About This Episode
Shay Foulk and Joe Vaclavik record on November 18 and look at the week of the 21st. The Ukraine grain deal extension was widely expected and priced in, but Vaclavik will not treat Russia-Ukraine as settled. Russia pulled out once already and understands its leverage, so a headline could land on a Sunday night at any point. The missile that came down in Poland moved grain sharply, which tells him the market was carrying only a slim probability of escalation, not none.
On seasonality, he notes a fairly strong tendency for row crop markets to move higher from mid-November into the first week of January, with the caveat that seasonals only work when they work. South American weather is already trading: Brazil looks good with talk of a record bean crop, Argentina has issues, and he calls the picture neutral to slightly bearish. Corn is different because Brazil's second crop is not planted until after the first of the year.
Vaclavik's bigger concern is China COVID and what it does to demand across commodities, especially energy, where crude has stayed soft despite widespread bullishness. He is impressed that money managers have held a very large net long in corn through a negative seasonal window, crude falling from $120 to the mid-$70s, and a 25 percent peak-to-trough drop in the S&P. His own call into year end is neutral and possibly sideways.
“There's actually a fairly strong seasonal tendency for row crop markets to move higher from, say, mid-November through maybe the first week in January. Seasonals only work when they work.”
— Joe Vaclavik
Key Takeaways
Row crop markets have a fairly strong seasonal tendency to rise from mid-November through roughly the first week of January, though Vaclavik warns seasonals only work when they work.
The extended Ukraine grain deal was already priced in; he still calls Russia-Ukraine the biggest day-to-day wild card for grain.
Funds have held a net long of roughly 200,000 to 250,000 corn contracts through harvest, crude's slide from $120 to the mid-$70s, and a 25 percent S&P drawdown.
December option expiration can pull corn toward a round number, with $6.50 and $7 the levels he names; beans were still above $14 at recording.
China COVID demand worries are, in his view, the reason crude stays soft despite a bullish consensus, and that spills into grains.
He expects USDA to cut its US corn export estimate given a weak export book, which means a larger carryout on the balance sheet.
Full Transcript
Shay
Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk and Joe Vack with us. Joe, how are things as you head into the weekend, the 19th and 20th of November here?
Joe
Vaclavik: I'm doing great, buddy. A little tired, had a busy couple of weeks. I was out of town playing with the band the last weekend. I'm fishing this weekend. I've been pushing out YouTube videos and podcasts and everything else just like always. So I could probably use a break, but not going to get one anytime soon.
Shay
Foulk: Well, getting ready for some turkey this next week, maybe. I don't know. Do you, uh, do Thanksgiving? You got Thanksgiving plans going on?
Joe
Vaclavik: No. Yeah, big plans. Not at my house though, uh, not this year. We usually do, but not— I think we're going to my sister's house. So yeah, I'll get, I'll get, I'll get my day off in there. Good.
Shay
Foulk: Glad to hear it. And of course, we're recording here 18th of November on Friday, looking at the week ahead. Week of the 21st here. You know, the first thing that I kind of wanted to pick your mind on a little bit is if you could just kind of review, you know, what have we seen this week of November 14th to the 18th? How do you think about what happened as far as price action or any news that we had here over this last week, Joe?
Joe
Vaclavik: There were some headlines of note. So they extended the grain deal in Ukraine, which I think was pretty obvious. I think that that I think market participants were well aware that that was coming in some way, shape, or form. Now, that being said, I don't think necessarily that this is like the end-all be-all of Russia-Ukraine. I think that situation could still— I think it could still turn on a dime at a moment's notice. I mean, Russia pulled out of the thing once. I think they've got— I think they understand that they have some degree of leverage when it comes to this grain situation. And if they get to a point where they feel like they need to use it, I feel like they could.
So I think that at any point in time, you could come in on a Sunday night or any— at any point during the week, and you could see some sort of headline regarding Russia pulling out of the deal, or Russia wants to interfere with shipments, or anything along those lines. I think that the potential for escalation with that situation is very much intact still, despite the fact that it looks like it's eased you know, momentarily.
Shay
Foulk: And I think maybe a tribute to that is when that missile landed in, you know, Poland there, and we saw grain markets kind of pretty quickly make a sharp turn. And that was just kind of a— the sentiment to me of, hey, this, this Russia-Ukraine thing isn't all baked in necessarily. There's a lot that can happen there yet.
Joe
Vaclavik: No, I mean, that's the thing is like, you know, the war is ongoing and at any point could escalate into, I mean, it could happen that fast where it's just one missile strike, one bomb, one whatever, one Russian, you know, bomb makes its way into a NATO country and all of a sudden it's World War III. And I don't think that the market necessarily thought that this week. I think the market thought that there was a slim chance of that. If the market thought that, wheat would have been limit up on Tuesday or whatever day that was, and the stock market would have fallen apart. And that's not what happened. I think we just reacted to like, maybe something's going on, maybe we're— maybe that's a slim possibility. But yeah, I mean, it could change very, very quickly. It's a massive wild card.
It might be the biggest wild card out there in terms of, you know, what could move grain in a really big way on a day-to-day basis. Mm-hmm.
Shay
Foulk: And, you know, one thing that I'm kind of curious about, I'm really curious on your take on this. To me, the whole thing is just weird, you when you're at war with a country, and you're making these grain shipment, like deals and agreements, and you're talking about 3 months at a time, versus or a year at a time, you know, Ukraine was hoping for a year grain shipment deal in place. I don't— that whole thing to me is just kind of weird when you're actively engaged in war, but you're making these trade deals. How do you think about that from like a historical perspective? Or Am I out of line thinking that that's weird?
Joe
Vaclavik: No, it is weird. It's super weird because, you know, you'll read one headline and like the stories will be right next to each other on the newswires. One of them will say Russia agrees to grain deal or extend for 4 months or whatever. And then right next to it, it's Russia is bombing Ukrainian energy and infrastructure, you know. So I guess that I'm no geopolitical expert. I guess Russia thinks that there's something to be gained out of this. I do think that they're having issues of some sort with these sanctions when it comes to shipping grain and fertilizer, and probably a lot of other issues related to sanctions that they don't want to necessarily admit to or address. But I mean, the sanctions have caused them problems, and maybe they think this is a way that they can— maybe that's, maybe that's their goal with this, is that they see some sanction relief.
I just don't know that I've— I haven't seen any Western leader even mention, mention sanction relief to this point. So I don't know if that's what Russia is looking for. I agree that it's kind of odd. The whole, the whole thing. Yeah, we'll let you ship grain, but at the same time, we're going to just, you know, try to bomb you into oblivion. It's, it's interesting times, man.
Shay
Foulk: Yeah, sure is. Next thing I wanted to ask you about here, Joe, is when you think about, you know, the next couple of months as we head into kind of this holiday season, I think we're past some of the major reports that might have some, some influence historically versus when we start seeing South American weather reports roll in and things like that. From a historical standpoint, last couple weeks in November and into December, how do you think about market action? What are you looking at? What should the farmer that's listening to this podcast maybe be thinking about here in the next couple months?
Joe
Vaclavik: There's actually a fairly strong seasonal tendency for row crop markets to move higher from, say, mid-November through maybe the first week in January. Seasonals only work when they work, so, you know, some years they work wonders, other years they don't work at all. That's what That's one thing to be aware of, I guess. When it comes to news items, I mean, you got your normal stuff. You got— I think we're already trading South American weather. I think we're trading the fact that, you know, it's going to rain in Brazil and they're in really good shape and everybody out there thinks they're going to have a record bean crop, or at least thinks they have the potential for a record bean crop. It's still early. Argentina's got some issues, but all in all, I'd call that situation probably neutral to slightly bearish, I guess.
I'm not going to say it's outright bearish because you've still got a lot of weather to trade. But I think they've maybe taken a little bit of weather premium out of the bean market. Corn's a different deal because Brazil doesn't plant that second corn crop until, you know, after the first of the year. So we're not quite doing that in corn, I don't think. Yeah, I think that's the story. I think South American weather for sure. I think this China COVID thing is a, is a really big story when it comes to commodity markets. And maybe people aren't as— maybe aren't as aware of that. But I think it's a big deal. It's a big— it's a big deal to people in in commodity circles are talking about, not just the grains, I think almost energies more importantly.
I think a big reason the crude oil market has been soft when, you know, keep in mind, like everybody and their mother is really bullish the crude oil market, right? But the darn thing doesn't rally. It doesn't go up. It goes up and then it goes right back down. I think this China COVID thing has people really concerned about demand for a lot of commodities, you know, energy, grains, you name it. I mean, China is such a big consumer of everything. It's a big deal.
Shay
Foulk: Yeah, and, and talking on crude, I mean, we're looking at my chart here. I mean, we're well off, well off the high. And so any, I mean, anything outside of that sentiment that, I mean, why is there this bullish outlook but we're not seeing the action there that people might be expecting?
Joe
Vaclavik: I'm no expert on the energy markets. I know there's a story when it comes to the diesel market or the distillate market in particular. I think there's a story when it comes to crude, but, you know, market's forward-looking, and if the market thinks that Chinese demand for crude oil is reduced, that's a big player. And I think also some of it has to do with the way that traders and speculators act in commodity markets. So, I mean, like, every commodity market is pretty much peaked, right? Like, the ones that had the really big runs, you know, your crude oil, your your heating oil, your unleaded gasoline, your grain markets. Livestock's a little bit different. They never really had the big inflation rally. But I think the general, like, idea is that first half of this year, commodities rallied, like, pretty much altogether as, as inflation was a big deal.
Everybody wanted to buy commodities to hedge inflation. And then you got into recession talk, like, June or July, everything peaks out. And now, we might be on the backside of inflation. We had some cooler inflation prints this month. And if that's the case, the large money manager just is not as interested in some of this stuff as maybe he was 5, 6 months ago, I guess.
Shay
Foulk: And that leads into my final question is, what happens when you look at the funds and some of the positions that are taken there, or where those positions are set? I should pose it as either way, right? So if we have a market downturn, for some reason things fall off in commodities here over the next couple months, what's the reaction there? Or if we have a run-up, is there still enough interest in the volatility there to where you're going to see continued strength or continued involvement by the funds? What are your thoughts on that?
Joe
Vaclavik: I am really surprised that the funds have held on to their long position in the corn market the way that they have through all of this. So we went through a negative, you know, seasonal period, you know, usually like the spring, early summer through harvest, it's kind of negative seasonally. They held on to that big long position pretty much all through that. You never really saw any harvest pressure in the corn market. Crude oil went from $120 down to, you know, mid-$70s, and they're still long corn. You got China COVID headlines, they're still long. I mean, it's been a really sticky, large net long position in the corn market. Stock market corrected, what, from peak to trough, was it 25% in the S&P? And they didn't really budge from it. I mean, it's really impressive the way that they've held on to that position.
They haven't held on to the length of the beans in the same fashion. There was a point there several months ago where they were almost back to flat beans, but I'm thoroughly impressed with the way that large money managers have held on and kind of stuck to their guns in regard to the row crop markets, at least. It's pretty impressive stuff, especially when you consider, like I said, so many commodity markets are so far removed from the highs, and they're just sitting here with this big long corn position. And I suppose, you know, I'll always say, if funds are long 200,000, 250,000 contracts of corn, that presents an element of risk, because if they decide to liquidate for whatever reason, yeah, I mean, they could send the market sharply lower. But I feel like we've seen a lot of reasons to liquidate, and they haven't done it. So It's pretty impressive to me.
Shay
Foulk: Yeah, I appreciate that perspective there. Anything else as we look at this next week, you know, the 21st headed into Thanksgiving? Any other thoughts that you have, anything that Joe's watching that you think the listeners ought to know?
Joe
Vaclavik: My personal thought is that things may be sideways for a little bit. If you had to guess, I think I was on AgriTalk a couple weeks ago and Chip asked me like what I thought was gonna happen between now and the end of the year, and I said I was neutral. Now it's kind of like halfway joking, but that's kind of like what I think, honestly. I think this is— I think this could be a sideways deal. I think they've thrown some bearish stuff at it, and beans are still above $14 and corn still above $6.50. You do have December option expiration coming up, so if you guys are listening Sunday— on Friday— and that could be a big deal for the corn market. Sometimes you'll gravitate toward like a big round number, and in this case maybe a $6.50 or maybe a $7 depending on, you know, what headlines out there, what's going on here this coming week. So that's one thing to be aware of.
I think the South American weather deal, especially as it relates to soybeans, will become a bigger and bigger issue. You know, we're going to watch export sales. The USDA reports aren't necessarily like the biggest deal this time of year. We kind of know what the U.S. crops are. You look for demand adjustments. I think that exports out of the U.S., especially when it comes to corn, are something that has to be watched. We don't have a good export book, and I think USDA probably has to come down with their export estimate. And that's going to mean, you know, a larger carryout on the balance sheets. But I think anybody who pays attention kind of already knows that.
Shay
Foulk: I guess the final thought that I would have here, this isn't maybe related to the weekly discussion, but looking specifically at USDA projections, how they change throughout the year. What are your thoughts on, as you look back at the '22 growing season, how do you feel that USDA has done or that that's been managed and how much weight and merit do we put in that as we move into the 2023 season?
Joe
Vaclavik: I'm not—
Shay
Foulk: how do I say this—
Joe
Vaclavik: I'm not like a big— I'm not the biggest USDA guy in the world, meaning like I don't look at the balance sheet and analyze every single bushel and every little movement that they make. I tend to look for the big picture takeaways. I mean, USDA, at the end of the day, they're using the best information that they have. At the start of a marketing year, it's all just projections. They're throwing out, you know, trendline yields. They're throwing out what they feel is the right acreage number. Throwing out what they feel could be the correct demand numbers. But there are a lot of those are just shots in the dark. I mean, you know, they started off the trend corn yield this year and we didn't end up with the trend corn. You can't, you can't predict stuff like that. So I think that USDA has its flaws.
I mean, everybody's got their issues with USDA's numbers and they're too slow to adjust this or they're too high with the corn yield in this particular state. I just, I tend to not read as much into it maybe as some people. And that's not a knock on people who like read into everything. That's just the way that I have always done this. I think they're doing fine.
Shay
Foulk: The reason I asked that question is not to pick on USDA or any of the other private groups out there, but I think the point that you're driving home there is a lot of times it can be anybody's guess and they do the best with what they have. And in particular, as we start with the, you know, you said we're already probably pricing in some of the South American weather things and, and making market moves based on that. Same thing there. You know, there's a long ways to go in the growing season. So from producer standpoint, just make sure that you got those, those budgets in line. Joe, you and I are going to link in on this following Monday here, have a discussion on budgets for 2023 and have an outlook there.
But, you know, I think it's important just to kind of keep that in mind that like anybody else, these groups do the best that they can and got to take that with a grain of salt.
Joe
Vaclavik: So A lot of the things that they print, yeah, just quick, a lot of the things that they can, a lot of the things they print, like a lot of the demand adjustments, just to give you, or even the supply adjustments, like just as an example, USDA cut their estimate for Argentina soybean crop last week. That wasn't a surprise to anybody because they've got planting delays, they've got drought. A lot of times the stuff can be projected, but a lot of the, a lot of the bigger items oftentimes can't be, like the acreage numbers in particular. Are one of just the big unknowns.
Shay
Foulk: Like every year, I say this all the time, every year everybody gets the acreage numbers wrong, right?
Joe
Vaclavik: And then we have to get the report and then kind of work backwards and redo our balance sheets. Like there are some things that are predictable, some things aren't. And there's, there's some stuff in the middle too. But, you know, a lot of this stuff, you know, Brazil and Argentina, we trade weather forecasts every day. So by the time they've made the change for Brazil or for Argentina, you know, we already know to some extent.
Shay
Foulk: Now that makes sense. I appreciate the follow-up there. Well, I think that's all that I had unless you got anything else here, Joe.
Joe
Vaclavik: I do not. Have a great week, everybody. And yeah, thanks for having me, Shay.
Shay
Foulk: Yeah, absolutely. Enjoy some turkey and hopefully a little bit of time off there. And thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.