Weekly market outlook: Mar. 7th-11th - Russia Ukraine conflict heats up the market

Duane

Lowry: 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.

Shay: Welcome back, everyone, to another episode of the Ag View Pitch. Today you have Shay Polk with Duane Lowry. And Duane, as we head into the week of March 7th here, lots to talk about. It seems like over the last couple of years we haven't ever run, run short of anything to talk about and a lot on the docket here. We're going to hit on some key topics, looking a little bit at Ukraine perspective from, you know, farmer marketing and maybe some, some things to look for and some things to avoid. Have a brief discussion around basis and then some of the energy and inflation implications we have coming on. We're also going to touch a little bit on some USDA numbers and livestock demand and probably a few other things along the way here. But first of all, good to have you on this morning, Duane. How are things in your part of the world in Iowa there?

Duane

Lowry: Well, we got a little bit of rain this morning on Saturday morning, so that's a good thing. And it's warmed up a little bit, and otherwise it's time to turn the calendar and start looking at spring. And you know, won't be long, planting will be upon us.

Shay: You get that first thunderstorm through and everybody gets an itch to get the planters rolling, but might be a few weeks out from that yet, I would guess.

Duane

Lowry: Yeah, we got some cold weather coming, so we'll get a dose of reality too.

Shay: Yeah, getting through this first false spring here. So, you know, a lot, a lot going on on the global stage right now. Of course, everybody's attention is, is focused on Ukraine, and we're gonna, you know, hit some of the implications that Ukraine has on each of these subjects here today. You know, overall, how has the development of Ukraine changed, uh, you know, this last week ending in March 4th there? How did things progress over that 4 to 5 days that maybe impacted the market as we move forward, Duane?

Duane

Lowry: Well, I didn't expect that Russia would invade Ukraine, and if they did, I thought it would have been confined to the eastern fringes. And so there are a lot of people that were surprised at the scope of the invasion. And I think over the last 4 or 5 days or the last week, I think it's the scope of the invasion, the scope of the, the almost indiscriminate bombing in some civilian areas that has caused the market to, you know, dramatically elevate the fear and panic aspects of analyzing anything. And in terms of grains, that leads to a discussion ranging from, will the spring crops even get planted? And then if they are planted, and if they are harvested, you know, are they going to make it into the export arena?

It's quite clear on the military maps that Russia's gonna completely landlocked Ukraine before this is over, and whether that means there is a Ukraine left or whether it all becomes Russia or whatever, who knows, but at minimum, they appear that they're gonna have to be landlocked, so if there is a remaining Ukraine, they're gonna have to find a way to work and get along with Russia because they're gonna want the access to the Black Sea ports. So all of that creates a question mark on, you know, available supplies And I think that probably dominated this past week's trade in terms of, you know, dramatically ratcheting up the fear and the panic, and that was most displayed in the wheat market. That's not so much, or to a lesser degree, in the corn market and not really all that much in the bean market.

Shay: So let's talk a little bit about some of these numbers, you know, from world supplies and how Ukraine has potentially impacted that outlook. You were talking here offline about some USDA Forum numbers that were maybe impacted by that. Tell me, tell me some of your thoughts there and what some of those implications might be.

Duane

Lowry: Well, I'll touch on the Ag Forum, USDA Forum numbers first, just for a quick glimpse. Their total acreage number was, I think it was 228 million acres for U.S. corn and wheat and soybeans, and basically that was the highest total acreage of the last 8 years. So how that mix comes out with corn and soybeans, you know, is yet to be determined, but just the fact that they have the acreage at the high end of where it's been for the last 8 years tells us that there are some limitations about how much more those acres numbers can go up. They had pegged in corn acres at 92 million, they had soybean acreage pegged at 88 million. What those numbers mean, the 92 million would mean 1.4 million less corn acres than last year, and the bean acres up only 0.8 million acres. And what those means in terms of supply and carryout, etc., given they used a yield of 181.

I think that's kind of like the official trend line, but a lot of privates are using some numbers around 179. But at 181 on the acres that they gave us, they had a carryout projection of 1.965. Just to put in perspective, uh, to equal the carryout that we're supposed to end up this year with, which is basically 1.5 billion, you could have the, the 92 million acres of corn and produce 176 national crop and you'd maintain carryout. So when you look at the corn balance sheet using those acres numbers and, you know, conservative yield numbers, you still end up with an equal carryout. If that ends up being correct, and there's a lot of different pieces of the puzzle that can change to alter that, but if that ended up being correct, that's not a supply shortage situation.

If you go to the soybean numbers and they increase acres to 87.2, which is up just under 1 million acres from last year, your carryout ends up being at 305 using a 51.5 yield, which is basically the same as what we had last year. In comparison of corn versus beans, that bean balance sheet looks tighter. Than the corn. But here again, there are so many variables that can play into this. Um, so I think the, the highlight coming out of that forum was that, uh, um, if we have a normal or even a sub-trendline yield in the case of corn, we're probably not going to have a supply situation. And if we can get a normal yield in beans, we're probably not going to have a supply situation. I think that's a little bit sobering versus, you know, all the panic and fear that's going on here, but realize there's a tremendous amount of variables here.

So I think that's the first thing to point out from that. And regarding, you know, other implications as far as Ukraine is concerned, in the— their biggest thing that they are probably seeing right now is the corn implications. And if you take a look at their— let me see if I can find some information here. Ukraine's corn production this past year was a very, very good crop, probably one of the best crops they've had, and their export numbers were up very significantly. But when— let's put it in terms of comparing it to U.S. so that we have a proper perspective on this. Ukraine produced 1.65 billion bushels bushels of corn, and they exported 1.3 billion bushels of corn. And at least a third of that corn export was going to China, which with a large part of that probably already shipped in the current year.

So if they— if their production is cut, it's important and it's very significant, but it also is important to understand how much is being produced there in relationship to us so we have a perspective. If their production were to be halved, then, you know, that would equate to— that loss of production would equate to approximately half of our carryout. Okay, so I just want to offer that up for perspective. In the case of world wheat production, Ukraine produces 1.2 billion bushels of wheat They export about 882 million, and to put a perspective on that, our U.S. wheat carryout is 628 million. So if they were to have a half a crop there, or those half of that supply wasn't available to the global marketplace, I'm just trying to offer perspective of how much— how significant that could be.

I think in terms of once we get past the fear and the panic aspect of the stage of the game, there are some raw numbers here that are a little less concerning than what the fear and the panic stage. I'm not trying to completely minimize it, but I am— I just want to make sure people have that perspective. The other thing that's important to realize is, and we'll talk about this more at the end of the segment, and when we talk about Ukraine, It's important to remember where China lines up here. China's lining up pretty firmly on Russia's side of this. They have inked deals for coal, they have said that they'll take their energy, they have indicated they'll take wheat. China is not a large importer of wheat, but it is possible that they could end up feeding more wheat and less corn if they— because of their new relationship with Russia.

So there's a lot of implications here with what happens with Ukraine and Russia that can impact China, and a lot of that also can have an impact on U.S.-China relations and trade. And so there's a lot of different pieces to talk about, but I'd rather talk about those at the end when we talk about Ukraine.

Shay: So other reduced world supplies here, Duane. I think I had seen something this week that maybe South American projections were coming in just a little bit lower. Do you have any insight on that?

Duane

Lowry: I don't have any numbers in front of me, but the South American corn thing would depend on quite a bit on second crop corn, which is still, you know, in, in, in process, and Argentina. I don't think that we're going to find that much of a reduced supply of, of corn for export out of South America in general. The soybean production numbers are certainly down, uh, quite a bit from preseason levels, but when you look at, uh, the carryout levels that they had plugged in for Argentina and Brazil, um, it's very possible that they will have a minimal impact on their total number of exports that they ship because the carryout number will just be reduced and the— their share of the world marketplace may not change that much.

For evidence of that type of thinking, I think all we have to do is look at how much new US exports business has occurred in the last, you know, several weeks or couple months while the South American soybean production number was clearly working lower, and that's been minimal. We've had minimal additional old crop bean sales out of the US beyond just some routine business. In the last several days, we've had China return to the, the market buying old crop beans, but they were so far behind pace that I think that still falls under the category of routine. So I think that we're not seeing signs that, uh, old crop supply situation on a global level or U.S. level is really going to be in short supply.

Shay: Thanks for that perspective there. Let's maybe turn a little bit to, you know, farmer marketing and how that's looked over the last week, last two weeks really. But boy, boy, what a week here that we saw ending in March 4th, you know, continued volatility, dramatic price swings, a lot of uncertainty in the marketplace there. What are, what are some things when you put on your farmer hat, Duane, that you should be looking for and maybe some of those key things to avoid as we move forward or things to take into consideration?

Duane

Lowry: Well, the first thing that probably needs to be mentioned is there's producers out there that at some point in time in the last few months have bought put options, and undoubtedly their, their strike price they bought is far below what current values are. So they probably should give serious consideration to rolling those puts up, even if they've already rolled them once. There's probably an opportunity to roll them again to get up to current levels. Now these puts are extremely high priced, volatility's high, and so if even if the market has rallied a significant amount, you're not going to get all of that. But if you don't roll up your put options to a higher strike, then you're not doing anything to benefit yourself from the price rise that has already occurred.

So if you bought those puts, your, your preference, what you were trying to accomplish, was to establish a floor, but you also bought the puts because you wanted to have upside opportunities. So here we've had, you know, dramatic upside opportunity, um, probably $1 from what— in corn, and probably $2 in beans from when those puts were most likely bought. If you don't, um, roll those options up to capture at least half of that gain, then, you know, you're missing the point of why you purchased those puts, I think. So I think that would be the first thing, a group of people I would be focusing on.

Second group of people are the people that have made some sales, and depending on, you know, what level of percentage they're sold, as prices go up, I would think that the desire would be to continue to extend that sales percentages sold even beyond levels that you normally would have on this calendar date, because at the end of the day, it's, it's the price and, and slash profit that is the motivator of how aggressive to get on the sales. So even though we're not, you know, into the production part of the season, it would seem like there's, there's merit in continuing to expand, extend sales as opposed to stopping making those sales. The last thing that I would mention on farmer marketing is, you know, I have not been a willing seller of '23 production and have refrained from that significantly until probably a couple of weeks ago.

And now I do think that there is merit in having some starting sales. I don't think a guy should get super aggressive on '23 because you still have the inflation component that makes, you know, a sale out there, even though they might look at relatively good prices when looking at, you know, last several years of history. If this inflation ends up being a long-lasting major shift and it continues and is prolonged, sales even at today's '23 prices are not going to seem like very good sales. So I think there's merit in starting, but I'm not I don't think there's a lot of merit in getting too far extended.

Shay: So I'm going to maybe lean on you a little bit here. You said perhaps being a little bit further sold than what you normally are at this time period, or maybe even a little beyond your comfort level. Can you quantify that a little bit, Duane? I know it's different for everybody, but just generally speaking, how would you quantify what that might look like in relation to a quote-unquote normal year?

Duane

Lowry: It's impossible to completely quantify that because every producer's perception of that and where their comfort level is completely different. However, I would say that if you wanted to extend your sales, you know, beyond your comfort level and you wanted to extend something that was a good balance between trying to capture the reward that's offered because most people have most of their 22 input needs covered or cost determined, and so this is really adding profit to the bottom line, then I would say that you could legitimately make your sales all the way up to your RP level of your crop insurance. If that was— if you're 80% or you could do that, go as far as that, or 85%, you could go as far as that. The incentive for extending the sales is the idea that— obviously the idea is that these prices may not be sustained.

And the incentive for not making the sales is that you will get better prices later, either during the growing season or at harvest time. Or the other reason that people might not make sales is They don't want to get caught in a situation where they make these sales and then we end up having, you know, a major production shortfall and all of a sudden, you know, the entire price structure just completely blows up. But if you look at it from a risk or a historical perspective and things of this nature, year in, year out, the advantage goes to the guy that is willing to advance sales as profit opportunities. Are presented, as opposed to the guy that is not willing to make those sales.

Shay: And I will just add for perspective, you know, first of all, thank you, Duane, but I will add for perspective that we do have, you know, clients, farm operations that we work with that are anywhere from that, you know, 5% sold on new crop all the way up to your protection levels that you were talking about there, Duane. So again, it's different for everybody, and looking at profitable sales You know, how do you manage that from a long-term perspective and what does that mean for your farm operation? Those are questions that you have to answer as a farmer individually. Anything else that—

Duane

Lowry: go ahead. I would, I want to add one more thing on this farmer marketing thing. It always boils down to the, you know, the fear of missing out and the willingness to lock in a profit. The last thing that you would want to have happen if you were trying to picture what's the worst case scenario, what's the worst thing that could happen to agricultural producers out here from this point forward to the harvest time, and that would be a serious disruption of US-China trade relations, which is certainly possible in all the craziness going on in geopolitical events here.

You don't know how far they're gonna mushroom out of control, but a serious threat to that, if the powers that be determine that the U.S.— or excuse me, the Ukrainian crop may not get planted, um, I can virtually guarantee you there will be a move underfoot to, uh, offer incentives to pull some CRP acres out of production, and every country in the northern hemispheres are going to be finding ways to maximize their acreage in production under that type of scenario. There's also been move underfoot by USDA and the White House administration to consider, or at least look at, or at least talk about changing or removing the renewable fuel blending mandate. And while you may or may not think that's possible at all, what is important about these things is they've become— they are now on the discussion table.

And what that tells us is there is a threshold, there is a point where the powers that be, due to food inflation costs, etc., they're going to say, "Enough is enough, and we will go to extraordinary measures to curtail that." All of that means a threat to U.S. agricultural profitability.

And the last— and if we are currently building in, you know, some dramatic what-if scenarios, I don't know if we're building in yet worst-case scenarios yet with Ukraine or not,, but to the extent that we're on that pathway, if that situation is resolved in a manner that 2022 production is not seriously impacted and the supplies are available to the world marketplace by the time harvest evolves in that region, the last thing you'd want to arrive into harvest was to be able— have to go to explain to your banker that you had this tremendous increased cost of production, and yet you didn't take advantage of the sales and the profit opportunities that were offered.

And in the current set of volatility in markets in general, in geopolitics, and in military operations, and what all the implications to all this might have on just the whole economic outlook, I think, you know, to consider that as a possibility, I'd say that's just as much warranted as considering the other end of the spectrum. There is potential for a lot of volatility here, and that volatility means there is downside risk, and that should constantly be respected. And I think that's the last thing I would say about that.

Shay: Sounds great. Thanks for hitting on that. I wanted to turn a little bit— you and I were talking offline just on how basis has changed a little bit here recently, weakening in a lot of areas and holding steady in others. How do you think about that from a, you know, market analyst standpoint and from a farmer marketing perspective, Duane?

Duane

Lowry: Well, I think there are a lot of different things to talk about there. In the case of old crop corn, I think basis values have weakened in some or a lot of locations just due to the pipeline being very full and plenty of grain moving into the pipeline and driven— that movement driven by the price rally, and therefore basis weakens. So that, that's one aspect of it. In the wheat market, you've seen basis values weaken dramatically in the last several days. That is being driven by a wheat futures market that is, you know, going ballistic. That creates tremendous margin call pressure on the grain elevator and the commercial entities and things of this nature. And so consequently you've seen some of those people move bids that would normally be maybe in the July contract to the September contract because they've seen the spreads tighten and July go up a lot more than SEP.

And so the commercials change their bid structure to say we're going to bid off the SEP for the only purpose that they don't want a short futures position in the July contract. And so if you had an HTA in the July, which would be a normal place to put it, suddenly your basis value is going— is getting hit because the commercials have switched their basis to the SEP and the July has gone up more than the SEP, and so they kind of punish you for having that HTA sitting in the July. So the wheat market, wheat producers are experiencing very, very weak basis. Now if you're a wheat producer and you have an HTA or you have a short futures position and the basis is weakening, and especially for the guy that has short futures position, you're getting killed on margin calls.

So the only way to end that is to, to liquidate that position, and then the only way to protect your price is to go into the cash market. So you're seeing producers being forced or enticed or being emotionally panicked into making cash sales at these wide basis values. I've heard people tell me that new crop wheat could have a $3 or $5 basis in, you know, hard red winter wheat area. I don't really believe that, but that's the kind of fear that's out there, and some of that fear is coming out of the commercial entity. And so the reason that the basis is getting so wide is because the commercial that's putting on that short position sees a lot of costs, or he doesn't want to have that short position, and a way of discouraging that is to back off the basis. Uh, or if he— if somebody wants to lock that in, then they're going to make sure they get paid well, and that's why the basis.

They're also concerned about what's the freight going to cost them to move those bushels into the export arena, um, and things of this nature. So there are some legitimate reasons why the basis is weak,. But in those cases, I think that basis weakness is more panic-driven than it is driven by any actual developments, and the basis values could easily return to something more normal by the time wheat harvest arrives. So if you're a corn or soybean producer, we can learn from that, and that, you know, we might not like what we learn, But if, if when we look at the corn and soybean producer looks at new crop basis, more than likely he's already got basis that he doesn't like, certainly worse than the last few years.

Um, but if you wanted to subscribe to the theory that corn and soybean prices were going to go ballistically higher on reduced supply, or at some point in time there was going to be a period during the growing season that the U.S. corn and soybean production was in serious question, and the futures market happened to go, you know, to some crazy level that we haven't seen before, then we have to expect that that opens the door to the risk that new crop corn and bean basis could follow the same pattern that we see in new crop wheat basis in the last several days. So, one, does that cause you to go ahead and lock in new crop basis on corn and soybeans so you eliminate that risk of that developing? It's not an unreasonable thing to ponder, okay. Number 2, does it cause you to be less likely to do HTAs and leave that risk of basis open?

Or 3, does it cause you to say, I'm just gonna— if I like a price, I'm just gonna make a cash-forward contract and be done with it, which of course by doing that you take away the flexibility that a, say, a futures contract may offer, but that is a legitimate choice and a legitimate decision process that needs to go through. I would say this, that if you're looking, if you're a producer in corn and soybeans and you like the flat price and it doesn't, you're not thinking about basis plays or anything else, you just like the flat price, You might in this year have an understandable reasoning or merit to shift more towards that cash forward sales, where I think a lot of people have had a tendency to do more HTAs over the last several years with the expectation that basis would at some time be better, and oftentimes it was.

So this year maybe what we've seen in the wheat and the basis risk that I've just been talking about, maybe that's a reason and a rationale to utilize the cash forward contract more than you might have in other years. And I think there's legitimate merit on that. I, I certainly could understand that. Now, on the other hand, um, if these basis values get too wide, some will argue that there's opportunity there to hedge, and then you can expect basis to improve. Um, I'm not sure, I probably wouldn't argue any of these points too greatly, but because we're dealing with such high, uh, flat prices, um, I probably would be inclined to use some cash-forward contracts as your marketing tool to lock in those new crop sales as opposed to, uh, other tools, even if the basis was wider than normal.

For the sole purpose that you're eliminating the risk of having happen to you what we've seen happen to wheat producers right now for their new crop bids basis-wise.

Shay: So I got, I got two tough questions for you, and it's on the same topic that we were just discussing. When in history, when you think back over your experience, Dwayne, uh, Can you give a couple of instances, or even if there's just one instance, of when we faced similar conditions as to what we're looking at right now? That's the first question. The second question is, you know, in hindsight to those situations, when you talk about, you know, you kind of talk through three different options there. Do we lock in some basis? Are we less likely to handle some of those HTAs? Or do we do cash flow forward sales. In hindsight, in that situation or those situations, uh, what was the right move at that time? And I know these situations are different, but you have a lot of experience there, Duane. Can you touch on that a little bit?

Duane

Lowry: Well, and, uh, one thing that comes to mind, it might not be exactly equal, but it does pick up some of the components of a lot of these things we've been talking about, is that was back in the 1995, '96, the HTA fiasco that we had, where in the buildup to that period, there was a broad acceptance and almost promotion, no, not even almost, it was a promotion of pushing people to make 2 or 3 or even 4 years of sales in advance using HTAs, with all those HTA sales in the front end. And then the plan was, when they promoted that, the plan was that the HTA position, which is a short position, is in the front end, then they would constantly be rolled, and there'd always be a premium, or a carry in the cash market, or a carry in the futures market, and so as you rolled it, you would be capturing higher and higher prices and benefit from that roll.

That was the theory, that was the plan, That's how it was promoted. In reality, what happened was that the market went to an inverse, and so the front end was the strongest, and we had, you know, May corn go— I don't remember— $1.50 premium to December, or maybe it was more than that. I can't remember off the top of my head now, but it was dramatic. And so if you had a short position on there that was in the old crop but yet it was actually production you're gonna produce for that fall, or maybe even 1 or 2 years or more beyond that, then your short position was going against you dramatically, but what you had growing in the field, or what you planned to grow in some subsequent year, was not going up in value at all. So it was a dramatic trap.

That is what has happened— or that is a type of thing that is happening with the wheat market and the futures market going ballistic and the cash market, you know, not— its basis is collapsing, okay? So that's one example of that. In terms of other examples that I can think of, I don't know that we have any off the top of our head. We did experience the Chernobyl event in 1986, I believe it was, that had a dramatic impact of driving prices up sharply and significantly, and, and that was also in the front end, the spreads tightened, but that ended up being a short-term thing. I think within 30 days the spreads had collapsed again, and that was a short-lived thing, but that was a temporary spike that had some similarities to what we're talking about.

The last thing that probably is worth mentioning, I don't really subscribe to this theory, but it is worth mentioning, we had a dramatic turnaround in just the general price structure of historical prices versus the new history. You know, we went to new plateaus during the '70s, fueled by inflation. So if you happen to be somebody that feels inflation is here to stay and it's going to be, you know, a long-term trajectory up, then You know, that brings in the argument that you want to be slow to make sales. I don't know if the slow-to-make-sales argument, even, even if you subscribe to that theory, is warranted or legitimate on the 2022 crop, but it is possibly a legitimate reason to not make sales for '23 and beyond, or if you make sales for '23 and beyond, that those sales are small increments to start out because of the level of uncertainty.

But those are the only examples that I can think of. Mm-hmm.

Shay: Well, thank you for the perspective on that. Sometimes that history is really important. From the inflation standpoint that we just hit on, I think that's a little bit of a natural progression into, you know, our outlook here on what inflation implications are long-term and if the Fed is going to make adjustments maybe on what their original plans were coming off of COVID here. Or as they think about the year and 3 years ahead based on the Ukrainian situation here. So talk to me a little bit on your thoughts around inflation and how that has changed or not changed over the last month or so here, Duane.

Duane

Lowry: Well, I have been under the opinion that inflation could possibly be temporary. Temporary measured— was something measured in months, not something measured in multiple years. That was based on the, the idea that the Fed would raise interest rates, the dollar would get stronger, both of those things combined would have a softening effect on inflation. I am also— part of the other reason I was looking at it from that perspective is I look forward to the 2022 election, the 2024 election. I see different people gaining political power in the US. I think there could be a big red wave. I think a big red wave in, in the '22 election could have a dampening effect on inflation in the eyes of the investor. And I think that— so I still believe those. So I, I am still cautious that it's possible that the inflation we are experiencing may be only temporary.

Maybe it's only measured in months, whether that's, you know, 6 months, 12 months, or 18 months, I don't know, but it's possible it's not measured in years. The real wildcard on that is going to be the energy prices. If we— stall out with crude oil prices here at the $115 level, and that stall out has occurred because of developments in Ukraine. You know, there's some sort of diplomatic settlement finally arrived, or, or whatever. But if the— or Iran comes back and their oil's available, or OPEC decides to open up the spigot, any of those things are possible. If that happens and we stop here at this $115, $120 in crude, and we don't just go on a straight-up trajectory, then I think that has a tempering impact on the potential of inflation to be long-lasting.

And I don't know exactly what would cause it, but we always have to be open to it, that what happens if there's something that causes energy prices to take a tumble and return to $80 crude, for example. And what would those— what could possibly happen that, people might ask? Well, an economic slowdown, a change of habit on the consumer, reduced miles that they drive, reduced consumption, political powers and decisions that because of what's happened in Ukraine and Russia that suddenly there's newfound interest and willingness to use nuclear nuclear power, and things of this nature that changes the long-term trajectory here.

And maybe it won't happen as long as we have the current balance of power in Washington, but if this balance of power changes in the 2022 election and the 2024 election, that could dramatically change the outlook and the approach philosophy towards energy, and we might open up this drilling and give the energy industry more confidence that the U.S. energy policy will be more friendly towards people that are going to extract oil. Those are types of things that could happen to cause the energy prices to top out here and weaken, or just, just even if they went sideways, would be a calming thing versus hearing that it's going to $200 a barrel. So I don't think that it's a certainty that this inflation is long-lasting, but if the energy prices can't be sustained, then it is, okay, or it will be until that is— the energy prices are arrested here.

So the inflation is being felt on the expense side of the ledger for sure, and that's not going to change anytime soon. In fact, that's going to last a lot longer than the potential inflation on the, on the revenue side. As a producer, the ag commodities are more vulnerable, and your profitability is certainly more vulnerable to something that the the revenue prices of that you— on the products you sell are facing the pressure from all the financial energy by the Fed to attack inflation. You're going to feel that in your revenue that you get, but your expenses are going to go up based on actual inflation that's occurring right here in your own backyard.

And that creates a situation where you could easily see your profits be squeezed greatly, which makes me all the more focused on locking in the profits that are offered in '22 because you may not have anywhere near these type of profitability levels offered in '23. So I think that, you know, the price is irrelevant. Profit is what's important. And I think the profit levels for many producers are the, you know, super great at these levels. And I've I think you better capture them because you might want to take some of those profits and roll them forward for your '23 year.

Shay: That's a great point, Duane. Last thing I want to wrap up on here that we were mentioning before, before today's call, today's conversation is livestock demand and how that outlook is. Duane, I don't have a great pulse on that. So what are your thoughts there?

Duane

Lowry: Well, I'm not a livestock guy either, so I don't have— you know, a tremendous feel for that either, but I think it's important to point out December soybean meal is right now trading at, you know, $415 a ton, give or take. In the last several years, the topside, the absolute topside on meal was largely $400, and the amount of time spent above $400 was very limited, and the vast majority of time was spent under $3.50, and probably the largest amount of time was spent around $3.00. And so now that meal cost is, you know, it's 30 to 50% more than, than what it's been for several years in general. So I think that's a threat to livestock producers' profitability, and therefore, you know, a threat to demand.

If you look at the hog market, you've in the last several years you spent a lot of time where hog futures were, oh, let's say they were 70 to 90 on the top side, okay, and right now you got spot hog futures, you know, trading at around 100. You got, if you go to December hog futures though, they're trading down to what is it in the 80s, I think. Let me look quick. December hogs are trading 85, so the revenue side for the hog producer is in that range of zone where it's been for several years, but yet his cost side on the, on the meal is 30 to 50% higher.

And if you take a look at the corn, you know, Dec '22 corn currently is trading at $6.30, traded I think $6.50 this week or something around that level, and prior to that, the last several years, the top end of December corn was $4 to $4.40, and the amount of time spent at any of those levels was very limited, and the vast majority of time, you know, you were dealing with prices at $3.75 or less, and And so, you know, look at how much that hog producer's got his costs going up, and when he goes out to his December futures, it's, it's only $85. I mean, that doesn't work. And so you already are on a journey and on a pathway where demand destruction is occurring. We may not see it or feel it, or it's not in the, in the focus, but it has to be occurring. And I'm sure the poultry industry is facing something similar. I don't know that. Um, so we have to be concerned about demand.

Um, on the demand front, it's not livestock related, but, you know, in our balance sheets, um, we have a very lofty corn export number built into our balance sheet. We have a very lofty bean export number built into our balance sheet. These kind of prices are going to encourage maximum acreage expansion in the Northern Hemisphere, and it's going to encourage maximum acreage expansion in the Southern Hemisphere. Of course, in South America, there's greater opportunity to expand acres, but they certainly have the incentive to do so. Um, so, um, we have a price structure now that probably is hurting our demand and hurting our demand outlook. How to put numbers on that, who knows?

But when you've got, you know, 2.4 billion bushels built into your balance sheet for corn exports, and a few years ago you were 1.8 billion, I think that's a threat or a potential area where we could see some demand destruction. The ethanol industry has gone through a period of time where their margins went dramatically has been reduced. I don't know what the ethanol blending situation is going to evolve, but we're kind of in the crosshairs here, so that's somewhat of a concern. We have to assume that these gas prices are also going to hurt gasoline demand consumption. That has a direct impact on ethanol usage, so there's some threats there. I think the biggest threat on a U.S. balance sheet for grain producers is on the horizon is the China factor.

And as China gets closer and closer tied in with Russia, um, even though they don't import a lot of wheat, their wheat feeding can change a fair amount, and it's very possible that they could end up getting Russian wheat and end up feeding that wheat as opposed to importing more corn. Regardless of who they imported that corn from. So I think that's a potential factor, but the biggest threat to China— or excuse me, the biggest threat to U.S. producers regarding demand and China is rising tensions between U.S. and China in an environment where China has ability to get those bushels somewhere else. And At the present time, Russia's soil moisture, wheat condition is about as good as they are ever at the— for this time of year, so opportunities for production there have only been going up in terms of what people think is possible. So China may have an access there.

This whole Ukraine situation is— and the sanctions has caused China to be Russia's banker largely. And so it's possible that the U.S. loses out some business to China because of that connection. It's also possible— we talked about the elections coming up here in '22 and '24— with different people in power, and based on the experience we've had here with Russia and all the pushback for strong sanctions against Russia and things of this nature, it's possible that some of that spills over to a very negative sentiment towards China. Especially if there's a red wave. I think there's a better chance that that happens. And even when the past administrations have tended to continue China's most favored nation status, continued to try to maximize relations there, there has been efforts in Congress to be— take a tougher stance against China.

Now some of that was political posturing where there was no intent that they think that was ever going to happen, and a congressman or a senator could take this toughest stance he wanted to, um, to try to gain political points with his, his voting base because he knew that it would never pass Congress. But if you get a red wave to occur in '22, it is possible that the approach to China becomes a little bit tougher, and China's response to that may very well be to do less business with the U.S. if there's a opportunity with global balance sheets to get business done elsewhere.

Um, and when you look at the landscape and you look at the horizon, even with the Ukraine situation out there, it is very plausible that we are, uh, creating a situation between expanded acreage incentives because of price to create a period of time in the near future where supplies are somewhat more plentiful, and therefore China may have opportunities not to be as aggressive with U.S. purchases. And since our balance sheets have an optimistic number built into them, there's a lot of room that we could get hurt that we're not really thinking about right now, but there's a lot of opportunity for our balance sheet to shrink in terms of demand. And, you know, the last thing to say about demand is It's just pure economics. And, you know, these prices can't be occurring without having some impact on the user somewhere down the line, if not having an impact on all users.

Shay: I think that's really important from a long-term perspective. There, there is a tremendous amount of downside potential, as we're all aware of. And yeah, I think China's— China could have a huge impact on that. Any, any last comments as we kind of wrap up here, Duane? We were going to touch on Ukraine again. Anything else you wanted to make sure that we were hitting on or that you think is relevant from the Ukraine situation?

Duane

Lowry: Well, based on your comment there, I think we're nearing the end of where you want to be on a timeline, so we won't go into the Ukraine thing very deep, but I do want to go into it a little bit because it's important that we don't stop thinking or we don't stop discerning what we're dealing with. The marketplaces have factored in a tremendous amount of fear and panic into any type of what-if scenario that they can imagine. So some of the worst things that can happen have already been built up into the price structure. That's the first thing to say. Second thing is, people are expecting, and maybe they're right, they're expecting that Russia's just gonna continue to go in, they're gonna continue to attack these cities, it's gonna turn into an urban warfare, it's gonna last for months or years, such as Afghanistan. These are the kind of things that are being offered and suspected.

And hey, maybe they are. I'm not here to say what's going to happen. I am only here to say that the coin has two sides to it. So that's one side, that lasts for a long time, or Russia completely overtakes the whole country, which threatens ag production, at least in the short term, or whatever. So that's what marketplace is dealing with now. I'll offer up another scenario. When you look at the map on TV about where the Russian activity and military operations are at and what's been going on, the entire western part of the country is almost, you know, nothing going on there in terms of military action. But if what is happening, it's clear that Russia's gonna make sure Ukraine is landlocked. When this is over. And that means that Ukraine will have to have a good relationship, or a workable relationship with Russia to have access to those Black Sea ports.

And that's going to— it's very important to Ukraine's economy to do so. So Russia's going to capture that southern area, they're going to keep that. Then you go on up to the eastern, there's going to be some part of that eastern they're going to decide that they're going to keep. Then you get up to Kyiv, you know, they've had this, all these troops sitting out there and not advancing much, and the media has told us it's been due to tougher than expected Ukrainian resistance. They've been told it's due to inept Russian soldiers and having all kinds of flat tires and all these other things. I find that a little hard to believe.

I just find that common sense doesn't seem to pass the smell test, and I wonder What is the possibility that that convoys have been sitting there waiting until the southern military operation is over, and they have control of that entire southern parameter, and then the plan of Russia is to lay siege on Kyiv and the government there, and all the people there, and the bombings that they've had are to create an atmosphere where Kyiv is more interested in having— in being forced to have us produce a settlement. And what's the possibility that that happens and this ends up being not long-lasting? It's hard to believe that Russia has the ability or the appetite to occupy a country for, you know, multiple years and fight insurgency throughout all of this. That's hard to believe that is going to be the outcome or that they can even do it.

Last thing I want to say, and on Ukraine in an abbreviated version because of time, is China. China is a huge important factor here, and China is now Russia's banker, and they are now going to be the offtake for anything Russia wants to export. And they're gonna take the oil, they'll take wheat possibly, things of this nature, but China's huge. China does not like high food prices. They do not like food inflation. Do you think that China is going to allow Russia to create an atmosphere inside Ukraine where the 2022 spring crops aren't planted? I don't believe that. I think China has tremendous influence on that. If they got Putin to hold back on his, his attack until after the Olympics were over, I would say that's a decent amount of influence. If China is going to be Russia's only main banker and source of of funds, I would say that puts them in a very high influence.

And because China doesn't like food inflation, I am optimistic that somehow the, the production for the 2022 season, I don't think it's going to be disrupted by a significant amount. And the only way that statement can possibly be true is we have to have a relatively quick end and conclusion to this, and that has to be some sort of negotiated settlement.

And so I ask you, with your military experience, what is the possibility when you see those maps that, uh, the bombing activity is to create an atmosphere to, to where they feel like they're going to come in, but maybe they don't actually come into Kyiv and they don't actually overtake that, they don't embark on a house-to-house, building-to-building, block-to-block type of assault, but instead They seek capitulation through the negotiation process, and they divide the country in half with that river— I can't think of the name of it— from north to south that takes it all the way to the Black Sea. Everything east of that, plus that southern fringe, is Russia's, and the rest is a new Ukraine, a new landlocked Ukraine, and part of the settlement is NATO— that new Ukraine join NATO, and there's a limitation on what type of military hardware they can have.

So I ask you, what is the possibility that what we've seen Russian troops doing could be actually part of a plan, that this is what they're after, is this short-term capitulation and getting a settlement that way, as opposed to a years-long street-to-street battle?

Shay: Well, the first thing I would say is if Putin can accomplish what he wants to accomplish in Russia quick— or in Ukraine quickly, uh, he's, he's going to move towards that. I mean, that's obviously what the end state is here. I don't think long-term occupation with low success is key in his mind. But with that being said, from the negotiation standpoint that you mentioned there, not sure you can trust anything that comes out of any negotiation or peace talks or meetings or whatever else. Based on the weeks and months that led up to the Russian occupation along the border where they said, oh, it's just training exercises, uh, you know, yadda yadda yadda, and then of course the invasion happened. So I think the lack of trust in anything that, you know, comes out of Moscow or Putin in particular is important to keep in mind.

The second thing is I wouldn't necessarily underestimate their willingness. Now, I'm not going to say their ability, but their willingness to occupy long-term. I mean, you look at Crimea, you know, they've been there since 2014, and there has been continued occupation, and there has been continued border conflicts. That just hasn't been front on the news story outside of, you know, people that are interested in the military engagements around the world that haven't been paying attention to what's going on there. And from that standpoint, too, I mean, it has been continual counterinsurgency from various groups and factions in that region to where, yes, the Ukrainian people are going to conduct counterinsurgency. They've proven already that they have the willingness and the desire to thwart any Russian progression, um, you know.

So from, from that standpoint, I wouldn't rule out the the willingness for long-term occupation from Russia, but again, if they can accomplish that in a shorter time and meet their objectives, continue to flex their power move against NATO, United Nations, and really the rest of the Western world, then they're going to move forward from that standpoint. The other thing that I would mention— go ahead, Duane.

Duane

Lowry: I was just going to say, if Russia controls a lot of the power plants, which they are in the process of accomplishing that, and if they have these main cities encircled, specifically Kyiv, and the West has clearly shown there's going to be no appetite for military intervention on behalf of the West, and all they're going to do is try to ship in military defensive weapons, which could easily end up being inaccessible to the Ukraine fighters if the cities are surrounded. What recourse does Ukraine have as a political entity? They don't really— they're not going to have any choice, aren't they going to be forced to engage in some sort of a settlement, even if they can't believe or trust the integrity of it? I mean, they're not going to have much of a choice, are they?

Shay: I don't know if I can answer that from a geopolitical standpoint. I think you pose an interesting question. You know, that's a little bit on the wargaming side and the what-ifs. I think what is interesting though that we maybe haven't discussed here a little bit, Duane, is looking at the political insight from Russia's perspective and what the Russian populace's general outlook is on continuing to support or at least submit to the fact of what Putin is trying to accomplish in Ukraine. And I'm not sure there's long-term sustainability.

The actions from sanctions and government political influence obviously were not an effective deterrent when it came to the invasion of Ukraine, but the long-lasting impacts that it has on the Russian people and especially others that are in power without a clear vision of what success looks like in Ukraine, um, from Putin's standpoint, I'm not sure that the sustainability within the government there is, is sustainable as opposed to the military occupation. And I would also add that there's been a fair number of reports that have indicated that the Russian general army is very lackluster, low morale. They're facing some serious issues on supplies, not only from food and fuel, but in other areas as well. And the Russian Air Force or air power has been very restrictive and/or in some cases been pretty well decimated in some areas as a result of Ukrainian air superiority.

And they continue to gain on that every day. So, you know, a lot of this just to tie back to what the long-term outlook is here for Ukraine, to your point on does the spring crop get planted? I don't know how to answer that other than, you know, when I think about some of the major cities and regions and you compare that to where you're at, you know, in the United States, if the 10 major cities in Illinois were invaded, I'm not sure outside of inputs and logistics that from the farm operation standpoint, you know, it would prevent continued production outside of where do you go with the exports, you know, even, even on-farm storage.

And I know that's different in different Ukrainian areas, but, you know, I guess I don't have a real good pulse on what that looks like from a rural versus urban perspective where the majority of the conflict is occurring, particularly in that eastern area of Ukraine. Well, you know, a lot of questions there.

Duane

Lowry: If you're the Ukrainian producer, Okay, and you're living there in that region, you've got the influence on you of being there, and it's not abstract thinking. There's some hard realities. Who's going to loan you the money to put the crop in? Is the financing going to be available? Secondly, the lender, are they going to say, yeah, we'll loan you the money, but then when harvest times come, if we're now part of Russia, are you even going to legitimately own that crop, or is that crop going to be taken away from you? You know, whose crop is it?

I think there's some— those kind of concerns that if this isn't resolved, it opens the door up for more likelihood that production and acreage will be reduced because of just sheer not thinking like that, the financing and who's going to finance it and who's going to Who's gonna be able to maintain that, no, you're actually still gonna own it when it's time to harvest it? So those are some, I think, some legitimate concerns that could threaten the production. So I don't know. It's very fluid. We don't know anything.

But from a standpoint of the marketplace, the marketplace, through panic, fear, emotion, and what-if thinking, has built in some of the more worst-case scenarios, and anything that is seen as softening or leveling out or reduction in bombing activity, more activity on the negotiating table, anything that makes this thing be seen as a temporary thing, ends up being negative to grain prices at this current level. Anything that is seen as long-lasting and, uh, totally in takeover of the entire country of Ukraine by Russia, that becomes something that's more bullish towards prices even at this level. So we're going to have to continue to monitor it. We're going to have to be forced to continue to try to discern and try to figure out what's going on.

And make educated guesses, but the marketplace is currently factoring in some of the more worst-case scenarios, and even the worst-case scenario, taking away a large portion of Ukraine's production, the numbers that I threw out early, but versus what they produce versus carryout available in the world, it may not be a an unworkable situation if that were to be the case. And I think it's important to realize again the emphasis and the focus of— and the influence that China may have on the— on how Russia comes to a settlement on this entire Ukraine situation. And it also has an implication, China, that they could end up using more wheat and less corn if that was the case, because they're going to get Russian wheat if they want it., and they'll probably get a discount.

You know, in the global arena, trying to get a home for Russian crude oil was difficult recently, but a home was found at, I think, a $25 to $30 discount versus the prevailing price on crude. So, you know, those supplies somehow, someway, will more than likely work into the global system somewhere. So there's just a lot of different things to think about. At the end of the day, the only thing the farmer should be thinking about is, is his own profit opportunities. And I think, like I mentioned before, most everybody would be concerned about what that profitability looks like in '23, and most everybody has got some tremendous opportunities for profitability in '22. I think there is merit in being more aggressive to capture those '22 profits because you might have to be bank on some of those for to get through the '23 season.

Shay: It's a great way to wrap up there, Duane. Always appreciate the discussion. Thank you for taking the time here as we look at a market outlook for March 7th, and hopefully in a couple weeks we'll maybe have a little bit more developments and, and link in with you at that time. Duane, again, appreciate it and thanks for joining us here today.

Duane

Lowry: All right, thank you, Shay.

Shay: And thank you everyone for listening to another episode of the Ag View Pitch, and we will catch you next time.