Weekly market outlook: volatility continues

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, and we are heading into a new week. This is Chris Barron and you have Joe Vaklovic with us. How's it going, Joe?

Joe

Vaclavik: Doing great. We got some real nice weather here in Tennessee this weekend. It's going to be mid-60s and sunny. Baseball season started. I'm coaching Little League again, and we've got our first— we've already been practicing for 3 weeks, 4 weeks. We've got our first game coming up here in a couple days. So spring has kind of sprung down here at least.

Chris

Barron: That's good. I was in central Illinois last week working with a producer, and it was interesting. As you got further south, you could see that some of those guys were scratching around a little bit. I think farmers are getting itchy and our kids on our end are going to start golf here this week. And so it's going to be, going to be spring full throttle, I think.

Joe

Vaclavik: Yeah, I'm sick of winter. I'm ready for some warmer weather.

Chris

Barron: Absolutely. Yeah, that's for sure. And this whole COVID thing and stuff, you know, we're ready for a new season, that's for sure. But what I want to do real quick for starters is if we look back at last week just for a minute, kind of a quick question. Thursday we had, we saw some kind of strong losses, or it appeared that way, and it, it kind of made you sit up on your seat and look at that, at the red. And then Friday we kind of recover and, and things kind of seem okay. But that's just a good sign of volatility, isn't it? I mean, what do we, do we make anything of that, or is there some threats going on there? What, what do you think that, that meant?

Joe

Vaclavik: I think Thursday was a real interesting day because not only did you see a big sell-off in the grain markets, but it was really a broad-based sell-off across a lot of different asset classes.

Unknown: You had the stock market sustain some heavy losses.

Joe

Vaclavik: You had the energy markets with a huge down day. That was the day that crude oil was down $4.50 a barrel. You had the livestock down sharply.

Unknown: It felt like there was broad-based selling.

Joe

Vaclavik: It could have been something as simple as, as one or two big funds reallocating positions or liquidating positions. I think also that the rising interest rates had something to do with that. You know, we've had this spike in the yield on the 10-year note and on some of the longer-term Treasury items, and that can kind of spook investors sometimes, and it can actually pull some money back into Treasuries, whereas that hasn't really been a big, you know, anything that's real attractive. And it's still not attractive at these levels, but it can spook the market a little bit short-term.

Unknown: So I think Thursday feels like this broad-based sell-off across a lot of things.

Joe

Vaclavik: And then the grains kind of separated themselves on Friday. I would probably say, in my opinion, I don't know that the trade necessarily expected that corn sale to China on Friday. Those sales on Tuesday and Wednesday I think were kind of expected.

Unknown: Fact that I think they've been pressed into the trade a little bit. But that last one, I'm not quite sure about that.

Chris

Barron: Hmm, interesting. So, you know, as we look at China and think about, you know, that's got a lot to do with it, looking back at last week and the corn purchases as a starter, you know, and the talks and what's going on there, you know, politically on that side of it too. Can you talk a little bit about— I mean, China has been one of the, the drivers to the strength in the market, but on the same token, there's probably some threats here with China with respect to what we might be seeing as prices as we move forward. So as producers, what things should we be watching with regard to China?

Joe

Vaclavik: Well, China has bought more corn from the U.S. this year than they've ever bought. They've already got more than 19 million metric tons of corn from the U.S.

Unknown: on the books, whereas I don't know that they had ever done more than like 5 or 6 in a given marketing year previously. They had not been importing more than 7 million metric tons a year. So to put that in layman's terms, I mean, China is going to import like 4 or 5 times more corn this year than they had been in any year in recent memory.

Joe

Vaclavik: And a lot of it is coming from the U.S. The risk here, if there is a risk, and this is all positive, I mean the fact that China has bought all this corn, continues to buy all this corn from the U.S., it's all a big positive.

Unknown: It's all been a big factor in the rally in the markets.

Joe

Vaclavik: Your risk here regarding this China situation, if anything, is that we still have a ton of corn to ship to China.

Unknown: We've got, I think, unshipped sales sales to China at like, I think it's 600 million bushels or pretty close to that.

Joe

Vaclavik: And that means that we essentially, between now and the end of the marketing year on August 31st, we're going to need to essentially average like record shipments just about every single week to get all this corn out the door. And it's possible, it's definitely possible. But the other thing that could happen is that, uh, let's say 2 months from now Brazil looks like they're going to have a really big crop. China could very well cancel or switch some of these purchases to South America. It's very possible. I don't have any reason to believe that that's the case right now, but if the right scenario unfolds, Brazil has a really big crop.

Unknown: There is precedent for China canceling sales.

Joe

Vaclavik: I think it was, it was 2013 or 2014 that China had bought some corn from the US, not nearly what they bought this year, but they ended up canceling like half of it. And I I don't— again, I have no reason. That's not what I'm expecting or predicting, but it is a risk, at least I think, in my opinion.

Chris

Barron: Okay, as far as we see it from a farmer's perspective, one of the things you've always talked about, and we talked about this the last time we had you on, was the length from the funds and in this market and what that means to, you know, market strength. And probably volatility a little bit too, which gives us opportunity, you know, pricing opportunities. What's your thoughts there? I mean, can we get it, can the funds get even longer yet, or, you know, are we kind of tapping out that side of it?

Joe

Vaclavik: Historically speaking, the funds hold what I would consider to be an extreme long position in the corn market.

Unknown: As of last Tuesday, CFTC said that funds were long 361,000 contracts of corn.

Joe

Vaclavik: That's larger than any— that's a larger amount of length than at any point in 2012 during the drought. The only time funds were long more corn than that was in 2010-2011. There was a timeframe.

Unknown: What's changed here recently, and maybe you've talked about this already, but The CFTC and the CME have increased the amount of contracts that these large speculators are able to hold.

Joe

Vaclavik: So if there was ever a time for fund traders to extend length to levels that we've never seen before in the corn market or in the soybean market, this might be it because you've got your fundamental story, you've got some generalized inflation in commodity markets or upward movement in commodity markets. Commodity markets, whatever you want to call it, and now you've got the funds with the ability to increase these positions. So if you were to see new record length in corn this summer on a weather issue or something, that would not be surprising to me.

Unknown: Now in soybeans, the fund length is a little bit more modest right now. It's still what I would consider to be large historically, but it's not extreme. It's at a level about 156,000 contracts.

Joe

Vaclavik: Which is a level that we've seen on and off over the last 4, 5, 6 years. It's happened on a handful of occasions. So it's not an extreme, but, you know, again, put another dollar on this market or get some weather issue and they could very easily be record long in the bean market. Typically, the way that I like to use the CFTC data is like this: if the funds are modest to heavy short the market, That's typically when I know that I probably shouldn't be selling anything, or I should avoid sales if I can, because just about every single year in the modern era of record keeping, funds have went long the corn market, at least 100,000 contracts. They went long the soybean market in every single calendar year since they began modern record keeping in 2006.

So that's the first and probably most important thing to me, is that if the funds, large speculators, are real heavy short, that means we're in a down market, we're in a bear market, that's when I want to avoid sales. When I'm more interested in making sales is when the funds are long the market or extremely long the market. The problem with that, or the flaw in using only that as your indicator, is that in a year like this, you would have been selling at much lower prices because the funds have been long or heavily long for such a long time now. So it's not a perfect strategy by any means. But it has helped me—

Unknown: that particular indicator has helped me to avoid sales in bear markets or at very poor prices over the years. Mm-hmm.

Chris

Barron: That sounds like a good strategy. Definitely something to pay attention to. That leads me to another—

Joe

Vaclavik: Yeah, it's like, it's, you know, it's one indicator of a lot of indicators. Right. And it's one that has its purpose, but it's not— it's by no means the only one.

Chris

Barron: Right, right. So that leads me to another topic here, and as we march toward the quote-unquote March 31st USDA report planning intentions and farmers on, on what we see from the Ag View Solutions side of things with planning intentions, we, we haven't seen a huge amount of change, you know, one way or the other. There's a lot of people pretty much staying Similar to what they do, there's a little bit of maybe leaning towards soybeans in a few areas, and there's a little bit of leaning towards corn in a few areas. And so it kind of depends on where growers are at and what their agronomic needs are. And, and producers just every year continually get more intelligent about these, these decision-making, uh, deals. And so sometimes it, it almost frustrates me when I hear, well, farmers like to plant corn. Well, at least all the producers I work like to make money.

And so they're looking at, you know, from what we see anyway with our clients, looking at, okay, where's the, the profit potential? How does this fit in not only this year but next year? And, you know, you make a change in your, in your plan this year, it's going to affect 2022, and you got to be thinking, you know, multi-year. So having said all that, you know, and as we look at corn versus soybeans, is there any, anything— I mean that you're seeing from your client base or anything that gives you any kind of indication that— is there any surprises out there? Are we gonna, you know, is there anything that, that from a farmer's perspective that we should be setting ourselves up for in advance of that report as we move towards that?

Joe

Vaclavik: I typically go into these reports with the idea that there's going to be some sort of surprise. There typically is. Very rarely does the trade or the pre-report estimate, uh, really fall in line with what USDA prints. There's— it seems like there's always some sort of surprise. I go back to last year before we ran into some weather issues. USDA in, in March, on March 31st last year, told us we were going to plant 97 million acres of corn. That's the survey results on March 31st revealed. And during the survey period last year, December corn was trading $3.60 to $3.80. That was the price range during the first, uh, couple weeks of March last year. So even with prices at $3.60 to $3.80, we were going to plant 97 million acres of corn. That was the intention. Uh, last year soybeans were trading $9 to $9.20 during the survey period.

Unknown: And they estimated soybean acreage at 83.5. I have this— this is not a prediction, this is like a gut feeling type thing— I just, I feel like the corn acreage is going to be higher than what people think.

Joe

Vaclavik: And, and the only reason that I think that is because every time that I've ever seen corn make money, or even not make a whole lot of money in some instances, it just seems like that corn acreage number seems to surprise to the upside. And I look at the board, which was averaging, you know, during the survey period in the, in the 470s. Gosh, that's got to buy a lot of acres. And I get that soybeans make money too, I understand it.

Unknown: I kind of feel almost like acreage of both of these crops could end up being larger than expected.

Joe

Vaclavik: I know that USDA in their Ag Forum said like about 182 total combined corn and soybean acreage. I wouldn't be surprised if that was 3 or 4 to life, um, to be honest. But I, I don't really have any predictions about it, Chris. I just, I, I feel like the trade's gonna miss something really bad, as they typically do, um, uh, and, and I hope it's, it's, it's a friendly deal and not a bearish deal, uh, is, is my hope. But, uh, no, I've never— long story short, I've never had much luck predicting these acreage reports, and I don't know anybody else who has either.

Chris

Barron: Well, in, in my experience over the years too, it just feels like a lot of times Yes, these reports can be volatile, but a lot of times it seems like once the dust settles and you get about 2 weeks past the report, all the other news that was originally driving the market comes back in and is still the market-driving forces, you know, unless you have a massive shift one way or the other. It always feels like to me— is that, is that wrong to, to have that opinion?

Joe

Vaclavik: Well, a lot can happen from the time that the surveys are taken in early March to the time that the crop is actually physically planted. I mean, and that's where weather comes in. Weather is not just something that matters in June and July and August. I mean, weather starts to matter now, really.

Unknown: So a farmer may intend to plant this or that, but the weather may eventually steer steer him in another direction.

Joe

Vaclavik: And that's ultimately what we saw a whole lot of, obviously, in 2019 and, and some of last year to some extent. And the market, or the trade, is going into this with the assumption that weather is going to be mostly normal. We're going to take prevent plant acres back to mostly normal levels. We had huge prevent plant the last 2 years, 20 million acres in '19 and over 10 million last year. If you go back to normal, that means you only have like 2 million acres of event plan or somewhere around there. So the market, you know, typically the way that USDA works and maybe the way that the trade works is that we go in with the expectation that things will be mostly normal until it's not. And that's kind of the way that, that's the way that USDA's methodology works at least. Now what does the market think? That's a much more difficult thing to gauge.

Narrator: This is Alyssa with the Ag View Solutions team. Here at Ag View Solutions, we work with farms and ag businesses all across the country on cost of production, business decision-making, collaboration opportunities, farm and ag business structuring, and transition planning. We work with operations of all sizes to help you with the important decisions that need to be made in your business. If you have questions or would like to learn more about how we can help your farm and business, please email us at cbarron@agviewsolutions.com And thank you for listening.

Chris

Barron: So one of the last things I want to get to then is that as we go to and through and, and even after that report to an extent, is from a technical standpoint, and you can answer these questions probably, but, you know, our— a lot of farmers are like, do you think we're going to be able to, you know, to test these highs again and, and maybe get through them? So you take you know, can we see close to a $5 Dec '21 corn potentially, or whatever. And, and as I look at our clients, you know, our client base, the last time I looked at it about a week and a half ago and kind of averaged where people were at, it looked like sort of on average anyway, you know, about 38% sold on corn. So a little higher than what I thought. That meant there was some sales that occurred, you know, 2 months earlier when I'd averaged where people were at in that, in that 20% range.

So, so people have been making sales, you know, along the way, just kind of chipping away at it. And on soybeans, we're right at— we're seeing about the same thing, right at about 40%. Now we have some, a few that have very little sold, and we have some operations that are, that are at or just slightly above 50% when you look at the range. So having said all that, as a perspective of kind of what we're seeing with our clients, Do you, you know, do you think there's much hope to, you know, test those highs again, maybe get through them, or is it just going to take weather? Because we, you know, we've had this demand-driven market. Now you're talking weather. You know, it's going to take weather to carry it much beyond that or some new news, isn't it?

Joe

Vaclavik: Well, weather, weather has always been the biggest driver of grain prices.. And even in a year like last year, you know, people are going to look back at 2020 and this early part of 2021, and they're going to say, oh, that was the year that China came in and bought all the grain and drove prices up, right? And yeah, that has something to do with it, but did— you know, you got to keep in mind the corn crop in the U.S. was 1.5 billion bushels lighter, uh, at the end of the day than, than what USDA had projected early in the year. So it, it was not just China. The fact that the crop was much, much lighter than originally anticipated in this country has a lot to do with where we're at currently, and people forget that because you haven't heard about it in a long time. It hasn't been the headline, but as a matter of fact, that was the bigger swing item on the balance sheet.

It wasn't the exports. It was the fact that the crop was 1 billion or 1.6 billion lighter than what the government had anticipated back in May or June of last year. So weather, weather is always the biggest driver of grain prices, at least in my opinion. There may be somebody who would disagree, but I think most people probably would agree. So I think that if you run into a weather issue this year, markets are going to be a little bit more sensitive maybe than, than what they had been in recent years. We just don't have the wiggle room on the balance sheets like we have in recent— we have had in recent years. If you run into a real weather issue or even just a crop scare issue, I think there could be some phenomenal marketing opportunities this summer. And that's an if, that's if you run into a weather issue.

Unknown: So I think that in regard to new crop marketing, you probably want to have some bushels set aside, like a certain percentage, and tell yourself, I'm going to sell these bushels if we have a crop scare event in June or July.

Joe

Vaclavik: That's kind of something that I've had in my head for a little while is that, you know, I'm going to have a certain percentage, whether it's 15, 20, 25, 30%, whatever the number is, like I'm going to commit to selling those bushels on a crop scare rally in June or July. I think that having a little bit of flexibility in your marketing is probably good this year because of the fact that, or the risk, at least in my opinion, that you could have some really crazy new crop prices. To the upside if the right weather things happen. And again, that's an if. But at the same time, I don't want guys to abandon their grain marketing, and that's actually what I'm seeing right now, is that nobody's interested in grain marketing here these last several weeks because the markets have been sideways.

I think people feel like the markets are kind of bulletproof, and it's kind of funny just from where I sit, you know, I get, I get the frantic phone calls and the worry when the markets are down and out. And when the markets get really good like this, phones don't ring quite as much. Crickets. It really should be the opposite, but it's not. And that's how it's always worked. It's probably how it's always going to work. But just that would be a big kind of key thought for me to maybe leave you guys with, is that, you know, guys always get worried and are most like panicked about marketing, you know, when the markets are down and out. When the markets are up like this, Yeah, it's bulletproof. You know, the news is positive.

Unknown: There's not a whole lot to do.

Joe

Vaclavik: And I get that guys have been burned by sales the last, you know, 8-9 months.

Unknown: What's the worst thing you could have done the last 8-9 months in your grain marketing?

Joe

Vaclavik: The worst thing you could have done is like sell anything, right? All we've done is go higher. But this is not going to last forever. Could it last another few months? Sure it could. But, you know, don't abandon your grain marketing when things are good and then start to focus on it when things are bad. It should really be the opposite.

Chris

Barron: Yeah, one of the things too, um, get your take on this, but I like to see people as we get toward the busy season when, you know, we're busy planting. And as producers, and as one myself, I have to admit or confess to is that we get busy as heck and our minds are not on the marketing. And so, you know, you talk about having a percentage of it set aside for you know, a possible, you know, crop, you know, scare, weather issue during that June-July time frame. I also think there's a segment of that that needs to be set up during planting season. You put your offers in it and scale them up, and then, you know, don't go in there and change them. Just, you know, figure out what those numbers are, put those offers in, and then go plant your crop.

You know, it seems like if, if we don't do that, a lot of times we miss some opportunities because sometimes it's Sunday night or, you know, you don't know when it is for sure, or else you're laying under the planter and your hands are all greasy and you're thinking you should be making a sale. The next day the market's down and you're like, I knew I should have made that sale yesterday, you know. So it's— I think, like you said, it's just staying on the plan and, and making sure that you, you're disciplined and follow it.

Joe

Vaclavik: Yeah, I love the idea, of course, of having some target orders in. And at this point, I mean, any target order you have in above the market is going to make money for you. What I would stress to the grower as we get into the planting season, as things get really busy— I did a podcast episode, I think, with this exact title one day— just spend like 5 minutes in the morning before you go out to look at the markets. Look at your spreadsheet, look at your budgets, just take a glance at everything. I mean, you know, your job is to grow a crop and then sell a crop. Don't forget about the sell the crop part. If you can dedicate just even, even 5 minutes a day in the morning before you, before you head out for the day to just examine and run through your numbers, take a look at your brokerage statement, take a look at your spreadsheet, that can really go a long way.

And a lot of guys don't even put in that 5 minutes. And I think, yeah, just do that.

Unknown: Just take that 5, you know, 5 to 10 minutes in the morning before you get moving.

Joe

Vaclavik: That, uh, that could really, that could really help you out quite a bit, right?

Chris

Barron: Hey, one real quick, one last thing here on, on— we haven't said— we've been kind of talking around all of these principles and information and things in perspective around the mostly the corn market. Any comments on soybeans or wheat that people need to be watching this next week, specific or kind of the same?

Unknown: I'll start with wheat.

Joe

Vaclavik: Wheat has been sluggish. We've kind of negated what has been a longer-term uptrend, especially in the Kansas City wheat market. The SRW wheat market's been under some pressure also. Wheat's kind of interesting to me because it's getting really cheap compared to corn. Mm-hmm. Kansas City wheat old crop is within—

Unknown: what is it? It's above corn by 30 cents.

Joe

Vaclavik: That's very, very tight. So I'm kind of curious to see what's going to happen with wheat.

Unknown: Can Kansas City wheat and corn go to parity?

Joe

Vaclavik: I mean, it's happened before, but it probably doesn't stay there very long. And then the wheat, you've got like this totally different story. The demand's really not that great.

Unknown: We've still got a lot of wheat. We've had some really beneficial rains. Over the Plains and even over the Midwest here recently.

Joe

Vaclavik: So the wheat is like kind of a red flag to me to some extent because it shows that these markets are not bulletproof, that they can go down, that these trends can be negated.

Unknown: Soybeans look really good to me still.

Joe

Vaclavik: Any of the chart work that I've done suggests that we're still— this uptrend that began really like in August of last year is is still very much intact, and the soybean conversation is closer to the corn conversation in that, you know, if there were some sort of weather issue that should arise, upside potential is substantial. And I kind of view it the same. Like, if we get that crop scare, you should have a percentage of your bushels set aside to price, which I know is always difficult to do. I should have mentioned this, but if there's a crop scare issue, there's a good chance that there's a crop scare issue in your backyard also. So, you know, just making flat sales may be a little bit easier said than done. That's where, you know, a time where some sort of option strategy or some sort of more flexible type marketing strategy could come in handy. Gotcha.

Chris

Barron: Okay, last thing, go ahead and give a plug to your, your podcast, your Grain Markets and Other Stuff, and your Grain Marketing 101 series that you've been doing. I know a lot of our clients pay attention to that and you do a phenomenal job. Tell us real quick as we wrap up here what you're up to.

Joe

Vaclavik: Well, I started doing, running the podcast January of last year, so it's been, what, 13 months now or so? No, 15 months. Podcast is going really good. The podcast is called Grain Markets and Other Stuff, and there's a YouTube channel by the same name. Everything I do is is in video and audio form now. I do a morning update every business day. It's posted on all the podcast apps at probably 6:45 AM Central Time every day, and it's like a really quick 5 or 6 minute listen where I basically just kind of run through the headlines. I tell you what's happening in the markets.

And then I've been doing some of this, uh, more educational type stuff, um, where like you mentioned, the Grain Marketing 101 deal is a live stream that I do I've been doing it like every 2 weeks where at about 7 o'clock PM I'll jump on YouTube and Facebook and do actually a live video where I'll discuss some of the more like basic fundamental items in grain marketing. Like the last couple episodes I think I did one on capture and carry that was real popular. I did one on just put options, like real like basic kind of grain marketing fundamental concepts.

Unknown: Stuff that's not related to what's going on in the markets currently, just kind of basic concepts that farmers need to understand when it comes to grain marketing.

Joe

Vaclavik: So that stuff's been going great.

Unknown: I've had a great response to it. It seems like people are really interested in learning more about even these most basic items. Like, there's this whole range of skill levels and knowledge in regard to farmers and marketing.

Joe

Vaclavik: Like, you've got guys who are real novices who are just getting started. Seems like you've got a lot of transition type stuff and operations right now where, you know, maybe it's going from, from father to son or whatever, and the son's just having his first year or two in grain marketing and it's just getting started. Had a lot of interest from people like that, but even some of the, even some of the older guys, the more experienced guys, you know, could always use a brush up on some of this stuff. So it's been, uh, it's been a good deal.

Unknown: I think people like it.

Chris

Barron: Yeah, that's awesome. That it's definitely something that we recommend that people pay attention to. You're doing a phenomenal job with it, so just wanted to make sure you Could mention that. Joe, thanks a lot for the conversation today. I think it was really good, and, and, uh, if anybody needs to get a hold of you, how do they do that?

Unknown: Uh, go to my website, it's standardgrain.com, or my email is info@standardgrain.com.

Joe

Vaclavik: And if you email me, I actually, I'll respond to you pretty much immediately, uh, during, during business hours at least. If you have questions, concerns, you need a copy of the chart or something, uh, don't, don't be afraid to get a hold of me.

Chris

Barron: Sounds good, appreciate that. Hey Joe, thanks a lot. Joe Vaklovic, Standard Grain, and appreciate the conversation. Appreciate everybody listening, and we look forward to talking to you next time. We'll catch you again on the Ag View Pitch.