Weekly market outlook, Jan. 25th-29th: welcome to market volatility

Mark

Welch: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris: Welcome everybody to another episode of the Ag View Pitch, and we are heading into a new week, and this is a Monday instead of a Sunday update. We had a few things going on over the weekend and Also, we saw some interesting things going on with the market. And so today we have with us our guest, Mark Welch from Texas A&M University. How's it going, Mark?

Mark

Welch: You bet. Good to be with you, Chris. I appreciate it.

Chris: Well, it's good to have you here. And, you know, we've seen some interesting things last week in the market. We saw, and, you know, and we talked offline a little bit, kind of the airplane analogy when you take off from the runway and you're in that climb and the pilot reaches over and pulls back on the throttle. And if that airplane levels off fairly quick, everybody sits up and looks around, and I think that's kind of what happened with the markets after this past week is everybody, you know, that market stopped that climb and everybody sat up and started looking around. So I guess let's start there. You know, this was a little bit of a wake-up call possibly. What's your take on what we saw? And then here, first part of the week on Monday, we saw some pretty good strength too. So talk a little bit about what we've seen here in the last couple of days, market-wise.

Mark

Welch: Trading. Yeah, you bet. And yeah, I think watching what the market did on Friday, yeah, you kind of had that little, you know, butterflies in the stomach feeling just a little bit, that all of a sudden things look different very, very quickly.

Chris: Doesn't have to climb all the time, does it?

Mark

Welch: No. And just a little bit of deceleration when you're like, say, in that power climbing mode, and it's kind of that oopsie-daisy kind of feeling. And of course, you know, this run that these markets have been on going all the way back into August, again, such a complete turnaround from what we were expecting as we saw the global pandemic expanding, the impact on the global and U.S. economy. And, you know, so many factors around commodity demand were just crashing into April and May and then even into June. And as we saw things, you know, begin to pick up some You know, didn't expect anything like this on the demand side. And then, you know, overlay that with the production issues that we had, not only in the U.S., but our export competitors, the smaller crops coming out of Ukraine and Russia and Argentina, you know, just compounding the supply situation.

And if you look at these stocks-to-use numbers that were reported by USDA in that January WASDE, what's pretty well the final crop numbers for 2020. Yeah, things are tight. Um, the number I like to use is days of use on hand at the end of the marketing year. And remember, Bob Wisner at Iowa State always talked about, watch that days of use on hand number. If it gets below 40, things are tight. You know, he called 40-day supply kind of working stock needs. If you get below a 40-day supply at the end of the year, you're going to get a lot of people get pretty aggressive trying to make sure they've got enough of what they want.. And in that January WASDE, uh, we went from the, uh, 42-day supply in December to a 39-day supply in January. So things are legitimately tight on the supply and demand balance sheet on the fundamental side of the market.

But we've also seen that, that the speculator enthusiasm, you know, uh, following these prices trending higher, the, the longs in the market, if you look at corn by some measures are at record high levels in terms of bets for higher prices by those speculators in our commodity markets, specifically for corn. So a lot of, you know, upward momentum from those folks. And so for any reason we see, you know, with the profit taking or, you know, technical indicators that maybe we're overbought or they're set for some setback, you know, we can see those kind of influences., you know, very quickly take some of the steam out of a market, even though fundamentally, you know, nothing changed from Thursday to Friday to Monday necessarily. But yet you just see those kind of market reactions and pullbacks. And then is the money coming back in? You know, that's kind of a question to be laid out.

But I think we are seeing two things I think that are pretty clear. One is, yes, the fundamentals are tight, and that's for corn. That's for soybeans, that's for cotton, that's for grain sorghum, that's getting tighter for wheat. And so when we're going into the new crop year with tighter fundamentals across the board of those commodities, then that shapes up the next question of there— we're limited in just how much of an acreage that we can bring back for any of these specific commodities. And if you look at what we've planted in these major crops the last Oh, going back to 1996, about 250 million acres. Well, we planted 238 last year, so we've got about 12 million maybe that we could bring back into production. And, and all these groups are clamoring for, for those acres, and, and I think that gives you some, some upward, uh, pressure on prices as well.

But I think we need to keep in mind the impact or the consequence of high prices is more acres. We're going to get more acres somewhere of something, and it's not always going to be in the US. Certainly we're going to see, you know, folks around the world responding to this, this price signal as well. So I think there's just a couple of things to kind of keep in mind as we, as we watch the market opportunities that both the fundamentals and the specs and the technicals have given us in these markets. And the reminder on Friday, we need to maybe be setting up paying attention because the world can turn.

Chris: So these big fund investors, you know, that probably is a big, obviously, chunk that's driving this thing. Do you feel like, you know, what we saw over the weekend, you know, was that sort of a buying opportunity, do you think? I mean, we saw that money flow back in. What's your, you know, I guess, and maybe you don't have a crystal ball there in Texas, but we don't have one in Iowa either. So I was just, you know, as you look at, you know, going into this next week, the next weeks, months, how active do you think these funds are going to stay? I mean, do you think that maybe they could continue to just keep driving this thing? Because, you know, there's obviously money flow back into this whole thing, you know, with COVID relief and some of the things.

It just seems like there's money coming from places that we're not sure where it's coming from, and it seems to be driving some of this. What's your thoughts there?

Mark

Welch: You bet. And I think, you know, a couple of things to keep in mind is that, you know, step back, you know, a little bit, as you just mentioned, looking at the overall economy, U.S. and globally, you know, are we recovering to a point that is going to support and sustain higher levels of commodity demand? And we do see some indications that is happening, you know, in Asia, maybe a little bit ahead of some of the rest of the world, but perhaps some things are starting to look a little bit better, especially as you know, as we get the humps and the valleys smoothed out of the vaccine rollout and some of those other factors. But then you also look at other investment opportunities, you know, the information that, you know, we get from the Fed, from meeting and the outlooks that they provide, that, you know, we're looking at very low interest rates for a significant period of time.

And so if you look at investment opportunities, you know, where might those investment dollars go? Something you've seen in the stock market, you know, reaching all-time record highs, but then also I think with the recovery of the economy, perhaps, you know, commodities starting to participate in some of that as well. So I think there are these money flows that are into these markets, which again create opportunities for us, and how sustainable and, you know, long-term, I think there's some fundamental factors that still need to be played out. You know, weather in South America, just how, how large will the crops be that will be coming out of the field in the next few months, as well as the production prospects for the corn crop, you know, that second crop that they'll be planting very, very soon. And then, you know, export demand from China, is that sustainable?

Are we seeing, you know, is something likely to change in that part? Or other, you know, corn importers around the world. We talk so much about China's imports, particularly of corn being so much higher this year. But, uh, but global corn exports are, are up significantly in, in addition to what China is doing. So again, you know, positive from that, that regard. But then again, overlay that against what will the supply response be to this current situation. If you look domestically, you know, in the U.S. at some of our feed use tendencies on the consumption side, You know, the prospects for increased feed use. Well, we got some headwinds there. Again, we need a strong economy to support meat and protein demand. Fuel use. Yeah, you know, the ethanol is coming back a little bit from the big dip we took with the drop in gasoline demand and the impact of the coronavirus.

But long-term gasoline demand is not projected to be higher over the next 4 or 5, 6 years. That peak gasoline demand, at least from the private vehicle sector, may be kind of already dialed in. And so that's something that will weigh against future corn consumption and other feed grains. So I think we've got to look at these different pieces of not only the sustainability of our use trends and where they're likely to go, but then particularly the supply-side response. And of course acres is only part of it. Weather is the other piece. And we certainly don't know what that's going to bring to us. But we are seeing, you know, our grain production and the major commodity production, you know, more diversified around the world, which does offer, you know, some degree of a cushion against a problem in one, just one area, which on the supply side offers some degree of protection.

But I think certainly the pressure is going to be for acres to be higher, you know, heading into that '21 crop and then playing out the weather. And so I think that's going to drive that and those investment dollars, that spec money. Yeah. Could things get tighter and we get $6, $7 corn? You bet. We've been there. We could make a run at it again. Could we see this thing turn around and be back at $3.50 very, very quickly? Yeah. Yeah. I think you could draw that scenario out without stretching too far either. So again, I think that's the pendulum of those money flows will help push us probably too far both ways. Again, I think that's why marketing plan management is such a critical factor in terms of being prepared for whatever these markets bring. You know, what are you going to do given these opportunities that these things are providing?

Chris: Yeah, one of the things that we tend to see and have seen over the years as we help producers look at cost of production and manage that side of the equation and manage the known factors, I guess, as opposed to the unknowns like weather and the markets and things. But one common theme that we've always seen is that, you know, you take, say, take for example $4 corn or $10 beans, and if you go back in history and look, you know, the amount of time we spend at, let's say, levels where we're at for corn, soybeans, and wheat, and if you go back and you draw a line from where we're at now. And historically, we don't ever spend very much time here, which, you know, tells you somewhat of a story, I guess I would think.

You know, when we look at our cost of production and have looked at that since 2013, every year as we go into a new year and we help growers populate their cost and get those things dialed in and then look at each other and say, well, there's red ink at the bottom of this and we're just going to hope and pray that we can get enough bushels to lower our cost of production and/or manage these expenses because this market isn't giving us a lot of opportunity. Now the opportunity is here and it seems like it's even harder for a lot of us to pull the trigger because we don't want to leave additional opportunity on the table. We've gone a lot, a lot of years burning through some working capital and just, you know, and so any, any good advice for managing those emotions? Because, you know, it typically is, if we want to be honest with ourselves, it's emotion.

Even though we've got the numbers in front of us and we look at it, it's the fear of not being able to capitalize on price opportunity that may arise in the future, as opposed to managing the risk to the downside. And then obviously there's a lot of tools to manage those things, but, you know, we also see limited use of some of those tools, and that's why I'm a big advocate of You know, getting with somebody that, that really does understand the tools if you don't understand them, and make sure you're utilizing some of the tools to at least take some of the risk off the table and get a floor on it, at least on some of these bushels, because the opportunities that are here usually don't last a long time. Any comments on that as far as just managing that fear and greed equation?

Mark

Welch: Oh, you bet. And I think that's just such an important component of that is Are there other practices or communication that we can have with our management team or other persons that we are involved in the financial management of the operation that can help us take the emotion out of those marketing decisions? I haven't figured out how to test this just yet, but I've got a strong belief that farmers are more afraid of high prices than they are low prices. You know, you don't want to be the guy that, you know, down at the coffee shop or the Dairy Queen, and, and, you know, you sold your grain at $4.50 and everybody else is talking about selling at $5 or $5.50.

Chris: Oh, that's happened to everybody this year. If anybody wants to be honest, we've all sold our grain at a lot lower price than where it is now, and I think that's what's screwing up our ability to make sales on the new crop.

Mark

Welch: Well, and, and, and to look at that, that, yeah, I let that go too cheap. But look what these markets are providing me now for the next one, for the next piece, the next leg of whatever sales that I've got allocated, whether it's based on my production cycle or timing around, you know, whatever decisions you would use of selling that crop out across time. You know what these opportunities are providing that you bet. What a great place to be is that, yeah, I sold it too cheap, but you know what, I've got more to sell and it's at a better price.. And so even though, yeah, you maybe let some of it go too soon, looking back, yeah, you wish you'd held on to it. There is going to come a point that we're going to wish we sold it because it's going to be going the other way. Mm-hmm. And again, managing, you know, both sides of that equation.

And, and you just mentioned, you know, looking at some prices now that do we have some opportunities, whether with options or minimum price contracts or, you know, whoever you sell your grain or commodities with. Working out these pricing relationships with them. Even, you know, an option that's down near your cost of production. These prices may be well above what your average cost of production would be. Either put a floor up kind of snug up under where prices are now, or with a pretty inexpensive alternative that can put that price floor kind of back down around where your breakevens are. And we've got a nice safety net built into the program. If these things go higher and keeps running, Man, that's fantastic. That was pretty cheap price insurance. But if it does break, if we do see some setbacks in these markets, then, you know, we've got some protection in place.

You know, if you look at the times going back into last century, even the times that we've seen significant rallies of long-term price increases, and I mean the real price of grain going up, and you hear these referred to as the golden ages of agriculture.— you know, they're related to coming out of World War I or out of the Depression and grain demand and grain prices after World War II, the surge in grain sales after the Russian grain robbery in the 1970s and the world trade explosion, and then the last one, of course, was the biofuel boom of prices. Which of those— what kind of great explosion in demand are we seeing that explains those periods and how do you compare that to what's happening right now? Yeah, we've got some, you know, export prospects a little bit better out of China.

But are we looking at a, a fundamental shift in, in the demand base when we're talking across the board for grains? And, and I don't see it. I think what we're seeing is a response to some short-term problems in production, some short-term opportunities in exports, and that may be sustainable to some degree moving forward. But the world, in terms of our grain consumption patterns, I don't see how that's changed. I don't see this as one of the, you know, opening stages of one of those golden ages now opening up before us again, like, you know, 2007, '08, '09, '10, and then throwing a drought off we go. Certainly things are tight. If we have another weather issue, yeah, this thing could get really, really exciting. But what fundamentally, on the demand side of the ledger, would derive and support the kind of prices that we're seeing right now that won't be overcome by one good crop?

Chris: Mm-hmm.

Mark

Welch: We weren't going to have one good crop was going to turn the world around in 2010. Uh, but that would— that's exactly what could happen now. Yeah, these higher prices could fix it real quick, and just a combination of higher prices and, and just good weather. And, and now whether we'll get those this year, I certainly— I don't know. Well, that's why I like the idea of using some tools and to protect us, catch these prices going up, get some protection under these, and then if it keeps going up, man, that's fantastic. I got more, I'll sell them. Right. But if it does turn, I've got something in place.

Chris: Um, two things I guess before we wrap up. One is, you know, as we catch some of these prices, any suggestions on time of year and amounts? I mean, right now as we look at it at our client base, and it's not really a recommendation as much as it's just some perspective. Again, we try not to be the recommendation crew here. We try to be the you know, just to kind of give perspective. But on the same token, you know, if you look at, you know, where our average clients are that we work with, you know, we see some sales on the books. And on Friday, I think, you know, or early in the week, I think people thought maybe they had too much sold. And then all of a sudden, I think they thought they didn't have enough sold. You know, and it's, it's amazing how fast you go from one, one side of the pendulum to the other side pretty fast.

As the market moves, and we're bound to see more volatility for a while. Any thoughts on just managing that volatility other than what you just said, or just, you know, do you think options is maybe the better way to go versus, you know, having some sales?

Mark

Welch: Yeah, and I think I'm much in the same camp that you just described. I'm not providing, you know, marketing recommendations, telling anybody when to buy or sell anything, but I try to provide some perspective on what the markets are telling us and maybe what history tells us a little bit. And, you know, to see that surge of higher prices into harvest last year, you know, what a phenomenal price run that we had. How often does that happen? I think we need to keep that in perspective. What is the greater likelihood that prices are going to be lower in the second half of the calendar year? And I mean the 4th of July than they were in the first half of the year. And you can go back to about 1980 and look at that December corn contract, and prices are higher the first half of the year compared to the second half of the year about 70% of the time.

So 2020 was one of those 30%ers, and you're gonna— it's gonna happen, you're gonna get some of those. But, but over the long haul, what is the likelihood of that particular price pattern playing out? And it's, uh, again, it's about 70% versus 30%. So that's going to guide me in making a market, building a marketing plan, and just kind of in general, in the first half of the year, I want to have the majority of my sales, you know, locked in before we get to the Fourth of July. Now again, we'll kind of adjust that, not doing all at once, not throwing in one big bundle, but in pieces along the way with that kind of general philosophy that that's kind of where I want to be. And if it goes higher at the end of the year, man, that's great. I got more grain to sell of this crop. Plus the next one.

And if I— if it does follow more seasonal tendencies, you know what, I got a— I got a good base protected and I'm glad we got that done. Now throw in your storage and, you know, other, other things, depending on who you're selling to and when and your basis and all those kind of things that you can lock in and play to your advantage. You bet. But building that relationship and communication with who you're selling to combined with, I think, kind of an overall understanding of what markets kind of tend to do, where they're most likely to go. I think that's good information then for building a marketing plan and again, some objective guidelines to remove some of the emotion out of that, that we've kind of got something laid out.

We've got some price objectives, we've got some time objectives, and let's talk about those, let's lay them out in front of everybody, and then I think that gives us maybe some discipline then that when we see those time and price targets, when we're hitting them, which I hope we do on the top side, then yeah, what a great opportunity to get something done. Yeah.

Chris: And just to add to that a little bit too, higher prices also tend to yield higher input costs the following year. And so, you know, capturing some of that, that just as an add-on to what you're saying is, is be aware, you know, watch, watch these input costs and what that might look like. And that's really my last question. Are you, or do you see the need, you know, if we do get to some of those, you know, exorbitant high prices that we really don't spend much time on, what's your thought? I mean, it's hard to sell out, you know, that second year or that third year, and sometimes we should, but it's really hard when you sit there and you look at, you know, maybe Dec '21 corn, for example, and look at Dec '22 or Dec '23, and you're giving up, 50 or 60 cents, but on the same token, maybe it's above your cost of production.

Do you think that it makes sense, or, or do you wait for, you know, something that gets to some crazy numbers and then you would pull the trigger on some multi-year? What's your thought there? Last question.

Mark

Welch: Yeah, I sure think there is so much advantage to start again broadening our, our time horizon, uh, particularly unless we see that we're in one of those times in which, as we described, that golden age when we're just, you know, booming. And that might be a time when maybe you step back a little bit and just capture as you go. But, but again, long term, fundamentally, what has changed that's going to drive this price pattern and these fundamentals forward? That again, that one good crop won't, won't break. And so I think that's even an added incentive then to look at that '22 contract, the '23 contract, and again, not going crazy. But yeah, we work with producers all over the country and, you know, in these rallies right now, they'll be pricing some of that '22 corn, you bet, because they know, they know what their cost of production is.

They know what are likely to be the things that they can control as well as some they can't perhaps. But they have a good handle on their production history, their true cost of production over time. And you bet they look at these opportunities and they're not going to let it get away completely. Again, start to get a little something done, layer that on. And again, if we're wrong, man, that's fantastic. We got higher prices ahead. That's great. If we're right, gosh, aren't we glad we were able to capture a little something to give us a little more cushion, a little more profit, rather than just letting the whole thing run up and let the whole thing run down like we have all seen. We've all done, you know, so many times we watch it go up, we watch it go down, and we stood on the sidelines and didn't do a thing.

Chris: And along the way, those input costs chase the marketing opportunities, and they go up about as fast as the markets do, and it tends to take a little longer for them to come back down. So if you don't take advantage of some of those opportunities, it can be a double whammy too.

Mark

Welch: That's exactly right. No, they don't tend to come down, uh, you know, nearly as quickly, or if ever, do they? No. Uh, you know, to the point that many of our prices on the output side will do, which— and then I think just in the current, uh, you know, perhaps the political environment might be changing in which our net farm income is going to come more from our marketing and marketing returns rather than government programs or some support we've had over the last several years. And I think that just highlights again the degree to which we really need to be honing up our marketing skills and digging into that marketing toolbox. The tools that you are comfortable using, that doesn't mean use everything somebody trying to sell you. If you can't explain it, don't use it. Right.

But we do need to be looking at what some of those marketing alternatives may be that that maybe we haven't, uh, you know, had to rely on in the past, that, you know, there might be some— this might be the time to, uh, to see about, uh, you know, maybe expanding our skill set just a little bit when it comes to grain marketing.

Chris: Awesome. Hey, this has been a great conversation, Mark, and I think, uh, you know, there's just a lot for us as producers to manage right now on the emotional side of things. We've been, we've been through a roller coaster ride, and I think the ride's going to continue for a while here. So we'll We'll keep you, we'll keep your phone number in line to help keep our emotions intact along the way as things move from one week to the next.

Mark

Welch: Well, it's always good to visit with you, Chris, and you bet, be glad to visit anytime. I think you're right, we need to buckle up. We're not going to get off this ride anytime soon.

Chris: You bet. If people want to take a look at some of your stuff, what's the best way to kind of look you up?

Mark

Welch: You bet. Just, you send me an email, jmwelch@tamu.edu, or through the Texas A&M Extension Service. My market newsletters and stuff that I put out, they're all posted on our website, but you can contact me directly. And if you want to get on that mailing list, no cost to do that, I'd be glad to share that kind of information with you. But look forward to hearing folks that have specific questions or concerns or maybe things we're missing, uh, be glad to get those perspectives.

Chris: That sounds good, Mark. Thanks a lot, really appreciate your time today.

Mark

Welch: Thank you, Chris. Y'all take care.

Chris: You bet. And thanks everybody for listening again to the Ag View Pitch, and we will catch you next time.