Sunday night market outlook 07-19-2020

Narrator: Hey podcast, Duane was not able to join us today, but we do have on Joe Vaklovic. Joe runs another podcast called Grain Markets and Other Stuff. So before you do anything right now, the link to his podcast is in the description. Click on that, go subscribe, give it a listen. A lot of great information there. Enjoy today's podcast.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we are heading into a new week and we've got a special guest with us here today. Uh, Dwayne was not able to be here, and so we're lucky enough to get Joe Vaklovic. And Joe, go ahead and introduce yourself, and then we'll kind of get into some of the topics heading into a new marketing week.

Joe

Vaclavik: Well, um, I do commodity brokerage and I do grain marketing advisory I have a business that I own and operate called Standard Grain. We have customers, or I have customers, all over the Corn Belt, all over the country. I also have a podcast that's called Grain Markets and Other Stuff that I started back in January that's floating around out there. I live with my family just outside of Nashville, Tennessee. I worked, I grew up in Chicago and worked in Chicago for many years prior to moving down south a couple of years ago. And I did work at the Board of Trade. I worked for a lot of the larger brokerage firms and grain marketing advisory firms before heading out on my own, which would have been in 2012. And I guess that kind of brings me to where we are today.

Chris

Barron: Awesome. That's great. I'm an avid listener to your Grain Markets and Other Stuff. It was kind of interesting what— I think it was maybe 1 or 2 episodes ago you were talking even about grilling hamburgers. And so I think that's the other stuff part of that. Is that right?

Joe

Vaclavik: There is an other stuff. I've got a lot of hobbies and interests outside of grain marketing. I love to cook barbecue and grill and that sort of thing. I'm also big into fishing. I actually fished a tournament here in Tennessee yesterday and won the tournament, believe it or not.

Chris

Barron: Whoa! Wow!

Joe

Vaclavik: Yeah, and then You know, I talk about my family a little bit. I talk about music. I've been a guitar player and songwriter and that sort of stuff since I was a teenager, before that even. And talk about music a little bit here and there. So yeah, it's a broad range of things, but mainly grain markets and grain marketing in particular.

Chris

Barron: OK, well, hey, we'll talk about that here again at the end. But speaking about that, you did have a topic one time there where you talked a little bit about the funds and kind of explained the funds and what is. And with that said, let's segue now into where the funds are at right now, specifically on corn. There's been a lot of talk about, you know, the funds being, being short, you know, the market, and, you know, maybe them having to get out. But there's been some other things at play here. Talk a little bit about where the funds are at and how that might impact things moving forward.

Joe

Vaclavik: A brief explanation before I tell you their positions and what it means. The funds are a group of of large speculators, and there are tons of different hedge funds and pension funds and money managers that are grouped into this group of people that we— who we call the funds. And the funds are large speculators. They have no interest in the cash market. They're not hedgers. They're not farmers. They're not grain merchandisers. They're people who are just playing this game to make money is what they're trying to do. They have held a short position or a short bet long position in the corn market dating back to August of last year. They have not held a long position in the corn market in, in almost a full 12 months now, which is a record amount of time. Usually throughout a calendar year you'll see some fluctuation.

You'll see the funds go long for a couple months, you'll see them short for a couple months. They spent more time on the short side here recently, but this is the longest streak that we've gone with a short fund position, and we have seen some short covering. That short fund position in the corn market peaked at about 300,000 contracts and change back a few weeks ago, and we've seen that position cut in half. Some of the private groups at Friday's close were estimating that the funds were only short about 125,000 or 126,000 contracts. So we've seen some short covering there despite the lack of upside in the market.

Chris

Barron: Right. So do you see any more change there, or do you see that impacting anything? Positively, negatively?

Joe

Vaclavik: Well, what I typically look for as a grain marketer when I'm advising customers on when to make sales, I want to see the funds long the market when I'm doing the majority of my marketing. There is a direct correlation between a long or a heavily long net fund position and your very good or premium marketing opportunities. So I don't like making sales when the funds are short, which for a person like me has obviously made things difficult since last August. Now, the soybean market would be a little bit of a contrast. We've actually got a fairly significant net long position that the funds are holding in the soybean market. It's almost to the point now where I'd say, yeah, this is probably an opportunity to make sales just based on that data in a vacuum. So That's how I use the data. Different people use it in different ways.

I tend to use it in the most simplified way that I know how and really what's worked out well historically. If they get— funds get heavy long, sentiment gets positive, that means the market's up. That correlates with some of your best marketing opportunities. When the funds are very heavily short, that's the best time to avoid sales and really sit on your hands if at all possible.

Chris

Barron: Good stuff. Good stuff. Hey, let's move on. We're going to stick to corn here for a little bit. We've seen some purchasing from China. What's your take on what's going on with China? What are you hearing?

Joe

Vaclavik: I'm very skeptical of the trade deal as a whole and have been skeptical from the get-go for many, many reasons. Even if we're to assume that all of these purchases come to fruition, I think it's very unlikely that they hit these trade deal targets by the end of the year. They're buying corn not because they're— they want to hit the trade deal target, in my opinion. They're buying corn because they need corn. Corn prices in China are at multi-year highs. They're the highest since 2015 or 2016. Their stocks have drawn down. They have quality issues in a lot of this old corn. They've been selling everything that they've offered at their state auctions the last few weeks. So they're buying corn from the U.S. because It's in their best economic interest to do so. I don't believe it has anything to do with the trade deal, to be honest with you.

They— it actually makes financial and economic sense for them to import corn from the United States. I think one figure I saw estimated that it— imported U.S. corn was 50 cents to $1 a bushel cheaper than domestic corn as of last week, to give you an indication.

Chris

Barron: So do you see that continuing and that demand giving us a little strength, or is that just kind of a one-off?

Joe

Vaclavik: I don't know. I don't know anything about China. I don't know what they're going to do. I really don't know. Yeah, I don't know what they're going to do. I mean, I hope it continues. Obviously, the more business, the better. We need as much demand as we can get in a market like the U.S. corn market, which is incredibly oversupplied. I very much hope it continues. I think there's a lot of skepticism in the trade. I think there are a lot of people that believe that it won't continue, that it's a flash in the pan, that even some of these sales are eventually cancelled. But for the moment, I mean, you've got to argue that that's one of the few positive inputs we have as far as news is concerned for the corn market.

Chris

Barron: You bet, you bet. Okay, let's lean into ethanol for a minute. You know, that's obviously picked back up quite a bit. Where are we at and what do you see coming at us that way?

Joe

Vaclavik: It's been a tremendous recovery. I mean, ethanol production in the United States fell off a cliff in March and April. We saw an enormous— I mean, we were going from, you know, 1 million barrels a day and we dropped down to 550,000. So we almost cut ethanol production in half in the span of 2 or 3 weeks, basically. And why that happened, it all goes back to the virus. Everyone stopped driving, therefore your gasoline demand fell off a cliff, and therefore your ethanol demand fell off a cliff. Cliff. Now, what we've seen since late April has been very impressive. We've seen, I think, 11— I think it's 11 now consecutive weeks of improved ethanol production. We've seen ethanol stocks drop back down to what I would call pre-virus levels, and we've seen gasoline demand perk up. Now, all that being said, we're not back to normal. We're still grinding corn for ethanol.

I think it was 12% or 13% behind last year's pace as of this most recent week. So we've got some work to do, and it's still a problem because I think that to get back to normal, you need to get driving back to normal to some extent. And you've got states like California and like some of these other places where you're seeing a spike in virus cases. And don't ask me my opinion on the virus, but the amount of people driving is still less than it would be in a normal summer, and that's still a problem. Ethanol margins for the producer are excellent right now. So even if, even if the driving doesn't get back to normal, I think you could make a case that we could get production back to normal even without that because the margins are so good right now. But that may not stick around forever.

Chris

Barron: Okay, and we need a place to go with the ethanol if it's not being used too, right?

Joe

Vaclavik: Right, and we've got room to store it now. We've got stocks back down way off of the all-time highs that were posted back in April when production was hitting all-time lows essentially. So we've got, we've got some room for, for storage. We've got some room to keep pushing production higher for several weeks, but there could come a point where the demand just isn't there because we're still not driving as much as we used to.

Chris

Barron: Okay, last, last area of discussion, and then I want to get into kind of where this, this market might be going into a new week a little more specifically. But if we look at probably the big item yet, big ticket item for, for corn and eventually here soybeans, but is weather. And, you know, I was on AgriTalk with you last week as your guest, and you asked the question, you know, what's crop look like? And I've seen even more of it since last week, and I would say this crop looks unbelievably huge to me from my vantage point. What do you think, you know, with weather and with potential size of the crop, and we're getting rain and getting not every pocket, but a lot of the areas that needed the rain got the rain, and the weather looks a little less threatening. So what's your thought there?

Joe

Vaclavik: Yeah, the weather to me— and I'm no weatherman, but I have a working knowledge of how the forecasts and models work and that sort of thing— there's no threat here. There really hasn't been. We had a very short-lived crop scare event, if you even want to call it that, that spanned all of about 5 business days. You know, they're a couple weeks ago. So I have no objection to the idea that the crop is big. I think that the market has probably already discounted a great deal of that. You know, one thing that somebody told me about the futures market a long time ago is that there's really no such thing as new information. Everything for the most part is priced in. And I'm not saying that we've got a 180 priced in, but We're probably pretty darn close, to be honest. And now you've always got to look for, you know, what's next. Could the crop be bigger than 180?

Yeah, definitely could be. Could it be smaller than 180? Could you get into harvest and figure out that it's just not as good as what everybody thought? And that's happened before. There's precedent for that. So it could go both ways. It's not really a question of what's being traded right now. I think a 180 or better is being traded right now. It's a question of what's the next shoe to drop? What's going to be the next thing that we're talking about a week out, 2 weeks out, 3 weeks out, a month out? But that's really what moves the market. It's not the things that we already know.

Chris

Barron: So that's a pretty good segue into the what's next going into this next week. On the corn side of things, what's your take? What are you seeing? What should farmers be watching? And then I have a specific— one more specific question on corn after that.

Joe

Vaclavik: The best piece of that question is, what should farmers be doing? And I'll tell you what my thoughts are on grain marketing as far as corn and soybeans are concerned. I think that the biggest concern for anybody right now should be, obviously, any old crop bushels that are still unpriced. And most people are probably to the point where they're down to minimal stocks, hopefully. And unless you want to carry these bushels over into the next marketing year, you've got about, what, 5 or 6 weeks left to do your marketing. So that has been my main priority, and even I had some unpriced corn and soybean bushels ahead of that recent rally that I've pretty much cleaned up here as of late. When it comes to new crop, I think you're in an entirely different situation.

Old crop, you're on the clock, you may need some money, you want— you don't— you maybe don't have the storage for these bushels to sit around for another month or two. New crop, I have very different opinions. I just, I don't see the incentive for a farmer to sell new crop corn at $3.40 on the board because of the crop insurance situation. And I know that you look at spreadsheets more than I do and you know what the implications are. If you're a guy who bought 85% revenue protection with the $3.88 spring guarantee, you may just not have that much downside risk in the market. There's a point here where the crop insurance is going to come in and kind of kick in and provide you with some downside coverage.

So even if you're bearish the market, I think that just the fact of the matter is that the risk financially on your balance sheets may not be incredibly substantial at this point with these prices. And correct me if I'm wrong.

Chris

Barron: No, I think that's, that's a good point. Obviously there's, there's a lot of sides to that, a lot of specific individual situations, and that kind of leads me to the This last question that I have is— and Dwayne and I have talked about it, and we've had this discussion with several others and on almost every farm— and that is the question of what do we do with these excess bushels at harvest time anticipating a large crop, knowing that you can— you maybe can't store 100% of that, and those bushels that you can't store maybe are not yet priced, or some of them may have been priced during that that real brief market rally we had.

And, you know, now, now what is a lot of the questions that I'm hearing from producers of, you know, these excess bushels, because it's really difficult to put that stuff into commercial storage because you do the math on it, at least the way we calculate it with Profit Manager, and you look at the cost of that carry, there's not enough benefit on the other side of it to justify any kind of commercial storage. And so then, you know, you get it priced and leave the topside open somehow. And the question for a lot of these guys is, you know, when do we pull the trigger here, you know? And some of them feel like they missed the boat maybe on that rally, but on the same token, you know, maybe there's still some opportunities. What's your take?

Joe

Vaclavik: That, that of course is the flaw in the crop insurance argument, is that, well, what if we really just knock the COVID off the ball in regard to yield and we've got all these extra bushels and the crop insurance check is not quite what we thought or we can't store them. As a grain marketer, I've told people this on many occasions, I can't fix a bad price. I can't— there's no magic solution that I have for you to take $3.40 Dec corn and turn it into $4. That's just not a thing that anybody can do no matter how— No matter how much somebody, or how smart somebody says they may be in regard to options trading or spread trading or whatever it is, I can't take $3.40 corn and fix it. I just can't. So if it is, if your operation depends on pricing some bushels here and you have to do that to make sure that you stay, you know, viable as an operation, then I guess you have to do it.

I don't like selling corn here. I don't. Not old crop, not new crop. Old crop, I'll do it if I have to because I'm time restricted. New crop, I'm not seeing the story right now. I just, I mean, the funds are short, the sentiment's negative, people are, people think we have a big crop coming. It's just not, it's not something I'm interested in. I did a podcast, this is maybe off topic a little bit, but I did one last week about contra-seasonal years in the corn market, and the market these last going back really to 2013 or 2012, it's kind of trained us to believe that not very many good things happen in the second half of the year. You know, you get your weather rally and then we sell off, right? That's been the trend, and we sell off into harvest.

There are plenty of years when you go back, you just have to go back a little bit further than 2012 to find years where you've had rallies in August or in September or in October or even later than that. 2009, 2010, 2011 were all very good examples of that. So I'm going to go out on a limb and say that I think that a contra-seasonal year, contra-seasonal second half of the year in the corn market is very possible given the fact that the first half was extremely contra-seasonal in nature. We saw our biggest sell-off of the year in all likelihood in March and April, which is not normal at all. So why not have a not normal second half and rally into August or September or October? I think that that's more possible in this year than maybe over the last 7 or 8 years.

Chris

Barron: Okay, that's good stuff. And, you know, and I think, you know, the challenge for a lot of these growers, it does come back to that individual decision-making process of what is your yield, what is your, you know, your margin target so that you can either be profitable or at least minimize some loss. And, you know, and I told you when we were on AgriTalk, and I say it all the time, is that, you know, the fastest way to lower your cost of production is increase yield. And some of these, you know, big yields, all of a sudden the cost of production is significantly lower. And if you have to, you know, dump a little overrun at a low price, that's not all bad either if you've still got a whole crop and you're, you know, that icing on the cake, so to speak, has to be priced. It's just, I think the question for these guys is, do you price it now or do you price it later?

And it's probably something that individually they're going to have to decide on.

Joe

Vaclavik: Yeah, and this is never an easy decision. Grain marketing is not easy, and it's not easy to look in these markets and know what to do. And anybody who tells you otherwise is lying. This is very difficult, and it does vary quite a bit from operation to operation. So there's no There's no blanket solution for everybody, not by any means. And a tool like the product that you offer, I mean, that's the best grain marketing tool that there is. Knowing your costs, knowing what your revenue is going to be, knowing your situation rather than just, you know, what somebody like me thinks on a podcast. I mean, that can maybe give you an idea or two about the market or what could happen or maybe what to do or not to do, but the best tool are your own numbers are the best tool.

Chris

Barron: Right, right. Hey, so let's hit soybeans here quick. You know, kind of the same questions I asked you. You know, we talked about weather, China demand, the funds, a little of those kind of topics. What do farmers need to be watching in this next week on soybeans? What should they be thinking?

Joe

Vaclavik: Well, there's still time. I mean, the soybeans, as far as the yield goes and weather and and some of that stuff, it's still up in the air. I mean, there's still time for weather to come in and impact the bean crop in the U.S. That's very possible. I'm not saying that that's going to happen or that there's anything in the forecast that's threatening, but there's still time for that to happen. So that would be probably the biggest thing to pay attention to. These Chinese purchases are interesting. Just like with corn, we hope they continue, but by no means do they need to continue. Brazil is going to plant record acreage this year, the equivalent of about 94 million acres. So they are outproducing us by a fairly significant margin at this point. So there's going to be competition, you know, barring some sort of big crop problem down there.

The soybean situation in the US is— there's quite a contrast between soybeans and corn, as a matter of fact. In US corn, just to give you a real broad view, USDA is projecting that our stocks-to-use ratio is going to be the highest since, I think, 2004 at the end of August next year. That's a very bad place to be. That's a very bearish fundamental indicator. When it comes to soybeans, you're looking at the tightest situation since 2016 if their projections are anywhere near reality, and they are just projections. They're educated guesses at best. But the outlook in beans or the fundamentals, and probably everybody shares this opinion, is it's more friendly than corn. So I put it this way: I've seen beans trade $10 with more bearish fundamentals over the last 4 years several times, right?

Chris

Barron: Okay, so there's some hope there. What about basis? And hit soybeans first and then tag corn onto that real quick because I kind of forgot to ask you about that. But as it relates to soybeans, kind of the same question I asked you about corn, A lot of, a lot of the growers that we work with, and I know a lot of producers, that soybeans kind of that cash market for cash flow and stuff, and a lot of those go off the combine. And I think we're seeing a little lower percentage sold than kind of normal as, as producers look at that. Maybe they don't plug in the price, but should they be thinking about basis soybeans first?

Joe

Vaclavik: So when you're talking new crop basis basis? Are you— it's, it's so different in every area of the country, especially the last couple years. Are you guys seeing better, better than normal new crop basis right now?

Chris

Barron: Well, right now we're seeing slightly better than normal, and so we're also seeing really good soybean fields everywhere. Everybody planted really early, and it's probably the best soybean crop I've ever seen as well as I travel. So it's starting to make me wonder a little bit if— if this follows through, we do get good weather through the month of August, you know, should a person be thinking about maybe getting some of that basis locked in if they know for sure they're going to deliver it?

Joe

Vaclavik: Basis contracts are not a terrible idea, but they can kind of back you into a corner. And I see it every delivery period that we get to. And I get calls from farmers, and they'll say, Joe, I have these basis contracts. What do I do with them? And it is very often the case that the market will leak lower or trend lower in that week or two ahead of the time that these basis contracts need to be priced. So, if you want to write basis contracts because the basis is favorable, that's great. But don't forget about the futures.

Chris

Barron: You got to price it.

Joe

Vaclavik: I feel like what happens so often is that people will— farmers will price the basis and then just wait indefinitely on the futures. And I don't know if they forget about it or if it's a greed thing or a fear thing, whatever it is, but too often do I see people write the basis contract and then not take care of the futures. And then you're forced to either, you know, sell futures— price the futures at some of the worst levels of the year, like we just saw recently ahead of the July delivery period, or you're forced to roll it, which is not cost-effective. I hate seeing people roll basis contracts, especially in these carry markets. So that would be my advice.

If you have good basis, by all means take advantage, but don't forget about the futures part, and certainly don't wait until the last minute because that's proven to be an absolutely horrible strategy the last couple of years.

Chris

Barron: Yeah, the other— I would just add to that, one of the things we try to do with our clients too is to make sure that they have a margin target. So it's You know, what is that price objective? Making sure you have those targets in place, because a lot of times, you know, you have about 5 hours to, you know, when that opportunity, it seems like, is there. And so figure out what that price objective is, get those targets all locked in so that the discipline follows through, so they don't get into that trap you're talking about, about either forgetting about it or the greed-fear factor or whatever it is.

Joe

Vaclavik: Yeah, I think that that's a perfectly viable strategy, and you may have to adjust your targets over the course of time time. Right. What I don't want to see is, I don't want to see you wait until the last 2 weeks to price these basis contracts. That's been an incredibly bad strategy in these well-supplied markets. Now, if we ever get into a situation where we're not in markets that are so well-supplied, and we'll get there someday, that strategy, that thought and that process is going to change. But I think for the time being, waiting until the last 5 or 10 days to price your basis contracts is not a good strategy.

Chris

Barron: Yeah, it hasn't been working too good. No, not at all. Yeah, so hey, anything that I haven't asked you about, and we pretty well hit corn and soybeans pretty well, if you got anything on wheat or anything that is, you know, something that I haven't asked that you think needs to be touched on going into this new week.

Joe

Vaclavik: If you want to talk about wheat real quickly, the market has been, I'd call it, a little perkier. We've tried to rally and then we sold off, we tried to rally and then we sold off. I don't know how many wheat growers you have that listen to podcasts, but I'm not hugely bearish the wheat. I don't think I'm hugely bullish. I see that the funds are short. We had some really nice wheat marketing opportunities back when fund traders were long earlier this year, and those were some of your best opportunities to price wheat, whether it be SRW, HRW, even spring wheat. There were some better opportunities there. So I don't see anything in terms of like a golden marketing opportunity in wheat right now. You should pay attention to this rally in the SRW market, though. We've come up quite a bit.

We're not quite back to where we were in April or even earlier than that, but another 30, 40 cents, I may start to get interested.

Chris

Barron: Yeah, one thing we're seeing with wheat is, and not so much in Iowa, but pretty much every other state we work in, producers starting to look at that as possibly an opportunity going into 2021 as a crop rotation alternative. In some acres. And so it's going to be interesting as we move into a new year and start thinking about a new acre mix again already.

Joe

Vaclavik: Yeah, and next year is going to present a lot of challenges. There's been a lot of talk about Beast '21 corn and pricing it to get started, and the fact that you're not going to have, in all likelihood, a spring insurance guarantee that is as good as what we had this past year, although that's not set in stone by any means. February is a long ways away. But yeah, there's— I've heard that sort of talk. I'm just kind of going one step at a time here.

Chris

Barron: That's right. Hey Joe, thanks a lot. Hey, how do people again hit your podcast again? How people get a hold of you and, and where they can look you up at?

Joe

Vaclavik: Well, the podcast is called Grain Markets and Other Stuff. It's on every podcast app there is. It's on Apple and Google and Spotify. And pretty much all of them. My website is standardgrain.com. If you want to know a little bit more about what I do for customers, check out that website and check out my grain marketing subscription. I offer subscription that basically— it basically tells you when, how, and what I'm doing specifically in regard to marketing on a daily basis. And I've had a really great response with that. I've had this idea for a long time, Chris, that there's a lot of farmers out there that just they want to improve their marketing, but they don't want to trade futures and they don't want to trade options. I think there's a lot of farmers in that boat, and I've put this thing together so that those sort of people can participate in a marketing plan.

I think there are too many— I think there are too many grain marketing outfits and firms out there that are really pushing people into futures or options when they don't necessarily need to be involved in that to improve. So I'm trying to kind of hit that base a little bit, but really good response. And the podcast, I've had a great response. Just started it in January, and we continue to see improved downloads and interest, so pretty happy with that.

Chris

Barron: Awesome. Well, it's definitely a great podcast. I make sure I listen to it every time you post it, so it's an excellent— doing an excellent job with that. And appreciate your time today, and maybe we can get you back on again sometime, and appreciate your information.

Joe

Vaclavik: Sounds good, Chris. Appreciate it.

Chris

Barron: All right, thanks, Joe Vaklovic. And this is Chris Barron, and we'd like to thank everybody for joining us this time with the Ag View Pitch, and we will catch you next time.