going back probably early last decade.

And a lot of that is a function of a weaker dollar, concern on deficits increasing, the concern on inflation down the road. So the investment community is more keen on what's going on in all commodities, but seems like there's some focus on the food commodities in that regard. So a couple of interesting years to kind of compare in similar ways, but in some ways dissimilar, if that makes sense.

Chris

Barron: Yeah, interesting. So, you know, we've, we've talked a little bit about some of the dynamics that are going on with, with ethanol affecting the market. Obviously the, the report, and sometimes that's a flash in the pan, but this year I think it's confirmation. It appears to be anyway. There's obviously these years that compare. I guess the next area I would like to dive into a little bit, and you start— you sort of touched on it, but it seems like from an economic standpoint, you look at how strong the stock market is, you look at all the money that seems to be pouring into, um, into these markets, you know, on the commodity side, um, how long can this last?

I mean, we're seeing this, this new administration wanting to pump another trillion dollars into into this, and it seems like every time there's money being pumped into the system, that a bunch of it squirts out into, you know, into these other markets as well and continues to give us even additional strength. Do you see that happening, or what's your thought there?

Clark

Neighbors: Well, I think that's a great question. I think we're seeing that happen. I think we're seeing the anticipation of that happen. That's with the anticipation of the outside money. So there's that dynamic. And keep in mind, historically, when a lot of this managed money gets long something or invests in something, it's typically not short-term. I mean, you have your momentum funds that everybody talks about, they're in and out and so on. The longer-term index funds, ETFs, those kind of things, they're usually in for the long haul. Not to say, you know, 6, 12 months from now they may or may not be in the market, but 2, 3, 4 weeks down the road, they're not going to be running for cover. Typically, that's what history says. But I think, I think the more function to watch longer term, Chris, is When you look at how tight things are, can we fix it? Fix this market?

In other words, the job of the market when you get in these kind of markets, okay, is to do one of two things and/or both. One is to ration demand, okay, and right now that's the function of the market. And two, to try to increase supply. Well, we can't do the latter right now in the Northern Hemisphere anyway. So Because we can't ration— or excuse me, increase supply yet, that tends to keep pretty good support under this market, you know, as you go into the springtime, see what the progression of the crop looks like. As far as rationing demand, you know, we touched about it on the ethanol side, that's the one part we have to watch over the next several months, you know, is ethanol margins going going to slowly decrease production in that market? The answer is maybe. We'll see.

The other side of the coin, looking down the road, as things hopefully open back up, via the economy, COVID, people travel more, look at that ethanol demand, and especially get towards summertime, prop up. And then the last side is the feed side, and, you know, numbers are big right now. That can change because the dynamics in the livestock industry with higher price feed is going to be interesting to watch. I hear some fearful things in the industry that some end users don't have very good coverage in this kind of market, so we'll see. But I know there's a genuine concern, almost fear to some degree in that sector of the availability of, uh, soybean meal this summer. Of the availability of corn in some sectors in the U.S. sometime this summer. So the key is, can we fix that?

And even if you start looking into next year and plugging in numbers for acres, etc., you know, chances are the carryout's not going to go up dramatically. So I think you lean with that, and what's going on, you know, this may not be a one-year wonder type market where it's here and gone. Not to say we don't see corrections, and we will, and sell-offs, etc., but when you look at it from the dynamics of where the market's been over the last 5 years, 10 years, 15 years, I think you could look at markets that are, you know, more than a one-year wonder and last, you know, into another year or two potentially. That's what we'll see.

Chris

Barron: So assuming we keep this relative strength under the market, and now I want to get into the last part of the conversation here, a little bit into the, into some decision-making that producers are faced with right now that's kind of difficult. Sometimes it's, it's almost more difficult to do marketing when, when it feels like there's the most opportunity. Sometimes it's the most difficult time to do any decision-making. And so with that said, you look at, how do I wanna say this? You look at where the market's at, some of the producers that we work with, as I look at where new crop, and I wanna kind of more focus on new crop, but as we look at new crop here for a minute, it seems like producers are maybe hesitant to pull the trigger but feel like they should. And we're seeing guys about 20% plugged into the market, 25% maybe on corn, and similar percentage in soybeans.

Is there anything that you want to, or would want to say that, you know, producers should be thinking about, you know, in terms of having some sales plugged in for new crop as we move forward and look at acres? The other thing that we're seeing consistently too is that right now there's, there's definitely more money on the bean side of things and guys still scratching their head, should I plant a few more acres of beans and, and, and what's the corn market got to do to, to even that back up.

Clark

Neighbors: I was just going to ask in regards to what you're hearing as far as what producers are looking for is if there's any tweaking of their acres beans versus corn. So that's interesting. One other question I have for you, Chris, are you hearing producers saying, I want to see what that February insurance price is before I make any—

Chris

Barron: Yeah, yeah, good point. Yeah, good point. And that's the thing too, you know, like I said, I think people are in— and again, this is average because we see, we see some people that are pretty heavily priced for '21 already, and we see some people that have not pulled the trigger on on one kernel of corn or one soybean yet, or wheat for that matter. And so, you know, as we look at the dynamic differences and what's right for one operation isn't necessarily the right thing for another one. So everybody's got to do their own deal, but it just looks like there's a lot of hesitation there, more so on the corn side, as a producer looks at beans and does have some acres that they can flex back and forth between the two. There's still some undecidedness out there yet to where I think some of those acres could swing back to corn if the market would align itself better.

But I don't think those acres will shift back to corn until we get those— get that corn-bean ratio back to a little bit more of a normal level, which I think we're about 20 cents away on corn yet relative to soybeans from what I'm seeing.

Clark

Neighbors: Okay, that's interesting. So I guess how I would answer that, number one, is we're kind of in that transition time, right, timeframe right now. Seems like once you get the January report behind you, you kind of close the book on the old crop to some degree. And now the focus is on new crop. And that's kind of what you're mentioning. My general message so far to producers has been this, as far as new crop sales. You know, like you said, everybody's a little different in their comfort level and what they want to do. But the key is, I think, know your cost of production. You know, work with yourself and your group and put ideas together on that, what works better as far as, you know, acres and that type of thing. And, you know, obviously at levels we're at, there's probably some money to be made.

So in that degree, You know, you need to reward the market to a percentage you're comfortable with. I hesitate getting too aggressive yet in general because it's January and, you know, the markets usually have— usually is the big key there— have better opportunities as you get into the springtime, once the grass is green, once we You know, again, we start to look at that supply for next year and try to— the market tries to wrap its arms around what that's going to be. So, you know, whether that's being 10% sold, 20%, 25%, I personally probably wouldn't go any more than that at this point. Now, there's other ways to, say, protect some production but keep some upside open. You know, there's a— and I'm not going to go into details, but there's option strategies a person can do just to keep themselves a little bit in check.

You can use short-dated options which have shorter time frames and not as expensive. But I think the key thing I would want to get across, and I mentioned 1996, earlier. I think the hard part for producers right now, to some degree, in the new crop— and it's human nature— you look at where the cash market is, you look where new crop is, and you get a big inversion, right? And it's 80 cents on corn and it's $2 plus on beans. You know, that new crop looks cheap in comparison. Mm-hmm. Now having said that, If you sell some new crop, I strongly encourage to put it where it needs to be. In other words, if you're hedging it, put it in November. If you're selling some sort of a cash product out there, make sure it's tied. Don't get cute and trying to sell new crop in the old crop. In 1996, that was very common and came back to haunt a lot of people because that spread got so dynamic.

So that is the key thing I mentioned is even though that market in the new crop doesn't look quite as aggressive or as eye-popping as the old crop, be conservative, be traditional, and put that where it needs to be. Now going forward, as far as, all right, 10%, 20% right now, when and where do I step that up? A lot of people, I think, right or wrong, want to get past that February insurance number. You know, that March, April, May, June timeframe historically is good. We're kind of in a market right now that's so dynamic. We're going to see some huge volatility, huge swings. You got to let the noise go away and just continue to, you know, do things like you do and know where your numbers are. And to some degree, you know, the market stays at these levels and/or higher, we'll see. Decisions are going to be hard, but same point, the big picture, they're going to reap some reward.

It's just to what degree. And these are the kind of markets where emotions can take hold. Hate to use the word greed, but sometimes it can take hold. A person's just got to be smart and hopefully make decisions that make sense and scale into this, uh, into these sales. The only last thing I would say in that regard is if a person's adding acres of beans and doing that on what they know today and the functions of the market today, those extra beans probably need to be locked in. Yes. Making a decision today on the market today, not on what it might be in in 90 days, right?

Chris

Barron: That's great advice because, you know, I see that tendency occasionally where, you know, well, I'm going to do this because the opportunity is a lot better, the crop has changed, the rotation is set, the price is not taken advantage of, the dynamics change, and now you're on the other side of it. And, and, you know, my, my quote to people always is Coming off of a year like last year and into a year like this year, and the dynamics can go either way, but my caution always is just don't let— like in this year, for example, don't let 2020 calibrate your 2021 marketing. You know, you have to look at each year as it on its own merit, on, on your own dynamics, and, and you have to just kind of step into this thing a piece at a time for sure. So I like, like those comments you had. I think that's really good.

One last thing, and it kind of revolves back to the front end of the conversation we had that I had forgot to mention, but one thing that I've been hearing and I'm seeing with my own eyes as well is the basis on old crop has really widened out since this report in particular. Do you think that's a short-term thing because the price has gone up and people were selling and there's, there's stuff moving now for a while? Do you think that basis improves again a little later on and it might take till spring for that to occur? But what's your thought there?

Clark

Neighbors: I do, because of the situation we're in. You know, there's a bushel bought today is a bushel I can't buy tomorrow if I'm an end user. There's no doubt the rally in the last 30 days we've talked about, there's no doubt the acceleration coming out of the report the other day fed another chunk of grain, especially corn, into the marketplace. Okay. Mm-hmm. One note on that, and talking to elevators around the country that I do, and the number I kind of hear is the producer has sold 85% of the beans full crop, so there's not many bullets left to sell in beans, okay. So the dynamics of basis down the road on that are going to be interesting on, you know, if you were the lucky individual that still may have some beans. As far as corn, I think we're maybe at 60%, and the other day with the push in the market, I think we saw more movement in the western Corn Belt.

So you saw, say, in Iowa, Nebraska, Minnesota, a little more widening of the basis that you mentioned. I think if you go east, it didn't really have as much impact. Farmer in eastern Corn Belt has already sold a bigger percentage. You know, the weather's been good this winter, it's been easy to move it. But to answer your question, I think that basis comes back. What's interesting about these kind of markets is it's very rare when you have a Ford rallying like this and the basis to generally stay pretty firm. I mean, we've had at or near recent record basis levels up for the last 20, 30 days. I've had people selling basis corn into, say, the export market, and I use St. Louis kind of as a basing point, at levels I haven't seen for years with this kind of market. So I think that comes back If you get into our part of the world, the Mississippi River opens back up in April.

As I mentioned, that corn export program is really going to start being dramatic, or dynamic here, now going through June. U.S. corn, believe it or not, is still the cheapest feed grain in the world. We're going to see huge amounts of rail going to the West Coast. We're going to see, you know, the barge situation and rail going south be very aggressive. So I do think it comes back, especially as we get closer to planting time, farmer gets in the field. But you mentioned there's a lot of grain that's already moved, so that end user down the road, as I said, is somewhat concerned on the supply availability or what they may have to pay to get that supply.

Chris

Barron: Yeah, I think it's going to be interesting, and I think probably depending on how the weather is throughout the growing season, especially as you get toward that July-August time frame. So, you know, if a person's sitting there with some hedge-to-arrives or whatever and continues to roll those forward on some prices that they weren't as happy with to maximize that basis, there might be some opportunities there possibly.

Clark

Neighbors: Yeah, yeah. You're getting the dynamics of this summer. I mean, at some point this market will correct itself and maybe a fair amount, and we won't be able to see it coming because the fundamentals will still shout like they haven't been. But, uh, yeah, and I, I think the key takeaway, Chris, is, you know, this year looks like there's a lot of opportunities in the next few months to make some, hopefully some good sales, and, you know, help the balance sheet, etc., etc. I mean, it's one of those years that can transform things going forward, hopefully, for a lot of producers. Yeah, for a couple years anyway.

Chris

Barron: Yeah. And, and like you said, I think, you know, we all as producers need to be very cognizant of where our margin opportunity is, that profit margin, and not get super hung up on, you know, where could this thing go. You know, who knows where this thing could go. Nobody, no Nobody called this. And when there's pretty good opportunities there, and I think the other, the other watch out, and the final question I have for you is, you know, kind of that final watch out is if this thing does continue a little higher, there are already a lot of our clients concerned about, you know, what does this mean for cash rents in '22? What does it mean for crop protection and seed and fertilizer and energy, you know, all these things. You know, with that said, I mean, you got to think about both sides of the equation as a producer as you work through '21 and think about '22 as well.

Clark

Neighbors: Yeah, I think we found out what 10, 15 years ago— rising revenue equals rising costs, right?

Chris

Barron: Exactly.

Clark

Neighbors: The, uh, the job The job of capitalism is to have everything come towards breakeven eventually. Yep, exactly. I think Warren Buffett says something like that. So, you know, that, you know, the revenue side potentially looks really good, but yeah, eventually the backside of those costs change. And, you know, we'll see. You know, that's to be determined. But yeah, it's a great point, Chris.

Chris

Barron: So, hey, I think this great conversation— is there anything else I didn't ask about that you need? Burning thoughts, ideas, or anything before we wrap up here that I didn't bring out?

Clark

Neighbors: The only thing I would add, you know, in these emotional markets, like you said, don't get caught up in a certain price. I mean, we all want to say, well, can corn go to this level, beans go to this level? And I think a lot of times it's human nature to listen or hope, and well, so-and-so said this, so And that's fine, you know, everybody's got their opinion on that, but you still got to know where your levels are, where you're comfortable with. There's some really good opportunities in these markets and potentially above and beyond where we are, but a person just can't get caught up in a certain level. Make percentage sales. Don't wait for that, whatever that quote-unquote big number is to go forward and on that assumption. I've been doing this quite a while.

When you get in these kind of markets and they get really volatile, especially if and when it gets towards the top end, I very rarely see a producer that sells the top dollar in beans and the top 50 cents in corn. It just typically doesn't happen because that first correction, you don't want to believe it, and then, you know, then, you know, so just kind of keep that in mind when you start start talking about pie in the sky numbers, just to put things in perspective, I quickly looked and I think in the last 7 years beans have spent like 5 weeks above $11, okay, and corn just a few weeks, you know, above $4.40. So, and I think those are longer-term really good support numbers to look at if this is the more than a 1-year type scenario. But those are still really good numbers. We went through that in the rearview mirror here quickly in the last, you know, 45 days. Right.

Put things in perspective.

Chris

Barron: Yep. Hey, I think this was a good conversation. I appreciate all your insight. If people want to get a hold of you, what's the best way to reach you?

Clark

Neighbors: Sure, Chris. Phone number is 800-372- 3-2525. Website's b-i-b-z-a-b-o-y-i-s-commodities.com. If anybody's roaming through Cedar Rapids and wants to stop in and say hi, they're more than welcome.

Chris

Barron: Awesome. Hey, I appreciate it. Thanks a lot, Clark.

Clark

Neighbors: Thanks, Chris.

Chris

Barron: You bet. And hey, thanks everybody for listening this time to the Ag View Pitch, and we will catch you next time. Thanks.