High stakes poker, or just another year of decision-making for US agricultural producers?

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. And it's the 12th through the 16th of December, so we're kind of just getting into the middle of December. We have with us today Dwayne Lowery. Uh, Dwayne, how's it going, and are you getting all your Christmas shopping done?

Duane

Lowry: Good, and Christmas is all done. We've actually celebrated our Christmas early this year with, with our family, so we're actually done with that.

Chris

Barron: Wow. Yeah, yeah. Well, I usually wait till like the day before Christmas. I'm maybe like some typical guys anyway where you get that done, uh, you know, before Christmas. But right before, I guess it's a little procrastination.

Duane

Lowry: Well, as long as you get it done.

Chris

Barron: Yeah, yeah, I guess so. So, and, uh, a little groggy today here. We, um, as we record this over the weekend going into this new week, um, we, uh, we were in Michigan, um, doing a peer group meeting, uh, last week and had a phenomenal meeting with bunch of great producers and learned a lot. And while we were there on last Friday, there was a USDA report, and I honestly didn't pay any attention to it. And was there anything there that, that you are thinking that's worthy of looking at as we continue forward here into the next couple of weeks, or anything that you're looking at from the, from the government's reports side of things?

Duane

Lowry: In terms of raw data, there were not anything super significant, nor were there anything really, uh, surprise. Uh, they increased corn carryout slightly, that trend that was expected. And I think, uh, number crunchers probably think that might, uh, go up again in later months. They left the U.S. bean carryout unchanged. Um, some expected, or probably most expected that to go up a little bit. So maybe a little bit of a surprise there, but largely a pause. Punt by USDA, and they left wheat carryout unchanged. No real surprise there. World numbers were, um, down slightly in corn, not statistically significant from a month ago. The bean number was slightly above last month, again not significant, and the wheat numbers were a non-event. They left South American production on corn, beans both unchanged.

I think the trade thought that they might have lowered Argentina corn and soybean production. And as long as we're talking about Argentina, in terms of South American weather, Brazil is doing mostly fine and has been mostly fine and favorable throughout the growing season so far today. The possible exception to that statement might be a trend towards, uh, diminishing precip totals in southern Brazil, and so there is time on the calendar where that could end up being a concern at some point. And the marketplace is largely dialed in, you know, pretty optimum yield expectations for Brazil. So there is some room to catch the market maybe a little bit off guard. Argentina is having a difficult time getting crops planted due to dry soil moisture, which has been going on for months actually.— and some extreme heat, a lot of 100 to 105-degree temps on some days.

They are supposed to get some rains here over the next 7 days, basically now through Monday or Tuesday, but so far precip has failed to hit some of the central areas, which is some of their larger production concentration. So their plantings are well behind normal, and they've been experiencing a lot of dryness, and looking at the long-range maps, it looks like that is a theme that's going to continue. So somewhere down the road, the odds are that USDA will have to lower Argentina's production, and I'm not sure the marketplace has really clearly been trading this problem that's developing in Argentina.

A lot of times it's been kind of poo-pooed and cast aside, saying, "Well, Brazil's doing so good, it doesn't really matter." And they're also— the marketplace just hasn't— there's been no clear, concise, day-to-day tie-in between Argentina's daily weather forecasts or developments there and price action. It just hasn't been the case. But there is one thing interesting. Back on, I think it was the 1st of December, EPA came out and said that they were going to have lower mandates on biodiesel, and that caused soybean oil to take a dump. The first day after that, the soybeans also took a dump, but since that time we've had soybean meal prices just skyrocketed, and we've had soybean oil prices continue to decline, and beans have rallied 50 cents.

And I wonder, with Argentina being, you know, a very large exporter of soybean meal, and, you know, significantly larger exporter of both oil and meal than both Brazil and the U.S. Maybe the Argentine weather situation is being displayed a little bit in the soybean oil, soybean meal price relationships, and maybe that's part of why beans are up 50 cents since the 1st of December. I don't know that. I mean, you can't— we're not finding that discussion a lot in the marketplace, but it is interesting, and so it might be being expressed that in that manner. But if you buy into that argument on the case of the soy complex, then why is the corn market still, you know, on the bottom side of parameters and where it's been over the last, you know, 30 or 45 days? So they're not trading the weather for— in the corn market.

So it's difficult to find a lot of times, not just this year, it's difficult to find correlation between day-to-day fundamental headlines and price action, especially once you get past the Thanksgiving holiday into the Christmas holiday, the New Year, etc. And that's certainly the case right now.

Chris

Barron: I think there's a lot of people watching, you know, we like say we saw that price increase in soybeans, and I think there's a lot of producers sitting on a chunk of the '22 crop now that pretty much everybody, um, with a section— with the exception of a couple of spots, but pretty much everybody's got harvest wrapped up and sitting on some extra bushels. And you know, you see that price increase and it gives you a little hope on the soybean side. The corn-bean ratio hasn't been as, as good for corn as it has— or as good for soybeans as it has for corn relative to profitability. And so I think people are sitting there kind of on their hands in hope mode, I think, hoping that these prices come back up some.

You know, there was a while, a period of time there where, you know, $7 corn was achievable and, and price levels on beans that, that were close to where guys were okay with maybe pulling the trigger but wanted to sit on some hoping for $15 cash beans and $7 plus corn. When we go into January, a lot of times we see some seasonals, we see some price improvement. As you watch the charts— and not asking you to predict anything because nobody knows— but as you watch the charts and seasonals, and is there enough interest from the funds, or is there something out there that, that could give them that? And if they do get that, you know, The next question is, do people pull the trigger and all of a sudden it needs to go higher yet? So what's your thought, you know, as we head through the rest of December and into that first part of the year?

Duane

Lowry: Well, let's start with the last part of your question, the part about pulling the trigger. I think that when you're sitting here looking at March corn futures right now are trading, you know, under $6.50, that I think they settled Friday at $6.44. And you compare that to where they were from like the Pro Farmer Tour all the way through harvest. We spent, we had March futures trading, you know, $6.80 to $7 on almost any given day. And if you didn't get it that day, wait 2 or 3 days and you were probably something in that range. And a lot of time actually was probably spent close to $7. And now we're at $6.44.

And if you go back to the period of time from that was first influenced by the Russia-Ukraine war back in February, March, April, and, you know, your April, May, June timeframe, that March contract was trading $7.25 probably on the bottom side and maybe $7.50-something on the top side. And again, that was found frequently in that April, May through early June. Period. So considering those two windows of selling opportunities, and the market is now a dollar lower than it was during the spring of this year, and it's, it's at least 50 cents lower than where it was through much of the harvest period, then I think there has to be a cold hard reality on the part of the producer here that the best prices are clearly in the rearview mirror. And if we get back up there again for maybe South American weather concern or something, who knows what might come along.

If that were to happen, then I think absolutely yes, they need to take advantage of that because whether they realize it or not, prices are slipping away quite a bit from what they could have had. And so to get back there again, I think they definitely need to take a look at that. The marketplace, a lot of commodity markets are trying to, or have experienced weakness at different times over the last periods of weeks or months, driven by economic concerns, recession concerns, the Fed effect of raising interest rates. All of these factors are working against the producer, and I've talked about it many times on podcasts before. And so there are, there are problems with the marketplace., and the carryout levels are going up, or the expectations are that carryout levels will be going up. And so there are certainly, you know, some strikes against having price rallies.

That's not to say that we can't get one here yet. There is time, based on the calendar, to get one from South America, but I think the point here is your best opportunities are behind us. And so if we can go back and get somewhere close to those again, I think there's a lot of merit in wanting to make those sales.

Chris

Barron: Energy prices as it leads to inputs and everything else, we have to get into all that, but like, you know, we've seen energy fuel. I just noticed, like I said, I was in Michigan this last week and I was kind of shocked at, you know, where prices at the pump have really come down a lot. Is there pressure? I mean, is there some direct pressure, do you think, or correlation there realistically that is actually, you know, for corn in particular, any of these things, it's driving some of this too?

Duane

Lowry: Well, the energy prices being down certainly helped to deflate the argument that inflation will keep ag prices well supported. But the problem with focusing on the energy markets today, you know, you got crude sitting here at $70. That's on the bottom side of where it's been at any time since the Ukraine war started out, and it's well off its highs, and it's sold off from where it was even a couple of weeks ago. The problem is, maybe we're looking at what will be the new bottom side of parameters for some of these energy prices. You know, OPEC is pretty solid in maintaining a reduction in production by 2 million barrels a day, and this was driven by expectations of reduced demand.

There's been one abrupt thing that we haven't talked about that has occurred over the last couple of weeks, and that is a clear move by China to move away from their zero COVID policy and basically to reopen. Now, they'll frame that in a manner that doesn't make them look bad for having that policy to begin with, but it's clear that the restrictions are coming off, and it's clear that they're also trying to stimulate their economy through banking and lending strategies and policies. So, uh, we probably are looking at a situation where global energy consumption rates are going to be going up, not down. And yet, OPEC has said just here last week that they're going to maintain their cuts. So I don't think that lasts very long, that keeps crude oil at $70 a barrel or goes lower. So I think we're looking at the bottom side of the crude oil prices and energy prices.

And it's very possible that a rising crude oil price over the next, let's just say, 60 days might provide a reason for the grain markets to rebound, and I think that's one thing that I'm gonna be expecting to happen in terms of the energy prices moving up, and I think that could be a rather supportive feature for the grain markets. I think that there has to be some pondering at least to the possibility that we're not going to return to $50 crude oil. And if we're not going to return to $50, suddenly $70 looks relatively cheap. And when you consider the fact that this is now lower than it was before the Ukraine war, and we're well off the highs that we made after that at $130, and well off the highs that we spent quite a bit at trading around $110, say, um, maybe this is the bottom side of the energy prices.

And if this is the bottom side of energy prices, maybe the grain markets, at least for the time being, maybe we're on the bottom side of where it's going to spend some time too, and specifically in corn when I'm making that statement. So I think there are some reasons to be somewhat optimistic that grain prices can stage some sort of a bounce going into the, maybe even into the February timeframe. I think that if you want to be bullish on corn or soybean prices, you pretty much have to be hoping that there's some sort of production concern that continues to evolve in Argentina. You might be hoping for some sort of a production concern to develop in southern Brazil. Both of those are plausible scenarios, especially Argentina. I mean, it's actually happening right in front of our eyes. Marketplace may not be responding to them, but it's, it's a real thing that's happening there.

So I think there's reasons to be supportive or optimistic near-term prices there. I think the energy prices, even though they're on the bottom side of prices now, I think that's going to change. And if we begin to see that change, then I think that suddenly becomes a legitimate reason to think that we might get some rebound in grain prices as well. The other thing I want to point out A lot of our listeners may not be wheat growers, but the wheat prices are extremely cheap. I mean, you got Chicago wheat down here trading at, you know, $7.30 for March, $7.12 I think was where the nearby December contract is at, and wheat prices versus corn are historically cheap.

They're not the cheapest they've ever been by any means, but they're certainly down on the bottom side of parameters where the only time we ever get cheaper wheat versus corn is when corn is in short supply, carryouts are declining, and we got to get wheat priced into the feed ration. We don't need wheat priced into the feed ration this year, and yet— so that makes wheat look very cheap. So I think the wheat market's probably on the bottom side of where it's likely to be, and So I think there's something going to be happening there to improve prices. So I think there's reasons to be somewhat optimistic, and I think that the soybean market rally in 50 cents from the first day of December has caught many people by surprise. The trade sentiment just in the last 2 weeks had turned quite negative, and I think a lot of that bearishness is pretty late arriving.

With the markets already down at the bottom side of where they've been for months. So I wonder if the market isn't getting too short here, too many bears around, uh, not enough respect given to Argentina's weather conditions, and quite possibly a setup that where if crude oil does rally, suddenly the grain market gets some recovery. So I'm actually, um, somewhat optimistic for a near-term corrective rally some sort of a second chance opportunity to make some more sales. I think there's some— I think there's some reasons to be optimistic, and I'm quite optimistic towards the wheat market. In fact, I would think that those that have done a good job of forward pricing on their wheat for '23, all of a sudden prices are down far enough that there might be an opportunity here that people people should be considering maybe buying some call options against sales they've already got on the books.

So I'm actually, I'm really not all that negative right at the moment. I think that there is still ample reason for a producer to maintain a bias that they are seeking to protect revenue, and so on rallies they want to take the opportunity to protect that revenue. I think that still remains. But I think there's a decent chance they're going to get a better opportunity to make some sales, and I think that it's possible we could get a rather, you know, impressive price run up here. I wouldn't be shocked if beans rallied 75 cents or a dollar from here. I wouldn't be shocked if corn went back towards $7 again in the Chicago futures market, and I wouldn't be surprised if wheat found a reason to have a pretty sizable rally here.

So I'm more bullish than I am bearish, but in terms of farmer marketing, I'm still very concerned about revenue calculations going down the road, and therefore I think rallies are meant to be utilized by the producer to capture revenue and capture profitability. I think there is still a threat in terms of profitability eventually coming to us, but in the near term, I'm more friendly than Yeah, that, that's all, you know, tells, tells me, you know, again, you know, I always like to come back to the discipline side of things and the managing the margins.

Chris

Barron: And, and, you know, to me, that what that tells me, you know, um, as we get opportunities, to your point, and we need to have those targets in play already there because sometimes it seems like, you know, you say $7 number, you just, you know, pick a number. Sometimes you get about 10, you get about 10 minutes, or it hits overnight or something like that, to the point where, you know, you really gotta have those targets in there. I think the other thing too, just as I look at our clients and what's quote unquote left to sell for the '22 crop, it varies, you know. I mean, we've got some people that are done, they have everything sold. We have some people that have have a ways to go, quite a ways to go in a couple of cases. You know, I think the people that started selling early are looking at, well, geez, I sold way too soon. I gotta try to hit a home run on these last sales.

And you really just got to look at the average sales price because those people that started too early are going to end up, you know, what we're seeing is an average cash on farm price coming in somewhere in that, you know, that $630 range. And so anybody that's above that, that's kind of the average cash-on-farm price we're seeing, you know. So if a person's started too soon and you sell a bunch at the, you know, in that, you know, $7 range and get a decent average, that's really the key. And those that haven't done anything or very much, and there's not very many, but there's a few out there that haven't done much, I mean, again, it still comes down to that average price. And then I— and then the other thing too, and then the last thing I'd like you to just kind of touch on for a minute, um, Dwayne, is the '23 crop. You know, what's it take? I mean, you got to have money influx.

I mean, it's been the funds that have helped drive this stuff. When the money flows into the commodity index, it seems like that's what gives it the strength, you know, is when the funds start throwing money at it. If we finish up the '22 crop, we really got to probably be looking at getting a bunch of risk off the table on the '23 crop as well, don't we, on the 3 commodities you're talking about?

Duane

Lowry: Well, I think, uh, taking risk off the table is probably still the producer's number one priority. When you look at prices and profitability compared to the last 10 years worth of history, the amount of time they've had opportunities to make the profits that are offered even now are, you know, not very often. The profits offered for '23 now may not be what they had for '21 or '22, but it's still better than most years in the last 10. And so I think that is still the priority. We spent a lot of time from the Pro Farmer tour period until just recently in with Dec '23 corn at $6.10 to $6.30, call it. $5.90, and now you're at $5.90. So you are on the bottom side of where you've been, but to get 20 cents onto that market and go back to $6.10 where you spent a lot of time at, that's not unreasonable and that's not impossible, but it still probably is a selling opportunity if it occurs.

The only time that we were higher than that would have been in, you know, the spring of '22. Several months ago, and even then, you know, you had a lot of opportunities to sell $6.50 for Dec '23 corn. I doubt if we go back there, and if we do go back there, it'll have to be some sort of a weather problem in the U.S. We probably won't get there on a problem in South America, but we could easily get back to $6.10 again, and I think that becomes, you know, a legitimate reasonable target to, for producers to maybe consider trying to protect some revenue again. As far as the beans are concerned, the beans have been more well supported, and November '23 beans are just under $14 right now, and that's basically the top side of parameters we've been in since August.

And even in the spring of this year, The highest that November '23 beans got to was just under $14.50, so we're basically within 50 cents of the highest that that contract has ever been, and I'm not sure what the dynamics fundamentally are for beans and corn looking at for '23, but I know from a revenue offered, even where Nov '23 beans are at right now, they look like that to me, like they're a pretty good opportunity. And if a guy is struggling about maybe he doesn't want to sell corn at $5.90, or maybe he doesn't want to sell $6.10, whatever argument he's using for that probably is not a legitimate argument not to sell $14 Nov '23 beans, you know what I'm saying? Profitability, they're still quite attractive.

So even if they're reluctant to price very aggressively on '23 in the case of corn because the price just looks so much cheaper than what they've had over much of the last 2 years. That really can't be said about beans, so I think there's still an argument that he could still be protecting a lot of revenue on that part of his operation.

Chris

Barron: Yeah, I had a conversation last week too, and I've had some with producers. I think the challenge though with the soybean side of things is, is when you look at the at the cost of production and where the land cost is in some of these areas, and it's not so much like in the Dakotas and stuff, but when you get into like the I-states and some of these high-dollar rents, you look at the cost production, you got so many more dollars vested in, in the, on the input side on the crops. It's easy to have, you know, on the cost production side, you know, to be spending well over $1,000 to put that, that corn crop in. And when you look at where the price is and, and yield prospects for a lot of the people listening, at least in the center part, you know, the, the corn still— because of this corn-soybean ratio, you know, 14 still doesn't quite cut it for a lot of producers.

Now there's people listening that are different because I talked to a guy yesterday that he's gonna probably increase soybeans. But, you know, there's still a lot of operations out there that, you know, it's going to be hard to grow as many acres of soybeans and, and make the money. But to your point, what you're saying is, is where these price levels are in soybeans, you don't see a lot of hope for, you know, unless all of a sudden corn really takes off or something happens, like you said, on a weather event in the summer or whatever. You don't see a lot of hope for things really given us a lot more than where we've been?

Duane

Lowry: Well, I'm not sure. I think there's a— I'm not sure there are very many reasons you can point to that you can say with confidence you're going to get better opportunities than we've had offered to us at different times over the last several months. No, I don't think so. Those times over the last several months, you had, you know, a very ramped up amount of emotion in the marketplace about inflation and how that was going to buoy commodity prices. Since that time, you've had interest rates ramp up significantly, which takes away some of the investment community's desire to own commodities. That part of the world's a little bit different. Even during the summer, even since Russia invaded Ukraine, If you follow Commitment of Traders data, the funds were never as large of a buyer as you would have thought they could have been or thought they might have been.

It just did not materialize. That was under what seemed like relatively optimum conditions for them to throw money at commodities. Now, you have certainly less than optimum reasons for them to throw money at commodities. And so I don't know, I think that I hear what you're saying when you talk about the revenue that the producer wants or needs, but you're talking about costs that are fixed. The rent costs are fixed, the high input costs are fixed. They're not going away. And yet if those reasons are used as a reason not to make sales or not to protect revenue, That's an extremely dangerous situation because what happens if, if we get along to harvest of 2023 and we end up that we've had, maybe by that time we've had an economic downturn or we've had a good production season in the US, you know, I don't know, it's, it's extremely dangerous situation.

If I want to take the other side of that, I could say, look at the soil moisture profiles in some of the western part of the belt, you know, there are a lot of concerns about that. So this is a high-stakes poker game.

Chris

Barron: It sure is. Nobody knows, and I think to me it's just one of those things where it's never been more important when we're putting in the most expensive crop we've ever put in. That's what we're seeing anyway with our clients, is the most expensive crop ever. And probably the stakes, as you say, you know, there's a lot of money on the table right now. And I think we're going to have to play this poker game real careful-like and with some discipline, to your point, because there's, there's more risk than ever. And, and there's still currently some pretty good opportunity, but we're going to have to, we're going to have to take some money off the table when the opportunity's there.

Duane

Lowry: I'm afraid that if there's opportunities offered over the next 60 days, let's just say, I'm pondering what kind of window we might look at after the next 60 days, where we might not find those opportunities, and what that's going to look like. And I don't know, it's— overall, there's still a backdrop of concern. Concerned that history says you don't stay at these prices for an extended period of time. History says you don't stay with these exceptional profit opportunities that are presented. And, you know, look at the amount of acreage increase you had in South America this year. Look at what happens when you get high prices. I don't know. There's a lot of risk here. Like, I'll just go The best summary is to say it's a high-stakes poker game, and having a path of inaction here is probably far more threatening than having a path of some sort of proactive approach.

Even though you might not like the profitability offered in beans at, say, $14, maybe that doesn't sound high enough. I guess my first question to that is, okay, what yield are you using? Are you using a typical yield that you forward project or using something more comparable to the actual yields that are being produced in the last few years. I mean, a lot of guys are getting bean yields that are exceptionally higher than they use in their cash flow projections, so, um, certainly not a given that you're going to get them, but again, the prices offered are at the upper side of parameters ever offered. This far in advance of a production season. Yeah, yeah.

Chris

Barron: I guess what we're seeing is just in general that there's, there's just more net income available on the corn than there is in the soybeans. And in the corn and some other commodities too, in some other areas of the country, what we're seeing currently right now, just when you look at the price ratio between corn and other commodities, is all I'm saying.

Duane

Lowry: But yeah, but when you say that, Chris, when you say that these exceptional price profit opportunities, more opportunities offered with corn. Compare that to what you've seen over the last 10 or 12 years offered in corn. You know, you're, you're still miles above normal.

Chris

Barron: Oh yeah.

Duane

Lowry: Isn't that correct?

Chris

Barron: Yeah. Yep. Yeah. And that's where the opportunities are there now to, you know, if, if we get these, you know, a little bit more of a rally from where we're at right now, I think a person's got to look in the mirror and say, You know, why am I not selling? You know, I guess is the question.

Duane

Lowry: Nobody knows what the future is, but my concern is, and I sense it in conversations, that producers are not willing to make sales at, uh, for '23 because they can't generate a profit similar to what they've, uh, seen manifest in the last couple years, and I'm not sure that is a good benchmark to make that decision off of, right? You're comparing it to the best profitability offered, you know, probably in their lifetime. And if they can't, you know, not achieving those, and that's a reason not to make a sale, well, gosh sakes, then you'll never make a sale, right?

Chris

Barron: And the same thing's happening within the 23Sales. I mean, there's these early marketers that we see— I'm one of them— that You know, we sold, like you said, you know, you sold corn in the $6.60, $6.70 range in your first sales, and now it's $5 in the $5.90-something range. It's hard to pull the trigger now because the first sales we made were higher than, you know. And so to your point, we got to manage average prices and look at the average and stop looking at what this sale was or that sale was and look at the, the big picture of the economics, I think, is really point.

Duane

Lowry: Yeah, I think that's probably accurate.

Chris

Barron: Yeah, so Dwayne, this has been a good conversation. I think this is one that we could continue onward in as we get closer to January, and if we, if we do get to where some of these margins are, are a little better than where they've been, maybe we, we have a margin conversation here and talk a little bit about kind of where, where we are, where we've been, where we're at, and where we want to go. And I think that'd be good conversation. But for now, Dewayne, I think this has been a good, good conversation and really appreciate your time.

Duane

Lowry: All right, thanks, Chris.

Chris

Barron: Yeah, you bet. And again, thanks everybody for listening. And if you've got any questions or anything that you'd like us to be hitting on and some other topics, I'll be back next week with some things that we're going to hit some topics on going into the winter on the business side of things. So Just appreciate everybody listening, and we will catch you again next time on the Ag View Pitch.