2023 risks and rewards: weekly market outlook, January 3rd-6th

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 not only heading into a new week, we are heading into a new year. Happy New Year to everyone., and it's January 3rd through the 6th, if I'm getting my dates right here. We'll find out here in a second with our awesome guest that we have with us, Joe Vaclovic. Joe, how's it going?

Joe

Vaclavik: What's up, Chris? Happy New Year.

Chris

Barron: Happy New Year to you too. We're excited to head into this new year. There's going to be a lot of challenges, but man, the outlook looks pretty spectacular, at least from our vantage point at this time. But before that, what I'd like to do is ask you this question, Joe, is if you could give us a bit of a review from the 2022 year and kind of what you saw, what you learned, and what do we need to take away from 2022?

Joe

Vaclavik: '22 was interesting, to say the least. In regard to the market, so you opened up the year and we had this inflation story going on. I think during the first half of the year, you had this flight to commodities as a hedge against inflation. These big money managers or the funds or outside money, they wanted to own commodities to hedge inflation. That was part of the story the first half of the year. The first couple months of the year, you got to remember last year. Brazil harvested a short soybean crop, and you had a pretty sharp rally in the soybean market, uh, and in the corn market also during the first couple months of 2022. I think a lot of that had to do with— I mean, it was many things, but I think a lot of it was inflation hedge money. I think a lot of it was because Brazil's crop was short.

So you started off the year on kind of a bullish or friendly note last year, and then, you know, you had the Russian-Ukraine invasion, which was super friendly for everything. And it was shortly after that that a lot of your commodity markets peaked. Some of your commodity markets peaked like immediately, and then some of them didn't peak till June. But then the back half of the year, we got into a more like risk-off type deal in a lot of your commodities across the board. When I say commodities, I'm not just talking corn and soybeans. I'm talking crude oil. I'm talking, you know, all the outside stuff. We saw a lot of this stuff move lower. You know, we had a short corn crop in the U.S. this year. We had a short soybean crop to a lesser extent. We've had drought building. So there's, I mean, it was really an interesting year. There was a lot of news out there to impact this thing.

I'd say that probably the second half of the year, maybe one of the bigger things was the Fed, Federal Reserve raising rates, I think impacted every market on the planet. Stock market finished the year with some losses. You know, it's not every year that you see double-digit losses in the S&P 500, but that's what we got this year. And I think a lot of that ties back to the Fed. Just a lot of moving parts in 2022. But good news for the farmer is I think profit margins, you know, on the farm returns were all pretty much positive for the entire year, which is great.

Chris

Barron: If you were to, you know, as you look back at 2022, is there— what's the biggest mistake, if there was a mistake that we made? And I have one, one follow-up on that one, but what's You know, is there any, anything that people could have done differently or anything that you, you see there?

Joe

Vaclavik: Well, yeah, I mean, you shouldn't have made any grain sales for like May or June, right? But that's not, that's not the way to do business necessarily. I mean, we had a crystal ball and we knew that Brazil was going to be short and inflation money was coming in and Russia was going to invade Ukraine. Yeah, it would have made grain marketing a hell of a lot easier. But yeah, I mean, that would be the mistake in hindsight. I mean, I don't— I guess some people saw Russia-Ukraine coming. I don't know if people saw the impact necessarily. You never know what the crop is going to do in the United States. And that's part of the reason that the markets are as good as they are right now. I mean, the fact that we had, you know, a short corn crop and short soybean crop. So in terms of mistakes, I don't know. I mean, you can't predict the future.

Chris

Barron: Yeah, what are, what are some of the things that you saw, you know, either your clients or you think that farmers did well that maybe is a repeatable thing? You know, sometimes if you do, do something right, it's a— if it's repeatable, it's a gift that keeps on giving. What, any, anything on that side of the equation?

Joe

Vaclavik: I'm seeing a big move. So in the course of my career doing this, and I've been doing this for what, 18 years now, I think I've seen a big move toward better budgeting. Like 10, 15 years ago, I very rarely saw detailed farm budgets. Now I think you've got a newer generation of farmers, guys in their 20s and 30s, and certainly older folks as well. I think that generation in particular, the next generation that's kind of taken over, they're doing a fantastic job with budgeting and being aware of their costs.. And I think that, uh, that will serve them well when it comes to marketing and staying in business, not only through the good years. And it's easy to stay in business in the good years, but in the bad years also. And there will be bad years.

Chris

Barron: Yeah, that's interesting. I, I did a podcast a while back, um, that we're gonna, um, and we're probably gonna have you on for one of them, uh, what I called the, the top 10 ag issues, uh, and opportunities for 2023. And, and The list ranges from, you know, land, commodity prices, equipment values, labor budgets, cash flows, risk mitigation, access to capital. I remember all these right. And then just quality decision-making, not having a transition plan, and communication. Those are kind of the top 10 that we are hearing from our clients that, you know, okay, those are the issues and opportunities we got to deal with.

But, you know, we're gonna definitely get you involved on when we we do a kind of a lengthy conversation on budgets, cash flow, and the risk mitigation podcast because I think those are all things that, like you said, with the budgeting, I think it's a real key thing because you can look at the operations, and I'm sure you see this, and it is those operations that do follow through on those budgets and use discipline because it's one thing to get your numbers together, it's another thing to be disciplined, isn't it?

Joe

Vaclavik: Yeah, so, you know, I work with farmers in regard to grain marketing, and I send out a newsletter, and I have blanket recommendations, but I do talk to farmers individually very often about the marketing situation. And when somebody asks me about, you know, their given situation, what should I be doing, I mean, the first thing that's always going to come out of my mouth is, what does your budget look like? What's your profitability look like? Do you have a copy of your spreadsheet I can take a look at. I mean, things along those lines. So I mean, it's, it's the best starting point. Um, it's the best place to start with your marketing and then you move from there. So it's, it's important. And I know we push this all the time and we both sound like a broken record all the time. Uh, you just can't, you can't, you can't overstate the importance.

Chris

Barron: Yeah, for sure. So let's, uh, move on to another topic, I guess, right now as we head into this first week of 2023, and probably the second week because we're going to be getting toward a USDA report, what are some like here, the here and now things? What's, what's Joe Vacovic paying attention to right now in the first couple of weeks of January that is, you know, is a focal point that the producers need to be paying attention to?

Joe

Vaclavik: Well, short term in terms of headlines, I mean, I have a feeling that during the first couple weeks of the year I'll be talking about a lot of the same stuff I've been talking about the last, say, 4 weeks. I mean, okay, so South American weather, Argentina's got some problems, we're aware of that. Russia-Ukraine is a constant wildcard. It hasn't mattered a whole lot recently, but there's always a chance for an escalation there. I'm not going to rule that out, and if that were to happen, probably presents you with some sort of opportunity, especially as it relates to wheat. I know that, I mean, you don't talk about wheat a whole lot, but the wheat market really sucks as of late versus what it was, say, 6, 7 months ago. So you could see some sort of recovery there if there were some sort of escalation in that war. I think China is a wild card.

So China's reopening and they're doing away with these, uh, COVID zero policies. And some people think it's positive for demand big picture. Other people think short term it's maybe negative because, um, You know, there's this big spike in COVID cases and they've got problems. It's going to be a— there's gonna be a lot of growing pains associated with exiting these lockdowns and everything after 3 years of lockdowns in China. So I mean, that would be the stuff short term, and it's not going to be too far from now that we start to get into acreage debates for the United States. I mean, the stuff you and I have talked about when it comes to budgets like corn versus soybeans, it looks like corn is the clear winner economically. Is the farmer going to go with that, or is the farmer worried about paying these really, really high input costs for corn, and will that reduce corn acreage?

I don't know, but that's going to be a big topic of discussion. And then you've still got a drought. You've got a drought in the Southern Plains, Central Plains. A lot of the Corn Belt, you could say, is drought-stricken to a lesser extent. So there's going to be a whole different set— something's the same, something's different. Say first quarter.

Chris

Barron: So there's, um, I was on a podcast with, or a conversation with Damian Mason and his group yesterday, and they were talking about, you know, it's a record amount of deferred payments. I think Ryan Moe was saying that, you know, there's an elevator in Iowa that has, and they have like 70 locations, but it's like 10% of the state has like a billion dollars of money that is still— that's going out the first week of January. And if you think about all the deferred pay, from what I've heard from Cargill and others, it's the hugest amount or the largest amount ever of deferred pay in terms of dollars that's going to hit the banks, you know, in January in this first week.

If farmers are sitting there flush with cash but they still have grain to market, Is there a threat there, or what are some of the things that, that you would tell producers to pay attention to on those remaining 22 bushels, whether it's corn, soybeans, wheat, whatever?

Joe

Vaclavik: A lot of people would say that you should just be done with your 2022 marketing. You should price everything, forget about it, and look at '23. And if somebody were to do that, I would have absolutely no issue with it. There's, there's a lot of And you know very well there's tons of profitability baked into these 2022 prices for your old crop bushels. So still got unpriced bushels from last year. I mean, is there risk associated with it? Absolutely. But there's a tremendous amount of profit baked into it. If you're not going to go and sell cash and you're still just sitting wide open, unpriced, unprotected on old crop bushels, I mean, I very rarely push guys to like, hey, you need to be buying options or whatever, but I would strongly consider like some sort of maybe what I would call like a backstop put option on some of your old crop bushels.

Like go buy a March $6.50 corn put or something like that just to make sure this thing doesn't go to hell in a handbasket on you. $22 is the least of my concerns when it comes to marketing. I'm much more concerned about $23 bushels, even $24 bushels maybe. $22 is, is you're going to make money. It's just question of by how much. And by holding the bushels, I mean, what are we betting on here? You're betting on weather, which nobody can predict. We can't predict what the United States weather is going to do this summer. So if you're waiting for spring or summer for a crop scare event, you may get it. In a lot of years you do get it, but it's not a guarantee. So you're betting on things that we just simply can't predict. So when people ask me, you know, where do you think the market's going going to be in the spring? Should I wait the price basis until the spring?

Should I wait for the price futures? I mean, the things that drive price action during that time frame are things that cannot be predicted at this point in time. So I mean, I'd explore— I don't think it needs to be a complicated risk management strategy, but maybe something just to set yourself up a backstop on any sort of old crop bushels that are unpriced, unprotected. I just think it would be really silly to let this thing totally get away from you at this point.

Chris

Barron: —Are you still keeping, like, if there's, say, the producer's got 20% of their bushels left, or some number, whatever, but they've got those bushels left, are they— would you prefer to see them pricing that and keeping the basis open? Because basis has kind of been all over the place, and depending on certain areas, depending on where you can go, and I know it's a regional thing, but any comments on that?

Joe

Vaclavik: Um, it's super regional. I mean, it is more variable this year than I've ever seen. So I don't know that I can say like you should do this with basis because it's so different all over the place, right? I mean, if you're in an area out west where basis is a dollar over the board, I mean, which way is your basis risk? I'd probably say your basis risk is that you normalize to some extent, but I mean, that's just personal thought. I mean, you can go to a $2 over basis, it's not impossible. I think this basis thing is going to be strange for a while given the big discrepancy between crops out west and crops in the central and eastern areas of the Corn Belt. There's a huge difference. And the board, all of the futures contracts that we trade, those are contracts that are deliverable along the Illinois River. So if you're in Kansas, it's a totally different market.

So I don't know if I have any big, bold recommendations when it comes to basis. If your basis is historically really good, I don't have any problem locking it up. If you want to wait, I mean, most oftentimes a lot of your best basis will come during planting. So if you got old crop bushels and you're comfortable sitting on them until that time, that's very often a good time of year, like April, May, even into June some years, to price, you know, old crop basis, I guess.

Chris

Barron: Yeah, I would say in our operation, you know, just here locally in northeast Iowa, I'm you know, we don't have much left to sell, but anything we're going to sell, if we see some rally here in the next week or two, I'm not going to lock basis because I still think, you know, you have winter storms, you have weather, you have all kinds of goofy stuff. Like you said, you can't predict, but if you can be flexible, a lot of times you can capture better basis, you know. And so that's the, you know, kind of how I'm doing it in my area. And I think everybody, like you said, has to kind of figure out the right recipe for their region in their area. So that's good. Good comments. One other thing too is interesting, you know, I, I, for 20, first 20 years of my farming career, I was a pork producer. I raised hogs, and I always was kind of looking at it on the purchasing side too.

And it was funny because there was always this dichotomy between, okay, if, if I'm buying grain, I'm worried that it's going to go up, and if I'm selling grain, I'm worried that it's going to go you know, that it's going to go down. But on the same token, you might not sell it if— because you think it's going to go up. So you're not, not a seller because, well, this might go up. And then on the purchasing side, so, so what are some of the livestock producers doing that you're seeing? Are you, are you seeing them that need to buy the grain? Are they, are they staying, just staying current, or are they buying more? Because I don't see as much of that. Or is that anything that you see going on?

Joe

Vaclavik: They're in an impossible situation out west, especially. You can't hedge basis. I mean, you can. You can lock it up, but you can't buy a call option on basis, and if you could, it's too late anyway. What do you do and how do you manage or mitigate risk if you're in an area where the cash market has zero resemblance to the futures market? They're apples and oranges. You've got like $8 cash corn in some areas way out west in the Plains, in cattle country. It's very, very difficult.

I mean, you could have bought futures as a hedge against this a long time ago, and maybe you would have done all right on those positions, but you couldn't have predicted or really— I mean, I guess you could have tried to lock basis or just booked as much cash as you could at lower levels, but it's really difficult, and I think a lot of people in the livestock business are, are struggling, uh, greatly with this. I mean, the good news is that, you know, cattle prices are up and they're good. Um, uh, profitability is variable, highly variable across the board, but it's very difficult. I wish I had a great, uh, solution for that issue, and I really don't.

Chris

Barron: Yeah, it's, it's tough. That's kind of why I asked, but it's a tough, tough spot to be in for sure. Um, on 2023 now, um, As we move forward from a macro perspective, and you're going to be at our conference in Florida in January, the Ag View Executive Business Conference, and we're excited to hear what you have to say. But what things are you watching from a macro perspective as we head into 2023 that farmers need to pay attention to? You mentioned all the things we saw in '23. Any, any particulars?

Joe

Vaclavik: I mean, the biggest— like, if you put me up on the stage and said, Joe, you have like 2 minutes to make a point, my point would be that, um, big picture, these markets come out of your grain markets, they're going to go back to the cost of production or below the cost of production. It's just a question of when. It's a guarantee. It's a question of when. Is it '23? Is it '24? Is it '25? I don't know that. It could be 2035. But it's going to happen. That's been the trend in commodity markets for 100 years or more. I mean, we spend periods above the cost of production, or well above the cost of production, and then eventually you run into the perfect storm of overproduction. You get big crops in South America, you get big crops in the U.S., you run into some demand issue, and the prices fix themselves. And that's the risk.

I mean, the risk is that you are buying the highest inputs you've ever bought. You're paying the most money for inputs that you've ever bought, and that you should know in the back of your head that maybe it's not this year, but what if it is this year? Uh, we're going to have prices that are back below the cost of production, and it wouldn't take that much. You get the right headline, you could be there next week. I mean, we've run the budget, uh, you and I did a video this week regarding corn and soybean budgets '23. You take 50, 60, 70 cents off these '23 corn, and a lot of guys are looking at, you know, uh, returns that are below breakeven. You take, I mean, even, even what, 50 cents off beans, and some guys might be below breakeven. It wouldn't take much. So you're operating just this tremendously risky environment, uh, given the input situation.

That's not like me predicting that that's going to happen in '23, but it's going to happen at some point.

Chris

Barron: Yeah, for sure. Um, last question I have for you, I think last anyway, we'll see, uh, energy. Prices, you know, look crude and all that stuff correlation to, to our commodities that we're watching all the time. Comments? You know what, I'm actually—

Joe

Vaclavik: I, I, if you would have told me that crude was going to go from $120 down to like $75 and beans would still be $15 and corn would still be $6.50, $7, I'd be surprised by that. I would have guessed, I would have guessed earlier in the year that you would have seen a similar, not necessarily like 100% correlated sell-off, but I would have guessed that you would have seen something similar occur in the grain market. And we did have that sell-off. You got to remember, we got really cheap— not cheap, but we got down into the 5s in corn in July, and we got down, I think, into the 12s or low 13s in beans in July. And it was a short-lived sell-off, and then you saw a big kind of contra-seasonal, like late summer rally out of that. So it did happen for a minute. So I think that that's actually like a really positive thing that the grain markets were able to shrug this off.

I mean, crude oil and diesel fuel, those are like markets that everybody's bullish and everybody thinks they need to go up, yet they've been— crude oil at least has been in bear market territory for 6 months. So I am— if you would have told me what happened, crude went from $120, $125 down to $75, $80, and corn's still almost $7, beans are still above $15, I would have been surprised by that, I think.

Chris

Barron: Well, yeah, that's kind of why I'm asking, because it just seemed like they decoupled or whatever, and they were— there was always this kind of a correlation, and all of a sudden it kind of seems like it's not there. So I just— that's kind of what— something I think is kind of interesting.

Joe

Vaclavik: But it definitely looked like they were paired, like all the commodities— it looked like commodities were moving very much in tandem the first part of the year. And that's when, again, you go back to the inflation trade where Yeah, big money wanted to own commodities because we had this rampant inflation. And now, you know, for the moment it looks like we're on the back side of inflation and we have kind of decoupled or de-paired from the energies. And from, um, it seems like the commodities are kind of back to doing their own thing, which is probably a better place to be, I guess.

Chris

Barron: Yeah. So my last comment is a, is a comment and a question, but, um, Joe, I'm a, I'm a farmer in northeast Iowa, and obviously we do this podcast and we work with a lot of producers across the US and Canada and and do a lot of different things in those, in that realm. But I am a farmer in northeast Iowa, and I am a subscriber to your content because it's unbelievably awesome. It's really full of amazing information, and you work super hard at it every day. And as a farmer, I really appreciate that. If people want to get a hold of your content, your daily information on YouTube is phenomenal. That doesn't cost anybody anything. And then you also have a subscriber only video that's amazing that comes out every day, every market day.

Joe

Vaclavik: Talk about that real quick. Well, I started— so there was a transition in my business that took place like 4 or 5 years ago. You know, I've always done brokerage business and handled futures and options business for farmers, and I decided that I kind of— I didn't want— not necessarily take it in a different direction, but I thought I had more to offer than just that. So I started doing the podcast, I started doing the YouTube channel, I started doing the premium newsletter subscription, which is a $50 a month deal where I send you an email every business day. It's at like 5:30, I send this thing out. I wake up at 4 and put this thing together every day. And then we do these paid videos, which are like the premium videos, and you're actually a contributor. Shay's a contributor. Matt Bennett and Brian Splitt from AgMarket.net are regular contributors now.

And we send out what I call premium content every day. So every day we tackle some sort of issue, whether it's grain marketing budgets, or we do a review of the grain chart and we talk about support and resistance areas, or I'll talk about the Fed, or I'll talk about the stock market. I mean, so much, it's a ton of information that I'm sending out. I really like this, I like the business model for me. I feel like I'm doing a lot more for the audience than maybe I was when I was just doing brokerage business. And it's, uh, it's had a super positive response. I mean, people are really interested in what's going on in the markets. And honestly, now that I have you guys on board as like official contributors, and I've got some more official contributors, I guess I can say this: if you guys aren't signed up for this, I think you're missing out on a ton of information.

Chris

Barron: I would agree 100%. I mean, uh, you're— the content, you, you, you work really hard at it, and it really shows. And so anybody that's listening here, this is just my My advice to you is to, to subscribe even if it's just for a month and check it out, and you will not— you, you won't go away. You'll continue to, to want to get the content because it's pretty awesome. And Joe, really appreciate it. Again, as a farmer, thank you for doing that too, because it's, it's first thing I, I listen to every, every morning. It gets my mind in tune with the markets, and then I look forward to the, the video that you kick out usually in, or, you know, mid-morning or midday there every day.

Joe

Vaclavik: Yeah, at the very least, if you guys interested, at the very least, if you're, if you're not listening to the podcast already or watching the YouTube videos, check that stuff out. Totally free. You get an idea as to like where I'm coming from and kind of how I think about stuff. And the premium deal is $50 a month. You can cancel it at any time. There's no fee, there's no other obligation. I'm not going to call you and try to sell you anything else. It's just, just a content service. And that's again, really great response to— you can go to standardgrain.com and check out all the details.

Chris

Barron: Awesome, that sounds good. Hey Joe, this has been a great conversation, good way to start the year off. And like I said, we'll get you back on as we do some of these 10 podcasts on the ag issues and opportunities for 2023. Shay and I'll be working on those throughout the next couple of months. We're gonna, gonna try to get 1 or 2 of those out each month, and there'll be a kind of a detailed commentary on some things that we're getting out of what's going on in the world. So with that said, Joe, thank you very much for your participation today. Really appreciate it and hope you have a great year.

Joe

Vaclavik: Thanks, Chris. Happy New Year, everybody.

Chris

Barron: Yeah, thank you and, and Happy New Year to everybody. I hope you have a prosperous and productive year, and if you need anything from us, reach out. And any questions or content you'd like us to cover, let us know. And thank you for listening, and we will I'll catch you again next time on the Ag U Pitch.