Kim Schmidt:

Hi, I'm Kim Schmidt, executive editor of Farm Equipment. Welcome to Farm Equipment's Used Equipment Remarketing Roadmaps podcast. In this episode, host KC Seymour of Moving Iron LLC and guest, Chip Nellinger of Blue Reef Agro Marketing, discuss the commodity market, starting off by talking about the wheat market and conditions in Argentina, Brazil and the Black Sea. Let's jump in as Casey and Aaron start off the conversation discussing the wheat market before moving on to the beef market.

Casey:

Chip Nellinger is with Blue Reef Agro Marketing out of Morton, Illinois. It's nice to come on, talk about tapping the marketplace. Chip, how you doing this morning, man?

Chip Nellinger:

Doing well. We're getting some rain this morning. It is not looking like a white Christmas so far, but we'll take the rain, I guess. We need it.

Casey:

It was one of those deals where we were supposed to get rain, or snow yesterday, and we got it. But I think we got a little bit more than what we anticipated for. So it's the second big snow event we've had, and we're supposed to have a big snow event come across the high plains here, I think Monday through Wednesday or something like that next week. And so we're getting all geared up for that. But it sounds like there could be some significant snow come across places that really need some moisture.

Chip Nellinger:

Yeah, that's a good sign. I think that's part of what's been beating up the wheat market here for the last couple weeks. Just one of the issues with that, but yeah, they'll take it. There are areas that really need some significant moisture between now and next spring to recharge the tank and help heal up some of the pastures and range land and get this drought in the rear view mirror, hopefully.

Casey:

Yeah, we need three or four inches of rain just to get to a drought, so we're doing good. All right, so speaking, let's talk about that a little bit. So wheat market right now, you've been talking about, just talked about it, been getting beat up over the last couple weeks or so. We've seen some moisture come through the area. We're seeing some reports out of Argentina that they're, even though Brazil's getting some really good rains, that parts of Argentina and some growing areas there are still in some pretty significant drought. I guess you look at what's going on in the Black Sea, what's happening there with the corridor being open, but we're still looking at getting stuff pushed through. We need to, I guess, Chip, looking at the wheat market going through the end of the year here, what are your thoughts there and how do you think exports are going to stack up going into that exporting timeframe that we look at every year?

Chip Nellinger:

Yeah, that's maybe one of the biggest issues that we have going. We just cannot get anything going. Even through the meat of that Black Sea being closed in zero in the way of exports out the Black Sea, we just could not see much of an uptick in our export demand. So that seems to be the biggest issue in the wheat market. Now, you've stretched this thing to the downside, probably a little bit too far. I think you're probably at a better place on the chart, a fair value in here, but still, this past week's export sales. We just cannot get out a single digit territory.

So that is the biggest issue we have going forward. Seems like this time of year, as you get wheat in the northern hemisphere into dormancy, we talked earlier about the drought and the plains, Kansas, Oklahoma, Texas panhandle, maybe going to get just a little bit of a precept, but when it's in dormancy, it's hard for the market to get charged up about this drought and production problem. So if we're going to see that, that's going to be early springtime frame into May, June, to see if we get some more moisture.

So my point with that is, there's just not much bullish right now that is able to get into the wheat market and give funds a reason to buy it. Now, I would say that we're getting this thing stretched pretty far to the downside. The funds have a pretty big, short position built up. So at this stage of the game, who's left to sell it? And so, that's when you can typically see some nice sharp, short covering rallies. But it might take deeper into winter, early springtime frame before we refocus the market on what the production potential is. You mentioned Argentina, they're in a drought, their wheat crop has definitely been, the top side's taken off of that, no question about that. How much of a production problem they have is yet to be seen. But right now, the market is just searching for something to try to stabilize it and be on the bullish side of the ledger and it's been a tall odor to try to find that the last few weeks.

Casey:

Yeah, that is very true. There's a lot of pressure out there right now. This whole week's been a rough week for commodities, especially when you're looking at what you've got going on there. We had what a CPI report, inflation report came out this morning.

Chip Nellinger:

Yeah, we had CPI report, it did show... These reports are tough to read, right? What do you compare it to? You compare it to a year ago, you compare it to a month ago, it's down, it's up. They're a little confusing to read. But at first glance, the number came in, now this is what producers, manufacturers pay for the goods to turn that into end products. And so, it was a little bit hotter than expected from a one month perspective, but it is down from October still sitting north of 7%. As I look right now, the markets, the financial markets, taking this report in Stride. I think next week, probably more importantly, is the producer price index, and then we've got the Federal Reserve out next week with their next decision on interest rates.

So next week, we're screaming into the holidays, the volume's going to start shrinking in all these markets, and you're going to throw a lot of financial market gyrations in there with whatever the Fed does and whatever that consumer price index report does next week. So inflation's still there, it's ticked down just a little bit from the peak, but it's not dropping probably as fast as what people would like, obviously. That's obvious. You go to the store, go fill your car up, gasoline's still down from the highs, but still pretty lofty levels when you're talking about a lot of different products out there.

Casey:

Right. So let's talk about the beef market a little bit and what you see happening there because all this is starting to correlate, that you're starting to see two things come together. One, you're seeing oil prices got hammered over this week as well, so that's going to be some reflection there. Cattle prices took a big hit, so did hogs as well. Think this is a short term thing? Feel free Chip, do you feel like this is a little bit of that inflationary period hitting up here a little bit where we're seeing some demand starting to weaken a little bit?

Chip Nellinger:

Yeah, that's going to be the battle as we go forward into the first half of next year, the next two or three weeks as we kind of get through the holidays, it was always a tough time for the livestock markets and the retail meat markets. A lot of that holiday type buying is in the rear view mirror now, and so you get some fluctuations. We had some big swings in boxed beef, higher and lower the last few days. So a lot of volatility starting to rear set, but this is the real struggle the beef market, and pork to a lesser extent, is going to fight into the first half of next year. The numbers are shrinking, I think we're finally at the tail end of some of the breeding stock liquidation. And the numbers are shrinking as evidenced by the last cattle on feed report, some of the lowest numbers we've seen in a long, long time.

And so fundamentally, the things look pretty good. I don't know the first part of the year, but the question is, you mentioned the crude oil market getting beat up. We're just touched under 72 on crude oil prices. That's down from north of 80 a week and a half ago. And the crude oil market's, I think, pricing in the possibility of a recession in the first half of 23. So that's going to run right into the brick wall of our cattle inventories that are shrinking what should be very bullish. Are we going to be able to hold the demand together? So that's going to be the real dilemma that we're going to be talking about a lot, I think, over the next six months. Can we hold the demand based together? Export sales this week were abysmal on both pork and beef. That could be a seasonal type thing as well.

It's just a one-off. Is it a one-off? We'll have to see. But if that continues, that trend continues into the first part of the new year, where we're struggling on export at the same time the consumer's getting pinched with inflation and demand falls off, that's going to be something that really could be a headwind for the beef market especially. So it's going to be an interesting few months ahead of us, obviously out your way, and south. Record strong bases, so producers are out there buying corn at $8 plus, high feed ingredients. Feeder cattle are high price, pasture conditions are atrocious. So it's a challenging time out there for all segments of the cattle industry right now. And the one thing we do have going for us, still fairly high prices, we're in that 152, 153 type range for cash cattle. And so, it's been holding together and that maybe is one silver lining to look at going into the new year here.

Speaker 4:

We'll get back to the conversation in a minute. But first, I wanted to invite you to join us at the Precision Farming Dealer Summit January 9th and 10th in St. Louis. To download the program and to register, visit precisionsummit.com. Now back to Casey.

Casey:

So let's talk a little bit about what's happened over in China. So we saw two days ago, a headline came out that China had officially weakened its stance on COVID-19 lockdowns, and they're going to really take those off a little bit. Obviously, there's a big thing to go there, but now you're starting to see all these reports come in where China's cutting demand on cotton, they're cutting demand on soybean mill and all those kind of things. You see that they have because of where their economy is at right now, what are your thoughts on how that's going to affect the overarching export business that we see happen right now,? And as China comes back online, where do you think, and when do you think, I guess, will we start seeing some more of this export boost that we see from China this time of the year?

Chip Nellinger:

Well, that's all [inaudible 00:10:37] If I knew that, if you and I could figure that out, man, we'd be on an island somewhere that we owned with a big yacht out, tied up in front of our private island. All questions that the market's going to grapple with going into the first quarter of 23. I think it's going to be back and forth. I think you're going to get continually lied to by Chinese officials on what their stance is and what they're going to do going forward. I'm not even sure they know from day to day what their plan is, but that's what the market's going to watch every day. And it seems like the last couple months, it's just like, "Okay, we're going to relax the COVID policy," and then 24 hours later we're clamping down. And you just don't get good information out of China and you never will.

I would say as far as the exports go, they're no different over there. Their economy has been struggling. You throw this COVID lockdown thing in there, and it's even more challenging for their domestic economy. And so, there's no question as you look at some of these different categories of what they've been importing, a lot of different line items are lower. And so what does that mean, particularly to our bean export program is going to depend on what Brazil raises for a crop. We mentioned Argentina's in a pretty severe drought right now, they need some rain immediately or they're going to continue to shave production off the top end. But at the same time, Brazil looks really good at this point of the growing season. 153 ish type million metric ton crop is expected right now out of Brazil. That's a massive crop, that's well north of 5 billion bushels.

Some people think with continuing rain, that crop could be upwards of 5.6, 5.7 billion bushels. That'll be 1,000,000,002 bigger than they raised a year ago. They're going to have a lot of beans to export. One thing's clear to me, China's going to take every bean they can from the Southern Hemisphere at our expense. The last two or three years have been great. You look at our bean exports, China takes, what? 55% of our beans? Great customer. It's been increasing. It's been increasing because they've had to buy it from us because there's been two droughts in a row in the Southern Hemisphere. As soon as there isn't a production problem in Brazil, which could be as soon as February, China's going to shut the key off the United States, I'm fearful of, and get every bean they can for as long as they can, out of Brazil. Why wouldn't they? They've put billions of dollars into the infrastructure within Brazil, river terminals, export terminals, roads, a lot of that has been helped with Chinese money.

Why wouldn't they want to see a return on their investment? So, that's my fear going forward, and I think that's something from a bean standpoint, we're here at multi-month highs. We're at the highest level in beans that we've been since September, on some fears about the Argentine situation, on soy meal rallying because of meal oil spread unwinding. But we've got this monstrous Brazil crop that is in the baby stages right now. Is it going to grow up to be the Godzilla that eats our lunch as far as export competitiveness? That is the main issue that we're sailing right towards the waterfall here. We'll know more by late January, 1st half of February, but that'll be here before you know it.

And I think China, if they are slowing down. Back to your question, I feel like I've been rambling to answer your question. If the COVID lockdowns and their economy is slowing down regardless, and their bean demand is going to shrink, at the same time, Brazil has a monstrous crop and we're increasing greatly the supply, that's a double whammy and that's definitely not a good combination, and that might be exactly what, over the next six, eight weeks as we get into the real heart of the growing season.

Casey:

Right on. Okay, so we're looking at your plan, as things are moving in this time of the year because we're looking at some interest or some input costs and those kind of things, getting that stuff locked in for next year and what that looks like, especially with some profitability that we see on the farm this year. There's going to be some movement in that direction. What are some of the things you're looking at right now from the input cost standpoint that you're paying attention to, that you're talking to your customers about?

Chip Nellinger:

Well, a couple things. Number one, diesel fuel has come way down. It's not to say it can't go a little bit lower, but I think that needs consideration. To be looked at, the opportunities to lock some diesel fuel in, especially out ahead. Some fuel suppliers allow you to book out ahead, and the way the future's market is structured, the deferred markets are well under where the spot market is. So that might be an opportunity. Natural gases come way down off the highs, a lot of people out your way, whether it's speed lots running their feed mills off of natural gas, some people use natural gas in grain dryer setups, that might need a consideration. Nitrogen fertilizer, that's a volatile issue and that's case by case scenario. A lot of people have that locked in, and or applied already. If it's fall, a fertilizer application. And out this way, there's a lot of fall and [inaudible 00:16:16] that gets put on.

Some people are waiting. We have seen some fertilizer and nitrogen numbers start creeping lower. Even if they go a lot lower, I'm a little bit reluctant to think that it's going to get passed along to the farm price by the time it's needed this spring. So inputs are really something that everyone's going to have to struggle with this year. There's no question about that. We've been doing with our customers a lot of number crunching, and it's really going to boil down to the type of land that you're on and your yield potential. If you're here in the heart of the corn belt and you have very realistic chances of raising 240, 250 plus bushel corn yields, it's hard to get the numbers to swing to beans. But in my mind, that's only 30 million acres maybe, at most, between corn and beans last year, we planted, what? 180 million acres almost.

And so the big majority, two-thirds of those acres, if your corn yields are a little bit lower and your bean yields are pretty stable, there's going to be a real fight for acreage. So I think the take home is, input's obviously a lot higher than a year ago. We need to really put a pencil to it and figure out what works for our operation. It's going to be the highest priced corn crop to plant that we've ever seen. With that being said, we're at the second highest new crop corn levels that we've ever seen for this point on the calendar, and the highest new crop bean levels that we've ever seen at this point in the calendar too.

So we do have some fairly high, new crop commodity prices to help cushion some of these higher inputs. But this is the time of year to really put a pencil to it, really get a plan in place, and be ready to execute that, and we might be staring opportunities right in the face right now, from these new crop beans at the $14 level. That seems to have been the cap recently, and that's a profitable level almost any way you dice it, and not a bad place to start, in our opinion. But you got to crunch those numbers, you got to know where you're at, you got to have a plan, and then be ready to execute that thing when you get opportunities.

Casey:

Right on. All right, good stuff as usual, Chip, folks will reach out to you and get more information about what it is you're doing at Blue Reef Agro Marketing, what's the best way to do that?

Chip Nellinger:

Best way is to just give us a call at the office and that number's 309-550-7213. We'd love to chat with you.

Casey:

Right on, man. Appreciate you being on the podcast, Chip.

Chip Nellinger:

You bet. Take care, Casey.

Kim Schmidt:

Thanks to Casey and Chip for sharing their conversation with us. You can keep up on the latest industry news by registering online to receive our free newsletters, visit www.farm-equipment.com. For Casey as well as our entire staff here at Farm Equipment, I'm Kim Schmidt. Thanks for listening.