Weekly market outlook: Nov. 1-5th - market fundamentals to watch

Narrator: Thank you for listening to the Weekly Market Outlook. It is our pleasure to bring an industry-leading market analyst to provide you with the most value possible in your farm business. Please reach out anytime by emailing cbarron@agviewsolutions.com.

Joe

Vaclavik: There's absolutely no reason to screw up your 2021 marketing from this point forward. There's, there's no excuse for it. If for some reason corn goes from 5.5 back to 4.5,, or back to 4 or whatever. I'm not predicting that, but if that were to happen, I mean, there's no reason to not have a floor under it on what you haven't sold, um, even if it's an out-of-the-money option, just something. There's no reason to let this thing, uh, get away from you at this point.

Chris: Welcome everybody to another episode of the Ag View Pitch. We are heading into a new marketing week, a new month, November 1st through the 5th, and we have today with us Shay Foulk and Joe Vaklovic. Start out with you, Shea. Uh, it's good to have you on here to help me ask questions How's it going?

Shay: Yeah, things are good today. Uh, rain finally shut off here over the last 5 days in Illinois. Uh, we've had about 6 inches of rain in my area, so harvest progress has definitely ground to a halt, which is good getting caught up on some office stuff. But, uh, we got a lot of crop out there yet, so hopefully we get some drying weather here over the next 5 to 10 days and keep rolling on harvest.

Chris: Yeah, we'll touch on that too. Uh, Joe, how are you doing? What's cooking?

Joe

Vaclavik: Uh, doing good. We've got a Halloween party for the kids, uh, today, although we have some rain here, uh, down in my neighborhood. And as you said, we can keep the rain down here because, uh, it appears like, uh, row crop harvest in the Midwest has, uh, slowed down substantially with these recent rains.

Chris: Yeah, it's, um, I've gotten some phone calls, probably more so from the Illinois area, but it's hitting a pretty good chunk in Indiana and Iowa as well, just really kind of brought things to a screeching halt. Mostly a lot of soybeans out yet. Do you see that, Joe, doing anything to, you know, having any effect like on basis or anything in place that you've seen, or is that really not affecting anything too much other than maybe in specific areas?

Joe

Vaclavik: In regards to the markets, no, I think it's a non-factor. We're still ahead of schedule in terms of harvest activity. This is not some sort of like disastrous harvest delay or flood situation. It's not convenient, it's not ideal for people in those areas, but in regards to the markets, I, I think it's essentially a non-factor.

Chris: What are you seeing, Shay, just on harvest progress? You mentioned your area is pretty tough. Anything you're hearing from other clients and stuff too?

Shay: I would say overall, uh, Illinois is probably somewhere that 60 to 75% complete. A lot of guys, like you said, are looking at anywhere from 35 to 50% of the beans left, which as we roll into November here, uh, like Joe said, it's, it's not ideal. I think conditions are still fairly good overall. A lot of corn came out, uh, stock quality issues drove producers to go after that corn, uh, early. And it's been interesting to watch here too, you know, as we look at some, a little bit of an in-season rally on this corn market. Has a lot of people asking questions, and I think we'll dive into that here in a little bit, but Overall harvest progress, like Joe said, is well beyond average because of some of those factors, and we'll see how it plays out in the next 10 days.

Chris: Yeah, Joe, dive into that. Um, Shade just mentioned, you know, the corn rally. What's driving that? Where is this— where is this coming from?

Joe

Vaclavik: Um, I think there's multiple concerns. I mean, first off, demand is really good. We saw the second-best weekly ethanol production number on record last week, and I expect strong ethanol production to continue. Not only are the margins fantastic for the ethanol producer in the United States, but demand for ethanol itself is very good. Ethanol stocks remain very low seasonally. We haven't seen any big build in stocks despite the fact that we're grinding a lot more corn here the last few weeks. So that is a big time positive. I think the other issue aside from demand— we've got great ethanol demand, we've got a really good-looking book of export sales. Feed demand would be your one soft spot maybe. But then, in separate from all that is this 2022 acreage situation, which is garnering a lot more attention.

You're starting to see the fertilizer situation garner a lot more attention, and I'm sure you guys have discussed that at length already. But the implication for the market is, is that the 2022 acreage situation when it comes to corn in particular is an unknown, and there is fear that because of this fertilizer situation, not only the, the skyrocketing prices but simple lack of availability in some areas of the country, that all those factors may result in lower corn acreage, uh, which we can't really tolerate on the balance sheet to any significant extent. The way things are set up, we really can't afford to lose 3 or 4 million acres of corn next year, as some people have suggested. I don't know if that's going to be the case personally, but that's, that's the fear out there right now.

And I believe that that's been one of the driving factors, uh, also, uh, behind this rally in the corn market. And we had a contract, life of contract high close in December '22 corn futures, uh, on Friday.

Shay: You know, one question that I would have on that, Joe, uh, when you look at the fertility or the fertilizer impacts maybe driving some of that fear there. I'm not sure we've heard about any relief in sight when it comes to that. So I mean, are we looking at this uncertainty continuing well beyond harvest, or what factors might drive some of this volatility we continue to see?

Joe

Vaclavik: I think that the uncertainty, the uncertainty is generally supportive for the corn market. I don't know that, that they have the ability to take, say, these '22 corn futures down below like $5 anytime soon unless this situation changes drastically. I mean, those are questions that involve the supply chain, logistics, policy in China. I mean, there's so many different factors, natural gas prices, you know, all sorts of different things are contributing to this fertilizer situation. But I don't know that it changes drastically between now and February or March. I mean, I suppose that it could, but I— this is a dicey situation. This is going to be one of the more interesting acreage battles that we've ever seen.

You know, the way that the markets are set up, a lot of people will like year to year, they'll look at that corn to soybean ratio and the corn to soybean ratio favors corn planting by significantly in any other year. But 2022 is not any other year because of this fertilizer thing. So it's going to make it really, really interesting.

Chris: Yeah, and that, that's an individual by farm by farm thing too. I think I heard you mention it on one of your podcasts, Joe, just that, you know, just because that ratio is good doesn't mean that farmers are going to change their, their rotation either, does it?

Joe

Vaclavik: No, farmers don't look at the ratio, or at least I don't think they do. If I was a farmer, I wouldn't. I would look at, uh, I would look at my cost of production, I'd look at my budgets, I'd look at my availability in terms of fertilizer, by pricing. I did a survey of all my customers, 63% of them told me that there would be no change in their rotation when it came to corn and soybeans. 21% said more beans, 16% said more corn. So not everybody out there is, is like leaping away from corn acreage. I think that in any given year there's always this, I think people overemphasize the amount of acres that actually swing around. When in reality, like, 63% of people, according to my numbers, say that, hey, we don't change rotation, we just don't do it. It's not the way we're set up, it's not the way we operate.

And maybe this year is different, maybe it is because of this fertilizer situation, but that's, that's at least what my customer base told me, which indicates that we're not going to lose 3 or 4 million acres of corn. That's what I was told by my customers, that this is a moving target.

Chris: One of the pieces of the equation is that ratio though, and I want to come back to, you know, we talked about the rally in corn, but there, but soybeans not— are not keeping up with those movements. Any, you know, what, what things are holding soybeans back? What are some of the challenges there that are— that you see?

Joe

Vaclavik: Uh, the first thing I would point to would be exports, uh, the pace of both sales and shipments. Export sales for this current marketing year in soybeans are 35% below where they were a year ago. And granted, a year ago we had a record program with all the Chinese buying, all that stuff. But USDA tells us on their balance sheets that soybean exports in this current marketing year are only going to decline 7%, yet the sales are down 35%. So USDA, it's all but a guarantee at this point that they've got to go on their balance sheet and reduce that export number, which would result in a higher carryout number. So the, the situation in regard to soybeans on paper, supply and demand, is much looser than in reality than what USDA is projecting now. And a lot of that's being traded in the market already.

I think the market's already trading a carryout number well north of 400 million bushels, maybe closer to 450 depending on who you ask, of course. So a lot of that's been priced in, but that's, that's one of the reasons that the bean market has been so sluggish. The other thing is Brazil. I mean, Brazil harvested a record crop this year. They're probably going to harvest a record crop next year. If weather cooperates and they've had a big improvement in regard to moisture. They had some big time deficits going into the growing season. It's caught a lot of rain. So they're in really good shape. The other issue, which also ties back to exports, is that we essentially killed a month of shipments with Hurricane Ida when it went through and resulted in these power outages at these terminals at the Gulf and we slowed everything down for a month. So it, it resulted in this backlog.

And I don't know if you can ever catch up. Especially if Brazil's going to have a monster crop ready to go come, say, March.

Chris: Gotcha. Do you want to talk a little bit about some of the macro things too? You've talked about some of the challenges in, in the soybean side of things, and what are some of the macro issues as we move into, you know, into the winter and, and move towards spring that we need to be watching and paying attention to?

Joe

Vaclavik: Government policy. Government policy is a tremendous risk to all of our markets right now, and it's not something that garners enough attention in regard to agriculture and this community, I guess, if you want to call it that. So the stuff that I just mentioned, all your supply and demand items, that's the stuff from year to year that is typically going to drive prices. But you've got this big wildcard out there in in the Fed, in government policy, in interest rates, all of which— these policies are all kind of on the chopping block here. A lot could change between now and this time next year. The market fully expects that the Fed is going to begin to taper their asset purchases, which is not the biggest deal. The big deal is going to be if they hike interest rates, and if they hike interest rates in any real meaningful way.

An interest rate hike is bearish every asset on the planet, whether it's the stock market or gold or cattle or corn or anything like that. If the money is not free anymore, and I'm talking like a material hike in rates, I'm not talking going from 0 to half a point or something, but if you were to see any material hike in interest rates because they decide, "Hey, we have to tame this inflation in some way, shape, or form," it's a negative factor. And it could ultimately result in a deflationary environment. And it can happen very quickly. It's something that concerns me. And I don't mean to scare anybody, but the market's pricing in rate hikes late in 2022. And maybe this is something that doesn't impact us till 2023 or even years after that. But I think it's something you've got to pay attention to.

I think it's an added additional risk this year that just hadn't really been in the cards here the last several years.

Chris: I, I think there's a lot of people sitting there thinking that, you know, when they're considering '22 sales or marketing, quote unquote, the rest of— and I'll have you touch on this after, Shay, after Joe talks about this and see what you think. But, you know, it looks to me like there's a lot of people sitting on some old crop just thinking, well, inflation, you know, I sold some too soon. I'm, you know, inflation's coming in, this price has got to go higher yet, so I'm going to sit on this stuff. You know, how do you respond to that logic? Or, you know, what, what would your comments be to that, you know, and, and maybe being really super slow to sell any '22?

Joe

Vaclavik: Um, I think that to some extent you have to have some '22 booked, uh, just because you are laying out these phenomenal input costs and you're in the process of doing it. So what's the risk here? The risk is that you go pay an arm and a leg for your input costs and then for whatever reason the market falls apart. And I know I don't think that that's what's going to happen, but that's the risk. And as a risk manager, I suppose my job is to identify what's the risk. And that's the biggest risk that I see right now is that a guy goes out and pays these phenomenally high prices for fertilizer and other inputs, uh, in regards to corn in particular. And then for whatever reason, the market decides to lose a dollar. And now you're caught holding the bag on high input costs, you have nothing sold, we have no crop insurance price set, and you're just in a bad spot.

So that's a situation that I think you need to avoid. Now, do you need to go like hog wild and have half of your '22 crop sold? No, I don't think you need to do that. But I think that having some bushels sold, some extent to kind of offset what you're seeing in input costs. Is almost something that you have to do. It has nothing to do with my opinion of market direction or your opinion of market direction. It's just simple risk management.

Shay: I would add to that, you know, when I look at it from our farm operation, you know, having those base sales in place is good because it gives you a plan not only for your team and your farm operation but also talking to the lending institutions. It's no secret out there that these input costs are going to have a tremendous impact on not only cash flow, but also ask, you know, the ask to the lending institution on, hey, here's what we need to put in and take out a good crop for next year. And they're thinking about it, obviously, with everything going on. But they're also going to look closely at, okay, you know, we're willing to put this increase on your line of credit or your borrowing capabilities. But what's your plan? Do you have a plan in place? And so, been talking a lot with some different lending institutions on that and the impact that could have.

And the other thing, margin protection insurance that we talked about here over the last month, month and a half ago, whenever that was, I think some producers took advantage of that to help take a little bit more risk off the table when it comes to those decisions. But if there's people listening that are just sitting and waiting and maybe don't have a plan on 2022. I think that's where I would encourage you to, you know, take the time. If you do have rain delay, if you're sitting here in Illinois looking at water in your front yard, uh, take the time to make a plan. Don't just wing it. Uh, look at what these input costs are truly doing to your farm operation, uh, how that's going to affect your lending and borrowing capabilities.

And when you go and talk to your lending institution What plan do you have in place to show, uh, that yes, I'm going to make some cash sales for Dec '22 at $5.50 right now, but to what extent? And what do I do if the market does take a downturn? What's my backstop there?

Chris: What Shay just said makes me think of another question for you, Joe. Um, he talked about, yeah, selling that $5.50 corn. What about the soybeans? Like we said, that's that's been sluggish, but it feels like we probably need to be doing the same thing on soybeans, but we're all more, more concerned about corn. What's your thought on that?

Joe

Vaclavik: Um, similar deal. I, I typically, in my experience, um, I have had— this is just me— I've had an easier time, uh, figuring out how to market corn than I have soybeans. I typically sell beans when I sell corn. That being said, I would probably bump my forward soybean sales up to whatever level that I've bumped my forward corn sales. These are profitable levels. There's nothing wrong with taking some of that risk off the table. One other thing that I wanted to mention, Shay mentioned the Margin Protection Program, which is fantastic. There is another thing, and full disclosure, yes, I do brokerage business and I'm not trying to sell you options or anything, but CME several years ago started listing these short-dated new crop options. So they have a set of corn options that trade off Dec '22 corn futures, just as an example.

And they expire, this is the April set, they expire March 25th. You could buy like a $5.20 put option that goes off March 25th under Dec '22 futures. They settled at 11.25 cents on Friday. I mean, that's good protection through the crop insurance period, through the month of February. So if you're a guy who's maybe can't get margin protection or doesn't want to do it, and, uh, you're not comfortable making any more cash sales, something along those lines to carry you through the crop insurance period is not a terrible idea either.

Chris: Another quick question for you now that you made that comment. So what, what, you know, you talked a little bit about the vehicles. What about basis? Do you think a person is smart to, to leave that basis alone for now? Because it's quite a ways out there, and I know it depends in certain areas, but there's a lot of areas where we're pretty short on on corn and soybeans for that matter. Do you leave, you know, do you do HTAs or maybe some, you know, some futures or, or whatever the producer is comfortable with but leave the basis open, or what's your thought there?

Joe

Vaclavik: Very, very rarely are you going to get a good basis bid for the contract that's going to be delivered 12 months out. So I mean, if that's available to you, uh, I have no issue doing cash contract if you see a basis bid out there for '22 that you find favorable. But typically, typically, I mean, I prefer to separate futures and basis and do them separately. But if there's some crazy stuff going on in the basis world these days, so if somebody's out there offering you some really good bid historically in regard to basis for '22, by all means, take advantage. But most of the time, it's especially this far out, you're not going to get anything that you're going to be happy with in terms of basis. And, and, you know, wait for the seasonal stuff to play in. You know, usually basis is good during planting. Uh, you might get some sort of basis push on really strong demand.

And I'm talking that for '22, nearby basis is a different deal, of course, right?

Shay: Well, I'll hit on, I'll hit on nearby basis real quick, Chris, because you and I were talking about this last week. Um, you know, some areas are really good and some areas we're just not seeing The carry overall in the market, or the basis is— the basis is one thing, but the carry that we're seeing to roll it out, you know, roll these contracts out is pretty weak right now. So when we talk about the input costs and the short-term decisions that we have to make for the 2022 crop year, there's a lot to be said about the time value of that money, and especially if folks are lending or using lenders for their cash flow needs, the interest that you're incurring on the little bit of carry that you're able to pick up in the market there, in some cases, what I've been seeing with our clients looking at our numbers is it might not be worth it.

So, you know, if anybody needs to look at that time value interest carry cost, we have a real simple tool that allows you to put that in. You know, how many bushels do you have left out there to put a marketing strategy on? Or if you're thinking about rolling it, what, what are you actually going to capture by doing that? And what are the implications of continuing to roll that versus having cash in hand now to maybe take advantage of some of the, the cash discounts, the early season purchase ordering? And like Joe said too, you know, just making a decision on if you feel these input costs are going to continue to go up, what, what are you going to do about that? You know, are you going to make decisions based on your farm operation, especially if you're not willing to or not planning to make a change in your crop rotation?

So just another factor not necessarily related to basis, but I think those two things go hand in hand when you look at that carry in the market too.

Chris: For sure. Uh, Joe, any, any comments, anything, uh, we have not touched on that we should have or we should yet?

Joe

Vaclavik: Um, we touched on the macro stuff. I talked about interest rates. Uh, in regards to old crop— but not old crop, but 2021 bushels— it has been a popular strategy, and I know you guys have talked about it too, about just being, being done or close to done with 2021 bushels. Um, I have no issue with that. Um, I think that that's great, the profitability is phenomenal. At the same time, I have a lot of customers who are not interested in being sold out for whatever reason, whether it's fear of missing out, uh, whatever it is. And I personally, I don't think it's crazy to hold on to some of your 2021 bushels. I don't think it's a crazy idea if somebody calls me and says, hey, I want to hold on to X percentage of my 2021 crop and wait on higher prices.

Um, maybe you're getting greedy here because corn's, you know, north of $5.50 and the basis is good, but at the same time, you know, guys don't like when they miss stuff. And from, from where I sit, I see that probably more than anybody. It's like if I tell a guy to sell corn at $5.68 versus these futures and it ends up at $6.50, even though that $5.68 was a great sale, made a ton of money, You could have done better, right? So, um, it's not a crazy idea. I think that some sort of risk management though is necessary. Um, you know, options are not extremely expensive right now. You go out to March, you can buy, you know, 550 puts for 17, 18 cents.

So if you're a guy who wants to stay in the ballgame, you're not interested in, in, uh, what the market's selling right now, I— my personal recommendation would be, hey, that's okay, you're not crazy, but Just make sure you don't let this thing get away from you either.

Chris: Just make sure there's a floor there that so it doesn't fall completely.

Joe

Vaclavik: There has to be, there has to be, right? There's absolutely no reason to screw up your 2021 marketing from this point forward. There's, there's no excuse for it. Like, if for some reason corn goes from 5.5 back to 4.5, uh, or back to 4 or whatever— I'm not predicting that— but if that were to happen, I mean, there's no reason to not have a floor under it on what you haven't sold. Even if it's an out-of-the-money option, just something. There's no reason to let this thing get away from you at this point.

Shay: That should be the wake-up call, Joe. We're gonna clip that out and put that at the front of this message because I think that's very important.

Joe

Vaclavik: And if producers are not making decisions, they need to be thinking real hard about that. So that's great. Yeah, it almost mirror— you know, last year at this point, we were in the process of rallying and prices looked great. Guys made, and this isn't last year, but guys made early sales and then 3, 4 months later they were kicking themselves. So I'm not going to say that you're crazy by any means by putting grain in the bin to some extent and waiting to see if corn goes to $7. But at the same time, you've got to hedge your bets. It's not expensive to do it. There is no reason to let, you know, $5 or $5.25 corn get away from you at this point, given what's, given what's available. Given what the market's doing, given what you can do on the risk management side simply by just like, you know, owning an option and just sitting on it for 4 or 5 months.

Shay: That's great.

Chris: Yep, all good stuff. Shay, anything to wrap up from your end?

Shay: No, I just say everybody out there listening, you know, there's a lot going on trying to get harvest wrapped up, thinking about the markets, uh, you know, just stay safe as everybody gets, uh gets things tied up here. And despite this, I think Joe said it a couple times, Chris, you and I have talked about it a lot, we're still looking at profit, right? There's still, there's still really good profit potential out there for next year. So don't, don't get caught up in the emotional aspects of it. Run your numbers, have a plan in place, and truly be thinking about how not only these 2022 input prices are going to affect your farm operation What marketing strategy should you have in place?

We're looking at another profitable year here, and that, that should give you hope and optimism, uh, even, even after, you know, maybe some tough harvest conditions or it dragging out a little bit longer.

Joe

Vaclavik: So that's all I have.

Chris: Joe, last word.

Joe

Vaclavik: Uh, in regard to safety, yes, be safe. I don't farm, but I fish, and my dad tells me every time he comes with me that I drive my boat too fast. My bass boat goes like 80 miles an hour, and he's like, you know, don't rush, you're gonna kill yourself. So yes, safety first always, and I always try to keep that in mind.

Chris: Yeah, I would echo that too, Joe. We need you around. We're gonna have you at the Executive Business Conference. We need you to stay healthy, so pay attention to what your dad says.

Joe

Vaclavik: Absolutely.

Chris: All right, dad's wisdom is always something to listen to for sure. So So hey everybody, we really appreciate you listening. Again, pay attention to Executive Business Conference January 27th and 28th. We will have the program live on our website. Take a look at our website, you can get registered there, and we'll have more on that on Monday too. So look forward to talking to everyone at that. Look forward to having you guys get things wrapped up. Stay safe, and we will talk to you again next Next time on the Agnew Pitch.