Weekly market outlook: Nov. 29 - Dec. 3rd - new month, new opportunities?

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: Hey everybody, Chris here with a reminder on the Ag View Executive Business Conference. Our early registration deadline is November 29th. At midnight, which is Monday. Again, we've just got an outstanding lineup of speakers and networking opportunities with these presenters as well. We've got Paul Niefer, Joe Vaclovic, Damian Mason, who wrote the book Do Business Better, Jim Wishmeyer, and Bill Connerly, The Economist, and Steve Johnson, who we know a lot of you are aware of. And so again, just a reminder, if you are planning on going, the early registration deadline is November 29th, Monday night. And you can just click on the agviewsolutions.com website and you'll see the registration button there and you can get registered.

Jarod

Creed: Thanks a lot.

Chris: Welcome everybody to another episode of the Ag View Pitch, and we are heading into the very end of November, first part of December. We've got Jared Creed with us with JC Marketing. Jared, how's it going?

Jarod

Creed: Good. Happy Thanksgiving to you and your family and all your listeners.

Chris: Yeah, yeah, appreciate that. We had a interesting week last week. And, and just talking to you offline there, it sounds like you had about 35 people here over the Thanksgiving holiday and 12 kids. Man, you had a madhouse, it sounds like.

Jarod

Creed: It was a little full. It's a little quieter now, as you can imagine.

Chris: Everybody's gone and, and you can, you can breathe again now, huh? Yes, sir. Sounds good. So, all right, well, um, New week, new market discussion, a lot of things going on. On Friday, we saw a— just in a short window of trade there, we saw some pretty hot pressure coming from some COVID news or whatever. What do you take of that?

Jarod

Creed: Well, I guess if you look at how the market reacted in energies and even grains and equities just on the concern of a ramp up in COVID. And I'm gonna put that out there. I'm not a COVID specialist. I'm not gonna pretend to be so, but it's rather alarming or maybe just flat out scary just how fast that market can move, any market for that matter, on the fear or the what if of a pretty dramatic resurgence of COVID And, you know, we started the week with a lot of news out of Germany and other European countries. You know, I think I saw on Tuesday or Wednesday that the average rate of positive COVID tests in Germany transposed to the U.S. population would be like 175,000 cases a day in the U.S. if you looked at the Germany numbers. And obviously Germany is no, you know, they're no slough, a very large country in the middle of obviously a large European Union there.

And when you see equities get rocked how they did, you see energies get rocked how they did, and you see it spill over to grains, and grains more or less stayed pretty resilient in my opinion, it maybe is a little bit of a wake-up call. And it's certainly not the normal price action that we've been accustomed to seeing over the last couple decades going into Thanksgiving and into December. So I would say that it was rather impressive to see corn be down double digits to almost be up double digits at the end of the day. Uh, definitely some mechanics of option expiration mixed into that, right? So we'll have to see how the follow-through is at the beginning of the week. But anytime you have crude down $10 and you have, uh, RBOB and heating oil and all these other energies down 25 to 35 cents a day. That's, that's alarming. That's a, that's a big, big deal, right?

Chris: And, you know, you talked about the energy side of that. There's other stuff going on in the energy stuff too, between this administration trying to get something out of OPEC, which is good luck probably, and then you've got, you know, releasing some of the— releasing the oil reserve, and, you know, all the stuff, all the politics going on there. What's your take on the energy thing? And we'll get into how that's impacting, you know, everything from natural gas to LP to anhydrous to, you know, to other fertilizers.

Jarod

Creed: Well, it's another notch in the belt of what seems to be the push towards green energy. Let's not forget about that in the face of all of this SPR release. You know, think about the SPR, okay, we released 2 to 3 days worth of crude oil use. Um, same thing I said on COVID. I'm not trying to be political here, but that seemed like a very silly move to get into a standoff with OPEC to release a measly 50 million barrels of crude oil from the SPR.

Chris: Is that about 3 days of use?

Jarod

Creed: Yeah, 2.5. You know, I think that most people would say 17, 18 million barrels of usage per day in the US. Too bad our energy secretary didn't know that answer off the top of their head in the first place. So it kind of makes you scratch your head. What is our administration really going towards there? And OPEC more or less probably got ticked off at that idea that, oh, you're going to release oil? Okay, then we're not going to bring any additional oil online. I think that there could still be a lot of gamesmanship in that. Maybe you still see Russia increase their production. To kind of go against what OPEC wants to do. But then on Thursday, it seemed like OPEC had kind of softened their tone as well. So it's a mess. How about that?

I'm not gonna lie that right now with what's happening in the corn market in relation to margins at the ethanol industry, we really can't afford to see too much noise in that space to dramatically shift the landscape of profit opportunities that ethanol plants are currently looking at. Uh, you need to have crude stay firm. We need to maintain an open driving window for the next 30 days, uh, to continue to keep ethanol margins where they're at. And in fact, you know, record ethanol margins, monster ethanol margins. Yeah, the ethanol industry is probably going to have a record month of November as a whole. And a lot of that is pent up on good demand, just the push towards green energy, you know, the requirement of a 10% blend mandate. We can't afford to all of a sudden shake the boat so hard on demand of fuel to slow that down.

That would— that's, you know, to your listeners, that's the number one risk right now when it comes to corn, corn demand, and obviously, uh, exceptional corn basis at this time of year.

Chris: Well, it's kind of the yin and yang too though, isn't it? I mean, also the higher energy costs are going to help to maintain higher fertilizer costs and all that on the other— on the cost side too, right? So we're going to be trying to navigate in between both sides of that equation, aren't we?

Jarod

Creed: Yeah, and I think there's a lot of belief that these high fertilizer prices, um, you know, the common Econ 101 thought would be, okay, well, we're rationing demand, we're going to slow down the usage of this. That doesn't necessarily mean that you have to have a dramatic price setback in these fertilizer markets over the next couple months. In my opinion, when you look at natural gas at $5, $5.50, The producer of that fertilizer product is literally only going to produce what they have the demand for. And that's domestically. And then when you think about internationally, you have a whole bunch of other factors taking place of just stopping a phosphate liquid flow throughout the world market.

It's people, you know, Russia, China, Other countries involved in this as well that they're just fighting tooth and nail to keep their product in their house, which obviously, you know, supply and demand. Okay, we're tight on supply, but that does not mean that somebody's going to come out and just start producing more fertilizer product at these prices just because the farmer is going to stop buying it right now. So, you know, and Hydrus specifically, I think there's a lot of belief that we're gonna see cheaper anhydrous prices into next spring. I'm not in that camp. I'll be first to admit that I'm wrong on that. I just don't see that they're gonna overproduce anhydrous at $5, $5.50 natural gas just because. So it's not like we're gonna go fill up our supply at these prices.

Chris: Yeah, that was one of the things I had conversation with Pete Meyer a couple weeks ago. You know, he was like, well, it's not the price you need to be concerned about, it's the availability is what you need to be concerned about. Any thought on that?

Jarod

Creed: Well, logistics are obviously a nightmare. Um, that's gonna play a big role in it. Um, you know, similar, just like ethanol margins right now, it's a logistical battle moving ethanol on the rail right now, and that's prompting— that's propping up ethanol prices. And I think the same can be said with fertilizer. I agree with that. It's not necessarily the price, it's just getting your physical hands on a product. I would like to think that the American farmer was proactive enough that we're not going to have a massive issue on our hands from a fertilizer standpoint. Well, there's been a tremendous amount of fertilizer application take place, right, in the last 30 to 60 days, that we're sitting okay going into next spring.

Chris: Well, and as we, we speak here, you know, you know, going into the week of the 29th of November here, there's still a window yet. There's a lot of anhydrous still going on, a lot of, you know, so, you know, and the weather looks open yet for maybe another week in a lot of areas for that to continue. So that might help a little bit. We'll see. But let's shift gears here a little bit. What I want to hit on next here is, um, there's still a lot of, um, the way it sounds, unpriced bushels out there of this '21 crop. Corn in particular, less on the bean side. But, you know, as we look at basis, particularly short-term here now, you know, we're entering the first part of December this week, and as we do that, what's that, what's that mean for, for basis in the quote-unquote holiday season?

And when the farmers are pretty much shutting their doors, they don't want income yet in this year, but they probably will next year. Is this going to create a basis opportunity, and how would you know, what should producers be watching and thinking about on the basis?

Jarod

Creed: Sure, so if you break your demand in 3 buckets, feed to feed, I think the basis values in the feed market are going to be somewhat reflective of the local demand for ethanol. Uh, exports are so-so, we're not lighting our hair on fire there in any way, but obviously ethanol is the darling of the ag industry at this point. In my opinion, the farmer is flush with cash for a multitude of different reasons. Higher prices on the tail end of last year's crop, coming off of a couple years of substantial government programs that provided a tremendous amount of revenue, and, you know, whatever they had sold going into this year on top of a very large crop. And there's a lot of co-ops with record deferred payment books already in place, and that was, you know, even a month ago, that was just that was the situation.

You know, I think the farmer, A, doesn't need the cash, B, has seen a tremendous amount of volatility in the market in the last 12 months, and is just pretty much willing to focus on fertilizer, lock them indoors, and wait until the end of next year. And I think that can be a recipe for disaster. I think what we're doing right now is making the assumption that basis will be as strong as it is in the first quarter of 2022 as it is now is more or less just betting on a come. We're betting that, A, it doesn't make sense for me to sell grain 60 days from today. It makes sense for me, if I'm going to sell anything, to sell it for shipment today. That's just what the cash market is trying to do to the farmer, especially in corn. Beans, different story.

There is a bit of a carry there, But corn primarily, when you're looking at 10, 15, 25, 30 cent cash inverses in a 30 to 60 day time frame, and you know, for your listeners, just simple inverse, what is that? The price today is higher than what it is 60 days later. The market wants the grain today. Typically the farmer's been rewarded handsomely when somebody is asking for the grain in that big of a fashion with those type of premiums. I think it just needs to be let go. You know, we have a goal to really not have any basis exposure anymore by the second to third week of January with the bins empty by the end of March. That doesn't mean that I can't go still participate in the market long term if I so choose, but I'm separating that basis deal. I mean, good luck finding an ethanol plant in all of the US right now that's not above option basis for December.

I'm sure there might be a couple, but there's The majority of them are substantially higher than what we've ever seen, a tremendous amount of 20, 30, 40 overbids in the Western Corn Belt available for the next 30 to 45 days. And I think that needs to be let go. The margins are there for the ethanol plant. They're wanting the corn. You're betting that a farmer movement doesn't put a damper on that after the first of the year. You're betting on something not happening in the energy markets. And we just saw a tremendous amount of movement on Friday. So there's a little bit of a wake-up call. And anything else that can come down from, you know, any shape or form from COVID from, you know, regulations out of D.C., whatever it may be, we're making a pretty big bet that ethanol is going to have the same type of margin structure that it has today after the first of the year.

And that's all it is. If you don't want to sell today, hey, so be it. But just know that you're not You're not looking at waiting for something to get better because you're already on a scale of 0 to 100 from an ethanol margin standpoint, you're already at 800. So you're, you're right now you're betting that it stays as good as it is, not necessarily gets better from a cash standpoint without any other black swans or any other stuff thrown into the mix. And I, and I think one other piece that we talked about this last time And we've been doing a tremendous amount of research for next year's expenses. The fastest way we can keep our costs in check next year, one of the most easy to control, is our interest exposure.

And having a significant amount of cash on hand going into the end of the year, deferred into the beginning of the year with more grain movements in Jan, Feb, March, uh, I have operators that they're going to be able to shave close to $100 grand of interest exposure in just the first quarter of 2022. That right there, you know, that's a sunken cost. You might not get a check in your hand for that, but at these higher input levels, at these prices, uh, with interest rates kind of ticking up a little bit, still in an inflationary environment, I just kind of struggle with why, why, why am I going to leave all that risk on the table from a price standpoint and ultimately increase my costs next year just because of the world around us. I have the ability to control it all now, right?

Chris: And when you look at, at the margin for any individual operation, you really got to say, did, did you know, how much do you want what your original margin target was, or maybe was during harvest potential to get away. I mean, it's probably meeting everybody's margin targets with the exception of maybe a few operations, but 90-some percent, probably a high percentage of people listening to this, could have never guessed we would have had these kind of margin opportunities with where the price is and probably where the majority of the people's yields were, with the exception of some, understand that, but, you know, the crop insurance and some of those things were there. Let's shift gears again. Demand, just want to hit on that, and then I'm going to hit some '22 thoughts. But on the demand side, is there any watch-outs or any positives or, you know, anything there?

I mean, we talked about the energy and, and the ethanol. Anything else? Any other drivers there?

Jarod

Creed: Well, it was, you know, Jan/Feb/March last year was a tremendous buying spree in corn from China. I think that the market is definitely hinged a little bit on repeat business. Right now our export estimates certainly appear to make the assumption that China is going to be a big player for the balance of the crop marketing year that we just harvested. Without them, you have the ability to add, you know, 100, 200 million bushels to our balance sheet rather easily. But I'm not so sure that, you know, today that that really matters. We have so much other stuff going on in the marketplace. I think demand for the most part is a, you know, it's a moot point for at least another couple months for now.

Chris: Okay, last, last thing I want to get to here before we run out of time is the '22, you know, we're, we're starting to work with producers now again on Profit Manager, looking at cost of production, looking at crop rotations. This is one of the first times I've seen wheat come into the conversation as much as it is in some areas as an option even. And then, you know, the corn versus soybeans and, you know, access to nitrogen and all those kind of things. And what does this acre mix look like and what should I be doing? Any thoughts on '22 when we look at that acre mix? I mean, I'm gonna throw my— let me throw my two cents in there real quick is Everybody's got to do their own numbers. Now I'm going to shut up and get your take on what you think's coming.

Jarod

Creed: Well, if you look at a 30,000-foot view, the, the focus on what are we going to do to corn and bean mix next year is premature. What we have to do first is figure out how many acres are we going to take out of the corn and bean pie first. And we've already taken out, you know, probably 1.5 million acres out of the different classes of wheat. And adding additional acres of cotton and all these other small grains that also have huge margin opportunities as well. We're going to have a smaller corn and bean pie. And when I look at the margin opportunity on the table, again, looking at strictly price— supply can change this— but at price, I don't have anybody that it says to go plant beans over corn. Even corn on corn versus beans.

If you're going to go out there and budget a 10% above APH yield on beans, okay, I can get, I can get on the same page with you there why beans make more sense from a financial standpoint. But if it's not for an agronomic purpose, I don't have anybody really that it just screams to say, hey, let's go plant more beans. Even at the current urea prices and $1,300, $1,400 a ton anhydrous. I have the ability to— right now, our corn goal for most of the, you know, I-80 to I-90 corridor is we need to gross $1,100 to $1,200 of revenue per acre next year in corn. And for that profitability in corn, what that would represent, you know, we have to have a tremendous bean yield even at $12 beans to get there, or $14 beans. Or $14 beans. And that's, you know, that's kind of counterintuitive thought process.

Oh, I need higher priced beans, but I'm planting the beans because it doesn't make sense to plant corn. I mean, that, that doesn't go together, right? So I think that it's pretty simple. What we talked about last time is if you're buying your, if you're buying your fertility, you're locking in higher price, uh, rent, whatever it may be, just make sure you get those dollars sold. Pretty simple. I mean, the crush ratio, you know, the crush between the corn and the beans that the farmer produces, uh, and the money that it takes to grow it— I would gladly take $5.50 December '22 corn with $1,300, $1,400 a ton anhydrous and, you know, $50 an acre more rent. I would take that every single day. It's a tremendous profit margin opportunity on the table for next year right now as well. I mean, you're part of the world, Chris.

I'm, I'm guessing that you have a, a whole bunch of producers that when all the dust settles, they're going to spend somewhere between $800 to $900 an acre to grow an acre of corn, and it's probably closer to the high end there. Well, if I'm spending $900, I probably can raise at least 200 bushels of corn, and 200 bushels of corn at $5.25 cash right now, well, I'm already at $1,050 an acre. I'm already at about a 15% return if I'm spending $900 an acre. The farming industry does not generally get the opportunity to look a year out and lock in a 15% return. And if you had a— if you were the— you had a board of investors sitting around you and you were showing them, hey, you— I got the opportunity to lock in 15 to 20%. They'd be saying, well, what are you waiting for? Get her done. So I think it's eye on the prize.

A lot of emotions tied to all these higher input prices, a lot of emotion tied to how do I market the balance of the '21 crop. But think about the big picture. Tremendous amount of profit made in 2021, pretty darn good year coming off of 2020, and a pretty great margin opportunity going into 2022, even with all the noise that's going on around us. I would—

Chris: yeah, and I would echo that. I mean, I, you know, we're, we're tracking our, our client data, as I know you do, along the way too, and we're seeing kind of the same thing. I think we're at like 9.27 or something like that on client— I have the numbers in front of me, but, um on cost on corn, and we're seeing about a $60 to $90 better for corn range in most instances. When you look at margin per acre, revenue per acre, better for corn even with throwing all of the high-dollar, you know, numbers on there. Just when you look at that price ratio, beans are not priced high enough relative to corn for one thing, and then the other side of it is, you know, like you said, that 200-bushel corn, you got to jack that yield up or you got to bring the price up, one of the two.

And, you know, I think as long as we can have availability of supply of the stuff we need to grow the corn, both from a, you know, fertilizer but also crop protection side of the thing is another story too. But if we can, if we can get the all of the necessary resources to put the corn crop in, at least from what we're seeing right now, there's a definite advantage to the corn over the soybeans yet, even with where the, where the costs are.

Jarod

Creed: I agree.

Chris: So wrapping up, anything that I didn't, didn't hit on, anything that you were thinking that farmers need to be thinking about as we head into December here?

Jarod

Creed: I would say the main thing to take away for me is just the margin that's on the table for next year, that's great. But let's not overlook the fact that we do have a tremendous amount more risk going into next year. Risk is both good and bad. But the downside revenue versus cost risk for next year is substantially higher than what we've seen for years. You know, when we're in a $3.50 to $4 market, okay, our risk is to, you know, absurdly $2.50 corn, maybe $3 corn. Now, you know, when you're looking at a $5 to $5.25 market, our risk is legitimately having low $4 cash corn and not being able to break even.

So just, you know, embrace that, that, hey, I have more downside risk in the big picture just because of higher input costs, higher grain prices, all these variables that it looks phenomenal on paper right now, but it can go ugly very quick with just a, you know, a modest setback in corn price to a price that we would have killed for, for 3 or 4 years.

Chris: Last, last, last, last question real quick though. You know, what, what makes you feel comfortable As far as what are some of the tools these guys need to be looking at to protect that downside risk?

Jarod

Creed: So far it's just kind of been a scale-up sell mode. I'm going to explore, you know, volatility for next year is quite high coupled with insurance programs that we have. I'm going to explore maybe selling some at-the-money straddles, you know, selling the at-the-money call and the put. Make sure you're discussing that with the broker or somebody that knows what they're doing there. And then looking at maybe just a few minimum price type of strategies to get me through the next 6 months, because I think that's probably the farmer's biggest risk is at least just the next 6 months. Yeah, if we can get something covered in that time frame and you need to have some flexibility, we'll go find the tools that give you that flexibility. Just make sure you're not giving up on, uh, you know, letting $5 corn go.

Chris: Yeah, yeah, manage the risk. We're not giving any recommendations here, but it's, it's perspective, we really need to pay attention right now. We've got opportunities in front of us that we have not seen for a long time going into '22. So hey, Jared, this has been a great conversation. Awesome insight, awesome input. I love, I love your, your take on stuff and really appreciate it. Thanks a lot.

Jarod

Creed: Absolutely, Chris. Have a good one.

Chris: Yeah, you too. And again, thanks everybody for listening, and we We will catch you again next time on the Ag View Pitch.