Weekly market outlook, May 23rd to 27th: how will economic turmoil drive the markets?

Narrator: Thank you for listening to the Weekly Market Outlook.

Chris: It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business.

Narrator: Please reach out anytime by emailing cbarron@agviewsolutions.com. Welcome everybody to another episode of the Ag View Pitch. We are heading into another week in the month of May. And we are lucky enough to have Mark Welch, Texas A&M Grain Marketing Specialist and TPAP Director. Mark, how's it going?

Chris: Chris, uh, things are going well down in our part of the world. Always good to be with you.

Narrator: It's great to have you. Um, you know, you being in Texas probably have a little bit different world than we do. What's the crop condition look like in your world?

Chris: You know, it really boils down, Chris, to which side of Interstate 35 you farm on. You know, that basically runs down from the Mexico border and heads up through San Antonio, up through Austin, the Dallas area, obviously up across Wichita, Kansas, Kansas City, and northward. You know, on the west side of that line, it is dry. It, you know, just severe drought conditions. Now, there is some rainfall in the forecast this weekend for a chance of perhaps some cool weather to move across and bring some rainfall with us. It's probably gonna be too late for a lot of the wheat, obviously, uh, but still maybe, uh, you know, give a little boost to some pastures and some spring crops that we still have time to plant. I-35 East, uh, you know, we've got some really good-looking crops, so we need some rain.

Uh, there's some corn that's starting to curl a little bit, but, uh, you know, we're just right around the kernel— a corner, excuse me— from having corn starting to tassel. Down this part of the world, we'll have, you know, grain sorghum heading out So with the heat that we've had, it's pushing the crop. And even before we've had some moisture, we could use some rain. But again, it's just kind of which side of that line you're on. And obviously with these prices, it's discouraging to see tough conditions and good prices. But, you know, many times those things do go together for us.

Narrator: Yeah, for sure. And it's interesting you say I-35. I think we could echo that in the north too. Although, you know, they— it is, you know, you do go on the other side, on the west side of I-35 in the north, and it's not terrible, but it does get intensively drier as you continue to go further west. So we're kind of echoing or rhyming what you're saying there. With that said, you know, one other quick thing before we get into the hard part of the markets here, but, you know, planting is coming along pretty good in most areas, and there's a lot of what we call catch-up Without the mustard, I guess. But there's a lot of people, you know, getting stuff in. There's still a few pockets.

But the other thing though, and we talked offline a little bit, and I'm starting to hear rumblings pretty heavily in certain pockets now as well on, got planted the first time, now we're planting the second time. I think what happened was we had some pretty significant forecast calling for rain. And, you know, and like I said, never throw rocks in a glass house. I mean, we, we all got to make decisions, and I think the— everybody is looking at the calendar and thinking, wow, we got to get going. And, and then it went from cold and wet to 90 degrees and quit raining, even though they had rain in the forecast. There's a bunch of areas that didn't get any rain, so now we're seeing a bunch of replants. So, um, are you hearing anything on that as well, or what's your—

Chris: what do you Yeah, down in our part of the world, not so much. We've had some delayed planting, just waiting for better conditions. And now we're seeing as we're pushing towards some planting deadlines, yeah, we're hearing of some crop that's being what we call dusted in. Even though we don't have moisture there to germinate the seed, if you're going to get it in, and again, with rain in the forecast, perhaps this thing might still work out. So jumping the gun just a little bit. We do have the advantage down this way that if we do either can't get a crop in at regular time or say you have a hail or a storm and have to replant, that many parts of the state where we grow cotton, really the optimal planting window is still a little bit ahead of us. Late May, mid-June is not too late to plant cotton in a good part of the state of Texas. Grain sorghum is a great fit.

For a lot of the state. We've got something to get some late spring moisture. You know, we can plant grain sorghum, you know, well into June in many areas and do just fine. There's even some varieties that'll work, you know, plant the Fourth of July and still have time to make a sorghum crop. So, you know, certainly this is a year that with the extreme conditions that we've had, if we were to see, you know, a shift to something more favorable, there may yet be some opportunity on the production side., you know, to jump in and do something to take advantage of these good prices.

Narrator: Yeah, you guys have a lot wider window than, than we do, and there you go, that helps for sure. Um, so speaking of planting still yet, let's go, um, a little ways away and talk about Ukraine for a minute. It sounds like, for at least from what I'm hearing, um, the crops getting put in even though there's a lot going on there war-wise. Are you hearing anything different there?

Chris: That's exactly right, and the same kind of information. As the fighting has shifted from the northern part of the country, the capital, and over to the eastern and southern provinces, what that really did in terms of agricultural production, it shifted from the spring growing areas in the north, primarily corn, and now affecting perhaps more of the wheat production areas as you get down along the east and the south. Certainly, you hate to see that wheat crop out there just to be right around the corner from being harvested And obviously access to those fields and the equipment and the labor and all the things you'll need to go get that crop are going to be extremely limited under the current circumstances. But it may be opening more opportunity to produce some crops, again the spring-planted crops. Yeah.

And of course that's if you get them planted, then you still gotta, you know, do something with them, right? If they have the infrastructure and the transportation logistics to to store the crop, to move the crop? Will they be able to export the crop, even if that is their intent, if they can't access the Black Sea? And it does seem that that is kind of the movement that the effort is taking now, is to, you know, seal off Ukraine's access to those southern ports. Now, shipping basically has been shut down, you know, since the war started. But certainly to more galvanize Russia's control over that Black Sea region, that area down there.

I think that would be the long-term significant economic consequences and perhaps the leverage for any negotiations or ceasefire settlement that might come, because whoever controls the Black Sea really controls Ukraine's access to the global economy to a large degree.

Narrator: Do you think any of that is— I mean, obviously that's probably still impacting the market, is it, um, very much? Or what, any, any thoughts there? Is that going to be a continuing thing that, I mean, if that drives the market?

Chris: Yeah, and obviously it's going to take, you know, weeks and weeks and months and months for this all to unfold and to figure it all out. But it was interesting in the May WASDE You know, USDA puts out their first official projections for the new marketing year. And if you add up all the world trade for wheat exports in the new marketing year are actually a little bit higher than they were for last year.

Narrator: Hmm.

Chris: A couple of things going on there. Obviously, you know, Ukraine severely limited, right, in the market activity in the new crop year. But if Russia wants to ship grain and they can find some way to get paid, their exports are actually expected to be higher. If Canada makes a crop, uh, just with normal production, uh, yield-wise, just back up to a trendline yield, not a bumper crop, uh, exports from Canada are expected to virtually make up for all of the exports we lose from Ukraine. So again, with wheat as opposed to corn, we have so many players in that export that participate in the export market of wheat. You know, it takes 6 or 7 or 8 countries to account for, you know, 70 to 80% of exports in wheat, whereas in corn, you know, it takes 3. So we just— we can, we can make up the difference. Now, there's a lot of talk about India, you know, are they going to ban their exports?

What— you saw the headline, everybody saw that. But what does that really mean in terms of trade flows of wheat coming out of India? How bad is their crop hurt by the heat that they suffered, you know, right as it's maturing and right here at harvest. So again, it's going to take time to sort all that out.

Narrator: You can sure see what it does to the market when, when it's announced.

Chris: Holy cow. Well, doesn't it though? You got to throw a headline like that, uh, you know, on a, on the weekend, right? And see how that market then opened on Sunday night, uh, and then look how we've traded then through the week.— you know, given it all back, you know, as the trade has unfolded as we've gone through the week. And again, you know, trying to sort out what this really means. And I think that's a great microcosm of what's happened this week in wheat. We're probably doing all summer long for large markets.

Narrator: Yeah. So we've talked a lot here about just, you know, the production side of it, getting things in, getting things moved around, all that kind of stuff. On the demand side, You know, one of the questions I have for you is, I'm curious that, you know, every other time we've ever had, you know, extremely high prices, what are they followed by? You know, things go the other way. And usually one of the things that kind of starts that is what you would either call like demand reduction, demand destruction. You know, I can even throw in there, you know, the food versus fuel thing. The consumers go to the grocery store and and are feeling the brunt of it right now. And, you know, so food versus fuel, ethanol, all that kind of stuff. Just, you know, what's your perspective? What— talk a little bit about the demand side of the picture here for a minute.

Chris: You bet. And, uh, you know, again, uh, I think you, you raise a great point. And the chart that I like to, uh, to kind of overlay, uh, and, and that demonstrates that to me is what we do in short crops when it turns— comes to the demand side is I chart out, per capita consumption. You know, the overall consumption, because there's more of us, we're growing world population, you know, that, that particular measure is maybe not quite as sensitive. But if you, if you map out how much we consume per person globally, uh, the reaction looks a little more dramatic, uh, on the consumption side in short crop years. And this year is shaping up to be, given what's happening in Ukraine and Russia, and I don't know what else the weather is going to do to us this year, but certainly would fit that definition of a short crop year.

And we do see a significant decrease in global per capita grain consumption. And I use grains, oilseeds, you know, it's all of them. So there is a market response. Is it destruction? You know, probably not, because typically what we have after a short crop year is we make a crop the next year. You know, it's rare that we will have, you know, two short crops in a row. And, uh, and that trendline growth of world per capita grain consumption has been on a strong upward trend since the early 2000s. Another factor, however, that will temper that growth is global GDP, particularly growth in the economies of emerging developing category. And so many of those countries in Asia would fit that category. You throw in Brazil, you throw in Russia, would fit in that group.

And as those economies have expanded and per capita incomes have increased, that has driven a global increase in consumption per capita for grains. However, when we see times of an economic downturn, recession, or in significant areas of that category of countries, of emerging and developed economies, we see a slowdown in that per capita consumption of grain. So what do we have this year? We've probably got both. Yeah, we've got a short crop year and we've got certainly an economic slowdown if we don't turn this into a recession. Mm-hmm. So I think we will see a combined impact on our grain markets. Now, it doesn't mean you stop eating grain, obviously. As a, you know, a basic food product. There's still going to be, you know, some foundational consumption.

But on the margins, for their substitutions available, whether it's feed or whether it's fuel, yeah, there's going to be a market response. There's going to be a pushback, these high prices, where consumers or producers, whoever buy those products, are able to do that. And so yes, I would expect that to play out as we go through this marketing year.

Narrator: Well, and, and, you know, you think of the ethanol, look at the gas side, look at the diesel, some of the, um, some of the buzz on, you know, $6 gas and, you know, energy prices, and you look at what oil's doing. Um, any thoughts there? I mean, does that continue to make the commodities strong though? Because on the other hand, and I'll throw this all at you at once, yeah, but on the other hand, you've got the stock market And, you know, I know Joe Vaclovic had done on one of his subscriber-only videos, so I'll throw that out there, give him a plug, but had talked about, you know, when the stock market gets beyond that 20% lower, it starts to get pretty risky for the commodities.

So talk a little bit about that yin and yang between the stock market pressure and, you know, in a potential recession and, you know, the, the demand and where energy is at, you know, because that, that's a little bit inelastic, isn't it? I mean, you— we got to have diesel fuel. I mean, we're going to move stuff around and we gotta—

Chris: I know, sure. And it's kind of— yeah, I think that maybe relates a little bit to even, you know, for instance, you know, food grain consumption. Uh, yeah, we're gonna eat, uh, we're gonna, we're gonna drive our cars and our trucks around, but yet That doesn't mean we won't see some reductions where those are possible, or some more efficiencies we try to build in where those are possible. And yeah, with $4 or $5, and I guess in California $6 a gallon gasoline, would we expect that to have an impact on consumer driving habits? You bet. Yeah.

Now, can't cut out everything, obviously, but with the summer driving season, you know, kind of just ahead of us, will that start to impact consumer choices in regard to everything so much more expensive, you know, family travel and excursions that they might do otherwise with school letting out, you know, will that have a— will that look different, you know, in this current environment? And so again, with, you know, corn and ethanol, you know, ethanol consumption tied directly to that gasoline demand. Again, I think that if we look at what's happening on that on those miles driven category that you'd expect there to be some pushback, you know, given this level of prices.

On the other side, on the production side, you know, obviously it takes, you know, just like it takes a while to, you know, to get a new wheat crop, you know, in the ground and going to respond to these higher prices, it takes a little while to, you know, pick a hole in the ground and get oil production rolling again, especially with the labor and issues that they've got, you know, in the oil patch. There are a lot of constraints there. We can't just open the valves and have more oil and gas flowing just overnight. But at $100, $110 a barrel, does it make sense to try to increase production to take advantage of that? You bet. And so again, over time, I think we will see our markets try to adjust. But again, I think on the margins where consumers and producers both, you know, can start to make adjustments in these, uh, economic conditions, uh, supply and demand. You bet.

I expect that we'll start to see that, uh, more and more as each day goes by.

Narrator: Yeah, interesting. So what— how do you think the funds— what, what are they thinking? Good question, right? Um, you know, what, what do they— do they do? I mean, if, if we do see the stock market continue under pressure, do you think I mean, they probably step away from the commodities to an extent, don't they? Or do you think the oil and all this other stuff is going to be the stronger driver?

Chris: Yeah, I think one key to that in my mind— and I'm not some, you know, great, you know, stock market guru or anything like that— but just kind of watching the— how these, you know, funds and markets kind of, you know, either work as substitutes or complements, you know, to one another. Is certainly we've seen a flow of money to commodities in this inflationary environment. Right. And that's kind of, you know, Investing 101. Yeah. That, you know, commodity investment can be an offset or counterbalance to what's going on in the stock market. And so if we're seeing, you know, you know, that one struggling, the stock market struggling, money flowing into commodities. To me, what would stem the flow of money to commodities is a significant downturn in the global economy. Now that raises kind of a whole nother issue. Uh, yeah, prices being higher.

Now what's that doing to, to growth and to demand of basic commodities? One market that I've been watching very carefully over the last couple of months, it's kind of unfolding with, with energy prices going higher, grain prices going higher, is copper. Copper has been on a downward trend over the last several months. And of course, when you think about copper, not as a precious metal investment, but watch copper because of its industrial component and industrial uses. And so to me, it's more of a barometer of global economic activity. Uh, if we're seeing a lower demand, uh, or lower prices, you know, for copper then perhaps there's another slowdown that that might be reflected. And if you look back over the last several weeks, you know, the price of copper has been coming down as, you know, energy's gone up, grains have gone up, but, but not the copper market.

So I think that would be the, the point at which, uh, the, the bloom on this commodity rose might start to come off a little bit, uh, if we were to see some real evidence or measures that we're headed for a recession in the US or globally, then to me that kind of changes the dynamics of this commodity market.

Narrator: Interesting. So, you know, we've talked about the planting and the production side. We've talked about the demand side. I guess the last segment I'd like to hit on for a minute here is at the farm decision level.

Chris: Okay. Yeah.

Narrator: It gets a little bit easier once your crop's in and you see it up, I guess. You know, it's hard to make sales to a certain degree. You know, we all, I think, like to— we're all visual farmers, right? We like to see the crop. We like to know we're going to actually have something. And so for those, and so for, for those who do have, you know, a crop coming on and things are looking good, you know, what makes you comfortable on them? We'll start with '22. I'm gonna go to '23 in a minute, but you know, what makes you comfortable, Mark the farmer, and if you've got a crop, you know, you're planted, things are looking decent, and, you know, we've just talked about all these external things and we're sitting here looking at, you know, from our client base, a pretty darn good return based on where the expenses were and, you know, probably opportunity here yet for a while, maybe.

What are your thoughts?

Chris: You bet. And, and, and obviously this, this was so much uncertainty and volatility in this market. This thing could still, you know, blow up and who goes, you know, which way on these markets, right? But it's interesting to note, if you just look at kind of, you know, the seasonal patterns and tendencies, when you look at the December corn contract, we're kind of following something that looks You know, it kind of looks normal. It's, it's magnified in this current price environment. But is this thing kind of starting to maybe look a little choppy as we get into, you know, late May and early June? And if let's say we do plant an extra million acres of corn and instead of USDA's 177 bushels per acre, we get back up to that 180, 181.

And if we still see some, you know, struggling to get some use numbers up like for ethanol or for feed with, you know, some certainly some headwinds in the livestock industry, right, on some of those use categories. Yeah, you know, I would expect a, you know, huge collapse in this market, but again, kind of a seasonal kind of pattern developing. It kind of makes sense to me right now that I'd have trouble arguing why that would not be a likelihood, even though, of course, obviously there's so much uncertainty from South America to Ukraine to turn that thing upside down. But given that, and that we're protecting profitable margins, you bet, you know, looking at some tools, whether you're locking it in outright, some kind of price floor, you know, have those tools that Yeah, options are expensive. I know, I get that. But there are some things we can do to kind of cheapen those up too.

If they're just out, out, you know, can't just buy them at the money, but could you at least get some kind of an insured price floor against your cost of production, which is likely not buying a, you know, a $7.50 corn put, but it might be buying something a little cheaper than that just to get again that the security that would come from that of eliminating some of that downside price risk. If we look at the— where this corn contract has traded, yeah, we've been up over $8 on December corn before, you know, and we're certainly, you know, tap that up here again this year. We've never closed the December contract up near $8. You know, every year that it's run up to there, by the time that contract expired, it settled back down from that considerably.

And so I think it's just, you know, worth putting this current marketing move in perspective, that, uh, yeah, just because we're trading there here in, uh, the middle of May doesn't mean that's where we're going to end by any means. In fact, most years we don't, and we never have, you know, closed up at these kind of levels. So again, just kind of put perspective on, on what these opportunities really do look like. What— and I should not let these get away.

Narrator: Yeah, what are your thoughts on soybeans then? Because, you know, if we do plant that extra million acres to corn, do we bring that corn or that soybean price back up to where it needs to be relative to corn, because that's what's causing a lot of— that's part of the cause of the shift, not all of it, but it's part of it. Because we've, we've got a lot of operations— we ran a lot of numbers for a period of time there right in front of planting where we had, we had a number of operations shift. And I can't imagine that— I mean, that's a cross-section, our, our clients— but I can imagine there was a lot of other people probably doing or thinking the same thing.

Chris: Right. And there again, so then how would that, you know, play over into some of the other markets? Right. Would that mean we could see a little more of a rebound in some of those? You know, and soybeans are one that I don't follow as closely since we're in Texas. It's not a significant producer of soybeans at all. But I think even in terms of global numbers, I think we'd have to keep all that in context as well, particularly, gosh, you know, talk about uncertainty and disruptions gosh, in oilseeds from, from, you know, palm oil to sunflower seeds, you know, that, that whole world has just been turned upside down from one, again, headline, you know, to the next, uh, you know, how that will play out. Uh, so how much of what's built into the soybean market today is not a concern of just basic oilseed supply?

Uh, and, and so then how might an acreage adjustment, you know, fit into that as well as you go through your normal seasonal patterns again? Getting a crop planted and conditions looking pretty good, uh, does that again take some of that, you know, risk premium that maybe is built into that market? And so I'm not saying soybeans won't go up, but it might moderate to some degree even if we shift a million acres, right? Uh, that it might not necessarily mean we're going to blow the top off beans because how much price risk premium is already built into there now anyway. So again, I just think it'd have to all be You know, again, try to see how the troubled waters settle. Yeah, right. Because we're still at pretty good levels, right, uh, you know, where we are right now, even on the yet that November contract.

Narrator: Final question, uh, 2023, um, I can show you guys that have zero sold, and I can— and I know of a few that are at about 15%, and I don't know of anybody unless, you know, text me or email me if you're a client and you're above that or whatever, protected or whatever. But I don't— I haven't seen any anyway that are much above that 15%.

Chris: Yeah.

Narrator: Um, what do you tell somebody that has zero done for '23? Is that smart, or is it something maybe you should, you know, put your toe in the water a little bit? Just your, your thought. I know every operation is different, so I'll say that on the front end.

Chris: But yes, generally speaking, resources and best premiums. Yes. Oh yeah. Attitudes around risk. You know, every, everyone's different, but to look out on those horizons. And again, I'm, I'm kind of a fundamental seasonals kind of guy, and so when I see that, uh, contract kind of peaks out generally in this, um, you know, on the early part to mid part of June is typically when you see the peak of the December corn contract. Well, is that a time to get a little something done on the next year's crop as well, particularly in a year like this? Where we're at such historically high levels. And so, yes, to look out at that and, and 10, 20%, would I do much more than that? Probably not.

But, but to get a little something locked in, considering that, gosh, that December contract for '23 trading up around $6.30, $6.40 a bushel, if you sold 10 to 20% of that '23 crop, at $6.40 a bushel, and that was the worst sale that you made, everything else you sold was better than that, things are probably gonna work out okay for '23 price-wise.

Narrator: You think?

Chris: You know, if that was the worst thing you did was getting this bit locked in early, I think a lot more things would have to mess up your deal to make that a bad decision, right? You know, at those levels. Wheat, looking exactly the same situation in wheat. Horrible production prospects here for much of Texas right now. But what about that '23 contract? And again, we're going to have crop insurance. We don't know what the weather is going to be, but to get 10, 20, 30% locked in next year, even though the prospects are terrible now, we've got some great pricing opportunities to look at at '23 that this current situation is providing for us to start getting, I think, a little something done and just level out. Some of the price risk that we face. Now, we're going to take out some valleys, probably take out some hills too, but hopefully raise the averages.

And certainly there's no question that looking back over even a relatively short period of time, these prices are really, really good. Your production costs are high. I get that. I'm saying your margins are going to be great, but the market doesn't care what your margins are. And we need to get these prices And just again, not let these completely get away.

Narrator: Yeah. And a lot of, well, not a lot, we have operations though that have their land locked in, you know, they're not as heavy cash rent, or if they are, they've got it locked in and they know their equipment costs really well and stuff. I mean, you're talking 40% of your total cost of production is locked in. So selling a percentage of that, of a quote unquote known input, cost. A lot of times, more often than not, you know, there's always that 2 or 3 years out of the 10 that, that, you know, you're better off not to do anything or know anything. But, um, you know, 75% of the time, being proactive and being a margin manager really pays big dividends over time, at least from, from my observation anyway.

Chris: Exactly. And especially, yeah, those situations where you, you do have a firmer handle on a lot of that, again, you know, price risk on the input side that others do face. And yeah, do you lock in too much not knowing what those costs are going to be for that '23 crop? That makes it really tough, right? But again, these prices are really, really good. Yeah. And, and so regardless of what your costs do, these prices are still likely to be really, really good opportunity, uh, nothing else based just on our historical patterns. Yeah. And so I just don't want to ignore that.

Narrator: There's definitely two sides to every coin, right?

Chris: Well, there you go. Maybe 3.

Narrator: Yeah, true.

Chris: Or 10 this year, last couple years.

Narrator: So hey, this has, uh, been a great conversation, Mark. Um, I really appreciate your time, and I know listeners do. We get a lot of good feedback when we have you on, and look forward to having you back again real soon.

Chris: Well, I always appreciate the, uh, the, the conversation and, and the context I get from you. Chris, of, uh, been up there in the heart that the world that drives so many of these prizes. Uh, appreciate you checking in and, and look forward to getting to this again.

Narrator: You bet, we will be in touch for sure. And again, thanks everybody for, uh, listening as well, and we will catch you again next time on the Ag View Pitch.