Weekly market outlook: May 31st - June 3rd, summer weather market headed your way

Shay

Foulk: Welcome back everyone to another episode of the Ag View Pitch here on Memorial Day weekend 2022. I know Chris and Grant have a great podcast lined up for you here this weekend. Just wanted to take a couple minutes. Chris had asked if I could do a prelude to today's message in honor of Memorial Day. Many of you know that I served in the 75th Ranger Regiment, and while I was there on my last deployment, we lost a member, Sergeant First Class Christopher Saliz. And I just wanted to share a brief recap of that story. And it was July 12th, 2018. He was on a mission with about 10 other Rangers in support of a mission with the local nationals, the Afghanis, and they were clearing a valley area in a heavily defended region. They came under intense enemy fire. An Afghan partner was wounded, and as a result of that, a 9-line medevac request was called up.

And the local partners were not willing to take their wounded to the helicopter, so Sergeant Sleaze took it upon himself to make sure that the wounded got there and that he was evacuated properly. And this was all occurring while there was heavy and intense enemy fire. And as a result of that, Sergeant First Class Sleaze positioned himself between the enemy and the helicopter, and as the helicopter was taking off, in order to protect the crew and the team that was on there, He was mortally wounded at that time, and knowing the dire situation, he waved off the helicopter in order to save the crew because of the environment that they were in. And I'll never forget the notification that we got on that, that Sergeant Sleaze had been killed in action. And it's a feeling that you'll never forget and something that I hope most of you have never had to to handle or had to process.

We held a ceremony for him that same day or the next day and conducted the proper ceremonies for his flight home, a lone soldier boarding a C-17 with the honor and respect that was due of such a great man. And when he arrived back in Savannah, Georgia, my wife was there. And it was as if all of Savannah was raining and thundering and coming down. And the newspapers read that Savannah was crying as a result of their wounded warrior coming home.

And so as we think about Memorial Day and we think about those who we've lost and we think about the sacrifices that were made, not only for the countless thousands and hundreds of thousands who have died defending our freedoms, That story I just shared with you, that's one story, and, and there are so many more that are just like that of service members that were killed, wounded, suffered scars the rest of their lives as a result of their time in service. And so this weekend, while its origins are not certain and not necessarily known, or no one time or place can claim the beginning of Memorial Day. We continue to celebrate that today and recognize it.

And so I ask that as, as you enjoy time with family and friends and barbecue and NASCAR races and whatever it is you are spending your time doing as we move forward into this week, uh, you know, whether it's right now or when you're done with the podcast, just, just take 30 seconds, take 1 minute to think about, you know, someone that you know that served, or if you know someone who lost their life or know of a family member, that's what this weekend is about. We're so blessed to have the freedoms that we do in this country. So thankful for those who paid the ultimate sacrifice. But I hope you enjoy today's podcast. Thank you for listening as we support the military, the men and women in our armed services. And we're so thankful to enjoy the freedoms that we have. Enjoy the podcast.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week and it is going to be the first part of June, so we get the last day of May and the first part of June, and we are lucky enough to have with us Grant Schimmick. Grant, how's it going?

Grant

Shimek: Good, Chris, yourself?

Chris

Barron: Uh, doing really good, doing good. And so, uh, just was talking with you offline, we got done planting corn and soybeans in our area. We were lucky enough to have decent weather, and now I'm into tree planting season, I guess, to keep keep the spouse happy. So, ah, I see. So, um, I guess, um, with that said though, you know, there are still some areas that are struggling a little bit. The Dakotas, they had a really late start. Any, um, anything out there that producers need to be aware of with planting, replanting, things like that? Anything that's going to be affecting the market, or is that really not anything that's a big news deal now?

Grant

Shimek: I don't think any— I don't see any big news on replanting as of yet. I'm sure we'll— somebody always has to see some of that in a given year. The area like Indiana, Ohio, a week and a half ago were well behind, and there's been a lot of catch-up there in every area they could run this, this week. And a lot of those guys did get things in before the rains hit. So that's been an improvement. What can be planted is similar in that Dakota's Red River Valley, what can be planted is being planted. Some, you know, I'm sure many guys have seen pictures of planters rolling around standing water, so they're going where they can. As far as to quantify the impact of that today, I don't have any worthwhile information with that.

Definitely gonna hinder final acreage, but nothing that we can quantify at this moment outside of saying that there's a lot of areas that have some beautiful stands that have gotten in well. So we're going to have some, some of those to a degree is going to be made up for, as it looks today anyway.

Chris

Barron: Yeah, um, as far as, you know, looking, um, looking around at different areas and stuff, what are you seeing for basis on on, you know, I want to bounce to that for a minute because there's, there's still some old crop sitting around. What are you seeing for basis? Is there still strength there and opportunities for guys to move stuff? Because we had, we've had kind of a sideways week last week also where things weren't so good. We ended up finishing strong, but talk a little bit about that too.

Grant

Shimek: Well, there have been good basis levels. We did see a significant bean basis improvement, but after it was Definitely, there's areas that with the rally we've seen in beans the last 2, 3 trading days that we've lost some of that basis strength, and that's just a matter of flow. The futures market has done the work and the heavy lifting the last 2, 3 days, so the basis has backed off from some of those things, but there was a significant improvement, say, compared to where we were on that big spike up in that March timeframe where basis really dogged it. We've come back and, you know, really have a really good net flat price right now. Corn basis is still fairly firm in a lot of areas, but obviously we're at that stage where the planters are getting parked, so there are going to be areas where we slack off just by the sheer force of that.

Chris

Barron: Yep. So talk a little bit too, you know, I mentioned how the price movement may have affected basis. Talk about, and I guess maybe get your crystal ball out a little bit, but talk a little bit about where you see things going. I mean, we've, we're entering the first part of June now, and always, you know, weather factors into things. There's some technical stuff that you watch a lot. Talk a little bit about what you're paying attention to and what farmers need to be aware of here in the next few weeks.

Grant

Shimek: Well, if we look back over, let's say, just 3 weeks ago, the predominant fear was everything's gonna burn up and be too dry. We probably haven't lessened the potential to have some really significant heat, but in a lot of areas, you know, let's say some people I deal with in Texas, we were able to catch some rains the last 2 weeks, and they've been lifesavers. Things are improving. We still have a lot of heat in the forecast on some of the bigger picture forecasters, but we also appear to have a good amount of moisture, at least looking out the next 2 weeks. If you think about, well, what's the next weather narrative going to be? It's going to be tough to make it dry enough in the next 2 or 3 weeks. It would take a good 30 to 40 days to build a weather narrative based on dryness, and that's usually what we need for those real gas on the fire thing to happen.

So we're looking out further at this stage now, in my opinion, to the end of June, getting closer to the acreage report before we could have that kind of narrative built. And as far as the weather forecasters that have been calling for the huge burn this summer, They still are, but when you balance it out with their moisture forecast, it doesn't appear to be as bad as it looked a month ago.

Chris

Barron: Mm-hmm.

Grant

Shimek: So, and so I think that we've kind of rung it out, and I don't know if we have a lot here. We don't have a domestic story, and when we're this high, we're going to need some gasoline to be thrown on the fire here. Obviously, the Ukraine-Russia conflict has been a big, a big driver. That's probably— if we're going to get something out of left field to keep juicing this market, it's going to need to be something like that. Otherwise, the domestic narrative doesn't really lack some teeth right now to the upside.

Chris

Barron: Mm-hmm. Is there anything— I mean, you watch technical stuff about as good as anybody I know. Is there anything there that's yelling anything on any of the, any of the commodities?

Grant

Shimek: Yeah, for a lot of the markets, when we look where we are relative to those COVID washouts that happened March, April 2020, most markets the last 30 to 45 days have made new highs for their move. So we've made new 25-month highs relative to those lows back 25 months ago in 2020. In my experience, that's where market is is ripe for at least a shake down or correction. And we saw it the first week of May in diesel and unleaded gas. Later on within the last couple of weeks, natural gas did it. It's a little bit different structure in crude oil, but everything is, is wound tight. On grains, like today we had August beans— excuse me, July beans— make a new high for their new life contract high. We didn't take out the continuation high, but we're, we're getting close to those things. Nov beans very close to a new high. $15.55 is a life contract high. We got to $51.75.

I think we're very, you know, very close to running out of gas unless we have something for a narrative to build here. And my opinion is that we're more likely to Correct. No, I'm not, and I'm thinking in that, you know, say June 15th to August 15th timeframe, I think is more likely to be a trough instead of a peak, given where we're at now. No, I'm not saying that I think there's some kind of grand washout, and because a lot of things that have gotten us here are still there. And what I think it is, and it's kind of a It's all the same market is a way to say it. We have what appears to be building a world liquidity crisis. So somewhat of a— somewhat rhymes with the 2008 setup. We have industrial metals and things like housing have pulled back big, and with the Fed increasing interest rates, it's creating a real headwind.

Now, those things don't solve such as the Fed increasing interest rates doesn't solve the supply, supply problem we've had coming out of COVID but it does create a headwind and destroys demand enough to, to mitigate prices. Once they lift off the brake, the problems will still be there and will still be inflationary. So what I think we're seeing is this kind of a contraction and pullback. And it should dampen the inflation rate, I think, fairly significantly, not implode it. And we'll get that pullback into mid, mid to late summer, and then kind of morph into something as we get into fall. I'm not looking to be a wildly aggressive seller. But I'm still with my clients, I still advocate being, depending on the individual, 40 to 50% floored. At these levels. Certain individuals can be— want to be a lot more, but the profitability justifies it in the long run.

It looks like we could do some big things over the next year or two.

Chris

Barron: So are you think— are you saying, you know, that 40 to 50% floor, that's on corn and soybeans both, right?

Grant

Shimek: Okay.

Chris

Barron: When— so Let me, let me go down this path just a bit. You mentioned 2008. One of the things that, you know, we keep watching is, you know, you talk about economic headwinds, you got these external things. Again, you know, from a technical standpoint, you're kind of the, the go-to in my opinion. And what are the funds looking at? Where's the money flow? And how is that correlated to the stock market in your opinion? What, what other—

Grant

Shimek: it's actually It's actually highly correlated because in the last, say, 45 days, I mean, the exposure to commodities by Wall Street— and I don't mean the typical CTAs that we deal with in the commodity business— so Wall Street exposure to commodities has been the highest it's ever been. So that goes back to what I was talking about. It's all the same market. Money is been heavily positioned in this already. So what we, what we hear a lot of, well, if the stock market breaks down, we'll get capital rotation into commodities. But they've already positioned, Wall Street anyway, heavily into commodities. And even when we look at the traditional CTA positions, they haven't gone up and eclipsed the numbers that we saw in grains for last year, but we're in the top third. Off and on throughout this year for that range.

So it's going to be— it's more likely to be a bigger liquidation event than it is of longs, than it is to be, you know, adding length, unless we get weather outside narrative that's going to juice us to the upside.

Chris

Barron: So what other things, again, On maybe this is the fundamental question, but on the other side of things, do we need to be watching? You've got China, you've got South America still, things to pay attention to, and you've got Ukraine, Russia. I mean, is it all the above? Is it— what other things am I missing that, that are maybe a black swan or something that's gonna either give us a bunch of strength potentially, or other than weather, or take us the other way?

Grant

Shimek: Yeah, unfortunately it's all the above. That's just the world we live in. Europe's been fairly dry. I mean, the production there might be the next surprising thing. It could be hit. I think they're having some issues with, as far as expectations on wheat production in Europe. That's probably the thing that hasn't gotten a lot in our press. Recently that there has been a hit to production in South America, but we kind of traded and priced that a few weeks ago. I don't believe it's gotten worse, but it's definitely happened. China is a riddle wrapped inside an enigma as far as to figure out what that is. And I— what I mean by that is the whole— if anybody paid attention to the lockdowns, they had, to my recollection, somewhere between 250 to 280 million people locked down. Shanghai being the one of them where they had ports locked down for 5, 6 weeks.

What are the effects of that long run? I mean, this is why the whole supply chain issue isn't going to go away. I mean, we, we just haven't seen the long-term impacts of this most recent lockdown yet. So some of those things, it is hard to figure back to, well, what's that mean for grain producers or for agriculture? We have a lot of conflict, and if the conflict with China kicks up, well, you can't imagine that initially that that's bullish.

Chris

Barron: Hmm.

Grant

Shimek: So— But long run, still same amount of food mouths to feed. Right, in the world unless something really cataclysmic happens. So I mean, they all look very short-term corrective. Short-term to me being, you know, 4 to 8 months, not year-long corrections.

Chris

Barron: So with that said, I'll paint a scenario. We get into the growing season in the next month or so, we do get dry in a big enough area, and that dryness in the West moves east or whatever. We just have dry weather, the market starts to notice it. You're talking 40 to 50% sold, you know, and that's always the hardest time to sell to, right? It's not raining and that gives you the market opportunity. And usually that's when you need to be selling. But what it's really hard to do— what, what's your next level of sales would you go to? I mean, that's hypothetical, I understand. But, you know, are, you know, if you're sitting there with a decent crop and you're getting the rain and you're okay, do you go to, you know, 65, 70?

Grant

Shimek: I like to go to 60, but I think you're— it depends on the calendar. We definitely want to be confident with that crop if you're talking about a committed sale, right? And I think that's the maximum for me. I'd rather go to paper if it's going to be north of 60%.

Chris

Barron: Given you feel you have a crop, you know, but, uh, and is that going to make sense to do that on some of those extra bushels that, you know, that you don't know you have, but yet, you know, those are pretty— could be some pretty good opportunities, you know. Sometimes those are when the best opportunities are there.

Grant

Shimek: True, true. I mean, if, if we're— if it's going to be a better opportunity than it is today What if you put another dollar on top of the highs that we've seen already? Well, this is— Right. It's just gonna put a lot of operations, if they're matching, you know, their, say, a 3-year average, if they've had good yields, I would assume you're gonna see operations with deep, well over 50% return on gross dollar invested, probably knocking on 60, 65. You are gonna be hard-pressed depending on, it depends on the individual's mentality. Some people are focused on, well yeah, but what about my cost next year? I gotta make as much this year 'cause I'm gonna have a higher cost next year. And that becomes the individual discussion, but it can be pretty hard to mess up 60% return, you know, 50, 60% returns on investment.

Chris

Barron: Yeah, I'll get to '23 here in a second, but I want one more question there. What happens if the opposite happens too? All of a sudden it does get ugly, we do get super dry, the weather forecasters that are calling for this stuff end up being correct and it does get super bad. Any, anything there to pay attention to or to be watching?

Grant

Shimek: If you, if you have a high degree of sales on, you gotta have a backup plan, at least some options, some outright call options with 60 days of life to get you down the road through that. If it develops over this coming month, well then you definitely want to have something in place to get you through the acreage report. And typically new highs after 12th, 15th of July, in most years we've then ramped in much higher. Not every year. You gotta really watch that calendar. And you come out of the June crop report and you can have some extremes that happen those first 2 weeks, but you're closing new highs. It really is, you know, somewhere between that 10th to the 14th of July you can really run historically.

Chris

Barron: Mm-hmm. If the— so if See, all this stuff's going on either on either side of the equation. I want to go to '23 for a minute. Um, what's, what's your comfort level? I mean, I looking at where our clients are at that I have their '23 information, I don't have very many yet on because it just guys haven't gotten to that point yet to where they've rolled their '22 information over and started looking at it. But I do have some, and what I'm seeing of the few that I have, if I just aggregate those and look at them, it looks like the clients we have within a very small database, but it's about 9% sold on both corn and soybeans. Is that kind of an area you're comfortable? Is that too much, not enough?

Grant

Shimek: What do you think? I'm comfortable with that. I really wouldn't want to be more than 15%. I think the long run we can go, we can have some really tremendous moves yet over the next two growing seasons. There's probably going to be a moment of doubt and confusion though, meaning we're gonna— when the shakeouts come, they're going to be nasty. Bear market— bear slides in bull markets, those are very powerful and fast, and they will scare you. But in the long run, given, in my opinion, Based on a number of things, but the simplest one is anybody's— a lot of people have seen is that agriculture production cycle would be going into a decline phase after this year. This is the last year of the uncertainty phase, and I expect that you're going to have some, some big bullish moves yet just based on in general lower productivity.

Will that be driven by weather or just human intervention that's, you know, wars and so forth that causes things? Maybe. But I don't want to get— it's hard enough to market this one year, and that's why I, you know, somebody's willing and they want to be more sold out there, You just got to have a backup plan to say where you're wrong. So for most people's comfort level, getting even half sold this year is— there's a good many people that don't want to go that far. So I've not been pushing '23 because until we have a grasp on, or you as an individual have some kind of concept where your input costs are going to be, we might be maybe just trading one risk for another.

Chris

Barron: Yeah, and that's just the thing. It's been hard when prices are high. It's hard to make sales too because on the input side. And that leads me to my final or last question I guess I have for you here before we wrap up. But inputs for 2023, I've talked to— so I want to get your two cents, but I've talked to a number of clients that we work with so far, and not very many again on that category yet, but holding back a little bit of seed, holding back some, you know, herbicides and insecticides and some of those things that maybe they had extra of or whatever. Looking at that equipment cost as things go up, managing land rents, you know, with land rent and equipment being the two biggies. What are you hearing or what are you seeing from your clients on '23?

Any, any news, anything out there that that makes you, you know, go, holy crap, or, or I need to be doing this, need to be doing that?

Grant

Shimek: At this stage, no. I'm biased. I have a bias that we should see this shake down into midsummer. I think that will set us up some opportunities. Take, for example, not that necessarily a lot of people listen to this may not use it, as a product, but it's just something I can pull a chart up quickly on. So we had urea hit a high on the exchange around $887, $900, and we're down in the around $570 today. And not that it's going to get cheap, necessarily retail, but I do think it'll set up an opportunity if we do have that shake down to get some, some coverage there. Most people aren't really doing much about anything. If they— a lot of people can't get prices is what I am told, of what they do go shopping and people, their suppliers aren't offering it. So I don't really have anything to offer on the, the seed and, and chemical and fertilizer portion now.

But I will say the issues that we mentioned before with China locking down, the, the machinery side of it, this does not look like it will be any better anytime soon. So the electronic side and the parts availability is something you have to be very diligent on. I think it will be very hard to function at times in the next couple of years when it comes to machinery. Yeah. So as much inventory of replacement parts and backups as possible, it's going to continue to be the main, main thing on that front.

Chris

Barron: Mm-hmm. In a nutshell, you see inflation continuing to get more intensive or stay, you know, at kind of the same rate?

Grant

Shimek: I think we're actually going to pull back on the inflation now. So let's say official rate's been somewhere between 8 to 12 and reality has been more like 16 to 24. I think we're gonna see it pull back where they're gonna throw out official rates that are more like 4 to 6. Which is still really hot compared to where we used to run a lot of the 2 to 3s. But, you know, reality will probably be something more like 8 to 12%, still high. But I think that's for, you know, that might be for the rest of this year or beginning early in the next quarter. We'll see. I think we're going to see it, and then we'll go through another big wave of inflation later on. It's just, I think this current leg is just running out of steam. It's still going to be there. And then there'll be times in the next couple years I think it will have yet again tremendous runs of inflation.

Chris

Barron: So what's your crystal ball say on inflate— on interest rates then as they try to tamp it down? Or do they chill it out off for a little bit, or do they do what they're saying they're going to do for the rest of the year?

Grant

Shimek: I doubt they'll do all the, the increases that they've jawboned about. It's definitely going to continue to push up short-term rates, or at least the expectations of it. The long-term rates, you know, my opinion is the bond market really washed itself out, the long-term bonds here in the last 3 weeks. So I don't— I think that as far as long-term money on land and so forth, it might— you might see rates actually pull in slightly. Over the next month or few months. But cat's out of the bag in a big macro sense, we're one off of the lowest interest rates that humanity has ever seen. So rates end up going higher after we go through this little corrective phase.

Chris

Barron: Sounds good. Well, I think we've had a pretty good conversation here. The only thing I would give you is if you have anything, any last thing you want to leave people with that they need to be paying attention to.

Grant

Shimek: I think we pretty much covered it all.

Chris

Barron: Sounds good. Well, we'll leave it at that then. And Grant, if people want to get a hold of you or just have like a one-on-one conversation and kind of pick your brain, what's the best way to reach you?

Grant

Shimek: I can just go to my website blackoakfinancial.com and all my contact info is there.

Chris

Barron: All right, and, uh, you've always done a great job working with us and we really appreciate it. And, uh, if you need to get a hold of Grant, you can reach out to him. And again, thanks Grant, really appreciate it.

Grant

Shimek: Yeah, thank you, Chris.

Chris

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