Will Santa leave a marketing present under the tree?

Mark

Welch: And it all comes down to this. 2 on, 2 out, bottom of the 9th. The Farmers lead by 1. Full count, here comes the play at the plate, and it's the Ag View Pitch!

Chris

Barron: Welcome everybody to another episode of the Ag View Pitch, and we are heading into a new week. It's a short week, it's a holiday week. We're getting into the holiday season absolutely now with Christmas being in this in this week and the new year. Thank God coming our direction. And I guess I'd like to introduce Mark Welch with Texas A&M. He's the grain marketing economist. How you doing today, Mark?

Mark

Welch: Oh, doing well, Chris. Great to be with you.

Chris

Barron: Well, it's great to have you. And so I'm going to start right out of the chute here, and we talk about a holiday week that we're going into. And this past week we, uh, finished up strong. Are we getting some Christmas presents under the tree here on the marketing side that we need to maybe take advantage of a little bit?

Mark

Welch: Well, I think that's a great way to look at it, Chris. If you look at the strength that we've seen in these grain markets, you know, coming off the lows that we kind of carved out last, you know, late July and into August, and then the rally that we have seen, uh, certainly it's one whether you've got crop in the bin, uh, that is unpriced, or whether we're looking at the crop that we're going to be planting next spring.

Uh, I think it's certainly time to evaluate what this pricing opportunity means, you know, what's going on on the board, what's happening in your local basis, you know, having those conversations with wherever your grain is going to go, uh, whether it's an ethanol plant or your local co-op or a feed mill or whatever your outlet might be, to have those conversations of when we see what's happening on the board, uh, what opportunities is that creating that we might not want to let slip away, uh, in that, uh, you know, these, these conditions may not last forever. But, uh, gosh, I'd hate to see us not reward this market with maybe getting something done at these prices that we've seen. It's been great.

Chris

Barron: Yeah, for sure. So, um, we'll come back to the kind of the what to do, but let's talk for a few minutes here about some of the drivers, some of the things that are, you know, keeping this market strong, it seems like, and giving us some strength. We've seen some continued pretty, pretty strong export demand. Talk a little bit about that.

Mark

Welch: You know, one of the most, I think, interesting things that I've been tracking in the grain markets kind of in general, and I'm talking about food grain and feed grain, and I'm even throwing in soybeans. If you look at what's happened to world per capita grain consumption, and I've got a chart that I build on that going back to the 1970s, and from about the mid-'70s to the late 1990s, world per capita grain consumption was basically flat. In the late '90s, we've been on a strong upward trajectory. Of course, I think some of that's biofuel, but even before and after the, you know, the biofuel boom, we've seen that trajectory increase. And it's tied— the greatest correlation that I have found to that strong upward trajectory in grain consumption is the growth in incomes in the developing and emerging economies around the world.

Much of that is centered in Asia, and, and that we're in that part of the world. And so as those economies do better, our exports do better. And it would appear, at least at this point, that even coming out of the pandemic, that those economies are recovering faster than some of the rest of the world. And I think that's good for world grain consumption. And if you look at corn exports specifically, of course, we know the role that China is playing in the current marketing year. If you look at where China was a year ago, they were at about, uh, 7, 8 million metric tons. Uh, they're going up to 16 or 17 in the current marketing year. That's a big change. Yeah. So they're, they're a bigger piece of the pie, but the pie is getting a lot bigger. Uh, if you look at the world trade of corn, we're going from 158 million metric tons to 180 million metric tons.

So we're increasing the total trade by 22 China is accounting for less than half of that. So again, that the demand growth, the consumption patterns are strong. And then if our export competitors are having some crop production difficulties, specifically Ukraine and Argentina, that brings more business to the U.S. farmer. And so, you know, I think that's been the underlying strength on that, on those consumption numbers and certainly have been very positive. For a price outlook as well.

Chris

Barron: One of the things that, you know, you talk about the competitors, you hear so much about South America. What's the impact there specifically that we should be, or should we be watching out for that as, as you know, we get a little further into the season here?

Mark

Welch: Right. And that's a really good point that that is not a settled issue by any means, uh, in that, of course, Ukraine's crop was down considerably, uh, in much of Europe. Particularly Eastern Europe, in the 2020 crop. Argentina is particularly dry, and they're going to have production problems. But when we talk about Brazil, the current projections, at least from USDA— and of course we'll get private forecasts and things through the winter and early next spring— are for an increase in corn production coming out of Brazil. And the primary export corn crop won't be planted there until they get their soybeans out of the way. And so we're talking, you know, February, March, and they'll be planting that second crop of corn. That's their export corn right there. And so we'll be watching that, of course, as we get through the spring and what conditions might look like there.

But there's no question that the higher price structure in the corn market, the incentive is there for everybody to plant more corn next year. And the limiting factor will be the, you know, the weather conditions that will impact what that final number in terms of production is going to be. But the incentive is there for us as well as all those other major producers, which are increasing in terms of the export competition they bring year to year. It's a steady rate of increase. If you look at South America, you look at that Black Sea region, it's on the growth. And so as we see growth tends there in our competition, it'll be a matter of weather in terms of the degree that that will actually compete with us as we get into the new marketing year. Of 2021.

Chris

Barron: Yeah, so that's a, a lot to, to consider, a lot of things to watch on the export side of things. One other question I have for you on corn that appears to be potentially a pretty strong threat yet in the next few weeks and months, we got to watch really close, I think, is ethanol. Any comments on, on that as a threat potentially to the market and to what degree?

Mark

Welch: You bet. The chart that I look at the most closely to try to gauge what's going to happen in the ethanol market is gasoline demand. And we're still looking at gasoline demand compared to levels of a year ago. We're still down about 10% in terms of gasoline consumption in this country. And of course, then gasoline consumption is the primary demand factor when we look at where ethanol is going to go. Now, there's still some exports. Another factor that could change that, if we were to burn higher blending levels of ethanol, you know, that could support higher ethanol consumption even in a period of when gasoline consumption is still sluggish. But again, tied to the broader economy, how quickly do we get the economy back to something that looks more normal? I think gasoline demand is a good barometer of that.

And as long as gasoline demand is struggling at those levels below— what we've seen, say, in the last several years, then I think that's going to put a damper on ethanol. The other factor, I think, for ethanol, if you look at the longer-term projections for gasoline demand in this country, are that it's not going up. We are burning gasoline in vehicles that get better gas mileage. We're not driving any more miles on a personal level, based on estimates by the Energy Information Administration.. And then we're driving more vehicles that don't use gasoline at all. Now, that's a very, very small percentage, but it's still— that seems to be the growth segment of that transportation industry. So, you know, longer term, it doesn't look like that demand base from gasoline consumption in the U.S. is a growth market.

And so I think that's going to be a challenge then for corn and, well, feed grain for fuel. Moving forward.

Chris

Barron: You talk about, you know, corn and a lot of these feed grains. Talk about that too on the consumption side there domestically. What do you see there? Any threats or any opportunities there?

Mark

Welch: You know, I'm really looking at domestic grain consumption moving forward to be flat, really at best, over the next year or so. Again, based on what's happening in the ethanol market Now we look at, you know, grain sorghum and its small contribution to the ethanol market with strong export demand from China. We're not going to send a lot of ethanol— excuse me, a lot of sorghum to the ethanol plant. And so that creates a little more space for corn. But again, I think with the ethanol being flat and on feed use, you know, we saw grain-consuming animal units, again, a number tracked by USDA, went down. In 2020 for the first time in 6 years. And so what kind of rebound or growth if the economy gets better, and we might see perhaps more animals going on feed down the road in 2021.

But with higher grain prices, our livestock and poultry industries have gotten pretty efficient in terms of the feed per grain consuming animal unit. They can get a lot more pounds of protein out of a pound of corn. Than they could a few years ago. They're getting better and better at it. Right. So I think that even caps— if we do see even those animal numbers come back up, I think just the efficiencies and the impact of higher costs will limit the bushels of grain that actually go there. So again, I'm looking domestically. I don't see a lot of growth. And that's why I think exports are the highlighted point of my balance sheet to sustain prices like we've seen this last fall.

Chris

Barron: Yeah, the last thing I want to talk about, about some of these market drivers here, and a quick question, and then I want to get into putting you on the spot a little bit here and talking about some of this 2020 inventory yet in 2021 decision-making. But real quick before that, we've seen some pretty strong interest with the funds coming into these markets, and obviously they're a big driver to make these markets move and give us, give us strength and sustainability. What, what's your thoughts there? I mean, we're seeing, you know, some pretty heavily long-positioned situation here. Any comments on that risk there or opportunity there that you see?

Mark

Welch: You bet. And it's so interesting again to see those numbers because they're reported by the Commodity Futures Trading Commission. They come out every Friday afternoon about 2:30, and it's, you know, traders, speculative traders in the market, and as well as the index funds. And they come on Tuesday afternoon, what their positions were. And to see that huge swing from those speculators in the corn market, they were at record low— excuse me, record low, yeah, long positions, or net longs were at a record low level. They had more short positions on the market in August than they ever had before. And then now we're seeing them tracking to near record net longs on the upside. So just a huge swing in just a few matter of months, and obviously the correlated price with those positions.

Now I'm not gonna sit here and say that caused the price, you know, that's an argument for some other folks, but certainly there's a correlation there. And so I think that's given us a lot of support for this rally and the trend that we've seen upward in prices. So we get toward the end of the year, as you mentioned, the trading year kind of winds down, things kind of slow down, people taking time off for holidays and maybe stepping away from their account. Could we see perhaps some profit taking? I want my year-end, you know, trading balance to look pretty good for my year-end reporting. Am I able to maybe take some of these positions off the board and then reassess after January? You know, that would be kind of typical.

And so just from that speculative trading position and the volatility associated with that, you know, I think we could see maybe a little top of the market maybe come off in that regard. Whether the fundamentals change at all, Jason, on the activity, especially when they're at these record high levels of trading volume. So I think that creates, and as you just mentioned, creates a lot of volatility. It's also creating opportunity. And, you know, I can't predict what that group of investors is going to do. You know, I try to look at fundamentally based on where the price is, whether it's because of speculative speculators driving the price up or fundamental aspects of the market? You know, is that— do the fundamentals support what that price is projected at right now? And so that's kind of where I come back to.

And how much premium maybe are they putting in the market relative to what I think the fundamentals would support? And so I think we're seeing a little— is their enthusiasm maybe outrun the fundamentals? Maybe to a degree. Uh, and so again, I think that is an opportunity of which we need to be aware, uh, recognizing that's a, that's a bunch that could change their positions very, very quickly, and there would be some price impact if they decide to sell off a bunch of contracts here at the end of the year.

Chris

Barron: Yeah, there could be some, some price threat there. So with that all said, now, you know, there's a lot of drivers in here that, that can kind of take this thing one way or the other, or, or tug-of-war back and forth and create that volatility. But as we look 2020. And with our client base, we're, we're just getting a good start here now of actually looking at what final yields were, what, what, uh, the bottom line's most likely going to look like depending on how we, we price the balance of inventory from the 2020 crop. But one thing that's beginning to become very apparent to me, there's a fair amount of profitability in the majority of the operations. Now it's It's not too hard to find operations that didn't have a very good year that were in these drought areas or some of these other variables that have impacted their operation even with the additional aid that came in.

On the other hand, there's some very profitable operations. Any comments or suggestions from you on the marketing side as far as kind of wrapping up, so to speak, in this holiday season, wrapping up the 2020 and putting a bow on it and having it done so you can be focused on the '21 marketing? For a lot of these operations, particularly the ones that, you know, could probably just finish this thing up, put a bow on it, start focusing on '21. What would be wrong with that? I mean, do you, do you see a lot of strength potential for '20, or, or just talk about that for a second if you could too?

Mark

Welch: You bet. And again, I think it's one, a situation in which every, you know, individual producer and operation You know, everyone's situation is going to be different. One price, one basis doesn't work for everybody. But to, to look at the opportunities that this market has provided that it didn't look like we were going to get just a few months ago. Right. And again, I guess my concern is not let the rally get away. Now, that doesn't mean we sell everything right now. Would you lock in something even looking ahead to the '21 crop? Or looking for those tools and those commitments that you would make just to get some kind of floor up under this contract. Again, talking to your— whoever your grain merchant might be.

If you're not willing to do it on the board, talk to them about a minimum price contract, or what can we do to lock in the basis if we like that, what's being offered, and maybe we're not ready to do something on the price, or locking the price and not the basis. Right. There's so many— there's a lot of flexibility out there to manage these prices. But to just think that, well, I've got it in the bin and so now it's secure and somehow that, that lessens my risk. I'm not speculating in the futures market now because I've got the corn in the bin. Well, if that corn in the bin is not priced right, there's no less risk on the value of that in the bin versus what you've done out on the board, because that's what the board's what's going to drive what the value of what's on the farm.

So again, just evaluating the risk that is there and what this price has given us and all these factors we've talked about, you know, export demand and fuel fee and export competition. You know, we're projecting and we're speculating on, you know, what those impacts might be on our prices moving forward. You know, we don't know. Nobody knows what those future— what those elements are going to be in the future and what that supply and demand balance sheet what the price is going to look like next month, much less in May and June and next October. But we do know what the price is today, and we can look at that price level today, what's offered for you on your farm for your production, and is that price good enough? Maybe not for all of it. Is it good enough for some aspect of that production, whether it's old crop or new crop?

And at least have a plan by which 'You know, we're going to maybe orderly market this through the winter and in the spring and as we get the next year's crop going.' But at least given some thought to not letting this get away. And there are some tools and strategies that we can use to do that. And I think that's the important conversations to be having this winter.

Chris

Barron: Well, and, and, you know, and it still comes down to— I'll throw a couple of my two cents in there, but it It's really hard to stay focused on 2 years for a long period of time as well too. And, you know, if you're in a position where profitability looks pretty good and wrapping this thing up and putting a bow on it at the end of the year, I have never seen yet where people feel bad about that, especially if we haven't gotten started on '21 and we can start focusing on that. And with that said, Mark, 2021, we're looking at, you know, Dec corn at $4.18, soybeans at $10.81, you know, wheat's been very strong as well. What, you know, what's your idea on, you know, what's, what's a good percent sold to be to start with?

You know, if you started at these price levels, and hopefully that's your lowest price, but we're, you know, we're able to start right now as we look at 2021 with a lot of our clients going into a new year of black ink in almost every case looking at the 2021 opportunity. So to get started pricing, it looks like it makes a lot of sense, but to what degree do you think people should consider maybe plugging some sales in for '21, or what's your thought there?

Mark

Welch: It is going to be, I think, the dynamics of the pricing opportunities, how tied they are together. I appreciate you kind of bringing out that point. With the difficult planting conditions that we've seen the last couple of years, particularly up in your part of the world and up in the Northern Plains, you know, our planted acres of our major crops, you know, we're down some 10 or 12 million acres. So we've got a little slack built into what we've been able to plant the last couple of years that if conditions warrant and are a little more favorable, we could see a significant increase in planted acres of our major crops, right, in '21. And again, on the, on the to the tune of 10 to 12 million acres with strong corn prices, soybean prices, wheat prices, sorghum prices, good cotton prices.

You know, we're not just going to steal those acres from the South and the West like we've been able to do in the past. You know, those sorghum guys are there, they're seeing profitability. The cotton deal looks a little better. So we're not just going to, you know, scavenge those acres this year like maybe we've done a little bit in the past. So I think the competition is going to give us some support for that, but we're going to go for prices then for next year because the market is bidding for those acres. All that said, with the price ratio of soybeans to where they are to corn right now, that profitability for beans is very, very competitive. And if it stays in this— what the prices you just gave, if I do that ratio right, 2.58, Yep, somewhere along in there. That's a, that's a pretty strong number.

Uh, in the last several, uh, well, in this biofuel era when we've seen that ratio that stay that high in the spring, our corn acres and our soybean acres have been about the same. So if we plant 180 million acres of corn and beans in this country, that's kind of the top end of what we've done the last, uh, you know, last several years. Uh, if we're looking at, uh, you know, 90 million acres of beans That's still only 90 million acres of corn, right? We're going to need record yields to keep up with demand next year. If, if we just plant 90 million acres of corn, that, that's going to put some pressure on the market. Now, I think that's what we're seeing reflected even in the futures now with that December '21 contract trading where it is, that we're betting on not a big increase in acres and we're putting a lot of stake on a pretty high yield.

So I think there is That again creates opportunity. Could we see more acres than that? Sure. I think maybe, you know, 92, 93, 94 is very possible. But with bean prices as strong as they are, I think it'd be hard to get above that. And even just a trendline yield of, say, 178 bushels, you know, that keeps us around— the way I run the numbers, you know, $4.10 next October on that December contract. So there's still a little premium in where we are now. So those are the kind of factors that I kind of weigh against getting something done. Now, the question is how much, and that's gonna be different for every producer. But if you're not willing to lock in, you know, large percentages, that's fine. I get that. I think there's, you know, a long way to go before we have a good handle on what next year is going to look like.

But again, are there tools that let you provide a floor under some of this market, or at least have a plan by which we are going to either scale up some sales if the market continues, or cap— if this is it, this was the top, how are we going to handle that? How are we going to manage that situation? Are you more comfortable selling up into a market or let it top and then sell as it comes down? Everybody's different as they would look at those market opportunities. But not knowing what that top is does create a challenge. And so over time, would I want to get something done early in the year, you know, 10, 20, 30% maybe by the time we get into the January crop report. I think that makes a lot of sense, especially if it's already locking in a reasonable profit or a significant profit, which it will be for many producers at the levels we're seeing right now. And that adds to that incentive.

Chris

Barron: Yeah, it certainly is too. And you know, just looking at it from our perspective, we've just had too many years where we've put these numbers together and we've seen red ink at the bottom at the beginning of the year, and what saved us has been one of two things, either high yields or increased aid payments. And in this year, in some cases, it was a combination of both and has really created some strong financial year-ends in some cases. And I think in those cases, it's kind of a slam dunk just to finish up 2021 and kick the emotion of greed out of the equation. And then look at 2022 and kick the emotion of fear out of the equation of selling and maybe it's going to go higher. If I make a sale, I'll be mad. But like you said, if you start out at 10% and it goes up, you didn't sell the whole thing. You can still, you can still, you know, enter into this.

And if you're starting out in the black, it's, it's pretty hard, you know. And we don't want to give advice here, but we do want to give perspective. And, and you don't want to look at a Christmas gift that might be under the tree and, and pass it up when, when it's sitting there for you. And so I think it's just something that we all gotta look at our own operations and make our own decisions. But I think we also need to have some perspective and courage to kick the emotion of both fear and greed out of the equation to the best of our abilities.

Mark

Welch: You bet. And I think getting, stepping back and getting some perspective and looking at why we made decisions when we made them. If we're looking at, yeah, December calling the board at $418 and then throwing your basis If that price is a good price and it works for your expected production levels and your cost, and, and we get down the road 6 months or 12 months, we're having this conversation next year at this time. Was there a strong, valid reason for locking in some corn at that price? You bet. And evaluate that against what the opportunities are at that point, of course, moving forward. But yeah, there's some maybe a little seller's remorse if we sold some crop too soon. You know, particularly here in Texas, our corn crop comes out quite a bit earlier in much of our state. And so we saw a lot of grain that got sold in August and September. It was gone. Right.

And now to see this rally, yeah, that's very frustrating. That's very discouraging. But what an opportunity. I've got some more corn. I'm going to be growing corn next year. And so, yeah, you maybe got that one a little cheap, but I'm not going to let this one get away because I'll sell you some of that next one. Yeah. And the opportunities that that has created for us. And so I think, again, keeping it all in perspective, stepping back, evaluating why we do what we do when we do it, and the conversations around that, I think, just like you said, that removes some of that emotional response out of that and brings back a little more of an objective reason of, you know, we thought that was a good idea and this is why. And so we're okay with that. And so if our decision-making process is valid, over time that will lead, I think, to better decisions being made.

In any given year, maybe the outcome wasn't exactly what we thought it was going to be, but was the process flawed? And I think that's kind of where we need to be this winter, is how we make those decisions and what's mostly likely to lead to the better outcomes. A big rally right at harvest, man, that's great. Like, you— I like your analogy of a Christmas gift. How often does that happen? How many times do we see higher corn prices even in the second half of the year compared to the first half of the year? It's about 30% of the time, right? So it's gonna happen.

Chris

Barron: Yeah.

Mark

Welch: And it's the vast majority— it's— you're gonna see lower prices that second half of the year, not higher. And I don't know anything that's changed that. In our current fundamental situation that we're looking at moving forward.

Chris

Barron: Yeah, the biggest thing we've been trying to coach people on is to don't look at those early sales you made that you feel bad about because they were, they were too cheap. Look at, look at the, the remaining inventory, the opportunity that's there, your average price, not, not the low price you sold it at. What's your ending average price in addition to the, the aid and everything? What's that do to your bottom line? And then, and then just recalibrate and and roll into '21. But any final comments that you have and we'll kind of wrap this up.

Mark

Welch: You know, one thing that I do appreciate looking at just kind of year to year, and we don't have the 2020 numbers in just yet, the farm database that comes out of the University of Minnesota, that FinBEN database, where you can kind of benchmark, you know, what average, you know, production costs and prices and yields and in the top financial performers when it comes to either net farm income or specific enterprise compared to, say, the average or the lower performers. And to look what the top 20% of— in terms of corn revenue for 2019 is the latest information we have right now. But what are the top 20% producers doing compared to average or compared to maybe the low 20% performers? And if you look at those for 2019, the top 20% of the returns for corn, their yields were higher, they got a little higher price, and their costs were 16% lower than average.

So a better yield, a little better price, but a lower cost. And you're talking about what that— all those numbers break when you break it all down. The, the breakeven for corn in 2019 of the top 20% of financial performers in that FinBin database, their breakeven was $3.30 a bushel, and that's total cost. $3.30. The average of all corn producers was $3.94. And so if you look at those kind of— what, and again, a little better yield, a little better price, and they're watching their costs. What can we do to our operation in 2021 to address those 3 issues? Can you do— make those adjustments to do that little better in each of those 3 categories? And I think we start thinking that way, have that become part of our management psychology and everybody in the operation focused on those issues.

I think that's how we get to operations that are profitable and sustainably profitable moving forward with that kind of mindset.

Chris

Barron: Right, and, and those are excellent points. I would, I would add to that even and say too, one of the things we always notice, the quickest way to lower your cost of production is increase yield. If you look at the speed of which the cost of production reduces, and so I think it's, it's just also a warning to everybody to be really careful what costs you cut and how you cut those costs. It's, it's all about cutting the the appropriate ones. So it's, you know, being more efficient on the machinery and equipment and being more efficient on some of the expenditures that are, you know, needs versus wants type things. And some of those things for the business that actually will increase yield. And be real careful not to cut too much on crop protection or seed or, or those things that, that have the potential to either increase or protect yield.

Sometimes we spend a lot of time back and forth with our suppliers trying to save a, you know, a couple of dollars here and there, you know. And we might be thinking, well, we're saving $5,000, but if you divide that by the bushels, it's not even a penny a bushel, you know. Right. And $5,000 here, $5,000 there, you gotta be really careful of where you pull that $5,000 out of.

Mark

Welch: Right. And then we talk about getting that cost down, you may spend more money to get your costs down. Right. Right. Exactly. Because it's a correlation.

Chris

Barron: Right. It's correlation between price and yield.

Mark

Welch: Right.

Chris

Barron: Yeah.

Mark

Welch: And again, it takes a little time to slow down, run the numbers rather than the knee-jerk reaction, whether it's on the input side or selling on the production side. Right. Again, evaluating the plan around managing all of those issues. Is such a key component.

Chris

Barron: Right. Hey, I think this is a great conversation. We went a little bit long, but I think there was some good comments from you, Mark, coming from the university. A lot of times we can all use a little perspective and a little education to kind of recalibrate going into a new year and as we slow down for the holiday season and take some time with family and get our minds right again and come back at this and hit it hard again. So Mark, really appreciate it. Thank you very much for, for being on today.

Mark

Welch: You bet. Great to be with you, Chris.

Chris

Barron: You bet. And again, this is Mark Welch, Texas A&M Grain Marketing Economist, and we appreciate everybody being on. Have a great Christmas and look forward to catching you all again next time on the Ag View Pitch.