The Joes talk grain markets and other stuff

Joe

Paulson: Hi, this is Joe Paulsen with the Ag View Pitch and our weekly market outlook. This is for the week of January 20th. Today we are visiting with Joe Vaklovic with Standard Grain. How's it going today, Joe?

Joe

Vaclavik: I'm good, Joseph. How are you?

Joe

Paulson: Lovely, lovely. Well, it looks like we got a ton to talk about here and we'll just dive right in. So, you know, I know there's some tariff things out there. What are your thoughts there?

Joe

Vaclavik: Well, Trump's going to be inaugurated on Monday, right? Uh-huh. And I think for a long time there had been, has been a lot of fear surrounding the tariff situation. Trump's going to come into office, he's going to institute tariffs on China and Canada and Mexico. And China and Mexico in particular are very important when it comes to our ag export trade, corn and soybeans. But the script, I think at least momentarily, kind of flipped last week. So Scott Bessant, who is Trump's Treasury pick, had his confirmation hearings and they were discussing tariffs at length. And he went and talked about China and actually the Phase 1 trade deal that Trump and the US and China signed in 2020. And he said China hasn't made good on their ag purchases. He said he's going to push Beijing to resume those purchases and maybe even pursue some sort of makeup provision like a Phase 2 trade deal.

So whereas, you know, a couple weeks ago the fear was, oh my gosh, China's going to stop buying soybeans, and they are going to stop buying soybeans momentarily here because of Brazilian harvest, not because of the tariffs. But I think that there was a little bit of a sentiment shift perhaps with regard to those comments. And then Trump spoke with Chinese leadership on the phone supposedly, oh, during the last couple days, and we didn't hear a ton of details about that, but it sounded positive that there were discussions going on and the tone coming out of those conversations sounded not so combative, I would say.

So I think that headed into the weekend, the markets and traders and fund managers may have been just a little bit more optimistic about maybe just the whole tariff situation before, which is a total flip from, I, I think, what had been the sentiment, you know, just a couple weeks ago.

Joe

Paulson: I think that, uh, you know, To understand Trump, you almost got to read his book, The Art of the Deal. Yeah. And, and, you know, everything is posturing. And in that book, he says numerous times that, you know, you always ask for twice what you need. Mm-hmm. That way, if you got to settle for half, you get what you need. Yeah. And that's, that's kind of how he runs his presidency as well, it seems like. But Yeah, I mean, the tariff thing is a scary deal, but I mean, that sounds super optimistic.

Joe

Vaclavik: There was some negative stuff also. Canada has been kind of chirpy talking about retaliatory tariffs. And when it comes to corn, soybeans, wheat, Canada doesn't buy much from the United States. They do buy a lot of ethanol. We do import some fertilizer products from Canada. So there's definitely an implication there. But I think that China, who has, historically and also this year been our biggest soybean buyer. That's a big deal. Mexico has been the largest buyer of US corn by a wide margin the last couple of years. So I think that when and if it comes time for negotiation with Mexico, that's going to be something that's of importance. Mexico has bought a ton of corn this year. They continue to buy corn. Some people think that they've kind of front-loaded the program either to A, capitalize on lower prices.

Up until recently, they did a really good job of locking in corn at lower prices. Or maybe they do want to get out in front of some sort of tariff situation. So I think that could be important. And, you know, I've been told and I don't have any inside information, but the way it sounds to me is that in the first couple of days you're going to see some tariff announcements. So short term, I mean, I don't know. Long term, I don't know. I just think this is going to be something we're going to be talking about for a while.

Joe

Paulson: Get your offers in to be ready on the— because it's going to be a wild ride. And that way if we have some, you know, it's going to be up and down depending on news and—

Joe

Vaclavik: oh, it could very easily be like positive headline one day, negative headline the next day, or even within the same day. You could see a lot of that. I remember when this— when the first trade war started in 2018, 2019, I mean, there was a lot of that. There was a lot of back and forth market trading the headlines. It happened and it could happen again for sure.

Joe

Paulson: Oh yeah.

Joe

Vaclavik: I hope the result's different. I don't wanna see soybeans in the eights again, but you could see a repeat of the kind of news cycle type thing.

Joe

Paulson: Mm-hmm. You know, before we started, you were talking a little bit about Argentina and the dryness down there. You know, can you expand upon that a little bit?

Joe

Vaclavik: To put it very simply, Thursday, Thursday last week, the forecast, the weather forecasts looked fairly convincing that rains were going to return to Argentina and in a pretty sweeping fashion. And you saw that sell-off in the bean market. I believe it was Thursday. You saw the market come back on Friday and corn rallied to new highs on Friday. What happened with the forecast is that the rains shifted to the north and the way it would appear is that a lot of your central and southern soybean areas in Argentina are going to stay dry. So I think the market perceives that as being a friendly item with regard to corn and soybeans. Brazil's in darn good shape though, and the rains are going to return to southern Brazil the way that it looks. Southern Brazil had been dry, it had been a problem area. So as it stands now, I think the Brazilian crops are going to be really good.

The second corn crop is still remains to be seen. That's— they haven't planted it yet. They've got some early soybean harvest going on in northern Brazil. But Argentina, I think, is going to be an area of contention here. Certainly, I, I know that one of the exchanges came down with their production estimates, uh, this past week. And if these rains are— if the forecast is now reality, if what I'm seeing here, the rains are further north and not in these central and southern areas, you could see further production cuts. I still think combined total Brazil-Argentina is going to be a monster, but, um, I think it's something that, that people were focused on.

Joe

Paulson: So I farm some ground for a company out of Argentina, and they own and operate about 250,000 acres between the United States, Argentina is their largest area. That's where they're based out of. And I was talking to my farm manager the other day. And he was actually down there. And, and he said it is He thinks that their crop is going to be down about 40%.

Joe

Vaclavik: Corn or soybeans or both?

Joe

Paulson: Corn. Corn. He said the beans, he goes, the beans, you know, have a chance yet if we can get some rain eventually to finish them off. But he says the corn, he goes, it's really, really bad.

Joe

Vaclavik: Look at you, Mr. Worldwide International Man of Business. They've had something in Argentina with regard to corn the last couple of years. I have no idea what it is. The leafhopper disease. We've said it, we've mentioned it on the podcast like several times because whenever they come out with a production cut, it's all these damn leafhoppers. I have no— I don't know what that is. I don't farm, I don't do agronomy, but it's, it's been an issue for them. And the dryness is going to compound that, I think.

Joe

Paulson: Oh yeah. It seems like, you know, when things get dry, That's when everything comes in. That's when the bugs get bad. That's when, you know, it's like getting, you know, you get kicked in the nuts when, when, uh, when it gets dry like that, for sure.

Joe

Vaclavik: Yeah. So the forecast doesn't look convincing and it is, I mean, they, they're just wrapping up soybean planting in a lot of these areas. So there's probably an argument to be made that, hey, there's plenty of time if the rains come back, but La Niña, don't, I'm not a weather person, but La Niña is is partially responsible for the dryness that they've seen in Argentina. And if it continues, I mean, it's a friendly input. I'm not saying it's worth like a $2 rally in the bean market because it's probably not, but it's a friendly input.

Joe

Paulson: We can use all the friendly inputs we can get. Absolutely. You know, you talked a little bit about, obviously, I mean, we've— it's been exciting in corn for sure here over the last— Oh, yeah. The last week. You know, there's— but, you know, it's the front— it's the front end that has been so exciting. We have seen, you know, Dec corn get up over, you know, the $4.50 level, which is just starting to approach breakevens as far as cash price. You know, what's a guy to do? You know, I mean, you, you look at your, you know, I look at my profit manager and if I sold everything today, I would probably like break even at APH, just barely. Yeah. You know, how, how deep does a guy go?

Joe

Vaclavik: You know, I think old crop and new crop are apples and oranges. I think they can be totally different things. And the market has shown us that. The last couple of weeks. You've seen this big rally in old crop versus new crop spreads, meaning that, you know, your nearby March, May, July futures contracts have gained sharply on December. December's had a tough time. I mean, it has rallied. We're back into the, what, mid-$4.50s, which is better, but that's still not what farmers would like to see. The big problem with new crop is soybeans. There's just no, you can speak to this, there's no profitability there and you're not even close to it. So not even close. So the idea, I think, among the trade is that we're going to pick up a bunch of corn acres because corn, like you said, is approaching breakeven levels where soybeans might still be $1.50 below breakeven for a lot of guys.

So I think that the new crop corn situation and the idea that, you know, you're going to increase acreage to maybe it's 93, maybe it's 94, some people think it's 96. I don't know what it's going to be. Corn acreage number is going to be up though, and that's something that may ultimately limit the impact of a much tighter old crop situation.

Joe

Paulson: So over the last few weeks, as we're doing profit managers and I, you know, talk with producers from all over the place, the overwhelming sentiment is everybody's planting some more corn for the most part. Yeah. And, and me, me included. I mean, I haven't had corn on corn. I've been a strict rotator for, I don't know, 6, 7 years here. And, and I'm putting some more corn in, you know, so I think, yeah, that corn number is definitely going to grow. But is it going to be 2 million acres? Is it going to be 3? I—

Joe

Vaclavik: that's also the— there's also the thought or idea out there that farmers will skimp a little bit on inputs because things are so tight. And now with these direct payments on the way here in the next, you know, 6 to 8 weeks, I don't know if that's going to be a fact or not. I mean, maybe some of that's already a foregone conclusion given, you know, fall applications of different items. But that's, that's something that is also being discussed is like, is the yield potential going to be there because maybe farmers are cutting back a little bit? And also I think the, the idea that this— what I've been told— the corn acreage expansion is going to be more so a Western Corn Belt thing than an Eastern Corn Belt thing. And the Western Corn Belt's got a little bit more drought type stuff going on.

It's too early to talk about that, I think, but it's at least to be aware of it when you're talking about corn acreage expansion and where, where it may happen.

Joe

Paulson: Yeah, it's going to be an interesting ride for sure.

Joe

Vaclavik: Yeah.

Joe

Paulson: Do you like, you know, February, the crop insurance price discovery period's coming up here in February. Do you believe that the trade like battles for acres during that period of time?

Joe

Vaclavik: Do you think— It depends on the year. Depends on the year. In a year like this, I mean, I think the market is acting somewhat correctly. Like we probably need to get, pick up some corn acres in order to get our supply-demand situation back into balance because it's gotten, it's gotten tight. I mean, USDA, but say what you say, what you want about USDA, but I mean, they took the, the carryout estimate for the United States from, you know, 2 billion bushels and change down to 1.5 and change from September to January. That's a substantial shift, substantial shift. And that's why you've seen, you know, large money managers pile into the corn market and all of a sudden they're, long 300,000 contracts where they were short 300,000 contracts 7 months ago.

It's, it's been a phenomenal shift both on the demand side, which has improved, exports have improved, ethanol's improved, and then we got the supply cut. So you have like a combination of things that have been friendly for the corn market. But yeah, so I think the market knows that it has to solve a tighter US corn situation and it doesn't need to solve the soybean situation as much. And that's why I think the market is telling farmers plant more corn.

Joe

Paulson: And clearly, 100%. And they seem to be listening for sure.

Joe

Vaclavik: I would say so. But based on the conversations I've had about acreage, I mean, we know, you and I know this, most acres, most guys stick with the rotation, as you mentioned. But there are some swing acres and the acres that swing are going to swing to corn.

Joe

Paulson: Yeah, I'm probably up I don't know, probably 10% more corn than what I was normally going to have. Yeah. So that, you know, that all adds in. And if that's, you know, Corn Belt wide, that would be a substantial shift.

Joe

Vaclavik: Yeah. You're not going to see a 10% shift, but to see, to see a 3% shift is even substantial.

Joe

Paulson: Mm-hmm. So the— you talked a little bit about the funds going, going long. Yeah. Is that also a little bit of a threat? Because when they decide to go to the door, you know, it's going to drive the market down.

Joe

Vaclavik: Large speculators provide you with some of the best marketing opportunities that you'll see almost every year. My feeling generally is that when they when they do something, they go too big. So when they were short 360-something thousand— I don't know what the number was— back in July, that was a record short position. They were probably too aggressive and they probably pushed the market too low. And when they go the other way, I think in some situations they go— they get a little bit ahead of themselves, they get over their skis a little bit, and they sometimes push things to price levels that maybe are not sustainable for an extended period of time. So I think that they, they do present you with a degree of opportunity here.

That's not to say that we're approaching any sort of peak in the market because I mean, if you run into a corn situation, US, global, whatever, that's tight. I mean, you could be, we, we could very easily be on the way to digging ourselves out of this bear market cycle even though it only lasted a couple of years. I, I'd say We're still in the bear market cycle. You're still at or below production costs. I mean, we've come up, it's been a nice rally, but it's premature to say that, hey, the bear market kind of no profitability cycle that began in say early '23, I think it's premature to say that it's over, but it's not crazy to say that maybe we're on our way out or think that that's at least a possibility.

Joe

Paulson: And you said the, like, how long are the funds as of last week?

Joe

Vaclavik: The estimate was— so as of last Tuesday, which is the official CFTC number, 292,000 contracts, which is crazy. That was not on anybody's bingo card, um, for January of 2025. If you go back a couple of months, just wasn't. And what—

Joe

Paulson: and what— and, and how short did they get 7 months ago?

Joe

Vaclavik: 360,000 or 370,000 in July of '24. And the estimate that private groups throw out, these estimates, and they believe that there was a whole bunch of buying on on Wednesday and then Friday in particular, they're talking a number that's like 320,000 contracts net long. The record net long from 2011 is 409,000. So you're like a week or two of heavy buying away from a record fund long in corn, which is absolutely insanity. It's absolute insanity that that's what we're talking about here. You know, when you thought about what the situation was just, just 2, 3 months ago.

Joe

Paulson: That is a crazy flip.

Joe

Vaclavik: Yeah, even I think that's crazy. And the soybean situation with regard to, to money managers is crazy. I mean, they're long soybean market, not heavy long, but despite the fact that you've got projections for record world ending stocks, record world, close to record world stocks to use ratio, thing that's tightened up is the US. The US has tightened up. Maybe there's some optimism about some of the biofuel stuff that's come out recently. I think it's a little premature for some of that. I personally, and people would disagree with me on this, I think there may be something to be said for a potential reinflation event as it relates to commodities and a lot of other things. Like if you're a fund manager and you think that there is the possibility of a reinflation event, you don't want to be caught short these commodities that are trading at multi-year lows. You just don't.

If you look at the inflation numbers that came out last week, we had wholesale inflation, which is PPI, also consumer inflation. They're both still way hotter than they should be. I mean, PPI is wholesale inflation, is 3.3%. That was the highest, I think, since like February of '23. And wholesale inflation a lot of times makes its way down, trickles down to consumer inflation. So I mean, if there are people out there, there's got to be a few of them. If there's some fund managers out there who think, wait a minute, we've got some, some little bit hotter inflation numbers, Paired with Trump policies that some people believe are inflationary. People believe the tariffs are inflationary. People believe that deportations are inflationary. Is that, is that enough for you to own commodities like the corn market in particular, especially now that fundamentals have improved?

Yeah, that's not— I don't think that's a totally crazy thing to say because the world, the world corn situation is somewhat, isn't it?

Joe

Paulson: It's a little bit bullish, isn't it? I mean, they're a little bit— the world corn situation is a little tighter than it has been historically, correct?

Joe

Vaclavik: Or do I— Tightest in a few— it's the tightest in several years according to USDA. The problem, there's a lot of ways you can analyze the world corn situation. And one of the problems with the world corn situation is that a massive portion of the world ending stocks sit in China. It's, it's, I forget what the percentage is. It's like, it's like 60-something percent of projected global ending stocks sit in China. And those are not corn bushels that are ever going to be exported. Some people think that the numbers are wrong. So yeah, I mean, the world situation's a little bit tighter and the US, I mean, you know, we talk about soybeans in Brazil and, and how Brazil is really eating our lunch for us when it comes to both production and exports and pricing. Corn is not that way. The US is still king when it comes to corn and, and by a wide margin.

So when the US corn balance sheet tightens up, that's the most important thing. I think it's a lot more important than the global balance sheets in soybeans. I might make, a counterargument and say that the global situation's more important. You gotta remember that of the soybeans we grow in this country, you know, we export 40 to 50% of 'em. It's like 45%. Corn, we only export 15%. So soybeans are more of a global market. Corn's more of a domestic market. And that's why I think the corn, the, the US situation, which again has tightened up quite, quite a bit. The US situation as it relates to corn is more important. Right. I, I think the global situation as it relates to soybeans is more important. That's not to say the US situation doesn't matter. I think the global situation matters more.

Joe

Paulson: The— I saw a chart the other day, you know, talking about the global situation in beans. I saw a chart in a meeting the other day, which I thought was interesting. And they were showing the crush numbers, you know, and, you know, we've been hearing about this expanded crush for, you know, a couple of years now. And it looks like that's finally actually happening. I mean, we're like record crush, you know, which is exciting. And when you look back to— was it, was it 2019? We had that crazy high, you know, domestic soybean carryout. And then, you know, the price just took off from there. And it seems like over my farming career that beans are just the most irrational commodity to try and market. You know, there's no guessing.

There's things that come out of nowhere that can affect that market and drive it lower when you never saw that coming and drive it higher when you've never seen that coming.

Joe

Vaclavik: No question. I have found in my career of doing grain marketing advisory, that soybeans are very, very difficult to figure out. And what I've, what I've decided and what's worked for me, not always, but more often than not, is kind of keying my soybean marketing off of my corn marketing. No market is easy to figure out, but I feel like some of the stuff that, um, that I like to use when it comes to corn, you know, whether it be fundamentals or charts or crop scare events or seasonals, it seems like the corn is just slightly easier for me to navigate. And for that reason, I kind of prefer to sell soybeans when I sell corn and kind of use the corn as my guide because soybeans can, soybeans can rally $2 for no reason and they can break $2 for no reason.

We saw one of those back in, in like August when soybeans rallied because it was the, the story at the time was it's dry in Brazil before they even planted the crop. And it's always dry in Brazil in August. It's just how it is. But they're not, they're not necessarily rational all the time. The market is, is fickle. It's not as deep or liquid of a market as corn when it comes to the actual futures board. So yeah, I 100% agree. I think soybeans are an incredibly difficult market to navigate.

Joe

Paulson: You— I've been a subscriber of yours for years and, you know, just here in the last probably 12 months, I've started kind of taking your advice on finally doing that. When I'm selling corn, I'm looking at selling beans. And, you know, it ain't perfect, but I, I like it and it makes sense. It's, you know, it just simplifies trying to get those things marketed.

Joe

Vaclavik: Keeping this in mind, when it comes to grain marketing, every sale you make is going to be a mistake to some degree. Never very rarely, maybe once in your career, you're going to sell the high tick in the market. So by definition, you're going to sell below the high, right? Question of how wrong are you going to be? You're going to be wrong no matter what. So I've resorted myself to the fact that with whatever I advise, I'm gonna be wrong to some degree. It's just you've got to try to the best which you can reduce that degree of, of mistakes. They're all mistakes.

Joe

Paulson: I, you know, and I've said this on this podcast before, that some of the best marketing advice that I ever got is from a neighbor of mine. And he said, whatever you do, do the same thing every year and you will be okay. You start trying to chase, you know, forward selling this year, not forward selling the next year. He says you're going to miss it every time.

Joe

Vaclavik: And only reason I would ever change, like, I— you follow my stuff, so you know I do the same thing every year for the most part. The only thing that would make me change would be like rock-solid profitability on new crop bushels and maybe being more aggressive. Like if there was some sort of— let's say right now new crop corn offered you a 20% ROI, would you be more aggressive than you would be in a quote normal year? I probably would be. Personally. Mm-hmm. That's guaranteed. You know, if it's— if it's— you can lock it in, you got crop insurance, you know what your APH is. I mean, and you can lock in bushels at that sort of profitability, then that's the one thing that wouldn't— that's the one thing that trumps everything else is, is the stuff that's in your budgets and the stuff that is tangible.

But yeah, in most years, I mean, sticking to the same plan is going to be the way to go. 9 out of 10 times.

Joe

Paulson: I I tend to probably do somewhat almost the opposite, you know, just because of my personal, uh, like, I'm kind of a pessimist and I'm always concerned about, uh, you know, getting, you know, trying to secure the break-even. So when things look bleak and, uh, you know things look bearish, I'm looking at trying to, uh, I tend to try and lock in more so that way I have a, a firmer floor.

Joe

Vaclavik: You've got a baseline and a line in the sand on a portion, correct?

Joe

Paulson: Yep.

Joe

Vaclavik: But then there's something to be said for that. That's a peace of mind thing. And, and, you know, like we mentioned earlier, we may just be in year 2 or 3 of, of a 5-year bear market cycle. I mean, we could be Yep.

Joe

Paulson: And we've been there. We've been there before.

Joe

Vaclavik: To go back to the fund length, the funds get long corn in bear market years. They always do. Every year, 2014 through 2019, they got long for a little bit, then they'd go back to being short. That's not a prediction. I'm just telling you that's what happened. Yeah.

Joe

Paulson: Well, is there anything else that you want to touch on, Joe, before we wrap this thing up?

Joe

Vaclavik: The one thing that we didn't talk about a ton was old crop bushels. Yes. And the old crop market's phenomenally strong. The old crop cash market has weakened a little bit. Basis levels have widened on this rally. I'm very curious to see what happens here the next few weeks. I know that the farmer has sold into this thing pretty aggressively. We know that storage of physical bushels, there's a lot of restrictions there. You're talking interest rates. Commercial storage is obscenely expensive. So I wonder, um, can't help but wonder if the farmer is perhaps more heavily sold right now than he would be in a normal year. And if that's the case, does that give these large speculators more ammunition to drive this thing higher? Is it, is it easier to push the market higher, or are there still enough farmer-owned bushels out there that will cap this thing?

Or do the ethanol plants and the elevators, do they have enough forward coverage now given all the farmers selling, that they're not going to need to push basis and cash market's going to stay weak. I think that the dynamics have shifted so drastically. It's pretty interesting.

Joe

Paulson: I was at a meeting this week that my local grain elevator puts on. It's a rather large multi-state grain elevator. And, you know, I do— I've been trying to do a little more Custom Trucking for them. And so I was talking to the manager the other day, and he said to me, he said, things are looking bleak. They own a rail terminal that is just about 12 miles north of the two big elevators that I work with. And he said that most of their corn, he goes, if everything plays out the way that they have it played out, he said, almost all of the bushels out of the elevator are going to go to this rail terminal and then get, you know, 7 loads a day out of a truck instead of, you know, 2.5 or 3. And, you know, he thinks they're going to be damn near empty by July. Yeah, they're aggressively moving corn. I don't know what that means for the market, but I thought it was interesting.

They, you know, historically have not done that.

Joe

Vaclavik: So cash markets are strongly regional. Some places will be good, some places will be bad. A lot of depends on what last year's crop was. I mean, regionally, yeah, I've heard some really great summer corn bids. There's, there's some guys who sold summer corn for $5 cash this last week. I think it was out east.

Joe

Paulson: Wow.

Joe

Vaclavik: I mean, July board's almost at $5. It's not that crazy.

Joe

Paulson: I saw an interesting chart where they had had basically divided the Corn Belt by the Mississippi River, Eastern Corn Belt to Western Corn Belt, and the Eastern Corn Belt is in a corn deficit and the Western Corn Belt is in a, you know, corn positive. So, you know, I found that kind of interesting and it makes sense. My local Ingredient here in Chicago, they— that's where most of my corn goes and they pull, have a significant rail portion of their business. And, you know, if there's shitty basis out in Nebraska, you know, they just start bringing that corn over here and then the basis weakens here and they— Yeah, it's interesting how corn moves.

Joe

Vaclavik: Oh, yeah. Yeah. It'll go to where it's, it's needed or treated best, I guess.

Joe

Paulson: 100%. Well, thanks for your time today, Joe.

Joe

Vaclavik: Um, yeah, thanks for the invite.

Joe

Paulson: Appreciate it. Yeah, yeah, we're, uh, um, yeah, we'll see you in Florida.

Joe

Vaclavik: I'll be there, buddy.

Joe

Paulson: Sounds good, man.

Joe

Vaclavik: Thank you.