Funds go risk off: weekly market outlook March 20-24th

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 a new marketing week. March 20th through the 24th. And we are lucky enough to have with us today Clark Neuber from BIS Commodities in Cedar Rapids, Iowa. Clark, how's it going?

Clark

Neighbors: Good morning, Chris. Doing great. How are you?

Chris

Barron: I'm doing good. Doing good. One thing, one thing I am going to do here real quick is I'm going to throw a commercial in here at the beginning just to remind everybody on our new subscriber-only podcast called 19 Minutes. We've got some really good information already in there. I think we've got 4, 3 or 4 podcasts in there already on data and transition, and we've got some really great ones coming up on strip-till economics and things. And one of these days we'll get, we'll get somebody like Clark in here and, and really give us some answers in 19 minutes that maybe we can't say on a, on a regular podcast here. How's that sound, Clark?

Clark

Neighbors: Sounds good. Keeps me short that way.

Chris

Barron: Yeah, right, right, exactly. So But yeah, no, any— anybody that hasn't subscribed yet, check it out. It comes out on the 9th, the 19th, and the 29th of every month, and it's $30 a month and some really great stuff on there. So anyway, with that said, we want to get rolling here talking markets. So I guess, Clark, I'm going to start out with the biggest question. I forewarned you. I'm like, maybe I'll throw you under the bus here. But I think one of the biggest questions that a lot of people are wondering is will we have a spring rally? Is this thing going to come back? We've, you know, we've chiseled a bunch off the corn market in particular. Farmers are sitting there scratching their heads. One of the things we've said is, you know, maybe, maybe you get some targets in and let the market come back to you. What prices you wish you would have sold anyway. What's your thoughts?

I mean, what are the odds? What, what, what can farmers do when we're getting really close to the cost of production for a lot of these guys?

Clark

Neighbors: Well, I think you gotta first of all kind of back up and see what's transpired to get us where we are currently a little bit, Chris. So as you mentioned, the last 30 days or so we've seen, especially in the corn, you know, correction off the highs of a fair amount. Um, but I think we've got a clear road— roadmap of what's happened to some degree, um, and let me date back a little bit. About 6 weeks ago, uh, the firm that, that compiles the Commitment of Traders reports on a weekly basis had a cyber attack, and the CFTC had a tough time getting that information processed out after that cyber attack. And so finally, after about 6 weeks, it's been very much in lag— we got a clearer picture the middle of this week, and it shows the funds, or the managed money, have basically liquidated their entire corn, entire corn position in length.

And during that 6-week period, and most, most of it in a 2-week period, last week of February, first week of March. And so the fund length in the corn is back to its lowest level since August of 2020. So think back to that. We were, you know, quite a bit lower. That's when this rally started. So, you know, so you look at, all right, what caused that? And I think a lot of it's macro-related by the funds because of the uncertainty in the markets. You can throw in the macro environment with the rising interest rates, inflation, and I think it's created a fair amount of money coming off the table looking for safe havens. And we saw that very— prevalent this week.

Uh, not to get into detail, but based off the banking issues here in the last week and a half, and the funds from the total ag perspective, throwing corn, beans, wheat, et cetera, and, and the livestock were also at the lowest levels since August of 2020. Now there's variance in that. As I mentioned, the corn length is almost back to zero. The funds are very short wheat. They're still fairly long beans and an all-time record, record high on bean meal. So this week we saw the bean complex break, corn and wheat correct to some degree. Uh, you know, corn was up nicely this week. So I think you kind of balance that a little bit and say, is the bean market still somewhat vulnerable? Have we priced in, you know, the issues of the Argentine crop as we're coming to about the halfway point on harvest in, in Brazil?

So all those factors have kind of gotten us into this situation where you begin and you transition from South American weather to the U.S. growing season or the North American growing season as we typically do here in March and into early April. That, that transition is usually supportive of the market. So how I would wrap up with your, you know, your question is, as we get into the U.S. growing season, um, the tendency is for market to look for the— as one of my trader buddies in Chicago likes to call the 2-2 forecast— is too wet, is too hot, is too dry, is too cold somewhere. So that always causes support, at least initially, uh, in the U.S. growing season. And the other thing that I think is maybe not bullish but supportive is the carryouts. You know, corn carryout's tight, we're under 10% stocks-to-use ratio. The bean carryout's even tighter yet at under 5% stocks-to-use.

So And so those numbers being tight like that here in the US, and to some degree from a world perspective, is critical for the US to have a good crop. So the tipping point of that as we go through the growing season will be, you know, old season traders like me like to watch spreads and like to watch basis. When spreads and basis are firm, that means the market is going to be fairly well supported. Now, if you start seeing either of those relax, and then relax aggressively, that's usually a good sign the market's starting to feel pressure because all of a sudden the cash market, etc., is feeling comfortable with that supply. So the calendar's key, Chris. You know, between now and middle of May, now on the 1st of June, I think a guy can be a little bit patient right now on new crop. But patience is 60 days, 90 days, not 6 months. Okay, I think that's key.

You got to kind of incrementally look at the calendar and say, do I need to get some stuff priced? Because we've got enough noise in the geopolitical world right now, you know, whether it's Ukraine and Russia, whether it's what's going on with China, that we have to be a little cautious to say, you know, if something strange were to happen there, what's the impact? And especially with the Chinese, I think that's key, is they're a big driver of our demand, as we've seen this week with some pretty good corn exports.

Chris

Barron: With China in the, in the mix buying, you know, getting apparently back into the buying mood here as of late, what do you see that— I mean, is that— if that continues, won't that be kind of a, a good positive thing too as we head into spring if that continues, or what's your thought there?

Clark

Neighbors: Yeah, so China's been very, uh, from a corn perspective, non-participant to some degree so far this year. Uh, China in the last 4 years has really scaled up not only U.S. but world corn purchases, also with sorghum and feed grains. Uh, their crop production seems to have kind of flattened out the last 5, 10 years, not keeping up with, with domestic demand. So this week alone, China bought about 83 million bushels of corn. Now, we had, I think, 4 announcements this week. The first announcement, I think the reaction was, well, it's about time. The second reaction, or the second day, the amount was, well, this is about what the trade was anticipating. But— as I saw these sales progress through the week, it started to have some impact on the cash markets and basis because that equates to about 40 vessels. A lot of times that corn will go off the West Coast after PNW.

But the problem is, as we know, if you look at production from last year, the Western Corn Belt was, was muted on production. So it's almost like I saw some rail basis, say, into that cattle market, Texas Panhandle, Kansas, etc. Some July basis in those areas via rail went up 25 to 30 cents late this week for July delivery. So in the West, it's kind of, you know, it's almost like a Wild West shootout with, with the buyers out there because you have a combination of the cattle industry needing feed grain, uh, the ethanol industry fighting for those same bushels, and now you throw the exports into the mix. That part of the world is going to continue to be the tail that wags the dog in the cash markets going forward. But I think part of China's buying this week, if I think part of that is the situation in Argentina with the continued drop— of the soy and corn in that region.

Keep in mind, Argentina's corn exports usually are in that March through August timeframe, where Brazil kicks in about July through November. Keep in mind, most of Brazil's corn exports are that safrinha crop, which gets harvested here later this spring. So there's that gap with the Argentine situation. So I think China is starting to fill in some U.S. bushels to fill in that Argentina. Keep in mind, we're still way below what we've seen the last couple years on Chinese purchases for U.S. corn. Um, so I don't anticipate we're going to get back to those kind of levels, but it is encouraging to see them come back in the last week, fill some holes. We've seen some nice basis upticks because we're down pretty hard this year on U.S. corn exports, not only with China but with some of our other typical buyers.

Chris

Barron: Mm-hmm. There's some other stuff going on called the, uh, Russia-Ukraine war right now too. And so, uh, what kind of impact do you see there on the commodity side of things? Because I think people think, you know, you hear on one side of the fence, well, if we have, you know, if the conflict continues, it's, it's bad for commodities. If, if we have a big blowup, it's it's good or bad, you know, what, what are you guys watching? You know, what are you paying attention to with, with the war and how that all factors in?

Clark

Neighbors: Sure, sure. So, you know, it's interesting. We're basically a year into this situation, if you will. Um, during that time, if somebody told you a year ago Russia's gonna have their biggest year in wheat exports, I think we would all thought that's the craziest thing they ever heard. Russia had a record crop. Russia has been taking advantage of that record crop into the typical wheat markets, into the Middle East, into Europe, even into China and those areas. So, and the Ukraine corridor has been functioning probably far better than most of us thought it could. And you continue to see pushback with the Russians on, you know, keeping the agreement going forward, etc., etc. But, um, I think that's kind of a moot point as far as world, uh, sales and world production and world movement at this moment.

I think you have to kind of have that in the back your mind is if there's disruptions, because As I mentioned earlier about China buying corn this week, they've, they have been very aggressive in buying corn from Brazil and also from Ukraine and in that part of the world. So if we see disruptions there, does that pick up a little additional U.S. business? I think that's more potentially of a wheat play than it is corn, but I think that situation is a more of a muted scenario right now until something changes dramatically. So, you know, it's in the sixth page of the newspaper now instead of the front page. So I think it's kind of the back of everybody's minds. It shouldn't go away. But I think that's something to watch going forward, but maybe down the list a touch, Chris.

Narrator: Mm-hmm.

Chris

Barron: As we continue to talk about things that can move the market, I want to come back to the domestic stuff for a minute. Um, you mentioned the bank failure stuff that's kind of going on. Um, that's— is or is not affecting interest rates, depending on who you want to listen to and, and what direction the wind's blowing that day or whatever. But, you know, the, the interest rates, um, the risk-off, everything that potentially could be going on with the U.S. economy stock market, all those things. Any other things from a domestic perspective that you think threatens or bolsters the direction of the commodities here in the next couple of weeks that you guys are watching, or into spring, I should say?

Clark

Neighbors: Well, you know, I think as we mentioned earlier, I think it's had some impact on these markets over the last 2 weeks, especially as risk-off. I mean, If you think about if you're a big fund manager in London or New York, and you know, you've went for 10+ years of low interest rates, so you have to be a little more aggressive looking for other areas of returns, right? So the stock market has been very good historically over that time frame, but you've also seen a fair amount of influx into more risk assets like real estate and commodities. So now with interest rates and the return on money with interest rates becoming more of a possibility, why not take some risk off the table? Do I need to have as much money in these risky assets?

Now, we, you know, and when you look at the funds maybe backing away from commodities a little bit, we've seen a shift in the ownership especially like in corn, shifting that ownership from the fund to the commercial to some degree. Okay. As far as commitment to traders. But yeah, I think, I think a couple of things producers need to keep in mind. That's kind of a side note. I think the biggest thing for them is to understand, and I think in general, the U.S. economy to understand is the last 20 years we basically went through a period of free money, if you will. That's why the tech industry boomed, right? That's what got this SBV Bank into problems.

And, and, um, as producers or as consumers, understanding return on money, understanding what interest rates mean, understanding how much it costs to have inventory in a bin or inventory of Nike shoes in a warehouse and how that affects your business model, I think is critical to understand and not be naive on how that affects how the rest of the economy functions as far as that interest changing the flow of money, if you will. And so My personal feeling is I think interest rates and the inflation are not going to go away in a heartbeat. I think there's a lot of people on Wall Street that hope that happens because they've been so accustomed to this free money. So, you know, you go back 40+ years ago and we had really high interest rates in the late '70s, early '80s.

I don't think we see that scenario, but at the same point, maybe interest rates and inflation in this middle single-digit area could, could hold for a while, could hold for a while. So whether it's planning, you know, what that affects in cost of inputs, whether that, you know, functions with talks with your banker, I think that's just so critical to, to understand how this all transpires going forward. The return on that money and also the cost on that money. And the cost of that money is holding our inventory.

Chris

Barron: So, yeah, well, and like you said, you can have a lot of pain for a short period of time or, or a little bit of pain for a long period of time. Either way, you're going to have some pain just because of the situation we're in.

Clark

Neighbors: Sure. And so one last thing, as you mentioned in the domestic impact on that, so if you know, the anticipation with the rising inflation and what the Fed needs to do. And keep in mind, the Fed meets this week, whether they're going to bump up rates or, or hold things steady. I think most of the traders are anticipating steady, if not maybe a quarter, quarter point tick. Having said all that, how does it impact the potential of a recession going forward? I think most of your analysts or economists feel there's a recession coming, or we need to see a recession to slow things down, not only here in the U.S. but maybe worldwide. So does that affect demand? That is to be seen, you know, the impact on what that could be in the cattle industry a little bit with tightness of cattle, uh, inventory and so on.

That side note is something to watch, but, uh, a slowdown in recession can have some slight impact on demand, you know, higher commodity prices, ration demand, right? I think we've seen that happen in in the energies. I think we've seen that happen to some degree in the grains here in the last, uh, 6 months.

Chris

Barron: Yeah, so we've covered a lot of the macro stuff. As we wrap up, I want to take just a couple minutes here as we wrap up and talk about some of the micro stuff on the farm at that, at that level. A couple of key things on the input side, I just wanted to hit on energy for a minute. One thing with Ag View Solutions, one of our core values is transparency, I guess. So I will say, again, not advice. I mean, we're, you know, we're seeing some guys buy diesel now. Again, it's not advice, but we did on our farm last week. And right or wrong, I don't know. But it just seems like, you know, we talked about Russia and Ukraine and all kinds of different stuff in China and volatility that you could see, it wouldn't take much to all of a sudden crank energy prices right back up again. And so I'm comfortable with the known. I don't like unknowns. And so we went ahead and booked our diesel.

On the input side of things, what are you guys watching? Is there anything there that you guys see as a threat or an opportunity or any comments on that?

Clark

Neighbors: Well, it kind of gets back to your point on Ukraine and Russia and what impact that had on energies over the last 12 months. I mean, we went almost an entire full circle on that. Uh, first on inputs, I mean, natural gas is as cheap as it's been in several years all of a sudden. Uh, crude hit its lowest level, uh, this week that we've seen, uh, in the last 18 months, I believe, prior to the invasion. So the impact of that, whether it's unleaded gas, diesel, and the impact of the products coming out has cheapened up a lot.

So I, I think your point being, you know, if the numbers work and you run them through your, your numbers that you guys have, Chris, I think it makes sense to lock some of that in to take some of that risk off the table, make it a known, you know, because, um, you know, the one thing we've watched in here for the last 6 months is, you know, the The US or the administration has been fairly aggressive, especially last fall and last summer, releasing barrels out of the Strategic Oil Reserve with the idea they were going to replace those, those reserves once crude got under $70 a barrel. Well, guess what? We're there. So I think we need to watch and see on the weekly energy inventory reports to see if they start building those reserves back up, because we're at the values that the administration said they'd start to build back up those reserves.

If we do, uh, that could be kind of an artificial put to this energy market, if that makes sense. So I think that's worth watching. Now, obviously, other macro or geopolitical issues around the world could have create a pop back in the market again too. But the only other thing I would add though is, again, because of high energy prices and maybe, uh, uh, less driving, maybe driving more efficient cars, maybe driving a few more electric cars, we have seen demand of gas slowly start to diminish, uh, here over the last, uh, year. Partly due to price, but we haven't really seen that rebound with these gas prices coming down here of late. Mm-hmm.

Chris

Barron: All right. That's good. Last, last thing I want to hit on, 22 sales, and I'm going to get to 23 here in a second, too. But 22 sales, you mentioned basis. Are you concerned about basis? Usually there's a strong opportunity for a lot of guys during the planting season. On old crop, if guys don't have old crop cleaned up and they're sitting there now scratching their head wishing either they did or, or just being fine with waiting, any threats on, on basis or anything that you would be telling guys to watch with the remainder of old crop corn, soybeans?

Clark

Neighbors: Sure. We've seen— correct, correct. We've seen a tremendous amount of beans already sold. I don't think there's a lot of beans left in the country or in inventory anywhere. And all the elevators we talked to on the commercial side. Corn is not quite at that pace. We've actually are going to send a survey out to a bunch of our elevators this upcoming week, so I might have a clearer picture on this in another 10 days. But, um, I think two notes I would make were fairly historically high basis levels depending on where you're at, um, both on corn and beans. You know, some areas say in Eastern Iowa and parts of Illinois, maybe not at those historic levels, but they're depending on the timing. And as you mentioned, just getting the planting time, I think there's better values there. But I think the key to watch is base is strong, logistics are good.

Uh, we're seeing rail movement much more liquid than a year ago. We're seeing truck availability much better than a year ago. We're starting to see trucking rates come down in some sectors in the Midwest. So I think as far as old crop The key to, again, to watch interest rates. Holding corn in your bin costs 5 cents a bushel a month right now as far as interest costs. Beans are pushing a dime. So with an inverted market like we have in both corn and beans, and these inversions hit new highs this week, that's the market saying they need it today, not tomorrow. So I would look at your local bids. If the spot bid's good and you want to move stuff before planting time, get it moved. If there's good numbers out there, in April and May that, that offsets and give you good cash carry between now and then. Get your transportation locked in and get that moved there.

There may be some crazy numbers this summer, and I've told people this, but it's hard to hold inventory for some crazy basis levels this summer, especially out west when the market's kind of saying they need it today, not tomorrow. That's kind of, uh, rolling the dice, if you will, with the cash markets.

Chris

Barron: I like the— another way I like to look at that cost of carry instead of, you know, we always talk about capturing carry, but cost of carry is a thing when interest rates are where it's at right now. And you mentioned $0.05 a month with 200 bushels of corn, that's $10 an acre. And you sit on that stuff for 5 months, there's $50 an acre. And we don't think of it that way because we don't have to write a check for it. If we had to write a check, I'm pretty sure we would be like, I don't, I don't want to pay that. And you would, you wouldn't. So I think that's, you know, we always got to really pay attention to some of these expenses, even though even the ones that we don't directly write a check for, they're real. So last question, 2023, and we'll wrap this baby up. 2023 sales. We've got clients that have very little sold.

I don't think we have anybody anymore now that doesn't have something sold, but on the 2023, or at least I'm sure there's people listening to this that are at zero, but, you know, zero sold on '23 and we've got some guys at 100% protected, sold, whatever, at a pretty high level and lots of people in between. Any thoughts, comments, concerns as we head into the springtime here? Anything that guys should be thinking about on the '23 for corn, soybeans, wheat.

Clark

Neighbors: Any last— I think, yeah, I think we talked about that a little bit earlier. I think, you know, the— if you get into the growing season, the weather premium can tend to hold the market together. You might have to put some weather premium in the market. Um, again, this next 60 to 90 days is pretty key to pick up sales on anybody that hasn't put much in place yet, or any. Um, As I talk, and again, and in about 10 days I'll have better numbers on this, but as I talk to commercials around the Midwest, I would say in general farmers are well below the last 2 years on new crop sales as of this date. Mm-hmm. Um, I think there's the tendency of, well, if I sold stuff early the last couple years, you know, the markets got better later. So I think there's kind of you know, the short-term memory, if you will, on that.

And so I think the next 6— excuse me, 60 to 90 days is pretty key from a calendar standpoint to build up those sales and get things back in order. One kind of tool we like using during this timeframe is using short-dated options on new crop. Because you can buy options against December futures on corn, November options on beans, and not have to pay as much time premium. Uh, looking at May options, July options, uh, those can kind of work as a nice tool to get started on some additional sales, especially on sales that a guy's may, maybe unsure of whether he's going to raise or where his production levels are.

Chris

Barron: So that's kind of a nice little tool to keep in mind too going Yeah, it's just when we look at this, you know, from our perspective and we looked at the cost of production, look at our clients and we see prices get to these levels where they're at, it usually, you know, doesn't take long. And eventually this— these markets always try to figure out how to get their way back to the cost of production. And, you know, and when we're in that $5, middle $5.50 range, you know, somewhere in that, I think we closed last week in that $5.61 range, that's got a, about 30% of our, you know, 25 to 30% off the top of my head, guys really close to their cost of production. You know, we're, we're $0.25 away in corn as, as we closed last week from the cost of production on average, our average cost of production is in that $5.25, $5.25 range somewhere in there. Soybeans, we're at it.

$13 is, is cost production average that we're seeing for our clients with their expected yields. And we're below the cost production on wheat. So the, the prices— and so, you know, it's just, I think guys really going to have to figure out what margin is acceptable and, and probably get some targets in there and, and be paying attention, working with guys like yourself to get a plan in place for the, the remaining of whatever isn't sold for those that have a fair amount to do yet.

Clark

Neighbors: And I think that's a great comment, you know, and we've talked about it that, you know, what happens if something geopolitically happens and the markets break harder, you know, that those are things you want to protect against, those are things we can't see today. Those are things that don't fit in our wheelhouse, because producers are used to looking at the weather and production and what's going on. But boy, you pull the rug out on some demand. You know, those are things that you hope don't happen, but yet you want to protect against, especially when you get good returns like you're talking about.

Chris

Barron: Yeah. And we need the funds in there too. We need that money flow. And if that money flow evaporates, that's the, that's the other threat that kind of scares me a little bit is, you know, if, if some of that goes away, it just really, you know, we need, we need them in the market.

Clark

Neighbors: So. Sure.

Chris

Barron: So hey, really great conversation. If people want to get a hold of you, what's the best way to reach you if they've got some specific questions or want to contact you?

Clark

Neighbors: Sure, just reach out to our website, biscommodities.com, or call the office 800-373-2525, Chris.

Chris

Barron: So, all right, well, that sounds good. Again, Clark Neuber, BIS Commodities in Cedar Rapids, Iowa. Really appreciate your comments today. Thanks a lot.

Clark

Neighbors: Thanks, Chris.

Chris

Barron: You bet. And like to thank everybody for listening. Again, check out 19 Minutes. If you haven't subscribed yet, get subscribed, check it out. $30 a month, comes out 3 times. We are going to be kicking out a bunch of extra ones, um, as we head into spring too. So you're going to get really good value on that. And with that said, we will catch everybody again next time on the Ag View Pitch.