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Risk Off · Professional Ag Marketing Podcast

• 0:01
  SPEAKER_00: Welcome to the Professional Egg Marketing Podcast.
• 0:04
  SPEAKER_00: If you want a deep dive into the egg markets and risk management strategies, your search is over.
• 0:10
  SPEAKER_00: Come here after every Friday to get your weekly commodity recap.
• 0:14
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 0:21
  SPEAKER_00: This is your host, Mike Minor.
• 0:22
  SPEAKER_00: Let's get started.
• 0:23
  SPEAKER_00: Today is March 17th.
• 0:25
  SPEAKER_00: I've got Pat with us here again this week.
• 0:27
  SPEAKER_00: How's it going, Pat?
• 0:28
  SPEAKER_01: Doing well.
• 0:29
  SPEAKER_01: Good afternoon, Mike.
• 0:30
  SPEAKER_00: Good afternoon.
• 0:31
  SPEAKER_00: Well, we're gonna have uh title of this one's just gonna be risk off.
• 0:35
  SPEAKER_00: I think we're gonna talk more about the continuing crisis going on and uh some of the market behavior that we've been experiencing.
• 0:42
  SPEAKER_00: And I just really wanted to uh get a few more of your opinions on the current topic at hand and see how the markets are reacting to all this, Pat.
• 0:51
  SPEAKER_01: Uh sounds good.
• 0:52
  SPEAKER_01: We'll do our best.
• 0:53
  SPEAKER_01: We had a chance uh last Friday to uh I suppose be one of the first uh uh podcasts to talk about uh the the banking crisis and and what impact that it might have on on commodities.
• 1:07
  SPEAKER_01: And so, you know, we're a week further into this thing, and and maybe we've uh tuned up our analysis just a little bit, at least I hope so, Mike, but I I'm not sure that we have all the answers, that's for darn sure.
• 1:20
  SPEAKER_00: Nothing out of the norm on that one, I'd say.
• 1:22
  SPEAKER_01: Right.
• 1:23
  SPEAKER_00: So let's start talking about just uh a little bit about the situation, how big of a situation it is, and uh more of a hundred-foot overview over this entirety.
• 1:37
  SPEAKER_01: Well, I you know, the the uh the real question here is is is whether or not the issues that took place you know a week or so ago um were are contained and isolated to uh two or three uh major financial institutions, and whether or not the federal government and and to some extent the Federal Reserve are going to be able to keep the issue contained.
• 2:01
  SPEAKER_01: And so that uh certainly is the the uh the issue as it relates to what impact that might ultimately have on the commodity markets that we that we really care about and and and clearly clear about the the macro issue as well.
• 2:17
  SPEAKER_01: And so, you know, I find myself, I think it's you know, we we had uh at one point uh this week we're interacting um you know with a representative uh in the banking system and and uh uh obvious question is you know this this individual's opinion on what's happening.
• 2:34
  SPEAKER_01: And their response is a uh is uh a very relevant one and and uh and makes sense.
• 2:41
  SPEAKER_01: You know, they that the response was they believe that that this was a relatively isolated incident and that uh you know some management decisions uh you know at those institutions and that uh maybe uh didn't make uh a whole lot of sense in retrospect and didn't manage the increased uh uh interest rates as well as what uh as what they could have or should have or what most people did, that sort of a thing.
• 3:08
  SPEAKER_01: And and so you know the the the federal government did the right thing and and bailed out the uh the depositors, um the shareholders of the bank, a different story.
• 3:18
  SPEAKER_01: And uh again, problem contained and not uh uh and a not a uh a concern that it's sort of systematic throughout the the the financial industry.
• 3:28
  SPEAKER_01: And so that was the first comment, and a pretty again pretty common comment that you would hear kind of all week this week about how uh the the this issue uh can be managed and and contained and really so therefore no reason to panic, right, would be the uh the thought process.
• 3:48
  SPEAKER_01: And then you know you go on to say that uh um boy, you know, it's pretty popular opinion and the markets are trading, you know, such that uh you know maybe you know two weeks ago the federal uh you would have anticipated the Federal Reserve was going to to raise interest rates two basis points next week, and now this week we think they might only raise it one basis point or potentially even leave it unchanged here in in uh in next week in their from their March meeting.
• 4:16
  SPEAKER_00: And that's very abnormal to have it changed that frequently like that.
• 4:20
  SPEAKER_00: Like a week ago it they're gonna raise 50 basis points, and now they're gonna maybe not raise it at all.
• 4:25
  SPEAKER_00: Like that's very abnormal.
• 4:27
  SPEAKER_00: Usually you have a pretty good idea what they're gonna do quite a ways before it, and it doesn't really change.
• 4:32
  SPEAKER_01: Well, I'm wondering if we that's actually the the the real case, right?
• 4:37
  SPEAKER_01: Like they probably are still gonna raise it to basis points.
• 4:40
  SPEAKER_01: Good point, right?
• 4:41
  SPEAKER_01: And and but that's the whole point, right?
• 4:42
  SPEAKER_01: Like the markets are acting today as if um there clearly is a problem, right?
• 4:50
  SPEAKER_01: There the markets are acting if when uh folks are saying that the issue that that uh the that to put two major financial ins institutions uh into bankruptcy or receivership or whatever description you want to sort of want to use on that, that it's it is contained and it won't be an issue.
• 5:08
  SPEAKER_01: But the markets are telling us something significantly different than that.
• 5:12
  SPEAKER_01: And so it will be extremely interesting to see how the Fed manages that next week.
• 5:18
  SPEAKER_01: Um it would, at least from my perspective, if they actually don't raise it to basis points next week, it would uh to me be a statement uh that they concur that there's a there's a real issue going on a pretty public one too.
• 5:34
  SPEAKER_01: In incredibly, yeah.
• 5:36
  SPEAKER_01: And so and so as we talk through this, I think uh I mean it it makes uh it makes the Fed behavior next week um with well their action all the more important, right?
• 5:48
  SPEAKER_01: Yeah.
• 5:49
  SPEAKER_01: And uh and I would just say that I I I'd be surprised if they don't you know stick with their course and not start altering their plan on seven-day or fourteen-day uh changes.
• 6:02
  SPEAKER_01: Um they were very slow to start to raise interest rates, even though it was uh it seemed incredibly obvious to the markets and everyone else that uh um that inflation is coming, right?
• 6:15
  SPEAKER_01: The Fed was very reluctant to raise rates until they saw actual data that uh that uh the the inflation uh has been raised.
• 6:24
  SPEAKER_01: So we kept saying fishing behind the net, right?
• 6:27
  SPEAKER_01: They're making decisions for tomorrow based upon yesterday's news or yesterday's data, not doing much of any forecasting.
• 6:35
  SPEAKER_01: And so for them to change that strategy now, I think would be uh um I'd be surprised.
• 6:41
  SPEAKER_01: And so um I'm betting or thinking, not betting, I'm thinking that uh that uh you know the market uh at least as it relates to how it's uh trading uh uh the Fed news next week is is probably anticipating that the Fed be be more willing to adjust to current market situations and at least what they recently have have demonstrated.
• 7:06
  SPEAKER_01: Does that make sense?
• 7:06
  SPEAKER_00: Definitely.
• 7:08
  SPEAKER_01: And so so where do we go from here?
• 7:09
  SPEAKER_01: What does all that mean?
• 7:10
  SPEAKER_01: It it first means that uh um you know we're we're I guess from my perspective hopeful that that um you know the markets are behaving a little irrationally, um, you know, given the the the set of of uh circumstances that's taking place here where we believe that you know things like crude oil or lean hogs or or soybeans are probably selling off more than what would be justified, I say in quotes, uh based upon internal fundamentals.
• 7:40
  SPEAKER_01: And so um so we'll see how that too plays out next week.
• 7:44
  SPEAKER_01: It'll be s it'll be important to see how that tracks.
• 7:47
  SPEAKER_01: But um having said all of that, we also have to at least open up our eyes up to the possibility that um the markets uh are behaving, quote unquote, now rationally, and they are pricing in an anticipated drop in demand in things like energy and food uh because of uh uh pending slower economic activity.
• 8:12
  SPEAKER_01: And so if this is the tip of the iceberg, uh uh this this late latest financial crisis, and there is a systemic issue in the financing or banking industry that that does push the U.S.
• 8:27
  SPEAKER_01: economy into a recession, then the sell-off is warranted, and eventually the Fed will stop raising interest rates and maybe lower them and all those things, right?
• 8:36
  SPEAKER_01: And so and so the market's job is to price in today what might happen in the future, and in the short run, that can be an irrational behavior.
• 8:48
  SPEAKER_01: Um in the long run, it ultimately gets it right.
• 8:52
  SPEAKER_01: What all of us have to decide now, I think, is is uh um how much risk versus potential opportunity that you can afford in your business.
• 9:04
  SPEAKER_01: And so, you know in any commodity.
• 9:07
  SPEAKER_01: In any commodity, yeah.
• 9:08
  SPEAKER_01: This that that's exactly right.
• 9:10
  SPEAKER_01: And it doesn't it in in this case, it doesn't really matter if you're in the business of selling corn, soybeans, crude oil, or pigs, right?
• 9:20
  SPEAKER_01: You you you have to to make sure that we're that we're taking a look um from the inside out in terms of uh you know what our uh um financial position is and what our risk tolerance is and and and relative to uh what you believe that the next opportunity could be.
• 9:39
  SPEAKER_01: And so now more than ever, Mike, I I think it's important that we sort of get back to the basics a little bit here, try to spend a little bit less time on on uh on trying to guess what these commodity markets might do next and start to figure out uh start to spend a little bit more time on uh defining uh how much risk and what an opportunity is for your business.
• 10:04
  SPEAKER_00: Especially I'd say over the last 12 to 24 months, uh guys haven't been looking out in the future as far because we've had such a concern over inflation, and well, I don't know what my inputs are gonna be out there, and you know, in the in the grains I think it's kind of easy to see because fertilizer prices have backed off a lot, uh gasoline prices have, um you know, a lot of the input prices, uh glyphosate has backed off a lot as well here.
• 10:32
  SPEAKER_00: So now I I think it is important to really look out and say that 24 corn has only dropped to what 10-15 cents here on this big pullback.
• 10:40
  SPEAKER_00: Um just start looking further out into the future, something I think the American farmers got more complacent with and not done as much in the last you know couple years.
• 10:50
  SPEAKER_01: That's exactly right.
• 10:51
  SPEAKER_01: And I think when when you say that, what what comes to my mind is is you know, we've especially as it relates to corn, you you sort of become accustomed to you know, corn with a six or a seven in some cases with an eight in front of it.
• 11:03
  SPEAKER_01: And just a reminder, as we sort of you know bend back into internal fundamentals, that you know there's a the large part of the reason why we've had elevated uh uh grain prices is is we haven't had all that good a weather the last couple years, and and that can historically will change, right?
• 11:22
  SPEAKER_01: And if if the only question is is whether or not this is the year that happens.
• 11:26
  SPEAKER_01: And so it is important that we we keep that in mind.
• 11:30
  SPEAKER_01: Um the likelihood of improved weather in some major growing areas uh um I think is is higher, it's probable.
• 11:39
  SPEAKER_01: And so now we're we're sort of fighting this thing about should I wait till June to sell corn like I'm supposed to, or at le at least from a seasonal perspective, it usually makes sense to do so.
• 11:50
  SPEAKER_01: Or are we in the midst of some sort of a transition, you know, more of a three or four-year cycle transition that that uh you know the weaken that that that is is offsetting or fighting that seasonal tendency for increase in prices.
• 12:03
  SPEAKER_01: And so we all got to think through that.
• 12:04
  SPEAKER_01: Again, I I'm sure you know we've mentioned this the last couple weeks, but it's worth mentioning again.
• 12:09
  SPEAKER_01: There's tools available to us to to help bridge that, help manage the the risk of a of a cycle change uh relative to a seasonal um uh price rally.
• 12:20
  SPEAKER_01: And so um be happy to to discuss uh the specifics or in detail on those sorts of strategies if you're so inclined.
• 12:28
  SPEAKER_00: And this is more from a personal level to wrap up here, I think, Pat, but the biggest players in the market on the speculative side in the last couple weeks, now we've really seen them take a risk-off mode.
• 12:41
  SPEAKER_00: The people that accept greater risk than about anybody trading some of the craziest things like uh crude oil, corn, and massive quantities uh as an index fund to fight things against inflation or whatever it may be, they've ran away from those, drug corn managed money down to 20,000 contracts long is all now.
• 13:01
  SPEAKER_00: And they're running out of the wheat shorts that they put on, and they're going towards things like two-year treasuries, as we saw that drop massively.
• 13:10
  SPEAKER_00: And the way I would put it is uh for a lot of our businesses, if if someone like that is taking a risk-off mode, I think it's a pretty good time frame to maybe not take a ton of risk on your business if you don't have to.
• 13:21
  SPEAKER_01: That's logical.
• 13:22
  SPEAKER_01: And the other the other takeaway, I appreciate you bringing that up, the other takeaway is that is that um, you know, in this era of higher volatility, I mean, these markets aren't the markets that uh, you know, the generation before dealt with, right?
• 13:37
  SPEAKER_01: And and uh and these these volatile markets certainly do provide opportunity, but they also uh provide uh in situations like this an increased uh amount of anxiety at a minimum and and risk at a maximum.
• 13:54
  SPEAKER_01: And so um gotta I guess take the good with the bad and uh and at least uh appreciate or respect it is for what it is.
• 14:02
  SPEAKER_01: So I do I do appreciate your observation as it relates to uh that significant uh uh liquidation and sell-off and and reduction of open interest.
• 14:11
  SPEAKER_00: Thank you for your time today, Pat.
• 14:13
  SPEAKER_01: Thank you.
• 14:14
  SPEAKER_00: And thank you to all our listeners.
• 14:16
  SPEAKER_00: Please reach out to us at professionaleggmarketing.com.
• 14:19
  SPEAKER_00: Check out our other podcast as well, Professional Egg Marketing, that's released every Friday.
• 14:24
  SPEAKER_00: Trading commodity futures and options involves substantial risk of loss and is not suitable for all investors.
• 14:31
  SPEAKER_00: See you next time.