Weekly market outlook Dec. 20-24th: what will 2022 bring?

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: Hey everybody, Chris Barron here. Just a reminder, you have yet this week, if you're not signed up for the Executive Business Conference in Phoenix, January 26th, 27th, and 28th, we have 17 states right now and about 40-something operations and Some really great, smart, sharp people there, and obviously the great speakers we've been talking about. So if you're not signed up and planning on it, the early registration is good until the 24th, and then we go to a standard registration. But, uh, hopefully, uh, we can see you real soon in sunny Phoenix. Thanks. Welcome everybody to another episode of the Ag View Pitch. We are heading into another week. This might be a short week, I guess. We're heading towards Christmas and We've got Duane Lowery here. Duane, how's it going?

Duane

Lowry: Good, Chris, glad to be here.

Chris: Well, it's good to have you here actually in person. So this is kind of nice to usually have to do this stuff over the phone. So it's great to have you here and, and get a bunch of your wisdom out of you here today. Does that sound all right?

Duane

Lowry: Actually, I come down here because I know it when I leave, I become smarter just being here. Yeah, I'm not even sure it has anything to do with what we talk about. It's just being close to you and just letting all the knowledge just pour off.

Chris: That's really nice, but I don't think that's That's the case. But anyway, let's, let's talk a little bit about a whole bunch of stuff here. You know, like I said, we're, we're getting towards the very end of the year. There's been a lot of interesting things occur this year in commodities and in the general economy and all that stuff. And I know you're a student of the economy as well, not only the commodity side of things. And, and so I want to start out a a little bit with inflation. And I just offline here spent a little time with you kind of showing you where our cost of production numbers are at and kind of what we're seeing with our clients. And the information we get from the media is showing an inflationary rate in that, you know, 6.8 or 7 or whatever they said— they say inflation is.

And then when we sit down with our clients and we start looking at the cost of production going into this next year, we're seeing a number probably closer to 15 to 20% on the inflation. Any thoughts on that, of what we're seeing, or on the inflation? It just seems like it's a little higher than what's being reported.

Duane

Lowry: Well, I think at the end of the day, what's the only gauge that matters is what comes out of your checking account, and that's, you know, closer to like you're seeing, 15, 20% or more in certain types of parts of industries or types of expenses, and even the regular consumer, their costs are probably up more than what the Fed will tell us the inflation rate is. But the inflation is definitely real in terms of the expenses, but that doesn't necessarily translate to the revenue that we're going to get.

Chris: Well, that's what we see. And, you know, you and I talked offline a little bit. I was kind of showing you where we're at and kind of what we're seeing, and it's a Pretty significant price increase on the cost of production. We're looking at pretty high percentages, but I guess, you know, from a risk management standpoint, and I'm going to start off with the end and we'll start out here and end with this, but you know, what makes you comfortable with getting stuff covered? Because the risk is, as you said offline before we even started recording this, is, you know, the exposure of how many dollars we have out there, because that's not probably going to come down. Those are— those numbers are, you know, whether it's crop protection or fertilizer or land rents and machinery and equipment, all, all those variable costs, including paying ourselves. Talk a little bit about that.

Duane

Lowry: Well, I think the— without trying to interject any type of opinion or thought about what may or may not happen, just step back and look at the reality. And the reality is that for most producers, they have their largest inputs for putting in a crop they've probably ever had. And most of those are already fixed. And if they come down at all by spring, it'll be small, very small. And so any mistake that happens in terms of price, or any problem that comes up with price, it's, it becomes a really large problem. And then you've got to separate and say, well, prices are at the upper end of where it's been for the last 8 or 9 years by, you know, a notable amount.

And so if anything comes along, whether it's a supply and demand issue, whether it's an economy issue, whether it's, you know, trade tensions, whether it's, you know, some sort of economic conditions that cause the price to surprise people to the downside, this is not going to be a small problem. It's not going to be a small adjustment. It's going to be very, very large. And I look at it from that standpoint, and so I think the risks are very large here without even, you know, trying to, you know, formulate an opinion on it, just recognizing the facts and the starting points. It just seems like there's a lot of risk here.

Chris: So if we start with that in mind and continue that discussion for a second here, and then we'll get on some other stuff, but You know, as far as rate of return, and we set a margin target, which is what I always like to see, is okay, what's our margin target? Is it 10% or whatever? We see a lot of operations that can probably achieve close to a 10% return. What, what tools or what strategies, and, and it's not a recommendation, but what tools and strategies are you thinking that we should be looking at— you know, as we proceed here?

Duane

Lowry: Every operation is going to be different in terms of how much risk they can afford to take, what their costs are, etc. But in terms of the cost of getting a price established or protected, the options are very expensive. You know, the price of the raw product is high, the volatility is up, the option cost is very high. And it's just like the crop insurance this spring is going to be very high compared to what it's been recently. And that's because you're protecting a larger revenue, you know, dollars per acre. So there isn't anything here that we can do in marketing that's not going to provide some sort of sticker shock when you look at it. You know, at-the-money options are going to cost you a very large amount, 50 cents in corn, or, and, you know, a lot more than that in beans. But the— I think you have to figure out some way of capturing that.

My guess is if nobody's going to want to buy options on their entire crop, but if you have, if you're only buying options on, you know, 40, 50, 60% of it and you're doing forward sales on, on a chunk of it where you don't have the cost of the option, and then you are locking in your, your maximum profit on just those bushels that you do in a more, you know, final type of a price protection mechanism, that makes your overall cost of those options on your entire crop much less. But I think there's still value in doing that. For the guy that doesn't want to lock in a price because he's afraid of what he might miss out on, you know, unless he's willing to take on all the risk and bet it all, about all you can do is, is do some of both where you have a firm price locked in on a certain percentage, and then you're using options on the other rest of it.

And if you're using your crop insurance as a marketing tool, and if you've got an 85% plan or you got a 95% plan, you might be able to, uh, use your crop insurance as a little bit of a marketing crutch. And so maybe you go out and you spend money on put options today, and then let's say that sometime during the growing season, between now and the growing season, prices dip down to where they're below that crop insurance price, they're below that payment figure, then you can lay that risk off and, and go ahead and liquidate those puts, or you can write some lower strike price puts against it to bring in some income and reduce your cost. There's a lot of different mechanisms and tools that are, are possible, but you don't know any of them will occur, you know, right now.

But I think job one is to figure out a way to protect that revenue risk, and it's going to vary on— everybody's threshold of risk is different. But I don't think there's any really fancy way to do it, but it's going to be some sort of a combination of a certain percentage in options, a certain percentage in HTAs, cash forward contracts, whatever it may be. But I think the choice of doing nothing is not a very good choice given what I perceive as a lot of risk on the table here.

Chris: What do you say to the producer that's listening to this that's got, you know, let's just throw some percentages out, has, you know, because we'll hit old crop here a little bit too, whether it's corn or beans or wheat or whatever it is, but what do you say to the producer? What questions do you ask if they're sitting there with 30, 40, 20%, whatever, some percentage left of the old crop, um, do you sit there and hang on to that, or do you plow that into this next year and start focusing on the new year? What kind of— what are your thoughts, or what questions would you ask?

Duane

Lowry: Well, in case of the old crop, um, whatever he's sitting on at current prices, um, it's profitable, and it's probably quite profitable versus last year's costs, etc. And I have a very difficult time trying to discourage anybody from, you know, not taking those profits. I think it seems irresponsible on my part. So I'm inclined to encourage people to take profits as quickly, as fast as they're willing to do so. In terms of the risk factor, it's just as great on the old crop as it is on the new crop. And we've got, we have a narrow window of time. I'm sure we'll talk about South American weather, but we have a narrow window of time where there's still a premium of what if and unknown for that South American crop. But we're not too far away from a date on the calendar where that premium is going to quickly fade away.

And I think that producers that are holding on old crop here now, unless they are willing to bet on something going into a summer US growing season, it seems to me like their window of opportunity is going to be quickly closing here after we get past the first of the year. The tables, I think, are going to turn, and you're going to have more producers on the side of the ledger that says, you know, I don't need the money today, but I, I can see in a very short period of time I will need that money. And, uh, all of a sudden the pressure and, and for him to make the sale is maybe greater than it is on the part of the buyer to to make the purchase.

Chris: Yeah, and just to tack on to that, you know, when you look at cash flow, all of a sudden, you know, March 1st rolls around way quicker than we think it does, and physically moving the bushels. And then that leads me to a couple of things, managing basis, you know, any comments on that too? I mean, do you see basis staying strong into the springtime and Or what's your thought?

Duane

Lowry: I think it probably stays stable or strong. I'm not sure that when I say that I'm talking about continuing to get stronger as much as I'm talking about it stays at the kind of levels where it's at. But I think that becomes a threat probably sometime from April forward, and then I think that becomes a different story. But between now and through February, March, unless there's some big new development that we're not aware of, I would imagine basis holds together relatively well.

Chris: The last thing before we get into— ask in the South American thing that you'd mentioned— but, um, interest rates. You know, one of the things we look at, and we have a segment within Profit Manager where we look at the cost of carry, where, you know, you hear a lot of market analysts talk about capturing carry, and I always look at the cost of carry too. And And that has been pretty insignificant in the last few years, so that, that tool has not been used a lot because, you know, we've been not carrying the grain and, you know, and the interest rates have been low and all that. If we see, you know, during the course of '22, we see 3 rate hikes and we, we, let's say that it's a full percent, you know, I don't know if they're going to do a quarter each time or they're going to do a half and then a couple quarters or what.

But, you know, 1% and you start looking at what that does to the bottom line, it doesn't take very many 1%, you know, in the next couple of years to really change things. Any comments on, on that as we, as we look at, you know, finishing up '21 and look to '22? Any, any interest? And because I know you watch that stuff as well.

Duane

Lowry: The cash markets really haven't provided a lot of carry, and they're probably not going to provide carry. But that statement becomes a different storyline if we get to the '22 crop for the '22-'23 marketing season, because at that point in time, if your interest rates are moving up a little bit, supply is more plentiful, carryout is more plentiful— these are a lot of ifs here— but then all of a sudden you might see a structure develop again where we do have carry that gets built into the market. But I don't see carry being built into the market for the old crop, and I don't think it's really part of the decision process for producers at the present time. I think it's more a situation, you know, when do I need the money? Am I happy with the price? And they're just waiting for, you know, the time to make the sale. And most of the guys don't want to make the sale.

They really don't want to. They would rather make the sale when they need the money and, and continue to hold inventory. So I don't think the interest is a factor right now, but I think it might be more important for '22-'23 and setting up a futures price structure where carry suddenly does become a factor again.

Chris: And then that— we'll switch. I have one more question quick on that part, but it is, you know, when you look at— we talked about selling '20-'22, right? And so if you're looking at options is one thing, and you talked about the insurance and different stuff, but if you did like an HTA or whatever for the Dec '22, if the carry does come in and you are one that's gonna hold, I mean, those are pretty easy to roll out, right? And capture that.

Duane

Lowry: Yeah, I would say at the present time HTAs on new crop, you'd wanna keep your HTA in the nearby new crop or the Decs as opposed to going out to something in the '23 'cause there's not enough carry. And it is conceivable that by the time we get to the harvest of '22, we could have Cary developing again. But if that does happen, you're going to have been better off with that HTA in the DIS contract. And so I think that is where it needs to be right now.

Chris: Yep. Yeah. Okay. So South America, you mentioned that, you know, what's going on down there that is of concern or is an opportunity or what are you seeing?

Duane

Lowry: What's— Well, I think it's important to have a little background here. The marketplace, the speculator, the weather people, people that follow the markets closely, long before they ever planted their first acre down there, they were talking about La Niña and about the possibility of having problems of varying kinds over a large footprint of the area. And up until relatively recently, they've had a very good year down there. They've had early planting off to a good start. But now we've got areas that are dry and they've been dry for a little bit in south— southern Brazil. And the forecast over the next 10 days, 2 weeks looks like it's going to stay mostly dry. And we're also encompassing quite a bit of Argentina over the next 2 weeks is going to have a dry forecast. And if that lingers into the last part of January, that's going to be, you know, a growing concern.

At the present time, private estimates down there from— have been actually ratcheting up production estimates in both corn and beans. And so the problem isn't imminent. It might be for southern Brazil, but when you look at the overall production, we're still going to have a big crop increase from last year. And if we start to shave off bushels over the next 2 or 3 weeks, which is very reasonable that we probably are going to, you're still left with a situation that you're going to have greater supply than last year, what looks to be a plentiful supply globally. And I don't think it is a major problem if it doesn't get any worse than what I've described. But the problem is, if it's not raining for a couple of weeks, then you don't know what's 2 weeks after that's going to be like. And so the marketplace needs to add in some, uh, what-if premium and weather premium.

And that, I think that's what we're starting to see here in the last few days. And the markets have been volatile, but corn is at the upper end of prices that it's been for the futures market since the July contract went off the board. The beans are at the upper end of where it's been for the last couple of months. And there is room for more weather premium to maybe push beans 40 or 50 cents higher, maybe push corn values up 20 cents. Those are reasonable things that could happen if we continue to have a weather concern, you know, develop or add a little emotion to the marketplace.

And I think market analysts are going to go into the weekend here and arrive Sunday night that unless the weather is something decisively different and suddenly adds moisture, I think the marketplace is going to look at the overall price action of that we've had in the last several days and say, hey, the market's performing pretty well here. We're at the, you know, borderline upside breakout. I don't believe this upside breakout will have long-range sustainability, but it could be sustained for a couple of weeks and it could add, like I said, 30, 40, 50 cents in beans, could add 20 cents in corn. That's very conceivable to me. But I think the bigger picture problem is that, um, if South America is able to get good enough weather to have a normal or semi-favorable crop, which is still very much in, in play, um, we're going to have a very ample global supply situation.

And we've got China demand that's probably already overstated. And, uh, we're going to have a situation that despite the fact that ethanol usage in the U.S. is up and might work to pull down the carryout numbers in corn, I'm afraid our corn export numbers could come down quite a bit. Ukraine is going to have a significant amount of increased supply of corn available. Combination of Brazil and Argentina available for exports there versus last year is going to be up significantly. And we already see all kinds of signs that China has, may have little desire to buy U.S. ag products if they don't have to. They're going to have to buy some probably, but they certainly can buy a lot less than what is currently anticipated, and they're going to choose to favor other origins, I think, over us. And I think that is a potential threat, um, not only to U.S.

agriculture but just agriculture in general, because this— even when you start to talk about 22 acres, there's— it's not difficult to come up with a corn and bean mixture of acres that are very plausible and believable that will lead to production greater than what our overall demand will be, both corn and beans. So whatever the carryout is projected for at the end of '22, we're looking at with the '22-'23 marketing season that might be a growing carryout. So this is a potential threat, and, uh, we're gonna have to have a major product— maybe not a major— we're gonna have to have a notable production problem somewhere around the globe in order to keep these kind of prices. These prices are not going to be sustained with normal production, and South America was expected to be a good candidate to have a threat to production, and so far that threat has not been that significant.

And even the ones that we're experiencing right now, it may only be a temporary threat.

Chris: So it sounds like if we do see that, you know, the potential of the rally that you just described, we could see here in the next week or two potentially, could be a— could possibly be one of those opportunities where you, you sell the weather market. It always seems like, you know, whenever there's a weather market in the U.S. and you've got a weather market in South America, a lot of times those are pretty good selling opportunity.

Duane

Lowry: Good selling opportunities. And I think, uh, you know, just look at what it was like this last summer in the U.S. We had some really terrible statistical weather data, and we had crop conditions that looked really tough in a large area, and yet we ended up with national yields that are almost record, or they were record in corn. And, uh, um, so what are we capable of producing if we don't have another threat like that this next year? And how many speculators got burnt on that and will be a little slower to be concerned about a production threat in the US in '22? I don't know the answer to that question, but I mean, it's a reasonable question to ask.

Chris: Right, right. What's your crystal ball look like for the acre shift, you know, or what you're hearing, what you're seeing, what's your thoughts on, you know, the acre mix going into '22?

Duane

Lowry: I'm not sure what my own particular thought is, but I will say that a lot of the private estimates around— I've been surprised that they haven't deviated that far from what we had for '21, maybe a million acres here or there, but I would have expected maybe there'd be a little bit bigger change. I think that the opportunity to have a large switch of acres to soybeans and away from corn, which at one time was a kind of a talking point I think that storyline has been altered by the very favorable harvest and fall field work weather that we had, along with the fact that guys that had booked or prepaid for fertilizer, they had to either apply it or lose it, the, you know, right? And you had every opportunity to get as many acres fall applied as you wanted to. And you drive across the country, you can see that It seems like everybody got a lot done.

And so that makes you think that, uh, you know, you got a lot of acres that are kind of committed and you maybe have less acres that could, could be switched. I know there are some cases in the Midwest that had wind damage the last couple years, they've had rootworm issues, that they were going to do a few more acres of beans than they've done before. But most of those are guys are coming off of pretty heavy corn on corn you know, ratio. And I think there's some deviation from that. So I think the biggest acreage switches are going to have to come from the outlying areas. And, and I'm not sure where they're going to be, but I, I no longer think that it's, uh, as good a chance of having a large acreage shift as we may have had at one time for a possibility.

Chris: Probably picked up, you know, on the wheat side of things too, you know, this is the first time that in the last couple of years when we're analyzing the crop rotation decision-making, that wheat actually was a player, you know, with profitability. And some other crops for that matter, you know, cotton and some other things I think are gonna, you know, maintain acres pretty handily just because of the margins in those other crops as well.

Duane

Lowry: Yeah, I think that's correct.

Chris: So, um, anything else that I didn't bring up Dwayne, that we should be hitting on?

Duane

Lowry: Well, we talked about the inflation on the expense side. That's obviously real, but I want to caution people. I see a lot of people that believe that because we have inflation, that means commodity prices has to stay up or they have to go up or they certainly can't go down. And that's just not the case. They're a completely different animal. I mean, look at what the lumber price had done and look how it crashed. They're just— we're only just beginning to go into the winter period. And we have all this drama in Europe for their cost of electricity or availability of it and their natural gas and concerns about that. And yet we've seen crude oil prices take a sizable nosedive. We saw natural gas prices drop considerably at a time when nobody thought either of those was possible. Those are strikes against inflation.

We see the Fed that's been on 0% interest forever, um, deciding they are going to be fairly committed now to raising rates regardless of that, if it's a quarter percent, regardless of it's 2 times a year or 4 times or whatever it is. They seem committed to raising interest rates. Those are strikes against inflation. And I think that, um, we don't want to be political here, but just as a matter of fact, um if what some people are saying, that the Republicans make gains in '22 and make gains in '24, and if they happen to make— get control of Washington, D.C., isn't that a threat to inflation? Doesn't that change the dynamics of the printing press and how things are going to be— happen from a legislative standpoint? And as the speculators evaluate the landscape, I think something like that also makes them maybe a little less likely or a little less enthused to buy commodities.

And part of the, uh, thing that everybody's been betting on is that they were going to buy commodities or continue to buy commodities. And I see strikes out there that might be against inflation. We see it for sure. That's— that are things that are— they're going to attempt to do. And then two big components to this inflation argument in commodities has to be high energy prices and it has to be a weak US dollar. The dollar has been completely the opposite of what everybody expected. The energy markets have failed to carry through to what people expected. Those are two major strikes or threats against the inflation. If South America doesn't have a major production problem and they end up with an adequate or, normal type of production yield because their acres is already up, then we don't have the conditions in raw S&D numbers that guarantee a supply threat globally.

And suddenly I'm not sure if commodity prices can go up or stay up here just because, or just because of inflation. I don't think that's going to be a strong enough argument, especially when the entire argument from a speculator's mind is being undercut by interest rates going up, by the dollar being stronger than expected, by energy prices not being as high as they thought they were. These are a real threat, and I think they are things that are off most people's radar, but they need to be on that radar screen. And these are the types of things that, that goes back to the beginning part of our podcast here where there's risk here that's outside of what we are used to looking for. And if any mistake this year in terms of letting revenue slip away is going to be an extremely expensive mistake because of the— we're already locked into the high input side, right?

Chris: Right. And we're coming off last year when some of us, um, you know, I of course didn't do this. Yeah, right, I did. But, you know, we, we started selling too soon, so then you know, even if it's a subconscious thing, you're sitting there thinking, I don't want to sell too soon here, you know, or I got to make up for what I did last year, you know, I sold that first 30% too cheap. You know, you gotta— it's kind of like a golf game, right? You gotta, you gotta forget that first hole that you didn't do very good on and, and pay attention to the second one and, and not, you know, let past, you know, issues or challenges mess with your mind as you move forward.

Duane

Lowry: What you're describing is very real And I see it and hear it on a regular basis. But the only thing I have to say about that is if you over the last 10, 20 years or whatever amount of time you wanna look at, the guy that is always trying to sell ahead, trying to sell at the times when there's weather market, trying to capture those times when there's a premium built in because of that unknown and uncertainty year in, year out or over a career, that approach is better, way better, better than taking the approach that we're not going to make any sales, we're just going to sit and bet everything on, on everything being, you know, higher price.

Chris: You get to be right about 1 out of every 20, or—

Duane

Lowry: well, maybe, maybe, maybe a couple times out of 10 years. I don't, I don't know. Maybe. But that might be the one year that you've been beat up so badly you decide to join in and also make a sale, you know. Yeah, right. So it's, it's the entire marketing business is difficult. But we know there's profits offered now, and we also know that many years at this time you do not have an opportunity to lock in a profit like you have now, even with the high input cost.

Chris: Yep, good points, all good points. Great conversation, Dwayne. I really appreciate you being here and sharing your wisdom.

Duane

Lowry: Well, I appreciate being here.

Chris: Yeah, Merry Christmas in advance too.

Duane

Lowry: Same to you, Chris.

Chris: All right, thanks. And thanks everybody for listening. You guys all have a great week, and We look forward to seeing you again next time, or talking to you again next time, I guess, on the Ag View Pitch. Thanks.