Weekly market outlook: Feb. 21-25th - caution, uncertainty and volatility ahead

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. We are heading into another marketing week, the 21st through the 25th, but actually we've got a short marketing week, 4 days. To discuss here. We've got Duane Lowry with us. Duane, how's it going?

Duane

Lowry: Good, Chris.

Chris

Barron: That's good, that's good. So we're recording this before the markets open here on Monday night, and there's a lot of stuff going on, it sounds like, with Russia and Ukraine and just a lot of speculation. Any thoughts on things that farmers need to be paying attention to with that potential conflict?

Duane

Lowry: Well, first of all, um, we don't know how it's going to turn out. I've been of the opinion that Russia would not invade Ukraine, and despite all the heightened anxiety going into the weekend, I still don't believe that they're going to invade Ukraine. And, um, uh, so that's just my viewpoint. Um, if they invade Ukraine, it creates, uh questionable export capability coming out of that particular region. Most likely, and this comes from talking to people in that region, they feel that any disruptions to exports would be limited in terms of duration. Ukraine has already shipped a large amount of corn, but the other ramifications are how does the world respond if Russia invades Ukraine? Do they Is it somehow made difficult to purchase from them? And how does that play out?

Does China come to their rescue, so to speak, and do they become an importer of heavily Black Sea wheat region supplies? You know, how does that all play? I don't know the answer to that, but until proven wrong, I'm not going to expect that Russia will invade Ukraine. I don't think that they have any real purpose in doing so. I don't think they gain anything. I think they gain a lot by saber rattling. I think they gain a lot by intimidation. And, uh, as long as they don't invade Ukraine, they always have that card to play in the back of their hand. And as soon as they do invade Ukraine, that card goes away.

Um, so I, I don't think they're going to invade at all, but we'll see if we find out that they have not invaded by the time markets open Monday, um, and we're still told that it's eminently going to arrive, then we probably have a situation similar to what we had on Friday and for most of the week. If we get to Monday when we open the markets and they've not invaded Ukraine and we also have some sort of diplomatic breakthrough then the markets probably take that as weakness. But even given all the media hype that we had with regarding Ukraine, I think it's important to look and see what we did for the week. For the week, corn was up 2.25 cents. Chicago wheat was actually unchanged, and wheat was the market that was supposed to be the most impacted. And I think it's also worth mentioning here that from Thanksgiving till present, wheat for the most part was very much on the defensive.

Most of those most of those days and a large portion of the time in the last several weeks when this Ukraine situation was on the front page and the front burner, wheat was an underperformer. For the week that we just finished up, May soybeans were up 17, soybean meal was down, soybean oil was up, crude oil was down $1.21. Energy markets was another one closely following Ukraine and the crude oil market did not seem to respond the way that one might have expected. Um, so I'm not sure that the markets are sending a strong signal that they believe Ukraine will invade— or excuse me, that Russia will invade Ukraine either. But I suppose that's open for interpretation.

Chris

Barron: On the demand side of things, you know, how's China fit into all of this, do you think? I mean, with, with what, uh, with what we need to continue to have for the demand side of the picture? You know, what do we need to be paying attention to there?

Duane

Lowry: Well, first, I think we ought to look at it from the perspective of what is their demand of U.S. goods. And given any opportunity they have, it appears that they are trying to shun U.S.'s supply as best they can. Now, some of that is due to the global market structure that makes the U.S. not competitive. So Maybe it's not a political decision as much as it is an economic decision, but it's quite clear that they are choosing other supply sources over U.S. if given the chance. Secondly, um, in the case of soybeans, China's demand focus is largely, uh, new crop, uh, focused, not so much old crop, at least from the U.S. As far as total demand, China has been telling us for months that their soybean imports would be down and their corn imports would be down quite significantly.

The marketplace has a difficult time believing China, especially anything associated with their supply or import levels. And so there's a lot of doubt about anything they say. But at the same token, they've been telling us this for months, and so far their purchasing and their import pace seems to imply that they were so far telling the truth. Their supply level is a lot better than it was before they started a major import program a year ago, and, uh, or more than a year ago even. Um, so the indications are— the implications are that China will import less corn than they did last year. They will import maybe even less beans than last year, which is a little bit of a rarity. But it looks like their imports, according— I think the USDA lowered them by 3 million tons. They're also talking about increasing soybean production.

I don't know how much they're capable of increasing their level, but that is also something talked about. Their hog market margins have been in the tank recently, so I don't know if that plays into it as well either. But I would say that demand from China for U.S. is, uh, failing to achieve hopeful expectations to date, and the risk is that their demand ends up being a disappointment.

Chris

Barron: What, you know, that sounds logical. What about the South America situation though with production there? Isn't that a positive on the other side of it, or—

Duane

Lowry: well, their production is lower from preseason estimates. Their production is not going to be record, right? But, um, just because their production that is down does not mean that their export level has to be down. And I believe their export levels are going to be able to be maintained largely at the levels that they were before. So I don't think the reductions that we've seen in South American supplies is going to have an impact of any material amount on their ability to export.

Chris

Barron: Okay, um, let's shift gears here a little bit. So, um, I'll start out with the insurance side of things. You know, we're coming off of last week's, uh, insurance level prices on corn at $5.85 and soybeans at $14.23. So we've got some pretty amazing, uh, price levels, you know, protection levels on the insurance side of things. Um, what's your take on, you know, I've asked a lot of people this, you know, Dwayne puts his farmer hat on and says, you know, okay, here's, here's where I'm at, at a comfort level of, of having protection with these kind of price levels. I mean, one of the concerns I think that I see that I have is a lot of producers that do some preemptive sales, you know, make sales along the way, get frustrated and eventually stop making sales.

I call it price increase resistance, where the price just keeps going up and finally people just stop selling because they're mad because they sold it too low of a price to start with and maybe are losing sight of the big picture of the margin that's there and the profitability. So speak to that just a little bit on, on kind of where we're at at these price levels and some of your perspective on what farmers need to be thinking about as it relates to, you know, locking these and putting some of these sales in play.

Duane

Lowry: Well, it's certainly true that producers that sold at some time prior at levels that they were happy to make sales at the time now have, you know, seller's remorse. And with that, as also we have reached the point where producers are now no longer willing to sell. If the guy was not making sales, he still is not making sales. If the guy was making sales, he stopped making sales at whatever percentage level he achieved in terms of total sales. You can go back in history and find points, years of reference to back your stance, whatever that stance may be, if it is one not to sell or whether it is one to sell. In the years in, uh, in the current price structure, say from 2005 forward, in the years that we've had that you've seen high prices prior to the harvest time in either this timeframe or going back even to last fall.

The years that you had a situation where those sales turned out not to have been necessary probably would have been years that you had a much lower carryout to start out with. That's not the case this year. But in, in 2012, in February that year, we had prices of $5.60. We had a spring low at around $5. We had a summer peak of $8.30 and a harvest low of $7.10. So in 2012, when we had a big production shortfall, which we did, obviously wouldn't have known about in February at that time, you know, it did not pay to make those forward sales. In 2011, we had $6 prices in February, a $7.75 summer peak, and a $5.75 harvest low. So you could argue that it didn't pay to make those sales at that time either. But those particular years, we had a carryout of $989 million, and the year before was $1.1 billion.

And now you got to carry out of 1.5 billion and you've got global supplies that do not imply any sort of shortage either. So, but if you take out those 2 years, uh, in 2013, which was the last, you know, time we were at these price levels, you had a $6.50 peak in September of the previous year, which in this case would have been similar to having it in September of '21. You had $5.60 in February of '13, and by harvest lows you were at $4.10. If you go back to, uh, 2008, um, you had prices at $7.75 in July, and by October, November, you were ranged from $4.25 down to $3. Um, if you had— if you looked at 2009, uh, in June, July of 2008, you had prices of $6.75, and by 2009 you were at a summer low of $3.02 and a harvest price of $3.80.

So we don't know how this is going to come into play, but we know that there are both opinions can point to history and, and come up with something to back themselves up. But the different part, the part that makes it more difficult to have the situation by the time fall arises this year, that makes— means that people will regret having made their sales at whatever price they made them and whenever they made them. The part that makes that difficult is anytime that's been the case before, we had a much lower carryout structure going into this current marketing year than we did— than we have now, both US and globally. Neither one of the US or global balance sheets shows any type of supply shortage from a historical perspective. So that's different.

The other thing that's maybe not completely different from some of those years, but certainly different from most years is we have such a much higher cost structure and potential for volatility this year that a mistake made this year could be very disastrous. And if you're making a mistake but you're still making a profit, that's one thing. If you make a mistake and it turns out that you go from an opportunity of making a profit to an opportunity of of creating a loss. This year creates a lot more volatility and risk, and to me, that is by far should be more of a focus than the, the focus being on the fear of missing out.

Chris

Barron: On the insurance side of things too, you know, just from the comment you made on making a mistake, I think, you know, the insurance is going to fix or help protect a significant amount with these price levels too, because You know, I was just going back and looking at some of the historical fall price versus spring price, and without going through all that, just to say that, you know, this looks like one of those years if we have a good crop coming on and demand isn't, you know, blowing through the roof for some reason, and we just have normal demand and a really large crop again, which we seem to be able to produce under pretty crappy conditions every year, it seems like we could see a fall price significantly lower than the spring price.

And in that event, I mentioned this last week, you know, if you do the math on that and just you— if you— if each farmer would just yield their APH level and we have a significant price drop, that increases that, that yield guarantee and puts a significant amount of our clients in an indemnity payment therefore protecting that bottom side threat that you're talking about to a degree that I haven't seen before that well covered, you know, because of, you know, we have, we've had really high inflation, but we have such high insurance levels. I think that my message there though is, is when you sit down with your insurance agent, be prepared for some sticker shock, but get over it. Because the level of protection that you're going to be able to buy versus, say, last year is significantly higher.

And you're— so you're paying for that insurance, but, you know, if you divide that cost out on a per-bushel basis, you might only be talking 8 or 10 or 12 cents a bushel more than last year for a significant amount more coverage. So I, I think it's important just from a perspective standpoint that we step back and and make sure that, to your point, you know, there's a lot of risk there, that we protect that risk to the degree that we can.

Duane

Lowry: True. It's also important to point out that while we do have and will have a high crop insurance price protection level, if people are, you know, pick 85% coverage, for instance, you're still giving up 15%. Of that revenue that you could have if you made a sale. That 15% translates to $175 an acre. You know, how many times are people willing to give up $175 an acre? And how many times is $175 not, you know, historically a very, very large, uh, amount of profit that, that you let slip through your hands? If somebody takes an 80% coverage, obviously that's even more dramatic. At the end of the day, Um, let's give the two scenarios. If we have a scenario where we get normal production and prices do end up going lower to the point where there is an indemnity payment created, I guarantee you the guy that didn't make the sale is going to regret not having done it.

And the guys that make the most amount of money in those years are the guys that stayed with the historical or even above historical level of pricing. They're the ones that come out with the best and most profitable years. So You know, it becomes a philosophy. You're either, you're either more worried about protecting what's offered or you're more fearful of missing out of what might be ahead. You know, people get to pick whichever poison they want, but that's what it really boils down to.

Chris

Barron: Right, right. That's a good point. And it's kind of like back in the days of the LDP, you know, the loan deficiency, uh, payment. You know, if you, if you went ahead and made sales in front of that, it seemed like you made out a lot better because you had that that income. And then to your point, it's the same thing with the insurance. Now, if you, if you're— if you go, so go into that sold fairly heavy, it— you kind of double dip.

Duane

Lowry: It's been very rare to be at current prices, make the sale, and be regretful in the end. That's, that's the rarity. The far more probable scenario, the far more likely level, the far more likely— or actually what happened in history the far more number of times is the guy that is more aggressive on these type of price rallies that are outside of the normal range, that are super profitable, uh, super lofty historically— the guy that is willing to make those sales in advance has historically come out far better than the guy that has chosen not to do that.

Chris

Barron: We just all have to manage our, our psychology or our psychological condition a little better and not beat ourselves up when the market goes higher when we make a sale because You know, that usually means that, you know, there's an opportunity ahead. And so with that said, I want to use this to transition into my last segment here. I just kind of want to ask you a little bit about '23. That's out there a long ways, but, you know, what's your thought? Is there anything farmers need to be paying attention to as you look that far out? I mean, there is the threat of inflation continuing, which is going to continue to raise potentially all of these input prices, you know, we still have supply chain issues. That's probably gonna stick around for quite a while yet too.

Um, any thoughts on, on what we should be paying attention to as, as it relates to looking out even, even over the horizon or to the horizon, uh, on the market side?

Duane

Lowry: I've had people ask me about '23 sales for several months, and, uh, up until 2 weeks ago, I did not make any recommendation to make any sales. In fact, my encouragement was to hold off on those sales. My logic for having had that stance and that opinion was that because the near crop or the old crop prices and even the, the Dec '22 was at a premium to Dec '23, that if the markets tipped over and sold off, the spread reaction to that would have been one where all the nearby contracts, including Dec '22, would have been much weaker than Dec '23. So I'd use that as a crutch and a rationale to not make the sales. However, um, 2 weeks ago I started to make those, uh, recommendations that sales occur, and we spent a large amount of time with Dec '23 hovering just above the $5 level, and now you're at $5.60. And, uh, I think that has caused the tables to turn a bit for me.

I'm not very concerned about the supply issues, uh, lasting for a long period of time, so I'm not concerned about that. I'm not concerned about the inflation factor, uh, as much now as I would have been, you know, a few months ago. I think the inflation is probably more likely that we have, uh, reaching the point where that is peaking or will plateau. I'm not saying the inflation won't go away on your expense side, but, uh, in terms of the impact on the revenue side, I think maybe it's already peaked. Um, the economist that we had at your Executive Business Conference at that time said that the asset prices might be very close to peaking or may have peaked or we're certainly in that window. I noticed that after we returned home from that trip, about a week or so later, uh, Jim Cramer on CNBC was quoted as saying that he thought the asset prices might be peaking as well.

So we have to remember that when we look at this inflation factor, it isn't about the expense side of the ledger from an investor perspective. And we also have to look at what's ahead. The Fed is going to raise interest rates. They have told us they're going to, and they are going to follow through on that. They are going to reduce their balance sheet. And you can go through history and find out when the Fed is aggressively trying to fight inflation by raising interest rates and taking money out of the, uh, money supply, that has a significant impact on a lot of different things. And the farm sector and agricultural commodities, and maybe commodities in general, that impact is a very negative impact. And, uh, one of the main things that they're going to want to try to fight on the inflation side is the food prices.

And the food price attack on inflation, if you're a producer, is, is a direct assault on your commodity prices, but it's also got to be a direct assault on land prices. So what's going to happen with land prices and interest rates go up a tick, commodity prices come down, some of the profit margins, uh, take a hit in agriculture. And those are all plausible, reasonable, and historically accurate possibilities, especially if we— if Mother Nature gives us a normal production cycle here in the U.S. in '22. So there are real, uh, concerns and real points of vulnerability for the farmers out here that have nothing to do with supply and demand or production. But has to do with economics. And so I'm very concerned about that. And that's probably the biggest reason that I have a very alarmist view of what's ahead for agriculture over the next 18 or 24 months.

Um, and it has to do with things that are not associated with corn and soybeans. The stock market, uh, this week was down. They'll attribute that to Ukraine anxieties, but the stock market, it hasn't really been going anywhere for 10 months.. And, uh, yes, it's made some new highs, but not in the manner that— that's something that couldn't be taken away very quickly. The Friday settlement in the Dow Index, uh, that occurred yesterday, I think, is the lowest Friday settlement we've had since June. So if the January low is taken out of that chart, that chart looks very precarious, and there's lots of potential for that to expand. I think that if and when that happens the attack on inflation will suddenly take on a real sense of reality. And I think the commodity markets will not perform well with that as a backdrop.

Chris

Barron: Well, and that it— with all that said, it just, you know, kind of back to, to that '23, you know, just pick corn and soybeans, for example, you know, $5.60 and $13.11. At the close last week is basically a not a bad place for a lot of our clients to start. It's not a recommendation, it's just saying that, you know, I saw a lot of our clients and I, and I just was looking at our aggregate of where the average starting point was for making sales for 2022, and it was right around that $5 range, $5 to $12.50, $12.53, somewhere in there. And the starting point was just under $12.50 for the '22 sales. So you're looking at, you know, another 65 cents higher on soybeans and almost another, you know, 55 cents higher on corn for a starting point. It's, I just think something that, you know, as producers we need to really make sure we're looking through the right lens.

And, you know, you can't manage 100% of your input costs for '23 right now, but you have a still a pretty good idea on about probably 60% of those costs. And so it's just something that as a margin manager I look at. Again, it's not a recommendation, but it's just looking at it and saying, okay, pay attention here because there is opportunity for profitability in segments of the the '23. So I appreciate your perspective on that. And, and I think as farmers, we just need to stay on our toes when we're in this kind of a market, because sometimes the hardest time to make sales are when prices are high. Because, you know, the input thing follows along and it goes back down slower. And therein lies some of the threat. Any final comments and we'll wrap up.

Duane

Lowry: No particular final comment other than to, uh, maybe put a little exclamation point on the producer to encourage them to look at a— at number one, profitability offered. Number two, look at things outside of whatever you're thinking about in corn and soybeans. And for most, that means looking past South American, uh, production narratives that you heard. It probably means looking past the dryness concerns that still exist in parts of the western, uh, U.S., basically from the plain states and westward, um, I think, uh, and start looking a greater focus on what is going on economically and what, uh, it means if the Fed is going to attack inflation, which they have, um, all but guaranteed that that's what they're going to do. So I think those things to me deserve a lot more attention, a lot more focus than what most producers are willing to give it. Right.

Chris

Barron: Well, Duane, I really appreciate your time here today, and we'll get you back here again real soon.

Duane

Lowry: All right, thanks, Chris.

Chris

Barron: Yeah, thanks, Duane, and thanks everybody for listening, and we will catch you again next time on the Ag View Pitch.