Macro matters that move markets - weekly market outlook: Feb. 6-10th

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 a new marketing week where into that, what, second week of, uh, February, or first week of February. I gotta, I gotta think about the calendar here before we get going. But we're lucky enough to have Grant Schimick with us, Black Oak Financial. Grant, how's it going?

Grant

Shimek: Good, yourself, Chris?

Chris

Barron: I'm hanging in there. Apparently I'm still waking up. I got to figure out what part of the calendar it is. I, yesterday I was with, uh, my son and I was telling him what I was going to be doing next week, and I was on I was on the week ahead and he's like, uh, maybe you should do this week first before you do the next week. And I'm like, yeah, apparently I have enough stuff going on in my world right now. I can't keep track of what day is what.

Grant

Shimek: But, uh, yeah, you don't want to lose any time.

Chris

Barron: Yeah, exactly. For sure. We need all the time we can get. But, uh, no, I appreciate you being on and, and, uh, I know everybody's busy and I'm catching you here to, uh, just kind of talk a little bit about, um, where we might be going here next week or the next couple of weeks because we're heading into the— we're in February now, we're in this price discovery period. You know, we're probably— and I didn't look up to see exactly where we're at, because it's going to be changing here a lot in the next few weeks. But we're in that $5.90 range again, though, kind of where we were last year. Soybeans are going to be not quite where they were last year. Last year, we were $14.33. And we're gonna— we're probably in this next week, as people listen to this, we're not that $13.70 range maybe. So we're, we're a ways off of on the soybean side of things and where we were versus corn.

Talk a little bit about that soybean spread. Is there a reason soybeans in your opinion are not like bidding for acres or what's going on there?

Grant

Shimek: I think a goodly part of that is just the Brazil situation where they planted a lot of area. They have, um, relative to history, they're lightly sold. Last data I saw is they were about 30% forward priced of this, of the crop, the main crop now. And meaning with the kind of storage they have, there's going to be a lot of continuous selling to be expected into, say, May time frame. So I think that's, that's part of it. Um, and as far as some of this acre— the acreage mix as we go forward. A lot of my clientele isn't going to make any changes. They're going to stick with the typical rotation. But if it's an individual who needs to lock down returns, well, obviously corn's looking better in that context. So that's possible, but I don't think that drives a big swing, at least not at this point with this kind of the numbers we're seeing now.

Chris

Barron: Mm-hmm. You were telling me offline that you're probably gonna ask me about corn and bean, guys, and guys changing stuff around. And you were saying a lot of your guys are probably gonna stay with their rotation. And I had a couple of farmers I was working with, 3 or 4 actually, last week from Illinois. They were all kind of in the same boat, but yet, you know, not totally resistant to switching. I mean, when guys look at those numbers, what, what, what do you think's driving that decision just to leave it the same? Is there a lot of logistical reasons or just the workload, workflow, you know? Because when you look at the financials for some of the operations, it's a pretty big swing profitability-wise to the, to the corn. I mean, I— but on the same token, I can tell you we've got guys, and I'm sure you do too, that are making way more money on soybeans.

So You know, but, but you don't think— do you, do you not think that we'll see much of a shift towards a little more corn?

Grant

Shimek: Oh, everybody likes to plant corn. So I would— my personal opinion of that is that in the western Corn Belt, I think people are more inclined to, to plant more corn, a little bit more so than the eastern Corn Belt. Going back to your, your statement about logistics and agronomics. I think that is the main driver. And then once you're on that path, especially if you're 100% no-till, you veer away from your rotation less, and it just creates more challenges potentially for the next year. Yeah, I think that's why that is the case.

Chris

Barron: Yeah, corn on corn isn't that much fun, but, but yeah, you know, you look at the financials on some of these operations, and it's pretty compelling to figure it out, I think. But on the same token, like you said, there's, there's a lot of things that make the world go around too. Um, I wanted to ask you a little bit too, before I ask you some, some more, um, macro questions, but on basis, what are you seeing on basis with old crop? Um, there's still a few people hanging on to some old crop. Um, more than— I'm a little surprised, there's maybe a little bit more out there, and a few people as I get around and talk to operations, and I maybe thought there was in a few areas. What are you seeing, and what do you think on basis, um, from now until, let's say, spring?

Because a lot of times I like to wait until spring when everybody starts planting, and that's when I look for that next basis opportunity. But talk a little bit about what you're seeing.

Grant

Shimek: Well, obviously Western Corn Belt's the stronger side of it in general, and as we all know, basis is about flow. So if the flow stops and the basis is going to do the heavy lifting, when we, when we probe up here, there's lots of areas like on corn when we get near $7, the cash price isn't really moving in some parts of the Western Corn Belt. They're just, you know, let's say that there's parts of Southwest Iowa where the cash bids bounce around between just above $7 to $7.15, $7.20. If we get up to the high end of the range in the futures, the basis backs off. So to me, that's— it's about keeping the flow going.

If we did go through a scenario where we, you know, go break down the corn market or the bean market, well, we'll probably see basis pick up a lot of that, and we will probably see cash prices hang more so in the western Corn Belt and then in some spots the eastern Corn Belt. Obviously, yes, as we get into spring, I would assume that, uh, we're getting, um, into the planting season, we're going to have some pretty, pretty good basis levels. And as we go through the year, uh, we'll, we'll see some strong basis. But what is that flat price going to be? That's going to be the key to manage.

Chris

Barron: Well, talk about that flat price then for a minute. I mean, what are you seeing? What are You know, you're pretty good at watching some of the technicals, some of the trends, have a lot of times some pretty good perspective on things that are going on from a macro and micro perspective. And technically, what's your crystal ball say as we head towards spring before we get into kind of a weather market domestically?

Grant

Shimek: From a cyclical standpoint, some of the research is looking for, in corn in particular, an 18-month to 3-year cycle low to come in sometime in this, between here and the end of June. And on soybeans, it's not as long as 3 years, but it's still in the same timeframe. So we can hit some big air pockets from a cyclical standpoint. If you wanna know why is that gonna happen, well, that's a different question. I can't tell you why, 'cause the fundamentals will have to be there to make that. To flush out. As far as what we've seen historically, kind of tying back to the basis question and why maybe some people are not selling is that we had 2 years where we've had a very strong first quarter, especially even into February for cash prices.

Now, if you think back seasonally and you look back 30, 35 years, the Feb-March timeframe isn't usually good for flat prices or futures market or commodity markets in general. But we went that way anyway. So people's marketing memory is very reticent. So, you know, we've had two strong first quarters of prior two years, and we've had strong May-Junes also. So people are going to be, to a degree, inclined to wait and see what happens. And on a certain percentage of this old crop, to a degree, swing for the fences and see what June brings. Now that's not my perspective because of taking a look at like the net dollars per acre where we are, say, relative to the last 20 years. It's so strong, so I'm inclined to be out of this '22 crop because it's, it's such a big win for most people if you had average yields or greater.

And even some cases I've had clients who've had poor yields, but the net dollars were still very strong. And if they swing for the fences, they're going to end up being in the red a lot faster than anybody else. So I'd rather— if I'm— if you're going to swing for the fences, I'd rather do it on the '23 crop. Now whether that's the right thing to do or not, that's a different question, but at least you have a lot more time to be wrong.

Chris

Barron: Yeah. And the '23, you know, the scary thing for me there is, is, you know, we're looking at about another between it, you know, if you're a corn-soybean 50/50 operation, you know, or an operation where you're in an area we're going to have some wheat in the mix, we're seeing a cost of production increase somewhere between $90 and $100 an acre more than last year. So when you look at the amount of working capital required with interest rate increases, and people have more cash, but they've also spent more money, Um, you know, how, how bold, you know, can a person really be? I guess my, my bias is I'm more nervous about '23. Is that warranted? That, yeah, I'm way more nervous about '23 than I was going into '22 even.

Grant

Shimek: Are you? Well, without a doubt you can have things happen. I mean, we're living in a, in a very unhinged world, so to to expect that things are gonna cruise along. And absolutely, now you can, if you've come off a year where you've had good revenues, there's always ways to open that topside back up. And you can still cover, get started on '23, especially where you have decent revenues, you can net revenues to lock down and then take some of that capital and open the topside. So it's not necessarily an either/or question.

Chris

Barron: Speaking of some of the unhinged stuff that you just talked about. So last week, as we record this, last week, China had a quote unquote weather balloon investigation balloon. I don't know, you depends on where you read, what you look at, who you listen to as to what they were doing. I'm pretty sure they weren't doing a crop survey yet because there's nothing growing yet. Maybe they were just practicing to do a crop survey or something. But what, what's your thought on China? You know, I mean, you hear some people like, you know, we're in World War III, we're gonna be in war. I mean, the implications with China for the U.S. farmer is a massive consideration. Talk a little bit about what you see there as you look at some of the global stuff.

Grant

Shimek: Well, if you go back in history, back before Pearl Harbor, there was an event— I think it was called the Fugo Balloon Event— and there was a Japanese supposedly balloon that was floated over the US that had about, I want to say it was 33 or 330 pounds of explosives hanging off of it. And this is all a precursor to Pearl Harbor. So you could say, well, at that point, were we at war? Yeah, obviously, in retrospect, we were. Are we at war now with what's going on in the world? Yes, I would say, in my two-bit opinion on geopolitical events, I would say that World War III began late 2019. For the world. And it's just a matter of it unveiling itself now. Now, if you have the— now, why would that be? Why would our Western leaders be pushing us or just kind of sleep— to a degree, it appears like we're just sleepwalking into it.

But when you look at the level of debt that especially European Union and the rest of the Western world has, why would they do that? They want to default on that debt. So the classic playbook is going to be a major war event. So now when I say default on the debt, what do I think that looks like? I don't think it means they're not going to pay it, but your 30-year, 20-year bond or note that you have with a sovereign is going to end up being paid off maybe over 50, 60 years. So the terms are changed and are not in your favor. That's what I think is going on. So yeah, and as far as back to what we have to deal with is that, yeah, China's obviously— if we have issues with China, we got, we got problems. So the black swans could be, it could be a flock of black swans.

So if you— but you got to balance these things out, meaning if, if you, if you live with that kind of focus on that, you think, well, I gotta, I gotta cover up aggressively. And for a season, you might look really right. But on the bullish side of it, longer term, I've looked a lot at the agricultural production cycle that Lewis M. Thompson from Iowa State University back in, I think, late '60s to early '80s, he was there. And we're entering the first year of the decline phase of that cycle. And then that lasts for about 3 years, and then you go into a shortage phase. So as far as from a production side, I think we're actually going to have more natural headwinds from that cycle and have less grain, less food production.

At the same time, we have these human elements amplifying or creating other problems where we could make prices worse or tremendously higher depending on which moment and how things happen. So it's not that, uh, you can, you can jump on one side of it. You gotta think big picture both ways. And, you know, but so you gotta be really careful about locking in and getting emotional about a certain direction.

Chris

Barron: Um, as far as, you know, that's kind of the China thing, and nobody really knows for sure. So we, you know, we will continue to I bet China is one of those things. Stay tuned because there will be stuff to watch, things that are happening, and it's going to impact agriculture probably as much or more than any other— than a lot of industries anyway.

Grant

Shimek: Right. And one other interesting thing on China is that they have been probably more severely dry than we are as a nation. And, you know, they're, they're now looking at damming another river that flows into India, creating more conflict between those two nations. It may be looking at some of the weather gurus' forecasts, it looks like it's not going to be a bad spring here anyway in the continental US, whereas China looks to stay dry. So you can see those things all being a factor too.

Chris

Barron: Mm-hmm. So we could talk about China all day. I want to also ask you a couple other things before we wrap up here. Um, interest rates and the general economy as it relates to us as farmers, what do we need to be paying attention to as things happen domestically as well? What are some of the things you're watching that farmers, we need to be paying attention to?

Grant

Shimek: Well, as far as interest rates go, you know, we've had a massive increase as far as you— if you look year over year, it's tremendous. We've all seen operating lines go from, uh, you know, 3 to 5% now to some of them are upwards depending on people's agreements, 7 to 8%. So that's a tremendous amount of money. Yep. The— if the pendulum swings too far, it will correct somewhat, but I don't think, um, you know, more than, you know, wild guess, if we— whatever the high is on interest rates or operating lines, maybe we can recover back the other direction by half a point to a point and a quarter, somewhere in there. But to expect any dramatic drop in interest rates, to me, is unlikely. Because if you go back to, say, the situation with governments and the amount of debt they have, and if they want to push us into a world war, they're going to need to continue to sell debt.

So in our own country, the Federal Reserve probably can't lower rates because then the federal government can't sell debt. So we're going to be in a great competition on the private sector, even more so than we have been, for investment capital. And, you know, over the next number of years, I don't see why operating lines aren't going to keep marching higher. It's something you got to keep in mind. And, you know, And as far as grain marketing decisions, any decision, uh, time is money, so you better watch out, I know, how you're managing every dollar.

Chris

Barron: Well, and that ties into the inflation component here too. I mean, it doesn't take a rocket scientist to figure out, you know, the grocery store right now versus what it cost you, you know, 2 years ago just to get groceries, or, or, you know, energy prices were up, they've they settled back a little bit and they kind of back up again a little. I mean, the inflation that we saw from '21 to '22 was pretty massive. I don't know, my numbers always end up being about double what I hear people report when I look at what people have actually spent. But, you know, when you look at that, we're also seeing inflation has slowed down, but it's still there, still present. Um, and then like Alyssa, my wife, was looking at getting plane tickets, you know, for a, you know, a getaway that we typically do every year right before spring.

And the, and the air tickets were— the tickets for the flights were like double what they were the year before. Um, hotels and stuff are way more expensive than they were a year ago. Just all that kind of stuff. Are we in a recession, or are we heading to a recession, or are we already there? It's kind of like that war question, but What's your view there? Because you study a lot of that stuff as well.

Grant

Shimek: Well, a couple things. First off, for me, a trusted source had pegged inflation last year, the actual rate of inflation at 32% on a basket that's been followed for many years. If you take the official rate of inflation, and obviously they're always adjusting it, so it's not the same rate of inflation that we had say, in 1980. So it's not— none of these metrics are good to look at, but at least if you— whatever the official rate is, you take it times 2, and that's probably what we're really dealing with at a minimum. Yep. And, uh, as far as, well, what, what we see going forward with that is, yeah, I think it's, it's going to continue to be there. It's just not the rate it was last year. Um, So you have to expect that as we roll forward, that that's not going to change. As far as the overall economy and recession or not, you're definitely going to have air pockets.

But if we continue to have problems in Europe, which it looks like it's expanding, at this today anyway, you're going to have tremendous capital flight out of Europe and among other nations also. Where's that money going to go? Well, it's still today anyway, the US. So I still think we see a lot of capital flight into the US, which is going to support some of our asset classes, probably not so much government debt of any country, but stock market on blue chip stocks could see money flow in. I think that we're going to muddle along for a time. And if we get that tremendous capital flight, we might see asset prices take off. And we might be supported for a time, maybe well in the next year for that, if that's the case. Now, long run, those things aren't going to work.

Anecdotally, I saw a survey of economists here in the last 3, 4 weeks, and it was a long data series, probably from the late 1970s forward, and it had the largest spike up in As far as pessimistic on third, fourth quarter '23, it was the highest ever and by a significant margin. Anecdotally to me, that means we're probably not going to have a recession because the problem, the train you think you see coming 6, 10 months away in markets typically never shows up. It's the whole of the problem that disappears, like the whole energy crisis was last late last summer where Europe thought they're going to freeze to death. And that was around August, late July, August. Prices were insane, like on natural gas. And by the time you get there, they have the highest levels of natural gas inventories that they've had for years.

So I don't think we're going to have that kind of problem, as, um, at least as this year, early in the next.

Chris

Barron: Where does the money come from? I mean, A lot of these people, you know, then we'll get wrapped up here in a minute. I gotta ask this question from you because you, you see a lot of global stuff, and I think a lot of these things affect us as producers too. But, you know, where does the, where does the money come from? The average citizen that spent all their money, and I mean, the labor force, it still sucks. You know, you go to a restaurant and there's 3 people there and there should be 7, you know. I mean, the workforce isn't there. People aren't making money. People are making— the people that are working are making a lot more money. The wages have gone up, so they have money. But, but what about society in general? So you're, you're pretty much— I'm just, I'm just drilling in on the question. You're pretty convinced that the recession is probably not an issue then?

Grant

Shimek: Well, I don't think I I'm not— not to say that lower and middle income aren't in a grinder. They are. I'm not saying that's— but as far as the, um, where things are stopping and everything's a mess that rhymes with like the last half of '08, first half of 2009, no. Now, will that eventually come? Probably at some point, but I just don't think we're at that point at the moment.

Chris

Barron: Okay. Interesting. Well, I appreciate being able to pick on you and get your, your wisdom or your, your thoughts because you study this stuff way more than about anybody I know as far as what's really going on with that kind of stuff, how it affects the technical side of things, and then your charting and your how you kind of look at stuff into the, into the future. Last question, uh, or maybe it's a statement. Um, we had our conference, um, or a week or two ago in Florida on the Ag View Executive Business Conference, and we had a presenter there talking on technology, and one of the things he brought up was ChatGPT. Are you familiar with that, or have you used that somewhat?

Grant

Shimek: I mean, yeah, it's been everywhere.

Chris

Barron: Yeah, it's been everywhere. But it's interesting, I talked to farmers last week, and in both events they had quite a few people in the room. And I think there was the one meeting I spoke at one person knew what it was, and there was, you know, um, the other meeting I think there was 2 or 3. But it's still something I think just from the, the— and it's not just about ChatGPT as much as it is just about how technology in the next few years is going to continue to ramp up and be more of an impact on things than ever. If you go back and you think about how trading used to be at the Chicago Board of Trade, and then all of a sudden everything became electronic, it totally changed the paradigm. There was like this major paradigm shift in how things were done.

My last question to you is, what, you know, with how technology is changing and how fast these things are changing, do you see anything on the horizon in the next year or two from a technical standpoint that's really going to change much, or anything that we should be paying attention to as producers on the bigger picture?

Grant

Shimek: I don't have anything in the near term that I think is more important than not. I do think that the greatest risk to complex systems are— is the maintenance of such. And so as we have more and more complex systems within agriculture, and you're going into a lot of geopolitical conflict, some of these complex systems can can tank, can crash for a while.

Chris

Barron: So yeah, you can turn off an AI thing.

Grant

Shimek: Yeah, there is always this assumption that it's going to get more technologically advanced, but it gets more complex. But that can only go so far to where then the pendulum swings the other way because we've made it, it made it too complex. So I, I have a concern about those things as far as being robust. We're going to need to plant crops, we're going to need to feed animals, so The more we rely on these complex systems, how are we going to function if they don't work for a while? Big picture as far as technological advances. Yeah, we're going through sovereign debts, government debts have gone way too far. We're kind of at the end of a major economic cycle. What's on the other side of it? Historically, it's going to be a revolution in energy. What does that look like? I don't think it's lithium battery production.

I mean, that almost looks like you're going backwards compared to even lead acid batteries where you can recycle them and so forth and you don't have the environmental impact. So, but it's going to be something big that then propels us out of that. But that's probably over the next 8 to 12 years, we're going to have some major energy type revolutions. That would be to me the big thing that propels the world and the economies forward. Mm-hmm.

Chris

Barron: Yeah, it circles right back to acres and stuff because there's, there's a lot of people being hit up this year. I found looking for, you know, these companies looking for solar, looking for wind, and you know, those gonna take some acres and you gotta decide, are you gonna grow corn, soybeans, wheat, cotton, or solar, or, you know, uh, yep. Wind or whatever, and some of that stuff's going on too. But we kind of— I think it was good we got off target a little bit on the markets today, but you're one of the guys that pays attention to what's going on geopolitically, and you're kind of watching a lot of the macro stuff. So I appreciate being able to have a bigger macro conversation today than we do a lot of times on the market outlook.

Um, if people want to get a hold of you and talk micro or macro, what's What's the best way to reach you, to get in touch with you, to have a conversation, or to look you up?

Grant

Shimek: I can just go to my website, blackoakfinancial.com. My contact information is there.

Chris

Barron: Awesome, that sounds good. Well, Grant, um, this great conversation— I don't know that we solved anything. We're gonna have to stay tuned and see kind of what happens, uh, for this price discovery in the month of February, get people figured out, and hopefully, uh, We'll stay tuned and kind of keep chipping away at this marketing thing as we get more information every day.

Grant

Shimek: Absolutely.

Narrator: All right.

Chris

Barron: Well, thanks, Grant. Really appreciate it. And thanks, everybody, for listening. And we will catch you again next time on the Ag View Pitch.