The dog days of August: weekly market outlook Aug. 7-11th

Joe

Vaclavik: 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.

Paul

Yeager: Welcome everyone to the Ag View Pitch. This is the Weekly Market Outlook. I'm Paul Yeager, your host, and today We're joined by Joe Bakalovic from Standard Grain. Joe, how are things going?

Joe

Vaclavik: I'm great. How are you, Paul?

Paul

Yeager: I'm, I'm doing pretty good. Uh, I, I think, uh, you and I are similar in that we're both early birds, even on a weekend. We're, we're taping this at, uh, 7 AM, uh, Central Time, 6 AM Mountain Time, which is my time. But, uh, when do you know— on a weekday, when do you normally get up?

Joe

Vaclavik: Um, just before 4 AM Central, and I, I get the most work done during my day between 4 a.m. and about 7 a.m., like before the phones start ringing, before questions start coming in. That's, that's like when I'm like by far the most productive, I would say. So yeah, I've, I've always been an early riser. The last 3 or 4 years I've been even more early, I guess, probably than I used to be. But yeah, I just, I find, I find that I'm the most productive early in the morning.

Paul

Yeager: I guess I am the same way, you know, during my CPA career when I'm doing tax returns, like during tax season, probably start of tax season, I'm getting up about 3:30, 4 a.m. And then by the last month of tax season, I'm getting up at 2:30 and 3 a.m.

Joe

Vaclavik: So but now I also, I also, Paul, I go to bed before my little kids do. Like I go to bed, I go to bed at like 8:00. So the kids tuck me into bed is how it works in my house. That's— go tuck Daddy in, kids. He's going to bed.

Paul

Yeager: Well, let's go ahead and get started with where we're at. I sort of call this maybe the dog days of August. Yeah. Including on the football world. You know, I went to the University of Washington, part of the Pac-12, which basically next year is gone. You know, there is no more Pac-12. So, but what's, what's your views on, on the weather right now?

Joe

Vaclavik: Um, so you've got past weather and conditions, and past weather and conditions would be like, look at the drought monitor, look at the rainfall deficits, moisture deficits that we had Certainly in June, which was phenomenally dry. And really in July too, for a lot of the Corn Belt, the first half of July was better. And then the second half of July was really not so great. So, you know, you look at that drought monitor, and I don't know if it spells record corn and soybean yields to me, that's what's being projected right now. Current and future weather, I would almost certainly argue is kind of bearish. We're recording here Saturday morning, you pull up the radar, there's rains across Illinois, are going to move into Indiana. There's rains across Kansas, there's rains across the Dakotas. The forecast looks pretty wet.

So I think that the current stuff and future stuff looks maybe kind of negative, especially as it relates to the soybean market, given the, the idea that the bean crop's made in August, and we've still got potential to improve. So it's, it's a mixed bag. I mean, I don't, I don't have any real strong feeling or opinion about the yields. If I had to guess, I'd say USDA is is too high by a few bushels at the very least at this point in corn. Soybeans, I really don't know, but, uh, that's up for debate. A lot of people with a lot of differing opinions out there.

Paul

Yeager: Now let's say that they're off by 2 bushels, that's roughly 200 million bushels of corn, uh, that they're overstating it by. But unless our demand really starts picking up, that still really doesn't help the market that much, does it, Joe?

Joe

Vaclavik: Probably not. You don't know what demand is going to do. So people have pointed to, and I have pointed to this also, the new crop export book for corn is not good. It's not where it needs to be. That being said, the deficit versus last year, I think it's like 2.5 million metric tons. I mean, China decides they want to get involved all of a sudden, and that could shrink really quickly. But yeah, you're going to need to lose more than 2 bushels to turn quite a few more than 2 bushels probably to turn this into a friendly situation, I'd say. It's not to say you couldn't back and fill up to $5.50 on some geopolitical risk or whatever, but in terms of just the balance sheets, I do a lot of balance sheet work.

Um, you know, you start playing with the numbers and it's, it's tough to come up with a bullish scenario unless you start pushing that national corn yield, say, down into the low 170s probably.

Paul

Yeager: And that report for August, which is really the first time they really have some surveys and so on, and they're really updating their yields. Does that come out, what, the end of next week? Is that when it comes out? I can't remember exactly when it comes out.

Joe

Vaclavik: Yep, Friday morning. It's my favorite thing when USDA puts out a report on Friday morning at 11 AM and we get 2 hours to trade it and then go home for the weekend, right? Um, so yeah, it's, it's more of a, it's more of a report that's based on operator surveys, whereas, uh, the prior yield estimates are based more on like kind of USDA formula type stuff. So it, there could be some surprises there. Um, there definitely could be.

Paul

Yeager: Yeah, well, I guess we have less than a week to find out. So, okay, so that's it on weather. You know, we've had, um, some, I would say, news in regards to Ukraine and Russia, you know, earlier in the week. Well, the previous week, you know, we had the big rally due to the fact that, you know, Russia had bombed Odessa and so on. And actually, my grandmother on my dad's side, her family immigrated from Odessa. They were a German family.

Joe

Vaclavik: Oh, really?

Paul

Yeager: There was a big German enclave over there, and they came over in the 1880s, 1870s, 1880s. So they bombed Odessa, and then earlier this week we had another, you know, minor rally, but then they've turned around and Ukraine is now bombing, you know, the Russian port and so on. What's your thoughts on the Ukraine situation?

Joe

Vaclavik: So markets and marketing is always, they're always very difficult. These geopolitical markets are impossible. You just, you don't know what the next headline's gonna be. And even if you did, you don't know how the market's gonna react to it necessarily. On Saturday morning, so we're taping here Saturday morning, there was another headline that Ukrainian sea drones, I guess, which are like unmanned boats basically, attacked a Russian oil tanker in Russian Black Sea waters, the way it sounds like. So the war has kind of moved slightly into Russian territory, which could be a game changer in the right or wrong circumstances. Russia is the world's top wheat exporter, and if the trade believes for one second that those wheat exports are in jeopardy, it's a big deal for the feed grain markets and also for the oilseed markets just by default.

So it's something that bears watching every single morning. It's like I've got to wake up and look and see if there was a new headline, a new escalation overnight. And even if you see the headline, you still don't know exactly how the market's going to react. Like, I think Wednesday morning this past week, there was a new attack and the markets rallied. They ended up finishing the day lower. So even if you see the attacks or escalations, it's not a guarantee of anything in regard to price action or the markets.

Paul

Yeager: Well, it's even like yesterday's trading activity in the wheat market. You know, it rallied early in the morning and then At the end of the day, it was mixed. You know, I think, uh, soft— what, soft red was up a little bit, and hard red and spring wheat was down a little bit. So now, does this provide, uh, maybe not at this prices, but certainly, you know, earlier, maybe the week before and so on, does this provide the opportunity to have some orders in there at a higher price that maybe during the night, you know, not the day, but during the night, you know, the computer programs rally up, you get your fill. Does that provide an opportunity for people that are using futures to hedge?

Joe

Vaclavik: Um, yeah, people like to, you know, I think some people like to complain sometimes about the volatility that is caused by these black boxes and algorithms and funds and high-frequency trading, all that stuff. But it can provide opportunities. So if you have a price that you really like, or maybe you missed a price last time around, Yeah, it's absolutely worth having orders working, even with, even with your grain buyer. If you're working orders to do HTAs, those should be futures orders that they're working. That'll work around the clock. So it's worth having those target orders in. And a lot of times it seems like the highs, especially in, in wheat or corn on these Black Sea headlines, they happen like overnight or real early in the morning and then we kind of back off. So it's, it's yeah, it's not a half bad idea.

Paul

Yeager: Okay. Okay. And then one of the other issues you and I were talking about a little bit beforehand is that Brazil— if we go back 10 years, Brazil, as far as soybean production, was way behind. I don't know if I use the word way behind, but they were definitely behind our production. You know, probably what, 5 years ago they started going over our production, and now they're well in excess of our production. And I think they're going to add another 4 million acres of land into production next year, which part of that is the second, you know, the corn, you know, the second crop corn, which, you know, if you're looking at 4 million acres times 120 bushels per acre, and maybe it's more than that, but let's use 120, that's almost 500 million bushels of corn that obviously Brazil is not going to consume. It's going to go to the export market.

You know, both next year and, and for the foreseeable future, how does that affect the corn market?

Joe

Vaclavik: Um, I think for the corn and the soybean markets, it's going to make the export piece more difficult. We're going to have more competition, and, and some of that also relates to like, who are your biggest importers? Well, China's your biggest importer of a lot of things, and their, uh, their economic situation, their their population situation, a lot of it's kind of come into question as of late. So what we better hope for is that some of these domestic, um, usage policies that we're putting into place, um, sustainable aviation fuel and, and renewable diesel, all that stuff, you got to hope that all these, uh, plans and everything that's been talked about in terms of the crush expansion and new uses for, um, our grains domestically, we better hope that all of that works out the way that it's been advertised. I think in the case of the soybean crush, it is leaning that way.

I think in the case of sustainable aviation fuel, it is leaning that way. There was some talk just last week about how there's some internal fighting within the Biden administration about the SAF piece. But yeah, I think exports is going to be something that we may, we may lose some share there. And hopefully, we make up for it here domestically.

Paul

Yeager: Which again, as you mentioned, you know, SAF, if they really want to move that direction, uh, that should soak up a lot of the demand that we need to keep the prices up there. But you know, that's down the road too, a little bit.

Joe

Vaclavik: It's, it's down the road, but the transition away from, you know, uh, internal combustion engines is, is going to take a while also. So, so you hope that all of it kind of lines up, and maybe there's a bad year or two in there somewhere where You know, we're, we're just not exporting as much and we're not quite where we need to be in terms of SAF and that sort of thing. There could be some growing pains.

Paul

Yeager: Yeah. Yeah. Now, I guess for the farmer out there that has crop insurance at the 85% level, and including myself, you know, I'm at the 85% level on, on most of my corn and soybeans and wheat. Um, on the corn side, we're already at about— actually, I think we're slightly below that 85% guarantee, aren't we? If wheat's at about $4.90— or excuse me, if corn is in that $4.90 range right now, December, uh, 85% of the discovery price or the base price is around $5. So what, what is, what is the Again, I'm going to sort of call this taping the dog days of August. You know, what, what does a farmer really need to be looking at right now as far as from a strategy standpoint?

Joe

Vaclavik: Uh, first thing I'll say is that, um, seasonals don't always work, but they're seasonals for a reason. Like, on average over time, August is not a good month for row crop markets. September is not a good month for row crop markets. You've got to go into most years with the idea that you may not have very many marketing opportunities these next couple of months. So the things to pay attention to would be, as you mentioned, the crop insurance situation. If you are somebody in the central Corn Belt with 85% RP, you got to start to take your yield possibilities into account and take something like the, you know, the crop insurance tool that Chris and Shay offer here or something along those lines. Figure out where this government put option, if you want to put it that way, will kick in for you.

Depending on your situation, you may not have much risk at all in the corn market right now. Now, if you're in an area where maybe you can only buy 75%, the situation is drastically different for you. The area at the price level at which that, again, in quotes, government put option kicks in is going to be substantially lower. So crop insurance could be a big deal when it comes to marketing this year, and it could determine, it could be a big determinant, like, should I be making a sale or not? And I know that crop insurance or no crop insurance, most people are not interested in selling corn right here for new crop delivery. You're below production costs for a lot of people. It's, it's not a great situation, really.

Paul

Yeager: And looking forward to the '24 crop, we still, even at the price, the current price, with the fact that some of the inputs have come down quite a bit, you know, the major one fertilizer and so on, Should we even at this price be nibbling at sort of locking in some profits on that '24 crop right now?

Joe

Vaclavik: The price in, in terms of dollars and cents per bushel, like $5, $6, $7, $25, that number should be mostly irrelevant to you as a farmer, even though you have in your head now that $6 is a good price and $5 is a bad price, where it used to be $3 is a bad price and $4 is a good price, you know. It's all relative to the cost of production. Margins is the important thing. So if you're selling '24, you should be doing it for the right reasons. There's some profitability on the table. You'd like to eliminate some risk, help to offset some of the input costs, that sort of thing. But I, like the actual number, is it 5 or 6, is it 8, whatever, it's especially this early in the ballgame, it's kind of irrelevant, you know?

Paul

Yeager: Yeah, and it's interesting. I'm starting to hear a little more and more chatter that the new Farm Bill You know, everybody thought that the crop insurance side was going to sort of be status quo with no changes, no major changes. You know, they would enhance some, you know, maybe some of the provisions, especially for some of the specialty crops that typically don't have the best crop insurance options. But now I'm starting to hear, you know, that chatter that maybe some of the crop insurance is going to be changed, and it's not— the change won't be to the benefit, it'll actually be to the detriment. So It'll be interesting. You know, right now politics in DC is, is it's like watching a train wreck happen in slow motion.

Joe

Vaclavik: Yeah, but that's the case most more often than not, I would probably say, at least in my adult life, that's been the case.

Paul

Yeager: Well, and I'm a little bit older than you, Joe, or quite a bit older. And well, actually, back in the '70s and '80s, they didn't always get along. But they could come together and actually get some stuff done, or at least that was my memory. So, um, anything else that you'd like to go over today, Joe? Is there anything? Uh, again, I like to say this is what I call the dog days of August. It is, and until we have the, you know, the crop report next Friday, you know, probably I would guess the market action this week, unless we have a couple Russian oil ships go down in flames, uh, likely not a lot of volatility this week. Is that what you're thinking? Or—

Joe

Vaclavik: yeah, I think the volatility is, is absolutely possible. But I think that— I think a sustained rally could be very tough to come by without the right geopolitical stuff. I don't know if I see it coming from weather. You could see it come from the USDA report if they cut the yields by enough, if they cut the yields at all, first off. And if they cut them by enough, that could be something. One other note that I throw in here, USDA on just yesterday on Friday, on the 4th, they had their annual farmland value report out. And I'll send this over to you. So they've got United States farm real estate up just in 2023, 7.4%. And they have a great map on there where they do the state-by-state breakdown. Like to go through your I-states as an example, Illinois was up 4.5% just on the year at $9,300 an acre on average. Iowa was up 5.6% at $9,900 an acre on average.

Indiana was up 13.8% at $9,100 $1,100 on average. Farmland values are awfully, awfully strong.

Paul

Yeager: Yeah. And, and it's surprising to me a little bit that, you know, interest rates have gone up, what, almost 600 basis points now? You're looking—

Joe

Vaclavik: that's the crazy thing.

Paul

Yeager: Yeah. Yeah. Buying farmland, you have to pay a 6, 7, 8, 8 or 9% interest rate, and it's the equivalent of cash rent of, uh, you know, $600, $700, $800 an acre. But The American farmer still has a lot more cash than they had 5 years ago. So I think a lot of these sales are, you know, they're not borrowing anything at all, or if they borrow anything, it's very low amounts.

Joe

Vaclavik: So yeah, you and I talked earlier in one of my videos this— it was this last week about some of the outside money that's out there. There is a ton of money in venture capital and pension funds, hedge funds that is on the sidelines right now. They kind of missed this, this rally in the stock market, I think, to some extent. And there's, there's going to be an appetite for farmland. It's a great asset, it's a great investment. It's always performed well for the most part, with a few exceptions. So this, these farmland values are going to be pretty sticky, I think.

Paul

Yeager: Yeah. And I think what was this? There was an analysis done even during the '80s. The longest period you had to wait for farmland value to go back to break even was like 7 years. So even if you bought at the top, like in 19— '81, by 1988 you actually were back to at least break even. So, um, and of course even the stock market, I think historically, uh, probably 7 or 8 years might be the max. I'm trying to think, you know, we had the big crash in the NASDAQ back in 2000, and that was like the lost decade, was like 2000 through 2010 or something. But again, 7, 8, 9, 9 years, as long as you can, uh, ride out the bad time, you'll be fine in the long term. So and that's what these family offices and so on look at. They're looking at a 10 or 20 or 30-year horizon.

Joe

Vaclavik: Farmland's different too than like a paper asset, like a stock or, you know, a bond. Like it's, it's, it'll never go to zero. Like some, you know, stocks, companies can fail, things can happen with paper assets, but that doesn't happen with farmland, especially some of that good black dirt in the Midwest.

Paul

Yeager: You know, you don't have to worry about water issues like California or out here in my part of the country, the, the, you know, Colorado. Although I'm in an area southeast of Denver that in the month of May and June, uh, we've had 37 inches of rain. So it's been crazy. We'll send some of it your way.

Joe

Vaclavik: So I don't need it here in Tennessee either. I'd love to send it, uh, to, to the Central Corn Belt or whoever needs it because we've had too much. Too.

Paul

Yeager: Okay, well, Joe, thanks a lot for, for your ideas and thoughts on, on markets. Again, this is, I think I'm definitely going to caption this the dog days of August, and we'll see if we get a little increase this week on the crop report coming out on Friday.

Joe

Vaclavik: Thanks, Paul.

Paul

Yeager: Again, this is the Ag View Pitch. This is the market recap for this week. And this is Paul Yeager, your host. Signing off.