Weekly market outlook: Nov. 8-12th - USDA report discussion

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. We are heading into another marketing week and we have with us Ryan Moe from StoneX. Ryan, how's it going?

Ryan

Moe: It is going really well here so far. Really well.

Chris

Barron: Excellent, excellent. We haven't had you on for a while, but, uh, We'll chat on some markets here in a minute, but I just want to remind everybody that the registration is open for our Executive Business Conference. It's going to be in Phoenix, Arizona on January 26th, 27th, and 28th. So please go to our website, click on to the Executive Business Conference, and at least check it out, see if it's something that, that you could get away and, and get some education. We've got a lineup of pretty awesome speakers, and so if you guys can So get a chance, please check that out. Let us know if you got any questions, email Alyssa at abarron@agviewsolutions.com and she'll take care of you if you got questions. So with that, Ryan, let's talk markets a little bit going into this week of the USDA report. What's your crystal ball say?

Ryan

Moe: Well, my— I don't know how clear the crystal ball is, but I guess I would— I, I tend to lean on big crops getting bigger. The clientele that we serve, that my group serves, is largely west of the river there. And we didn't come across hardly any producers that were disappointed in their yields. They came out with significantly stronger bean yields than anybody ever dreamed was possible. And then on the corn side of things, depending, depending on fungicide application, there's a lot of people that were really pleased with corn yields as well. So I believe that this crop is going to grow, and how much of that is reflected in Tuesday's numbers is kind of yet to be determined. But I think by the January report, I think I think we'll be testing record yields on corn and beans.

Chris

Barron: So, you know, what, what do you, what are you telling your clients? And what, what things do you, as you know, there's most people are wrapped up. There's a lot of people though that have been in some challenged areas where it's pretty wet and people are trying to get wrapped up or they're doing tillage and all that kind of fun stuff. What are you telling, what are you telling guys as they wrap things up in the field? What, what's the next marketing step or the things that they really need to pay attention to?

Ryan

Moe: Well, I mean, I think the— and I think the biggest thing here, Chris, is that we can talk about this extremely strong basis. I'll call it career-high basis levels many of us have seen from the corn and soybean processor throughout harvest. Um, and a lot of that is attributed to the extremely strong margins that ethanol producers are making as well as soybean crushers are making. And that's something that we have to consider in our marketing plan as, as a commercial grain elevator and a, and a farmer as well, because these levels are just phenomenal, but they're coming from finite sources of demand. And that's the, that's the thing we want to be careful of is it's not like you're handing it to a commercial hedger that's going to be, uh, buying as much grain as they can and then they carry it and then they roll it and etc., etc.

If you're a 110 million gallon ethanol plant, throughout the year you're only going to buy 50 million bushels of corn because they use about a million bushels of corn a week and they take a couple weeks for downtime. And so you're looking at about a 50 million bushel book Well, that ethanol plant isn't going to go out and buy 55 million bushels of corn for kicks and giggles. They're going to get their needs covered, make sure that they can produce in this extremely high, high margin environment. And once they're covered, they should back out of the marketplace. And that's something that we want people to be very cautious of, is not believing that these overs in the marketplace are going to exist forever because they did last year.

Chris

Barron: Well, that is an influence. And then also, you know, like we talked about a little bit offline, the, this USDA report is, that information is going to carry on for a while. And if we put pressure on the market and, you know, take this market a little lower to another technical level or something, or if we go higher, that's going to influence the basis, right? So if we put pressure on this market, we could see a continued strong basis. Versus the other way? Is that— I mean, thoughts?

Ryan

Moe: Yeah, so one of the interesting outcomes from the yield survey that we did on last Monday was you get to have some really good conversations with corn buyers that, you know, like you said, they're, they're kind of settling down a little bit here too because the big rush of harvest is over. So some guys had some time to talk on Monday. The thing that I was able to grab out of that was that if these producers— excuse me— if these ethanol producers and feed producers in the western Corn Belt get a $6 cash number tied to their, uh, you know, to their location, they said their open order book is going to fill their November and December needs. Now that's really significant because if they get to $6 cash and we we hit $5.86 as a high on Tuesday. Well, if they were 10 over, well, they didn't, they didn't hit that magical $6 number.

Those people that were a 15 over, yeah, they, they probably got quite a bit of corn bought. So $6 cash could be a significant marker out there for the producer, for the corn producer. And if they end up getting a bunch of corn bought at $6 cash, uh, boy, I think basis levels could really drop down in, uh, in the western Corn Belt here in the next, uh, in the next couple of weeks. Because why would they want to keep pushing to buy corn if they got their no-decent needs covered?

Chris

Barron: Okay, so let's, let's talk demand, shift gears a little bit here, and I'll probably come back to, to what we were just talking about. So I'm going to loop through here, but talk a little bit about demand. I mean, is there any news that is either positive or negative, things that we should be watching as producers as we think through that, you know, that price target, which I would rather see as a margin target rather than shooting for some price number, but we'll get back to that too. So demand, talk about that a bit. What should we be looking for there?

Ryan

Moe: So let's start with soybeans. Um, from a demand standpoint, the local processor is going to continue to be the leader because their margin structure is just so darn good on a board crush level. So they are gonna— they're gonna bid as much as they can to buy as much as they can because they want to secure as many beans as they can, uh, to secure these margins. It's the absolutely financially prudent thing to do. I have some very major concerns on the soybean export scenario, because we lost 6 weeks of our key demand period because of Hurricane Ida. And our export window is usually open from late August into early February. And then the Brazilian come in and take over because the Brazilians can grow such a darn big crop. The concern that we've got is Brazilians are still raising a large crop and that crop is going in at a very strong pace and it's in very good shape.

So it looks like the Brazilians will be there at harvest. But the other thing that we haven't seen in a very long time is that the Brazilians are in the marketplace stealing export business from the U.S. right now. So the Chinese, if they're going to be buying from somebody— if, and I want to, I want to emphasize if on that in a major way, and we could talk for about 4 hours on that one here, Chris. Um, if the Chinese are going to be in the marketplace buying soybeans, Brazil is hot because of how strong our local cash bid is from the strong processor. So I've got some very real concerns about soybean demand for the next 9 months here and into the next year because of that window that we missed due to Hurricane Ida. So we want to be really, you know, coming into this thing eyes wide open on soybean demand outside of our local crusher.

Chris

Barron: So what about the corn demand between ethanol and all that on that side of the equation?

Ryan

Moe: Yeah. Yep, so corn, I mean ethanol, super hot right now. Great to see it. I mean, that's, that's, that's good for everybody. The, uh, the feed demand, I mean, it is going to be what it's going to be. I mean, the feed demand's pretty well fixed. I mean, we're seeing some DDGs work their way into feed rations, which you could expect with corn prices at these levels, but our feed demand should be relatively strong. The export window on corn is different than that on beans, so the export window on corn doesn't really close as quickly as it does on, on soybeans, and so we can have an export season that lasts quite a bit longer. One of the main, uh, deterrents for corn and soybean exports in general is just the extremely high freight levels that have been paid for booking ships.

So everybody wonders, well, what are those pictures of all of those ships that are tied up outside of the Port of Long Beach just sitting there waiting? What does that mean to those of us in Cedar Rapids, Iowa and Lamberton, Minnesota? Well, that matters. Right. And so the thing that has been very— that hasn't been publicized here very much is in the last few days, the Baltic Dry Freight Index has collapsed significantly. And so some of these issues with logistics are becoming much more price competitive. Right. So shipping lanes— and that is something that has not been very well publicized, but I think that's going to be a very good deal here. For corn exports for the rest of the year if we can get some sanity back into shipping rates.

Chris

Barron: So with all that said, then you're a farmer sitting there with X percent sold. What do you do with those unsold bushels, or do you have any of them, or how many of them do you have?

Ryan

Moe: Boy, I don't— I, you know, I look at it as what risk do I want to own. This basis is super strong here, Chris. This has been— I mean, it's career highs for me. How about you?

Chris

Barron: Yeah, I mean, it's— yeah, same.

Ryan

Moe: Yeah. So, and looking at last year versus this year, they're two very, very different years. So to say— to believe that we're gonna be, you know, 60 over on corn in August of next year, I'm not a believer in that. And so I don't want to own basis risk right now. I want to— if I want to own risk, I want that risk to be on the board. So it's sell it to your ethanol plant, sell it to your, you know, high bid supply, high bid corn buyer. And if you want to own risk, own risk on the board, you know, options are expensive, but shoot.

Chris

Barron: And I know there are operations out there that had short crops And the insurance, sometimes when you yield your APH, it just doesn't quite cut it. So I want to preface that before I say my next statement, which is there's a lot of producers out there that have record margins, again, probably beating what we saw, you know, in any other record year because we got in most areas or a lot of areas, we got yield and price with some exceptions. I'll recognize that because it's frustrating when that's not recognized, but I'll say that, right? And so, you know, for those that have, which is a high percentage of people listening to this that have record margins, you know, I guess my question is, why would you want to own any risk?

Ryan

Moe: I mean, so a term that is used in the trading world quite often is when the pig becomes a hog, it's time for the slaughter. Right. And these markets have a way of slaughtering. And I might be wrong, we might be talking 650 futures here. But sitting there looking at record margins, how do you not take that risk off?

Chris

Barron: Right, right. And, you know, an option, you know, you could, you could have the physical gone, have an option strategy. And these aren't recommendations, but it's just kind of a perspective and a wake-up that, you know, as one who works purely with margins and we look at margin targets instead of price targets with our clients, you know, it's, it's just something that I think, you know, we've got a massive gift here that in, in most instances. So with that said, let's look at '22 for a minute here. Um, you're talking record, so let's talk record input prices, you know, and the cost of production going up next year on corn over $100 an acre, and beans, you know, probably pushing $60 to $70 an acre from what we're seeing currently, and that may go up yet. So as we see that, you know, you're talking You just said a little bit ago, you know, light demand on soybeans.

That sent up a yellow light flashing in my head on the soybean side and on the corn side. If you do have— if you stick a fork in your '21 and that crop is marketed and we do see a rally, you know, you have a whole new crop to start marketing, right? So talk a little bit about '22.

Ryan

Moe: Yeah, so I mean, '22 is going to be I think that 2022 is going to be very dependent upon the health of the U.S. consumer. Because the health of the U.S. consumer has helped drive up the price of gas at the pump. Gas at the pump has created a lot of benefit for the ethanol producer, which has created a lot of opportunity for the US corn farmer. That's 21. 22, if we are able to maintain these $3+ pump levels for gasoline that every consumer in America is paying for, then we're sitting in a spot to where we can have these sustained, uh, corn prices and ethanol prices being where they're at and and margins can be very strong. If the health of the US consumer deteriorates, deteriorates rapidly for some reason, well, then we're, then we're going to be looking at 2022 levels that are, that are far weaker on corn than what we're seeing right now.

We're getting quite a bit of an Last week it kind of slowed down a little bit because of, you know, after Tuesday corn kind of hit the skids and just, I mean, kind of took off lower. We were seeing a lot of 5+ cash corn that was just— farmers were saying, hey, that's a good deal. They're putting on a nice 22 book and people are getting upwards of 15% sold. So I kind of like the idea of rewarding that when the market was going up. Now that we are, let me pull up my chart here and see that the highs on Dec '22 corn on Tuesday was $5.58, we're trading $5.40 now. Now that we're 18 cents off of that, I mean, I can understand not wanting to sell much more. But I think that if you're looking at— and Chris, you know more about this with the individual operations— how do— if we're 30 under at harvest, what does your margin look like at a $5.10 cash, even considering these extremely high inputs?

How does that look this year versus years past?

Chris

Barron: Yeah, we're still seeing pretty good margin, even if you were, you know, if a person did HTAs on, you know, you, you sell $12.30 beans and you're $5.40 corn or whatever, and you look at what is your normal basis level in most individual operations, they're still looking at a 7 to a 10% return on investment even with these high input costs, and especially when You know, you look at, okay, we bought nitrogen or whatever it is that we purchased on the fertility side of things at a very high level. You almost got to go 1-to-1, dollar for dollar, and sell, you know, sell those dollars worth so you can at least cover those— that at least cover that risk. And when we see people do that, and then you look at, okay, where is that current price at minus your quote-unquote normal basis it, it's still profitable.

So that's, that's why, you know, I think every individual has really got to run their numbers though because it is different. And then the other, the other thing going into '22 I think is going to be, and I don't know if this gives us any price opportunity down the road, but it is an acreage battle, not only, you know, macro but micro acreage battle as well, to where we're going to see, you know, people having to struggle between corn and beans. What do we plant, you know? How's that, how's that look, you know, from the profitability standpoint, you know? So there's gonna be a lot of, a lot of math that's gonna need to happen this, this year. A lot of stay tuned and see what the decisions look like.

Ryan

Moe: And this isn't really a fair, uh, number to put out there right now because, because of the increased cost in planting a corn crop. But, you know, when we look at that NOV22/BEANS22 ratio, you know, the, the number that, you know, my mentors always told me on this, at 250, 2.5, that is the ratio where it's the deciding factor between do you plant corn or do you plant beans on that undecided acre. As I'm looking at this here, and I'm seeing that trading right now at 2.24, which greatly favors corn. Now, what you just said, it needs to be most certainly acknowledged, is that the cost of planting a corn crop is higher than it's been in my years of trading corn. So like, it's not really fair. So that number has to be greatly favoring corn.

But as the numbers, and each individual has different, you know, different numbers, APHs, etc., etc.— it still looks like the, the market is telling the producer to plant corn.

Chris

Barron: Yeah, and, and the, the bean price doesn't have to come up to make that ratio correct either. The corn price can go down to make the ratio back to your 2.5. So there you go. And, and the other thing though, you know, it is just— and our listeners, our clients do this, but it's a matter of sitting down and looking at the agronomics looking at the yield, looking at the cost structure, looking at what does that do for '23, what does that do for '24, because there's always implications to, you know, a shift of one crop to the next or a change. And, you know, I've talked to several people that have done surveys on this, and we haven't done one yet. We will after we get completely through harvest with our clients, but figure out, okay, how many people are really even considering changing?

Because I know some of the people that I, that I know that have done surveys on this, you know, you're looking at probably 65% of the operations aren't going to change anything anyway, you know. So you got that other, you know, around 40% maybe that's going to be looking at swinging some stuff one way or the other.

Ryan

Moe: Yeah, I, I tend to believe that in the King Corn areas, the farmer loves to plant corn, has a passion for all things corn, and corn will rule the day unless the economics are so unbelievably one-sided to the soybeans. Farmers are gonna plant as much corn as they can. I think that's gonna be the psychology of the marketplace. Until this renewable diesel thing really flares up in a couple of years and makes the economics so overwhelmingly positive for soybean acres. I don't, I don't think we're going to see much of a switch in our key corn growing areas of— I think they're going to stick to the rotations because that's psychologically and historically, that's what we've seen them do. Now, will we put some other soybean acres in areas that are the outlying areas? I believe that to be the case.

And I think those acres will help support the— those areas are being supported by these new crush plants that are coming online and some of the hopes for what that's going to do for soybean demand. But I don't necessarily see a material shift to soybean acres next year, um, and corn at the expense of corn. I just, I just, I don't see that happening because we just love to plant corn here.

Chris

Barron: Yeah, I think there's going to be, you know, I, I'd argue that a little bit in some areas. I think there's some agronomic reasons, or there's a lot of rootworm pressure in some pockets and, and tar spots, right? I know where I think some of those guys are gonna gonna have some, some math to do. But, uh, hey, so let's, let's wrap up, uh, kind of where we started, back to the USDA report, and we'll wrap this up. Um, you know, I, I asked about your crystal ball, um, you said it wasn't super shiny. What things then should producers be doing in front of this and behind it as, as they look at bushels left the market, or anything they should be thinking of?

Ryan

Moe: Yeah, I, I With the move from Tuesday of last week to Friday, I mean, that was, that was a pretty, pretty solid beating. Producers maybe shouldn't do too much more coming into the report. I, I don't like going into reports with a position, so I'm not a person that has the stomach to go into a report long or short several contracts of corn or soybeans. That's just not my nature. I, after the last week, I think it's going to be very difficult to surprise this, this market with a, with a bearish number, you know, but if we happen to show up with some bullish numbers somewhere, I want to be selling corn at $5.99. As opposed to being the person waiting for $6.02. Right, right. So because I, I think there's going to be some very serious basis implications after, uh, the local processors hit that $6 number.

Chris

Barron: Okay, well pay attention to what the report says, but more importantly what the reaction is to it, and watch this basis thing and stay tuned.

Ryan

Moe: Hey, yeah, because the basis thing is going to get wild and that's going to, um, and I don't want to say, I don't want to say positively wild. Pay attention, right? Yep. Yep. So sounds, that's where I sit.

Chris

Barron: All right. Sounds good. Hey, Ryan, I think this is a good place to wrap it up. Really appreciate your time today.

Ryan

Moe: Yeah. Thanks so much for the opportunity. And, uh, yeah, Tiffany and I are looking at our calendars and, uh, Looking forward to Phoenix here in late January.

Chris

Barron: Hey, that's a great plug.

Ryan

Moe: Thank you.

Chris

Barron: Yeah, we definitely want to promote that. And if you're listening to this and want to get away on January 26th, 27th, 28th, look forward to having you in Phoenix at our Executive Business Conference. So thanks a lot for that.

Ryan

Moe: Yeah, that's a great lineup of speakers, so don't miss it.

Chris

Barron: Yeah, appreciate it. Hey, thanks, Ryan. So appreciate it. Thanks everybody for listening. Be safe out there as you wrap stuff up and get some tillage done and things. And be sure to give Alyssa an email at abarron@agviewsolutions.com. Take care, have a great week. We'll talk to you next time on the Ag View Pitch.