Hyper inflation equals hyper volatility

Joe

Vaclavik: 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 we are heading into another week. We're heading towards the end of March. And we've got Joe Vaklovic with us, Standard Grain. Joe, how's it going?

Joe

Vaclavik: Doing great. Uh, been a busy couple of weeks. I will, um, I'd probably tell you that these last couple of weeks since the Russian invasion of Ukraine, I think these are the busiest two weeks I've ever had in the commodity business. I did this through 2008, and in that time frame that was very busy. Uh, the drought in 2012 was very busy, especially because I was in the process of starting my own business at the time that that happened. But I think that this exceeds anything that happened in those two instances, in my case at least.

Chris

Barron: Let's start out with the Ukraine, you know, issue as it relates to everything from their production or lack of to the implications in fertilizer on the Russian side. What, you know, there's so much news and so much stuff and so many headlines. How do we filter through that? And as producers, you know, from your perspective, what should we be paying attention to and how's those things we're watching affecting us?

Joe

Vaclavik: Well, it's really going to end up being, in all likelihood, one of the most phenomenal supply disruptions that we've seen globally, maybe ever. I mean, if they can't harvest the wheat crop in Ukraine, if the Russian wheat crop is not available for purchase, if they can't plant a corn crop in Ukraine this spring. Those are all phenomenal issues that will have phenomenal implications on the global supply and demand situation on our markets here in the United States. The volatility as a result of this has been, you know, largely to the upside, especially in the case of corn. Wheat had a lot more back and forth, but, you know, it's resulted in higher prices, which is is the correct reaction to this. I mean, if you're going to shut off or reduce a third of the world's wheat exports and 20% of the world's corn exports, I mean, that's an issue.

My fear, of course, and what I know is that volatility does work in both directions. And for the moment, yeah, most of it's been to the upside, and that trend could continue for a while, but I think there's going to be a point in time— my fear, of course, would be that you know, even going into a weekend like this, you know, there's a ceasefire over the weekend, something changes drastically on the geopolitical front, and all of a sudden it's not that bad. I mean, that's, that's how I think of it as more of like a risk manager is like, what could happen to make this change real quickly? What could, what could happen to take these corn from $6.50 down to $5, like in the course of a week or two? Like those are the kinds of things that go through my head.

But I mean, make no mistake about it, that the situation in itself is, is an incredibly bullish factor in regard to not only the corn and wheat markets, but I mean, every commodity market on the planet in a roundabout way.

Chris

Barron: Mm-hmm. You know, you talk about that risk to the downside. You know, if you're sitting there from your perspective, looking at all of this stuff that's going on, and I know you understand the technical side of it. I mean, you know, and I know you don't have a crystal ball either. So, but I'm curious, you know, do you feel like there's just, there's more downside risk, or is there still some pretty good chance of some upside potential? What's your perspective just based on what we know currently?

Joe

Vaclavik: Oh, there's still the potential for some phenomenal upside if the right things happen. I mean, you know, we're talking about Russia, Ukraine here in the second week in March, when typically in a normal year we would be like laser focused on, you know, U.S. acreage prospects, maybe U.S. weather, maybe still focused on South American production. All those things that we normally focus on have taken a backseat, but they're all still very important. I mean, when was the last time you heard anybody talk about acres this year? I mean, it's not a topic of conversation, yet it's still very important in all of these crops given these tighter supply and demand outlooks and given the better demand that we're seeing on the export front, particularly for row crops. I mean, everybody needs acreage. Corn needs acreage, beans need acres, wheat needs acres.

Needs acres, but somebody's going to lose out. So it's incredibly interesting, and if you were to run into a weather issue this summer, I mean, there's some phenomenal upside potential in these markets. I mean, you think about the way that everything else in the world is priced. I mean, everything is at all-time highs or all-time highs plus 20%, plus 50%, plus 100%. I mean, there's no rule that says corn has to peak at $7 or $8 just because it did the last couple go-rounds, or beans have to peak at $17. Because that's what they did the last go-around. I mean, you could, you could very easily get into a situation where you exceed like previous all-time highs by a tremendous margin. I think that's very much possible.

But at the same time, I mean, the, the news and, and the geopolitical stuff, it happens so fast, and there's so much speculative money involved in the markets, which is mostly long speculative money. Something changes, they're going to head for the exits real fast. So I just, I don't have a crystal ball. I don't know where we're going. I think there's a tremendous amount of risk in both directions, upside, downside, sideways. I mean, diagonal, you name it. I mean, the markets, this is like from a risk management standpoint, if you're talking about a farmer managing risk, this is absolutely terrifying to me. The one thing that does provide me a little bit of relief, I guess, or eases my mind a little bit is that we have some really strong spring insurance guarantees. And that's a positive for this year, but you still got '23. You, you still want to make sure you make money this year.

So I mean, I just, I think risk in every direction is phenomenal, Chris.

Chris

Barron: Yeah, and you commented on, you know, where the insurance is at. That gives people a lot of, um, strength in that, you know, you can hold on a little bit. But on the same token, um, you know, when I look at where the majority of our clients are are marketed, you know, there's a, there's always the range, right? There's the highs and the lows. There's, you know, we've got some, some guys I could point to that have, you know, maybe less than 5% even sold yet. And then there's some others, you know, that are holding out. I'm not sure that they got more holding power than I do. And then you've got guys that are, you know, covered all the way almost to their insurance level, at least with a floor at a minimum, and, and everything in between. How do you, how do you manage that emotion?

And, you know, the, the bad part is, is, you know, in 20— in 2008, 2012, we, we learned a lot of bad habits. Are we learning some bad habits now? Because it seems like, you know, those who don't plan have been rewarded, and those who are risk managers feel like they're getting kicked. You know, how do you, how do you manage that emotion?

Joe

Vaclavik: Yeah, grain marketing in gen— in general is very much a mental exercise as much as it is like a financial exercise, because in this sort of market where, you know, corn seems to make new highs like every single day or every single week, I mean, any sale that you've made in the past, whether it's old crop or it's a forward contract for new crop, you look back on it and you feel silly about it, right? Because you Why was I an aggressive forward marketer or risk manager when maybe my next door neighbor wasn't and he ends up looking a lot smarter than me? I just, it's very much like mental gymnastics. And I'll be the first to tell you that I advised my customers to start with some light corn sales when corn was, Dec corn was what, $5.15 was probably my first 2022 sale.

And as I've told my customers and you get all my information, I mean, I would make those recommendations again because they were risk management sales. I mean, you're in a situation where you're gonna, your cost of production is up 20% year over year, right?

Chris

Barron: Yeah.

Joe

Vaclavik: And back when I advised, I think my very first corn sale, the only thing we knew that was that cost of production was gonna be up drastically. We didn't know if it was 15%, 20%, 25%. We knew that there was phenomenal risk. So I thought at the time, you know, it's my duty as a risk manager to advise a sale to help offset that higher risk. If I could go back and do it over again, I think I would do the exact same thing. I mean, I don't have a crystal ball. I can't predict where the prices are going to go. But if you want to call yourself a business person and a risk manager, I mean, I think that that's a decision that has to be made. And if you didn't make it and you look like a genius now, that's great. Wonderful. Congratulations.

But I mean, that's just not— that's not something that I could ever do personally in good conscience, is just to say, hey, I'm really bullish the market, don't sell anything. Anything and we're going to take this phenomenal amount of risk by not selling anything. Because envision a scenario where Russia didn't invade Ukraine and corn went from say $5.20 last fall down to $4. Where are you sitting then? In what sort of situation do you find yourself now? So I felt like it was the right thing to do early on to make sales. And I still got a whole bunch of new crop to sell. I still got a whole '23 crop to sell. So I'm not— I don't think you can go back and kick yourself over it. I know that, you know, like maybe you could say, oh Joe, well it's not your farm, it's not your money, it's not your whatever.

You can feel any way you want about it, and if you want to blame me or whoever for advising an early sale, that's fine, it doesn't bother me. But I mean, I felt like that was the right decision at the time, and I would do it over again if I had to.

Chris

Barron: Yeah, we are all on our own farms, we are all our own executive decision makers, and so It's pretty easy to blame somebody else. There's a book called Extreme Ownership. If anybody hasn't read it, I would highly recommend it. We all need to be— take extreme ownership for our own decisions. But let's transition to another question here with regard to, you know, the price of oil. We've seen that really all over the place as well too. And, you know, I know a lot of people are concerned about, you know, fuel and the impact of that. You know, that's not a huge, you know, fuel for the power tool, you know, for our equipment and stuff, for the machinery isn't a huge individual line item, but it is something that people are paying attention to 'cause it factors back into everything else on our input side, you know, indirectly.

And with that said, what are some of the consequences if we do just continue to elevate this oil price on corn ethanol production? What's your thought there? Is there some threat there or risk are we okay?

Joe

Vaclavik: People typically don't stop driving when gas prices rise. Gas prices are relatively inelastic in regard to demand, meaning that when gas went to $4 in 2008, you did not see a real big material decline in gasoline consumption. What people do is they stop spending money on other things. And that's why a lot of times high gas prices, or almost every time, a big surge in gas prices results some sort of recession and it could just be a mild recession or it could be a more significant, deeper recession. But my fear, I guess, in regard to ethanol would be that like this time is different, that you actually do get to a price where people stop driving less and in a material way. You know, this is a little bit different world than it was the last time gas was $4. People work from home now. People don't commute anymore.

I think a lot more of your driving is like discretionary driving, probably more so now than it was back then. I mean, I don't commute anymore. I used to. I used to drive to the Board of Trade from the suburbs when I lived in Chicago, you know, after I got married, before we moved. I don't do that anymore. So I think there's a lot of people in that situation in this country. The work from home deal is different. So if you do get to a price that ultimately results in reduced gasoline usage, and I don't know what that price is, it could be, $4.50 a gallon. It might not be till $7 a gallon. I don't know what it is, but my concern would be that eventually you could see a material reduction or decline in gasoline consumption. And then you're left with a situation where ethanol stocks are already like within an earshot of record highs. Like they don't have a whole lot of room to go higher.

So the ethanol producer would probably slow down production. I think that, that if I had to guess, Chris, that's an unwarranted fear. It's just, it's one of like a million things that could happen.

Chris

Barron: Mm-hmm. We just—

Joe

Vaclavik: the other thing would be maybe a policy thing. Like, we've heard rumblings about, you know, waiving biofuel mandates and stuff. I don't think that's going to happen, but I mean, you know the world we're living in. You can't rule out anything.

Chris

Barron: Well, and that's just it. You never know on the government side of things. That's scary. Um, a couple of the knowns we just recorded with you that'll be on your YouTube channel, um, cost of production information and some things on your YouTube channel. And, you know, we talked a little bit about, you know, the, the increased cost on corn versus soybeans and stuff. And one of the things I wanted to ask you about is, you know, most of our data is showing still a decent advantage, about to the tune of about $40 an acre more on average, for the producer to stay with corn with the information we have as of right now. Do you, or have you heard from many of your clients, any kind of an acre shift?

Even though that appears to not be that big of a deal, but it could be, you know, um, when you start looking at availability of stuff for corn and things and it starts getting late, you know, and, and guys would maybe shift over to beans. But as of right now, I think the the likelihood is still heavier on the corn side. What's your thought in terms of, of that thought?

Joe

Vaclavik: So my customers have largely told me that they're not— there's not going to be a huge shift in acreage, uh, this year. That's, that's what I've heard directly from people that I work with. Now, is that the end-all be-all? I have no idea. What I know about the acreage numbers, the March report, and then the June report What I know about it is that just about everybody gets the acreage numbers wrong every single year. People guess at them, they estimate them, they do surveys. Some people always miss something. There's always something we miss. And if you get it right, it's just luck because it's just such an unpredictable, crazy deal, this acreage thing. And honestly, if it wasn't for Russia, Ukraine, that would be one of the very main focuses of traders and analysts right now.

It's just not because we've got We've got bigger fish to fry at the moment with this, with this Russia-Ukraine deal. But I mean, I think it's a tremendous wild card. It's a tremendous wild card. And I actually think that the uncertainty in regard to acreage is, is a supportive factor for the time being. Now, if they come out and say we're going to plant 96 million acres of corn on, on March 31st, then that's not supportive corn anymore. But for the moment, I, I think that the uncertainty is a supportive factor for pretty much every market across the board until we've got a better feel for it.

Chris

Barron: So there's corn planters rolling in the south, and it won't be long, and the center of the Corn Belt will be rolling, you know, in what, another month or so from this recording. You know, if we have a perfect planting season, will that affect the market negatively? And conversely, if all of a sudden we get delayed and and have another, you know, one of those seasons where things get super delayed, will that affect the market one way or the other, do you think? Or do you think it's still going to be Ukraine and other stuff that's driving the market?

Joe

Vaclavik: It would have to be a pretty extended and severe planting delay. Like, was that 2019? We had the real bad delay there, and the markets actually rallied on that. That's the exception to the rule. The market typically does not rally on planting delays. So it would have to be like a 2019 repeat type scenario. So no, I don't think that's the biggest deal in the world. And on that same note, I'll say that if planting's quick and it goes off without any major issues, I don't think that's a real bearish issue either. I just, I don't think that the market gets overly worked up about the very early season stuff. It's when you get into like really into May and more so into like late May into June that that the weather market is really like working in full force.

The early season stuff, March, April, the market doesn't, in my experience at least, or my view, doesn't get overly worked up about weather unless there's something exceptional like a 2019 scenario, I guess.

Chris

Barron: Okay, with that said, one of the last couple of questions here, the funds. You know, you talked about, well, you know, you worry about if the market went from $6.50 to $5 or whatever, that's when that, you know, all the investors are running for the door. You know, talk a little bit about where the funds are at right now. You do a great job on, on your podcast and on your subscriber-only video, just kind of keeping us updated on there. Any updates on where the funds are at or things to watch there?

Joe

Vaclavik: Well, basically, in regards to the corn market, they've been like, in a historical context, they've held a very heavy net long position. For a really extended period of time. Like funds haven't been short corn since I think third or fourth quarter of 2020. So it's been a really long time. That whole stretch of time from 20, like 2014 through mid-2020, they'd go long, they'd go short, they'd be back and forth. And when they were long, that was a good marketing opportunity. When they were short, it was a good opportunity to sit on your hands and do nothing. This is a little bit different deal. I don't see that first off as being a useful grain marketing tool in this sort of environment. It was for several years there, Not right now, but it does present this risk of what if the funds liquidate?

But I could have said that a year ago and they never really liquidated to any significant degree. So it's definitely important to be aware of the fact that, yeah, these large money managers not only hold a huge long position, but they're also very fickle. And if there's something that they see that leads them to believe that they need to be out, they're going to get out in a hurry. We just haven't seen it to this point. And you know, there's, there's a good reason to be long commodities in the view of a lot of people. You've got inflation that's gone totally unchecked. Our government does not care about inflation at all. I mean, you listen to the comments from our politicians and from the Fed. These are the people that are supposed to be, you know, working on our behalf to control this stuff. Uh, Joe Biden says to blame Russia on high gas prices.

Uh, Pete Buttigieg is the transportation secretary. He says to buy an electric car. The energy secretary said, "Go buy an electric car." And the Fed is going to raise rates a quarter point from zero in what's becoming a hyperinflationary environment. They don't care. So until they do care, large money managers have a pretty darn good excuse to be long commodities, I guess. And you're seeing that in a lot of commodities across the board. I mean, grain markets, energy markets, precious metals, things like that are all acting really, really well. So for the moment, they just, they don't have a reason to get out. And at some point they will. But they don't have one yet.

Chris

Barron: And if you find, um, a place where we can get a hold of an electric combine or a tractor to pull the planter, let me know.

Joe

Vaclavik: Yeah, I'll be sure to shoot you a text message with the picture or something.

Chris

Barron: I'd appreciate that. That way we could make sure we can, uh, get something in the ground. But anyway, yeah, yeah, there you go. So the, the last question I have here for you then is 2023 As you look at that, what, what makes you feel either comfortable or uncomfortable about pulling the trigger on some '23 new crop at some point?

Joe

Vaclavik: Or I'm absolutely terrified, absolutely terrified, scared. I'm scared to death of 2023 because, uh, I mean, the prices are great as we speak here. These '23 corns like $5.82, no beans, they're $13.15. I advised one very, very small 2023 sale, both crops, a week or two ago. But what scares me is that this inflation deal, again, what if the cost to grow corn goes up another 20% next year? What if it goes up 30%? What if it goes up 50%? I mean, there's this Russia thing and Ukraine, fertilizer, gasoline, I mean, all these things, logistics, supply chain, all these things, there's no rule that says that that couldn't happen. On the flip side, What if your input prices just level off, but these '23 corn drops to $4? I mean, where are you at then?

It's an incredibly, at this point, Chris, I mean, it's an impossible situation to navigate unless you have a really, really good feel as to where you stand, like you farm in cash and you don't borrow money, or you're just not heavily leveraged. But most people are not in that situation. So I find '22 to be a little bit less scary now, given that we know our crop insurance deal. You get some profitable forward sales on the books, ideally. But '23 is a different animal. And my fear, of course, would be that this inflation continues, it gets worse, it does the same thing again in '23 that it did this year, which is, you know, a 20% or more increase in cost to the farmer in regards to corn and maybe less in soybeans. I mean, that's what's scary to me. So it's like, it's a damn near impossible situation right now.

Chris

Barron:

Paul

Yeager: Well, can they raise interest rates fast enough to curb inflation anyway? At this point, or—

Joe

Vaclavik: well, Chris, when they put me in charge of the Federal Reserve, um, I— in this situation, I'd be making emergency rate hikes on a weekly basis. That's where I'd be. Well, yeah, uh, they're— but you know, the Fed doesn't actually control what they do. Congress tells the Fed what to do, and Congress likes free and easy money, and, uh, that's exactly what they're getting.

Chris

Barron: Yeah, yep, sounds good. Well, hey, Joe, I think this has been a, a good conversation. We've covered a lot of ground? Anything I didn't hit on that I should have?

Joe

Vaclavik: Uh, no, not really. The one thing I might go back to is, uh, guys that have like early grain sales on, and I always, I tend to talk about my bad sales more than like anything good that I've ever done. Um, but I mean, there's, there's still a lot of opportunity here, and I don't know anybody who's like 100% sold for '22. I mean, there's, there's some great opportunities. I think '22 is going to be a really good year again. For farmers is as trying and as difficult as this is to navigate. '23 is the thing that concerned me a hell of a lot more, to be honest.

Chris

Barron: Historically, it's always been when the most risk and the most fears in the market has historically, at least in my career farming, has been an okay time to make sales generally, because that's when the most volatility and unknown is there. But this is a— we're a little bit in uncharted territories too, because I'm not sure Um, we're just— we're, we're seeing some things that all together are kind of unique and different.

Joe

Vaclavik: Um, yeah, the last time we had this sort of inflation was before I was born. So I mean, it's, uh, something that most of us have never seen before, uh, in our professional careers at least. And I'm sure there are some listeners that have, but, uh, yeah, this is scary stuff.

Chris

Barron: Well, and we had a Fed that was raising interest rates like you just said you would do too.

Joe

Vaclavik: Well, they were at— I mean, the last time, I think I talked about it in the podcast, or the last time we were at 8% inflation, like the Fed fund rate was, was it like 13% or something, you know? So it's, uh, it's a little bit different this time around.

Chris

Barron: Well, and, and are we at 8% inflation or are we at about 15 or 16, 17%?

Joe

Vaclavik: Oh, I think it's every bit of 20, but it depends on who you ask. In my opinion, it doesn't matter anyways.

Chris

Barron: Yep, yep. So, all right, Joe, thank you very much. Really appreciate it. If people want to get a hold of you You do a great job with your— you do the podcast every morning on YouTube. My wife always appreciates it that the first voice she hears in the morning is yours because I'm listening to your market update on YouTube. If people want to listen to that or check into your subscriber-only video, how do they do that?

Joe

Vaclavik: Well, the podcast is called Grain Markets and Other Stuff, and it's on every podcast app, Apple, Google, Spotify, all of them. And the new, new episodes uploaded every business day at about 6:15 AM or so. It's out real early. It's every single day. And then there's a YouTube video uploaded to the Grain Markets and Other Stuff YouTube channel about the same time every day. So I'm up early, I'm doing this stuff. I wake up at 4 in the morning and put all this stuff together every single morning and blast it out. So check that deal out, it's totally free. And then, you know, if you like what I have to say, I've got a premium subscription service you can check out for $50 a month. It's just an information service. It's, uh, the cancel anytime, no obligation, no other extra sale pitch or anything like that type deal. I've had real positive feedback from that, so check it out.

Chris

Barron: Sounds good. Hey Joe, thanks a lot again, and we'll get you back another time real soon.

Joe

Vaclavik: See you, Chris.

Chris

Barron: Yep, see you later. And thanks everybody for listening. We will catch you again next time on the Ag View Pitch.