Where did the working capital go?

Chris

Barron: 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. Welcome everybody to another episode of the Ag View Pitch. We're heading into a new marketing week, uh, the actual week before Christmas, the 18th through the 23rd. Lots of stuff going on in the world. We've got Jared Creed with us to talk markets today. How's it going, Jared?

Jarod

Creed: It's going good. Had a good Thanksgiving. Christmas is already almost here, and I can't believe how fast the calendar is moving.

Chris

Barron: Yeah, it's going quick. Yeah, a lot of the, a lot of the guys in the East and the areas where they had lots of yields, lots of bushels, wet corn, and trying to get rid of it all are finally starting to get things kind of wrapped up. And, and so that's good. A lot of, a lot of grain around, a lot of, a lot of inventory. And some things to think about for '24. We're going to start '24 and then we'll go backwards. But talk a little bit about what you're seeing, what you're thinking, and some of the things that we need to be as producers managing and thinking about here in the next few weeks.

Jarod

Creed: Yeah, just real quickly, I want to start with soybeans for just a moment and thinking about what the market's doing, the signals that are possibly being sent to us. Believe it or not, soybeans, they're rangebound at about a $1.50 range, $12.50 to $14.. And we've been unable to spend any time outside of that range. You can think about South America all you want. That's, that's as good a guess for anybody at this point. It's a huge, huge area. It's gonna be a while before we really understand if there's any type of massive impacts, good or bad, to unfold. But on the corn side, you know, you think beans have been steady for the most part, corn's just been a— it's just been flat, just not moving anywhere. We've had 17 weeks on next year's corn crop that the market has traded between $5 and $5.20. Those 17 weeks are 17 weeks consecutive, just very, very methodical.

On the old crop side, you would make an argument that we've been mostly steady to sideways with maybe just a small, small undertone of leaking a little bit lower. You know, one thing just to mention, just a few days ago, we had last trading day for December corn. Last trade was $4.56. In big carry markets, the historical tendency is that the next contract month ends up gravitating towards where that last contract expired. So at that point in time, you'd argue that we might have 20, 25 cents of downside in March corn over the course of the next 3 months. So when you look at things into next year with how quiet the markets are, especially in December corn, um, Things are at risk here for a lot of farms coming to basically the ultimate decision or the ultimate outcome really depends on what is that corn price going to be 12 months from now.

I know plenty of farms cannot afford and withstand a move from $5 to $4.50 to $4 without significant amount of financial damage to be done. I know on the other side, if we do go from $5 to $5.50 to $6, it's okay. And that's actually what we would like to have happen, even if we leave a little bit of money on the table for next year's corn crop. Because now we're talking about extending this run that we've had in agriculture out for another 2 years. And I'm not so sure that you shouldn't be focusing on that for the most part, that if we all of a sudden have this 6 or 7 year boom, You've never had that before. And I'm not talking about just modest incomes. I'm talking about really, really good incomes. With some farms, 2023 is going to end up proving to be a little challenging. You know, cost of production is not going as low as what I would hope to see it do for next year.

And that's across our client base, not speaking for everybody. But just knowing that, Chris, at the end of the day, you know, assume you're assume you weren't doing anything from a risk management standpoint, and all you're doing is procuring all these inputs. And all of a sudden you wake up 6 months down the road, you got a bunch of unsold inventory in a bin, paying 9% interest, and next year's corn is $4. It's not a good feeling. And it's not a good situation financially. A lot of the bank conversations that we have had here recently, banks are echoing that. Farmers not as quick to answer that phone as what they have been in the last couple of years for renewal season. And you know, where there's smoke, there's fire. Hopefully your listeners are not in that camp.

But it's time from both an old crop and a new crop perspective to really think about what you can actually withstand from any type of downside price action versus the opportunities that you possibly miss out on the upside. And I challenge anybody, there's just nothing in the market today to really drive a solid decision that corn should go one direction or another in a meaningful fashion anytime soon. End of January quarterly stocks report, final production. That's probably the first big needle mover that we need to watch for.

Chris

Barron: So what's your suggestion to stay with the '24 for a minute? Yeah. So what, what, what are some of the things that people need to be thinking about as some strategies?

Jarod

Creed: You know, maybe one consideration, there's not a one-size-fits-all strategy necessarily, but, you know, corn had set a 24-month low in implied volatility this last week. And you can't argue with that. That is, that is a factual value of price insurance. Nobody's concerned about the market moving higher or lower. But you take a look at it next year and still see next year's corn being above $5, spending all this time between $5 and $5.20, almost lulling us to sleep. That I can actually come up with a lot of valid reasons that several producers should be 60 to 75, 80% hedged out on next year's crop. And I'm not a big believer in talking about you need to be this certain percentage sold. This belief is based upon what type of price coverage you can achieve given the low implied volatility.

Basically meaning price insurance cheap, you get cheap relative to where it's been, you can make substantial amount of sales and cover portions of those sales for a very modest value on $5 corn, that if we do go from $5 to $4, the option premiums that you spent money on is going to be the last of your concerns. On the flip side, if we go to $5 to $6, great, you're still in the market. Now you got more decisions to make to continue to market that crop. So again, implied volatility cheap. If there's one thing to take away from that too, should add, if market stays somewhat steady between now and the February insurance average and implied volatility doesn't do anything silly, you know, our insurance premiums for next year should be substantially cheaper than what we've seen the last couple of years with a, with a lot lower coverage level. Oh yeah, there's a problem in itself.

If your insurance price is $5, what's 80% of $5? $4. Right. That means that if corn is $4 and you yield your APH, you got nothing to come from your insurance and you just watch the price decline by 20%.

Chris

Barron: Yeah, that's where I think, you know, paying attention to what you said there and trying to figure out, you know, where these breakevens at, getting that cost of production dialed in and kind of coming up with a reasonable margin target. And, well, I want to wrap up with some of that conversation. But before we do, there's kind of 3 things. The first thing was the 2024 opportunities, thinking through some of the things there to kind of manage that. The next one I want to hit on of the 3 things, number 2, is there's a lot of bushels sitting out here of '23 crop. And there's a lot of people in various stages of that situation. Some had marketed quite a bit, some not so much, some out yielded significantly more than they thought. So they have the extra bushels. In a lot of cases, I think there's a lot of producers out there that just feel like they didn't sell enough.

What, what do you say about managing those bushels? How patient do you be? Do you sit on them for a bit? Do you, do you every time you see a little bit of rally, do you just keep plugging sales in? Talk a little bit about what some strategies might be there.

Jarod

Creed: I'm gonna chuckle here just a little bit, Chris, that what I'm about to say, if any of the listeners come to Florida, or excuse me, Arizona.

Chris

Barron: Arizona.

Jarod

Creed: Yeah. For the meeting out in January, they might give me a stink eye here. You got to ask yourself a question. If I'm sitting on a whole bunch of unsold inventory after what the market has presented for the last 2 years, was it because I didn't understand what type of abilities I had to go about my marketing strategy from insurance and such, or was it based upon opium of the market going higher? Because both of those are just as dangerous, and not one comes more important than the other.

Chris

Barron: Or, or I had enough money.

Jarod

Creed: Well, we know the fact is that you were talking about top 3, top 4 margin opportunities on a farm ever, and we passed up on it. So it's like your listeners again, I'm hopeful that it doesn't apply to them. If you're sitting there thinking that, oh God, he is talking about me, find me. Let's talk about that. You have to understand what you have at your disposal And now the game has changed again, that we have to be realistic with ourselves. I can't make these decisions based upon what I think the market is going to do. I have to react to what the market opportunities are right in front of me today, to make sure that my farm moves forward in the right direction next year. And again, I think we are on a precipice, I am seeing land deals come up multiple times a day, multiple times a day, I'm fielding calls about I can rent this, I can buy this in multiple different states.

And it's because people are getting pinched. It's not all from just people stepping away from farming, there's people getting pinched. And you don't want to find yourself being one of those because again, we're on that precipice. If we go from 5 to 4, or if we go from 13 to 10, I don't know if I have the strong conviction on beans. I just know that a 10 to 20% drop in the corn market from present day recording this, we are looking at a repeat of 2014, '15, '16 tough farm financials. And throw on top of that 8 to 9% interest currently with, yeah, the hope that interest rates are going to come lower over the next 12 to 18 months., but they're not going to go from 9 to 5. We're still going to be left holding the bag on high input costs and higher than what we've been accustomed to interest rates. And that eats a guy alive in a hurry.

Chris

Barron: Yeah. So this is, this is supposed to be the weekly market outlook, but I want to go a little different direction with you for a minute here to finish up the conversation, to talk a little bit about what you just said. You know, the lenders are all of a sudden, at least in my experience, and it sounds like you've had some of these similar conversations, are really starting to become fairly concerned really quick. And it has to do with where is the money? Where is the working capital going? Where has it gone? I've talked to a number of producers that do a great job of marketing, and the working capital is gone. You know, I mean, that part of it's spending, part of it's, part of it's marketing, part of it's yield, part of it's insurance levels, part of it's where they ended up yielding. You know, they yielded their APH, they sold decent but maybe not enough.

And then conversely, on the other side, you know, there's those who are going to yield their way out of a potential catastrophe that had really good yields. That have those excess bushels that they could just go ahead and dump on the market at $4.60 or whatever the cash price is and call it a day and still going to be okay. But I think there's going to be a lot of working capital situations coming off of 2023. What are you seeing? Let's talk about that for a minute. And the loan renewals that you brought up.

Jarod

Creed: I think there's 3 different buckets, Chris. The first, the good one, is if an individual saw actually their net worth go up a tad. And their working capital stayed somewhat steady. And they were also acquiring land through the year, obviously down payments on land, cash purchases, whatever. It's going to eat up working capital. Working capital going backwards is not always bad. Just depends why it did. And then there's another bucket that maybe a guy staying steady on a land mass, not adding additional expense from an acre perspective, and their working capital really didn't move much and their net worth didn't move much. I'm going to assume that that was a result of pretty good marketing and an okay crop. Right. But that is pretty good marketing and okay crop is historically like, man, that's where I really want to be, right?

That's what, that's what's going to keep me in the business long term. So props to the first two. But if there's situations out there that there wasn't land growth, and even worse, land reduction. And working capital goes backwards. It's the, it's the verdict of holding on possibly to too much of last year's crop for too long. It's the verdict of having the most expensive crop that we've ever planted in the 2023 crop year, and dried up government funding from all these various buckets. And a $1.50 drop in the corn price. All when these budgets were put together to grow this year's crop. And I think there was probably fear in the streets of Mother Nature doing XYZ. That kind of goes back to understanding crop insurance and what type of revenue you need on the farm. We talked about that so many times I've lost track. But none of that has to do with market opinion.

And I think market opinion might be— market opinion and greed might be the result of the largest drop in working capital and net worth that we see year on year. And you just don't want to find yourself in a situation where all of a sudden your lending capacity at the bank is impacted because you don't have the equity that you need to borrow the amount of money that you need to plant a crop. That's when all of a sudden, the bells and whistles and red alarms start going off. And I'll echo exactly what you said, there are operations that are probably already not going to make it out of what just happened in the last 18 months. Not all from bad decisions. Just maybe a combination of different things. But Well, I'll tell you a real example.

We got a lot of guys who are going to gross $1,300 to $1,400 an acre revenue in their corn crop, lost money on beans, just okay yields are not good enough yields, I should say, okay prices. And, you know, their working capital is going to stay steady at best. They might have bought a little bit of land. But when you're grossing $1,300, $1,400 an acre in corn from sales, hedges, insurance, so on and so on. And you don't move forward, telling you those are real numbers. So I hope you don't find yourself sitting across the table from the bank and all of a sudden seeing, whoops, I just went backwards $200 an acre of working capital. I think it's going to do a lot.

Chris

Barron: I think the big one that you mentioned is the spending. What we've tended to see during cycles of good times is the spending you know, you update some equipment, you update some things, maybe you buy that 80 acres that did come up, that's close enough, or it's beside your whatever, and you pay too much, or too much for now anyway. You know, it's probably in the long haul, if you can, if you can make it work, it's probably okay. But the reality of it is, I guess, just getting to the point, I think spending is a big chunk of that. A lot of our clients, and probably the same thing with yours, a lot of them did a pretty good job of marketing. I mean, none of us do perfect, but did a really good job of getting a lot of those bushels gone.

And, you know, but I think those who didn't, you know, back to your, your several reasons for that, the weather, not understanding insurance, some of those things. I think the other one too, just to tack on to what you're saying is that, you know, we have with a few years where people got rewarded for doing nothing. And so we were continuing to do nothing. And that's— that worked for 2 years, sort of. But that, you know, 8 out of 10 years, 9 out of 10 years, that doesn't work, you know. And I think we got to recalibrate now. And I don't know if you had any other comments on that. I just kind of wanted to wrap up the conversation around, you know, we're going to— we're going to all be having some interesting conversations with lenders and the balance sheet is going to tell us and earned equity is going to tell us how we did.

Jarod

Creed: Yeah, I think we kind of closed with the same comment last time, Chris, but right now I just think it's the job of the, especially the row crop producer, to defend the money that created in the last couple years. We're not on offense because I don't think we can afford to be on offense right now until something probably in the market actually pushes profitability to a level to let a guy be on the offense for a moment. And again, that's not a market opinion. I just— back to the implied volatility piece, it's staring us all in the face. We have guys who— a wide array that are comfortable being 20 to 30% marketed on next year's crop to several who are 100% sold for next year. And and have been for a while, not market opinion. Once again, I just shared 17 weeks consecutive we've been between 5 and 5.20.

It's not like we've had some brilliant marketing strategy roll out to make all those decisions. What was happening is getting awareness of what our cost is going to be and what type of situations unfold over the next 12 months. That was more important to their bottom line to make sure they're going to take a step forward no matter what. Everybody's situation is different. Everybody wants to make a different amount of money. But sometimes what we want and what we need is wildly different.

Chris

Barron: Yeah, sometimes, like you said, you have to defend where your position instead of—

Jarod

Creed: and I think that catches the masses. And if there's one suggestion I had right now, I would be, I would be heavily dependent on having lots of conversations with the accountant and the banker now. If you don't do it typically for another 60, 90 days, I heavily, highly encourage you to do that sooner rather than later, if possible, to at least start getting some projections. Because that's a— that's— I think you and I share the same pet peeve of getting to the end of the year to deal with the banker and the accountant to find out how you did the last 12 months. Don't do that.

Chris

Barron: Yeah, for sure. Well, hey, I think this has been a great conversation, a little off target from just the markets, but I think these conversations are probably more important than market sentiment, all those kind of things. I mean, we have to be disciplined, we got to make decisions, we got to manage margins, and we got to stay in business. And sometimes it's, it's not all about offense, you got to play defense too. So I really like that message. So, uh, really appreciate your time today, Jared.

Jarod

Creed: You bet. See you in January.

Chris

Barron: Yeah, we'll see you in January in Phoenix, and we'll also, uh, have you back probably before that, uh, to kind of see how things are going. The beginning of January might be interesting. Hopefully there's might be some opportunities there to clean out that '23 inventory. So we'll have some conversations and see if we can price some more bushels out of our hands. So with that said, thanks, Jared.

Jarod

Creed: You bet.

Chris

Barron: All right. Thanks, everybody, for listening. We'll catch you again next time on the Ag View Pitch.