Pearson: This is the Friday, March 10, 2017 version of the Market Plus segment. Joining us now is Ted Seifried. Ted, welcome back.
Seifried: Thanks for having me.
Pearson: We are excited to have you. I did not get a chance to discuss the cotton market with you during the program. Dropped 70 cents on the week. Ted, where does she go from here?
Seifried: Yeah, we're running into some pretty stiff resistance. You look at the 80 mark for cotton. We've spent very little time over the 80 mark even in 2012 drought year. That is a formidable resistance and talking about USDA's baseline numbers, 11.5 million acres, that's a pretty sizeable increase year over year. While we have had that influx of Chinese demand, which we really needed and we're back to export levels that we haven't seen since 2010, 2011, you do think the bigger acreage going in, the prices have probably bought that acreage, maybe even slightly more. You would think now is a good time to cool this market off. So I think producers, cotton producers really need to be looking at hedges in here. And you might just be looking at the beginnings of that chart rolling over. And even if it's not I don't think we're too far away from, again, getting above that 80 level has proved to be a very tough thing to do. I'm not sure we have the fundamentals to do it and stay over it. So right in this neighborhood or if we go higher I'd sell it there too. But I think producers need to be looking for hedges in cotton right now.
Pearson: Six weeks ago 70 was the tough nut to crack and now we're 10 cents higher. Boy, it's tough to look a gift horse in the mouth when you get this kind of a price movement.
Seifried: Agreed. But realize historically that 80 number has been a very difficult number to stay above. So, again, even if we get through it briefly I think the likelihood of staying above it, it just isn't there. While I like the cotton fundamentals, I just don't think they're bullish enough to keep us at that elevated price that has historically been a big problem for us.
Pearson: Okay. So would you be hedging 100% if we get north of 80?
Seifried: For new crop without having an idea of what the weather is going to be like this growing season I don't think I'd ever go to 100%.
Seifried: Yeah, no I think 50 is a much more reasonable number, somewhere in that area.
Pearson: And then would you reown it if we do get that break back down into the low 70s?
Seifried: I think you can reown calls, it's not a bad idea. But I always have a hard time going from zero to 50 unless it's in a car.
Pearson: Then you have a hard time stopping at 50.
Seifried: Yeah, well there you go. But listen, I'm more of a -- I like to scale in and scale out of things. So to go from 0 to 50 to me just feels awkward.
Pearson: Even at historically high levels?
Seifried: I guess what I would say is that I would love to see guys add 50 but I would hope that it's not starting from zero.
Seifried: So yeah, I'd like to see guys at 50% right here basically.
Pearson: Okay. Awesome, thank you, Ted.
Pearson: Now we do have some great questions. It has been an eventful two weeks in the commodity trade, in the world of agriculture between the RFS rumors last week, the fires affecting Kansas, Oklahoma, we talked about it on the program. But geez, it's heartbreaking to see those images. Our first question comes from a little farther north. This comes from Paul in Minnesota. He's wondering, he's got a very long question. I'm going to summarize it for you here. 50/50 rotation corn and beans, how do you differentiate yourself? He says, how does the guy in Minnesota set himself apart versus the guys in the I states and the Dakotas who are on a straight corn and bean rotation? So I think Paul has got a little more flexibility. What would he be looking at this year to differentiate himself?
Seifried: Set apart as far as what now?
Pearson: Do you roll in hard red spring? Do you take some acres out of corn or beans? Look at something else?
Seifried: I think the interesting thing to do this year is to go more corn than beans and go against the grain. Because if we do have a weather issue and we've got more bean acres and we're able to absorb that better, especially with a massive South American crop, corn might be the darling, corn might be the one that has more upside potential if we had something like that. I like corn. I like wheat. I think wheat, unless everybody does the same thing and we end up planting a lot more wheat acres, but we're cutting acres out on wheat too. So you look at where the opportunities are, it's not always where everybody else thinks they are. Right now everybody thinks the opportunity is in beans. And, listen, based on where crop insurance levels are set and if you've been able to sell those prices and you're hedged at those prices we know we're going to be profitable on beans. So I understand why we're going to get more bean acres. But when it comes to trying to do something like that, trying to be savvy and trying to predict the future, I suppose, if I were going to take a risk I like the idea of going a little more corn heavy because that's against what the trend is. And, again, if we were to have a problem I think that means more upside potential for corn.
Pearson: Let me float this at you, have your cake and eat it too type scenario, plant more beans, sell more beans especially if we get to that $10, $10.21 level on the board. That's going to get you fairly close to $10 cash, $9.75 in a lot of places in Minnesota.
Seifried: Right, and so we've done that and we've been urging anybody who is adding beans or going to a more bean heavy rotation, why are we making that decision? Well, we're making that decision because of the price and where it is. Okay, then we have to protect that price because if you make that decision based on $10 beans and then beans go to $8.80, well that was a bad decision. So we have to protect the price if that's the reason for making that decision.
Pearson: So let's roll, we're going to plant more beans, make those sales if we get that chance again. They may want to buy corn on the board, plant it in Chicago.
Seifried: Yeah, you from corn, I like that idea and we've been doing a lot of that, not exactly that. But I like the idea of owning the $4.25 call spread for December corn. There has been a lot of weather things this year. Again, we're not hearing about it this year because the weather guys last year were talking $5 or $5.50 to $6.50 corn and that never happened. So now we have a bad taste in our mouths about that, we don't even want to hear about what the weather might be for this summer and things like that. But look at it. Chicago had six record highs in the month of February, six out of 28, wow that's a huge percentage.
Pearson: No snow at all in Chicago in the month of February, right?
Seifried: Or January.
Pearson: Or January.
Seifried: January and February, that's never happened. No, we have not had a snow in Chicago since I think December 12th or something like that. It has been 74 days or so. It's a record. Records all over the place we're setting records. Ice pack on the Great Lakes, which that was one of the big things last year that everybody wanted to talk about, it's the lowest it has been since 2012, 2011, 2012. We're well below where we were in 2012. I think also record low or close to it.
Pearson: So let's say we get that weather scare and now, Ted, March 31st planting intentions coming up, what are your numbers now that you're working with?
Seifried: Well, before we get to that though, one of the things weather wise that concerns me the most or scares me the most about this year is that we transitioned from El Nino to La Nina last year and that La Nina was really quite weak and it looks to be ended at this point and that El Nino might come back towards the end of the growing season, September, October, which could mean a very awkward transitionary sort of timeframe during June, July and August. If that's the case we could be going through some really non-favorable conditions and then pouring rain and then hot and dry. It doesn't take a crop failure this year to get upside, to get some pretty significant upside because, again, we've been building that demand. It just takes something that is maybe a little bit less than what we have been seeing in the last, a mediocre crop finds some pretty significant --
Pearson: What is significant upside? Are we looking -- that $4.50 is probably in the cards, is $5 in the cards?
Seifried: Well, I've been doing a lot of balance sheet studies and I think, yeah, $5 corn, I think that's reasonable to think. If we're low 160s to 158 national average yield I think you're at $5 corn pretty easily.
Pearson: Trendlines 173?
Seifried: Yeah, but that trendline has been really spiked up here over the last couple of years. I think it would be relatively, listen, five years ago if we had a 161 national average yield, oh my gosh, that would be a fantastically wonderful crop. And seed technology is getting better and that certainly makes a lot of sense. But what if we had a year that was a little bit of a hiccup, not a disaster, not a 2012, but just a little bit of a hiccup and we've had three years where if you take those three years out each one of those would have been a record, the three highest yielding years we had have been in the last three years and I'd say we've had maybe five years of very good weather or very good crops at this point.
Pearson: Since 2012. Just to throw in a little sand or a little wetness on your blanket, I don't know, wet blanket, listen to Elwin Taylor from Iowa State University, climatologist this past week said he does expect above trendline yields, looks to be fairly favorable weather for the growing season.
Seifried: Yep, I've heard it. How did the weathermen do last year?
Pearson: So it's a buy the rumor, sell the fact situation.
Seifried: Fair enough. Well, that's the thing, I don’t' think we're going to build a big weather premium into this market so that idea of a spring rally, we had it last year but that was because everybody was so worked up about how the weather was going to go. This year we don't want to hear it, we're not going to build that weather premium into the market. That spring rally we may have already seen that. So like in 2012, if we do start to see something happen in weather it might take a while for the market to react, but when it does it can be sharp.
Pearson: Okay. Well now we're talking long-term into the summer. I'll bring us back, rough week, Chad in Randalia, Iowa wants to know, should we expect to see corn and bean prices bounce after this week's downturn? This was volatile. And if so, what are you watching for levels as a near-term bottom?
Seifried: Okay. So, beans are at a very key support level here and we started to test it at the end of last week. The last few times we've gotten to that support level we've had a very healthy bounce off of that. This is where the technical traders, the funds, they like to defend that. I'm not so sure that we're going to get this big glorious bounce from this level. I think that the selling pressure you're going to get from the hedge, or from the harvest in South America might keep this bounce minimal and I'm worried that we're going to violate that support and maybe take another leg lower. So, if you get a 10 or 15 cent bounce in soybeans I think you really need to look to adding sales if you haven't already. But I think any bounce you get here in the beans I think you look to sell. And as I was saying earlier, giving the fundamentals that we have, unless something were to change with the South American forecast and there was a problem with harvest or something were to come out of RFS as far as lowering the tax credit or reinstating tax credits, if those two things don't happen and we still have the same fundamentals that we're looking at today two weeks from now, if we're not 30, 40 cents lower on soybeans then I think you've got to stop watching fundamentals and start looking at the fund-amentals and start looking at the money flow because the fundamentals to me are really quite negative especially at the prices that we're trading at right now compared to year over year. I think we should see that downside potential here now.
Pearson: Okay, next question. You brought it up a little earlier. Viking in North America, he's on Twitter @VikingKing6. He wants to know, what is your view on the RFS? Does the point of obligation matter to farmers? Do we growing the corn have to care about what is being discussed from this leaked memo that turned out to not exist?
Seifried: Wow. That is a really complex question because the simple answer is no. The simple answer is if RFS is going to increase ethanol usage by going E15 year round and we're going to be producing more ethanol then that's great. If we're going to reinstate biodiesel tax credit and we're going to be producing or using more domestic soybean oil, that's great. The problem is where we run into an issue and where this gets really, really complicated and really complex is that if we start taking things away from ethanol producers and their profit margins start to fall, then maybe we're not producing above RFS, which we are now by a fairly good amount.
Pearson: 11%, 12% of a blend.
Seifried: Absolutely. So, if we take that away and then we're only producing at the mandate that might actually be lower than where we are now. So there is reason to be kind of concerned about that. You want to see this go well for the ethanol producer. You want to see this go well for the blenders as well. But the idea of having more corn mandated I think is great. For a while I've been saying it, and it's not a very popular opinion, I'm a capitalist and we produce above the RFS for a reason because exports are good and the profit margins are there. I'm more pro-profit margin than I am pro-RFS. So if those profit margins stay good I don't really worry about what happens with the RFS because we'll keep exporting, we'll keep producing. But face value it's very difficult to tell which way the RFS --
Pearson: Because it comes back to RINs, the renewable identification numbers and we could spend 45 minutes on that topic alone.
Seifried: Well, just yeah explaining RINs can take five minutes.
Pearson: Exactly and then I still wouldn't understand it.
Seifried: And how that market works and who is getting them and how that is used and how that affects profit margins. Long story short, that does affect part of the profit margins for the ethanol producers if you take that away and their profit margins come down then you take away part of the incentive to continue to produce over RFS and if we do that well then hopefully we get to move the RFS high enough to make it as good if not better than where we're at now.
Pearson: Currently is today. Alright, Ted, I do want to ask you this. One word answer, Ted Seifried. We're not going into detail, one word. Does the, Tim Crookston wants to know, from now on does the South American soybean crop get smaller or bigger? One word answer.
Seifried: Weather. Meaning we'll see. We've got to see what the weather is but I think bigger.
Seifried: Knowing what I know right now I think bigger.
Pearson: Okay. Big crops get bigger. Alright. Commodity question of the week, Ted. Could you tell us what the wheat to corn price ratio means? And it is important? Do you care?
Seifried: I mean, do I care? Yeah, sure. So the wheat to corn price ratio is the same thing as the corn to soybean, which is the more popular one that we talk about. So, okay, wheat trading where it is right now, how many times do we have to multiply that and how many times do we have to multiply corn to get to the same number? So where do you have wheat at?
Pearson: Wheat is at, July wheat, new crop $4.56 versus $3.80 for corn so we're at 1 to 3?
Seifried: Right. So, the thing there, the tighter that gets, the closer corn gets to the wheat price, the less likely it is we're going to plant more wheat acres and also the more likely it is that we're going to use wheat for feed. But the higher wheat is compared to corn the less likely we're going to use what for feed, which is very beneficial for corn because corn has lost a lot of feed demand to wheat in the last couple of years. So that is why we watch it and that's why we look at it for acreage, we look at it for the demand side of things although, again, the one that is looked at more commonly is the corn to soybean ratio. That is one that I think we talk about on a daily basis especially when we're getting into acres decisions like we are right now. But we always look at the comparison between crops for different reasons. But right now acreage is the main one.
Pearson: Perfect. Well, Ted Seifried, thank you so much for taking the time to join us this week.
Seifried: Absolutely. My pleasure.
Pearson: And join us again next week when Dan Hueber joins me here at the Market to Market table. And as you may have noticed it is still fundraising time here at PBS. And if you find value here in Market to Market, please consider making a pledge and invest in this service that provides you with the news and market analysis you have come to know and trust. And be sure to join us next week when we'll explore how a lunch box staple is getting and out of the world, out of this world makeover. So until then, thanks for watching. I’m Mike Pearson. Have a great week!
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