Weekly market outlook April 3-7: April fools or April facts? The latest USDA numbers

Chris: Hey everybody, before we get going with the podcast with Joe Vaklovic and myself talking markets going into the first week of April, just want to remind you about 19 Minutes. It's our subscriber-only podcast that comes out on the 9th, the 19th, and the 29th. We already got some great content in there, and in the next month here, we're going to have several really interesting conversations. The first one's going to be on banking. The next one's going to be on family business expectations, and the one on the 29th is going to be on discipline and business development and discipline. And so with that said, check 19 Minutes Out. We'll have a link here at the bottom of the podcast information, and check it out. I think you'll really enjoy it. Enjoy the podcast, and we'll catch you later.

Joe

Vaclavik: Thank you for listening to the Weekly Market Outlook. It is our pleasure to bring an industry-leading market analyst provide you with the most value possible in your farm business.

Chris: Please reach out anytime by emailing cbarron@agviewsolutions.com. Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week, the first week of April, about the time when everybody's getting antsy to get the planters out in the field and, uh, we are lucky enough to have with us Joe Vaclovic. Joe, how's it going?

Joe

Vaclavik: Good, good morning, Chris. How you doing? I'm doing good.

Chris: Doing good, good, good to have you on. It's been a little while since we've had you on. Uh, we've spent some time kind of helping you on your subscriber-only videos. And, uh, one of the first things I do every day is get up and listen to your YouTube videos. And so put a little plug in there for you, Joe. You do a great job on that stuff. And it's been a while since we've had you on. It's great to have you here.

Joe

Vaclavik: Yeah, I'm, I'm neck deep into the content business now. That's, that's what I do every day is, is podcasts and YouTube and video content. Talk about markets. That's kind of the deal here.

Chris: Yeah. Yeah. And it's— and you're doing a good job with it. And so that's why we're excited to have you on here again today. So let's get, let's get right into it. There was a little thing called a USDA report A lot of the farmers I think were watching planting intentions on that March 31st report. Let's start there. Give us a little review, pre— or a little review of what you saw and anything. What are your takeaways?

Joe

Vaclavik: There was not a major surprise here. In some years, you'll see the trade miss corn acres by 2-3 million or soybeans by the same amount. We don't really see this this time around. Corn acres came in at 92. The traders looking for 91. I think a lot of people right off the bat are questioning this corn acreage number. I think a lot of people right off the bat are going with the idea that 92, that may be the highest number that we see. One of the reasons for that is, is because of where the acreage expansion is expected to take place. So USDA says we're going to plant 92 million acres of corn. That's what the survey said, right? That's an increase of 3.4 million from what we did last year, final numbers of that 3.42. That's what's expected nationally. 1.3 million is going to come from North Dakota, South Dakota, and Minnesota combined.

North Dakota, they're looking for an additional 800,000 acres versus last year. Minnesota, they're looking for an additional 350,000. South Dakota, they're looking for an additional 150,000. Why is that problematic? Well, it's problematic because of the weather up there. Snow cover up there. They've got 2 feet of snow in North Dakota, like across a big area of what would be corn and soybean country, and in some areas much more than that. So I think a lot of people are looking at where the corn expansion is supposed to take place and thinking to themselves, '92 is probably not going to happen the way that it looks unless you see like a drastic, drastic shift in the weather conditions from here on out.' Yeah, interesting.

Chris: I, I think I was in Minnesota last week and North Dakota. I talked to you when I was up there. I saw it firsthand. There is a ton of snow, and then where there's not snow, the ground's froze pretty good. And it just takes a while for that ground condition to get suitable for planting too. So I would concur a lot that that's probably a real deal.

Joe

Vaclavik: Yeah, so you start to play with balance sheets and, um, you know, so, so there's a couple things. So if you're to assume that, you know, assume that 92 is maybe not real, assume maybe it's closer to 91, it could end up being lower than that. I mean, I don't know, none of this is, is a guarantee here at this point. It's all up in the air. But, you know, if you start to, to start to incorporate into your balance sheet that lower, uh, March 1st stocks number that they printed, uh, start to incorporate perhaps a higher export number because of what China's been buying, in the US corn market here recently, you could get yourself in, and maybe this is me trying to be bullish, but I feel like this is the way that it probably goes. You can get yourself into a situation that looks a hell of a lot less bearish than it does at face value.

Because if you go take that 92 that they printed for corn yesterday, plug that into the Ag Outlook Forum balance sheet, use a trend yield, I mean, it's going to look bearish, but there's a lot of like little things that could change the situation. Drastically. And it's for that reason that, like, around this time of year, there's just so much, so many unknowns. That's why the seasonal tendencies this time of year are typically like sideways to higher in the corn market, because there's just so many unknowns. Like, they usually don't sweep the legs out from under this thing in terms of market direction until we know substantially more about crop prospects.

Chris: Mm-hmm. You mentioned seasonals. Talk a little bit about kind of what what you think we are, or what you know that we typically see and kind of when this thing shakes out. I was telling you before we even started recording, just in talking to a lot of people as we've been wrapping up winter meetings, on-farm meetings, there's a lot of hope out there right now. I hope the price comes back up to where we would make some more sales and catch up. Talk a little bit about the seasonals.

Joe

Vaclavik: Well, the hope the market goes higher, I mean, that's a constant in any year, right? I mean, it's just varying degrees of that. I did a premium video last week and I talked about what happens following the acreage report in corn and soybeans. And we talked about like report day action, but then more importantly, like what happens in the weeks following the report. On average over time, corn and soybean prices tend to trend higher following this report. They tend to trend higher uh, really into April, May, sometimes into June, sometimes even into July. And that's on average over time. There are years that are exceptional where you will move lower, uh, during the spring, but that's not really, uh, the rule. To move lower would be the exception to the rule. So there are exceptions.

Seasonals don't work every time, but the, the general gist of it— and this probably goes for just about any year— is that during the spring, especially if when you've got some sort of like weather condition like we've got up north in this instance, there's so much uncertainty when it comes to production that the market, it typically holds together and oftentimes will even add some weather premium in the spring and into the early summer until we know like, one, that the crop is planted, and two, like the weather's not a disaster.

Chris: Yeah, interesting. So talk a little bit about the technicals that factor into that equation too, though. So there's, you know, and there's just with those seasonals, everybody's, you know, your technicians are watching the technical side of things. Talk a little bit about what, you know, you might expect or what people are watching from that angle.

Joe

Vaclavik: Well, when you're talking about technicals versus fundamentals, fundamentals is supply and demand, right? Fundamentals is weather, it's China buying corn. Technical, you're talking about more charts or past action in the market, trying to compare this to other years, that sort, those sort of studies that really don't have much to do with supply and demand. The charts, long-term, I still think we're in, like, I would probably make the argument, at least for corn and soybeans, we're still kind of in this bull market environment that we've been in since like the third quarter of 2020. I mean, we've seen a lot of volatility within that bull market, but I'd probably say we're still, You're still in bull market territory, still in that cycle. It hasn't failed yet.

Shorter term, I mean, yeah, you could pull up the daily charts and find some trend lines that say we're, we're still trending lower short term, and maybe that could all change by next week. But very oftentimes, I mean, in terms of like the charts, a lot of the old December corn charts I look at, a lot of the old November soybean contracts I look at, the highs are some— the calendar year highs are very often posted in April, May, June, sometimes July.

Chris: Okay. So another area I want to go into, you kind of mentioned, so we'll segue into China. And then you've— we've always got the Russian-Ukraine war and some of those things going on that may impact demand. What are you watching for? What are you paying attention to on the demand side of the things with all the geopolitical stuff going on?

Joe

Vaclavik: Is there anything there Oh gosh, I think the China thing is by far the biggest thing going on right now. We don't know how much they're going to buy. So they've already bought, what, 120, 130 million bushels of corn. And it was all old crop corn. So that means if they're going to take delivery, and I have no reason to believe they won't, they're going to do so before August 31st. So this is all going to happen pretty soon. There's rumors and chatter out there, maybe total purchases are going to be 5 or 6 million metric tons, whereas now they're just over 3, I think. So if that comes to fruition, if they bought, if they buy double what they've already committed to, that would be very, very helpful. You got to think we're looking at an old crop carryout situation that on paper right now, the way USDA has it penciled is like 1.34 billion bushels.

I mean, start to up your export number by 100 million, 200 million, and that number could come down really quickly. And that's not just a thing that affects old crop, it affects new crop because, you know, your old crop, ending stocks are your new crop beginning stocks. So these balance sheets all blend together. And the fact that China's in here buying, I mean, I think that's probably the most important thing that I see very near term on the demand front. And the question is, you know, does it continue or not?

Chris: Gotcha. Gotcha. So another area I want to get into and kind of just keep cruising down the list here are the funds. We need them in the market. They've kind of left us. What's your thought there? What, what's it going to take to get the funds activated again in here?

Joe

Vaclavik: I have a crazy theory. So the funds started liquidating soybeans there a few weeks ago, they started liquidating what had been a pretty big long position in the soybean market. And I think it happened around the same time that those bank failures happened. You had that Silicon Valley Bank, you had the Signature Bank deal. There was a lot of question marks regarding the U.S. banking system at that time, and all of those questions have since been answered. The Fed, the government essentially kind of bailed out these banks, is, is without getting too much into it.

So I think during that crisis there was like a big, there was like a big risk-off attitude among large money managers, and we saw it reflected in some of your like commodity markets that had acted really well soybeans, meal, live cattle, feeder cattle were another example of a market that's like big-time bull market that corrected sharply during that timeframe. And all those markets have bounced back substantially since that happened and was resolved. I don't know if that's a crazy thought or not. I've been told I'm not crazy for thinking that. But in any case, yeah, funds got some room to go. I mean, if they want to be long corn, I mean, their net short in real time are pretty close to it. They've liquidated all of the length in the corn market, yet corn prices are still pretty high. So I'd call that a victory.

I mean, if you would've asked me, you know, 6 months ago, Joe, funds are net short corn, where's the corn price at? I probably would've said old crop corn south of $6, and I probably would've said new crop corn south of $5. So the fact that it's held together so well despite all of this fund liquidation that we've seen in corn especially, man, I think that's a positive.

Chris: Okay, another question. And we'll just keep throwing you questions here. Interest rates. When I look at clients here, as we've progressed through the winter, I continue to see almost every farm I get to, the next one and the next one and the next one, the interest rate on line of credit's even higher yet. I'd say I'm in the process of aggregating that, but I would say, you know, 8, percent hits an average. And, you know, last year, you know, at the beginning of the year, we were, we were way less than half that. It's gonna be a big deal. Working capital positions are pretty strong. But, you know, as it takes more to put the crop in, and, you know, this, this cost of money is a big deal. If, if you have your crystal ball on interest rates, at what point does this thing slow down?

Joe

Vaclavik: This thing in terms of what?

Chris: Interest rates. Interest rates. Are they going to— are they going to slow down or are they going to keep just grabbing a quarter here, quarter there? What's your thought?

Joe

Vaclavik: General consensus right now is that the rate hikes are either done or that we may see one more and then they're going to peak. So like Fed funds rates, generally speaking, people think are going to peak somewhere around 5%, effective, give or take, which is really close to where we're at right now. So I think if you look at— I can actually pull it up while we're talking here. If you pull up like that CME Fed tool, they give you like the odds of what the rates will do at the next meeting. And the next meeting is May, and it's 50/50 between no rate hike and a quarter point hike. So they may take that effective Fed fund rate up to like 5.25% where it's at 4.75% currently. I mean, they may do that, but a lot of people think that, yeah, we're close to the end of the cycle here.

Remember that a lot of times, like the general rule of thumb is that, okay, if we have inflation, interest rates, the percent— interest rates as a percent need to come up to like where inflation is, right? Well, we're pretty darn close to that because CPI is like 6% and now you've got Fed funds at 5%. So you're pretty darn close to like, you got inflation coming down and you've got rates going up. So we may— there may be some light at the end of the tunnel here in terms of rates. Rates. That's at least what the Federal Reserve says. The, uh, the way that the interest rate markets, Treasuries are set up, they're actually, uh, indicating that the Fed's gonna like start cutting rates sooner rather than later, which is a crazy, uh, concept. I know that the way that it sounds, but, um, like they think that by 2024, maybe even before that, you could see some rate cuts.

Um, keep in mind that the Fed has been wrong about like everything. I mean, they were way too late to hike rates. They should have been doing it you know, during the middle part of 2021, and they didn't make their first hike till March of '22, I think. So they've been behind and off on a lot of stuff. This could be no different. But I mean, I think the general consensus right now is that we're pretty close to some sort of peak in rates.

Chris: Mm-hmm. Um, as far as you continuing on the general economy for a minute here as we get towards wrapping up the— you know, there's still talk of recession and all that kind of stuff. And as I travel around all winter I see in all these airports, these airplanes are full. Everybody's moving around, everybody's vacationing, everybody's doing stuff. It sure doesn't look like anybody's short of money and they're handling this inflation pretty good. Your take on the general economy?

Joe

Vaclavik: I think it's good. I think the job market's really good. That's a big thing. So wages are up. Everybody, for the most part, anybody who wants a job can get a job. That's, that's a big deal. The Fed actually wants to see that change. The Fed has, has essentially stated that they need to see unemployment higher, which is really a terrible concept when you think about it. Like our government is trying to put millions of people out of work. That's probably not what the government should do, but that's kind of what they're trying to do in terms of economic activity. One of the positives is that we had low interest rates for such a long period of time. Like anybody who had a mortgage, refi'd it at 3%, right? And now they're set for 25, 30 years. There's, there's a lot of people, probably the majority of homeowners are in that situation.

So I think that if we are headed into a recession, I, I think my general thought is consumer is pretty well prepared for it, or about as well prepared for it as they could be. And that's highly variable. Everybody's different. Everybody makes a different amount of money. Everybody has different spending habits. Everybody's got different levels debt. But I think the fact that everybody was able to refi long-term debt at super low levels for the last, you know, couple of years, that's a big deal.

Chris: What's the correlation between that general economy, stock market, and everything to commodities? Anything you're watching there?

Joe

Vaclavik: So we've talked a million times about how recessions are bad for commodities. Like, so the typical economic cycle, once you get into the, like, what they call the late phase of economic expansion, which is essentially like when the stock market peaks, is I how a lot of people read it. You get into the late phase of economic expansion, uh, that often correlates with high commodity prices, which pushes inflation, and then you see the Fed hike, and that ultimately pushes you into recession. And recession results in, uh, you know, lower demand for everything, whether it's crude oil or gasoline or corn or soybeans or whatever. We're not really seeing much of that in the grain markets yet. Um, and, and we have seen it in the energy markets, which is kind of interesting.

Like, Crude oil has been trending lower for months now, whereas everybody thinks crude should be at $100 and it's just not, and it doesn't want to rally. So I don't know. I mean, I feel like we're almost getting into an environment where the commodities are kind of just doing— they're kind of all individually doing their own thing. Whereas for a lot of, like, say, the late half of '21 into the first half of '22, the commodity sector was highly correlated within itself. Like, they were all kind of moving together. Like, energies were moving with grains or moving with a lot of different things. And now it seems like they're kind of, they're kind of separating and kind of doing their own things fundamentally, which is probably the sort of marketplace that I prefer anyways.

Chris: Okay, last thing. Joe Vaklovic puts his farmer hat on and looks into spring planting timeframe. I always tell people the best time to market a lot of times is when you're working on your planter, your hands are greasy, and you're thinking, I should be making sales. And then you don't do it the next day, you're kicking yourself because you didn't do it. One of the things I always like to see people do is do that before we get super busy, is do that last set of data and looking at your costs, looking at, you know, dialing in those numbers again just a little bit better and then putting targets out to get to whatever level as an operation you need to be at from a cash flow perspective and for just managing your business professionally, like we all should be doing. That's my two cents.

What do you, Joe Vaclovic, the farmer, look at, pay attention to as you head into planting season and a little beyond?

Joe

Vaclavik: This year is no different than any other year as far as I'm concerned in the way you should make decisions. My general rule of thumb is that I like to look at seasonal tendencies. So I told you earlier, these, these row crop markets, they tend to peak in When April, May, June, right? And it's very, very difficult. And that's easy for me to say. It's very, very difficult, if not impossible, to predict when exactly and from what price, you know, the market's going to peak. I mean, that's, that's not something that's possible to do.

But my general rule of thumb is, okay, so you get some rally into the spring, essentially by like that first week of June, anything that needs to be sold prior to the end of the calendar year has to have a home or protection, meaning that if you have old crop bushels, you got to get them sold by— if there's a rally before, say, that first week in June, that's, that's my general thought. You want to be pretty much done with that. New crop bushels that you can't store, you got to have them protected, forward contracted, accounted for in some way, shape, or form prior to that first, second week of June, somewhere in that timeframe. If you have bushels, if you got a ton of storage, you're in really great financial shape.

And you can store stuff until, you know, the following summer, say you can store '23 corn bushels until July of '24, then those would be the bushels that I'm not as concerned about. But in terms of anything that needs to be marketed for old crop before the end of August, basically, or for most people sooner than that, and new crop, I mean, if you can't store it, you've got to have either sales options, some sort of protection on all of that stuff as you get into the month of, say, last half of June into July. Because those months there, like the late summer into fall, like July, August, September, October, those are typically not good months for the market. And there are exceptions. There's always exceptions to the seasonals. But if you were to do it one way every year, the way that I explained would be the way to do it.

Chris: Mm-hmm. Yeah. What we see a lot of times is, you know, people undersell, you know, just because a lot of times when you need to sell is when you don't think you have it or when, you know, and so I'm not being critical. I'm just saying that as an observation, we see that a lot where You know, we're sitting on some bushels, even though we have the storage, you know, just because you have the bin doesn't mean it has to be full. Because, you know, you got to look at basis opportunities, and you have to look at your cash position. And it hasn't been too much of a violation to your business the last few years, because interest rates were low.

But when interest rates are 8%, and if you're sitting with $1 million worth of grain in the, in the bin, towards the end of the year and you've got a million-dollar line of credit line, you know, that's, that's not going to be a great place to be in, you know, moving forward if interest rates are 8% plus, you know.

Joe

Vaclavik: Yeah, it's a total game changer. I mean, right. Like when I— so like in my newsletter and stuff, you know, I throw out marketing recommendations and I don't— as far as that stuff is concerned, I don't consider the interest rate implication because there are more people than you think out there farming in cash that aren't borrowing money. There's, there's, there, it's not a huge percentage, but it's more than you think. So I don't take that into consideration. But if you're, if you're farming in the real world, you absolutely have to take that into consideration. I mean, you and I have talked at length and some of the stuff we put together about how, you know, it costs you what, 4 cents per bushel per month to store corn if you've got a line of credit against it or whatever the number is based on the interest rate.

So I mean, it is something that absolutely needs to be taken into consideration where it really had not been a consideration for, what, 15 years. So you've got a whole generation of, of people farming who might be in their 20s, 30s, hell, maybe even early 40s that haven't had to deal with this sort of interest rate thing. Whereas now, I mean, it's, it's absolutely something that has, that has to be considered when you're talking about storage.

Chris: No doubt. Yeah. Yeah. And that 4 cents, you know, you got to look at that, those numbers from a couple of different angles. I mean, it's about $10 an acre per month. Yeah. Set on that stuff for 4 months, you know, there's $40 an acre. If you had to write a check for $40 an acre, you'd make a different decision. So we, even though we aren't writing checks out for some of this stuff, you know, we want to make sure we're doing the math and thinking clearly about it. Yeah. Any, any last comments? We'll wrap this baby up, wrap it up however you want.

Joe

Vaclavik: I said this in my YouTube video on Friday, when I run the USDA, Chris, the USDA reports, they'll be released at like 7 in the morning. The markets will be closed. We'll all have a chance to drink a cup of coffee, take a look at them for an hour. Then the markets will be open. The fact, first off, that it's released during the market hours when the market's open, it's a big disadvantage to people like you and I and farmers. It's a disadvantage. We don't have time to digest the data. It's a huge advantage for your big money of the world, your algorithms, your black boxes, your Ken Griffins of the world who run Citadel. It's a huge advantage for them. It's a big disadvantage for us because we don't have time to digest the data. Um, the second thing is this, this 11 AM release is crazy, especially on a Friday.

So you're going to put out the biggest USDA report of the year on a Friday at 11 AM when the market's only open till 1:20. So we get, we get 2 hours and 20 minutes to trade like the biggest report of the year, then they close the markets for 2 days. I have a lot of issues with how these reports are released and when they're released. Um, I feel like that needs to change, but I have no say in that, unfortunately.

Chris: Yeah. Well, it's, it's like you and I have talked offline before, you know, the, the report happens and then the dust settles. And eventually, as we head into spring, there'll be other news that's going to drive the market anyway.

Joe

Vaclavik: So, yeah, we got another 2 days of trading this at best, and then it's going to be on to weather and snowpack in North Dakota. I mean, that's going to be the stuff we talk about.

Chris: Right. Sounds good. Hey, Joe, this has been a great conversation as usual with you. I really appreciate it. And people want to catch you on your YouTube or whatever, quick plug.

Joe

Vaclavik: Grain Markets and Other Stuff, YouTube, any podcast app, Apple Podcasts, Spotify, it's uploaded every morning. I do it like religiously. It's up before 6 AM Central every single business day.

Chris: Awesome. Sounds good. Thanks, Joe. Really appreciate it.

Joe

Vaclavik: Yep.

Chris: See you, Chris. Yep. And thanks everybody for listening. And we will catch you again Next time on the Ag View Pitch.