Fundamentals always win out: weekly market outlook January 16-20th

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 heading into another marketing week. The third week of January, the 16th through the 20th. We are lucky enough to have with us again Jared Creed, JC Marketing. Jared, how's it going?

Jarod

Creed: I'm doing well, Chris, as always. I appreciate the invitation.

Chris

Barron: Yep, well, we throw it out there a lot. You have a lot of, a lot of good content, a lot of good comments. And, um, just had a busy week myself down in Texas at TPAP. That's a— just was talking to you about that offline. That's a great educational opportunity. So anybody that wants to check that out, just kind of Google TPAP. It's put on by Texas A&M Extension. It's just a phenomenal program, and, and anybody listening that was there I'm sure would echo that. So, but Jared, we had an interesting report last week. I'm not sure it panned out quite the way everybody kind of thought it would. Talk a little bit about some of the takeaways now that the dust has settled from, from last week's report. Any, any lasting things or anything that are good takeaways that we need to be paying attention to?

Jarod

Creed: Well, I'd say first and foremost, it's like a big sigh of relief, especially if you're a producer. Yeah, so much data dropped on one day, and I know we spend an extensive amount of time last time I was on with you discussing various pieces that could take place on, uh, you know, January 12th. Oftentimes considered a Super Bowl of USDA report days. So a little recap, you know, we basically had 4 different reports. You had a quarterly stocks, which its most important piece there was a, uh, what's the word I'm looking for there, a rewind vision of what our quarter 4 calendar year feed usage was. Uh, on top of that you had an updated WASDE which, yeah, gives you a little bit better of a look at nearby local demand, specifically ethanol and exports. On top of that, you had another winter wheat seedings report, another acreage number to basically be privy of.

And then to kind of wrap all that up, on the same day we actually had another CPI report. And all those 4 pieces ran an incredible amount of— I can't emphasize enough how important January 12th was. I'm not going to try to find these fancy words to tell you. It was a crazy, crazy day leading up to it, just with how much data we're getting fed in one time slot and its potential impact in the markets for an extended period of time. So you kind of look back what happened. There was a lot of belief that our corn stocks number would be elevated. And I kind of thought that, you know what, the number, the line in the sand is we need to be 11 billion and no more. We ended up coming in at 10.8. The average estimate was a whole 300-some million bushel higher. And I shouldn't forget to mention inside that WASDE somewhat, you had your final crop production from last year.

It wasn't necessarily a surprise that we lost harvested acres, but I would say that the amount of acres that we lost was a surprise. Roughly 1.7, 1.8 million acres cut in the western Corn Belt, and you added 300-some thousand in the eastern Corn Belt. Net-net, you ended up taking your yield up a bushel an acre. Makes sense when you drop off those poor yielding areas that did not get harvested, and we lowered our production quite a clip. Uh, so there's kind of your leg into the quarterly stocks report. The WASDE, yeah, no, no big secret on local supply and demand. No surprise that we're backing off our exports a little bit more. No surprise that we, um, well, we should have maybe backed off our ethanol a little bit, but we didn't. And a very, very small tweak to the feed bucket.

Feed only went backwards 25 million bushels, and I think that's a resounding number right there to emphasize that the feed market didn't cut demand in the face of all that $7 to $8 corn that the feeder was exposed to in quarter 4 of the calendar year 2022. Keep in mind that's quarter 1 in the USDA marketing year. So one other piece, you know, another update in South America production, uh, kind of eye on the prize there. You wanted to see— from a supportive price action, you wanted to see a net reduction between Argentina and Brazil corn and soybeans. You got a net reduction in soybeans. You didn't quite get a net reduction in corn. It was stagnant. Nevertheless, we know that there's probably more cuts to be made in the Argentina soybean crop, and at this point in time, they haven't started rationing up the Brazilian bean crop to maybe the potential that it has.

But nonetheless, it reiterates the, the very tight stock situation we have, not just domestically but worldwide. I would say the takeaway there for me, Chris, amongst everything, CPI being at 6.5 on Thursday morning, and then all those other 3 data points that I just mentioned on top of that, you know, wheat acres are up a couple million acres year on year. The combination of all that very well may be enough for a period of time here to keep the ag commodity markets at least afloat. It's like we're looking for what's that shoe to drop that takes commodity markets much, much lower. I think it's, it's crazy that here we are in the beginning of 2023. And finally, it's like we've moved past all of this macroeconomic challenges that we've been facing. And we're back to fundamentals. Fundamentals always will win out. It's not a matter of if, it's just when.

And you can make a pretty valid argument that in the here and now, fundamental situation is tight enough that we've got our work cut out for us in the Northern Hemisphere, in the Southern Hemisphere, everywhere in the world to raise enough over time to get our supplies back to a comfortable level. Things are tight, and that's why you still see prices where we're at today.

Chris

Barron: Um, let me ask a couple of specific questions on that before we move on to another topic here. But the— so the WASDE reporter, if you just take the, the demand side of the equation here for a minute, and you made a couple of comments that I heard when I was in Texas, right? So you talk about areas where it's dry And at TPAP, I also spoke with an Argentina farmer who was there who farms the equivalent of about 20,000 acres and had a lengthy conversation with him. It's pretty interesting. We'll get to that in a minute. But, you know, you talk to these, these producers in Texas and some of these areas where it's super dry and, and the cattle numbers are going to go down. They're moving stuff around.

Basis is strong because the feed's got to get to where it needs to go and all this and that, but You know, if they didn't change the feed, feed usage number at all, and then you talked about the ethanol number not moving and it probably should have, is there something, you know, in the next report that we're going to need to really kind of be geared up for or ready for potentially on the demand side? Because it takes demand, I mean, even though we're short, but, you know, the demand side's kind of what really gives us more strength or keeps the strength there, right?

Jarod

Creed: Uh, common logic would say yes, Chris. I'm not so certain we have that much to worry about anymore from the demand side. We can have some small cuts here and there, and if anything, it's probably be on the front of ethanol. I don't know if we can really do much more damage to exports. I suppose you can maybe sneak it back another 50 to 100 million bushels, but in the big picture, things will still remain very, very tight. And the reason I say that is with what the US dollar has done, and with what values in domestic corn in Argentina with the weather they're facing, and a lack of ability to export any more out of Brazil at this point, and ongoing situation in Russia and Ukraine, we're basically the cheapest and easiest origination point in the world for corn. And I shouldn't say basically the cheapest, we are, we are the cheapest.

So if there's going to be an export window, it's going to be in the next 6 months, because 5, 6 months from now you're going to be talking about the safrinha corn crop. But there's a long roadmap to get there as well. They got to get the bean crop harvested, they got to get the crop planted timely. And, you know, behind the scenes and all this, there are actually a few places in Brazil that is too wet, won't stop raining, and that's slowing up their harvest. That's hurting some of their soybean yields. Which, uh, all of a sudden potentially pushes them behind the 8-ball on safrina corn crop. We're not there today, but that's maybe the next thing to look on the horizon from what Mother Nature— what, what, um, you know, what kinks Mother Nature can put in the armor.

Chris

Barron: So, so the feed use, I don't know, doesn't trouble you at all?

Jarod

Creed: No, not at the moment. I mean, maybe a little bit of a, a little bit of a pinball hat idea here, but It's no secret that the feed industry continues to move towards more and more vertical integration. So your large meat producers in the U.S. of being Tyson, JBS, Cargill, etc. When I look at them buying corn at elevated values, do they really care? Their behavior didn't show that they cared because guess what they do? They just pass that price right on back to the consumer at the meat counter. And that goes all the way back to CPI data. It's no secret that food is at a higher value. Is it all because of— is it all because of inflated commodity prices? No. Some of it's back to the consumer demand. I know we talked about that extensively a couple times ago that I was on.

The demand from the US consumer, worldwide consumer, is, in my opinion, a big reason of why we still have certain inflation in certain buckets. And our inflation number really just came down primarily based upon energy numbers— gasoline, oil, so on and so on. But everything else, you don't go to the grocery store and find cheaper food at the moment.

Chris

Barron: No.

Jarod

Creed: So everything's being passed down back to the consumer, and the consumer hasn't slowed up their buying, right? Interesting. So to answer your question, I am not all that concerned about demand in the next 3 to 6 months.

Chris

Barron: So on the positive side of things too, then, you know, like I said, I had the pleasure of sitting down with this farmer for dinner 2 nights in a row, visited with him a little bit, and he was telling me, he's like, it was this crop that he's growing is the poorest crop he's ever experienced. And it might just be his area, it might just be, you know, backyarditis on his part or whatever. We all have that wherever we live, you know, and we all kill the crop a couple times too if we're farmers or whatever in the process of the growing season. But, um, how impactful is that going to be if it's as bad as this farmer's telling me?

Jarod

Creed: I think you got to look at it two different ways, maybe three different ways. Let's just start with Brazil and then get back into Argentina. Southern Brazil has been impacted somewhat from the weather that Argentina has been experiencing as well. So, but Mato Grosso is like the equivalent of Illinois, Ohio, or excuse me, Illinois, Iowa, Minnesota, Nebraska, the U.S. top 4 growing areas. If our top 4 are good and Mato Grosso is good, it, it significantly impacts the ability to take the average down. So moving out of Brazil, getting back to Argentina, um, you know, look, if you look at their Buenos Aires Exchange ratings that they give out, similar to USDA crop progress reports and conditions reports, it's, it's incredibly poor. I think this last report was 6% good to excellent and like 60-something percent, uh, poor to very poor.

I mean, it's very, very challenged down there right now. I think there's plenty of estimates on the soybean crop that original USDA numbers was closer to 50 million tons And a lot of people lining up in that 35 to 40 million ton area now. So cutting off 400 to 600 million bushel of production. The trick within Argentina is that about 80% of their beans would be used in the crush market. They're not a big exporter of beans. So it doesn't necessarily create a huge windfall for, hey, we can go source beans from the U.S. That'd be great. We don't have the beans to sell them in the first place. But you're going to see a little bit more export business happen out of Brazil. But to the meal component, all those beans leave the country in the form of soybean meal. And that's why you have seen meal basically go from a $400 ton commodity up to $500 a ton nearly.

So that might be like a little bit of a saving grace, I suppose, for domestic crush in the U.S. as we go down this path of more renewable diesel plants coming online, you crush more and more beans, you produce more and more meal, right? And we need to have a home for it. It's a challenge to get meal moved in any way, shape, or form, uh, with, uh, a lot of efficiencies. But that's maybe the biggest story out of Argentina right now, is that in a worldwide market, you're going to create a shortage or a significant reduction on available soybean meal. The actual soybean crop doesn't impact the worldwide import-export markets. It's more about soybean meal.

Chris

Barron: Mm-hmm. So you talked about—

Jarod

Creed: and then, and then real quick on Argentina, on their corn. Yeah, they are a competitor of U.S. corn, and we've already seen their values relative to our values. Uh, we are cheaper than them now, some of that having to do with lower crop available in that part of the world. Their premiums are obviously going up ever so much, ever so slightly. And meanwhile, our premiums have been slipping a bit, making us more competitive than them.

Chris

Barron: Yeah, you talk about corn too, is interesting. Just talking to him, this quick side note, but he was like, yeah, when we haul to the port, you know, it's basically a day to the location, you sit in line for a day to unload, then you drive back for a day. I don't think it'd be very much fun trucking they're just crazy how, you know, some of that— how the infrastructure and some of the things still there are quite a bit different. But they live it all the time and it's not that big a deal. You, you had said, um, something that I want to come back to, you know, fundamentals always win out is your quote. What are the funds looking at? You know, the— what, what's the big money looking at now?

I asked Joe Vaklovic this last week, you know, what are they Now that we've been through this report and they did whatever magic they did for themselves during the course of that, what's this mean for the funds moving forward in your opinion?

Jarod

Creed: The index fund continues to leak out of the commodity space as inflation prints, uh, continue to soften. Managed money is about nothing. Yeah, they got some positions in beans. There's a rather large position in soybean meal, but as a whole they continue to remain very, very stagnant. Our volumes have been much lower than you would think you would have at these type of price levels. Um, open interest continues to reflect that. I think it goes back to the idea of it's in a corn market or soybean market, it's just as hard to be long a $6.50 to $7 commodity or a $14 to $15 commodity It's just as hard to be long as it is to be short. Short, you got a fundamental issue that's tough to bet against. Long, you've got a situation where everybody's lining up to sell it at a higher value. So, the managed money space, I just don't think they care.

I'm almost taking our friend Pete Myers' words, they don't care, they don't care, in my Jersey accent as much as I could, right? They just don't care. Uh, and I think that has been the tune for, for months upon months now. Someday, sometime, we will get some information that will entice outside money to take a position and run with it. But right now they're unwilling to. Like, historically, your, your 1,000-lot or your 1,000-contract traders, spec traders, if they have historically traded 1,000 contracts at a time, they might be trading 50 right now. The price to play is way too high, and it's just tough for them to stay engaged. And don't forget, they made a tremendous amount of money in the first half of 2022, so they could be just sitting on the sidelines, sitting in the weeds, waiting to do something else.

Chris

Barron: Yeah, so with all this said, you know, there's, there's the pluses and minuses. We do have— we are sitting on a short supply. We're heading toward February, which the month of February helps us as producers get a, a bit of a comfort zone and kind of know where we're at in terms of, you know, truly having a floor on a high percentage of the crop. What are you— what's your advice to producers as we head towards the month of February? What are the key things to be looking at in both old crop and new crop?

Jarod

Creed: First off, it's better to be lucky than good, and let's just hope that we can maintain these prices for another month and have some pretty decent insurance averages. Quite frankly, we haven't really moved the market on new crop corn or beans, uh, worth a squat since the last time I was on with you before Christmas. Yeah, um, it just hasn't moved. If we can get these prices established another 4 weeks down the road the safety net or the downside risk to the average operation evaporates pretty darn quickly. Then it becomes a known number. Once that crop is planted, you're able to quantify what that worst-case situation is. At this point, I do think— I'm not trying to advocate some type of a bullish position, but I think things are tight enough and going into the U.S.

growing season that we may still have some better pricing opportunities ahead of us in the next 90 days on new crop production. And you better have your homework done like we talked about last time of knowing where you need to be, have those orders in and ready to execute if you get those opportunities. And that might be as simple right here, Chris, saying that maybe it's as simple as 6, 6/10, 6/20, 6/30, 6/40, 6/50, spacing stuff out, just letting some go as the market gives you an opportunity. Knowing that an average between $6 and $6.50 for whatever percentage of your crop you need to have done in that range is probably enough to keep you afloat in 2023 no matter what happens from those sales and insurance. And on the bean side, it's arguably not that much different.

It might just be like $14 to $15 spacing out orders in there, knowing that we have a fighting chance chance of making money for next year's beans if we can grow somewhere around $900 an acre. So that's the average producer across I-80 to I-90, I would say. I don't know if there's anything that complicated to be looking at right now, Chris, beyond just having those numbers on paper, in your head, and as a goal, and having targets working where you need to let bushels go for new crop. Old crop, a little bit different. As the market rallied last week, cash basis has softened a touch, uh, and I would think that that probably continues to happen for a period of time. There's no secret that this next summer basis could still be a little wild, but the cost to carry, to wait for that opportunity, is pretty extreme.

Um, I don't want to say the ship has sailed on old crop But the message hasn't changed since the last several times we've talked. Just keep moving grain. You're back closer to, I would say, oh, $6.75 to $7. You're going to catch a significant amount of listeners. $7 to $7.25, you're going to catch some more. On the bean front, you're still probably talking right around that $15 area. Hopefully those numbers work for the operation and just keep stuff moving because the interest bill is what we're trying to avoid right now. Just the old adage of in the grain merchandising world, a bushel bought right is already half sold. That's the farmer right now. You're getting yourself put into position in a good way in 2023. You've played 3 good quarters maybe, or 3 good years. And now we're trying to make sure that we're wrapping up a win.

And trying to maybe play a little prevent defense, perhaps get ourselves in a good position for 2023 where we might be 3, 6 months down the road, Chris, talking about 2024 in a much more, uh, aggressive manner.

Chris

Barron: And not as a recommendation, but, you know, I mean, we've been talking this whole time, you know, 2022, it's really hard to figure out why we would want to sit on any of this. Just kind of keep it moving, take advantage, you know. I mean like you said, if the price is going up, the basis is going down, maybe you, you do some HTAs or something, deliver some of that stuff when this spring or sometime, you know, depending on where you— where your timing is for cash flow and all that kind of stuff. But getting that moved, I think that's, that's a good point.

Jarod

Creed: On the '23 stuff though, hey, real quick, just to clarify what you mentioned, I think you meant— yeah, I think you meant maybe writing basis contracts. Not writing HTAs, writing basis contracts. If you feel the market can continue to go higher, at least get your basis established. Well, ideally just sell the cash, right? I don't think that it's a great idea for anybody to be thinking about HTAs at this point in time. In the event that the board keeps moving higher, you're going to find yourself with an HTA and basis going lower.

Chris

Barron: Yep, yep, true. Um, I guess, you know, the thing is, is like you said, the message there, keep things moving. That the '23— I've got a question before we wrap things up here too. You know, you talked about, you know, stepping into this market, basically plugging sales in at these price— you know, wherever your target, your starting target price is, and then just up a little bit, up a little bit, and just keep plugging them in. Number one, I'm curious on, on, you know, percentage amount is going to be different for everybody, but what tools make you comfortable there? Is it, is it HTAs? Is it futures? Is it cash? Is it options? Or is it some, a little bit of all? Or what, what makes you comfortable? What would you be doing?

Jarod

Creed: No cash until the crop is planted and we're closer to pollination or closer to August rains for soybeans. HDAs or hedges. If you're uncomfortable going that route, I suppose you can always go down the path of the minimum price route, whether it be just owning a put or selling some grain and buying a call. But I still think you stay away from basis at the moment. The percentages, like you said, it's different for every single farm. Hopefully this isn't the first sales that our individuals are making. If it is, you might have a decent opportunity to make some catch-up sales. Uh, this is kind of taking it to the next level of if a guy is already 25-30% covered for next year and we know more variable costs now, what is my next step?

And most guys knowing that magically, regardless of where an individual is located, having corn with a 6 in front of it and having beans with a 14 in front of it works. It might not be anywhere near the margins that we've experienced the last couple years, but it's still giving a fighting chance to make those type of margins, whether it be price up on the balance of the crop or hopefully, and probably more likely, uh, better yields. Um, I mean, so you still got a lot of flexibility in your back pocket. But I'm thinking that I'm gonna probably have some producers that are closer to 50% marketed by the time they get 50% planted. And historically, you can make an argument that, that March, April, May, June timeframe might provide some of the better opportunities we have for the crop here as well.

Chris

Barron: Gotcha. All right, I was taking some notes there too. So, uh, any, any final comments there? I mean, this has been an excellent conversation. I think you, you nailed it on a lot of things. Anything I didn't hit you up on that I should have?

Jarod

Creed: No, I, I just think the takeaway again here is we dodged a pretty big bullet January 12th report. You always run the risk of having some surprise really ding the markets. Uh, with that said, you still didn't have all that crazy of a reaction from the market. And that's another sign that outside money is just a non-participant for the most part. Weather is going to be king here for the next 60 days, primarily in South America. And on top of that, I suppose in another month, it's going to come up for a lot greater of a discussion of talking about that last 2, 3, 4 million acres in the US of where it goes. Are we going to tear up a little bit of wheat and plant some more row crop? Are we going to swing acres a little heavier to soybeans versus corn? And if none of that— sounds pretty rough around the edges to say this, but it's none of that junk that, oh, I'm sticking to my rotation.

Yeah, an individual may be sticking to rotation, but generally speaking, the U.S. farmer pays attention to price, and we move acres based upon price. And that might be what the price— uh, well, you would wish it would be a lot more on that. Unfortunately, there's a lot of those decisions made on what is the value of the old crop grain that I'm selling right now. And quite frankly, if we're making those decisions, uh, based upon price today, or hopefully a vision of what profitability is, we're not just making that decision and not taking action steps to do something about it. I'd say that's just the main takeaway right now. 30 days, we're going to know a lot more. We're going to know a tremendous amount more about South America. And we're going to know a lot more about planning intentions and maybe some 30-45 day weather forecasts going into late March, early April for the US.

Chris

Barron: Awesome. Yeah, appreciate your, your content and everything here. It's been a great conversation, and I think you got a good point there. In another 30 days, we'll continue to get smarter as every day chips away here, and especially as we get into February and get into the month a little ways too, and and start figuring out. You'd made another comment, it's better to be lucky than good, and we're going to need to be lucky during the month of February too and keep some price strength there to keep the floor there on the crop insurance. But with that, sir, what's that?

Jarod

Creed: I said yes, sir, 100% correct.

Chris

Barron: Yep, that's right. Well, hey, Jared, really appreciate your time again and look forward to getting you back on here again as we get towards the month of February, and we'll have you on again too from Florida, you and Joe Vaklovic and a couple others are going to be down there. So we'll definitely get, get you guys and Ryan Moe and some of you guys on here together and have a little powwow like we did last year. So looking forward to having you guys all in a roundtable discussion on the markets here in a couple weeks. And with that said, thanks again, really appreciate it.

Jarod

Creed: You bet, Chris.

Chris

Barron: You bet. And thanks, thanks everybody for listening. And we will catch you again next time on the Ag Dew Pitch.