About This Episode
Joe Vaclavik of Standard Grain starts with what normally drives July, which is weather, and then explains why this year has extra passengers. Yield is usually the largest swing item on the balance sheet, so weather is the perennial price driver, but Ukraine, inflation and recession fear are all sitting alongside it. He does not read the forecast as especially bullish or bearish, and notes that seasonal tendencies in the row crops usually turn sour once July arrives.
The sharpest idea is a caution about macro narratives. Vaclavik says recession is a difficult thing to use as a grain marketing tool, because telling someone to sell on the possibility of a downturn is not really a strategy. The risk is still real, since commodities historically behave badly in recessions that begin from high prices, and he suspects part of the recent weakness is simply the inflation trade unwinding as money managers exit positions they held as a hedge.
For the next crop year he refuses to pretend at knowledge. Nobody can predict where new crop corn trades a year out, so the only defensible reason to sell early is that the number works in your own budget against high input costs. Shay Foulk adds the Ag View view that most operations still show profitability at current levels even after a 10 to 15 percent inflation factor. How much to sell then depends on leverage and debt, not on a forecast.
“It's really tough to use the possibility of recession as a grain marketing tool.”
— Joe Vaclavik
Key Takeaways
Do not use a macro forecast as a marketing trigger. Sell because the number works in your budget, not because of a headline.
Yield remains the biggest swing item on the balance sheet, so weather stays the base case driver even in noisy years.
Broad commodity weakness can be positioning unwinding rather than a change in your own crop's fundamentals.
Let leverage set your pace. A highly indebted operation needs earlier coverage than a cash rich one at the same price.
Offset committed input costs with matching sales so a profitable budget survives regardless of direction.
Watch the equity and outside commodity markets alongside the crop. Fund liquidation can outweigh a friendly forecast.
Full Transcript
Shay
Foulk: Welcome back everyone to another episode of the Ag View Pitch. Today you have Shay Foulk with Joe Vaklovic coming off of the Fourth of July weekend. Joe, hopefully you had a good time with some family and friends.
Joe
Vaclavik: Good time, fireworks, hung out with kids, got a little bit of fishing in. I'm tired, recovering, trying to get back in the saddle here, I guess.
Shay
Foulk: The people listening this morning are probably in the same boat as you, but glad to hear you had a good weekend and Kind of an interesting outlook as we jump back into, you know, what to expect with the markets. Or maybe I shouldn't say what to expect, but maybe some key things to be looking at when we talk about, you know, this first, second week of July here. How do you think about where we're at historically, uh, or where we're at today versus where we're normally at historically this time of year, Joe?
Joe
Vaclavik: Well, I mean, typically you're looking at weather and, and almost exclusively U.S. weather this time of year. And this year is different for a couple of reasons. I mean, I still think weather and crop potential are extremely important. I mean, they always are. Your yield number, generally speaking, is like the biggest swing item on the balance sheets in most years. So weather is, you know, year in and year out your biggest price driver. So you're looking at weather this time of year, you're looking at seasonals, which, you know, the seasonal tendencies of the row crop markets kind of turn sour here. You know, once you get past mid-June into July, that doesn't mean that you couldn't see a weather rally, you know, first week in July or second week in July. You certainly could this year, especially because the crop's a little bit late.
But without getting too much into a weather conversation, I don't see the weather as being like overly bullish. I don't know that I'd call it super bearish either, but we've got rain in the forecast for a lot of the Corn Belt here the next 7 days. There were some rains over the weekend, so it's not a super bullish weather forecast by any means. Maybe we've sold off enough to this point that we can stabilize even with the rains in the forecast. I don't really know. The thing that's different about this year is that you've got, you know, not only weather and your normal stuff that you deal with year in and year out, but you've got this Ukraine deal. You've got this— these fears regarding recession. And I think that those are two things that are, you know, the inflation element. All those things are just some stuff that we don't typically deal with.
Shay
Foulk: Right, and that's where I was going to go with that. So, you know, recession versus weather outlook versus news, just based on this time of the year, particularly with Ukraine, Russia, um, you know, how should a farm operation that's looking at marketing either, you know, some additional for '22 or even looking out to '23, how do you handle that? We've seen huge sell-offs last week and just kind of over the last month as well. I mean, what are your thoughts on that, Joe?
Joe
Vaclavik: It's really tough to use the possibility of recession as a grain marketing tool, I guess. It's really difficult to say— I don't know if I could just tell somebody, hey, we might enter a recession. And if we did, that would be bad for the grain market. So you should sell. That's not like a real— it's not the greatest marketing tool, I don't think. But there is risk associated with that. Because, you know, most of the time during recession, recessions, commodity markets just don't act well, especially when you're starting from higher prices. So it doesn't— if you were to get into a recession, some people think that's where we're going immediately. Some people think it's not going to happen. Some people think it's 2 years out. I mean, it's not good for commodity markets. And we have seen some general, more broad-based weakness in commodity markets.
And I think that some of that is— I think some of it is due to recessionary fears. I think some of it is just the inflation trade kind of unwinding. You know, all these big funds and money managers, they were all on commodities as an inflation hedge. And if they think we're on the backside of this inflation deal and maybe that's what they think, they may just be exiting those positions for whatever reason. And it's not every commodity market, you know, the energies have held together pretty well, but a lot of commodity markets have been under some significant pressure here.
Shay
Foulk: When you look at that, too, and I'm really glad you hit on the recession part of that because it's not just, you know, whoever you're working with as a market analyst or as a grain market advisor. But farmers have that sentiment, right? You know, we're hearing across the countryside right now, Chris and I'll get a lot of calls on people saying, you know, things don't look good. How are we going to handle this? What's the long-term impact of this going to be? And some people are nervous about it. Now, again, like you said, whether that's marketing advice or how heavily you weight that, I don't know. But, you know, we were talking offline here from a profitability standpoint, the levels that we're at right now as we look into 2023, for 95% of our operations, we're still looking at profitability if sales were made today.
Uh, you know, there's maybe some strategies to put in place there for a farm operation that's looking to take some of that profitability and capture that while they can. How do you think about that when we look out to 2023, Joe?
Joe
Vaclavik: Uh, I don't know very much about 2023 other than pretty much what you just said. There's profitability associated with current 2023 fall delivery prices for corn, for soybeans. It's not the type of profitability that maybe you saw, say, on the '21 crop. But it's, it's not, it's not a negative margin or negative profitability situation. So I think that if you're going to make sales or any sort of marketing activity like this early on, it's got to be simply because it's, it's a business decision, it's profitable on the farm, You're worried about high input costs, you want to offset some of that to some degree. I mean, that's why you would make a decision for '23. It's not because me or somebody else has some big bold prediction about where these '23 corn is going to be, you know, 12 months from now or 15 months from now. I mean, nobody can predict that.
We don't know if we're going to get into a big recession that results in, you know, widespread commodity weakness and they take another $2 off corn. Or maybe this was, you know, this is the tail end of the sell-off and we see some sort of of rebound in grain prices. I don't really know, but I think that the only thing you can really use for '23 in regard to a grain marketing tool is, is just your budgets. Does it make money? Does it not make money? If you have that margin protection deal available to you, which I know a lot of people don't, that's absolutely something to take a look at. But yeah, I mean, I don't know anything more than anybody else about 2023. I just— if it were me, I mean, I'd look at my budgets and I'd say, you know what, if there's lot of risk for me associated in buying these input costs, then yeah, I'm probably going to offset it with, with some grain sales.
And maybe it's just a really small amount, maybe it's a bigger amount. It depends. You know, you guys always talk about depends on your own situation. I mean, are you super leveraged? Are you in a ton of debt? Or are you cash rich and you don't have that, that strain on your budget and the necessity to make sales? So just, it depends on a lot of factors.
Shay
Foulk: Yeah, I appreciate you mentioning that. And, and Joe, we were talking offline here as well. Uh, later this week sometime we'll send out more information to those who are listening today. We're going to do a YouTube Live, uh, probably you, me, and Chris will discuss that, and we'll pull up some of this budget basis. The reason that I mentioned that profitability is still there when you look at the levels that we're at currently, like you said, they're not going to be the same profitability as what we, you know, maybe have seen over the last 12 to 18 months for a lot of farm operations. But even with an inflation factor built into the composite of a lot of the farm operations we're working with of 10% to 15%, there's still profitability on the table for farms. So we'll be looking into that as well. Going to keep it short here today, Joe.
I guess when you think of the next week or 2 weeks ahead, what's one of the primary things that you're going to keep a close eye on and anything else that farmers should be thinking about as we wrap up here?
Joe
Vaclavik: I mean, for me this week, it's twofold. It's weather and it's recessionary fears. And that's— those are the two things for me that are top of mind. If you continue to see weakness in the equity markets, if you continue to see weakness in some of these outside commodity markets, I just don't think that that bodes well for the row crop markets. And I think that it could be— I don't know if I even want to say this, but I think it could be an even bigger factor than the weather, put it that way. The weather absolutely matters and yield and crop prospects absolutely matter. But the funds are still long 200,000 contracts corn, they're still long a whole bunch of soybeans too. You've seen what happens and what has happened in the wheat market. I mean, your, your spot month winter wheat futures have lost like $4 a bushel from where they were like 6 weeks ago.
So I mean, it's crazy, crazy things can happen. And that's not a prediction or anything. But it definitely is cause for concern for me at least.
Shay
Foulk: Awesome. Joe with Standard Grain here. If anybody listening is interested in your newsletter or finding out more about what you do, what's the best way for them to reach out to you?
Joe
Vaclavik: Just check out the podcast or the YouTube channel Grain Markets and Other Stuff. A lot of you guys have already probably heard of it, but I do a new episode every single morning, every business day at least, and they're up really early, like by 6:15 AM Central or so on YouTube and on every podcast app. So check that deal out if you're looking for a quick rundown down to the news and the headlines every morning.
Shay
Foulk: Great. Hey, thanks for the time today, Joe. Really appreciate it.
Joe
Vaclavik: Yep, see you, Shane.
Shay
Foulk: And thank you everyone for listening to another episode of the Ag View Pitch. Be sure to look for more information on the YouTube Live we will be doing later this week. Have a great week, everyone.