Micro and macro market management - weekly market outlook: September 19-23rd

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 a new marketing week, the 19th through the 23rd. Of September, that third week of the month as we get headed towards harvest. And we are lucky enough to have with us Clark Neighbors. Clark, how's it going?

Clark

Neighbors: I'm very good, Chris. How's your morning going?

Chris

Barron: Ah, it's going— anyway, it's going good. Just, uh, hadn't had— we haven't had been lucky enough to have you on for a while, and, and I got to thinking, and as I just told you offline, it's like, okay, we're about to harvest Clark is one of the guys that really a lot of times has a pretty good pulse on what's going on in the industry, especially when it comes to the end users and some of the things they're looking at. So we'll get to that in a minute, but kind of wanted to start out with you for a second here on a couple of things. I guess first of all, let's rewind, look back to last week, the beginning of the week. We had that USDA report. Was there anything that you took away from that that we still need to be paying attention to as we look forward here, uh, heading towards harvest?

Clark

Neighbors: Yeah, that's a good question, Chris. So last Monday with USDA report, I think it was—

Chris

Barron: I'll have you speak up just a little bit there too, Clark, just make sure.

Clark

Neighbors: Sure, are we better there? Yep. Um, uh, I think a couple things jumped out of that report. Number one is the B number, uh, from a production standpoint. Was a fairly big surprise to the entire industry to some degree versus expectations, not only with 1 bushel drop in yield, but also the drop in the planted and harvested acres. I believe I saw that it was the biggest miss on production on the September report ever based on what the trade guess was. So it changes the dynamics when you have a 200 million bushel carryout on beans. There's not a lot of— pretty close to pipeline. So it does give the dynamic that it puts much more emphasis or attention on the southern hemisphere, the South American production through the, the winter and next spring. So it's going to be interesting to watch. So I think the report changed the dynamic of the outlook of the beans.

Prior to that, I think there was a little more optimism On the corn versus the beans, I should phrase it that way, in general the corn numbers were in a roundabout way pretty neutral coming into that report and coming out. Now since the report, I think at 11 o'clock on Monday when the report came out, no beans were trading roughly $14.20. We closed last week this last Friday at $14.48. We made a run above $15 during that window on Tuesday, um, and then corn, we've kind of slipped off those highs from earlier in the week, but I think this is the second highest prices we've ever had on Nov beans and December corn this time of year going into harvest. So these are still very, very solid striking numbers. And I think the report adds a lot to the stability, barring anything strange happen, as far as supporting these markets going forward.

Uh, very little carry in the markets, uh, on corn or beans, either one, which adds to the dilemma. And we can talk about that a little bit on the cash markets, but as far as carrying these inventories, whether it's in a farm bin or in a grain elevator, uh, once it's harvested going forward through the year,— and it becomes a situation of what's the basis opportunity going forward depending on what market you're looking at.

Chris

Barron: Well, yeah, with that said, you know, we'll kind of address that here in a minute. You know, as you look, there's a little bit of early harvest activity going on in a few places. It tends to be the places where they were super dry and maybe didn't have as— weren't blessed with as much rain as they would have liked to have had or whatever, and some of that early harvest getting going. I've heard some mixed mixed reviews, a lot of variability in some of those areas. Have you heard much or anything?

Clark

Neighbors: I would echo the same thing you just said. I would say harvest activity is, except in those dry areas you mentioned, fairly muted so far. I know there's some areas in central southern Illinois, we do a lot of work with some customers in that area, that have done very little so far. I mean, some, but very little. They're usually 7 to 10, if not 2 weeks into harvest on this weekend, typically. Not ready to go yet. The corn's fairly wet. It gives you the impression in those areas, especially where the crop's probably pretty good, crop's finishing well. So I think that'll be interesting when we start hearing yield numbers coming out of those regions. They could be pretty, pretty good, possibly. So we'll see.

And the only other thing I would add to that, Chris, is except in those really dry areas that, you know, were limited on rain and the droughts and so on, I think the only reason you're seeing much activity in other areas is trying to capture some of this late or spot basis premium whether it's into a processor or into some other markets where there's just a pipeline that's right now pretty darn empty and waiting for that new crop to fill that. So if a producer is in one of those areas, they have to do a little calculation on, all right, how much is the premium? How much more is it going to cost me to dry this? Keep in mind those basis levels are on a slippery slope right now. Cedar Rapids, for example, here in eastern Iowa, early in the week I think corn basis for spot was something north of a dollar over.

I haven't heard of the updates for Friday afternoon, but I know Friday morning we're about 50 over, so you're starting to see that premium dissipate as these end users get close to harvest, which is, which is common, but we've seen some crazy numbers.

Chris

Barron: A lot of times in some areas what you see though too is is you get that first dip and then, and then it comes back some and then you get another one and usually that second one's a little steeper than the first one. But you know, you get that early harvest, those guys go out and pick that 100 acres or that couple of farms or whatever or the areas that, that were hurt, bring some grain in and then there's like a lull and there's an opportunity basis-wise there. And then the other basis opportunity we see a lot of times or we've seen a lot with a lot of our clients is if you're willing to deliver, you know, if you know you got to do some fall deliveries and you can deliver when everybody's combining beans, and, and that, you know, that's always fun, you know, trying to figure out the labor piece of that.

But if you can figure that out, there's usually some opportunities in those two windows as well. I would say it's kind of what you see too.

Clark

Neighbors: Yes. Yeah, I'd say that's very, uh, very accurate. Um, if you're in a pocket where you have these really impressive spot values. Keep in mind, here today, gone tomorrow. You know, we may see some ebb and flow in this basis, but the risky part is a break in the near part, near term. But all in all, Chris, though, I mean, you could say, and we've talked here in the office and I've talked with several customers, this year's setting up a lot like last year right now, where there's not a lot of carry in the market and the cash markets seem pretty firm, basis opportunities could be really good in certain areas this year. The one thing that I think is sharply contrasting to a year ago is the tail that wags the dog as far as the short areas of supplies are more in the fringes.

It's the Southern Plains, it's the poultry areas in the, the Delta of the Southern Midwest like Arkansas, it's the poultry and pork areas in the Southeast. And all of those regions are dependent on the railroad to deliver that product. So considering the potential of the rail strike last week, considering the, to some degree, lack of execution by the railroads over the last year plus, it's going to make it a really interesting year. A good customer, a good contact in Kansas was telling me this week, if you add the Nebraska, Kansas, Oklahoma, Texas, Colorado production levels and compare to a year ago, corn's down in those 5 states 400 million bushels versus a year ago. Milo's down roughly 200 million bushels versus a year ago. Not that you need to replace all those bushels in those feeding areas, but that would equate to about 1,700 100-car trains to fill that hole, theoretically.

So those are the areas that are gonna be interesting to watch. So BN Railroad shippers go into that area heavily. At the same point, going to the Southeast, we're going to presumably see some of the same situation. So, rail is going to be a really interesting area to watch this year on A) values, B) execution, and the bottom line is a story like that is a good example of how you ration demand because if you're in cattle country feeding $8 corn, how long do you want to do that, right? So, we'll see how that all plays out.

Chris

Barron: Yeah, there's two sides of that story. The other side of it too is, you know, that, that does, you know, kind of give some basis strength though too, I would think, doesn't it? If, if, you know, it's, it's sucking corn out of certain areas, it does still give you some level of support to a degree.

Clark

Neighbors: Oh, absolutely, because everybody's gonna be, you know, that the areas that are going to have to feed those regions are the rail shippers in Iowa and Illinois typically. So That means they have to compete with the ethanol plants and the processors in the river, uh, in this part of the world.

Chris

Barron: It starts to give you some reminiscence of last year a little bit, like you said.

Clark

Neighbors: Correct. Yep.

Chris

Barron: So, um, a couple of other things, several other things, but I guess next is, you know, um, as you look at the, at the harvest activity and as, as people get going, you know, one of the things that You see, some operations will be like, you know, I'm going to harvest and I'm going to get the bins full, then I'm going to see how much overrun I got, then I'm going to deliver that. What you're saying here is code for figure out what you think your yield is, haul the bushels out on the front end when the basis is better, or get that locked in, get that figured out on the front end. And then if you end up— if you're going to err on one side or the other, err on the side of having the bins you know, 10% or 20% away from being full at the end of harvest, push that stuff out because the processor wants it now. Am I reading what you just said?

Is that code for what I just said, or is that kind of the play you would look at? And then secondly, that space, are you using that space for soybeans or corn if there is some space at the end there or whatever, you know? Are you moving those extra bushels out as soybeans or moving those extra bushels out as corn at this point?

Clark

Neighbors: Great question. I'm not sure there's a correct answer, but I think, yeah, I think if you have the opportunity to capture the early basis, especially on corn before you get into quote-unquote gut slot harvest and are able to take advantage of that and execute, that's the obvious answer. Once you get into harvest, whether to, you know, leave excess space at the end and/or Is it preferential to store corn or beans? I think that's somewhat of a fluid situation. You let the market kind of decide or tell you, all right, which one's given me the best carry, which one has the most premium. I think, I think the answer to that, if I were to guess, would be how are bean premiums during bean harvest, and if those values are attractive, it's probably worthwhile to move beans at that time and then save that extra space for corn later.

If it's kind of a flip of the coin, and again it's going to determine what kind of carry you have, say, in the market, and I'm just going to throw October 15th out there as kind of the middle of harvest.

Chris

Barron: Might be the beginning of harvest in some areas. The area I'm in, we're not going to get going very quick.

Clark

Neighbors: Good point. Good point. All right, so maybe the 15th through the 1st of November, whatever that number might be. Yeah, but, uh, the later you drag that harvest on though, the harder it is to fill the pipeline, right?

Chris

Barron: Uh, which, which happened some last year.

Clark

Neighbors: A little, you know, give a little tail to the, uh, to the, to the basis levels as you get into harvest. Historically, I would always say 15 out of 20 years, your best basis gain on beans is about the 15th of October until about Thanksgiving. So I always like to have that in the back of my mind is if I have extra beans and I have the, uh, say, bin space filled at home, do some calculation on what storage rates are at the commercial elevator and it's worthwhile to pay storage to try to pick up that extra basis premium in town, I would lean towards the beans on kind of a short-term window with that in mind. And again, that's just kind of that window where historically that's been the case.

I can't say that's been as consistent the last 2 or 3 years because basis has just been pretty solid going through, and when you get what's presumed to be a 200 million carryout of beans, I'm guessing we're not going to see a lot of carry in the beans. I'm guessing right now the market's saying we're going to not have a ton of carry in the corn either. I think carries that may be put in this market, and when I'm talking about carries, forward carries, what we get in the next 30 days might be the carries we get for the balance of the year. So, key is if the bushels go in the bin, you know, is basis going to offset the cost of money, which is getting more all the time with interest rates higher. The guys are going to want to calculate of what do I need to return on this basis over the next 2 months, 3 months, 4 months, you know, however long they're wanting to hold some of that inventory.

Kind of keep— the cost of money is a different ballgame today than it was a year ago or 3 years ago with the value of the product is twice as high and interest rates now at values that are quite a bit higher than they were Just recently too.

Chris

Barron: Yeah, I have a tool in, in Profit Manager that we use with our clients that calculates the cost of carry. You know, we always talk about like, you know, capturing carry. Well, you— what you just described is looking at the cost of carry. And in that calculator, you basically put your bushels in at whatever the current price is, and it'll show you a per-day cost, a per-month cost, and an annual cost. And when you start looking at that per-day cost, it starts making you scratch your head and look in the mirror and go, uh, maybe I should make some sales here, you know, when you start looking at it from that perspective.

With that said, hit a little bit on, you know, what you're seeing with some of the macroeconomics, you know, whether it's interest rates, inflation, the Fed, just, you know, are we going into recession, you know, just kind of talk a little bit on kind of what your crystal ball is showing, uh as we head into the next several weeks and months from a macro perspective.

Clark

Neighbors: Yeah, and I think our markets have been more— how do I want to say— sensitive to the macro environment of late than we've seen in the past. And, you know, the inflation story is alive and well. We saw that with the CPI when it came out Tuesday., and the reflection of the stock market on that. The bottom line is the market was jolted, saying we still have inflation. The Fed is going to have to, in people's eyes, or the market's saying, the Fed is going to have to continue to be diligent or aggressive in raising interest rates until inflation is dissipated. There's arguments whether that's a lagging indicator, or does the Fed go too aggressively? I mean, you have a lot of debate on both ends. But the Fed's made it pretty apparent they're going to be aggressive with interest rates until inflation becomes less of an issue. So keep in mind, this coming week the Fed meets midweek.

The market's anticipating, I guess right now, 3/4 of a point increase in interest rates. That's pretty well priced into the market. Question is, going forward, how much more do we see? And the So inflation's alive and well. What does that all mean for commodities? And, you know, I think the general thing, and something that came out late in the week, was I think Thursday evening, FedEx came out with quarterly earnings that missed by a mile, and the stock dropped about 40 points, or not quite 25% of the stock value. And the significance of that is that's a major worldwide transportation company. If you go back 15 years ago when Alan Greenspan was Fed Chairman, he supposedly used FedEx as one of his benchmark companies to give you a barometer of what's going on in the world.

So with FedEx and that kind of a, or performance, is that an indicator of, you know, what's going on in China, or the lack thereof, because of their no-COVID policy and their shutdowns, and, you know, growth has slowed? Is it an indication that Europe's having issues based on higher energy costs and the reflection? So you can make a strong argument those two regions, if not in a recession right now, are going to be in one, if you want to tie it in together. The question then going forward is, do we see some of that come into the U.S. markets? Do we see a slowdown? And there's some indications that we are. So the bottom line is we're seeing some pressure in the stock market, and if you get into recession, it tends to have headwinds on all products, you know.

Maybe the ag products are the least affected to some degree because they're less sensitive to recessionary things because people need to eat, but at the same point, this macro environment's a little concerning. Hopefully it doesn't get any worse. Hopefully if we do go into recession, it's mild. But however you want to look at it, I think right now the macro side's kind of a headwind into these markets a little bit that are on their own, you know, supply and demand and fundamentals, especially on the grain side, are still fairly tight. Those macros may limit the upside to some degree. We'll see.

Chris

Barron: So last area of discussion I want to hit on here while I've got you on here is around the idea of 2023, and I'm going to start with inputs. As you look at inputs and as we've seen them, we've, we've put together a pretty significant amount of 2023 cash flow projections, you know, getting kind of figuring out what that crop rotation is going to look like for '23, putting together, okay, based on fertilizer and seed and all these things, we've got a pretty good handle on, you know, there's still some inflationary activity going on that's pushing the inputs that we as farmers are all going to have to lay out there going into '23. With that said, and then also with you saying, okay, there's some headwinds here from a macro perspective, namely, and you can address this if you need to, but is the funds.

I mean, what's the, you know, what's the desire of, you know, that outside money to come in? And we need that to keep strong prices and to give us the the lift that we want. If we, if we want to move higher from where we're at, probably there needs to be some sort of news or something. So with those, those two components that are sort of headwinds from a margin perspective, which I always want to get to, and we look at 2023 currently right now with where these prices are at, and we plug in numbers for the, the most of our producers, there's still, you know, 10, 15%, in some cases a higher percentage than that, of a margin opportunity What's your thought on 2023 in terms of, you know, getting some things marketed, or are you more patient, or what kind of conversations are you having with your clients?

Clark

Neighbors: I typically like to look at the calendar and say right here, right now, it probably is not a bad idea to have, you know, 10% locked in on grains, 15, 20. I don't know if I'd go any further than that. Having said that though, Chris, and a lot of, a lot of the information you just talked about as far as input costs and all that, I think there's much more risk on that than we typically see going forward. So I think that creates a situation where you may have to be a touch more progressive either on the calendar and/or percentages. A little quicker or, and or earlier this year versus waiting till maybe the calendar flips over to 2023. And what I mean by that, maybe you're 5 or 10% further along on sales, a little more aggressive locking in input costs and so on, especially if you know you have a margin that you just mentioned.

So I think I think I would be— to answer your question, I would be a little more aggressive having some in place and/or a little bigger percentage than I typically do this time of year if I'm a producer that likes locking in some of the crop early along with inputs. Because you look right now and the tail that wags the dog on all that stuff, the energy costs, right? And that tends to— be where the outside money influence focuses. And it's interesting right now, because of some of the macro headwinds we've been discussing, that could be some of the reason where arguably you could say crude's only $85 right now, considering what's going on in the world, should it be higher than that? Uh, the United States has talked about buying crude to put back in the strategic reserve that they've pulled out of for the last 3 or 4 months.

If crude gets down around $80, that seems to me that's a put for the market. So do energy costs get much cheaper? And if the answer to that is no, or not very much, to me that means input costs are going to have a very difficult time going lower. Then you throw natural gas into the mix, which— is so dependent on what's going on in Europe and the production of products in that part of the world. And I think that could have a major influence on, again, the difficulty of backing off on input costs very much. So the risk of a situation with the pipelines over there and/or a colder winter pick your poison, the chances of input costs getting cheaper next spring, not to say they can't, but odds are it's going to be more difficult than normal. So again, I think that ties in with having a little more inventory in place, etc., etc.

The other side is, you know, on the selling situation with the '23 crop, if we do run into a little bit of a macro situation and the markets reflect that, um, you know, do we see some— I don't think it's significant because I think the fundamentals are too tight, but do we see some softening of prices because of that? We could. So that ties in with that situation because I feel, at least as we sit here today, the downside's fairly limited. I don't think you have to be super aggressive locking in '23 because the downside Again, as you sit here today, it's probably not significant, but at the same point, if you got some margins like you were mentioning, it sure doesn't hurt to lock some of that in, especially with, you know, land values the way they are.

I mean, there's so many moving pieces, so many moving pieces right now that it's pretty important to have products in place that you guys specialize in to help, you know, kind of tie things together and make dollars and cents to the bottom line.

Chris

Barron: Yeah. Yeah, I'm just, I'm a fan of managing margins. I mean, I, it's, it's hard to predict pricing at all, and as you well know, and if you can kind of manage that, it's a kind of a win-win. I think, you know, we've got a lot of people locking in, booking, purchasing fertilizer and stuff, and what makes me feel warm and fuzzy is to do some one-to-one. You know, you buy $100,000 worth of fertilizer or whatever it is, and you write a check or you book it or whatever, you lock it in, you know, maybe lock in an equal dollar amount on the other side of the equation provided the margin is sufficient for what your desires are. And in many cases when we've ran the numbers, it's been, it's been sufficient. And, you know, is it, is it record-breaking? I don't know if it's record-breaking, but it's pretty darn good from what we typically see.

And, and you can lock it in And I think sometimes the problem is the fear of missing out, or FOMO, or whatever you call that. You know, sometimes we got to manage that, I guess, is one of the things that's always important for us to think about.

Clark

Neighbors: Yeah, very good advice. I wholeheartedly would agree with that. If you can lock it in and it makes sense, makes it a little easier to sleep at night too.

Chris

Barron: Yeah, yeah, sleep is important, that's for sure. So hey, really appreciate the conversation. I knew this would be a good one. And like I said, I really appreciate your expertise, especially this time of year with the information and the things that you pay attention to on bases and stuff. If somebody wants to get a hold of you and just kind of pick your brain or talk to you a little bit about your service and stuff, what's the best way to reach you?

Clark

Neighbors: Um, either way, Chris, they could call the office and talk to anybody in here in the office. It's 800-373- 25, 25. Website's biscommodities.com. Scroll down, catch an email address there of myself or somebody in the office. So yeah, either one of those are good alternatives as far as reaching out.

Chris

Barron: Awesome. Hey, really, Clark, really appreciate your time today. Thanks for all you do. Appreciate it.

Clark

Neighbors: Thanks, Chris. Happy harvest. Hope things go well.

Chris

Barron: Yeah, yeah, us too. And everybody be safe out there if you are getting rolling. And again, thanks to Clark Neighbors here, BIS Commodities. Give them a shout if you got some questions. And thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.

Clark

Neighbors: Did you see any action? Did you make any friends?