Weekly market outlook: Sep. 20-24, risk vs reward

Narrator: The team at Ag View Solutions is excited to be hosting our first annual Executive Business Conference on January 27th and 28th of 2022 in Phoenix, Arizona. Our planning has begun and our goal is to take your business to the next level. Our main topics will include, but not be limited to, the risk management, negotiations, economic outlook and agriculture policy, business structure and development, and taxes and legacy planning. The conference will also have plenty of time set aside for high-level networking. We have amazing speakers lined up who are excited to bring you valuable information and excitable items for you to take home to your operation and make your business better and more profitable. Again, this is a high-level conference to bring you value. We have decided as a team that there will be no commercials during these two days.

Our focus is our participants and how we can help you achieve the next level in your farming operation. We will be limiting attendance to around 100 people. Registration will be opening up at the end of October. If you want to make sure that you are on this invite list, please email abarron@agviewsolutions.com and just put in the subject field Ag View Executive Business Conference, and we will add you to our list. We are looking forward to seeing you in sunny Phoenix, Arizona in January.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we are going to have another conversation going into a new week. And we're getting towards the end of September, guys are getting in the field and harvest is getting real close to going. And I'm lucky enough today to have two expert professionals with me sitting right in front of me. We've got Paul Niefer again, and we've got Dwayne Lowery, back by popular demand. How's it going, Dwayne?

Paul

Neiffer: It's great to be back, Chris. I'm gonna admit I'm a little nervous here. Yeah, probably intimidated.

Chris

Barron: Well, it's been a day or two since we sat across the table here, and, and appreciate you being back and, and sharing your expertise with us. And just got done listening to you on the phone talking to somebody about margin protection, and you got that figured out, so we'll, we'll hit that on another podcast. But I On the marketing side of things, as we go into a new week, I guess, you know, we've seen pretty good price strength, although last week, you know, we finished the week a little bit bumpy. What's your thoughts? You know, how close are we to a harvest low? Have we seen it? Is it coming? What's your crystal ball say?

Paul

Neiffer: Well, we've had times before at this time of year we did get to the harvest low. I think those conditions were different. I think the market makeup was different at those times than it is now. We did not have a capitulation of old crop inventory into a bottom. We did not have a capitulation of speculator longs that dumped. So it's different this year than— and I don't— I think it would be a mistake that we've seen our harvest low. I think I also think that when you evaluate that, you need to look at things in the full context And remember that the absolute top made in the corn market was actually made when the corn planters were still in the field. And we're actually, you know, we spent most of the summer below those levels despite the fact that we had the Northern Plains, you know, drying up into almost nothing. We had the northwestern U.S. into extremely difficult.

We had a Canadian crop decimated. We had Brazilian corn production off sharply. We had good demand sales at that time and ex— good expectations. We had all kinds of maps circulating the trade about the percent of normal in this area, that area, based on precip. We had soil moisture maps. You couldn't have asked for a more bullish scenario. But if you look at how the price pattern evolved, it quite a bit underperformed people's expectations or fears.. And where we're at now, uh, is still well below what people thought. And there are still bulls in the marketplace and people thinking that the yields are less than what USDA says. I don't know what they're going to be, but I'm just saying that we've had bulls jump from one lily pad to the next, you know, on one bullish narrative for more. And when that failed, then they jump to the next.

But they're still, you know, circulating in a pond that's not that's not gone anywhere. And the risk is that something like that is still ahead. And if we've been enamored with a bullish psychological what-if profile throughout the whole growing season, and now we're into the reality of harvest, and there's actually some demand concerns that are circulating out there now also, which are different than we've had. I don't think we felt that. And let's say that prices go nowhere and we get through harvest and the farmer is a strong holder for, lots of different reasons, we are going to end up at the end of harvest and maybe not have the prices that people thought, and the farmer will be sitting there with the bins full. That's always a threat too.

Chris

Barron: Yeah, what that leads to though, possibly, right, is, is some basis conversation a little bit. You know, what, what's your thought there? I mean, a lot of guys do have a lot— there's a fair amount, at least from what we see with our clients, is there a lot of HTAs and a lot of stuff sold But no basis locked, you know, the carry's okay, I guess, in the corn. It's nothing to write home about. And on the soybeans, it's, you know, really tough to put the beans in the bin. But what's your thought? I mean, does it— if a producer's got enough storage to hold everything but still has some bushels not, you know, that got to go away, what are you kicking out the door, the corn or the soybeans?

Paul

Neiffer: Well, I'm not sure, um, I have a solid answer to give you on that, but I would say that if you're in a position to capture some premium basis values now because of early harvest, I would capture that if you knew you were going to have bushels that you had to move. I don't even know for sure how basis is going to look. It's easy to build the storyline that farmers will maximize their storage, they will be slow to market, for a lot of reasons. Whether those reasons are right or wrong, we don't know, but they will be slow to market. We, we know the ethanol demand is going to be robust. We don't know how much export demand will be taking place at the Gulf and the timings. We also don't know what transportation is going to cost, and if the transportation to get grain to the Gulf is super high, you know, all of a sudden we're backing up more corn into the domestic market.

That could weigh on basis from what we think it might be for other reasons. And so I, I'm not really sure, but I believe that one thing I think will happen is the farmer will maximize his storage use. I think the carry in the corn market, which is not really that much from a historical perspective, it might completely go away. Now maybe there's a period of time in the next 2 or 3 weeks or some, or you know, something like that, where the spreads widen and we add a little bit of carry. But I think as you go through harvest, and especially once you get past the 50% mark, I think the, the spreads will remove carry, maybe basis tightens, but I think spreads will take, take some away. And so that's going to be how the marketplace tries to get bushels from the farmer and/or the elevator.

I think the last thing the market will do to try to gain bushels from the farmer will be a flat price rally unless we have some new narrative going on that right now I don't foresee, but I, I don't think price is going to be what's going to be used to try to get bushels. I think they'll try to get bushels by removing carry, encouraging elevators to move through unprofitable positions that they had from other purchases they made, things of this nature. And I think they'll try to make sure that no elevators has a hedged inventory. And so I think, I think that's happened. So, but basis is not probably going to get super weak. But the one thing that does make me a little bit concerned is, is the timing of bushels leaving the Gulf, how expensive freight could be, and how much that could have an influence on basis that maybe we're not thinking.

And I don't feel like I'm smart enough to answer that.

Chris

Barron: Well, it's like you said, the demand side of the equation is a piece of it. The other side of it, and I've heard various people on the radio and different things this last week talking about early yield information, and it's interesting, you know, one person will say, well, the yields are going to be way better, and the next person says, no, they're off. And, you know, we're probably 2 weeks away yet from having a good handle on what really we're going to see. But personally, what I'm hearing, at least from our clients, is on the corn side, things are better than expected in most cases. Now, it's a slightly different story as you go into the Dakotas, obviously, and pockets in Minnesota, but Illinois and Indiana and some of those places are, you know, even where it got dry late, they're in a lot of cases they're saying it's a little better than we thought.

And the same thing with some of these early beans. Any, any thoughts on that?

Paul

Neiffer: Or— well, first of all, the early yield reports are, you know, really early yield, really subjective. And usually what happens is people spin it and focus on the ones that already join up with whatever their opinion is, right? But as it general thought, I would say that areas in the West that were dry and where you've gotten yield reports out of there, I think they're better than expected. I believe areas in the East, some are better than expected, some experience tar spot and late season disease, they are less—

Chris

Barron: their expectations were higher, right?

Paul

Neiffer: And I find it interesting that a lot of those less than expected are in— are actually 220 yields and they were expecting 250, right? You know, so I don't know exactly how to weigh that, but a lot of your Areas in the south are doing better than expected and better than normal, so it's difficult read yet.

Duane

Lowry: Well, isn't the latest USDA projection still the third highest average bushel on record? So I mean, we should have pretty good yields across the country in order to hit that number, I would think.

Paul

Neiffer: Yeah, it's— they were, uh, very close to a record. There were a couple years that were very tight together in yield, and for all practical purposes, you can almost say they are calling for a record yield. And given the inputs that we had and the storyline that we had and the dryness, etc., it's so hard to believe that this was a year to generate, uh, record, uh, yields. But if we, if we somehow had woken up from hibernation and we didn't experience all that stuff this summer and we just heard what we hear now and see what we see versus last fall, yeah, yes, I believe that we might believe there could be a record yield, right?

Chris

Barron: Yeah. And then, but, but, and also with the with the prices, right? If you, if you just woke up from, you know, last, uh, say August, and just woke up now and saw where the prices are at, you'd be like, well, do we have everything sold? You know, and I mean, Paul, you're a farmer now. I mean, well, you're, you're seeing this, right?

Duane

Lowry: I mean, well, and we were just discussing that my biggest concern isn't this crop, it's next year's crop. I mean, with the, with the extra increase in fertilizer pricing and everything else we have a chance to at least to lock in at least a profit. So whereas waiting until March to get the— or February, March to find out what our insurance price is, that's why this margin program actually sounds pretty good to me.

Chris

Barron: Yeah, yeah. And we're going to definitely— this is an advertisement for the Margin Protection podcast I'm going to be doing here later on here with Duane. But what Paul just said, Duane, I mean, 20 to crop. You know, when you look at $5, a little over $5, being able to make your first sales, lots of people were perfectly happy to make their first sales at $4 for the '21 crop. Nitrogen up 110%, some of the other expenses up significantly. I've told a lot of other people this, I mean, we're seeing corn cost production going into '22 up about $150 an acre. You know, your soybeans up $70 an acre. I mean, what's your thoughts on '22?

Paul

Neiffer: Well, first of all, if you're correct and the costs are up $150 and the price is actually about a dollar higher than what we've been used to seeing for a new crop price opportunity at this time for the last several years, then then you've still got a better revenue than what the cost. Exactly. Okay, and I think that producers need to look at it from the perspective of when they're looking to manage risk. They have to ask themselves, have they ever put in a crop that by the time they're planting the corn in the field, between the cash rent and the input costs, will they ever have more money laid out there on the table as an obligation, as an expense, than they have with this year? And I bet not. And so therefore, um, there's a lot more risk than they are used to having.

And if prices right now for the '22 crop are higher than we saw at any time in the marketing years except for a couple of weeks or a few weeks in 2019, from about 2014 all the way till now, um, you have to honestly assess recent history and use that as at least as a guideline and say, I do have risk. And maybe my risk is amplified because of my higher costs. And it seems to me that there's a strong case to be made to try to remove some of that risk, offset some of that risk. And the margin protection insurance policy is one way of, one piece of that puzzle. Some marketing program might be part of the puzzle as well, but they're definitely— I don't think we can look at this as business as usual.

Duane

Lowry: Well, and I think the psychology of the farmer, it was much easier for that farmer last year to sell at $4 than it is for the farmer to sell at $5.

Chris

Barron: It's hard to sell when the price is high.

Duane

Lowry: Yeah, it should be the opposite. I mean, when the price is high, that's when you should be very happy to sell. And in the psychology, it's just difficult because you think it's going to go higher.

Chris

Barron: That's the way it always is. And when you look, I was just looking, you know, Dwayne, you're making those comments. I mean, you take $1,000, just think of it this way, you know, the working capital needed for '22, if it's in fact $150 an acre more for the average producer from the data we've got so far this year on Profit Manager, you know, you're laying out another, another 1,000 acres, you're laying out another $150,000 of working capital. To your point that, you know, we're laying out more money than we've probably laid out almost ever, probably. And the same thing on the soybeans, you're laying out on 1,000 acres, you're laying out another, you know, $70,000 there. You add all that up, the amount of risk out there from a dollars and cents standpoint for '22 is pretty significant.

Paul

Neiffer: Yeah, and if a guy doesn't think that risk is there, they need to find a way to transport their mind back to 2014, '15, '16, '17, and '18. Yeah, right. And say, how did that work there? Where was the concern there? How much working— did working capital draw down? And then ask yourself, do you really want to be at that kind of exposure? I mean, right, you'd hate to have your costs go up $150, and then from right now till next fall, prices drop another $100 an acre, and, and you missed out.

Duane

Lowry: Well, and also you have to realize that if pricing does drop to $4, you're still not getting any government payments. You know, that's, that's been in there in the past. You know, that's helped cushion it. You know, going forward, '22 crop, and unless corn drops below $3.70 and beans drop below $8.40, you're not getting a government payment.

Paul

Neiffer: I think that's probably right, and Paul would certainly know better than I would, but I doubt if the political environment is such to quickly come to the aid of the red states in the Midwest.

Chris

Barron: Probably not. Yeah, so what, uh, um, what else, what else, I mean, that you guys have? Anything else? I mean, what's the solution? So we're producers sitting here in this room looking at each other and saying, okay, uh, what percent should we be sold? You know, and it's the same thing for the remaining unsold bushels for '21. I mean, we put them in the bin and don't do anything, you're sitting there at a total risk on those unpriced bushels too. And depending on yield, a lot of these growers, even if you don't have quite what you thought you did, it's still probably record revenue, at least since 2012, at a minimum.

Paul

Neiffer: Well, I think, um, you got to do some real soul searching. Every farmer has to look at their own operation, their own yield, their own dollars that are available, and ask themselves, you know, is this profitable? And the answer is going to be yes. And is it quite probable? And the answer is probably yes to that too. And, uh, recognize there is risk at these levels. There's nothing saying that prices have to go up between now and March. And We can look at agriculture and be quite optimistic as a big picture down the road, but if you've got to market grain and turn that into dollars sometime between now and March 1st, you don't, you can't look at the big picture.

You need to look at the near-term picture, and there are things on the horizon that are already being talked about by people far smarter than myself that question whether China is going to follow through with their import of what we thought they would be, or what they did last year. Uh, that— those concerns are coming from the U.S. side. They're also coming from analysts on more of a global view, and that's also coming from domestic contacts within China that they may not be there. Okay, if, uh, South America doesn't have a major problem— and if you go through history, most— it's not a good bet to bet that they will— if they don't have one, all of a sudden you're going to have the farmer, which is— we've already talked about— he's going to have his storage bins full his back will be against the wall.

And no matter how bulletproof they feel, there is a date and time where they have to have that money. And if they don't have to have it, they strongly desire to have it. And the marketplace has a way of figuring out that point. And usually they don't give the farmers a free lunch here.

Duane

Lowry: Well, they're gonna have to clear out the bins for the next harvest.

Chris

Barron: So I mean, at some point it's, uh, Need the Ben starting to smell or need the money? One of the—

Paul

Neiffer: the other thing I want to say is if we are looking forward at 2022 and, and we have concerns there and we're nervous about that and we're nervous about profitability, etc., all justified, then doesn't that make the profit that's offered in '21 that's right there for the taking—

Chris

Barron: doesn't that— especially once you know your yields—

Paul

Neiffer: yeah, doesn't that make it even more compelling to capture that? I think it does. So, right, you know, you want to look at them separate, but maybe you want to look at it somewhat jointly that you're saying, I'm taking this money that's offered in '21 because it's right there, right? I don't want to give that up because I might need that for profitability that'll be in '22.

Duane

Lowry: That creates that excess working capital to cover those extra, extra costs.

Chris

Barron: Yeah. One other thing I want to ask Duane that I've asked some other people over the last, you know, several months is that if you think about where the market is, and it's, it's a strong market, you know, it's It's ebb and flowed a little bit here, but I mean, the margins are huge right now with all— with most operations. And so when we look at that, how much risk do you think is out there of that going away? Because almost every analyst I hear or talk to, they're not that concerned. They don't— nobody appears to be that concerned that we, that we've got a lot of risk on the table. And this is my final question, and, and You know, how— what, what are those things out there that as farmers we need to pay attention to, that we need to be concerned about, that we need to be making sure we're pulling the trigger on? Or is there anything—

Paul

Neiffer: well, if that's a track record from your last podcast, I'm about to alter that track record. The risk to the downside is there. We all know it. We've all lived it. We've all experienced times where we thought things were good only to be blindsided. We can look at things from a historical perspective in the recent 10-year history and say, okay, you got to be honest, there's downside risk here. If I were to quantify it, I would say that there's risk of $4.25 or $4.50 Dec corn or just spot corn in general. That kind of risk is, is, is significant. Why would that happen? Because the market is inflated and pumped up with several factors that are not givens, not guarantees. Number one, they're pumped up on inflation. Now we know we have inflation. But inflation in the market is not based on real inflation, the cost that you experience in your own life.

It is based on speculators' expectations of where that inflation level will be somewhere down the road. The boat's been loaded for many months on that speculation that inflation would be here. But again, if you look at agricultural prices, a lot of them topped in, in that April-May time frame, and they did not respond to all these inputs that we've already talked about that occurred this summer, and they actually underperformed. So now you have a situation where the, the speculator community is long for that for one reason. They may still be carryover longs based on the idea that yields this year are not what USDA says. That may still exist. They are certainly been long and bullish because of high expectations for demand for, from China to continue.

And like I say, there are many people far smarter than myself more connected than myself that are expressing concerns that have really just surfaced in the last few weeks about what China's future demand may hold. And then of course, you got South America that the marketplace has a bias to think that, hey, they might have a problem, but I don't think they're giving any weight to the fact that they might not have much of a problem. Right. So there are factors you can look at that would cause some, some concern. And I think it's important to note that the world in general is right now is kind of a chaotic situation, whether it's political unrest, social unrest, whether it's weather, it's crop, it's high inflation. This is a lot of stress on governments and societies. And we've seen China push back trying to drive energy prices down.

We know they've bought a lot of grain inventory in the last 18 months. They're in a better position now than they were 18 months ago. If they just happen to go slow with their purchases and appear to not going to meet what we expect them, the marketplace will react to that negatively. If they turn out sometime later and do buy it, maybe the market recovers, but we got to be concerned about how the market reacts. And I think that is a concern that is not getting enough.

Chris

Barron: And in the meantime, think about your individual cash flow and when the revenue has to come in and that kind of thing too.

Paul

Neiffer: I, I think that there's, uh, we just saw— this is not super related to grains, but yet it is— the junk bond market in China, um, has gone up sharply because they have one large, uh, property company that is, that's basically bankrupt for all practical purposes. But their junk bond rate went up to the— and exceeded the levels that it was at in early 2020 when we had the pandemic panic occur. And then China stepped in with liquidity and, and, and helped to lower those rates again. But what are they going to do this time? And then what's the chances that that melts over? To put in perspective, that property management company in China that is, is, uh, basically defaulting, they are significantly larger than what the Lehman crash was and their fault default was in 2008.

So We have to remember things like that can suddenly mushroom, take on their own, their life, and they spread out and impact other things. And then people, speculators, react emotionally and they just want out. And we are in the time frame of the year from here forward where that type of crowd is more interested in getting out of positions and protecting whatever money they made in, in calendar year '21 than they are interested in new positions, right?

Chris

Barron: So, so that's another threat.

Paul

Neiffer: There's a, there's a— I can Sit there all day and give you crap.

Duane

Lowry: Right. Yeah. And the speculators, they're not short. They're still a little bit long. So that's not putting a floor, that's putting a little bit of a ceiling.

Paul

Neiffer: And the farmer is not short. I don't think, I think he has sold less than he normally would have.

Chris

Barron: Well, there's a lot of room to hold stuff. I mean, elevators are—

Duane

Lowry: And a lot of them feel burnt from last year 'cause we sold too soon, including the people here at this table. Yeah. Weird. Yeah. Yeah.

Paul

Neiffer: So, you know, we remember what recently happened and we want to avoid that problem and we choose not to look at it from a bigger picture perspective. And so the setup here is really set up for a disaster, okay? Maybe not a long-term disaster or long-lasting, but certainly a period of time where it could be a lot worse than it feels today.

Chris

Barron: Okay, well, any other final comments from either of the two experts here that we got sitting across the table?

Duane

Lowry: Not on that cheerful note. I don't have anything, so.

Chris

Barron: Any positive thing you want to end with, Dwayne?

Paul

Neiffer: I think agriculture's future is bright, and I think that the positive thing is opportunities are right here and now.

Chris

Barron: How many months? For '22 and '21.

Paul

Neiffer: And '21. How many years at this time or at other times where we were hoping and praying that something down the road would create an opportunity, or how can we, you know, capture a little bit of carry and how can we try to make that profit? It's right here.

Chris

Barron: So that, right, that opportunity is here by expressing concern about what could happen.

Paul

Neiffer: The— don't neglect to realize the other part of that picture that is also visible is the prophets exist right now. You don't have to experience that concern. You can capture it all.

Chris

Barron: Yeah. And on that note, that's a, that's a positive note, right?

Duane

Lowry: That's a positive.

Chris

Barron: Yes. Okay.

Paul

Neiffer: I feel bad that I have to say that's a positive note.

Chris

Barron: Yeah. Well, well, we'll, we'll pause it there for now and, and Again, thanks a lot, Dewayne Lowery and Paul Niefer. Really appreciate you guys both being here and great conversation, and we'll be back bugging both you guys again soon, I'm sure.

Duane

Lowry: Sounds good, Chris.

Chris

Barron: Thanks. All right, and I'd like to thank everybody, and again, everybody stay safe out there with harvest rolling. Get your sleep, eat healthy, and be careful out there, and we want you back again next week. And so we'll talk to everybody again soon. Catch you Next time on the Aggie Pitch.