A powerhouse conversation at the Ag View Executive Business Conference

Shay

Foulk: 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: All right, everybody, welcome to another episode of the Ag View Pitch. Joe Vaclovic, Ryan Moe, Jared Creed. We're in Florida, guys.

Joe

Vaclavik: Doesn't feel like it. It's kind of cold.

Chris

Barron: It's not the best weather.

Shay

Foulk: It's from the Minnesota boy, though. I'll take it.

Chris

Barron: Yeah.

Shay

Foulk: I'll literally take it.

Chris

Barron: Yeah, it's 50s and kind of windy. Warmed up a little bit today. So we want to do markets. We want to do kind of an overview of what we talked about here at the conference. And also, you guys have some general talking points also.

Shay

Foulk: Where do you want to start? Yeah, I mean, great conference, first of all. I mean, it's been a lot of fun getting together with people we saw last year. Sounds like they're going to be doing a similar setup, uh, possibly Arizona next year. So make sure you guys watch for that and get on the agenda next year because there's a lot of really smart people in these rooms here and it's been great.

Chris

Barron: Yeah, no doubt.

Shay

Foulk: Um, Jared, I kind of want to talk— you led off the conference with your presentation, talk about corn, corn versus soy financials. And I mean, there is some very, very big things on the horizon here as far as acreage. And Joe, I want you to talk about that, but Jared, what you pointed out with these financials on corn versus soy, it's got to be eye-opening for people that aren't paying attention to that, right?

Joe

Vaclavik: It's definitely eye-opening, and this subject is obviously very case-by-case, always going to be, always going to, uh, and a lot of that has to do with geography. I would say, uh, generally speaking, I would say in the I-80 up to I-90 corridor, uh, and to a certain extent I-70 across some of your Illinois, Indiana, Ohio area What we find right now is that corn is a clear leader financially, especially from a mark-to-market standpoint today, cost versus revenue that can be generated. And also in a worst-case situation, as in if you have to depend on your crop insurance in a failure, the safety net in the corn market relative to beans is again in favor of corn. You can make the argument that some of these bean yields that you've seen in the eastern Corn Belt the last few years can certainly rival corn.

But the point of your question, I think, is that we see most of our corn costs year on year up somewhere 7 to 10%. Some are a touch higher, some are a touch lower. But I guess the, the benefit of the numbers that we go through, it's a weighted average. Uh, you know, I had slide up showing yesterday across about 150,000 acres in the Western Corn Belt that the weighted average showed That's what we were up, uh, and a lot of farms will be spending over $1,100 an acre to put a corn crop in. And if really going through all of the numbers accurately, the bean crop isn't far off from being a $900 an acre expense.

Shay

Foulk: Wow.

Joe

Vaclavik: That, you know, the, the price matters, always has mattered to the farmer. Hopefully there's a little bit of review on the actual margin relationship between the two. Hopefully that when an individual is making a potential last-minute decision to switch from one crop to another, they're taking action at that point, not just looking the actuals today and making that decision. Uh, the February insurance prices will play a huge role in how the farmer goes about it. A lot of times the comment in the farm industry is that, well, rotation is king. Well, that's true, but we always move acres. We always do. And it's a little intriguing to, to consider that our corn price is very similar to where we were last year. Our bean prices about 5% lower at this point. But we didn't really blow the doors off of either crop from an acre perspective last spring.

However, we had some planting issues. My takeaway in all that is just that— we'll talk about combined acres here in a minute, let Joe go over that— but if you're working with a base of 178 to 180 million acres combined, you're really talking about the movement of the last maybe 5 to 10 million acres of what placement those go to. And with how tight the balance sheets are as of today, uh, each one of them have their own reason to not let too many acres go.

Shay

Foulk: And you're looking at the cost structure like that, $1,100 and $900 to plant an acre of corn or soybeans, you're depending on a lot of luck to compensate you for a $900 cost on beans at this stage. And how many people want to go ahead and bet on luck happening?

Joe

Vaclavik: Well, your last presentation, Dr. Kohl, I think he was reiterating a message I was hopefully trying to get across, that our greatest risk is that the commodity price changes but the cost to run that business doesn't change anywhere near the same pace.

Shay

Foulk: Oh yeah, I mean, that was a substantial theme here, fixed costs, you know, and what the costs are this year and how big that is and how significant that is for every farmer that listens. And with the cost being so extreme You just can't depend on luck to make your, uh, to make your year this year.

Joe

Vaclavik: Mother Nature can certainly help us. Fastest way to dig yourself out of a hole is to overproduce, but that also has ramifications long term too. That's a, that's a narrow-sided view. Uh, my, my greatest fear is, is actually not that much different than we had this little conversation last year, is that we can maybe get through to 2022 in a good situation. Obviously prices blew up. Now the concern is, I think we can get through '23 fine, but if the shoe drops, when Whenever the shoe drops, what's that next year or two after that going to look like? That's where the real risk lies in American agriculture right now.

Chris

Barron: Yeah, corn's gonna buy acres this year. There's no doubt about that in my mind. My question is this: why? Why, why fundamentally, if you were to look at supply and demand or any other factor, why doesn't, why doesn't the soybean market want the acres when you know on paper you've got a really tight soybean balance sheet? Is it because Brazil's got a monster crop? Is it because we're going to have reduced exports? It's certainly not because we're expanding soybean crush. I guess the reasoning for it, I don't understand it fully, put it that way.

Joe

Vaclavik: Tinfoil hat, 1.2 billion bushel corn carryout and a 200 million bushel bean carryout is basically zero. Yeah, I mean, you can't use what you don't have. All right. And as we lowered our production, we're seeing those ramifications. We've enticed other places in the world to try to grow more. We're seeing that happen in Brazil right now. That can shift back to the US this next year. We could run the risk of North America, South America overproducing our nearby needs. But I'm in the camp that it's not all high price that dropped some of our demand buckets, maybe for your ethanol folks. But from an export standpoint, it's just flat out, we didn't have anything to give them.

Shay

Foulk: And we saw that happen in the corn exports this last report, why we took up such a took out such a substantial amount of exports, which I believe needed to come out because we were bid out of the marketplace for several months in corn.

Joe

Vaclavik: But not now.

Shay

Foulk: Exactly, because we need it. But okay, so we needed that corn in the far western Corn Belt. Now we're no longer outbid in the marketplace, but can we recover, right? And that comes down to a big China conversation, and I think—

Chris

Barron: or big Brazil weather conversation, right? They have a weather problem in the next 4 or 5 months.

Shay

Foulk: For suffering, you can. Possible.

Chris

Barron: Yeah.

Shay

Foulk: Yeah.

Joe

Vaclavik: I think we're back to square one that worldwide supply and demand is a heck of a lot more important than an Argentina balance sheet, a Brazil balance sheet, or a US balance sheet. You can make an argument that the sexy numbers are to pay attention to the US balance sheet and that impacts money's participation in the market. But at the end of the day, if Brazil is going to raise 150, 155 million ton bean crop, I'm okay with that as long as there's somebody there to buy it all.

Shay

Foulk: Exactly. And that comes down to a lot of presenters here at the show and other conferences that we've been watching. Everybody hits on China. And it's so interesting to me as we're going through the conference circuit this year, there's no middle ground on China. There is a certain segment of the speaking core that thinks that China is going to come out of this COVID— I'll call it the disaster that they've created for themselves— and people are going to— I mean, you're going to have 1.3 billion people just go wild and just spend, spend, spend, spend, spend. The other segment of the speakers are so bearish China they can't see straight because they're going to think that the Chinese are going to exit COVID and be afraid of their shadow for several months and demand is just going to crumble.

Chris

Barron: And they're the only importer that matters is the thing.

Joe

Vaclavik: Exactly.

Shay

Foulk: For us, for— yes, I can totally—

Chris

Barron: generally speaking.

Shay

Foulk: Yeah, because they're just so big and they are such a big needle mover. Yeah. Uh, are you guys middle ground guys on China or—

Chris

Barron: I don't have an opinion, I just know that it matters. That's my opinion.

Joe

Vaclavik: I agree with Joe that it matters, but at the same time, we're obviously working on creating our own new domestic demand. And that's the— I'll be— I'm excited in a couple years to go back and look at some of these conversations in a renewable diesel space. Yeah, I'll be excited to see, are we really going to have 500-some million bushels more of domestic crush demand? And at that point, I don't care about China not buying or buying from the US on soybeans.

Shay

Foulk: I think that— I think you're spot on with that point, and I think that is going to be very interesting to see how we do grow this domestic demand situation so we are not as dependent. And it doesn't even have to be domestic demand, North American demand, right?

Chris

Barron: You know, which overall is good. That's what we want, right? We don't want to be dependent on China, right?

Shay

Foulk: Work with our closest trade partners, you know, and they said they share borders with us, and that can be a good thing. Just, you know, it's something that I've been watching and something that I've just kind of noticed is something from a more macro perspective, is the Chinese story that kind of brought us here over the last 20 years, which is a rising middle class. First thing that they do is improve their diet and they eat more meat. And something that I think people will want to watch as far as a leading indicator with, okay, how are things actually going in China, is what are meat prices doing, what are demand doing? Because if those, if those people are feeling comfortable and doing well, They're going to eat better, they're going to eat a lot, and they're going to eat more meat. Are they going to— now, if they're in economic shambles, what does their diet look like?

What are some things that they— and I think that stuff directly impacts American agriculture. How do you guys feel about that?

Joe

Vaclavik: China, watch what they do, not what they say. It's hard to believe anything that you read. They bought a ton of Russian wheat here 6 months ago. Made sense. They have bought a tremendous amount of Brazilian corn. And soybeans. Obviously they bought plenty of corn from us a couple years ago. They're still in the market a little bit here and there from the milo space. As long as they stay consistent there, China is like the sexy headline to talk about. But if they keep buying, then we're just going to keep our focus on— look, you go back to 2014, '18, all those depressed commodity prices, that time sucked. But in that time, we definitely created a tremendous amount of new demand.

And you can make the argument, yeah, demand can go away and it won't come back as fast, but at the same time, you're not going to create all that new demand, all the infrastructure for it, and just take it offline forever. Yes. So it's, it's, it's going to fluctuate. You know, our friend Peter Meyer, he's adamant about it, that I can't remember the exact percentage. You increase production or you lower production, your demand is going to change every single year within a certain percentage range of that change in production.

Shay

Foulk: But back to your point though about if you are using, if you're demanding more of your crops domestically, you control, you have more control of that. Absolutely. Which is so much better for the US producer.

Chris

Barron: Did you hear yesterday when Jim Wiesmeyer just kind of like off the cuff and he didn't emphasize, he goes, "Yeah, you know the US and the West, we're in a proxy war with China and Russia." Like, and then he didn't like say much about it, which is a whole different aspect of this. Like you've got this Russia-Ukraine war then you've got the possibility of some sort of China-Taiwan thing, which ropes the US in like immediately. That's like a whole different conversation separate from the demographic conversation that like, I mean, how do you figure? You can't account for that. You can't put a pencil to paper and say, this is how it looks if this, this, and this happens geopolitically.

Shay

Foulk: Right. But the same thing happened 12 months ago when we were here. Yeah. We didn't know the what-if scenario. If Russia would happen to dance over the border in Ukraine.

Chris

Barron: We probably would have guessed like wheat was going to go higher, but other than that, I mean, I don't know.

Shay

Foulk: Yeah, so lots of stuff out there, impossible to tell.

Chris

Barron: You couldn't have— you still couldn't have even predicted wheat's going to go to $13, but then it's going to go back to $7.

Shay

Foulk: Exactly right.

Chris

Barron: So that's the thing.

Shay

Foulk: Yeah, so lots of fun ahead of us for the next year. Yeah, um, I don't know, you guys got any closing comments? We wanted to go ahead and keep this short because I got to get back to lunch myself.

Chris

Barron: Oh, me too, I'm starving. Uh, weather is important. We still got a drought and, uh, it's gonna be a big deal and we're not that far away from planting season. Um, weather is a big deal and we're not going to try to predict weather, I don't think. Maybe you guys can.

Joe

Vaclavik: Oh, the old ladies are cutting up their onions. It's going to rain in April and May. We've had a tremendous amount of fog in the Corn Belt in the last couple weeks and you know when that timeline's up, if the old wives' tale comes true there, we could have a little bit of a wet spring. But generally speaking We need to recharge the moisture profile anyway, so—

Shay

Foulk: Yeah, we can absorb a lot of moisture back home, so if it rains, we got a pretty dry sponge back home for us. So if you guys don't have anything else, we're gonna go ahead and wrap things up. Appreciate everybody's time. Again, watch for next year's conference, 'cause it's been a lot of fun this week, and appreciate everybody coming out.

Chris

Barron: Have a good week, everybody.

Shay

Foulk: Thank you.