Wrapping up 2023: weekly market outlook, Dec. 26-29th

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 a new week, December 26th through the 29th. There's a very important day front part of that week though, called Christmas. And so we want to start out by saying, regardless of when you're listening to this, Merry Christmas to everybody. And with that said, we are also thinking about wrapping up 2023. And with that said, we are lucky enough to have with us kind of a really interesting and cool guy for the first time ever being on this as the host of AgriTalk, who's on there for 2 hours a day. So Chip Flory, we actually have a a famous person on the Ag View Pitch with us. How's it going, Chip?

Chip

Flory: I'll bet you've had more famous on here. I'm doing good, Chris. How are you?

Chris

Barron: Well, it's great to have you. You know, longtime friend, longtime, you know, I would call it business partner. We do, we do, we, you know, we communicate and have done a lot of things over the years together and, and really kind of grown up together, man. Yeah, exactly. Exactly. So You know, with that said, you know, you, you have the opportunity to talk to a lot of really sharp people in the, you know, in the whole market area. And as producers, I know, I mean, most of our clients listen to AgriTalk and they listen to the conversations that you have with all of these different pretty wise people that look at the markets, they study the markets, they analyze things. You've got your people that look at technicals, you got your people that look at fundamentals and everywhere in between. Yeah.

I have a key question for you, though, to start this going into this next week, into these next months. We've just seen some pressure on the market and stuff. Talk to me about how as producers we should funnel out the noise because there's so many opinions, there's so much stuff that comes at us in some— in so many different venues and things. As a producer, what should we be thinking about? How do we funnel the noise?

Chip

Flory: Yeah, it's a great question and a tough problem to, to overcome at times. There's no question. You know, I'm going to throw one more category of people into the types of analysts that we talk about on the show. And sometimes it's just people that think differently. And it's not very often that you're going to hear a grain analyst say, You know, it's that time of the year. Just turn the screen off, check it and check, check it in the morning to see what the overnight did. Check it at the close to see where things wrapped up, but turn the screen off during the rest of the day because right now that's just a bunch of noise. Don't, don't worry about that so much. And it really comes down to just how much you can trust the price action that's happening right now in a low volume environment and a low volatility. Environment. And low volume scares me.

And I think it should, should scare everybody because if there's a headline that, that comes out and it causes prices to move in one direction fairly rapidly, that's going to trigger the computers and you get a bigger move either up or down than what you probably should get. So it's difficult to trust the moves. It's difficult. To anticipate what some of those moves are going to be. But the— you know, I guess the best way at this time of the year to get rid of some of the noise is just to turn it off and, and stay focused on some of the things that are more important to you. You know, let's, let's wrap up the business for the year. Let's make sure that we're going to be to Christmas dinner on time. Let's make sure that we're going to do some of those things with the family. That, that we've, we've probably promised to do for the holiday season. Exactly.

Focus on, focus on the things that are more important, I think.

Chris

Barron: Yeah. So great advice. Great advice. Now, like I said, we've seen the markets really change, you know, since last summer. We had these big opportunities. We had weather issues. We had all kinds of unique challenges and considerations that I think made a lot of producers hold back, maybe more than they would have. And one of the things is, is, you know, we, we got trained for a couple of years there that doing nothing was the right thing to do. Yeah. And you couple that with all this other stuff I just mentioned, there's a lot of people sitting on a fair amount of old crop inventory.

Chip

Flory: Yeah.

Chris

Barron: If you put your farmer hat on and you're one of these guys is sitting there, you know, and it varies all over the board. You know, there's people sitting there with 20%, there's people sitting there with 80% and probably everything in between. Yeah. Unsold. What, what are some of the things that producers should be focused on from a practical standpoint, in your opinion, with the experience you have and, and over the years of seeing that, what are some of the key things that producers should be?

Chip

Flory: I'm going to assume that beans are pretty much gone and that beans have been sold for cash flow. We're paying off the bills. From '23, and some of those bills are going to be for the most expensive corn crop that was ever planted. So I would assume that we're talking primarily about corn here. Yep. And the thing is, I started getting texts and messages just last week, guys feeling pretty good about themselves, loading up the, the trailers. With $6.50, $6.70 corn, you know, stuff that they had sold. And the co-op or the ethanol plant, whatever it is, called them up and said, hey, don't worry about waiting until January, bring it in now. We're starting to need some stuff coming in. So they're delivering some of that high-priced corn from, from that was sold probably in June or early July. And, and they're feeling pretty good about that.

The problem is they got to drive by that bin that's still unpriced. And so that can put a bit of a pit in your stomach, I think, as you're looking at that, trying to figure out exactly what it is you want to do. You talk about all the people that, that I get an opportunity to speak with during the years, and there are some that are— when they get on the show, they are all about risk management. That's all they want to talk about. There are others that are really into doing the outlook. They want to talk about this is what I think the markets will be doing in the weeks and months ahead. But one of the guys that stays so focused on this is a market, you've got to, you've got to focus on your, your strategy is Brian Bastin at Advanced Trading. And his one of his favorite lines is get control of the inventory that you've got, get control of the bushels you've got in the bin.

And what he's saying, what he's, what he's saying when he says that is put a price on it, but put a price on it and remove that physical risk of the crop that's in the bin and transfer the risk over to paper. If you think you're selling it too cheap, then buy a call option. And with what's going on down in South America right now, Chris, That might be the exactly right, exact right thing to do. Go ahead and, and move that, that corn that's still in the bin that you don't know what you're going to do with. Well, sometimes the best thing, if you don't know what you're going to do with that corn, is to do something but maintain your risk with it by with some flexibility in your marketing plan, whether you you buy it back with the call option or even with the futures market, futures contract in the volatility that we've got right now, I don't see how that's going to hurt you too much.

And plus with corn, with old crop corn down here at contract lows, I don't want to say that it can't go much lower because it can. I, you know, it can go another $0.50 lower. Yeah, absolutely. By the end of the first quarter, it could be another $0.50 lower. That can happen. Odds are with what's going on in Brazil, with some of the export demand that's around, we're going to get an opportunity after the first of the year. We typically do to take advantage of, you know, a New Year pop in corn prices. So, yeah, get control of that inventory, put a price on it, move your risk over to paper.

Chris

Barron: So with that being said, getting control of that inventory, let me paint a possible perspective for you. So we're, we're January 7th and the market has rebounded some. Let's stay on corn here then. Okay. So you see corn pushing that 5-something range, 5.07, 5.10-something. What's the process there then? Just sell it and run and buy a call, or do you stick a fork in it and call it good?

Chip

Flory: If it, if it's another $0.30 or $0.35 higher than what it is at Christmas time, I'm probably going to go ahead and sell it and then wait a little bit. Wait a little bit before I buy that call option because this, this market with fundamentals that we're dealing with, the most positive fundamental in the market is something that hasn't happened yet. And that is a big drop in the safrinha corn crop out of Brazil. It's expected that that's going to happen, but it hasn't happened yet. The, the current set of fundamentals, what we do know is that carryover is expected to be 2 billion bushels plus. We've got a decent export sales pace on corn, but our shipment pace, yeah, I'd like to see that improve. I'm still a little concerned that China is going to cancel some of the buys that they made. So there's some questionable fundamentals in here.

So with all of that, the narrative, the story that corn is telling us is fairly negative right now. So if you get a $0.30, $0.35 move to the upside in this market, I think that's a pretty good move. That's a rally. That's a rally in this market. And, and one that I think you go ahead and like you said, let's go ahead and put a price on those, those 23 bushels and move on.

Chris

Barron: So if you do that, what's wrong with just sticking a fork in it and being done? Is it what you're saying is it sort of depends on how much you had sold before that too? Are you, are you sticking a fork in 50% of your sales or 20% of your sales?

Chip

Flory: Great point. Great point. Yeah. If you're sitting there and, you know, I think I'd probably do that on up to if you're 75% sold, that's kind of a no-brainer to me. You let that last 25% go. If you're sitting at two-thirds sold, Okay, I might— it's getting tougher to do. Getting tougher to do, but I'm still going to sell a chunk of that. Half would be really tough to do all in one time. Mm-hmm.

Chris

Barron: Well, but it might be the prudent thing to do. I still, you know, as, as producers listen to this, they got to look at a bunch of things, right? They got to look at cash flow. They got to look at their interest rates. They got to look at what they have, line of credit. When their rents are due. There's all these— it's amazing how we got to spend money, you know, and then we're seeing this working capital reduction coming off of these balance sheets too, which is kind of a scary thing. So let me, let me continue a couple of questions in this line of thought here real quick is with, with the corn then. And we, we start looking at 2024 and we see that kind of a price on the old crop that might be giving us $5.25, $5.30 on that Dec '24 or something. I mean, what's your thoughts there? I mean, what are the funds thinking too?

So what should, you know, I mean, do we need to be paying attention to any of that, or we just be looking at our own stuff and say, you know, because the cost production we're seeing, I think I told you that on AgriTalk, I mean, we're looking at about $4.83 or so right now on cost production. What What are your thoughts?

Chip

Flory: When it comes to the funds and what they're going to do next with that pool of money that they've got for investment, obviously here running it up to Christmas and, you know, the bulls got the Santa Claus rally. That's, boy, that's, and it happened in a big way. I don't know if it's going to continue this week and if the bulls are going to be able to, you know, defend those gains that we put into the equities markets. But it's obvious that that pool of investment money is going to equities right now. It's not going to do a U-turn and head to commodities. I just don't see that happening. Not right now. It's going to take a bigger story. Than Brazilian drought to get that money to, to make that move back. Think about the, the, the environment that we were in on the last big rally that we had. I mean, it was an inflation story.

I think to get that money that drove us up to those June highs, to get that money to reverse course out of equities and come back into commodities, it's going to have to be an inflation story again. The dollar might help on that because we got the dollar trading back down there towards par. But I don't know if we can generate that much of an inflation story out of this economy in, in the— even the first half of the year, Chris. I think it might come back strong enough in the second half of the year. But I can't— we've always talked about interest rates and the influence of interest rates on the business of farming. But it's, it's weird to talk about the Federal Reserve and the Fed funds rate and what the Fed moves are doing to the commodity markets.

But when the funds have as much impact on day-to-day trade as they do, and the funds are looking at what those longer-term plans are, by the Fed with, with interest rates. You got to pay attention to that. And I don't see the Fed action driving money back to commodities, at least for the first half of the year. Okay. Now, if we get into some— if we get into some questionable growing conditions here in the US, coming off of less than an ideal crop out of Brazil. And then the planting season, I don't know if it's, you know, you're dry as heck. If the drought is still— excuse me— if the drought is still sticking around in Iowa, Nebraska, Missouri, Minnesota, and we start to get some interest rate cuts, then I think we could see some of that investment money start to roll back into commodities. But it's going to take a while.

That ship is going in one direction right now and it's moving at a high speed and it's headed towards equities. It's not coming to commodities. Yeah.

Chris

Barron: So that's, that's kind of the, the money flow or the absence of What about the demand picture? Is there any chance that the— I mean, is China just like out of the deal here? Issues in Mexico and stuff. Any thoughts there? Any hope?

Chip

Flory: Yeah. Oh, there's— yeah. But boy, it feels like we're putting more and more focus on the domestic side of the market. All the time. Exports always going to be important because they're going to use up that residual, those residual bushels that are still available for use. But when we look at the sustainable aviation fuel market, when we look at the renewable diesel market, the expansion on crush, we got good news last week on the pathway for corn-based ethanol making its way into sustainable aviation fuel. And Secretary Vilsack says it all the time, that's a 36 billion gallon market. Mhm. It takes like 1.6 gallons of ethanol to make a gallon of sustainable aviation fuel. So instead of 36, You know, I'm not going to do the math and embarrass myself, but it's more than 36 billion gallons of ethanol to make 36 billion gallons of SAF.

It almost feels like one of those be careful what you ask for. But I think we are definitely transitioning back to a biofuels market again. And I think— I, I think— I don't know, this is an uncertainty, but I think it survives even a change in the White House, uh, because this is what, what's happening now is, is consumer-driven. They're evidently telling the, the airlines that they want the sustainable aviation fuel on on their flights. So that's consumer-driven. The airlines are behind it. They're, they're doing things to help it happen, you know, make it happen. The transportation, the moving that fuel from, from refiners to, to the jet fuel hubs is already being done. You know, that feels a little bit cart in front of the horse to me. But they're already putting those pipes in place to make sure that they can move sustainable aviation fuel to the jet fuel hubs.

That's pretty encouraging to me to think that that is going to be something that's going to be— it's going to stick around. And then on the renewable diesel side, um, yeah, there are some federal incentives behind it, but it's primarily state incentives, and it doesn't happen— it does— I don't think it matters what happens in the White House. Uh, the renewable diesel, uh, support from California, Oregon, Washington, and some other states that are starting to come in, Minnesota being one of them, uh, I think that state driven support for renewable diesel will survive a change in the White House if that change happens.

So, you know, I, I don't want— I don't want to ignore or downplay exports, the importance of exports, but I don't want to take my eye off of what I think is really going to matter in the year ahead, and that's going to be the development of the— the— how about this— the redevelopment, the refiring of the domestic biofuel markets.

Chris

Barron: Awesome. We need, we need positive news, Chip. So that's what we're, what we're looking for. So, so for sure. Anything that, you know, we're getting close to wrapping up here. Is there anything that, that going into 2024 from a practical standpoint at the farm gate that you want to make sure that we all keep at the top of our mind as we roll into 2024 as producers from a practical standpoint?

Chip

Flory: Yeah. Assume a record corn yield unless proven otherwise. That you got to— even if it's dry where you're at, you should be expecting a record corn yield. I'm not saying trendline. But I will say a record corn yield, 176.6, I think is what it is from '21. Yeah, I would expect that, that, that we're going to take that out. That's one of the reasons why, Chris, when you were talking about you get a move into that, that $5.30, $5.35 range in the Dec '24 contract, what should you be doing with that? Well, I think everybody's going to be expecting a big corn yield. It may not be his trendline corn yield, but it'll be a big corn yield just because of genetics and management that the weather risk has not been removed from growing corn. I know that. But boy, it's sure been minimized. And by genetics and management.

And with that in mind, with that, with $2.1 billion in carry in stocks, if we would be able to plant 91, 92 million acres of corn, you throw a 177, 178 national average corn yield on it, you're going to build carryover again. So yeah, that makes me be— that makes me think that rallies are going to be for selling in 2024.

Chris

Barron: Again, that's really good advice or, or perspective, however you want to call it. But I, but you kind of answered— I was going to have a last question. You sort of answered it already is kind of the acre mix, because when I look at our average producer, corn is still kicking out about a 5 to 8% ROI. Yeah, soybeans is closer to 0 to 3%, but that corn-bean ratio, as it kind of bounces around a little bit, that could change a lot of things really quick. And then also I think cash flows might drive some of it. Any, any final thoughts on, on acreage?

Chip

Flory: I was, I was very hesitant to think a 91 number I was, I was more comfortable with a 93 than a 91 because of what you're talking about. But, uh, '23 was a heavy corn year, 94.9, or just call it 95 million acres of corn. So I'm gonna call that a heavy corn year with some of the, the the problems with, with rootworm and some of the other resistance out there, guys are talking about— more guys are talking about getting back closer to that, that their normal rotation. And that would take a few of the corn acres out of the mix. So with that in mind, I'm more likely to talk about a '91, '92 on corn rather than a 92, 93. I know it doesn't make— it's not a huge difference except for the fact that it's 180 million bushels on it.

Chris

Barron: Yeah, right. Yeah, exactly. So what's that leave us on beans then?

Chip

Flory: You're— I probably would be in the 86.5. So about 3 million.

Chris

Barron: Yeah. Okay.

Chip

Flory: Yeah. Yeah, I don't, it, it, uh, I think spring wheat isn't doing a whole lot to buy any acres up in the Northwest, but there's going to be some other crops that are going to take some, some acres away. Um, I think the focus up in the Northwest for the next, I don't know, 5 years, something like that is going to be to figure out just how many oilseeds they can produce up there. Right.

Chris

Barron: Yeah. Well, it's going to be interesting. It was a lot more fun saying it's going to be interesting when we were looking at to see how high it could go instead of how low it could go, you know. Right. But, well, hey, this has been an excellent conversation. I really appreciate your time and spending the time with, with these growers. Any final comments as we, as we wrap up here?

Chip

Flory: Yeah, you bet. Merry Christmas. And I hope Everyone has a very happy and prosperous New Year.

Chris

Barron: Awesome. Well, hey, Chip, as usual, good friend. Yeah, really appreciate your time and look forward to having you back again here sometime in '24 with some, some really good news on maybe, maybe we get a rally. We'll have you back and you can tell us that we need to be selling.

Chip

Flory: I'll be here for sure if it's driven by the biofuels. Okay.

Chris

Barron: Yeah, there you go. That sounds good. All right, Chip. All right. Thanks a lot. Thanks, everybody, for listening. Merry Christmas. Happy New Year. We'll be back towards the end of this, this next week here with some final wrap-up stuff for 2023. But put a bow on this year. Enjoy time with family, and we'll catch you again next time on the Ag U-Pitch.