Weekly market outlook: Jan 24-28th, high inputs + high prices = high risk

Chris: Welcome everybody to another episode of the Ag View Pitch. We are heading into another marketing week, January 24th through the 28th here. We're lucky enough today to have with us Mark Welch, grain marketing economist with Texas A&M. Mark, how's it going?

Mark

Welch: Chris, doing well. Great to be with you this morning. Appreciate the chance to visit.

Chris: Yeah, it's awesome to get you on the phone here and, uh, have a conversation that we can extract some wisdom from probably a warmer place than where I'm at. Been traveling around in some of the Corn Belt, it's been a little chilly. How is it in Texas?

Mark

Welch: You know, we've had some of the cool air pushed down our way as well. So we're a little cooler than normal as we wrap up the month of January. But as you say, we're in that warmer part of the world that we've got planting season just right around the corner.

Chris: Yeah.

Mark

Welch: You look at our producers down in South Texas, Texas, uh, they're, they're ready to go. And, uh, we'll move that planting season up as we get into early February, you know, come up along the southeast coast of Texas, and, and we'll move up into Central Texas, uh, here we're around the area where we are here in College Station by the time we get into early March. So, uh, yeah, we're, we're getting ready to go. And so it's just right around the corner to get this 2022 crop, uh, off and going.

Chris: Yeah, that's exciting. And it's crazy how fast, you know, it just seems like yesterday was Christmas or whatever. Now all of a sudden we're talking about planting corn. So pretty cool.

Mark

Welch: So you bet.

Chris: So let's get into, um, on the economic side with you being the Grain Marketing Economist here, um, the last couple of podcasts we've done on the marketing side of things, we've been asking our guests a little bit along the lines of inflation and the correlation to the grain markets, or the lack of the correlation to the grain markets, because we're looking at the inflation side from, from us as farmers and our perspective on the input cost side of it, right, for now. And, and I think there's, there's a school of thought out there that the inflation is going to, you know, continue to help support the commodity prices, and there's also a school of thought that, you know, there's a huge disconnect. What's your take on, on inflation as it relates to, to the commodities and what we should be watching for?

Mark

Welch: And certainly those relationships I think are very, very important. And we're all part of the broader economy, not only here in the US, but globally. And those things have influences that tie us all together. And at times those impacts and influences can seem much more direct, and other times perhaps even contrary, especially I think at times of a change in trend or a pivot in conditions. It might— when you might see that separation of what the normal relationship that you might expect. Generally speaking, if you look at broader measures of net farm income, typically net farm income is better when the U.S. economy is doing better. Now, many times we think what happens on the farm may not relate and be a direct corollary to that, but again, in general terms.

And so, as we're seeing economic growth, as we're emerging from the coronavirus pandemic, and we hope that we get through this current surge and things look brighter and better as we move out of this current wave that we're in right now. Economic activity is picking up. Again, that's better for the U.S. economy. If you look at GDP projections, the latest that I was looking at, From the Conference Board, their estimate is 3.5% GDP growth for the US for 2022, which is better than pre-pandemic levels. All that said, as the economy is coming back out of the recession, short-lived as it was, historically speaking, it was severe, but it was relatively short, to see inflationary pressures and labor condition adjustments is is not surprising in that situation.

So I think that if we're looking at, you know, a better economic outlook in the context of, yes, that's bringing inflationary pressures too, certainly I think that it's not all doom and gloom in terms of the impact on the economy and even on the farm sector. Now, when we get to the microeconomic level and the business sector level, we've got to manage those input costs.. And whether we're talking about, you know, inputs like fertilizer and seed and chemicals or energy or labor or land, you know, all those pressures do mount up. And if you look at our broader commodity prices, yes, there are some opportunities that are still there with higher grain prices. And it applies to, of course, to the oilseeds and also to cotton as well. If we look at the competition breakers for 2022, that there's a lot of opportunity out there that these prices Are manageable under certain scenarios?

I mean, you gotta make a crop first of all. Uh, and then are there tools and resources and, and, uh, we have things in place that we can either eliminate some of the downside price risk or take advantage of some of these prices that are being offered to us. Again, then it comes down to individual management in the short term. Uh, can this situation turn around? You bet. And typically what we see is if we see the lower commodity prices, particularly on our agricultural output, we tend to see those prices fall after we've locked in all those high-value inputs, and that's when we can really get in a bind. So yes, it's up and down, it's volatile. Again, there's some general trends that maybe provide a little encouragement, but yet that doesn't mean it doesn't take a keen eye to manage the local day-to-day operation to make all these pieces work.

Chris: So when we look at what the Fed, you know, and the expectations of, you know, from this week's announcement, kind of what interest rates, you know, the assumption of we're going to see several rate hikes during the course of this year, and then that's obviously the theory is anyway, is that's to help to put a cap on the inflation or at least, you know, help to mitigate that some. Talk a little bit about, you know, the impact of the interest rates, and then do you foresee anything of that hooking into the stock market a little bit, pressuring that, and then does that influence commodities?

Mark

Welch: Right. And, and yes, again, those kind of relationships. Then if we do see, uh, you know, upward pressure on interest rates, uh, how that can, uh, you know, put a dampening pressure on economic activity. Uh, and if you look at where, uh, rates have been as the Fed then of course lowered those rates in the emergence of the pandemic and the recession that we've been in, that we're cranking those back up over the next year, year and a half, back to something along more historical norms. Again, if we're returning back to economy that's maybe functioning— normal's probably not the right word to call it, but something we're more accustomed to without these major Setbacks. Yeah, interest rates currently are at the historic, still at this very historical levels.

And so yeah, to get them back up to something kind of a bump of 2 or 3 points is not out of context with where those rates were generally run. Would that put downward pressure on some other aspects of the economy? You bet. And particularly if you look at the relationship between interest rates or savings rates and other investment interest. Whether it be CDs or bonds or whatever it might be, if those interest rates on those more secure investments, as those get a little better, well then we see some money generally taken out of the stock market in that I don't have to have so much in those high-risk investments if my rate of return on these more secure, less risky alternatives might look a little more rewarding.

And that can apply to our commodity markets as well where we have commodities like bonds and the stock market, real estate, commodities in a large degree, they're an investment class of their own. And so we see investment money flow into commodities in times of high expectations of inflation. So there again, we're kind of going around the circle again, aren't we, of how one thing kind of ties to the other and feeds and leads to impacts in the other markets. So again, I think if we see some lessening of just inflationary pressures in general, and then that can be for several reasons. It can be actions by the Fed, like we've just been talking about, to maybe raise interest rates and kind of put a little— not the brakes on the economy, but maybe take our foot off the gas. But then just the normal supply and demand fundamentals of commodity markets in general.

If we were to see, for instance, oil production catch up with consumption and exceed that even to a small degree, what would that do to the energy markets? And that's the forecast moving forward for 2022. That that will be the global situation. If we make a corn crop in Brazil, we make a corn crop in the U.S., the soybean crop is not as bad as we think it might be in South America, or what's going to go on internally with China and their appetite for importing oilseeds and feed grains. All those factors that play into that, but if the fundamentals were to change, That starts then to also release some of those inflationary pressures. And then that, again, makes things a little settle down to a degree that we're trading more fundamentals rather than inflation fears and pressures. So lots of pieces to unfold, to monitor as we move forward.

But I think to look at indicators of what those pieces and how they add up, are important to keep an eye on, as well as, you know, all the other factors and influence for prices as we try to figure out what to do here in 2022. But certainly lots of things that are going on.

Chris: Well, we've— we're talking about a lot of the threats. So, you know, interest rates, the stock market, the funds, and where the money goes and or doesn't go, right? And inflation, and, you know, the thought of, you know, if we do have good weather Let me ask this. What— so we're sitting here with really strong prices. I mean, when I look at meetings and we sit down with our clients, there's not very many years at the beginning of the year when we can, you know, run the numbers and still have a pretty good black ink number at the bottom of the page. And we're seeing a lot of that even in the face of these high prices. And so On the other side of the equation, what's, what's keeping us this strong and what could keep us this strong moving forward? You know, what could keep these markets up here? Because I see some hesitancy and I feel it too, right?

You know, it's like we, we want to protect the downside to a degree, but we sure want to keep the top side open. And how much more top side do we really have, you know? And what's keeping it here? Any comments on that?

Mark

Welch: You bet. And that is, you know, it's all a discussion of, you know, extremely high and increased input costs when you put your budgets together this year compared to what we were doing a year ago at this time. You know, in the budgets that I've run for our districts here in Texas, yeah, if you plug in all the numbers to this point, it'll vary farm to farm, of course. But just kind of a broad view, yeah, the bottom line looks better putting our budgets together this year than they did a year ago, you know, even accounting for these much higher costs that we're having to plug in. But of course, that comes with a substantial increase in financial commitment and risk to do that.

And the cost of putting in that acre of plug-in, whatever you're going to plant, Yeah, the risk associated with that is going to be much, much greater given what those costs are going to be tied up in, in every bushel or pound or whatever we're growing out there. But I think if we look at, you know, what the possibilities might be, yes, the— if you look at— and of course, the key measure, if I'm looking at a price forecast, and just like many do, we look at those stocks-to-use ratios. What is the expected level of carryover stocks in a given marketing year relative to our level of use in that year? And as that stocks and that stocks-to-use number goes down, that's put our higher pressure on prices. And then as our stocks get higher relative to use, we'll relax, we're not so worried about those supplies, and so downward pressure on prices.

And as we're looking at the— moving now to 2022 and where we're coming out of, 2020, yeah, things got really tight. We had the short crop across much of the U.S. Brazil had a short crop, surge in demand from China, and U.S. and global grain stocks got very, very tight. We've eased that situation. The current expectations in this current marketing year, they're getting a little bit better, but relatively speaking, if you go back, I've kind of defined my area of analysis kind of through the more or less to the biofuel era, kind of a new world since 2005, 2006. But yeah, things are— we're on the tight end of the range even today, even though our supplies with the crop that we were able to make in the U.S., which is just astounding given how dry it was in so many areas. But our stocks-to-use numbers, it looks like for this '21 crop, are going to be a little bit better.

If the expectations are around any kind of normal weather. And we know we can't play that card yet, uh, but just looking at if we do have a situation that things— if we don't— without trying to predict, you know, a drought or a flood or catastrophe in any major producing area, uh, certainly at these high prices, the incentives are there for the acres. Now we've got to divide those acres up among a lot of commodities. Everybody wants some.. But if we just hold corn acres somewhere, we could give up a few corn acres. And if we had a trendline yield next year, production would still be higher in the U.S. Globally, the incentives are there, obviously, for more corn acres for anybody that can, that can grow them.

So again, factoring all those things back in and what we know about our estimates for, for consumption in the new marketing year, it looks like the stocks numbers would increase again. Marginally to a degree. And so again, I'm not looking— I don't think there's a lot of pressure that for prices to collapse, certainly as tight as things are today. But are the pressures and the likelihoods for that stocks-to-use number to get better, bigger, or smaller? And I think if it's going to get smaller, we're counting on either a major increase in a demand category, or we're looking at a shortfall of production in some major producing area. And putting the odds on that or the likelihood, is it out there? Absolutely. We certainly wouldn't— we would not completely discount that. But can we— again, would that be the highest likelihood of outcomes?

I think that's where we've really got to start making some judgments of what is the likelihood of that occurring. And so that's where I think some, some risk management tools and resources start to come into play to start at least protecting a portion of what might be at risk if we do not see those production impacting events. If we do, could we see record high prices right back again? Tight stocks to use, soaring prices. Absolutely. We're in that world. We're not— we don't have the supply of grain or other commodities sitting on the side that we can bring into play if there's another short crop. There's just not enough out there. Right. And so that's, that's, that's why we are where we are.

And so as we unfold that situation, as we move into the spring and early summer, that's when either the market will say relax and do what we normally do, which is start falling off in June and July, or by golly, this could be another wild ride and ramp this thing up again. So, so it's impossible to call, but, but I think there are, you know, patterns and likelihoods., you know, that we can still equate and put those into our decision-making processes and marketing plans and start to build on those kind of expectations.

Chris: Right. Yeah, the scary part is just where we start from too, right? You know, we've got a— it would be a long fall, or, you know, it just feels like we're getting towards the top of the hill, and it's a lot further to fall down than it is to climb up yet. And it just feels like. And, and with that, with all that said, you know, the last thing before I get to a couple of specific questions just on some ideas for finishing up '21 and, and continuing on the marketing thought process of '22, but, um, the Ukraine and South America, any comments on some of the stuff going on in either place as it relates to the market?

Mark

Welch: You bet. And of course that, that Black Sea region And we're talking about Ukraine and southern Russia primarily, right? Uh, the, the exports of grain that feed the world appetite, uh, are so important, increasingly important. Uh, if you look at the numbers in this current marketing year, uh, just looking at wheat, uh, Ukraine and Russia account for about a third of global wheat exports. Uh, so it's, it's a major source of, uh, of grains for the world. And any tensions between those nations, and then of course any tensions that would disrupt shipments and movement of commodities out of that region, and again, back in our environment of a tremendous amount of uncertainty and relatively short supplies, yeah, it would have a strong, I think, and severe impact on our grain markets.

And so anything that would, would calm and settle that situation absolutely would be very, very important. Of course, here's the middle of winter where it's hard to estimate, you know, what their production might be. And that's always a concern, just estimating, is Russia going to make a wheat crop and what degree will they allow those— that wheat production to be available to the export market policy-wise, price-wise, all those kind of things start to play in. So that alone is always a great deal of uncertainty at this time of year. Right. But then to throw in the political tensions, well, that's way out of my ballpark, but certainly one to monitor because it is very, very serious because again, that is a significant grain-producing and grain-exporting section of the world.

And of course, South America has been that way for a long time now, wrapping up their first crop plantings for 2021 and '22 marketing year. And now our eye very soon will be on that second corn crop.— that starts getting planted behind soybeans. Certainly again, with the prices as they are, if their inputs are available as well, you would expect that we would see certainly an increase in planted acres. But they've had their weather challenges, particularly I think in the southern areas of Brazil and of course Argentina. But the primary production areas for that second crop corn are a little further north into the central and south-central regions of Brazil. And so we're just planting season right around the corner for them as well.

So as we get into February, yeah, we'll be watching the production capacity and from acres as well as weather and yield prospects, looking at the battle for acres here in the U.S., setting the insurance price here in February using those futures, harvest futures prices, the average for the month. We'll set those for us for the year. Uh, yeah, February has become a very dynamic, uh, market-moving month, uh, given all that's going on around what's happening in South America and the decision that farmers are making here in the U.S. Uh, yeah, it could be, um, an exciting month that, uh, about to unfold.

Chris: So it sounds like the, you know, you reading between the lines here, then, you know, the tension with Ukraine, Russia, and, uh, and South American unknown and those kind of things are actually probably supportive at this point for a while yet? Is that kind of—

Mark

Welch: I think they are. Yeah. And then particularly underlying, of course, all that, Chris, being that stocks are tight, uh, and so I think just the, the uncertainty around these kind of things we've been talking about and concerned, but then we're doing that from a— that these concerns would be market supporting if we had kind of normal levels of stocks and supply. But then when you undertone the relatively tight carryover that we've got across many of these commodities, just highlights or heightens, I think, those areas that we need to watch. And so yes, do I expect anything short-term that would significantly change the picture and down we go? I do not. I think there's probably more of a concern of something on the other side.

If conditions again do play out in any kind of, you know, normal or unexpected kind of scenario, then I think certainly could see some downward pressure on prices as we move through this growing season. I think that would be the normal trend and seasonal tendencies, but yet we know that there are lots of things that can upset those and set us on a different path.

Chris: So as we get closer to wrapping up, I'm going to drive this into more of a micro on-the-farm picture then for you, and I'm going to just ask the question. Mark the farmer is sitting there with having had a very good crop in, you know, relative to a normal year. You've had a very strong crop. You've got some '21 crop left to sell. I don't care if it's corn, soybeans, wheat, whatever it is. What's your reasoning for holding on to it, or would you be more likely to push stuff out the door, or what's your thought process on that?

Mark

Welch: Yeah, and, uh, you know, again, I think there are some tools and signals out there that we can use to help guide that decision. Uh, you know, it does boil down to a large degree on your attitudes and your ability to and willingness to accept risk, uh, your financial situation, uh, you know, lots, lots of things feed into how we make, uh, you know, marketing and risk management decisions on a personal side and a financial ability side to weather the ups and downs of these prices. So given all that, I think if we're looking at signals of when and how much to sell, you know, say grain in the bin today, I think there are a couple of things to look at. One is what are the spreads being offered if you look at the futures contracts for corn? Compare the price on the March contract, May contract, July contract.

You get into September, that's a little bit into the new crop outlook, so that one, uh, maybe not quite as strong as an indicator. But to get us through this spring and, uh, you know, early part of summer, um, if there's not a premium offered in those contracts, that's kind of telling us that, you know, the market is telling us we want your grain today. We're not necessarily, you know, wanting you to store it, uh, because the premium's up front. Right. The next thing to look at is at your basis. Uh, I think the basis in our area, we've had a very strong basis, uh, all through this last year, and I think that's been the case across most of the country, uh, which is great. We've been rewarded then with that higher cash price relative to futures contracts than we would normally see. What is the likelihood of that getting better?

And so if we have a, uh, you know, a structure of the carry that's in the market that's not rewarding storage And if you've already got a high basis, again, I think the conversation with where this grain is going to go, whether it's to the ethanol plant or a feedlot or wherever you normally sell your grain, what is the likelihood of that basis for that stored grain getting better in, uh, in April or May or June or whatever your timeline might be for go ahead and selling the grain. So I mean, those are like the— as you kind of then look at So all of that being said, if the reward doesn't appear from those kinds of resources, then why am I hanging on to it?

Well, you're probably betting on a crop shortage in South America, or you're betting we're only going to plant 90 million acres of corn or 88 million acres of corn in the US this year, which all those things could happen and drive these prices much, much higher. But that's what you're betting on. So I think it's a matter of just, of What are the factors that are driving our decision? And I think there are some very objective tools that we can use, but then maybe you recognize to what degree we're using more of a subjective or a what-if kind of analysis, and it's fine, but at least what's driving the decision? And maybe that helps to provide a little bit of clarity. Like any major decision, financial or otherwise, if we wait until We have all the information we think we need to make a decision. We'll never make a decision.

You know, every decision is made in the face of a tremendous amount of uncertainty. And this is no different when we look at selling grain, whether it's in the bin or still in the bag, seed bag, and we're fixing to put it in the ground. But again, what are the factors we're using to make those decisions might perhaps provide a little clarity.

Chris: Yeah, and the same goes with the 2022 crop, right? I mean, we're really more so in the unknown yet even with the '22 crop. So, you know, we're going to get a lot smarter, like you said, as we get into the month of February, especially we get about three-fourths of the way through February and we can kind of see what that crop protection or the insurance level is at. And then the math gets a little bit easier at that point to be able to start to determine. Any comments on the '22 as we wrap up?

Mark

Welch: You know, I think that's exactly right. We'll have a little more on the price side of things, and then of course the market is going to try to see how that influences in the acreage decisions that individual farmers will make. We'll have surveys by USDA as well as private firms. Those will be released as we get information collected late February, early March. That'll be collected in March. So, yes, unfolding levels of information that we're going to have a little, again, a little more insight into where we are headed. But I think, again, if we're looking at kind of normal kind of patterns, holding acres where they are, have a trendline yield, current use and demand expectations, would my bet be for higher ending stocks next year than this last year? Yeah, I think they could go up a little bit. Not a lot.

We just don't have— I don't think we can— the battle for acres is going to be enough. We're not going to give everything to corn.. But if it just holds its own, uh, again, I think you should be aware of what those risk possibilities might be.

Chris: Yeah, the challenge this year from our observation is, is that the opportunities are probably better than we would typically see, but I would also say the risk factors are significantly larger than we would normally see too.

Mark

Welch: So, you know, I think that's a great way to put it. How many times we put that crop in the ground and that number at the bottom of the budget, it's not a black number. Yeah, you know, we're, we're worried about minimizing losses uh, you know, not maximizing returns this year. Yeah, it looks a little different for many, many cases if we make that crop. And, uh, so, uh, yeah, that puts us in a different light.

Chris: Yeah. And we've seen working capital positions in most of the operations that we've been plugging numbers in with and sitting down and doing loan renewals and things. And we're looking at, okay, wow, we just really had a phenomenal 2021 in almost every case. Not every but there's always exceptions, but have really improved working capital. But then if you look at that working capital improvement, we almost need a high percentage, or in a lot of cases almost all of that, to cover putting the next crop in, you know, just because of the increased— the inflation on the input side of things. And so it's, it's a, it's definitely a, a ball to juggle here, and, or a bunch of them to juggle, and, uh We'll get a lot smarter in February and we'll definitely reach out to you and pick on you and see what the crystal ball says for you as we get a little further down the path here.

Mark

Welch: Well, you bet. And I appreciate the perspective that you provide me from what you see with your friends, neighbors, and clients and what you guys are doing. Certainly provides insight for us down here. So always appreciate these conversations and the chance to visit.

Chris: Yeah, you bet. We'll definitely keep on it here with you. And again, thanks a lot, Mark. Really appreciate it.

Mark

Welch: You bet, Chris. Y'all take care.

Chris: You bet. And so again, that's Mark Welch, Grain Market Economist at Texas A&M. And appreciate everybody listening. Also keep in tune this next week. We'll be at the, the Executive Business Conference, the Ag View Executive Business Conference in Phoenix, and we'll have some reports coming out from there, from some of the speakers and things that are going on. And if you're heading down to Phoenix, looking forward to seeing you real soon. And thanks everybody for listening. We will catch you next time on the Ag View Pitch.