Volatility continues: weekly market outlook, May 3-7

Narrator: Thank you for listening to the Weekly Market Outlook. It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business. Please reach out anytime by emailing cbarron@agviewsolutions.com.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we are entering a new week in the month of May. And tonight we, or today I should say, we have with us, uh, Grant Schiemek., and he is with Black Oak Financial. Grant, how's it going?

Grant

Shimek: Good, Chris, yourself?

Chris

Barron: Ah, pretty good, pretty good. So anyway, we, uh, we are looking at a pretty wild and crazy market here, especially as we head into this new week. And I guess I want to start out a little bit with the weather because it's kind of a story of two different events. You know, we're in an area in Our operation, we actually finished planting both corn and soybeans. We had a run that I've never seen before where we started planting, we went through the whole planting process and didn't get rained out once. And I've never seen that ever happen, and that I can ever remember. And then you look at the operations out east, you know, Ohio, Indiana, some of those guys have caught a lot of rain. And then there's areas to the west of, of us, you know, here in Iowa that have really been dry in the Dakotas and stuff. So What's your take on, on weather?

You know, the stuff we're seeing here, is that, is that playing into this market some, or what's your thoughts about the weather, or isn't it?

Grant

Shimek: Oh, it's definitely playing into psychology for the producer. The western Corn Belt, more pronounced, just with dryness than the eastern Corn Belt. And yes, it has probably been one of the fastest planting paces of like, like you had uninterrupted. The areas like my northeast corner of Iowa here, we have heavy clay soils and mallow in just perfect conditions, best I've ever seen. And I was pretty much all getting in this week. And like everybody else, we want the rain to get it started.

Some of the weather gurus that I follow, one in particular has been talking about having temperatures about 3 degrees or approximately above average in May, and not a lot of good interpretation though on the moisture because it can be warmer if we get moisture, it's not that big a deal, but that's the key and definitely driving some people crazy and making, you know, scary to sell if you're looking at dust and think, wow, what if this stuff doesn't even get started properly.

Chris

Barron: Well, yeah, that's just it. I mean, we were— we planted all our beans first and we felt like we were in really good moisture. We switched over to corn and we were in pretty good moisture. But now, you know, as we've got— as we got to the end of the week, it got dry. And I think in this new week now, this first week of May, without some rain in some of these areas, it's going to get really hard. It's almost going to be type of deal where you're going to stop and wait for some moisture because you're probably not gonna put stuff in total dry condition. So it'll be interesting to see what happens there, I guess. But I wanna go to another topic here for a second with you, Grant, on these expanded limits and what's that mean to the market from your perspective?

I mean, do you think it's something that's gonna increase volatility, make this crazy market even crazier, or what's, What's your take on, on what we might see moving forward here?

Grant

Shimek: Well, it's going to add to volatility when we have the emotion to drive it, and lo and behold, we have emotion to drive it now too, right? So it's going to add to it. Now obviously it can work, it can and most likely will as the summer progresses, progresses, work both ways. So if we're going to expand the limits out to 40 cents on corn and a buck on beans and then have expanded limits that then go to 60 and a buck 50. If I'm remembering correctly, that you can cover a lot of ground in either direction when something changes. And when the emotions are this high, that's, you know, best guess is we'll trade limit— limits up and down a number of times this summer.

Chris

Barron: So does a person put some offers in to have some more sales on the books, or, you know, I mean, it seems like the nighttime has been the opportunity. If you— it's like every time we've put in, or I have, I'll just lay that out there, every time I've put an offer out to make, you know, to make a sale here, it's hit, and it's hit at night. So, you know, it's all, all of a sudden, you know, We've got a fair amount of sales on the books in some cases, and there's a few out there that have restrained and not sold as much, but there's, you know, there's been a fair amount of new crop sales up to that. You know, what we're hearing and seeing with a lot of our clients in that 40 to 50% sold, what makes you comfortable? What kind of mechanism do you want to be using as we move forward here to to kind of protect or lock in some price?

Grant

Shimek: I can make, you know, as far as blanket statements, everybody's different and you've got to do what is comfortable for you. Some people are not going to make any sales with the seed just going to the ground. They got to see some, you know, some plant health and have some comfort level. So here we are with high price, higher prices. This is one of those times, and I'm not an advocate even though I'm in the brokerage business. Am I for buying options left, right, and center and constantly doing that stuff? Not really. For my producers, it's, you know, we need to act when there's opportunity.

Here we have a situation where if you need to, if you can't get something on the books as far as a sale because of the comfort level, then using options is the way to go because we're at a point where you can, especially short-dated options on corn or beans, be net of option premiums, subtracting your option premium from your strike price, be at a price that's in some cases significantly higher than the crop insurance guarantee. So it's not like we're— it's a ho-hum trade-off, especially if your choices are do nothing or create some kind of floor.

And it might also be a scenario where, you know, especially if it's that first third, 30, 35% of the crop, if you sell it and you even get a call on top of it and it doesn't— again, short dated something with 30 to 50 days out, yeah, it's not going to cover you for the entire summer, but with the emotion and moves we're having here, you don't need to cover your position for the all the way to harvest. It will mean you got to manage that as time goes on, but the idea that you need to go in and say sell corn at $5.60 today and buy a $6 Dec call and you look at the net and think, boy, do I want to give up that much? Well, maybe you don't have to. Now, it doesn't mean it'll work out perfectly, but if it's the thing to get you off of zero or a light sales level, because the key here is these ROIs are very high.

You know, from the last time you and I spoke, I think at that point I was talking about how I had most my clients in that 30 to 35% ROI zone, right? At that point we were sub-$5 Dec corn and we were probably right around just under $12 Nov beans. Well, at this, this juncture here now, we're probably in that 35 to 45% zone for a lot of operations. Guys with higher APHs, we're I've had clients, we've walked through stuff where in the 60s. Wow. So, you know, maybe it is all the factors here. You can say we're not rationing, the cash market is on fire, we're in an inversion, but the black and white is good profitability. And if you look back at the last, say, 12 prior 12 years, I'd say there's probably 4 times we've been able to have ROIs this high or maybe even average something in that 40-45% zone for the whole crop. Probably '08, '10, '11, and '12.

If we look back on how you market on '20, maybe pulled that off too, but in those prior 4 years I mentioned, 2 of them you probably could have made it work if you just sat on your hands and cruised through '11 and '12. But '08 and '10 probably would have been hard to average that. So I think these are— it's that business management side of the numbers to follow instead of trying to figure out this, this puzzle. Because in a year like this, the piece— you'll think you'll figure it out, the pieces of the puzzle, and then the puzzles— the pieces morph and then it just disappears and the story changes. And that's what happens in highly emotional markets.

Chris

Barron: Yes, uh, interesting. And I also want to— so let me carry this a little bit further. So if you're sitting there as a producer, and we have a lot of operations in this boat, you know, 40, 50% priced, um, and you were talking about options, you know, how aggressive would you get with further sales as the, you know, looks like we're getting heat in some of these areas. For some of these operations that have stuff in the ground, things are coming up, it's going to be a little harder for people that don't, aren't planted yet. That makes it tough. But do you, do you buy, buy puts or something, or what, what's your take there? I mean, and how, how much coverage do you want? Is 50% too much? Is it enough? And back to that mechanism, is it, you know, do we use puts, or what's your thought?

Grant

Shimek: I think the ROIs justify being a minimum of half floored, and that probably is a combination of sales, you know, maybe your 20-25% sales and 20-25% with some kind of option strategy. I think many people that I work with are comfortable being well above that, 70 to even 100%. With paper, you know, that first 50. Do you want to go more than 50 or 60% with committed sales even in the context of crop insurance? No, but this is a personal comfort level thing. I think the prices from my vantage point justify stepping out of your comfort zone, and if you're typically coming into harvest with 30, 40% sold, this is— the ROIs justify taking that 40% higher. And do it in a non-committed fashion. It's one of the few times that I can think back, and I think it really justifies us getting some puts underneath it, and you're not committed.

So if it's the drought of the century, it's worse than 2012, and we, we're on a moonshot, fine, you're going to give away— you are going to give away some money, but there's no way to know that, unfortunately. Most of the time we're in a business where we're gonna see prices converted back to the cost of production, and sometimes it happens rapidly, and I think it calls for defense. So as far as the, the simple just buy a put and let it roll for the time being, I like the August short-dated base versus buying the full, like a December or November bean. They're based off of the new crop November bean futures and Dec corn futures. But the main reason is they expire on July 23rd. That would get, get you through the June crop report. And for corn in particular, from my experience, the game is over typically by the 10th or 11th.

Historically, you've got to close to new highs in corn after the 15th. And then yes, it can be an absolute game changer if that happens. But we've usually seen the extreme by then. And what if it's next week it rolls over, a week after? Well, you're there, you have a floor underneath it. See, selling options against it— if I was to sell options against it, I would look at selling maybe calls in next year's corn, like these '22 $6 calls. So I throw that risk out into a crop year that's not here. So if we blow this thing out even wilder to the upside, we would— I would assume we'd see more premium yet built on the '21 crop over the '22. So you're still keeping that front end wide open. Some people would, for those that want to sell something against it.

Otherwise, I, I personally wouldn't sell any calls in this crop year against a put position, mainly because it's not that it won't work out, it's just that emotional capital is thin on any kind of position that goes against people. And I think I've seen that a lot in the last 3, 4 years as we had markets. People have really, uh, for lack of a better way of saying— I don't want to say they lost their nerve, but we've been— we probably have some PTSD from the markets and COVID and everything else, right, that get in a stressful position, trading position, and you just want it gone. And what happens then is you lose perspective on the other things that you should— that opportunities are there, right? So I'm actually kind of avoiding trying to sell the calls against the positions, make them cheap. It's probably a year for plain vanilla options for a lot of people.

Chris

Barron: All right, I'm going to shift gears for a second here. Um, corn versus soybeans, and I've asked a bunch of people this in the last several podcasts, and it's getting to the point now where stuff's in the ground. But when we look at the price, you know, you look at the, the price ratio between corn soybeans, as we closed last week we were at about a 2.37 or whatever corn to bean ratio where corn closed last week, and that like, so Dec '21 closing at $5.63-ish, and the soybeans like $13.39, I think it was. So, you know, if you look at that, you know, we realistically probably should have $14 beans to make it kind of where the, your ROI that you're talking about is, is equal for the soybeans versus corn. Are you heavier sold on corn, low, you know, less sold on the soybeans? Do you, do you have some hope for soybeans to fix that down the road? What's your thought?

Grant

Shimek: I don't— well, obviously I don't think anything's going to change. There has been— the changes have been done last, say, you know, 40 days. That people, when the prices ramped, there was some switching. Was it huge? You know, this last 50 cents in Western Corn Belt probably did switch more acres. I don't, I doubt that it did from my experience with the Eastern Corn Belt guys. I mean, they're not going to break out of that rotation as easy. I don't think there's anything there that in rotation or the mix that's in place is going to change. It's probably just going to have to be just the elements of the market as we, as we go forward.

Chris

Barron: So do beans catch up? I mean, with relative to corn, do you think possible?

Grant

Shimek: I, I don't, I don't see the— I wouldn't want to be less covered on one than the other.

Chris

Barron: Okay.

Grant

Shimek: At this juncture. So I guess I don't have a solid opinion on that. If it happens, great. You know, my attitude is if I'm— I like my clients to be in that 30 to 50% cash sold and then another 20 to 40% of puts underneath. And if one wants to race away from the other, wonderful. Just judiciously roll that put strategy up.

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

Chris

Barron: That sounds solid. Let me shift it to another gear then. So basis, okay, these sales you're talking about that are, you know, cash sales or whatever, they're HTAs maybe, or maybe you're selling on the board. Wendy, what's your thought on basis? I mean, we're seeing, I mean, like right now we're hauling On our operation, I'm hauling a lot of old crop corn right now that were HTAs sold way too low here, to be honest. But, but I'm getting a really good basis because there's a ton of planters running around here. So I'm shoveling corn while other people get to sit in a planter. But it's a great time to move the old crop because the basis is really strong. I think we were plus, plus $40 here this last week, and that really helps to add a lot to the bottom line. What's your thought on the new crop, on the '21, both corn and soybeans on basis?

Do we, do we start locking some of that in, or do we kind of hold off and, and wait for an opportunity? What do you think?

Grant

Shimek: On the bushels that, if it was bushels I was going to move off the combine either way, I would, I would not take the basis risk, especially if historically you're looking at a basis that is firm to strong. I don't think it's worth swinging for the fences on new crop.

Chris

Barron: What about early, early, early harvest?

Grant

Shimek: Oh, if you, if you can swing it, yeah. If you can time, get some stuff out in September, could there not be a premium on that? That's different, right? Yeah, definitely could. But outside of that, I'm sure a lot of people listening to this don't want to necessarily deliver much off. A lot of my clients don't want to mess with delivering off the, off the combine, right? And logistically handle it, you know, it's to get through the lines and so forth. They don't want to do that. So then you're probably going to go with a hedge drive and Yeah, if it's December versus March, it depends on the HTA fees. It may not be worth going to— on this week's settlements anyway, it may not be necessarily worth HTAing these and then rolling to March. So I mean, it's getting fairly narrow here, so you might be able to make it back.

But if you're going to deliver in the spring anyway, it's— Probably still going to lean to just doing hedge to rise and rolling it out when the futures has some kind of carry back in it and dealing with the basis then.

Chris

Barron: Is that a little different with soybeans when you look at the inverted market? Probably, yeah. And they're going to want the beans, so you're going to want to maybe, you know, use the bin space for corn, you, you know, and get the beans out of here, probably— I mean, I'll, I'll say this and then see what you say, but probably makes sense to have it, you know, have the soybeans as HTAs or sold on the board, doesn't it?

Grant

Shimek: Yeah, it does.

Chris

Barron: I mean, you don't have to agree with me.

Grant

Shimek: It depends on the basis, right, locally. I mean, if you're going to take it off the, off the combine, and, you know, right now we've been— we've went through quite a few months of strong basis and that psychology, you think it's going to continue, but a lot can change by harvest. So I'm not willing to take a lot of risk on stuff that I'm not going to move off, off the combine for beans. Now if it's I'm going to carry them, put them in temp, you know, short-term bin space, try to get them to November, or definitely East Jan, well then yeah, I think hedge drives are the way to go there. And you're right, there's not, you know, odds are you're going to carry them past January. Well, not really the way the futures looks, and that's because we're going to have another big crop coming from South America, and there's no, that's why the carry is not there in the beans. Gotcha.

Chris

Barron: Okay, two more quick questions. So this is my last question, then I'll do a last last, but the funds are a massive contributor, obviously, to this crazy market. What keeps them in or gets them out? What are you watching? What are you concerned about? What do you think's steady there?

Grant

Shimek: Most funds are going to be technically based, and they're going to be a lot of them that are trend following, whether— and I don't necessarily mean long-term trends like weekly or monthly, they can be very short-term trends, but they're going to need that to continue, stay above short-term moving averages, not have any crossovers like a 15 and a 30-day moving average, or you can you know, put it on a shorter time frame if you're trying to pick a high, so to speak. Those, those things were— would be the type of one of the types of things they would trigger to exit. Definitely there's some that are going to be more fundamentally based. And so it's, uh, the The speculators this last week were expected to have bought a lot more contracts than they actually did. Things surprisingly lightened up.

I think that speaks to this more being a cash-led, demand-driven run than it is hot speculative money going into it, but it's always an element. If there was something that made them want to lighten up or— or pulled capital away, it's going to have a big impact.

Chris

Barron: And a quick one, probably.

Grant

Shimek: Well, true. Sure, for size, of course, the size of positions they trade has a lot of force.

Chris

Barron: Okay, my, my last, last question then is, um, and don't get a big head when I say this, but, um, you're probably one of the, the most studied and best technical analyst that I know as far as analyzing technically the things that are going on in the market. And you watch timing and you watch all kinds of stuff. So my last, last question is, from a technical perspective, what do you see not only in this week ahead, you know, but as we head into the middle part of summer? Anything that you're watching specifically, or anything that from your crystal ball we won't hold you to, but, but what are you seeing?

Grant

Shimek: Well, there were two really important time frames this year as we came into it that I thought that could be— if they were big swings to the upside, could be meaningful. First one was, I believe, was right around mid-February, and the next one was April. Well, nothing happened in February. We really didn't— the way the charts were painted, it just wasn't negative at all. Even though we corrected a little bit in March, it wasn't a big deal. The next time frame I told my clients we really need to watch, the big window was April 1st to May 7th, but particularly that April 20th to the 29th. And it doesn't mean that it, that it's the highs of the year. It could be. It's just that if there's a big spike there, I was saying we gotta, we gotta protect that time frame. And as intense as it is, I maybe it just keeps going into a more typical June high.

We can all imagine that, but I'm concerned by what I see. I don't— you know, that's why I'm advocating, if you're light on sales, and boy, it's paid off, buy some puts, create some floors. The game can change very rapidly. Is what voluntariness this is. If you talk to more completely commercial entities or cash, you know, pure fundamentalists, they're not gonna see that, and I don't disagree with what they see.

This market is, from their perspective, running on vapors as far as available supplies, pretty much from now through August, and that psychology started to build in the commercial side of this business from, from my perspective, my opinion, after that January report, and it's just gotten more intense since then, and a need to— we got to get supplies in— it really started and saw a big push for that in soy meal in that March time frame, and I, I think that is— I think this is about Commercials more than any other big rally I've seen. Now, if you look at the— to traders, the commercials have large short positions. Of course, those are hedges. Those are a lot of your sales, my sales out there that are back-to-back with sales.

I'm not saying they're speculating and betting the market is going to go down, but one of the other unique things that I've seen happen many times is that markets— and this is on any timeframe, you can look at hourly chart, we got weeklies, dailies, monthlies is if there's a big shock to the market, we'll do it in about 27 bars. And our big— something needs to be priced in. And I didn't really catch it at first, and I thought— I pondered this last week, but we had that really bullish planning intentions report in March, and from there on we've ramped. Well, if you count 27 trading days from that, you're going to come to May 7th. Now, it's not that it's exact, but you go a day or two on either side of that Now, if we turn down after this next week, it wouldn't surprise me that we'll have exhausted this, especially if we have another big up week.

If we just mellow out and grind sideways and it's no big deal, maybe I'm full of nonsense. But if we spike up into this, the emotion's here. Now, fundamentally, can we say that we're going to ration her enough by Friday? No, I can't say something like that. But I do think if we can have the emotions high all week and we keep it really intense into Thursday, Friday, it's possible. And am I going to run in there and sell futures with abandon or advise clients to just hedge everything? No way. It's create floors and/or have some kind of backup plan and know yourself. If this did turn around and had a hard down day, are you going to go in there and make any sales? Oh, that's probably not. It's tough, right? Tough for anybody. Just watch your net dollars, net return. It's about ROIs. That's the most black and white. Look at—

Chris

Barron: yep. No, I— hey, that's a great place to wrap up. I think, uh, like you said, from, uh These, these markets are crazy, and I like what you said at the end there. This is about return on investment, and we have not seen these types of opportunities for a long, long, long time. And we look at a ton of balance sheets, a ton of cash flows, and thank God we're finally seeing a year like this. I just, I just hope we don't see the, the $8 type corn stuff because of inputs and land rents and all that kind of stuff. So while we like high prices, we don't like too high of prices.

Grant

Shimek: So, right.

Chris

Barron: So hey, well, hey, really appreciate your contribution here to this. And we're definitely going to have you back. Grant Schimmeck with Black Oak Financial. Grant, what's the best way if somebody wants to look you up, get ahold of you, give you a shout? What's the best way?

Grant

Shimek: I just go straight to my website, blackoakfinancial.com.

Chris

Barron: Awesome, sounds good. Well, we will have you back again and we'll kind of see what this market has in store for us this next week and the next few weeks as we get into the month of May. And thanks a lot, Grant, appreciate it.

Grant

Shimek: Okay, thanks, Chris.

Chris

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