Weekly market outlook May 15-19th: USDA report and market fundamentals

Chris

Barron: Hey everybody, before we get rolling with today's podcast with Mark Welch from Texas A&M, excellent conversation. So stay tuned here, but just want to remind everybody about our subscriber-only podcast called 19 Minutes. We've got a lot of people listening to that now, some really great content on there. The one we put out last week on the 9th of May was called Family Business Communication Dysfunction. We've got lots of other really good ones on there that if you haven't listened or haven't subscribed, I recommend you do that. We'll have a link. To that to subscribe. Super easy. Just click on that and you can sign up. $30 a month and it gives you a lot of really good data.

Some of the other ones out right now: The Art of Giving, Building Business Culture, Desire, Discipline and Growth, Top 10 Bank Loan Essentials, You Are Not Unique, Strip-Till Economics Part 1 and Part 2, Transition Topics, Turmoil, Timelines and Taxes, just to mention a few. So there's a lot of really good content on there that Shay and I have. Put together for you. So again, go in there, click on to that, get subscribed, check it out. And with that said, hope you enjoy today's podcast with Mark Welch from Texas A&M. Thanks. Yeah, go ahead.

Mark

Welch: Oh, you know, the— we don't normally talk about the wheat market driving the corn market higher, but certainly with the strength we're seeing, you know, back there and concerns of wheat supplies, whether it's production in the US or availability coming out of the Black Sea, you know, that's another undertone of just a concern of of supply, of the supply situation that could spill over and provide some strength to other markets. And so certainly I think that's one to not to ignore. Even if you're not a wheat producer, there's still a lot going on in a major market that yet might be a source of some support for us as it does spill out over, spread out over other commodities and a general influence in terms of what happens to the grain complex.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We're heading into a new marketing week, the 15th through the 19th, kind of in the middle of the month of May, and we are lucky enough to have with us Mark Welch, uh, with Texas A&M. Mark, how's it going?

Mark

Welch: Going good, Chris. Well, I'm on the right side of the state down here in Texas where we're getting a little rain and it's been relatively cool even here for late spring for us. So the crops on our side of Interstate 35 look pretty good. It's a little dry out west, but just kind of depends on which side of the highway you're on.

Chris

Barron: Yeah, yeah, that's, it's kind of been the story of the have and the have-nots as far as water goes and, you know, cold in the upper Midwest and, and wet again and wet in the east. In places and then super dry in the West. So everybody gets a little bit of some, some kind of a weather challenge, it seems like, at some point during the growing season. We're seeing a lot of guys making some pretty good progress on planting. You know, we'll get another report here this week on kind of how things are going. It looks to me like the market doesn't really see any threat with planting as, as a quote unquote bullish or bearish either way. It's kind of a neutral thing. Is there anything else that you think that the market has baked into the, into the cake, so to speak, or not really at this point?

Mark

Welch: Yeah, it is interesting because all the, you know, attention that's given to the planting progress report that, you know, comes out every Monday afternoon about 3 o'clock, and whether, you know, how close we are on track to national averages. It's interesting, in the report that came out last Monday, you know, we're right about where we ought to be. It's about half the crop is in the ground. And on average, that's where we'd be around, around Mother's Day. The record high for last week of the growing season was 80% planted. And the record low was back in 1984. And that was 10% planted. Oh, wow. If you look at the yields those years, The yield in at 10% planting was a little above trend, and the yield when we had 80% of the ground was a little bit below trend.

So, you know, it's, it's interesting, it's track and it can create some concern, but it's kind of where you are and who got the crop in. I think that really got us, especially when we get to what USDA reported in that May WASDE, plugging in that yield of a record high 181.5 bushels per acre. Boy, everything's got to hit just right, you know, to see that kind of number. And obviously, planting progress and who gets the crop in when, you know, will play into that. But so I think those are kind of the undertones of how we interpret the numbers that came out, particularly in that May WASDE.

Chris

Barron: Yeah, anything else that you're taking away from last Friday's USDA report that you're kind of watching that, you know, people need to pay attention to in the next few weeks ahead? Or is there anything out there that kind of stood out to you?

Mark

Welch: You know, it'll be interesting to see that, again, that is the yield number acres, you know, USDA, they just take whatever the Prospective Planting Survey said, and they're gonna plug that one in. So it would take a huge issue between, you know, now and the first part of July, even before they'll change that number from what will come in the acreage report at the end of June. Again, June WASDE, they'll probably just carry that number right over. It would take a disastrous spring like 2019, where we were just flooding out across the Corn Belt, you know, something like that to change that planted number. So again, I think it's back to that yield is the first one. Are the conditions going to be such that it, you know, setting the stage for— that's a trendline yield, you know, I can't argue with where they got their number.

But it's a, it's a pretty aggressive number considering, especially I know that again, we talked about kind of which side of the highway you're on or which side of the Corn Belt you're on. If you look at the drought map, there's a big chunk of Nebraska and Kansas and they're major corn-producing states. They don't look good and they've been in drought for such a prolonged period. And so even if we do get some recovery and some, you know, better weather patterns even through the spring, Well, when you're coming from a deficit like that, even on irrigated ground, it's a yield drag. And so that's a big chunk of major corn production that I think could weigh into that number. So when I look week to week, you know, I've still got to keep that one kind of on the back of my mind of just what might happen there. On the use side, the numbers are pretty strong.

Increasing feed use, increasing fuel use, increasing food use for corn. All those categories higher. And, you know, especially on the feed category, when we're looking at, you know, cattle on feed numbers certainly are higher year over year, perhaps seeing some rebound in the poultry industry. And we'll see what the pork industry does. But there again, there are some factors there that I think could diminish the rebound even in that feed use category that we saw on the WASDE. Exports. Again, a very strong rebound from what we did in the old crop year with all the competition out of Brazil. So again, those are good numbers. But, but I just question in the current, you know, economic environment, you know, can we hold on to those as the year unfolds? And that's what we'll have to see, what goes. But that's my concern, the yield. And then can we keep those use numbers?

Again, I thought those were pretty, pretty high. That they plugged into the, into the WASDE.

Chris

Barron: So let's stay on the, on the demand side of things then. You know, you talk about usage and what we go through. You know, we've had some pretty major price pressure in the commodity— the whole commodity index. You know, when you look at just kind of where things have drifted to and it always seems like we get down to the cost of production And we've pretty much gotten there for a lot of producers on, on both corn and soybeans anyway, and wheat in some cases. Talk a little bit about just about, you know, where's this demand potentially going to come from? Because China seems to be canceling stuff and they prefer to buy from South America than us anyway. Is there any hope or, you know, where does the demand come from?

Mark

Welch: Yeah. And is my concern in for this next corn marketing year. And so we're talking about, you know, the rest of 2023 and into early 2024. I think that the general global and particularly, you know, US economic conditions as central banks try to get inflation under control around the world, that the pressures are going to be there to slow down economic activity. I mean, that's, that's the, the policy is designed to do that, right? Uh, and so to me, that is, that is going to be less conducive, uh, to a rebound in our commodity prices, whether we're talking about corn or copper or crude oil or cotton, you know, whatever it is, that, uh, those, those, those economic pressures, uh, can, can limit that rebound on the use or the demand side of the balance sheet. Whereas these high prices that we've had last few years, uh, they're certainly there to stimulate production.

Bring more acres in, bring in more production. And so I think that's what's reflected in the, in the May WASDE is that we're seeing that, that increase on the supply side, which all the economic forces are there to do that. But I think we still have some challenges near and longer term still with the broader economy. The inflation numbers we're getting from out of the US, yeah, they're much, much better from 7% to 9% inflation. Down to 5. That's really good. We got to get to 2 and flattening out at 5. And so I think the— doesn't mean the Federal Reserve will keep hiking rates like they have been at the same pace they have been. But I think it does mean that these higher rates are going to be with us for a sustained period of time. And so before we get some relief from that category and try to stimulate economic growth and activity, that could be a pretty good ways down the road.

And so that impacts the consumption of things like feed and food and fuel and fiber. And again, you get on the margins, but it does contribute to that overall demand outlook, particularly if the weather hits and we make that record high yield and we see that rebound in production in Europe and Argentina and other places identified in that May WASDE. That, yeah, to see the supply come back in proportion to use, those kind of numbers that we're looking at, a $4.80 season average farm price, which was in that May WASDE. Yeah, that's kind of a jolt. But yeah, that again, you can kind of run the numbers. And when we've seen these kind of supply and use ratios before, that it kind of makes sense that we could get down below that $5 level. Again right here in, uh, for this '23 crop.

Chris

Barron: Well, we're getting close now, uh, and, and I guess, you know, what you're saying here then, you know, as we got to get to 2 on inflation, well, the lower the inflation, the more pressure that puts on commodities. You know, a high inflation rate bodes well for commodities, and conversely the other way, So if that happens, what's, you know, where, where does the price strength come from if inflation isn't helping it? Is it— do we have to have a weather concern? Do we have to have, you know, what are some things that could give us, you know, some sort of a rebound?

I think what a lot of people are waiting for or looking for, or maybe a better way to put it, hoping for, is some sort of a price rebound where people can put some some offers out there and maybe sell where they wish they would have made some sales and didn't, um, that maybe would catch, you know, what, what are you looking at without being a prediction, but, you know, for some realistic, you know, uh, levels that, you know, from a technical standpoint even, are there areas that we can get back to, do you think, or is it just going to take a major weather issue or something.

Mark

Welch: Yeah. Again, you've touched on a couple of very, I think, key points. And as a kind of a marketing philosophy or a marketing plan, you know, typically as we move into March, April, May, we would see a somewhat of an upward price trend, specifically if you look at that December corn contract. And, uh, gosh, wouldn't it be nice to see $5.50 on the board again? And, uh, I'm guessing we'd get a lot of things done if we were to see, you know, a price bounce back up towards that.

Chris

Barron: But we were the same people that wanted to— wanted a $590,000 or a $612,000 or whatever, you know, from the technical standpoint. And then we didn't get back to those. Yep. Offers were put in, in the, in the $570-something range. We didn't get back to that. Now we're talking the $550,000 range. We got to recalibrate our thought process maybe a little bit here too, right?

Mark

Welch: We really do. And again, whether it's that, you know, a weather issue, another even geopolitical issue, you know, that could, you know, impact our markets, something, you know, from the broader economy that could, again, maybe, you know, either limit supplies or boost our demand prospects in some way or another, you know, kind of change that picture. Um, but if you look at kind of where we've been in other years, and the chart I keep going back to, and I wish I could get away from it, it's 2013 coming out record high prices in 2012, and we just traded lower the whole year. And we had a little bit of a price increase right before in there in May and June, a little bit of strength. But it's interesting, even in that year of gradually declining prices all year long, it was still better to get something done before the 4th of July.

And so even, yeah, looking at $5.10, $5.20 on the board, yeah, that's kind of hard to take. But that doesn't mean we're going to hold here. That again, if everything, if we, if we do make a crop and get the crop planted, that's projected in the US and around the world. Again, particularly looking to say at Argentina, if they're getting out of that La Niña weather pattern, they're much like us here in the Southern Plains. La Niña's get away from that and back to an El Niño pattern this fall when that's just what they need. So, you know, again, those are very positive for production prospects with still those limitations on the demand side. And so I think that's, that's just the real concern. And so yeah, it's gonna be a weather scare, something more than likely that may create some opportunities. Obviously, no guarantees, nobody knows.

But yet, Even just getting something done in this first half of the year, even if it's one of those years, it's just slugs lower all the way through, perhaps doing something and give us some flexibility if we do get a rebound. There are all kinds of tools to recapture some of those gains back in the market, but it doesn't mean we walk away from a plan just because we, we missed the 570. I missed the 550. It doesn't mean I quit trying because it doesn't mean we're not going lower.

Chris

Barron: Yeah. Yeah, and that's just it. You know, everybody's different. Everybody's got a different level of sales. There's some people listening probably have zero sold. There's people listening. I know of some guys that were 90, 90% covered. They look pretty smart now. But, you know, I think, you know, a lot of those that did that had a lot of risk too and couldn't afford the risk. And I think a lot of people, a lot of us got lulled to sleep you know, we just kind of hung around that $6 level for a long, long time. And, you know, and you just get kind of lulled to sleep. And I think, you know, one of the things that you brought up that I kind of want to have you touch on is 2013. You know, that's 10 years ago. We came off of 2011, 2012 with super high prices, and then '13, we just kind of slid sideways. This looks and smells a lot like '13.

That doesn't mean that it is, you know, I mean, we could have a drought this year, even though, you know, it doesn't quote unquote look like we might, you know, we could, you know, you just don't know. I mean, we're a long ways away from putting the '23 crop in the bin. But on the same token, talk a little bit, you know, you said, you know, I think something really smart there about just putting some tools in place. In other words, if we would get back to those target levels, wherever, you know, where do you wish you would have sold? Have some, some targets in place, some offers in play, but also maybe look at, okay, how do we minimum price that or how do we put a floor on that so that at least if it does go down to that $4.80 or below, we're not in the tank, you know, we're at least protecting ourselves and you can always leave that upside open. Any comments on that?

Mark

Welch: You bet. And again, there are, you know, with tools, with futures and options that let us create some of those kind of profiles. But also having discussions, I think, with, with where you're going to merchandise your grain. In Texas at this point, we still have a— our basis is still relatively strong. And so no, it's not as good as we've had in this for the '22 crop. But having those conversations, are there ways that we can perhaps— where, with who we're going to sell our grain to, how can we add value to what they're doing? And having those conversations of trying to either, you know, yeah, no, the board looks, looks pretty soft. But if I can still capture some strength in the basis, you know, it still might put me in a pretty good position here for this '23 crop, even though we've seen prices, you know, slip lower over the last several weeks.

You know, not ignore that side of, of how we add value on the cash side to, to really enhance that, that price position. And so however, however that's done, whether it's— they're glad to see those early commitments come in, whether you could spread those out, what are those conversations might be? But certainly, again, just adding value to who our customers are, maybe create some, some opportunities here to capture just that cushion or margin we need, particularly in this size we're seeing these prices slip lower.

Chris

Barron: Yeah, I think another comment you made there just on basis, I think basis management currently on old crop, there's still really strong basis levels in a lot of areas. So cleaning house up you know, you look at your average selling price, you shouldn't look at like individual sales. You need to look at your average. And for most people cleaning house on the '23 crop, you're still going to have a pretty darn— or '22 crop, excuse me, you're still going to have a pretty darn good average. And then for those that have some sales on '23, if you're selling some $5.50 or some $13 beans or whatever and averaging those, you know, and same with wheat, I mean, you're averaging— you got to look at the average price. And, and make sure that that's achieving your goals, I think is important. But your basis comment was a good one too.

I think, you know, early harvested corn and soybeans in, in some areas I think are gonna reward some people, don't you? You know, that, that, you know, the areas in the South that can be harvesting in, you know, maybe even in August or whatever, but, you know, you get up in the, you know, Iowa, southern Iowa or central Iowa and southern Illinois and those places, those guys can get roll in early, there could be some huge basis opportunities. I think, you know, maybe, maybe $0.50 to $1 over on corn, for example, you know, possibly.

Mark

Welch: We have seen that after coming off of a short crop year. Right. Those basis possibilities, particularly as you just mentioned, July and that first part of August, you know, there can really be some windows of opportunity to monitor that. Yeah. And again, if you're having our conversations, you know, throughout this growing season, if we're going to have these, these acres or these bushels look like they're going to be ready at this period of time. You know, what can we do? Because that, again, that, that gives whoever's handling that grain for us, whoever we're selling that to, give them some information and some abilities they have then to capture marketing opportunities as well. Right. And that's, that's worth a lot for the value proposition for where this grain is headed. Right. And I think those conversations are absolutely critical.

Chris

Barron: Yeah. Last thing I want to wrap up with is the general economy and how that relates to the funds. They, um, are an important piece of our, um, volatility. You know, volatility creates opportunities, and it seems like, you know, they jump in if there's some hot news or anything. Um, any comments or any thoughts on the funds or what it's going to take? Or, you know, or is the just the threat of a recession just keeping everybody freaking out and staying out, you know, risk-off? What's your thoughts?

Mark

Welch: I think that that risk-off comment for our grains, particularly, that's playing out. If you look at the reports from the Commodity Futures Trading Commission, those Commitment of Traders comes out every Friday afternoon. One trend that we've seen over the last several weeks and even months in some of the markets, if you look at the index fund investments, those are those long only, they're buying contracts and rolling over to stay long. They've been exiting the grains to a large degree. Yeah. And so as a hedge against inflation, well, if they're seeing less threat there and maybe a rebound in some other markets or other opportunities, uh, we're seeing a drawdown in that investment. And then even on the, the more speculative investors, you know, they're both sides buying and selling all the time.

Uh, was it last, uh, the report that came out a week or so ago, they have actually gone net short in corn. And if I remember right, that's the last time we had done that was maybe 2020, 2019. I have to go back and look and see. But to see a broad sell-off in terms of their bullish outlook in the corn market had changed considerably. And in fact, they were, they were net short the corn market, not net long, which doesn't happen very often in corn. We see it in some other places, but not typically in the corn market. So yeah, you talk about the kind of those broader pressures where we don't have that buying interest. And so it makes it hard to find that— where are you going to hit that, that, that support level? When are you going to catch that when you have so much of that momentum is working against us in grain markets?

And that's a whole world with their technical tools and algorithms and when it's going to be cheap enough and they'll step in and reverse those, that they will come. I'm not the person to predict where that's going to be. But that's certainly been an underlying, I think, force of downward pressure in our markets that has— that we've got to contend with. Mm-hmm.

Chris

Barron: Yeah. And I think as you see commodity price pressure, it does kind of help us, though, to recalibrate. I mean, with every bad thing, there's always some good in everything. And I think I look at it as, you know, at a certain point, we had to come back to reality. With respect to land rents, you know, machinery and equipment costs have gone up about 31% in the last, you know, 24 months according to our data. You know, I mean, it's just— and inflation was, was getting rampant. And, you know, and we were seeing it, like I said, land rents, machinery, fertilizer, all these things. And so I think if, you know, if we can, you know, kind of get back to reality a little bit. This isn't probably a bad thing. I guess with that said, you know, any final comments or thoughts for producers over the next few weeks as they look ahead? Any final comments from, from you, Mark?

Mark

Welch: Sure. And I think a key point in any marketing plan or marketing strategy is— and yes, it's way early— but to try to keep the best handle on what your actual cost of production is going to be in this crop. And are there still opportunities to capture some, some profitable margins? Yeah, if it looks like we're going to get this crop in on time, and the weather, weather patterns look favorable, and you are fortunate enough to have that above average yield this year. What does that do for your breakeven? And it may be that these marketing opportunities, as, as much as we've seen some good ones get away, it doesn't mean there's still not going to be some out there that we can still capture and protect that margin. Uh, and so I think, uh, that, that changes as, as the, as the year is going to go along.

But try to keep someone monitoring what that number is, uh, because I think we're looking particularly down the road, if these are looking at downward price pressures, you know, perhaps capturing and ensuring that margin with the tools that are available is, is absolutely key. But you got to know your number. Without knowing that, we're just kind of shooting in the dark. Yeah, at least this gives us a firm basis for a foundation then for making some marketing decision. But to me, it all starts there.

Chris

Barron: That's awesome. I think that's a great way to wrap it up. You're preaching to the choir here when you talk about let's, let's get that cost of production dialed in, keep it dialed in. The thing I'd wrap it up with is, you know, fertilizer costs are less You know, I mean, I was just figuring what we paid last year for anhydrous, we side dress, we're going to be paying $50 an acre less for anhydrous now than we did last year and less than what I had in our cost of production. And so, you know, everybody's going to have a different scenario, but you need to recalibrate those numbers because it changes things. And yield is the quickest way to lower your cost of production too. And so Anything you can do to enhance or protect yield, I think, is a key thing too. But hey, as usual, Mark, you had a lot of really good stuff to bring to the table here, and been a while since we had you on.

Want to get you back a little more often. So really appreciate your expertise, and you can get back to watching all the graduates in the window there behind you.

Mark

Welch: We've got a lot going on here with the graduation in full swing here at Texas A&M. So you kind of got to time your comings and your goings carefully if you're going to make it anytime. But always good to be with you, Chris. Appreciate the opportunity, the conversation, and all the work that you do, uh, getting this, uh, this information out. And anything we can contribute to that, well, we're more than happy to jump in.

Chris

Barron: Well, I really appreciate that. As usual, Mark, thanks a lot. And, uh, also like to thank everybody. And if you are still planting and, and got things going on out in the field, obviously it's going to be a time to get herbicides on and get a lot of things, uh, going. And it seems like a lot of the work takes off, uh, as soon as you're done planting, then the real work starts because you gotta Gotta get the crop rolling. So I just want to wish everybody a safe continued spring, and with that said, thanks everybody for listening. We'll catch you again next time on the Ag View Pitch.