Weekly market outlook: Jul. 19-23rd, weather continues to drive the corn and soybean markets

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, and today we are going to have a conversation as we go into a new week with Mark Welch at Texas A&M. How's it going, Mark?

Mark

Welch: Chris, doing well. Great to be with you.

Chris

Barron: Well, it's good to have you here. And we have had you on several times. One of the things that's a little different this time, as I told you before we got started here, we decided to put this one on YouTube as well as our normal podcast. So this is really the first one we've done with the market update. So you get to show your beautiful face first, I guess, of all the analysts, if that works for you.

Mark

Welch: Well, even though I've been told I have a face for radio, you know, this is what we got, this is what we'll do.

Chris

Barron: Yeah, well. Well, it's— I think everybody really is, is probably watching this not, not for the looks, but more so for, for looking at some of the good information that, that I think hopefully we can have a conversation on and talk with you a little bit about. And so one of the things I wanted to start with here is with respect to the weather. We're, you know, we're going to be looking at this next week ahead here. We're, we're getting, you know, Towards the latter part of July here in the next couple of weeks, and as we go into August, you know, everybody says we're looking at the beans and thinking different things at different times of the year. But weather, when we go through a weekend, a lot of times we see a big change depending on what that weather forecast is.

And so as we go into this new week here, what are you watching on weather, and what are some things there that you think we should be thinking about as producers?

Mark

Welch: Well, you bet. And I think the volatility that we're seeing is reflective of a true weather market. And just as you said many times, the, the tendency I think in these kind of markets, particularly among our speculative investors, is perhaps to sell off on a Friday and then jump back in on Monday, depending on Sunday night, depending on what happened over the weekend. And I think that's a key feature of overlaying, you the weather outlook short-term and longer-term over the July WASDE. It was interesting, you know, USDA came in and they raised acres just like we knew they would according to the June acreage report. But they left their yield number at 179.5, all-time record high yield for U.S. corn if that held. And with that acreage increase, the July WASDE showing a record corn crop. In the US, over 15 billion bushels. Right.

There's a lot of the Corn Belt that, you know, they haven't had conditions that are going to support anything near record yields this year. And so how much is, is that area that's been hit harder by drought going to be compensated by areas that are looking really, really good? You know, is one going to balance out the other to the effect of tipping the balance one way or the other? And I think that's what the market's trying to get a handle on. And it's almost as if week to week as we look at crop condition reports. Are the factors lining up to support that pretty aggressive yield estimate, or are we going to undermine that on a, on a weekly basis? And then even the weather outlook on a daily basis, reassessing, you know, where we're going to go with that number.

And so I think as long as that uncertainty continues until we get a little further into August, get a better handle on something around that yield potential, this volatility on this weather market, I don't see it doing anything but continuing and perhaps even accelerating until we get another, you know, month or so down the road.

Chris

Barron: Okay, so I have a question for you with regard to weather and some perspective as farmers and some things we need to think about because, you know, we started the conversation offline a little bit here and I was commenting to you, you know, I look at our cost of production for our average client and where the profit margin potential is right now on corn is somewhere in that $125-ish number, you know, sort of on average. It's different for everybody, but it's a pretty significant number. It's, it's as high as we've seen since 2012 by far, even with where prices are at on, on last Friday's close. And as we go into this next week and we see volatility, it could be more, right? And even if it's less, it's still good, right? It's still good, right?

And so on the soybean side, we're seeing, you know, over $2 there, and in some cases as much as $2.50 depending on where these acres are at and basis and some of those things. So with that said, I mean, when you see these weather markets right now, I mean, what do you, what are you telling producers? What, what should we be thinking about to manage the emotion? Because this, these weather markets and this volatility messes with our emotion. And so how do we, what, what discipline do we use there? And with that said, I'm asking a couple of questions here, I guess, at once. Shay always gives me a bad time for that. But also, as we look at that, what percentages do you think a person could be safe being at, at these levels? Because it's pretty darn good.

Mark

Welch: You bet. And these are some tremendous pricing and profit potential opportunities. And we don't want to let these get away. You know, there's— everybody wants to hit the top of the market. Uh, no one wants to leave revenue on the table, right, by pricing too soon. And so many times I think we get caught up around focusing on, on that in our marketing plan or marketing outlook instead of perhaps focusing on, on what these markets are really providing for us at this point. And, and as we talk about weather We talk about, of course, the price impact and response to good or bad or wet or dry or hot or cold, whatever that price response to that might be. We don't know. We cannot predict what that weather is going to do by, you know, later this week, much less we get to that or in a month. We just do not know. We don't know what that price is going to be down the road.

And so I think in terms of a marketing perspective and removing some of that emotion out of, out of making those marketing choices and decisions, is to focus more on what you do know. We're far along in this season that we've got a pretty good handle on our cost structure for the '21 corn crop. We've likely got a pretty good handle on your profit— or your, excuse me, your production possibilities and potential. If nothing else, you know your average production and what's predicted by crop insurance. You've got probably got a pretty good handle on what this year's crop is going to be. So if you know something about your cost, you know something about your yield, You know something about the breakeven price.

And as you mentioned, what level of profit margin current prices are allowing you to, to capture if we can take advantage and use these markets to our advantage, if nothing else, setting price floors and protecting this level of revenue. So again, I think the focus is more on what do you know? You know something about your cost. You know something about your production. And we also know something about seasonal tendencies, both in the futures market and in your basis. How do the opportunities this year compare to that? And so when I think about how much I want to have done by the time we say get to the middle of July, the first part of August, typically speaking, about 70% of the time, the price in the first half of the year is higher than the price in the second half of the year. So in my marketing plan, I want to be in that 60 or 70% price by the time we get to the 1st of August.

And, and we've had some great opportunities to do that. If I'm wrong and we go higher again from there, that means a higher price for my net revenue for the year as well as the opportunity that creates for 2022. That's okay, right? But again, that's kind of how it's going to shape my outlook for any given marketing year or marketing plan.

Chris

Barron: Yeah, the other thing I'd add to that too is the insurance level that you have. You know, for a lot of the— a lot of our clients anyway, if you look at where they're insured, we always look at bushels, uh, safe to sell, which our definition of bushels safe to sell are those bushels that are insured that aren't yet priced.

Mark

Welch: Exactly.

Chris

Barron: And a lot of times what we see there is a significant amount of bushels because producers will sell 5,000 or 10,000 or 20,000 or whatever, and it's too small of a percentage when we have these opportunities. And so that's the one thing I think from a perspective standpoint, not saying, you know, now's the time to sell or anything, but saying, make sure you pay attention to those percentages. One other thing you had mentioned offline too, I thought was really good that just have you comment on, but is sort of the disconnect between, you know, the hedge account and the cash sales. If you wanna talk to that for a second.

Mark

Welch: Yeah. You bet. And it boils down to your measures of satisfaction with your marketing plan or your marketing decisions. And if you're driven by satisfaction with your marketing by the balance in your brokerage account every month, that's probably taking our eye off the ball. Because what's gonna happen in that case, if you've made some sales, say right on the board, and now you're, You're making margin calls or you're losing, your balance is going down. You bought some puts and now those are losing value or expiring worthlessly. And so if that drives you to be upset with your marketing, 'cause that means you didn't hit the high of the market, rather than looking at that losses in your brokerage account, those are translating into gains from the cash market.

And it's highly likely that you haven't got everything covered in the brokerage account that you've got exposure to price risk-wise in, in the cash world, right? Uh, and so one, it's not really a good measure of what our net financial position might be. We, we want to lose money on those puts. That means we're not selling at our floor price. We want to do something better than that, right? And again, refocusing or getting, uh, our perspectives of what, what the net revenue or the net price impact would be from all these pieces moving together.

Chris

Barron: Yeah, I like those comments because in Profit Manager what we try to do is make sure that if somebody's making— putting a position on the board, they assign that to those bushels that will eventually be a cash sale, and it's either a plus or a minus. And so if you, if you put a— if you do a put position and you spent 25 cents on that and it expires worthless, but you're selling the grain at a significantly higher price, you just take 25 cents off of that cash price, put it on there, and make sure that, that, you know, that those two are connected. And instead of being disconnected, because it seems like every time when we work with the producer and they've got a hedge account and a cash account, a lot of times they don't necessarily— at least when we start working with them, they haven't been necessarily connecting those two.

And if they're disconnected, that hedge account's probably more like a spec account, isn't it, than a hedge account?

Mark

Welch: And that's That's the problem. And, you know, I've heard other people describing this as, are you using the market or are you playing the market?

Chris

Barron: Exactly.

Mark

Welch: If it's a hedging account, you want to lose money because that means your net cash position is better. Yeah. And so again, it's a matter of, I think, like you said, connecting all the dots and all the pieces so that we know how it all plays out, balances out, and what really counts for us.

Chris

Barron: I think there's a lot of brokers out there that would like that message being delivered to us as producers a little bit more than probably what gets delivered as a message. So let's keep moving on here. A couple of other quick things here yet in this conversation is, as we look at demand, I know you look at the big picture of the markets and you see a lot of economic things going on in the environment. So is there any, any washout— watchouts on the demand side? One thing that concerns me is if you look at the amount of grain that's expected to be purchased by China this year, they're saying they're going to purchase just as much as they did the last year. So that— is that concerning to you at all, or isn't it? And then what other, you know, either domestic or foreign demand issues are you watching that are things that we need to be aware of as producers?

Mark

Welch: Yeah, you bet. And of course, how we got into the world we're in right now was a combination of a supply shortfall with some production issues in the U.S. and around the world, and then just the incredible, uh, import demand for feed grain from China. And the current expectations and estimates and projections are that that will continue, uh, China's appetite for feed grain will continue into the new crop year at about the same level. And we're talking about, uh, when we say feed grain, I'm not just talking about corn, but also in the wheat market. If you look at wheat import projections for China, uh, continue again at really strong and high levels, and the expectation for those to continue. I think the change or the dynamic that's most likely to be different in 2021-22 marketing year is the source of those imported feed grains, in that it's likely that the U.S.

will participate at a lower level than we did in the last marketing year as we see, if we see, the production increases that we're expecting from our export competitors. Uh, we're looking at, uh, if weather cooperates, certainly these high prices will encourage production increases around the world, and the current estimates are for significant production rebound in places like Brazil and Argentina and Ukraine and Russia. And so exportable supplies are going to be available from a wider range of sources. Seeing the same thing in wheat. We had some, uh, some shocking wheat numbers come out, particularly with cuts to the spring wheat crop. Yeah, U.S., uh, wheat exports are likely to be significantly lower next year, but we're looking for an increase in exports from, from Europe, from Russia, from Ukraine, from Argentina.

Uh, so again, a reshifting of, of where those exportable supplies are likely to be sourced. So I think the demand side, particularly from China looks sustainable at this point, but I think it'll be the production patterns, and particularly a return to more normal production levels, that's going to shift the playing field when it comes to supply and demand balance sheets in individual countries.

Chris

Barron: Interesting. So from a farmer's perspective, how do we, how do we take that? I mean, do we take that into action in any way or form, or just keep an eye on things and— you know, because we're sitting here talking about these pretty darn good margins here now, you know, do you see, do you see risk or opportunity that moves us away from these price levels very far one way or the other?

Mark

Welch: Sure. And, and, uh, you know, this big demand that we're seeing— if we talk about, you know, exports particularly from China over the last year or so, you know, if that is sustained and, and projected to, to continue for even for a few years, maybe, I don't know how much longer term you project than that, the history of agricultural production, US as well as globally, is that there is not a demand situation that we can't overproduce for. If you think of the biofuel demand evolution, revolution that occurred, it took us a few years But we, we caught up to what that new demand base created, and we overproduced for that one. Uh, we'll make some adjustments. We will respond. And, uh, that, that's kind of the history of agriculture. Uh, give us a challenge and we'll not only meet it, we'll beat it.

Chris

Barron: Yeah.

Mark

Welch: Uh, and, and, uh, and so I think longer term, I think that's the real question, is in the world we're in right now, are we in a new Is this a plateau of prices? And if world trade stays at these levels, perhaps. But I think, again, given the level and the ability of not only the U.S. farmer but producers around the world to respond to price incentives, that these— anytime we see a price and a profit potential that we're seeing today, I want to protect that because that's not the history and the story of agriculture, to see these wide profit margins that are sustained for any significant period of time. They tend to be very fleeting. Yeah. So I want to, I want to capture all the value that I can in that when they present themselves.

Chris

Barron: Yeah. So as we look at a lot of these producers that are sitting here with pretty good crops, and we can find areas that were hailed out, we can find areas that had massive amounts of water it makes it pretty hard, and I understand that, to make sales. I mean, we were sitting here in our operation up until a couple of days ago that, you know, we just— we were super, super dry. We went for a long, long time with basically maybe a tenth or two at a time, just enough to sort of keep us alive. The ground was cracking, super dry. And then we, we did finally catch 3 inches. Well, that's going to get us by for a while now, but We took in 3 inches and didn't even have a puddle anywhere when it was done because we were so dry. And so, you know, that's going to buy us a little time into August. And I think there's going to be some opportunities.

But what I hear you saying, and it's kind of— I echo this a lot— is we, we better be watching these pricing opportunities and making sure we're, we're thinking about margin targets rather than price targets. And, you know, what profitable levels are we okay with? You know, and making sure that we take advantage of those. And so with that said, the last question I have for you is on basis. I told you before we started recording this, we've got a lot of people with hedge-to-arrives out there. From what we're seeing with Profit Manager so far, we're seeing a lot of options strategies and all these things, which is leaving basis completely open yet. Yeah. Any, anything there that you think, you know, timing of year, where the crop looks? I know basis is very local, so it kind of depends on, you know, everybody's individual situation.

But as a general comment, any, any suggestions or things that we should be watching as it relates to basis moving forward here?

Mark

Welch: You bet. And of course, you, you do have two prices to manage. When we talk about the price of corn, we always talk about what's going on on the board in Chicago, right? But you've got a basis and a local cash price that you've got to manage just as well. And I appreciate you bringing that up. And of course, what we're seeing across, uh, Texas at this point, and I think it translates to other parts of the country as well, we've got a really good basis as we're, you know, wrapping up the old crop year, uh, which would be expected given tight supplies until we see some relief coming in with the new crop, uh, coming in. Uh, that puts the pressure on buyers to bid up what grain that's out there, just make sure they've got enough to get them into that, that new crop year.

So having that conversation about basis opportunities for that new crop coming in, I think, are extremely important. How much can we carry over the strength of the current basis into some, some new crop pricing? Again, that's going to be likely to be an individual and local situation and discussion, but what a great time to be having that conversation. Is it time to lock— if we can lock in that basis either a basis contract separately or converting those H2As just to a cash forward contract and go ahead and do something to lock in that total price. And I think that's where that conversation and that relationship comes with who you're, who you're going to sell your grain to, whoever, grain merchant, feedlot, ethanol plant, whoever that might be. Have that conversation.

Is there a way that through how you manage your marketing with that, uh, with that person that's buying your grain, can you do that in such a way to add value to what they're doing? Whether it's guaranteeing bushels, timing of delivery, uh, quality issues, all the kind of things that go into value of a cash, uh, commodity at delivery. Having that conversation now— how can I enhance what your needs are, what you see the market providing and how can I meet that to capture the best opportunities that I can for my operation?

Chris

Barron: Yeah, and it might also be rolling some of those out. For example, if you've got some November soybeans or December corn, maybe rolling those out to a later month too, right? And, and sure, the problem with the soybeans though, as it looks to me, we're all probably going to be better off just to combine the beans and deliver them because there's no carry in the market, whereas with corn there is some carry. And so You know, what, what we're starting to see is it's probably going to make a lot of sense just to get, you know, get the beans off the combine and out of there and take your money and run.

Mark

Welch: And but there again, if having that conversation with, with your grain merchandiser, yeah, uh, they might reward something on the basis, uh, you know, given what their needs might be. And if, if they're not trying to slug everything down right there at harvest, they're there's some incentive for them to say, you know what, if you can, if you can back off a little, we'll reward you to do that, right? Uh, we want, we want the commodity. There's, there's help us in, in managing the supplies that come rolling in.

Chris

Barron: Yeah, there's probably going to be some really good basis opportunities early, and then you get in that gut slot of harvest, then that's going to change, and then, then it's going to change the dynamic. But I, I appreciate that because I think we really need to pay attention to, to basis for a lot of these operations in, in And kind of what we're seeing is there's just a lot of, a lot of basis not set yet, and we got to pay attention to that as we get close to harvest. How far away are you guys in Texas from getting rolling? I mean, how far away is harvest for you guys?

Mark

Welch: You know, we'll see some, uh, you know, corn of some significant quantities start rolling in by the time we get to the 1st of August. Okay. Uh, you know, be some, some grain sorghum that's coloring well. Of course, in South Texas, uh, that's where we'll, we'll start with the, you know, cutting corn down there. And it'll move up along the coast, Corpus Christi, and that what we call that coastal bend area, uh, shortly after that. But yes, late July and early August, we'll start seeing some harvest reports and some, some yield numbers, uh, coming out of Texas here in just the next week or two.

Chris

Barron: What do the crops look like in your area then?

Mark

Welch: What I have seen now, some of South Texas was dry early. Now we have some more irrigated production down in that part of the world, but as you come up the coast, uh, along that coastal bend and into Central Texas Uh, we were a little cooler than normal through much of the spring, and, and we've been wet over the last couple of months. So the, the yield potential is good, probably standing. It, it looks really, really good. You see a combination of production potential and price, uh, that you just don't have that come around every day.

Chris

Barron: There could be some money made. That's the, that's the plan, right?

Mark

Welch: You bet. So again, I would look for yields at this point for sorghum and corn, in this non-irrigated kind of central south Texas be much better than average. Awesome.

Chris

Barron: Excuse me. Well, that sounds good. Well, hey, Mark, really appreciate the, the contribution to the Ag View Pitch and having you on here again and having you on the first one that we did, the marketing piece anyway, on YouTube. Appreciate you being the first one on there and taking advantage of that and We'll be back and bug you again another time soon if that works for you.

Mark

Welch: You bet, Chris. Always enjoy the conversation. Good to be with you.

Chris

Barron: All right, thanks a lot. And thanks everybody for joining us again on the Ag View Pitch, and we will catch you again next time.