Weekly market outlook: Jun. 21-24th, navigating risk and uncertainty

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: Welcome everybody to another episode of the Ag View Pitch. We are heading into another marketing week, a short marketing week, short June 21st through the 24th, and we are lucky enough to have with us Duane Lowry. How's it going, Duane?

Duane

Lowry: Good, Chris. Glad to be here.

Chris: Good, good to have you on here. We haven't had you on for a while. We're coming off of Father's Day. Wish everybody out there a late Father's Day. How was, how was your weekend?

Duane

Lowry: It was a great weekend. Family was all together, so that's all that's important, and, and, uh, Very blessed to have 3 fantastic sons and 1 daughter-in-law and 2 soon-to-be official daughter-in-laws. We have a couple of weddings coming up in the next few— 13 months or so.

Chris: Wow, that's awesome. That sounds good. I got a couple coming up here too, so we got that in common. But so, hey, Duane, it's been a while, but Um, want to ask you some— start out with some questions on the weather. We've obviously had some heat, looks like there's some probably some heat in the forecast. Talk a little bit about what that is, how that's going to affect the markets, how the market's looking at it, and give us a little perspective on, on kind of the weather. It seems like it's been good so far, but what's the, what's the market going to look at moving forward?

Duane

Lowry: The market hasn't completely latched on to weather as a trading focus every single day type of situation. Even Friday, going into a long weekend with some very hot temperatures in the near-term forecast and relatively limited precip in a lot of areas over the next 10 days at least, the marketplace was higher early in the session, and that was driven off of weather sentiment, but we end up finishing— Dec corn was down 4 cents on Friday, Nov beans were down about 6. That was about 20 cents off the highs in beans and probably 18 cents off the highs in corn. So from a weather perspective, you— if you wanted to latch all that onto weather, the market failed. But at the same time, we had outside markets that were under pressure.

We've had the Dow dropped 10% basically in the last 2 weeks, so you had those factors that probably weighed on, on some of the ag trade later in the day as well. But if it was a true weather market, it probably would not have given that up. So we're going to look at weather this, this week. We're recording this on Monday morning. The temperature outlook is less hot in today's forecast than it would have been in Friday's forecast, so that isn't quite as concerning from that perspective. The precip outlook remains troublesome in some areas. The— probably the area most concerning for a lack of precip looking forward over the next 10 days would be central or eastern Illinois, southern Illinois,, and then parts of Indiana and Ohio. Ohio, it's gotten some good rains over the last 2 weeks that maybe they're not quite as troubled by that.

And then you look into the 11 to 15 day forecast for precip. There is more precip out there, enough so that would probably, uh, largely negate concern. The problem is, we saw it last year too, many times it's 11 to 15 forecasted rain event just never materializes. But anything we look at through weather here in 2022, we have to remember that we had a much worse situation in real time in 2021 in terms of dryness and lack of precip. We had a much worse Drought Monitor map a year ago, unless you were in Texas, then you might say this year is worse. But Otherwise, it was much worse last year than this year, and we still ended up with basically a record national corn yield. So does that temper the market's willingness to embrace weather concerns, or if they need to see, you know, more of a problem impacting the crop, you know, I don't know.

But at the present time, I would say that weather today versus Friday doesn't look as threatening, and temperatures still has some shortage of precip in it, but I think the marketplace will probably try to start out the week being a bit concerned about weather, but I'm not sure there'll be a lot of punch to it.

Chris: Gotcha. So let's shift gears then almost instantaneously. You mentioned the Dow and the pressure there, and I want to get to the correlation or the potential correlation between the commodities and, and the in the stock market. But, you know, what's your thought with investor sentiment or the funds? You know, if the Dow continues to be under pressure, does that give us some, some threat in your opinion to the commodities, or is that the best place to go in a crappy situation? What's your thought?

Duane

Lowry: Well, because commodity prices are very high and because commodity prices and food prices are certainly within the bullseye of the Fed for trying to target inflation. I'm not sure that we can say that commodities have a bright future if the Fed is attacking inflation and if the economic conditions are softening in terms of how that's viewed through the lens of the stock market. No, I don't think that's positive for commodities at all. The Fed is— two places that they would really like to knock back on inflation would be energy and food. And in the past, when they've had these attacks on inflation, they have ultimately been quite successful, and that was usually at the detriment of the U.S. agricultural profitability.

I would say the overall economic outlook, the action of the Fed, what they intend to do, what they desire to do, I would say that's a major threat to agricultural prices looking forward.

Chris: On the other side of that though, I would ask is, you know, what's the correlation with the energy side of that then? Because with the policies that have been pushed forward are really, um, you know, it's kind of, it's kind of tough to, to bring energy prices down if we don't have any oil. You know, you start looking at the supply thing and it doesn't seem like people stop driving that much. I don't know, is there, is there, I guess I'm asking this, is there a correlation there on the energy that, that could be supportive of, you know, corn in particular and that spill over to other commodities or not?

Duane

Lowry: Well, we've had a, you know, a major blow to energy production through the Ukraine war and Russia and all the political sanctions associated with that. And yet the energy prices is lower now than it was basically at the start of that war. So it may not make sense, but the energy prices have not really gone anywhere during that process. They had an initial run-up, and then we backed off $30 a barrel. Then we've gone sideways. We had a run-up recently, and now we are, you know, probably $12 off the peak in oil made just a couple of weeks ago. Um, I, I hear what you're saying, but, uh, you know, what happens when the marketplace or the investor looks forward and he sees an election coming up here in 2022 He anticipates a red wave there. They ponder what may happen in 2024, whether that red wave continues. Does the outlook for oil production change under those circumstances?

You know, I don't know. And the energy prices is an economic investment, and I'm not sure that we are seeing the price of energy respond to what we think it would based on the supply concerns that you have. I, I hear what you're saying, but I'm not sure that we're seeing that manifest itself in the marketplace. And to the extent that the corn benefits from high energy prices, uh, we've had high corn prices now for quite an extended period of time, and we've seen in the last, uh, few to several months, we've seen the large spec and the commitment traders actually been eroding long positions in corn and soybeans. And, uh, we've seen the wheat market that's well off its highs despite what's going on in Ukraine and Russia. So, um, I'm not sure that I see a confident correlation that says that energy prices from here forward is going to have a positive impact on agriculture.

If you believe all that, then you have to believe that the Fed is going to completely fail in their attack on inflation here. And I guess I don't believe that. I think the Fed will be successful. And despite the fact that wages have gone up quite a bit from where they would have been a couple of years ago, the amount of discretionary spending money available to the vast majority of consumers out here has really been sliced to zero or a negative because of the prices that they're paying at the grocery store and at the gas station. I mean, it's a sizable impact. And I think that, you know, what's that doing to livestock producers, or what's the outlook for that? What's all this price outlook have for that? You know, how many people are going to be buying the high-end prices on the meats? Are they going to buy less meat overall? Are they going to buy more chicken?

I mean, there's There's a lot of other factors there, and typically we would look at these type of historical price levels in corn and soybeans, and we would say that, you know, where's the demand destruction, and has— is demand destruction been underway, and what are the implications of that? What about the incentive to increase acreage and production elsewhere in the world? You know, we've had 2 years in a row here where we've had a negative influence on South American production If they were to return to some sort of a normal year, statistically the world would have a notable excess of supply. So there's a lot of different factors here, and I'm not sure we can single out any one of them and come up with a good conclusion.

And when you give full weight to the wide array of things that could affect this, a very plausible effectiveness, It's pretty scary with the amount of volatility that we could very conceivably see between the producers having to face the cost of inputs that always linger out longer than we want to see them, and yet could also suffer from a decline in revenue from the finished product. I just think that we're dealing in an environment here where we have a lot of risk and volatility, and the price structure that we have historically has not been maintained for an extended period of time. They usually end up having that demand destruction or production enticement to be increased. The combination of those factors are usually at play, and I don't see any reason they won't be at play again.

Chris: Yeah, the, the timing is always the, the big question that nobody has an answer for. As you were mentioning that, I was just kind of looking, and these are Influx numbers, but, you know, you look at our client base average cost production in that $520 range, you know, and, and the range is huge this year from low to high, but somewhere in that $500 to $520 range is going to catch a a lot of producers in that, oh, that, you know, $11.90 to $12.50. There's a bigger range in the soybeans, you know, kind of in that middle of the road cost production. But you're, you know, when you look at that, you know, you're looking at a, you know, $3 to $4 profit in soybeans, and you're looking at about a $2 profit in corn as we sit now, assuming that you get your, your yield, right? You get your APH or better. And, and I think that's the big question for a lot of people.

It just makes it hard, you know, to pull the trigger. But it almost seems like, you know, sometimes the higher the prices go, the harder it is to make decisions. And this is one of those years where, you know, you can— you're— we're probably going to— most everybody's going to hit a probably a home run comparatively speaking, especially to the last, you know, number of years. Talk a little bit about, you know, you know, and again, you can't predict timing, but are there any technical things that we should be watching? I mean, what's, what's plan B if a person's sitting there and not doing anything?

Um, there's a pretty good margin there, and then, you know, and even on '23, there's there's pretty good opportunities there when you look at, you know, as we look at the cost going into 2023, maybe a 10% price increase on the input side, there's still close to a 20% rate of return as prices sit right now, as we look at margin management. Any comments on, on some of those things?

Duane

Lowry: Well, first of all, Nobody knows what the future is going to hold and what combination of events are going to collide and to produce the final end result. Nobody knows. We don't. And even if a guy is right about the general concept of what might be ahead, if a guy wants to imagine a scenario where he feels that the profitability will be under attack and there'll be tough times ahead for agriculture, even if you want to say that, Ultimately, you probably will be correct, 'cause history and cyclical nature of this industry says that ultimately you will be correct, but we don't know about the timing. I think the main thing that I would point out is there are many years that we have a relatively narrow price range from the year's high to the year's low, and we have relatively stable price structures when it comes to inputs and things of this nature. That's one set of circumstances.

Right now we are dealing with a completely different set of circumstances that is at the other end of the spectrum, and that is where we have input prices historically through the roof, at the very upper end of history. We have prices received at the, at the upper end of what we've known to be history, and we have all kinds of volatility in the world stage from economic activity to war activity to an intervention policy by the Fed to attack inflation as opposed to some sort of status quo system by the Fed or some approach to the Fed where they're going to try to stimulate the economy, which is always positive to agricultural prices.

But this contraction where they're trying to take money out of the system, where they're going to attack inflation, to where we could have a combination of events occur where suddenly the prices received by farmers are declining much faster than maybe the cost of production is declining. There is such a wide range of volatility available to us now that any mistake made, whether it's selling too early or whether it's not selling enough or whatever, they're going to be so magnified on the implications of that. And I think the only thing the producer can do is evaluate what is offered, how much net return is that, what does that mean to my operation, because each operation is different depending on the amount of debt that they have. And we don't know how long these good prices will last, but we do know through history that they tend not to last indefinitely.

There is an end, and then when the pendulum swings the other way, we will have periods of times where producers will struggle to put together a cash flow that generates a profit. So the longer you can extend your existence of capturing that profit, that seems pretty attractive to me when you look through it through the lens of history, not to mention the fact that you just have so much potential for volatility. The U.S.-China relations right now are about as bad as they've been. I saw one place, an article written within the last week or so, that said it's the worst relationship that we've seen since Nixon visited China, and I think it was 1972 or '74. And, you know, that's a pretty bad place to be when we think we rely on China quite a bit for supporting world agricultural prices or for importing U.S.

goods, and if the tables turn and the global supply becomes a little bit more plentiful and a little less tight, you know, China's not likely to buy from the U.S. unless they have to, and I think that's the problem, and I think this whole U.S.-China thing has kind of been put off on the back burner focusing on other factors, but I find that troubling, and I find that troubling looking forward into the future. So I think there's just a lot of areas where we have points of vulnerability. Now, maybe none of these will occur. Maybe we'll have another problem with, uh, South American production this next year, or maybe the remainder of 2022 will be troublesome to U.S. production.

Those are all what-ifs that we certainly don't know, but again, I think if you look through the lens of history The amount of time that producers are able to enjoy the level of profitability that they have historically has been a small window of time, and we've probably already been stretching that window in the current environment than what we have been in the past. So I think that I'm far more concerned about the bad things that could happen to revenue and price structure than I am about the bad things that might happen to crop production.

Chris: We've kind of had a perfect storm to, to support these levels. Like you said, you know, the, the list goes on and on and on that has been supportive to high commodity prices, you know. And, and I— and that's a good point. I mean, I take your point on the, you know, if we're going to tackle inflation, that, that's not going to be a positive for commodities, but there's been so many other things in addition to inflation, you know, with the war in Ukraine and, and all those things. So that leads me to one of my final questions here, um, we— I want to discuss for a minute is, is planted acres as well. Um, I know there was a lot of acres in the north that either got switched to soybeans or PP or whatever, and that's not really been a big topic of conversation. It's kind of a big deal for those people who it's affecting, and I know it's not a huge amount.

Any comments on anything along those lines as it relates to either '22 or '23 moving forward?

Duane

Lowry: Well, the acreage report that we have coming up here at the end of the month, um, could be a volatile report. There are people that feel the corn acres are going to be down, soybean acres will be up. There are people at the other end of the spectrum that feel corn acres will be up and bean acres will be down. You have the prevent plant possibility. You also have people that say, well, these prices were so good that people aren't going to choose to prevent plant unless they absolutely have to. Every year we have probably, without looking at the history in front of me, just off of memory, roughly 1 million acres that we lose to prevent plant, even in a year where we don't think we have a problem. So we know we're going to have some of that.

Um, I have no idea what it's going to be, but I would say this, that I think there was a time during the, um, harvest time and the winter period where producers in the Midwest thought they were going to plant quite a few less corn acres and thought they would plant more bean acres for a laundry list of reasons. But I think as we got into the spring of the year, I think that there was a tendency to not go with quite as many soybeans and to plant more corn, and the price of corn had gone up quite a bit from March 31st into the final act of planting versus soybeans, and so there was a shift there of last-minute incentive. Some people thought they wouldn't get, have access to fertilizer. I don't think that ended up being a problem. They might have to pay a higher price, but it was, supply was there.

So I think it's a very wide range and who knows, my, I guess my personal guess is, and that's all it is, is a guess, my personal guess is that the corn acres will be higher than what the trade anticipates and the bean acres could possibly be less than what the trade anticipates. That would be, that's, that would be why I'd line up.

Chris: Yeah, we had a lot of clients at the, on the, on the last hour, as you said it, uh, that switched to corn on acres that they could. So I don't know that it was a how much it'll be, but there was a lot of people that switched some acres, and that's obviously going to add up to something.

Duane

Lowry: So yeah, and the, the last hour economic incentive and the changes from April 1st to the actual day that the acre was planted, those economics all strongly favored to go to corn. But like, a lot of those decisions don't get changed at the end either. But, uh, that's where I'm coming from. I'm kind of leaning that way. I think there's a lot of people leaning the other direction, but I, I kind of think the corn number could be, you know, quite a bit higher than what the trade anticipated.

Chris: We see the same thing as you, as we've been forecasting some '23 already. You know, you look at $14 beans and, and, you know, $6.40 or $6.50 corn, corn has a significant advantage, you know, to the tune of, you know, more than $100 an acre on our average client data set. So You know, it's when you, when you look at the economics, the economics ultimately is going to drive those things one way or the other. Or, you know, and, and the, the scary thing for me is I think sometimes we have a tendency to think, well, the, you know, the corn-bean ratio, the beans got to come up to corn, but it's pretty easy for corn to go lower and come back down to fix the ratio to the downside instead of the upside.

Duane

Lowry: I think there's a lot more influences, uh, in the marketplace that would drive corn prices down as a reaction to that, as opposed to driving the soybean prices up to get the ratio back in line or whatever.

Chris: So yeah, this has been a great conversation, Dwayne. You know, as, as we look into this next week, is there any kind of key thing that you would tell producers, hey, pay attention to this or this? You know, obviously there's a million things out there to pay attention to, but any kind of key things that you would finish up with?

Duane

Lowry: Well, obviously we're at the stage in the calendar where weather is going to be the most important thing. Mm-hmm. But I guess looking forward to the week ahead or the next few weeks or the rest of the growing season, as far as that goes, I would spend a little bit of time looking back and pondering, and that would be how come we had problems in South America production this past year. We had a war in Ukraine and Russia. We had complete political upheaval in, in terms of, of, uh, Russia and, and supply sources. We had a supply chain problem. We have all these factors, and we had a, this huge push and anticipation of inflation going up. Why is it that the large funds did not increase corn and soybean longs, and in fact, if anything, they've been gradually declining.

How come all these concerns about inflation, all these concerns about supply, how come none of that translated into a massive buildup in large spec length in the investment community into ag commodities? I find that very surprising and very troubling, and I don't think that I don't think it paints a bright picture, and I think it paints a threatening picture. Obviously, if we have a major production shortfall in the U.S. from here forward for the 2022 season, that extends again even farther the amount of time that we're in a perceived tight situation. But if we don't have that, if we end up with a few more acres in corn and we, we have all the incentive for, you know, maximum production in South America again, all of a sudden the tables can turn very, very quickly here.

And, uh, I think that, uh, producers looking forward have to be very respectful for how rapidly things can change, um, both in terms of, um, raw supply data as well as the impact of all that the Fed is doing and all the uncertainty that we have in so many different arenas. Here, and the risk of volatility has to be seen as being greater on the downside risk than it is on the upside risk when you look at anything market-related through the lens of history. So, I guess that's about the only thing I would have to say.

Chris: It's a good wrap-up. I was sitting there thinking it's about like playing a chess game. You got to think about 3 moves ahead here. Yeah.

Duane

Lowry: It's— Yeah. It's—

Chris: There's a lot of stuff to watch here.

Duane

Lowry: There's tremendous challenge and much of the challenge is in front of us and how the ultimate outcome plays out. For all practical purposes, we don't have— number one, we don't have control over it. Number two, we have no idea how all these pieces on that chessboard are going to play out. But there is one thing we do know. We do know what is offered today. We do know what production is guaranteed through your insurance program. We do know what price you're guaranteed or you could have if you were to take it. We know what your costs are. We all have all these factors that are known. So we do have some control. We can capture what is offered. We just don't know how much we may be giving up if we— whether we make the sale and we wish we wouldn't have or whether we don't make the sale and we wish we had. Those factors we don't know.

I think in probably in almost every case for the vast majority of producers out here, they're probably offered right now some of the best profitability they've ever had, even though the fact that they've had high input prices and even looking ahead to '23, the prices offered may not be as good as what they have for '22, but they still offer profitability and there's been many years where they couldn't get profitability offered at this stage going out that far. So I think that sometimes, you know, we have to look at things soberly.

Chris: Yeah, this may rhyme, you know, you don't know, like I said, for sure, but this may end up rhyming with 2012. Nobody wanted to sell corn for $2 a bushel less going into '13 and '14, but that would have been the smartest thing we could have done when the market went away. And at some point that scenario will happen again. We just don't know the timing, but, um, it's kind of the same thing again. I mean, like I said, you know, you look at— we've, we've plugged the numbers in for '23. We've got some pretty good data in there, and it still shows, you know, currently right now about $100 an acre profit on, uh, on the '23 crop. $100 to $130 on soybeans and about $200 to $250 on corn. At these current levels if people grow their APH. Now that's— you don't know the insurance and all that, so you don't want to get too crazy and go, go wild on it.

But there's, there's definitely opportunities we all got to pay attention to.

Duane

Lowry: Correct.

Chris: So hey, Dwayne, this was a great conversation. I really appreciate you taking the time to, to be with us today. Thank you very much.

Duane

Lowry: All right, thanks, Chris.

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