Market volatility ahead? Weekly market outlook, Feb 15-19

Joe

Vaclavik: And it all comes down to this. Two on, two out, bottom of the ninth. The Farmers lead by one. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new week, and we got a short week, 4 days. We've got Joe Vaklovic with us, Standard Grain. How's it going, Joe?

Joe

Vaclavik: Doing good. Uh, we had some measurable snow down here in Tennessee, uh, probably the most that we've seen since I lived here. And I've been here about 3 years now, just outside of Nashville. And, uh, the kids were out sledding and, uh, uh, having fun today. And my kids, when we left Illinois, were so young that I think my oldest probably remembers the snow, but the younger two definitely don't. So a little bit of an adventure. And then we're supposed to be— I'm supposed to be going to speak at Top Producer in Nashville. Tomorrow, as a matter of fact, on Tuesday. And I don't know if I'm gonna make it there or not. I kind of live down a back road here that doesn't get— you gotta remember, there's no plows, there's no salt trucks, there's no anything. So when the roads freeze, like, you're just locked in. So I'm hoping to make it there tomorrow. That's my game plan.

I'm gonna try to make my way out of here.

Chris

Barron: Yeah. Wow, that's crazy. I know last week we saw— a lot of us saw those pictures in Fort Worth and different areas. It just It's nothing to mess around with, that's for sure, just from a safety standpoint.

Joe

Vaclavik: Yeah, these areas that are not, are not prepared for it, they don't have the salt trucks and the plows and just aren't ready for it. I mean, the whole place just shuts down. If my kids go to school one day this week, I'd be surprised, I think.

Chris

Barron: How much snow do you have there?

Joe

Vaclavik: Oh, about 2 inches. Wow. That's all it takes though. Yeah. That's all it takes is it's just everything's iced over, you know? So all it takes.

Chris

Barron: Yeah. And that's funny to us in Iowa and, you know, in, in the northern states. Obviously we're sitting here right now with, I think, probably close to 30 inches right now here. It's about as deep as we've seen for a long time. And we were in North Dakota last couple of weeks, they don't have anything up there either. So it's just, it's been a kind of a weird winter. But let's get, let's get rolling on the markets here. Um, we talked a little bit offline. One thing I want to start out with is, you know, we were talking a little bit about, you you know, what we want to hit on going into this week. And one thing, our clients just don't have very much old crop left, if any at all, corn or beans. And that's one thing I would say about our clients. Sometimes we feel like the confirmation police when we go out.

The operations that call us to work with them have a lot of things pretty well figured out. They're pretty good marketers, and there's just not a lot of old crop out there. But for those who still have some old crop corn, soybeans, what do you think? And as we move into this next week?

Joe

Vaclavik: I'm not necessarily super bearish or super bullish. I think there's a lot of risk in both directions. I think that some of the factors that drive the market are going to start to shift in the next several weeks. You know, we're not that far away from the Planting Intentions Report. We're not that far away from planting season season. We're not that far away from, from talking a little bit more in depth about this drought that's developed out west and has even made its way into parts of the western Corn Belt. So I think that the narrative a little bit is going to change. You know, we're going to start to look more at the new crop balance sheets. What's— what does the '21-'22 balance sheet look like for corn, soybeans, and wheat?

I know there are probably a lot of people that are frustrated with USDA and how they've handled things recently, but that's going to be kind of the next— you know, big topic of conversation in regard to people not holding a lot of old crop grain. You know, I've talked about this before. This has been the year where the hold and hope grain marketer really kind of had his day in the sun, and the guy who is typically really good 7 or 8 out of 10 years and makes those forward sales, makes those decisions in advance to lock in revenues and profits, Those sort of guys didn't have as good of a year as they could have had because, you know, we had profitable prices available a long time ago at much lower prices. So it's an interesting year. I don't think that 2020 and this first part of 2021 is any sort of like new paradigm or any sort of new rule.

I think that this is— you're going to look back on this and say, yeah, that was the exception to everything we know about marketing, about seasonal trends. That sort of thing.

Chris

Barron: Interesting. Yeah, as you, as you think through the next step then, as we look at new crop, and, and that's one of the reasons I like seeing our clients kind of get wrapped up with the old crop, because there is an emotional connection there. And, and sometimes when you're trying to look at two different crops at the same time, it does get a little confusing and a little burdensome to make good decisions going into the next year. Just for clarity anyway, if nothing else. So as you look at the, you know, what we're looking at with these prices, uh, Nov soybeans and, and Dec '21 corn, you know, what's your thoughts there? I mean, what do you, what do you, what's your recommendation, I guess? What do you, what are you, what are you telling your clients to, to kind of keep an eye out for?

Joe

Vaclavik: Well, my first thought immediately when I look at the prices, December corn, it's almost $4.50, November beans at, you know, in the $11.70s, my first thought immediately is that we are going to plant a phenomenal amount of acreage. And that's not a surprise to anybody. It's not like that's a shocking statement to say or anything that anybody's going to disagree with. Yeah, we know if weather allows that we will plant massive acreage of both crops. Aside from that, I mean, I definitely like having some new crop sales on the books. You can't go wrong with the numbers right now. I mean, you, you know the numbers better than anybody does in terms of farm budgets, and I'm sure you've seen more than I have certainly. And you can't go wrong pricing a portion of the crop at these levels. Can you do better down the road? You certainly could. Could you do worse?

Yeah, I think you could certainly do worse too. The biggest driver of prices in grain markets, Chris, It's, it, it is weather. It has always been weather. It will always be weather. So when we're talking about new crop prices, I mean, they're largely going to be a function of weather. Do we have a short crop for the third year in a row here in the U.S., or do we plant 95, 96 million acres of corn and have a trend yield and have more corn than we know what to do with come this time next year? I mean, weather is, is still kind of like, it's the biggest driver of grain prices, and that's why new crop prices are so incredibly unpredictable.

Chris

Barron: Yeah, yeah. So I guess you're talking about weather. There's two other things I just drew a little picture in a box here on a sheet of paper as you were talking. You know, the weather is something that's going to have the potential to drive things, and I'll come back to that in a minute because I don't know the comment on that. But before I do, so I don't forget, this question is, you know, demand has been something that you know, when you look at all of the, at least the perceived purchases, and then, you know, what's actually going to be delivered? Are there some threats there or some things there that we need to be watching specifically that, that you'd like to note?

Joe

Vaclavik: The demand is, is fantastic. Although I want to make this point before I talk about anything else. When you go back to the— go, go back to May or June of last year, when the balance sheets were really, really burdensome. And I was just, I was just doing this on Friday, as a matter of fact, I was thinking about doing a podcast episode on it. And I didn't have time to do it. But from, from back in May and June of last year, when USDA was projecting a, they were projecting like a 3.5 billion bushel corn carryout back in May and June, right? The big changes on the balance sheet that occurred from like, say, June of 2020 up until last month, the reason why we've got a much tighter supply and demand situation is not because they were way off on the demand forecast. It's because they were way off on the production forecast.

They missed the production forecast in June by 1.5 billion bushels. 1.5 billion bushels. So you— and that's through no fault of their own. I mean, we had a huge prevent plant. We had a 172 national yield and they thought we were going to have 179. So I mean, when you think about the reason that the balance sheets in just corn, for example, are a lot tighter than what we thought that they would be, say, 10 months ago, it, I mean, the demand is one thing, but the fact that the production in corn in particular, just for this example, was like a billion and a half bushels lighter than what they projected was actually the bigger deal, in my opinion. Now when you take that and then you pair it with this record export book for corn and soybeans, that's how you get like this perfect storm of friendly news that helped push the market to these prices.

But I still go back to the short crop thing because it took a tremendous amount of bushels off the balance sheet, if that makes any sense.

Chris

Barron: Yeah, it does. I mean, that just, you know, the supply and demand, you're talking the supply, and that does make a lot of sense. I think it kind of seems like it started about the time the derecho happened. That was kind of the the impetus or the thing that got the snowball sort of rolling down the hill, and then we just kind of kept adding things to it.

Joe

Vaclavik: Right, that was a big deal. And those are things like, if you want to, you know, blame USDA for messing up, I mean, those are things that USDA just simply cannot know about in advance. You know, it was through no fault of USDA that we ended up with a crop that was so much lighter than what they had originally anticipated. And also on that same note, the total demand forecast where we ended up, I'm looking at the report from just last month, it was actually smaller than what they projected back in June. So it, it, yeah, we had this perfect storm of like Chinese buying and all this stuff, but we also lost a lot of ethanol demand. It's just, USDA messed up big time in a lot of places. But just keep in mind that that crop was a lot smaller than what most people had thought.

Chris

Barron: Right. The other thing that kind of kept the snowball rolling here, I guess, for lack of a better analogy, but to, you know, to keep the prices moving and going higher were the funds. And you talk a lot about, you know, the impact of the funds, whether they're long or short, and how that might be ways that we need to look at the market from a farmer's perspective. Talk a little bit about what we've seen and what maybe, you know, what, what we might be seeing with the funds and their involvement.

Joe

Vaclavik: Okay, so typically from year to year, one of the, the ways that I like to market grain, just one of the indicators that I use, is this: I like to avoid sales if possible when the large speculators are very heavily short the market. That typically coincides with the down markets. You're typically going to see your bottoms posted when funds are super heavy short, and that's what we saw back over the spring when corn was in the 3s and it looked like it was gonna get even cheaper. Large speculators were very heavily short. So at the time, that told me, the big fund short told me that I shouldn't be making sales. And conversely, or in the other direction, when the funds start to build real heavy long positions in these markets, that's typically when I like to make my sales.

Now the interesting thing about this year and the reason why this didn't work out perfectly this year is because the funds have been long and what I would call excessively long the market or extremely long for months now. It's been going on for such a long period of time, whereas you go back the last 6 or 7 years and they never really stayed long for that amount of time. I think there are some other factors at play here aside from just fundamentals in the grain markets. I talked a lot about the Fed, the stimulus, the money printing, the zero interest rates. There are a lot of dollars out there that have no place to go. And they're looking for markets that have a story. So, you're seeing it in the stock market. You're seeing it in some of the commodity markets. The commodity markets with a really good story, like corn or soybeans, for example. I don't think that can be understated.

I think that the impact of a zero interest rate environment, there's free money out there essentially for these big entities. That want to borrow it, they can borrow it. They can try to get a return. The money printing thing I think has resulted in inflation, not just in the corn and soybean markets, but in like everything. I mean, go try to buy a boat or a truck or a house or whatever. I mean, everything's more expensive now, which is very odd when you consider that we're in the midst of this great pandemic. You know, it's a very interesting situation.

Chris

Barron: Yeah, it sure is. So let me roll back to the weather thing and then another question for you. But in your comments on the weather, you know, provided we have good weather, there's going to be probably record acres planted. I was just in Alabama last week with a producer that, you know, that can grow cotton, soybeans. Obviously running the numbers real close with some of these producers that grow cotton and soybeans, and it looks like there's a lot more revenue opportunity in soybeans. So it leads me to believe that, you know, maybe we're going to see some acre shift from cotton over to soybeans, not to mention other crops over into soybeans. So if we see that, and then that, that's one comment. The other comment is, is if we do have this good weather, producers will spend money in season to enhance or protect yield, right?

So when the prices are better, when the weather is good and the crop potential looks good, the yield gets bigger. It doesn't get smaller, and it gets bigger fast because producers have learned how to really produce well. And I always tell people, the quickest way to lower your cost production is just increase bushels. And so, you know, what's your comment on, on that? You know, do you see some of that stuff as a threat, you know, first in the soybean side of things, as, you know, some of these crops could be leaning pretty, pretty heavily into the soybean side of things, and then we could really push out a huge crop? Does that— is there any threat there, I guess? And, and then hit corn on that same question or topic.

Joe

Vaclavik: Yeah, I mean, I think that that's exactly what your risk is when it comes to new crop prices, is that the farmer in the United States just knocks the ball out of the park in regard to production this year. And if that were to be the case, I don't know that even if we were to exactly duplicate what China bought this year, you could still find yourself in a situation where the market is hugely oversupplied. So that's— and it does all come back to weather and what you said about inputs. Kind of like a domino effect, right? So we start headed— heading in the right direction, we may accelerate even further in that right direction. And, and there's no rule that says that the national corn yield couldn't be 182 or 183 or something crazy like that. You know, it's not outside the realm of possibility. So I think that your biggest risk is, yeah, massive overproduction.

And then, of course, that some of your demand backs off a little bit. That these export sales are just not as good next year. I'm hoping we get some of the ethanol deal back online, say second, third quarter. But yeah, I mean, that's, that's why I mentioned that weather is really like, it's always been the biggest driver of grain prices, and it's going to continue to be. And I think that in a year like this, when we're going into the growing season with a tight supply and demand situation, it can actually escalate the risk in both directions. Like we're going to plant these huge acres, we're going to shoot for these big yields, If you don't get them, there's a lot of risk to the— I'm not going to call it risk— there's a lot of potential for upside in the markets if things are tight again for, for a third year.

If we have a third year in a row of a short crop, it's just, it's really going to be— weather is always the biggest driver, but I think it's going to be even magnified more so this year.

Chris

Barron: So you're talking potentially some, some pretty interesting volatility, and obviously that's what weather brings us. And then the other side of it I want you to touch on just for a minute here is It seems like a lot of times when it is a weather market or driven by that, you got about 15 minutes to make a decision, it feels like. And if you don't, sometimes, you know, if you do the right thing, you never do enough of it. And, and sometimes an opportunity presents itself and then it's not taken advantage of. Any suggestions on some things to consider as far as just tools to use or things to be, you know, what are some practical things that producers can be be thinking about using as some opportunities moving forward?

Joe

Vaclavik: Well, just keep in mind that when we have what I would call a crop scare event or a weather event or a bullish forecast in early July, those events typically are some of your better marketing opportunities. Not always, but not always your best marketing opportunities, but typically in the vast majority of situations historically, if you run into some sort of crop scare event where it looks like for a week or 10 days or maybe even for 3 days that the crop is in jeopardy, that that is an opportunity to do some marketing, right? So I think you've got to, to some extent, think about it in advance. When I had that conversation with Steve Johnson about crop insurance, I know you had him on the show too, you know, he talked about having, you know, a plan for like different segments of your bushels.

And there's a segment that he'd like to have priced here when we know what the insurance guarantee is going to be. And then there's some other bushels out there that maybe don't fall in that same camp. You may want to almost have a set of bushels that you know that you can go and price on some sort of weather event, and that's going to vary from farmer to farmer depending on cash flow needs, storage capacity, all that sort of stuff. But you always got to be prepared for a weather event and be prepared to do some sort of marketing or risk management during that weather event, whether it be just doing some HTAs for December or whatever delivery, or buying some put options or something. But you just, just be prepared for it because like in a lot of years you get something like that to some extent.

Chris

Barron: Yeah, and I take that as advice that, you know, when it looks like there's some opportunities coming your way, get some targets in, you know, get some, some, uh, you know, at least set some stuff out there so when something gets hit wakes you up and you say, okay, is this enough? Do I need to do a little more? And that type of thing. As far as one of the last questions I have here for you before we wrap up is on basis on new crop, you know, when, you know, you mentioned HTAs getting that cash price kind of locked in. What's your crystal ball tell you, you know, as we look at basis on new crop? I know that's always an interesting one. You know, this might be one of those years where early harvest, especially on soybeans? I know a lot of people are thinking, well, I plant earlier varieties and I can take advantage of that early basis, and probably to some degree on corn.

What's your thought on basis management?

Joe

Vaclavik: Um, basis is, is something that I don't— like, I don't do a ton of like blanket advice on basis because it's so highly variable. Um, I mean, typically you want to look for basis opportunities during planting when nobody else is looking for them. That's typically a very good practice to do every single year. So look for basis opportunities, both for old crop that you have left and for new crop during the planting window. I think that some of the new crop basis even will still have— there will be some lingering impact from area— in areas that had really short crops this past year versus areas that had good crops last year. You may see even some of that basis impact carry over But, you know, I always tell people just kind of know what happens with bases historically in your neighborhood. And when you see something you like, don't be afraid to lock it in.

You're not going to see the massive swings in bases like you see in the board. It's an opportunity to pad your bottom line, but it's probably not going to be like a make-or-break deal.

Chris

Barron: Okay, my last, last question is on capture and carry., look at this new crop. And, and, um, what's your thought there as far as, as we look to, you know, pricing that Dec '21? Um, you know, you talked about that on, on one of your podcasts here recently. What, what's your thoughts on, on some practice there?

Joe

Vaclavik: Okay, so when it comes to capturing carryout, a lot of— let's say a lot of your customers are going to make sales versus that December '21 futures contract for new crop, either futures or HTAs. In those instances, people should be watching now. You should be watching the carry in the new crop corn spreads now. There's actually carry in the new crop corn market right now. There's, I think, 10 or 11 cents from December out to July '22. That's not enough carry to make a to make it worth their while for a guy that has on-farm storage. But that spread, just that particular spread, just as an example, December '21 out to July of '22, um, if that thing gets to 20 or 25 cents at any point over the next 2 weeks, 2 months, 6 months, whatever, um, that's an opportunity to capture carry.

The one thing you've got to remember about spreads, and we could do a whole 3 hours on, on spreads, but The carries can only get so wide. There's never going to be a dollar of carry from December to July. Once it gets to a level where a commercial entity is able to make money just by storing the corn basically, or somebody is able to do it on paper, it's never going to go past that. So typically that December to July, like December '21 to July '22 corn, you're not very often going to see it trade past 25 or 30 cents a carry. It doesn't happen very often. So you should be watching it now. And just last year, as a matter of fact, that exact spread would have been decent. '20 to July '21 at the time, that spread traded like 28 cents a carry in April or May last year. And it was— there were opportunities to capture carry very, very early if you were paying attention.

And the same thing under the right circumstances could happen this year. So you gotta start watching it now, even for new crop.

Chris

Barron: Yeah. And usually what we see is, is the one of the best opportunities is to roll that stuff out to from that lease to the May or whatever. And then like you said, there's usually a basis opportunity there. You can kind of double capture some opportunity there. And, you know, and one thing I look at that I think needs to be mentioned too is, you know, if a person's borrowing money, there's a cost of a couple of cents a month there for the money. So that's why, you know, I like hearing you say the 25, 28 cents, because then it starts— it does get worth it then, you know, when you're looking at 10 cents that's, you know, that first 8 or 10 cents is kind of going to cover the interest on the money that a lot of operations have borrowed too. So that does have to be factored into that carry as well.

Joe

Vaclavik: Spreads and capture and carry is— and this is what I said in my, in my podcast episode I did— it's one of the things in grain marketing or in markets that is, is perhaps less of a gray area I'm not gonna say it's black and white, but it's less of a gray area than flat price movement. Spreads, like I said, when there's carry, there can only be so much carry. There's never gonna be an infinite amount of carry. And that's a conversation for another day on the mechanics of that. But if that thing, if that Dec to July, just as an example, and you may do Dec to March or Dec to May, but if that Dec to July as an example gets to 25, it's like basically a layup to go ahead and roll it in the vast majority of years. Right.

Chris

Barron: Yep. No, that's great. Um, anything need to be watching out this next week, or what's the next thing you're watching for in the markets?

Joe

Vaclavik: Um, like I said, I'm really going to start to shift my attention toward the new crop situation. Um, in regard to old crop, I'll be very curious to see what, what, uh, what the export situation, uh, turns into. Like, do we ultimately see cancellations? Do we continue to sell? Soybeans into, say, late February or March. That would be very odd if we did continue to sell a lot of beans into February, March. Corn, we've got some time till Brazilian harvest. That's where all the shipments are going to go. So that's kind of like, in regard to old crop, that's what I'm watching is exports, and then ethanol too is a big deal. And then new crop, I mean, acres and weather, that's going to be the name of the game for now.

Chris

Barron: Awesome. Last thing I want you to do is give yourself a plug on your podcast and and kind of what you do there.

Joe

Vaclavik: Uh, my podcast is called Grain Markets and Other Stuff. Um, it's also a YouTube channel by the same name, so if you like to watch videos of it, um, I do everything on both, uh, all the, all the podcast apps and then YouTube. And I do, I do a daily, um, uh, update on the market. It's posted to the podcast app at about 6:30 AM Central Time every business day, and it's, it's 6 to 7 minutes long typically. It's a really quick run-through of the overnight headlines, anything you need to be aware of. And then I do once or twice a week either like an interview episode like you've been on. I do interview episodes, or I'll do some sort of special segment. Like last week, uh, on Friday, I think I posted that one about corn spreads and capture and carry potentially in new crop corn. I've had a really great response to it.

I started the podcast just a little more than a year ago, probably 13 months ago. Um, had a really great response to it. Um, I like doing it, and I like putting the information out there.

Chris

Barron: Well, that's awesome. It's one of the best podcasts I listen to every day. When you do that morning outlook, that's really appreciated. I know a lot of our clients listen to it and appreciate it. And appreciate your time on this podcast here today, and, and thanks a lot. Really appreciate it, Joe.

Joe

Vaclavik: Thanks, Chris. Everybody have a good week.

Chris

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