Macro and micro market drivers discussed

Chris: Hey everybody, before we get going again on the market outlook for October 10th through the 14th, wanted to just remind everybody about the Ag View Solutions Executive Business Conference, January 25th through the 27th in St. Petersburg, Florida. If you are not registered, we just want to recommend that you get registered. We are going to extend the early registration though until the end of October. Um, just got quite a few people in, and I know I've talked to a lot of you that, yeah, I'm gonna go and, and I'm gonna get it done. I know everybody's busy with harvest, but when you get a rain day or you get a minute, please get registered. We will get full, and if you're not registered, please do so if you're planning on going. Looking forward to having everybody there, and we will get rolling here with the podcast. Thanks. Welcome everybody to another episode of the Ag View Pitch.

We are heading into a new marketing week. We're getting into the heat of October and the heat of harvest, October 10th through the 14th this week. And we've got with us Joe Vaklovic. Joe, how's it going?

Joe

Vaclavik: I'm doing great. How are you, Chris?

Chris: Uh, good, good. Um, you know, right before we started talking, I had to go out and check the dryer. Uh, as we record this, it's a morning where We had some frost on the pumpkin or whatever you call it, I guess, but it was a little chilly out and some harvest getting going. But some of these areas, you know, where the crops are good, corn is a little wet yet and things are a little slow in some areas. And then there's other areas where people are really hammering down. Our area is just seems like we're kind of pushing it a little bit. Corn's still a little wet and and not all the beans are quite ready yet as we head into the, you know, second week October. What are you hearing on harvest from your clients?

Joe

Vaclavik: Well, I won't say this too loud, but I'm hearing a lot of really good yield reports from people in your neighborhood or your neighborhood-ish, you know, eastern Iowa, Illinois, parts of Indiana. I mean, I've heard the word record mentioned many, many times from a lot of customers in those particular areas. But then, just like we've been told for most of the growing season, further west you go, the worse it gets. Yeah. And there, there are areas of the country that, that are real disasters this year. I mean, you look at parts of Kansas and parts of Nebraska and parts of South Dakota, there's some bad stuff out there. But I, I still wonder, like, just, just how good exactly the stuff in the central and eastern part of the Corn Belt is, because it appears to me at least, to be awfully good.

Now when I talk about, you know, when I do podcasts and videos and stuff, I don't ever talk about yield reports because I feel like I just don't have enough information to paint any broad picture of the crop nationally. But the stuff that I've heard so far, I mean, out of central and eastern areas, again, it's been pretty darn good, really.

Chris: Yeah, I'm cautiously optimistic in our area. I mean, there's, like you said, I'm hearing the same thing. There's some really good reports and areas, but some of the early stuff we've harvested anyway hasn't been quite as good as I was hoping it would be. But I think we get into the fuller season hybrids, and I think that's when the— hopefully the record stuff starts to materialize. So we'll see. That's the production side of things and the harvest side and the fun side for, for farmers. But I want to use that though to transition over to kind of a bigger picture thing, or the macro outlook of some of the things that we need to be paying attention to while we are harvesting and, and not lose sight of. So, and, and, um, I'll, I'll give you a plug, you know, you're— I know I'm a subscriber to your subscriber-only video, um, you know, you do your YouTube, uh, thing every day.

And anybody listening to this that doesn't watch your YouTube thing needs to watch that every morning. It's first thing I do. Um, just you condense the news because I refuse to watch the media, so I appreciate you doing that for me so I don't have to watch that crap. And then you condense it down.

Joe

Vaclavik: I think, um, yeah, in my experience doing this, so I've been doing all that stuff, all this, uh, media, YouTube and podcasts for, I think I'm going on my 4th year now. Um, there's, there's a lot of people who are interested in independent media, I think, is, is what I found. And, and I guess that you can put me in that category now. It's, it's media, it's independent, it's not, uh, corporate sponsored or anything like that. Um, it's just me. Me talking about what I think is important to people in agriculture, basically. So I've— there's an appetite for it, definitely, and it continues to get bigger, which is— it's all been shocking to me for a long time now.

Chris: Yeah, yeah. Well, and, um, you know, just, you know, uh, if they want to— I'll say that right now at this part— if they want to catch that on YouTube, if they aren't—

Joe

Vaclavik: where's—

Chris: what, what do they Google?

Joe

Vaclavik: Would they click Uh, if you go to YouTube, honestly, you just type in Grain Markets. I think I'm probably the first thing that pops up. But, uh, Grain Markets and Other Stuff is the name of the YouTube channel. That's the name of the podcast. Yeah, I mean, you can listen to this stuff on Apple Podcasts or Spotify or any podcast app. And then YouTube also.

Chris: Yeah, I just want to get that out there on the front end of this, um, just mainly because, you know, um, a lot of the stuff you've been talking about— and get back to my question here— is the macro things that are going on, you know, when we get in our own bubble and we're in our backyard and we're trying to get our harvest done, doing our things, there's a whole bunch of stuff going on in the big picture. Do you want to talk about some of the things that we need to be, you know, really paying attention to that's probably a pretty big deal?

Joe

Vaclavik: Well, in a lot of years, probably in the majority of years, your, your biggest thing that impact your grain markets are, are the things that we would normally look at. I mean, how big is the corn crop? How big is the soybean crop? How much is China buying? Those things also matter, and those may still be the biggest factors here, but when we've got this, um, this macroeconomic environment that we're in right now where we've got inflation and rising interest rates and, and, um, all of those messy things, I think it just presents an additional element of risk that isn't necessarily there in most years. So I think it's something that has to be paid attention to.

I mean, all of the other normal risks that would apply in any year apply, but I think that the inflationary aspect, the fact that maybe we're headed toward a recession, maybe we're in a recession, maybe we're headed toward something worse, I think that that's something that presents an additional risk factor for the commodity markets, I guess.

Chris: What things in the, in the general economy, I mean, are like, this, this is big that we aren't paying attention to enough?

Joe

Vaclavik: I mean, um, I mean, inflation is, is the biggest thing out there right now, the biggest thing on the planet when it comes to financial markets, uh, just in general, whether it be the stock market. And I could argue maybe to some extent commodities have been impacted by this But inflation's the big thing. And then the response to inflation. Mm-hmm. So Federal Reserve is, is going to, to do everything in its power to tame inflation. They don't care if they push us into a recession. Um, they're going to raise rates until they restore price stability and get this inflation situation under control. The situation's really odd. So like you're in a, you're in this environment now where good economic news is actually bad economic news. Just an example of that. So on Friday, we had this jobs report, right? And non-farm payrolls, jobs we added, were better than expected, 263,000.

The trade thought they were going to be 255,000. Unemployment was 3.5%. We thought it was going to be 3.7%. That should be good, right? Yeah. Well, it's not. The S&P was down 2.8% on Friday, which is a really big one-day decline for the stock market. And the reason for all this is that When you get good news, it leads the market to believe that the Fed has more room to raise rates, essentially. That we're in good enough shape that they can continue to raise rates and that they haven't done enough to really hurt the economy yet. So it's all backwards, which, I mean, it makes sense at the end of the day, but I don't like that that's the way that the market functions now, but that's the world we're living in.

Chris: Yeah, and it's interesting as far as, you know, you mentioned interest rates and that kind of thing. Those are, those are things that really affect us on, on the farm. What's your crystal ball say? I mean, do you think they're gonna— I mean, you hear all kinds of different stuff. What's your, what's your take on, on how far these, these rates could go?

Joe

Vaclavik: Well, I mean, that's the million— it's, it's like the trillion dollar question. Yeah, it's the biggest question on the planet right now. As far as financial markets are concerned. A general consensus among Fed members is that they'll continue to hike into next year, and then they may be able to pause maybe the middle of next year, maybe middle of '23, maybe '24, but that's all contingent on the inflation data, and we can't really predict that. I had thought for a little while that inflation had peaked when I saw commodity markets peak back in June. And then sell off and we start to see commodities back off and crude oil backed off especially. I thought maybe we peaked, but now you've got this big rally back in crude. Gasoline prices are perking up again. The labor market is incredibly sticky and wages are incredibly sticky and that's adding to the inflationary aspect.

I really don't have any idea. I mean, it's the biggest question out there for every market on the planet. It really is.

Chris: Yeah, and, and you foresee probably the crude oil— we, if we'd continue strength there, that's just going to keep continue to bolster commodities.

Joe

Vaclavik: Yeah, crude is a big thing. Um, you know, the crude's like, as I see it, it's kind of like the bus driver of the commodity market, right? You get the big move in the crude when crude rallies, you know, what, $15 off the lows like it did here after over the last couple of weeks, that's a general positive for commodities. And when it sells off like it did prior to that, it's general negative for commodities. And it's not always the case that we move with crude, but it seems like we have to some extent in the grain markets as an example here recently.

Chris: There's another area too on the macro side. We'll stay there in the macro stuff for a minute, but is Russia and some of the, some of the rhetoric or whatever that you've kind of discussed in your subscriber-only videos and also your morning videos. Talk a little bit about some of the threats there and some of the things you're watching and concerned about.

Joe

Vaclavik: Um, I think— I mean, I've said this a million times— I think the prospect of any sort of nuclear exchange has been underreported and underemphasized by the media here in the United States. It only started to really make its way into the headlines this last week because Biden mentioned it, and mentioned it very specifically, and indicated his concerns about it. Like I said on the podcast, I know that his approval rating's low. I know that people don't necessarily agree with everything that he says, and you can put me in that camp, too, but he's right about that. Putin is no dummy. He's smart. Crazy and his ideas are outlandish, but he has nuclear capabilities and he hasn't been shy about touting his nuclear capabilities.

So if there were some— so say like what the military strategists are saying comes to fruition and there's use of some sort of tactical short-range nuclear weapon on the front line, could it result in a domino effect where it leads us to some sort of World War III situation. Yeah, that could happen. But say that— say there was an exchange and that didn't happen, it probably puts a lot of shipments out of the Black Sea in jeopardy, specifically wheat and fertilizer products. Russia's like, you know, among the top exporters of all sorts, you know, every fertilizer product there is. It would have a lot of implications, I think, not to mention the loss of life and humanitarian catastrophe that would ensue. But, um, I just feel like that's a prospect that's gone underreported. Biden said it's like the Cuban Missile Crisis, and I, I think I agree.

Chris: Interesting things to keep an eye on. I guess one, one last one on the micro stuff— or macro, excuse me— stuff before I dive into a couple other little things I want to hit with you. But, um, South American weather and soybean, uh, markets— talk a little bit about what are you watching there, South America, and anything there that you want to hit on?

Joe

Vaclavik: So people will talk about how there's, there's going to be a La Niña event that will result in dry weather in Brazil, and that that's a possibility. That certainly is a possibility, and I'm no weather forecaster. There was a really good chart that University of Illinois had out on their FarmDoc website, which I know a lot of people to look at. La Niña does not necessarily mean that soybean yields are going to be bad or even below trend. There have been a bunch of years where there was a La Niña pattern in place and Brazilian soybean yields actually ended up above trend. Just because you have that sort of pattern doesn't mean that the crop's going to be bad. They've caught some rains here recently. Every private and government crop estimate is indicative of record crops. So as of right now, all the potential in the world, but you need weather to cooperate.

And you could talk all you want about La Niña and forecasts and patterns. I mean, nobody can predict what the weather is going to do more than, yeah, 4 or 5 days out. So I don't, I don't really put much like emphasis. I don't think that those long-term forecasts carry much weight. I've always found long-term weather forecasts to be generally useless, and I would probably file that, you know, all that talk in that useless category.

Chris: Mm-hmm. Gotcha. Okay, um, I think I'm going to transition now and come back to macro if there's something I didn't ask or something you're thinking of. But, um, you know, as we're in harvest and transition over to thinking about, okay, storage, uh, corn versus soybeans, and we've got a limited amount of, you know, for one or the other, and some of the stuff's maybe not all sold old, like you said, you know, there's areas where, you know, there's more bushels there than we thought. Hmm, okay, now what do we do? Basis, you know, talk a little bit first about the river bids, and then I'll hit you with a couple more questions around basis management and corn versus soybean storage.

Joe

Vaclavik: So the river problem, the low water levels on the Mississippi River, I think the statistic is that like 60% of our soybean exports go through the Gulf, and then the remainder mostly PNW and some other locations. But I mean, the Gulf is our bread and butter when it comes to exports of soybeans. And that's where I think you've seen the biggest basis impact. I have some customers who are soybean growers, you know, along the river in the, you know, Delta areas, places like that, and their basis has been— I mean, they've totally collapsed. I mean, they went from positive to the tune of 40, 50 cents to negative to the tune of 40, 50, 60 cents just in the course of like a week or two. So it's had an impact and it's had an impact on the spread market also.

So you've got really a substantial amount of carry now in the soybean market from, say, Nov '22 out to March '23, out to May, out to July. And that's something that, I mean, I don't think anybody thought was going to happen this year myself.— usually when you have a really tight situation in beans like we do, you're not going to see those sort of carries. It's pretty rare for the market to give you $14 a bushel plus a bunch of carry, but that's what we've got here. And I think that that's a result— it's a direct result of the river issues, in my opinion.

Chris: Mm-hmm, interesting.

Joe

Vaclavik: And the reason— the reason for that, the reason November's weak versus these deferreds is they just don't think they're going to be able to to ship beans during that time frame. So it came down the road to March, May, July, you know.

Chris: So speaking of that, I was telling you offline, like in our operation we typically don't store soybeans if, if at all. This year we've, we designated a pretty sizable storage commitment to soybeans and we're shipping a little bit more corn out in our area. For whatever reason, we're in the Cedar Rapids area, we've got a better corn basis, and then all of a sudden there's this carry in the soybean market. So it's incentivizing us to keep the beans even though it's not fun. I think somebody had asked you a question when your subscriber-only video is about how much not fun it is storing soybeans, and especially if you got to do it in, in not ideal situations. But, you know, I think storing the beans is going to pay pretty good, you know, or it looks like anyway with carry there. And then maybe moving the corn.

Any comments on just, you know, managing that basis and, and, you know, maybe rolling some of those November out to— I mean, we rolled out, I think, to May, looked like was kind of at the time. I just a couple days ago did that, and it looked like kind of the sweet spot to capture quite a bit of carry there. Talk a little bit about that, what your thoughts are.

Joe

Vaclavik: Well, you would hope that at some point between now and the spring it rains and the river systems are resolved, and that maybe by that point those people who were really negatively impacted by the river situation when it comes to basis, that basis normalizes. I mean, you would, you would hope or assume that that's probably the case at some point. So yeah, I mean, if you've got beans that are priced on an HTA or futures or something, I mean, rolling them forward and storing the beans, I guess, does make sense. It makes a lot of sense, especially if your basis is really deteriorated. That makes a lot of sense to me, even though I know guys don't like to store soybeans. Corn is— corn, the basis hasn't deteriorated as much and the carries aren't as good, so I understand what you're saying, that like maybe it makes more sense to store beans than corn this year.

Part of me thinks, though, that we've got such drastic— you have— we haven't these last few weeks, but you've got the potential for such drastic volatility on the board that like picking up an extra 10 cents a carry in beans is not necessarily the biggest deal in the world. I mean, you got a bean market that can move, you know, USDA comes out with the right or wrong number on, uh, Wednesday morning, I mean, beans could be 50, 60 cents in either direction in 5 minutes, you know. Right. So it's like, is working extra, extra working double time to store beans to collect an extra 10 cents worth it. I mean, it makes sense, I guess, on paper, but you got to figure that out for yourself because 10 cents is 10 cents in a $14 bean market. It's not what it was when, say, we were in trade war territory and beans were $8.50. Like, uh, it's a little bit different world, right?

Chris: Yeah, there's kind of 3 things that a lot of, a lot of our clients are managing, and I think all of us do, but it's, it's managing cash flow, it's managing logistics, and it's managing your, your revenue in a, in a given year. You know, this is a— for a lot of operations that had— are having good yields, it's going to be a, you know, an income management deal there too, as to, you know, where you need the money and, and kind of lining up those deliveries and, and that stuff with, with— to match kind of the financial side of it. Um, with—

Joe

Vaclavik: yeah, it's management stuff, and, you know, I don't, I don't have to tell you that, but I mean like the prop— the level of profitability associated with these prices, good basis or bad basis or whatever, I mean, it's really phenomenal. So these are all like good problems to have at this time, I guess.

Chris: Exactly.

Joe

Vaclavik: You know, generally speaking, and everybody knows that, but I mean, just to step back from all of the— all the details about how much, you know, is there an extra nickel of carry in beans or whatever, I mean, that's great, but you know, bigger picture, you're in good shape when it comes to everything if you had a crop.

Chris: Yeah, well, and that's the thing I'm sitting here thinking, you know, as you were saying that, it's 100% true, is, is, you know, there's the haves and the have-nots. Sometimes the have-nots turn out pretty good if they've got good insurance coverage and they, you know, did do some marketing and, and have themselves in a pretty good position. Sometimes the, the worst spot to be in, and I guarantee there's people listening to this that are in that spot, where you're yielding just enough, you're right at about not quite your APH, but you're just right in that spot where you're not going to collect any insurance and you're not at a high enough level. Thankfully, our commodity prices are high enough though that it's, it at least from the majority of our clients that we've watched so far, it's still keeping them in the black.

It's just not in the black as far as, you know, some would want to be. But like, you're right though, I mean, where these prices are at are a blessing. It's, it's really, um, you know, keeping everybody floating. And it's also really creating some record revenue years for some, some operations at the same time. With that said, you know, what makes you comfortable— and I'm going to skip '22 because people kind of are to the point now, they know where their cost of production is and all that stuff, so I'm going to skip '22. I'm going to go right to '23, and I'm going to ask Joe, if you put your farmer hat on and you've got some of your inputs bought, so you've got your fertilizer bought, you have a pretty good idea on your land rent and your equipment costs, what makes Joe with your farmer hat on feel comfortable, you know, with sales on, on the crops?

And you can hit corn, soybeans, and wheat if you want.

Joe

Vaclavik: It depends on which farmer hat I'm putting on. So if I'm going to be I'm gonna put on my young farmer hat and say I'm a younger guy with some debt and some leverage and additional risk. I mean, if there's, if there's a good amount of profitability associated with these prices when compared to your input costs, which I believe that there is, I have customers that I know for a fact are 50% sold, if not more, when it comes to 23 corn and soybeans. And I know that sounds crazy to some of you guys out there. Some of you guys have nothing sold, and like, you haven't even thought about '23. But they're making, you know, what we call business decisions. They're gonna stay in business, they're gonna make money, they're gonna play with that second half of the crop, see how, you know, how spring progresses, how planting progresses, how growing season progresses.

And I have other customers who have nothing priced for next year. Where would I feel comfortable? I mean, on average, if I'm somewhere in the middle, I and I'm not super cash rich, but I'm not super levered. I'm probably— I'm 25 to 30% priced on row crops. I might even be a little bit more aggressive on winter wheat. And I had already got some officially advised winter wheat sales for next year that started during the invasion. But I'd be— I mean, I'd be fairly aggressive, to be honest. And that's not a prediction about where I think the prices are going to go. I just think there's a lot of risk in the world right now. I like making money. Um, I'd keep it as simple as that, I guess.

Chris: Yeah, I mean, that's, that's what we all individually have to make decision. I like how you separate that out from the young producer to the, um, more mature operation, let's say. But I would also say that, you know, there's a lot of mature operations out there that have a lot of You know, they've— we've, we've seen a lot of working capital improvement in the last— since '20. So '20, '21, and '22 now, where we've, we've significantly, in, in a high percentage of operations, improved working capital to the degree that I'm not sure I've seen 3 years in a row where we've consistently done as good a job with our client base watching working capital improvement. So I think part of that too is protecting it, isn't it? It's just not trying to like hit a home run.

Sometimes you're better off if you can hit, you know, a bunch of singles or some doubles and, and, uh, you know, maintain where you're at, not, not run the risk of going backwards either.

Joe

Vaclavik: Yeah, you know, when— so I get questions all the time from customers about marketing and how aggressive should I be. And my first— the first thing I, I tell them is not like what I think the market's going to do, because nobody can predict what prices are going to do, especially a year out. Uh, usually my first question involves like, what's your financial situation? How much storage do you have? Uh, you know, things along those lines. I think that's more important because those are things that we can quantify. Those are things we can take to the bank. Uh, anything regarding, you know, a prediction on prices, I mean, that's just speculation. That's not real. Um, the only thing that's real is, is what we actually— the things that we actually know for a fact. Somebody might tell you that these 23 corn's going to $8, but that's just speculation. That's not fact. Yeah.

Um, so I think you've got to work off of things that are, are more factual that you can quantify.

Chris: Now I, I agree wholeheartedly. It's, it's, uh, as smart as you are, Joe, you don't know exactly where the market's gonna go. So, uh, no, I don't have anything.

Joe

Vaclavik: Nobody has. I have, I have zero clue where the market's gonna go. I really don't.

Chris: And everybody does. They admit it.

Joe

Vaclavik: No, they don't. And it's the first thing you should— if you— once you admit that to yourself, you'll be a hell of a lot better.

Chris: Yeah, exactly. I think, I think that's a good place to wrap it up, you know. Any, any other comments or things I didn't hit on, or things you'd like to leave people with?

Joe

Vaclavik: No, not really. I just, I think that one thing I'll say about the market— this has been kind of my observation— these last few months. I feel like, I don't know if I'll say farmers, just people in general. I think people in agriculture have been really— it become— we've been at these high prices for so long now, people become really comfortable with this. And it's the higher— the longer we stay up here, the more it feels like we're not going to go back to $5 corn or $4 corn anytime ever, you know. The longer you stay above $6 or close to $7, it feels like You feel like you become immune almost, and I just, I try to steer clear of that sort of thinking. Crazy things happen in commodities.

Commodity markets over the course of time tend to revert back to the cost of production, and it so happens that we're in a cycle right now where we're well above the cost of production and have been for, what, 2.5, 3 years. Typically, historically, that doesn't last forever. You usually revert back to the cost of production on average in commodities. Commodity market. So, um, when does that happen? I don't know. It's gonna happen eventually.

Chris: Yeah, it's not a matter of if, it's just when. And it's 100% right.

Joe

Vaclavik: Could be 10 years from now for all I know. I mean, I don't have any idea, but, um, I just— I don't think you— I don't think you want to become overly comfortable with the idea that corn's worth $6.50 a bushel forever, because it's probably not going to be.

Chris: Yeah, we've seen this movie before. 2012, nobody wanted to sell 2013 corn. It was, you know, corn was $8-ish or whatever, and, and '13 was $6 and change. And who wants to sell $6 corn when it's $8? And, you know, well, you gotta, you gotta, like I said, you gotta have your business plan and you gotta look at, okay, what's my cost production in that year going to be, and how would I manage the margins to maximize the opportunity?

Joe

Vaclavik: And yeah, there's going to be a year, there will be a year, whether it's '23 or '24 or '25 or 2035, there's going to be a year where forward marketing is is the deal again. Yeah. And it hasn't been for, for, you know, since, um, like 2019 was probably the last time like forward marketing looked like a good idea, right? And then prices exploded and it hasn't really, it hasn't really looked good in hindsight to make forward sales. But I will, I mean, if I see profitability early in the year, I'm going to tell guys to sell grain, um, forward price it and lock in whatever you can lock in and offset some risk. I just, I feel like that's part of my job is to explain what the risk is, make sure that there's risk management involved regardless of my opinion or anybody's opinion on price direction, you know.

Chris: Yep, yep, it's all about business management. So that's cool. Hey Joe, um, again, if people want to, uh, get a hold of you, what's the best way to get a hold of you or check you out?

Joe

Vaclavik: Just check out the podcast or the YouTube, guys. It's all free content. I work my ass off put it out there every day. YouTube videos are uploaded by like 6 AM Central every day, and that's about when the podcast is uploaded. So check that stuff out if you haven't already.

Chris: Sounds good. Hey Joe, thanks a lot for the conversation. Appreciate it.

Joe

Vaclavik: Yep, see ya.

Chris: All right, and hey everybody, thanks again for listening, and we will catch you again next time on the Ag View Pitch.