Weekly market outlook: Oct. 25-29th - manage your opportunities

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 new marketing week and it's actually the last week, full week of October as harvest wraps up and things. We're going to have a little conversation here with Mark Welch at Texas A&M. Mark, how is it going?

Mark

Welch: Oh, good in this world, Chris. Great to be with you.

Chris

Barron: Yeah, it's awesome to have you on again. I haven't chatted with you on the podcast here for a while, and I'm happy to have you back on and get some perspective, uh, from a market specialist like yourself. And so I want to just hit on first kind of what you're hearing on harvest progress. It looks like You know, in our part of the world in Iowa, there's a lot of the beans got out last week when we had some decent weather. This, this week's kind of wet in a lot of areas. Anything that you're, you're seeing or hearing with any harvest issues, or everything's kind of chugging along pretty good from what you're hearing?

Mark

Welch: You know, the perspective and the information that we're getting across the harvest, Chris, is again, I think this reaffirms how good this crop is given the challenging growing conditions that we've had all season long. Uh, certainly there are going to be some pockets and some issues where some very disappointing yields and some production numbers are going to directly express just how challenging those conditions were. But overall, the nationwide crop, when we're looking at corn and our feed grains more broadly and the grain sorghum, that it looks like it's going to be a really, really good crop. The national yields are going to come in really, really strong given, again, the large swath of the main grain-producing areas that had strongly less than ideal growing conditions going way back into last fall.

And it's just incredible, again, to see the productive capacity of what folks are able to do under what have been some extremely challenging conditions.

Chris

Barron: On that note, you know, that is a production side of the equation that feeds into the market. Does that or has that had much impact, do you think, on the market? I mean, if you look at the 100-day average on corn or beans or whatever, we're off the pace some, but we still have these really strong prices yet. You know, is there some influence from the, you know, what we're seeing is better than expected that's influencing the market some too?

Mark

Welch: You know, that is so interesting, uh, and it's kind of like we keep waiting for the market to react. Uh, again, pretty open weather through most of October, uh, the October WASDE, uh, not only did we lower some, some use numbers back in the old crop, uh, year that kind of boosted our carryover stocks based on the grain stocks report at the end of September. Uh, we also, you know, raised the yield slightly for the current crop year, and so we, we added to the corn supply and raised that ending stock number in the new marketing year. And so with harvest pressure and a boost in production and supply, the market just kind of, eh, just kind of sloughed it off. We just haven't seen that, what we typically would describe as just harvest pressure through October.

And even though many times we do recover kind of after that, the market has just held really strong through what we otherwise suspect would be, uh, you know, maybe some downward pressure, uh, seasonally right at this time of the year, and the market just has not done it. I think our cash bids across the country are staying really strong, and so I think it does reflect some of the underlying dynamics, you know, of this corn market. We do have supplies that are tight, and, uh, maybe with other pressures, uh, of the broader economy that kind of play in around supply chain issues and securing, you know, products and commodities for what we need to do and process down the road. How is that playing into the atmosphere and the market environment right now? But it's just, again, created market strength in my mind relative to what we would normally expect with open weather.

A little bit of a bearish WASDE report. And, and the market's just held right, right through it.

Chris

Barron: Yeah, it's kind of like, you know, in most areas anyway, kind of the absence of a quote-unquote gut slot harvest or whatever, you know, you look at basis— excuse me— in a lot of areas, it's interesting because, you know, we're just seeing such a strong basis in so many areas yet, you know. And, and I know ethanol is, is extremely profitable now, so you're getting that demand part of it in the corn side of things, but even on soybeans, from what we've seen in a lot of areas, there's a pretty strong draw now and not a lot of carry. So that leads me to my next question of, of, uh, you know, just managing basis and carry and, and the grain bins. I think a lot of times as producers we want to use our bins. We bought them, we spend a lot of money on them, and, you know, we want to fill them up or whatever. Sure. And we don't want to sit in lines or whatever, which makes sense.

But on the same token, if the processor's calling for corn or soybeans now, it doesn't— it make sense to do whatever you can do to deliver on those strong basis, especially when there's not a lot of carry? Or do you see something out there that, that I'm not seeing?

Mark

Welch: No, absolutely. And I think that, you know, in, in most cases, as you just described, uh, you know, the typical market structure you would have that carry in the market and that return to storage and your expectations around, you know, basis movement from harvest into late winter and early spring. And, you know, all those moving pieces and calculations around what you expect the market to do. And that's why we build those bins, to take advantage of that and to expand our marketing flexibility as well as to capture that extra value, that being able to just keep that commodity on the farm here to harvest and then deliver that, you know, at other locations and things down the road. So all those numbers and pieces, right, is why that works.

But again, how does our market structure this year, how do those numbers play out, and what's at risk, or what are the rewards of capturing that in the market now? And I think it's important to utilize those grain bins, yes, when they work to our advantage. And given the kind of, again, all those moving pieces, a lot lining as we would expect them to, absolutely, what a great tool to have. But that does not mean that there's just a rule of thumb or a default decision that we, you know, we got to have grain in the bin if there are those opportunities to go ahead and let that go. And of course, that's related to many of our marketing decisions of, you know, well, what if it goes up? What if I'm missing something down the road? What if What am I losing by capturing that opportunity now? Or what is the risk or cost of doing that?

What if things do go higher and this thing really does get tighter next year? Back to, you know, I wish I woulda, coulda. But again, what works now based on the structure we have? What's the market telling us to stay? What's the best decision given the information we know today? And I don't think that's a bad way to make a decision. Whether that's the right decision or not, we're not going to know until we get through the winter into the early spring. But what is the process and what are the information we use to make those decisions? And I think it's so important to rely on and to have our confidence in how we make that decision guiding what we do rather than just that gut reaction of what do I do? Is this the right thing? Again, the trust the process, what got us here. And I think that guides a lot of our marketing decisions.

Chris

Barron: Yeah, I think what happens a lot too is a lot of us made sales way too early. And so, you know, you look at that and then you do make some sales along the way, but your average price doesn't come up fast enough. It's like if you go to college and you start out with C's, it's almost impossible to ever get to an A average, you know? And it's the same thing, you know, we look at it as producers, you know, we're sitting here with a grade of a C on our marketing and we don't want to get any A's in the middle, it seems like, because we're still not going to get an A. So we wait and wait and wait. How do we get that grade point average up, right? You know, and, and I think that's happening to a lot of us where, you know, we, we, we, we need to get that grade point average up. We need to get that price up. Average. And so we wait, and sometimes I think we, we miss the opportunity.

I've always called that, you know, high price opportunity sales rejection. In other words, when the price opportunity is there, we just reject it because it's— for some reason it's not meeting the criteria that we have. And I think we're all probably somewhat guilty of that right now. And, and so, you know, with what you said and mentioning that, what I want to do is shift over for a minute to What are the risks of that right now? And I want to hit the demand side of the equation here for a minute. You know, demand is very strong, as I mentioned, on ethanol, you know, and the processors are bidding up, and that's probably why we see a lot of basis opportunities in certain areas. And obviously the short crop in some areas is driving it too. But on the demand side, talk a little bit about that.

What specific things are you seeing that are opportunities and risks and demand that we need to really be paying attention to.

Mark

Welch: You bet. And I think if we look at those major use categories or the demand side of the balance sheet, certainly we're seeing some recovery, particularly as the economy is coming back. We're maybe posting some inflation pressure in some issues. But you mentioned, you know, the ethanol piece of that. Certainly some profitability there now. We're seeing, you know, grain flowing to the ethanol plants. But if you look at the overall numbers that USDA is— and even beyond USDA, look at the energy information administration, the other measures of fuel and energy use in this country. What does the outlook look like for corn for fuel? And yeah, to get us back to 5.2 billion bushels of grain, maybe 5.3, could we get to 5.4? Those are pretty good numbers compared to where we've been the last couple of years. Where were we in 2017, 2018? Uh, you know, we were well above that.

Uh, you know, how much growth is there in that market in this current environment? If you look at gasoline use in this country, yeah, we're back up to pre-pandemic levels, but that's it. We don't have any growth in that particular part of the sector. And longer term, there's not a lot of growth projected for that gasoline, motor gasoline in the United States down the road, given more efficient fuel-efficient vehicles, all that focus now on electric vehicles. What does that path look like moving forward? And so yes, we're seeing a rebound now, kind of coming out of the pandemic. But further down the road, what does that look like? We're seeing, I think, pushback in the livestock sector, these high prices, you know, affecting profitability there.

And they got to have the grain, but we're seeing our livestock feeders becoming much more efficient in terms of the pounds of grain it takes to make a pound of protein. They're getting better at it every day and much more efficient, as are our ethanol producers as well. We're getting more ethanol per bushel of grain than we were 10, 15 years ago. So, you know, all those factors play into that, and the category of use that's really driven this price surge going back to, you know, a year ago was that export demand from China. And certainly globally we're seeing that demand for feed use, but there's going to be more competition in that space if our competitors fulfill their expectations, with projections for record crops in this coming marketing year from Brazil and from Argentina and from Ukraine and from Russia.

Uh, and so even for those, uh, that growing export pie, uh, there's likely to be, uh, other places wanting a bigger piece of that pie. Uh, so I think, uh, the, the growth on the, on the demand side of the question, yes, there's some possibilities there, but there's, uh, also if we have a, a supply response, which we were really short in lots of places coming out of 2020. Uh, if this is the first year movement toward that of '21 and we build on that again for '22, uh, I think we could see some, some downward pressure on prices even in the face of what is, yes, structurally strong demand. Uh, but there's a lot of incentive, uh, to boost that supply as well, and that's what these high prices do.

Chris

Barron: What about the competition too? I mean, we, we also face, you know, competition with Brazil, and I think you'd mentioned Ukraine and some places too that that just feeds that demand and we're competing with that as well, right?

Mark

Welch: You bet. And these prices that we're seeing are incentives for all of us to try to boost that production. And if we hit that year of good production numbers across the board, we could see that supply relative to demand situation start to change rather dramatically in rather short order. And so that's what we've seen in the past. And so I think we need to be aware of that. Yeah, if we're in a market structure that, you know, gosh, I made those sales too early and that market's, you know, higher and higher and higher. Yes, there's a lot of regret that comes with that, a lot of marketing frustration. But think of the market structure that's creating— that's a lot better place we want to be, that we left maybe some money on the table because I sold too soon and we went higher. That's a better place to be than those sales I made 6 months ago, those are the best I've made.

And then facing that downward trending market because of maybe some of the factors we've talked about, uh, that supply then outpacing, uh, even that demand growth or that demand, uh, that slack that we've had in the last couple of marketing years, uh, that, that's not the place we want to be, uh, when it comes to, uh, facing and building a marketing plan.

Chris

Barron: Yeah, so we've kind of hit on some of the risks on the demand side or things to watch there. The opportunities for, for some growth and some better price things a lot of times get attached to inflation. Well, excuse me, what is your— what's your thought on inflation? Is that a driver to, to commodity strength in the near term, or, you know, throughout the winter and into spring, or what's your thought there?

Mark

Welch: You know, I think that, uh, you know, typically, uh, what we see when we have fears and concerns about inflation is, uh, I think in the last, you know, 10 or 15 years we've seen commodities as an investment class, uh, become a more popular place to, uh, park some funds, uh, as a hedge against inflation. And so I think part of the inflationary pressures that we're seeing in our commodity markets is coming from that investment sector in that we have, you know, persons wanting to go long the commodity markets as a hedge against inflation, especially considering that interest rates are still so low. And of course, the stock market is still performing well. But again, I think commodities as an investment become more attractive in an era such as this. How long-term and how fixed in our economy are these higher pressures? I think we're all still struggling to get a handle on that.

We hear so much about the transportation and the delivery issues with all kinds of goods commodities all around the world. And we're getting the stuff from where it is to where it needs to be, given the strong demand and holiday season ahead of us. A lot of challenges around that. How long it takes to get through that, how we adjust those issues, I think will really play into our long-term inflation drivers and how, again, how fixed this is. In our prashlok at this time. To me, we are still in that, uh, pendulum swinging from shutting so much down just a year and a half ago in the, uh, the teeth of the pandemic, uh, which is really not very long economically speaking, uh, and then now swinging back to a large degree of recovery and, uh, again, looking forward to swinging the other way with economic growth and expectations and opportunities.

Uh, it does take a while for those things to settle out and settle down. And so I think we are still in that transitory process, to use the word from the, uh, that the Federal Reserve uses a lot talking about inflation. Uh, that, uh, how much of this is fixed in long term, I think it's too early to say. But yes, in the short term, as we're making our production and cost expectations for this 2022 crop, specifically. And if we're talking about the inputs required for that, and from fertilizer to fuel to equipment, is it going to be built into, you know, rental and lease agreements? Yeah, I'm guessing it probably is. And so just from the microeconomic managing my farm and ranch aspect of it, yeah, I think we're going to be challenged with some significant increased price pressure on our— on the input side.

Which just adds again to the challenges associated with making marketing decisions in that kind of world.

Chris

Barron: Right. I'm going to get back to my last question here in a second, but as far as what the market is, is, you know, looking at and what we've been talking about here, if you're a farmer sitting there and you've got a high percentage of your grain sold, let's say, you know, you're 50-60% priced Is that enough in your opinion if you're a farmer? It's not a recommendation, I'm just putting you on the spot here as a farmer. You know, what makes you feel comfortable with the old crop? You know, assuming that your cash flow is okay and everything and you're just looking at it from a purist as a marketing decision, are you comfortable holding on to very much old crop or do you want to take advantage of these prices if you're a farmer?

Mark

Welch: You know, I think, you know, certainly so many factors that will, of course, roll into that decision. Your financial strength, your attitude and willingness to bear risk and, and all those factors. But any time that I'm looking at prices that work and does that price— and I mean your, your net cash price, not just what's trading on the board, what you can actually deliver grain for, whether you're doing that today or you're doing it in February, you're doing it in May, whatever those agreements and possibilities would create for you right now— is that a price that works?. And if it does, then I think we need to take a long, hard look at ways of not letting that get away.

And so whether you want to do something locking that price in and then do something, say, on the side, you know, using options or other tools that you can use if you want to take advantage of that price goes higher. But I'm not so worried about that so much as, yeah, if I've locked that in and my sales are set through the winter and even I've wrapped up you know, kind of, uh, most of what I'm going to do with this 2021 crop, um, and this market goes higher, you know, again, that's the exact structure you want to have, right? You want to have a better marketing opportunity down the road because you're gonna have a crop next year to sell. Yeah, it's not like you've given up everything. Yeah, uh, you know, sell it, sell them the next one, right, man? That's okay.

That's a lot better place to be, right, than looking back and thinking, oh gosh, I wish I'd have sold some more because, man, we look Let that go away, right? Yeah.

Chris

Barron: And when you do the right thing, you never do enough of it. But, you know, yeah, but, but it's, it's just interesting because I, I can also tell you there's a lot of people listening here probably that had a shorter crop, things weren't as good, and they would like to be in that position. And there's a high percentage of people listening to this that are in that position that's enviable, uh, to be in. And, um, You know, it still comes down to the two things. You know, Mo Russell always used to bring this up to me. You know, there's the two driving forces that drive your decisions in marketing. It's fear and greed. And you know, which, which, which emotions driving your decision now, you know? And right, so I think managing those. Hey, my last question, and I want to get to this before we wrap up here quick.

Um, high fertilizer prices for '22, a lot of people are getting that stuff locked in. I feel like there's the threat of maybe not having enough sold to offset that. Do you see some continued price strength long term? What's your thought there? I mean, or, you know, do we need to be making sure we're one-to-one on this stuff? You spend $100,000, you better have $100,000 of grain sold.

Mark

Welch: What's your thought? Well, there again, I think it goes back to that question of what is that price that does cover and account for that increased cost? Yeah, just the numbers that we've been kicking around for our budgets down in this part of the world. Yeah. Can you add $100 an acre just for nitrogen fertilizer for next year's crop compared to last year? That's not hard to come up with that kind of, that kind of number, right? 200 bushel grain, that's, that's $0.50 a bushel that you're going to need better to cover that. Is the market providing that right now? And if you look at the strength of that December '22 contract,, and, and I don't know what, you know, kind of marketing and, and contracting opportunities associated with that, whether that strong basis is still built into a longer expectations. But yeah, they kind of do.

Um, and, and so again, I think the biggest danger is we've done something to lock in the high price on the input side, but we didn't cover then the output cost associated or output price associated with that, that, that makes that price work. Uh, the only reason we're buying that high input is because we've got the higher prices on the other side to cover it..

And if we don't have some degree of balance, or at least somebody with their, with their, uh, handle on the pulse of that market, uh, to make that decision if it looks like things are turning the other way, uh, I think we have a tremendous amount of risk because we've seen this several times in this biofuel era that, uh, we, uh, paid those very high input prices on the spring, but by the time we got to the fall, the prices that drove that nitrogen price up like it did look a lot different by the time we get to harvest the next year. And I don't want to get caught in that situation. So whether it's some kind of price floors, minimum price contracts, options, you know, whatever lets you provide some, some safety net around that, uh, at least be aware of that risk, right? And what the consequences of that could be. And you talk about fear and greed driving our marketing decisions.

One of the best ways to eliminate that from a marketing decision is to slow down, have a conversation around what's driving these prices, creating this market structure, uh, you know, bring other folks into the conversation and then put a plan together and try to eliminate some of that emotion that drives those decisions. And yeah, this is what our cost structure looks like now given these high input prices. Does the output price— does that work relative to that? And if it does, yes, I think having some protection and some coverage against that. That makes a lot of sense, right?

Chris

Barron: Right. Hey, Mark, I think this was a good conversation. I really appreciate your time today.

Mark

Welch: Oh, you bet, Chris. Always good to be with you. Uh, good luck, uh, wrapping up the rest of this harvest, and we look forward to checking in down the road.

Chris

Barron: Yeah, that's for sure. We will be back to, uh, bug you again. We're getting close. We're, we're probably about 30% of our harvest to go here yet, and, and, uh, hopefully get things wrapped up in the first part of November. And I think a lot of guys, hopefully if this weather would dry back out in a lot of areas and let guys get rolling for another week or so here. I think we'd get a lot of things wrapped up. So thanks a lot, Mark. Appreciate it.

Mark

Welch: You bet. Y'all take care and be safe.

Chris

Barron: Yep, will do. And thanks everybody for listening. Be safe out there, and we will catch you again next time on the Ag View Pitch.