Keep your eyes on margin management

Narrator: Thank you for listening to the Weekly Market Outlook. It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business. Please reach out anytime by emailing cbarron@agviewsolutions.com.

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and today we're gonna be going into a new week and we are lucky enough to have with us Joe Vaklovic to talk markets going into another week. How's it going, Joe?

Joe

Vaclavik: Doing good, doing good. Uh, recording on Saturday morning, which I actually— I like recording on the weekends. I feel like I'm a little— I got less going on. I can actually focus more on, on what we're talking about.

Chris

Barron: Yeah, that's good, that's good. So, you know, as we, uh, go into another week, we're coming off of last week's report. Um, it was interesting. I think it was kind of a shock to, uh, a lot of people that, you know, USDA was able to make the adjustment they were, and it was a positive thing. For the first time, I think farmers were pretty happy with the report. Um, what's your take on what we saw? And just a quick review, and, and, and does that have any meaning in, in some direction for the market as we go into the next couple of weeks?

Joe

Vaclavik: Well, yeah, the USDA told us that the corn yield, nationally speaking, is going to be quite a bit lighter than trend. It's going to be lighter than what most traders had expected. That being said, we've got an estimate here of 174.6 bushels per acre. The crop is not a done deal by any stretch. The way that USDA puts the numbers together consists of farmer surveys, the response rates there are typically pretty low, satellite imagery. I'm not quite sure how satellites work. And then they take that data and they adjust it based on historical yields. So I mean, this is not— that's not the final corn yield. That's an estimate of what the final corn yield may be. You can say the same thing in soybeans. And I think the soybeans are even more of a wild card. I mean, it's, it's mid-August, the bean crop isn't made.

We've got rains in the forecast for a good chunk of the Corn Belt here, second half of August, which could certainly help to tack some bushels back on. But for the moment, you know, the general idea here is that these bad areas of the Corn Belt and the Northern Plains, the Dakotas, Minnesota in particular, those yields are going to be bad enough to drag down the national yields and give us below-trend corn and soybean yields. Is that ultimately what happens? Probably, but not a guarantee at this point in time.

Chris

Barron: Gotcha. So let's shift gears for a minute here. And we'll come back to the production side. But it's been a while since we've heard about the funds and what they're up to, what they're doing, what do they think? And how did they look at the report? Is there any changes there? Does that give us some strength for a while or what's the perception there?

Joe

Vaclavik: The funds have been long the row crop markets for a very, very long time. It was back— you got to go back to July or August of last year to find the funds net short corn or soybeans. In this sort of situation, historically speaking, the funds should not go short the soybean market at all. The supply-demand situation, stocks-to-use ratios All that stuff suggests that when you look back historically at previous years when we were this tight, the funds will not go short the soybean market. If you look at that timeframe from say 2006 through 2010 or '11, and it might be even longer than that, I don't have my charts in front of me, but the funds did not go short soybeans during that timeframe because the balance sheets were tighter. And then we got into that 2014 through, mid-2020 timeframe, and the funds were both sides of the bean market.

They'd go long, they'd go short because the market was a lot more well-supplied at that point. So historically speaking, you shouldn't see the funds go short beans. You could probably make the same argument for corn. Things are tight enough, or at least the perception on paper from given the government data is that we're tight enough here that I just don't know that they have an interest in the short side of the market. So in recent years, up until July, August last year, the fund data, in my opinion, was one of the best grain marketing tools that you had. If the funds got to the point where they were long or aggressively long any of the markets, that was typically a really good marketing opportunity. If the funds got short or aggressively short, that was usually a time to sit on your hands and really not do a whole lot.

In this sort of environment, that tool becomes less useful because the funds are long and they stay long for months on end. I mean, we're going on more than a year since the funds were last short the soybean market. So it's interesting that speculators have stayed long for this extended period of time, and just the game in terms of large money managers has changed a little bit versus, say, the last 5, 6 years.

Chris

Barron: Interesting. So it's going to be interesting to see that. Another thing that— so I wanted you to Touch on funds. I appreciate that. Another area I want you to touch on a little bit that, you know, is with demand. What does that spell for demand as we see the, you know, the reaction to this recent report and what we can see the market's doing as far as China goes and any of our other opportunities on the demand side?

Joe

Vaclavik: You could really go down a wormhole with this discussion and talk about demand and possibilities for hours on end. What USDA told us last week is that new crop demand will decline because of the lighter crops, essentially. Typically what USDA does in these situations, when they lower the supply base, and in this case it was production, when they lower production, they lower demand. And that's what we saw on the US corn balance sheet. That's what we saw on the US soybean balance sheet. I don't know that that is a guarantee. And And I talked about this on my podcast. So USDA is projecting, just as one example, that corn export demand is going to be down in '21-'22 by almost 400 million bushels. And that may be true, but it doesn't have to be true. We have a record book of new crop corn sales that we've already sold for new crop delivery.

China bought a ton of corn out of the US for new crop delivery back this spring, like April-May timeframe. And they've got record commitments. So based on that, you'd say, why would demand be down year over year on the export front? You know, and other people might say, well, it's because of the high prices. You know what, China was buying all that corn in April, May when prices were $5.50 to $6 for new crop corn. So I don't know that it's a guarantee that we see this reduction in exports or in feed usage. And that's kind of what's being projected. But that's not a guarantee. And the one thing that USDA is not going to do this early in the game, they're not going to come out and say, hey, the demand is going to be phenomenal and we're going to have a light crop and the carryout is going to be 800 million bushels.

They're just not going to print that in this sort of report, although that's a possibility, in my opinion, that you get to a level that light. Now, you can make a counterargument and say maybe China's corn purchases were one and done. Maybe ethanol backs off a little bit, maybe feed backs off a little bit. And you could certainly argue the contrary, but There's a lot of irons in the fire here. There's a lot of things that can change. You're talking about demand for a timeframe that doesn't— for a 12-month period that doesn't begin until September 1st. So there's a lot of unknowns here and a lot of possibilities in both directions.

Chris

Barron: So do you feel like— we talked about the funds and the reaction to the report, which is probably more important than the report and kind of the sentiment of what's going on on the demand side of things. As a producer watching all this stuff going on, what are some of the risks out there? Because occasionally, and I don't do marketing advice, we work with people on, you know, cost of production and trying to make sure we've got that handled so people like you can work with them on some different strategies. So if, you know, what are you telling your clients, you know, to watch for as risks that are concerning to you? And what are some of the strategies strategies to manage some of that that you see as some options that work good?

Joe

Vaclavik: Well, I'm kind of splitting this up right now into two different crop years. You've got 2021, which is corn, soybeans you'll harvest this fall, obviously, and then 2022. In regard to 2021, 2021 from this point forward is pretty much a layup in regard to marketing. They could take $1 off corn, $2 off soybeans for this year, and you're still profitable. So that being said, you know, a lot of guys are still bullish the market. They want to take advantage of, of $7 corn should December corn or we get there, you know, next spring. Not everybody wants to be totally sold out, although being totally sold out for 2021 wouldn't be a terrible idea. The amount of money you would make on the farm is really phenomenal.

So if you're not going to be, you know, an aggressive seller, or say you've got a portion of this year's crop priced, I think that some sort of risk management strategy, whether it be an option, or something along those lines. I think it makes sense. I mean, there's just no reason at this point, given the value of options, given the way that the market's set up, there's no reason that you would really fail in your marketing for 2021. It's too easy to go lock in profitable prices. I mean, some of these options that lock in profitable levels for, say, December corn or November soybeans, you're talking pennies per bushel now to lock in really nice profits, even if you go with some really cheap out-of-the-money options. And that's not what I'm recommending necessarily, but I'm just saying that there's no reason why you should let your 2021 marketing turn into a disaster.

2022 is a different story. And there's a ton of risk associated with '22 because we know that input costs are rising drastically. We know that the board prices are not nearly as good. And if some bearish situation were to arise, say we've got another round of COVID lockdowns or China just disappears from the market, or for whatever reason, you get a collapse in the stock market, I don't know. But say Dec '22 corn goes back to $4.50, and that's not that far away, you're in a situation where, guess what, you aren't making money anymore next year. And that's where the risk is, in my view right now, is next year. Because we know that guys are going out and paying these higher input costs pretty much across the board. And we know that the prices, your output, your actual cost of price for corn and soybeans delivered, you know, fall '22, or they're lower than they are this year.

So, so the, the vice is kind of tightening on, on both ends here, right? Higher inputs, lower outputs. That's, that's where I see the bigger risk here right now from a marketing standpoint.

Chris

Barron: Okay, so let's, let's back up to 2021 specifically for a minute. We see, and you can kind of reflect what you're seeing, but we see a lot of producers that have a ton of HTAs on in a lot of areas right now where, you know, the basis isn't locked in anticipation of, you know, getting that basis locked or rolling those out, you know, or some combination of the above. And then, and then, and then we see a lot of people too that are completely, um, pretty well covered, you know, they've got some option strategies on or whatever to kind of protect that downside risk, but With respect to those HTAs that are out there and managing that early basis, what's your thought there? Corn first and then soybeans, and obviously there's no carry in beans, but what's your, what's your strategy on, on basis, and what do you tell people in, in different areas?

Joe

Vaclavik: Well, everybody's different because some people have no storage, some people have some storage, some people can store everything, and where you fall in that camp is of course an individual deal. That being said, there is some carry in the new crop corn market. There is not enough carry, in my view, to justify rolling HTAs forward just yet. I'm hoping that opportunity emerges, although in a market that is— that has kind of a tight supply and demand situation like we have in the corn market right now, you know, this on paper, when you look at stocks-to-use ratio, I mean, we're the tightest since 2012 or 2013 in regard to corn. So it's not a market that should offer you a ton of carry, but it does offer you a little bit of carry now. So it's a tricky situation.

I mean, you've really got to be— if you're a farmer, you've got to put a pencil to paper and figure out if rolling those HTAs makes sense for you. And I know everybody wants to use their bins, right? Everyone's got bins, they want to use them. And that would be the correct way to use them would be to capture that carry. So we haven't quite been to levels yet where it makes sense. The, uh, the Dec to March, I— you could probably argue makes sense. Dec to May, maybe, um, you'd have to see logistically if it makes sense for you, um, financially if it makes sense for you. You know, not everybody can haul everything at harvest. Sometimes you have to put corn in the bin just for logistics reasons. In regard to basis, it's such a localized issue. It's gonna have a lot to do with the crop size in your area.

Um, I mean, I always tell customers, you know, if you have good basis levels historically, don't be afraid to lock them in. If it's a price that looks good to you, don't be afraid to lock it in. And, um, yeah, if, if it's not good right now and, um, you're in an area that's going to have a big crop, uh, maybe you need to wait a little bit. Uh, it's, it's really, it's, it varies so much, Chris, from, from, uh, state to state, even from, from county to county sometimes. Um, it's, it's, it's not something that I typically advise on, like, you know, in a blanket fashion because it's so variable from that standpoint.

Chris

Barron: Yeah, on the carry What, I mean, what do you look for on corn? I mean, beans is useless to talk about on carry, but, you know, with corn, what are you looking for?

Joe

Vaclavik: I mean, you should talk about carry in beans because it's not like we've got big inversions in new crop beans anymore. There was a little bit of carry in some of those new crop bean spreads as recently as last week prior to the report. So you should be aware of the levels at which you should target a roll, you know, to roll in HTA, even in beans, even though we're not there, you should at least be aware of the levels. Um, what I typically do for my customers, I send out, you know, videos and charts and I'll say, hey, this is the level we should watch for December to March corn. This is the level we should watch for December to May beans, or, or I'm sorry, December to May corn. This is the December, July corn target. Like, just to give you one example, the December to July corn, like 25 cents is kind of my magic number.

If you get to 25, Historically, that's a really good price level, and those levels really don't change a whole lot from year to year. It's like historically, if you could capture $0.25 from Dec to July in corn every year, that would be really great. And we're not to that point yet. I think we got to maybe $0.13 there for a minute in time, but you could get to $0.25 if the crop ends up being decent, if demand backs off for a second. But you should identify the levels historically that make sense. And that's a longer conversation. The amount of carry that could present itself in the market is actually larger now than it was a few years ago because of some rules adjustments that the exchanges have made. But in general, there are some ballpark numbers that you should look at.

Narrator:

Preston

Pysh: Okay.

Chris

Barron: So anything I didn't hit on that I hit, we talked a little bit about the funds, about demand, about China, about basis, about carry, anything else that you're telling your clients or things that as producers we need to just be aware of in the next couple of weeks ahead?

Joe

Vaclavik: In terms of being— I mean, for producers, I mean, the stuff like the '21 and '22, the '21 being such a good deal, it's hard to mess it up. Just make sure you don't mess it up. If that means going and buying December $5 put options on a whole bunch of bushels or something, just to set that disaster insurance and make sure that you don't end up selling corn at $4 should that happen. And yeah, I know it seems pretty implausible. Plausible now that December corn would go from $5.70 down to $4.70 or $4 or sub-$4. But it's not unprecedented. That's exactly what happened in 2008. So there's always an outside chance that you could see this market just roll over and turn into a totally different deal. We all saw how quickly it changed for the better around this time last year. So any sort of a big move like that is something that you have to protect yourself against.

And it's that sort of big move that could cause you a problem for this year. It's not a small move. Like, if corn goes down 20, 30, 40, 50 cents, that's not the end of the world. Beans go down 80, 90 cents a dollar for '21, that's not the end of the world. It's just my main concern here would be like, no reason— there's no reason to mess it up at this point on what you have unpriced. Um, '22, again, my bigger concern, um, when I talk to customers personally, Chris, I, I try not to get too much into like Hey, China's doing this, or ethanol production was this last week. I can't really make decisions based off of that. What I can make decisions based off of are, you know, trends in the markets, profitability, cost of production, margins, time, logistics, capture and carry.

Trying to look at this USDA balance sheet, I'm looking at it right now, but I mean, there's not anything on here that can really help me to, to tell you what to do or where the market's going to go. By the time that USDA puts this out, it's priced into the market about an hour later. And there's nothing that I can do. I can't look at this balance sheet and say, hey, the market go up a dollar, down a dollar. It doesn't work that way.

Chris

Barron: Right. Last question for you. You mentioned 2008 and what happened in 2008. We did see a big price reduction. And a lot of times I know people are sitting there, like you said, waiting for it to go up. And what happens if it goes the other way, one of the drivers was the stock market and housing market and all that stuff. What would happen if we did see a major impact on the stock market to the commodities in your opinion? I mean, do you think there's a direct correlation or because of where inflation's at and other things? I mean, is there anything there we need to think about quick here?

Joe

Vaclavik: This is one of my favorite topics and I could talk about it for a long, long time. The government has backed itself into a corner because they've kept interest rates artificially low for a decade now, more than a decade. They have printed money at a pace that we've never seen before. If the government decides that inflation is an issue and that they have to do something about it, they have one way that they can do that, and that's to raise interest rates. If you raise interest rates, unexpectedly, and I don't think that's going to happen, they're talking 2023 is the general consensus, but if for some reason there's an unexpected change in government policy, the stock market in particular could correct drastically. I mean, we've seen the tear that this thing's been on.

If you would've bought any old S&P index fund on the low of the market in March of 2020, you would've doubled your money. In just a regular plain old index fund. It's really incredible what's happened. So if you were to see some sort of drastic liquidation in the stock market or for whatever reason, yes, I 100% believe that would carry over into the commodities. These funds, large money managers, they have interest in markets across the board. If you get a 25% correction in the stock market, No, I don't think corn is going to sit there and do nothing. I think there's going to be a reaction there. Do I think that's going to happen? No, I don't. But it's a possibility.

Chris

Barron: Okay, well, that answers my question because, you know, there's always, you know, we, we, we got to the point where we got sick of talking about black swans last year.

Joe

Vaclavik: Everything's a black swan now, right?

Chris

Barron: Right. And so it, you know, we still though got to keep our eyes open and be on our toes and pay attention to what's going on around us as we manage margins and as we look at our details and manage our businesses.

Joe

Vaclavik: So yeah, managing margins and managing risk has, has nothing to do with predicting what the markets are going to do. It's really the opposite. I mean, if we could— if me and you or anybody else could predict what these markets were going to do, we wouldn't need to sit here and, and talk about this stuff. I mean, we'd be able to just go sell all our cash when the market peaked and then be done with it, right? You wouldn't have to mess with options. You have to mess with crop insurance. You have to mess with anything. There's no predicting what's going to happen here. All you can do is try to outline the risks and try to figure out what the risk is. That's what I see as my job being essentially, is not to tell you where the market's going to go. It's to tell you what the risk is and how the risk is set up. If this bad set of scenarios unfolds, what does that mean for you?

That's the, the name of the game in regard to grain marketing, risk management, you know, margin protection, all that sort of stuff.

Chris

Barron: Yeah, risk mitigation's the name of the game. So yes, Joe, really appreciate your time today. People want to get a hold of you. And then, and then just real quick, and you know, occasionally I run across somebody that hasn't heard of your podcast, which I can't believe because it's excellent. You do a great job every every day, essentially, of bringing some good information out on YouTube, and then also your podcast. So quick, give a plug on that. So if anybody on here for some reason hasn't heard of you or heard of that, let us know how they get ahold of that.

Joe

Vaclavik: Yeah, so I stream live on YouTube every business day at 6:30 AM Central Time. And then what I do is I take the audio from that, and I upload it to every podcast app out there. So it's on Apple and Google and all the other podcast apps. So check it out. It's called Grain Markets. And other stuff. Just go to YouTube, type in Grain Markets and other stuff. You'll see my ugly face up there talking about markets, but every single day. And then we have special episodes that I do from time to time where I'll have you on as a guest or I'll talk about a specific topic. I also do— sometimes I'll do a quick video regarding a USDA report or something along those lines. So if you're looking for some real-time information every single business day of the week, I've been told it's a great way to start your day.

I don't know if I'd want to start my day listening to myself talk about the corn market, but some people do apparently.

Chris

Barron: Yeah, yeah, you know, now that's a topic in our house. My wife's not impressed when she hears your voice for—

Joe

Vaclavik: tell her I apologize.

Chris

Barron: Sounds good. Well, all right, well, thanks a lot, Joe. Uh, Joe Vaklovic, Stand Your Grain. Thank you.

Joe

Vaclavik: See you later.

Chris

Barron: Yep, thanks. And thanks everybody for listening. Again, we will catch you next time on the Ag View Pitch.