Managing opportunities: weekly market outlook, Nov. 14-18th

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

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch. We are heading into another marketing week and we are lucky enough to have with us Mark Welch from Texas A&M. How is it going, Mark?

Mark

Welch: Good to be with you, Chris. Uh, we got some showers moving across the state of Texas again. So, uh, from, from the summer that we've had, uh, even though it's late, uh, it's sure nice to see a little moisture. So, uh, things are looking much better every time we get one of these come across.

Chris

Barron: Yeah, you guys have been super dry along with some other parts of the country and stuff. And as we head into this, uh, middle part of November, I guess I would say that 14th through the 18th or so, this week. What do you, what do you think is, if I'm a farmer, and I'm going to start out with this question on kind of the micro side of things, but what do you think as a farmer, if you get done harvesting, and I know not everybody's done here that's listening, but you get wrapped up and you've got those unsold bushels sitting there, and we've been in this kind of range for a long time here, this kind of pretty tight range of trade. What are you doing with those extra bushels that are unsold? Let's say you got 30 or 35% of the bushels not priced yet. What's your thought?

Mark

Welch: You know, and that's such a good question. And as we look at these pricing opportunities and perhaps what some prices are telling us, obviously there's, you know, two prices to look at. You look at what's happening on the board and then what's happening on the basis. If you look at the futures market, first of all, you know, one thing that this has been a wild and crazy year with the roller coaster that we've been on and these really, really high prices that we saw earlier this summer. But I think it's also interesting to look at, as you're looking ahead, maybe looking at that March contract, at the May, you know, how does that contract trading relative to the nearby and have a lot of carry built into that, or is that price in the nearby contract relatively strong relative to the distant months? In other words, there's not much carry in the market.

And so I think that kind of perhaps gives us some indication of where we may be headed down the road if we were to see these future markets. Is that telling us that there's a strong demand for those contracts, those bushels right now,, you know, relative to what more of a delayed response might be? How's your basis looking? Uh, if your basis at harvest, are you looking at a much better than the normal basis than you would normally see? Has this, uh, you know, the impact of what we're seeing at the, uh, export market and the difficulty, you know, getting, getting grain down to the Gulf, is that backing up on you? Is that likely to show some improvement as we get to the winter and back to more of a normal kind of basis? I think those are all the kind of questions we have to ask and how that all comes together.

If we look, you know, further down the road, and one report that I thought was really interesting that came out this week, this past week, that it's not an official estimate or an official projection, but USDA came out with their long-term numbers for grain production, you know, a 10-year look across down the horizon of what they expect across our grain markets and livestock markets. And I think those are always very interesting. If you look at the numbers they put together for corn and a significant increase in the size of the corn crop for 2023, raising our, our carryover, our ending stocks, you know, for that next marketing year, uh, with an increase in acres, an increase in yield, and just kind of, you know, pick that thing apart and how likely or probable or does that kind of seem reasonable kind of numbers they put together..

And, you know, without a, you know, a big bunch of changes, uh, it's interesting to see that ending stocks number starting to creep up and then kind of a sobering outlook of where prices might, uh, might go over as we finish this marketing year up and looking into the next. So again, I think it's a combination of factors. That price even you're setting and looking at today, you know, does it work? Is that a good price? How much risk are you willing to take If you're going to turn down a bit of a profit that does work for you, given your production level that now is pretty well known, your cost that went into this one, and then not too early to start looking at what are we going to do with the next one as well as make some decisions for right now.

Chris

Barron: Well, that's just it, you know, throwing that question at you is, you know, okay, there's extra bushels that are not yet priced. And then, you know, when you sit there and you look at that and you say, okay, you know, what's my goal? A lot of the people listening to this are going to have a record year. Even, even in some cases where they, they had a really poor crop, crop insurance is saving the day in some. And I know there are some that, that, you know, were right in that, that bad spot where you had just enough yield, the crop insurance didn't quite fix you. And, and so there's some of that, but yet if you look at where the, the price is at, for, for most everybody listening here, it's going to be a record revenue year. And so the question, you know, that I guess I keep coming back to is, okay, how much is enough? Or, you know, what do we need?

You know, is it $7 is your number? Is it $6.50 is your number? Is it $8 that you're— I mean, what's your number? And I think, you know, just getting that target in play is a big deal. And I like what you said, you know, separating the price from basis. If we happen to see some price strength, the basis may not be quite as strong. But if, if we continue to stay on the lower end of this trading range, from what we're hearing, we're hearing— and I was going to ask you this, and if you're hearing the same thing— but I'm hearing some basis improvements starting to really take off in some areas where harvest is pretty well done, the bin doors are shut. Now that basis is starting to take off, which then in turn creates some pretty good pricing opportunities as well, wouldn't it?

Mark

Welch: You know, you raise a really good point that, yeah, as strong as most of the areas that we deal with down, down in this part of the world, you know, our basis has stayed so strong right through the teeth of harvest. Yeah, we backed up a little, but we didn't back up much. And even in areas that, you know, typically we don't see a lot of, you know, range in the basis from, from fall, even in the spring. We're still at really, really lofty levels of that basis. And so that may bode well for basis strength, as you're saying, now that we've kind of gotten, you know, put the combines back in the barn. Now, what are those basis levels likely to do, you know, moving forward? That if it held up as strong as it did, even with the, you know, again, right at the time of year that you expect to push to its weakest levels, it didn't budge much.

And that may be, again, another factor that plays into that decision-making process, you know, if it is strong. And then the conversation you have to have with your grain elevator, you know, your manager and merchandisers, those people that handle your grain, you know, what are they seeing? What are their needs? How can we add value to what they're doing? And if that gives us some ability maybe to lock in a a good basis through the winter or into next spring or see some opportunities there to enhance that relationship a little bit, it might be a way to get that extra nickel or dime or 20 cents that otherwise we might let slip away.

Chris

Barron: Yeah, that's like you said, you know, there's— you talked about carry too. It's not like there's very much carry there, so you kind of sit there and you scratch your head and say, okay, what am I waiting for here then? I'm just hoping that the price goes up because the carry, the carry isn't going to hardly pay for the interest cost. I mean, unless somebody's just sitting there on lots and lots of money. But, you know, at a certain point, you know, we have to start paying for, you know, inputs. You're going to have cash rents and other things and cash flow needs that, um, you know, it's just something that I think we got to be really cognizant of. In that arena.

Mark

Welch: So, well, I think that is so true. And again, and manage that decision. Look at all the pieces and how they come together, you know. And the last, you know, year, last 2 years, when it comes to, you know, pricing on the output side, the input side, our crop insurance choices, our crop mix, you know, we just haven't been in that, well, let's just do what we always do, it kind of seems to work out. You know, we're not in that world.

Chris

Barron: No, management-wise, not anymore. It seems like it just takes one headline and all of a sudden everything moves one way or the other.

Mark

Welch: You know, right, and we can be in a wreck or off to the races, you know, either way.

Chris

Barron: So speaking of that, speaking of headlines, breaking news, and all that kind of stuff that seems to frustratingly move things here, uh, talk a little bit about what you're seeing with any macro things to watch, whether it's, you know, Ukraine or Russia or South America or, you know, these things we can't control but that we need to pay attention to. Is there, is there anything out there that that sticks out that, you know, like, hey, we better be watching, you know, these couple of things.

Mark

Welch: Yeah, and I think those elements are so important to keep in mind. If you look at the relationship between economic growth globally, particularly in those parts of the world in which we send a lot of grain, our exports to those regions is very sensitive to economic growth, to projections of average income growth, which is another economic measure in our trading partners. And so when they have a slowdown, that can certainly impact the movement of grain and grain use numbers globally. And so these things do matter and they matter a lot. And of course, you know, into that mix of the geopolitical turmoil out of that Black Sea region and what that's done to us, crop prospects, I think, from what I'm picking up, are looking pretty good for the, you know, starting the spring year down in the southern hemisphere. And then, of course, you throw in China.

If their economy can, you know, pull out of their COVID lockdowns, restrictions, and the hampering that that has done, that's certainly given some, you know, some prospect for maybe some resurgence of grain demand, you know, over in that part of the world. So it all plays together, I think, so intricately.. And then, of course, the U.S. economy. Are we going into recession? We see some, you know, some maybe some better numbers that maybe it's a soft landing that the Fed's going to guide us through. You know, we can only hope. But the economic outlook does, does matter, and it matters a lot for our grain consumption patterns. And one thing that I'm particularly concerned about is that, again, kind of back to USDA's long-term projection, if you haven't looked at them, again, that's kind of a sobering picture.

Typically what happens is in agriculture, after a short crop year or things slow down economically or for whatever reason, uh, in terms of our consumption patterns, typically we rebound faster on the production side than the demand side kicks back in. Uh, and so that's kind of what the, the broader economic outlook I'm looking ahead for 2023. If we do get more corn acres, we did have a good growing year, South America hit the crop, we could see a significant rebound on the supply side while we're waiting for some of those economic forces and engines to kind of get stabilized and revved up and get going again. Uh, and so I think that can put us into that situation that we see, you know, those lower output prices, uh, relative to what we probably see, you know, some decline in input prices too at some point. But, you know, those always come slower.

There's always that lag of what we had to pay in the spring versus what we're going to get next fall. And so that's kind of the clouds on the horizon. The economic side is, to me, is a worrisome piece on the demand side of the balance sheet, on the consumption and use numbers, particularly if we were to see a strong production year, which, you know, it wouldn't take a big change and this thing could look quite a bit different.

Chris

Barron: And that, that holds true for corn, soybeans, wheat, basically all the grains.

Mark

Welch: Yep, you bet. And I think, you know, of course it'll be, you know, the acreage mix and all those kind of factors and pieces that we give up soybean acres to get more corn. Uh, but, uh, but again, it wouldn't take a big increase on some of these on, on the yield number, a few more acres here and there particularly if we're waiting at the demand lag, you know, waiting for those use numbers to pick back up again. I'm afraid of this production getting ahead of us, of the demand.

Chris

Barron: Right, right. So let's shift gears then logically to what you're talking about. You know, if all of a sudden, you know, the production does outpace the, you know, the consumption and the demand picture changes a little bit, it doesn't take much of a change to impact the commodity side of things and, and the interest of the, of the traders and all that stuff. And, and they've, they've been a huge support, you know, the, the long positions have been a huge support of the markets and stuff over time. What, what are you watching for on the '23 then? I mean, what, what makes Mark feel comfortable in terms of, you know, pulling the trigger on some '23 and maybe being proactive. Because the last couple of years, those who do nothing have been rewarded, you know. And, and all of a sudden it starts to recalibrate our thinking, right?

We start to get like kind of relaxed and like, okay, well, it's, you know, it's 6-something corn and it's, you know, 13-something soybeans. And, you know, and wheat's been, been off the pace now, but, you know, it's, it's It's just a comfort thing, you know, where you just kind of, you kind of get lulled to sleep here because the market's been in this range forever. It's not going to stay there forever, is it?

Mark

Welch: Well, and that's, uh, the, the real challenge with, with these marketing, you know, decisions and choices. And, and looking at '23, I'm looking at this basically the same decision I have, that it was big bushels that are unpriced, you know, coming out of the field right now, looking at what these projected pricing opportunities are— you know, relative to, again, costs that are still going to be a very expensive crop to put in the ground next year. If I'm looking at some kind of, you know, normal level of yield, and I'll have my crop insurance and those kind of things in place to help on the production side of all this, you know, do these prices work, uh, even at these, uh, you know, higher costs that's going to take for, for 2023? And if so, uh, is there anything wrong with getting some of that, you know, kind of locked in or layered in for a marketing plan.

Yeah, the last, uh, you know, 2 or 3 years, the best thing you could have done is just wait, do nothing, and just sell it out on harvest, and you'll be in, uh, you know, in pretty good shape. How often does that work? You know, will that work again, you know, next year? Uh, you know, you don't have to go back very, very far, and, and yeah, we hit those kind of years about 3 out of 10. It's kind of go back, you know, last, you know, 40 years That's kind of the way those patterns tend to play out. And even in this, you know, this most recent, you know, marketing year, those bushels that we priced at $5.50 or at $6, yeah, those look pretty cheap, uh, perhaps compared to, you know, what we could do right now just selling that right off the combine. But if those prices kind of worked then, if there's anything else that I'm making on top of that, I can live with that.

If I'm locking in, uh, you know, grain for '23 at $6 or $6.25, and that's the worst sale that I make. And I did it because it worked. I did it because it was managing my cost at $6. And, uh, and we go higher than that. I'm much more comfortable with that kind of scenario rather than, you know, that grain I priced at $6 or $6.25 way back last fall. That was the best sale that I made of the year. And we have one of those years that, you know, it does create more of a typical seasonal pattern. I'm glad I got something done, but gosh, I wish I'd got a little more. So again, I think just putting anything we do now, putting it into perspective of we don't know where this thing's going to go, which direction these markets are going to head, but what's the— of doing that today on a price that works you know, where do we want to be as we get down the road?

And again, if I locked in a price, that's the worst that I did, a price that still worked, you know, I think I'm in a place to manage, you know, my operation, you know, moving out of that perhaps rather than didn't get something done and have this thing go south and put it in a much more concerning situation.

Chris

Barron: Right. Well, and what we've been talking about the last well, forever, I guess. But, you know, when you, you lock in, you know, fertilizer, you lock in, or you, you have a known cash rent on, you know, a segment of the, of the operation, or whatever the expenses are. I mean, a lot of the '23 expenses are becoming a known now. And so, you know, locking in— and this isn't advice by any means here, um, None of us knows exactly where this is going, but just from a, you know, from a risk management perspective, you know, doing some 1-to-1 on those, on those things always seems to, like you said, you know, 7 out of, 7 out of 10 years, you know, historically that's been kind of the right thing to do. And we've had a number of years here now where doing nothing's been working, and it's making, starting to make you wonder, okay, When's this thing going to turn, you know?

And so that's, that, that's the thing I think that we all have to kind of be cognizant of and be careful of. The other thing I was going to mention too, corn versus soybeans, um, you know, we'll be hitting the road here starting again next week, starting to really crunch numbers on farm visits and stuff again and looking at that. But as I've looked at that so far this year, as we look at 2023, a lot of the farm operations, there is just so much more profitability in corn than soybeans. And I know there's people listening that have exceptions to that, but the vast majority— I mean, there's just, you know, the bean market has not kept pace with where the corn is. Um, for that ratio to get better doesn't necessarily mean that corn has, you know, or the soybeans have to increase in price, right? It could be the other way around where the corn comes down to meet the soybeans, right?

Mark

Welch: And, and again, that's kind of where I think If I look at those long-term projections back up from USDA and they, where they came up with their acreage numbers for corn and beans, does that kind of make sense? Well, if you lay that out against kind of what that price ratio that you're talking about between that, you know, that November '23 contract for beans relative to December corn of next year, yeah, that would kind of point that, you know, there's more dollars out there per acre. Yeah, it's going to take more dollars to put in the crop. You're going to have to handle more volume of crop. Getting it out of the field. And so all those things matter, and locations, and agronomically, you know what works best.

But yeah, just running the numbers, you know, the takeaway dollars and the pricing opportunities that are out there for corn just look really strong relative to a lot of the other crops that we're going to have as an alternative enterprise. And down in our part of the world and across the Southeast, you know, we're looking at, you know, cotton coming into play. As an alternative enterprise, and cotton prices have taken a big hit. Yeah, and so might we give up some acres, you know, in some of those, uh, more marginal corn production areas if you look compared to the Corn Belt. Uh, but still, we can add up acres here and there and around, and, uh, you know, we can be looking at another million, 2 million acres of corn that, uh, can again can really start making a difference, uh, as we look at our price prospects going down the road.

But yes, uh,— that, that relationship right now seems to me to kind of think that, you know, it's going to be hard to walk away from those corn acres when you look at what the profitability potential that might be. Yeah, relative some of these other prospects. Yeah.

Chris

Barron: So last question, last thing as we wrap up here, just wanted to hit you up a little bit on inputs for '23. And you mentioned the economy and are we going into a recession or not, and you look at interest rates and And, you know, for those of us that have to borrow money, line of credit, interest rates, it's going to be a way bigger change in our cash flow and what we're going to have to carry, whether it's seed, fertilizer, you know, crop protection, all of those things for, you know, machinery, just all the stuff, you know, laying out the money for the cash rents and especially those ones that are, you know, 100% upfront or whatever. There's a lot, a lot of money being laid out there.

Is there anything that you're watching on the input side of things or anything that any, any— your two cents, I guess, on what we should be managing there, if there's anything we can be doing now to, to manage that better?

Mark

Welch: Right. And that is much, of course, more— as hard as it is to make a market decision on the output side, you know, it can be as much or more so a challenge to lock up stuff on the input side. Now, that may be cash rents,, you know, pre-purchasing some seed, fertilizer. You know, I don't see fertilizer prices in particular, you know, coming down significantly until we see the price of corn come down and the price of natural gas come down. And with the winter ahead and the turmoil still in that Black Sea region, I'm longer term, I'm not a, you know, I'm not a bear on that market at this point. So again, I think that that's the stickiness that we're talking about. Those will be more responsive to what we're seeing on the output side.

Interest rates, you know, Wall Street got really excited this week that inflation wasn't as bad as we thought it was going to be in the Consumer Price Index last week. And so maybe the Fed will slow down the rate of interest rate increases. We're not backing up, but if we just slow down how high we're going, again, are there some management tools around that of locking in some rates or doing some management issues around that cost of money? Even though it may not be going up as much or as quickly as we've seen through most of 2022, doesn't mean we're backing down right away either. So again, just as that puts pressure on that budget, but so critical to look at every element of that budget of where can we control or manage those costs to be as efficient as we can with every single input, every penny we spend., and we don't want to sacrifice yield to do it. Yeah, careful.

Make those— analyze those decisions. Uh, but, uh, but what a key to long-term sustainability and profitability are those operations that manage those costs. And I'm sure you see it in the clients you work with benchmarking cost of production, uh, the cost to produce a bushel of corn or a bushel of beans relative to more industry averages or, or, you know, broader communities.. And those that can keep their costs down typically year after year after year, if they can do it without sacrificing yield, those are the ones that are going to come out on the other side financially. Whatever they do marketing-wise, they're in a much better position to handle it. So yeah, what a key element of our, of our business management.

Chris

Barron: Yeah. And especially like we've been saying this whole podcast is there's some huge opportunities yet for decent margins to, to pull the trigger on some of that '23. Again, not advice, but the opportunity is there.

Mark

Welch: At least analyze the opportunity and make more of a management decision rather than, yeah, right, right.

Chris

Barron: Sounds good. Well, hey, Mark, I really appreciate your, uh, your time today, and, uh, it's been a good conversation. And, and, uh, um, you guys are getting ready for TPAP down there, right?

Mark

Welch: You bet. It's good. We're gonna turn the corner on it pretty quick. Uh, looking forward to a great program. And looking forward to again getting back together and, and the impact that that program can have. We're really excited about, about TPAP coming up in January.

Chris

Barron: Yeah, that's great. We got a lot of, a lot of listeners, I'm sure, that'll be there and a lot of them that have been there before and some that need to, if they're not familiar with TPAP, go on, you can just go on even and Google it, but you can, if they want to check it out, maybe even for next year, where's the best place to look?

Mark

Welch: You bet. That's tpap.tamu. That'll take you to the website. All our contact information there. Glad to talk to folks about that. We've got a waiting list started for the next program. So you bet. There's going to be plenty to talk about when we get together in January. And obviously looking forward to getting to have that conversation.

Chris

Barron: Yeah, it's going to be fun to finally get everybody together in person for once. Can't wait. Good. All right. Hey, Mark, thank you very much for your time today. Really appreciate it.

Mark

Welch: Always enjoy, Chris.

Chris

Barron: Thank you. You bet. And thanks everybody for listening, and we will catch you again next time on the IBU Pitch.