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AGRESOURCE: “AG MARKET VOLATILITY; THE RISING IMPORTANCE OF FOOD; A NEW ERA?”

If you weren’t able to attend our annual meeting, watch the replay of Ben Buckner’s presentation. Ben is a Grain Markets Specialist at AgResource.

Video Transcript:

Hello, Midplains. This is Ben Buckner with AgResource company in Chicago. It is always such a pleasure to be a part of your annual meeting, at least virtually, especially in a year like this when we think everything has been very exciting and stays exciting probably for another 12 or 14 months based on south American crop losses there. Most people, if not everyone, is now well aware of, but that changes the game entirely, and there are some big time goals the market must accomplish, so it doesn’t change this longer term bullish trend. And in fact, we think we’re in this new era, the rising importance of food. Food now, again, has to fight against fuel for a finite amount of supplies, which on top of climate issues really raises the burden on price determination for the next several months.

So jumping right into our 2022-2023 market themes, we think this new commodity super cycle has started that doesn’t end for the next two or three years. There will be extreme volatility, but that is just kind of a side effect of the bullish and not having very much of anything. The desire to be a long of stock will be one of the market features probably for the next three or four months, at least. And once those long positions are established in stock, they will be intact for the long term. Energy is a new upside leader with inflationary risks present. And really we’ll talk a lot about inflation, which comes off as some kind of boogieman, but it is not some inherent magical thing. It really is just the sum of all of its parts. And so when we identify or isolate any one commodity, whether it’s crude oil, metals, especially the agricultural markets, we really see that stocks are tight. And stocks as a percent of consumption, which we will highlight over and over again, are at record lows.

And so when you add everything together, you do get inflation of 7%, 5% year over year. But that is because we just don’t have a lot of stuff. And to me really, what’s driving this has been adverse weather that has been sort of a buildup of the last four years, and we just cannot produce more than we consume. So this has been an ongoing theme and probably continues in the 2022-2023 crop year. So like 2012 or that period, we’re at a point where we need to garner new arable land. And so that is a big time chore of the markets, and is bullish even at current prices, especially if the U.S. is at peak farmland. I don’t know if we have new arable land that can he found at any price, so we have a finite pie which crops increased their share of that pie in 2022. Some will, but not all of them can at the same time.

South America now has lost a record ton of soybeans to extreme heat and drought. Drought has been the theme and crossed about 40% of South America’s belt. But really it’s been heat that has been the biggest villain with respect to yield this year. And that is not finished yet, there are areas of Brazil that will face ongoing drought, ongoing temperatures in the 90s and low 100s, during pollination and blooming. And so we think that the USDA nor CONAP really has digested the extent of this year’s South American losses. And what we’ll explain kind of walk through is what this means for global supply and demand. And it is not just that we’re adding premium because of adverse weather. This really is something totally different. We’re talking about the rationing of hundreds of millions of bushels of supply, which takes a sustained period of high prices or spikes to much higher prices from now.

Biofuel demand growth is also back, low carbon. There is obviously a premium being put on companies being green. It’s very hard to quantify exactly what the value of that premium is, but it’s very clear in United flights using maximum levels of sustainable aviation fuel. We can see almost daily plans for new renewable diesel production growth and plant capacity and plan capacity. And so veg oil will stay bull because more of those supplies will be used as fuel. So that also means that vegetable oils, soy oil, especially, is more closely tied to the crude market. And so crude oil itself is in a bulls trend due to supply and demand and balance. And veggie oils will continue to follow that. So the new demand drivers are record Chinese feed imports and renewable diesel, both will combine to raise the need for an additional 20 to 25 million acres worldwide by 2025.

Most disruptive to the U.S. ag market though is renewable diesel. So unlike biodiesel, this product is chemically identical to diesel. And so there are no restrictions on certain kinds of engines or use as a whole. So a lot of it is politically driven tax credits so far across both the West and East Coast. Do those spill into the Central U.S? And so, because those credits exist, this value, this premium being put on being green, until we get new administrations installed, perhaps in 2024, these markets will stay elevated, demand growth in the biofuel markets will expand. Currencies are also going to be more volatile. We start to wake up from this post COVID hangover, will World Bank respond differently and can the US Dollar stay elevated as the budget deficit grows to 30 trillion? We probably will see a majority of dollars have been printed since 2018. And I think a lot of those dollars have yet to find the U.S. economy.

So the dollar has been firmer than expected in recent weeks, but there is the growing risk, or at least the ingredients exist for sort of a lasting if moderate bears trend in the US Dollar, that by itself will fuel additional investment into raw materials, but really change profitability outside of the U.S. And so will we see slowing growth of production in places like Russia and Ukraine and South America. Climate change is real, but whether it’s produced by man is impossible yet to quantify, but it doesn’t matter. Weather pattern stagnation has been really the theme since 2017. So we’ve seen a substantial increase of the risk of droughts and flood, I’m sorry. The jet stream has lost its vitality and will be more wavering over the next couple of years, at least.

And so this really gives you these extreme cold and extreme hot events. The record heat last year in the Northern U.S. and Canada, the record heat this winter in Argentina and Southern Brazil really highlight this. And so I don’t think that these extreme climate risk will be changing at least in crop year 2022. So it’s something that we can’t do anything about, but we will have to contend with. So 2022 will be dynamic and full of opportunity and risk, also volatility. So we have to be very, very proactive in managing forward sales, input cost. We do expect very, very wildly swinging markets in the next six or eight months. It’s hard to imagine, I think, what we’ll be going through this summer as the perception of supply and demand from the market changes from perhaps adequate and weeks that weather forecasts are normal to the risk of running short of everything. Weather is adverse even for a week, even forecasts are threatening.

And so those different perceptions will result in 50 cent weekly move in corn up and down, $1 to $1.50 move in soybean. So it’s important to see the forest through the trees and that forest we think is bullish, but it will be hard to keep side of that, as we do see these major, major corrections and up moves really between now and October until we know what the Northern hemisphere produces. So inflation has been a big theme and that will stay the big theme. So clearly food prices and year over year change in food prices, as compiled by the UN, are nearing record highs. And again, I want to highlight that this is really just the sum of its parts, just the calculation of the change in price of all goods. And so that’s not terribly clever when forecasting inflation, but again, when we identify any one commodity, whether that’s crude or corn or wheat or sugar, even, or dairy products, those markets are all not terribly well supplied at the moment.

So every single one of those markets is working to increase production to balance supply and demand. So I imagine we will see inflation of 4% to 7% year over year throughout calendar year 2022, which it’s mixed that it’s very good for commodity prices, but that also is very good for the price or increasing of prices of raw materials and input costs. So it’s not all rosy, but when we can be proactive in managing those input costs, I think there’s a lot of profit to be had over the next couple of years. This is all true in the CPI and change in CRB Index. This is really the measure of the basket of commodities that we’re most concerned with, and that is energy and agriculture. And so agricultural markets will stay elevated, but so too will crude.

And I guess one thing we’re really concerned about is as we sort of get to this post COVID hangover, does money leave the equity market in bulk and find raw materials? We are already seeing that to some extent in the institutional or index fund position, but knowing too that even now commodities as a whole are very, very cheap when compared to equities. And so are we entering a period where this relationship changes, maybe not to the tune of oil embargoes or the 2008 financial prices, but again, this ratio jumped from one to two, and I think that would be a big deal for prices across the board, whether that is crude oil, commodities, metals, et cetera.

So we just wanted to point out that as equities maybe start to turn lower, commodities already had this bull story and will it be exacerbated just by the flow of money leaving equities and bonds and coming to raw materials over the next three or four months, the next couple of quarters? And what are the things that we have to deal with or contend with, and what’s driving inflation or arising prices of everything is that so far, at least, there has not been a huge impact on the family. That disposable income, well down from sort of peak COVID aid is still very, very high near the highest in history in the U.S. And so we can see that per capita income has pretty strong correlations with a lot of products, especially meat. It’s also true for grains and butter and bread, but the consumer so far has been willing to, or able to absorb these higher prices.

And so that’s really what central banks in the U.S. and across the world have to contend with. And do we raise inflation? Does that quarter or half a percent well detrimental to the economy of the way we were used to over the last two years? It probably doesn’t really impact what people spend on food or the amount of food that they eat. So is there a solution? Can we solve this problem of inflation in the next year by raising interest rates? And I don’t think that will be the case that’s because disposable income is high. And it’s not just high here, but across the Western world and even pockets of Asia, I think the consumer is doing just fine given currently high commodity prices. And a lot of the structure inflation will go unchanged for the foreseeable future. The biggest issue to us, especially in the Central U.S. and on the farm, is the cost of labor.

And that is because I think people are waking up to the fact that wage growth has been very, very sluggish, if not existent, over the last decade, but structurally, there are just fewer people being born. And so, as we’ve seen this really collapse in the rate of population growth, since the ’90s, we’ll have a smaller workforce moving forward, that that is something that can’t be changed in the next decade or two. We really need a generational shift in the amount of humans being born in the U.S. And that probably doesn’t change at any point in the near future. The latest population growth data is just one-tenth of 1%, and that is the lowest since 1900. And even the big time census data was just 0.4% population growth in 2020.

The second big structural issue for inflation long term is the cost of energy, and so transportation, and fertilizers, to some extent, and how they rely on natural gas. But the energy market, the crude rally is also very much rooted in fundamentals. And so you can see that crude oil supplies, less strategic reserves are just 410 million barrels currently. That is down 12% from last year, and is the lowest for this particular period since 2014. We’re not building inventories during the winter, which is also somewhat of concern, but we know that we’ve sort of surpassed COVID levels of drive and we’re back to pre COVID levels. So I do think we’ll see a normal seasonal stock’s draw in both gasoline and crude oil come June, July. And so from what point does that start? Will we looking at sub 380 million reserves at some point this spring and summer? And the administration’s release of strategic reserves of 50 million barrels is really just two and a half days of consumption. So well helpful, I guess, to some, that’s not going to change the big picture dynamic of crude oil and petroleum supply and demand.

As I mentioned earlier, the index funds that we can see very, very quickly are adding to existing market length, really testing the highs of last summer at over a million contracts spread across corn, wheat, soybeans, and livestock. The manage fund community has also been beginning to add length. And I do think that that is because of this bullish story that’s been ongoing and is really being compounded based on South American crop loss this winter. And so I think what’s noteworthy about these charts is that despite some sell offs and some weak price trends because of weather during the summer, the spec community and the institutional investor really never gave up on the bull story in agriculture. And so if like in recent years, we’ve seen shocks to supply and demand, and we add hundreds of thousands of contracts to long positions, do we start that process from what is already an elevated position? So I think that increasingly retirement accounts, for example, chasing returns do find the raw material in the ag space over the next quarter.

And as we talk about energy and rising and the multiyear high crude and gasoline prices, and these renewable diesel programs that have starting to ramp up and have planned to ramp up in parts of Western Europe as well, we think that corn and soy oil, vegetable oils increasingly are being determined by the price of energy. And so when we take a look at history, corn, most importantly, is not expensive at current prices relative to crude oil. In fact, if you can say that corn is a good and relatively cheap source of energy at the moment, even at 640 spot corn. Soy oil is above the historical norm, but when we add tax credits across the coast into the use of renewable diesel, I think it is right at average.

And so that is the message that we have is that corn and soy oil on the margin, these outlooks are kind of bullish into summer just based on energy markets, but also those are good value when viewed at in terms of energy prices. And also crude oil at $90, unlike the last several years, will work to sustain biofuel mandates in places outside of the U.S, such as Asia and Indonesia who have had these lofty goals for green energy use, but with cheap crude that it just has not been price sustainable. Well, that has changed. That has been reverse entirely. So I do think these governments outside the U.S. will hold to these mandates of increasing green types of fuel. So that kind of exacerbates the use of corn and vegetable oils, especially. And so that’s by itself has this long term bull story.

We’ve also found there’s been no change to global crop consumption. We’ve now have data that includes recessions in global pandemics. And what I wanted to highlight here was also in years of crop loss. And so the graphic to the right that shows the change in crop consumption, the red highlighted bars are years of major weather adversity in South America, like we’re going through now. I think, again, record negative change from initial estimates, we will see eventually maybe by the March, April USDA report. So highlighting years like this including last year, there really has not been much of an impact on growth. Growth always occurs no matter what. And so that leaves the U.S. in a very, very good position to fill this growing demand, because for the moment, we do have surplus inventories, South America does not. So I do think over time, we will see this massive shift in world grain and oil seed trade flows from South America to the United States.

And really that’s something that will occur, I think, in the case of corn over the next three or four months, and in the case of soybeans, over the next 12 to 13 months. South America will start to export soybeans at some point, but they will exhaust supplies by July or August until then demand comes back to the U.S. immediately thereafter. So while we’ve got demand growth, crop loss, the U.S. needs help in solving the supply problem. We don’t know if we’re at peak farmland. We might not know that officially for another decade, but we have seen combined major crop area since 2014, just unable to get above 262 million acres for whatever reason. And that has been the case in spite of combined hay and CRP acres as of late last year being record low at 72 million. So I don’t think we can still from hay or the CRP program moving forward. And even the CRP’s monthly report included a million acre hike in acres in the CRP as of January.

And so I think we have gained a million acres in CRP. We know we gained about 700,000 tons of winter wheat based on NASS data. So of this 260 million acre pie, we’ve already lost 2 million acres for spring row crops. And so I don’t think it is acres that get us out of this jam. It is really now left to technology, but more importantly, Mother Nature. And there’s not going to be much tolerance for adversity this spring and summer. And even hay might start still acres from corn soybeans, cotton sorghum, and barley, and oats because hay prices are very, very expensive. You got $187 to $210 per ton. Stocks are very low. This too is very much root in fundamentals based on whether last year’s crippling drought across the Northern and Western U.S.

The last time we saw a big spike in hay acres or hay prices with 2012. And in that year, we did ultimately add 2 or 3 million acres of hay in the following years. And so I think the message here is this competition for this, what seems like a finite supply of variable land. Every single commodity is computing for this. I mean, take a look today at cotton prices, for corn prices, spring wheat oats. It doesn’t matter. Everything is vying for their expansion, but not every crop will get it. It does seem that November soybeans are working the hardest on the margin over the last couple of weeks, but I also don’t know if that current new crop soybean prices are high enough to still acres from corn. When we know we can yield 200 to 300 bushels an acre, and even despite rising fertilizer prices, on paper, corn is still quite profitable.

So it’s going to be a pretty significant battle for acres in that March 31st report. Very difficult to forecast or quantify acres changes, but it is going to be very, very exciting. One market will be a limit up that day while another may be a limit down. Which one will it be? It’s very difficult to know today. So the two big demand drivers we’ll discuss in somewhat detail, very quickly, China and renewable diesel. So I think that for whatever reason, and now it supersedes politics in the Phase One trade agreement. China’s importing record amounts of total feed grains. And so despite China importing record amounts of feed grains, corn in China is still in a lot of places $11 per bushel, and has touched record prices over the last couple of weeks.

So it’s seemingly well timed. The Phase One agreement worked well for both parties for the most part, but it does also seem that China needs imported feed supplies. So we know that in the 2020-2021 marketing year, combined feed imports in China were a record large 54 million tons. And we think that number grows to 58 or 59 million tons this year. And so 45 or 65 million tons annually moving forward, unless the government can somehow they’re managed to boost production by 30% or 40% over the next decade, which is not impossible having a controlled economy, but does look to be pretty arduous. And the bridge between now and then over the next five or seven years will be imported supplies. And so China will account for the highest percent of world share. It will be the biggest market for feed exporters for the next couple of years.

And like I mentioned, corn prices in the south of China where fee is deficit and where they don’t produce a lot of things, that being consistently above $10 a bushel for the last really 12 to 16 months. And based on trade data, which is known and is a fact, and is quantifiable, this is the monthly imports of corn into China from all origins. And we can see that February 22 based on ship lineups and will be very, very elevated. So about 3.3 million tons. And that follows pretty big imports of over 3 million tons in January. So China’s need for imported supplies is very real and will be lasting for the next couple of years. And we think that 2022, while it hasn’t been very good for U.S. corn exports, so far, they stopped buying U.S. corn last spring. I don’t think there’s a way out of China having come back to the U.S. market over the next couple of months during spring, perhaps early summer.

A year ago, China was able to sell over 60 million tons of its corn reserves into the domestic market, and another 15 million tons of wheat to appease the feed industry and keep prices in check. Those reserve sales have not occurred so far this year. Combined wheat and rice sales of China’s reserves are just about 30 million tons so far in the 2021-2022 crop year. And so we think that the reserve supplies simply do not exist anymore. I don’t think it is a government decision that they’re choosing not to release reserves, but rather that they don’t have them. So it is well known by everyone that China is the number one by far market for soybeans, but we think that over the next five years, feed grains will be next. The 65 million ton sort of upside target gets reached by 2023, and trying to becomes a major, major market for the feed grain next quarter.

Renewable diesel. This is very difficult to really wrap our heads around. So there’s no a lot of data. It’s started to be compiled by EIA. So we can’t keep track of it moving forward, but based on plants under construction or proposed or announced, EIA has compiled this for us. And so it is about 5 billion gallons per year by 2024. And so that’s very, very difficult to wrap our head around. As we’ll show you, this is going to require a significant, impossible, in fact, increase in U.S. soybean acres to meet this, if soy oil is like, it has been 60% of the feed stock over the next couple of years. So this is where they are. I think that we’re now competing, the feeder, the exporter’s competing with companies like Shell and BP for this finite supply of oil seeds. So they’re clearly mostly on the West Coast where tax credits exist, growing on the East Coast where these tax credits are planned or exist currently. And so that’s still going to be the big, big drivers.

This is political, but again, for some reason or another, there is being a large amount of value being placed on companies being green. So it has a net positive for the U.S. ag industry and for farm income as a whole, at least for the next couple of years. And I mentioned, we do have new data. The EIA has started to give us things. It goes through October, but that October number in 2021 was combined oil seed-based or lipid-based fuels was a record large 220 million gallons. And so this number grows by 20% or 30% over the next six months. And the question that we have is, how do we meet this long term? Think calendar year 2023. And we’re not sure how that is solved.

Based on the plant, the planned capacity expansion that we got from EIA, this is what soybean oil use looks like, if that is the case. So you can see that it just about doubles over the next three years. And that’s only if this 60% of soil oil or feed stocks, 60% is comprised of soil oil. And so if that number is higher, then this gets even more absurd. So we don’t even really think about in terms of demand, but in terms of acres. So we’ve got to grow 40 million extra acres of soybeans to meet this demand, given what we think crushed capacity will be in the U.S. That is clearly not possible, unless we lose basically the entirety of our corn crop or wheat crops.

And so how is this solved? It will be solved through price. Eventually we think that these plants borrowing government policy changes will not be profitable in the end, and so that has to happen, but that’s going to take time and that’s only solved with price. So soy oil prices, soybean prices have to stay elevated. And I think soy oil eventually has to go to something like 90 cents a pound to really alter this trend, or in one way or another, we have to figure out how this is done because we can’t grow another 40 million acres of soybeans in the U.S. So as we get into the 2022 growing season, really that started more or less in South America. We’re coming off a year of record low exporter stocks to use in wheat, very, very close to record low exporter stocks to use in corn and soybean. So we don’t have a lot, to begin with. Now we will have even less based on South American losses.

And so the way we have built our grids based on where we think South American production will end up, exporter stocks to use of everything will be record low in the 2021-2022 crop year. And this is important. This is somewhat granular, but this is where price is determined. It’s what is the exporter willing to sell product for? And so having record low exporter stocks to use is clearly very bullish for all of these crops. And we’ll discuss in just a minute what this means for the duration of this bull route. And climate is not cooperating with global grain and oil seed yield growth. And we’ve got this pretty significant La Nina event currently. It was very easy to see we would have droughts in yield loss in Argentina, and that is occurring. These significant drought record temperatures, yield loss, corn and soybeans in Argentina, it’s not terribly surprising. In fact, it’s very, very normal to occur in years where La Nina is present during the winter months. But this one has been exacerbated by ocean temperatures elsewhere. And we’ve just seen a very, very extreme response from the climate based on La Nina.

And it starts with these incredible temperatures we saw for many, many days in a row. 9 to 12 days of consecutive 100 degrees or higher temperatures being recorded. And you can see that in some places, temperatures in major crop belts, which are highlighted, reached 114 degrees. And so I think we’re talking about crop death, and just the evaporation rates we saw throughout the entire month of January were incredible. This is going to be the big thief of yield, and this is irreversible at this point. Heat, of course, is fueled by drought, and that’s what we’ve been seeing. This is a very typical La Nina based climate pattern. This is all very normal, except that it extended farther north and west than everyone had anticipated. In fact, Southern Brazil and Paraguay so far have gotten it worse. 25% to 30% of normal rainfall between December 1st and January 31st in Paraguay and parts of Southern Brazil, which are big time corn and soybean producers.

This is during critical growing stages in a lot of this region. And so this had a big, big impact on yield, which we’re now seeing being reflected in the market, and with South American production estimates. Here is vegetation health compared to normal as of January 24th, the latest data available so far. And of course, Argentina looks pretty bad, but I really wanted to highlight Paraguay in the north part of the left graphic and that region of Southern Brazil on the right graphic. And so you can see the pockets of bright red, where vegetation health compared to normal cannot be lowered any further. It is the worst possible rating that we could get. Where it is red and orange in Brazil, it’s about 35% to 40% of soybean production, and really the entirety of their summer crop, which has been a devastating yield loss for Paraguay the entirety of their crops. Their crops have been cut in half or more relative to initial expectations.

Paraguay is a small but important export of corn and soybeans. And so even loss there has had this cascading impact on cash prices in South America, which in Brazil it traded about $8 in corn for several weeks now. And so it really does have an impact on. Brazil now has to import some corn from Argentina. So that takes Argentina supplies off. Paraguay has nothing to export, and so that really does impact. It’ll be some total of South American exports between now and probably the end of summer. And in Argentina too, it’s still growing. The crop will pollinate over the next 30 days. The corn crop soybeans will be blooming over the next couple of weeks. But I think already, as of February 15th, we’ve already lost up to 15% or 20% of yield and corn relative to trend. The soybean correlation looks very similar.

So the message here is we have very strong evidence for these ultra low South American crop production forecast. This makes a lot of sense to us. In fact, it could be getting smaller based on the weather pattern that we see forthcoming over the next 30 to even 60 days. So now I just kind of want to walk you through what we think happens to U.S. balance sheets overtime, and really this gigantic hole that is now left in the USDA’s world trade matrices, that either must be filled by the U.S. or can’t be filled at all. We’re dealing with something that we at AgResource have not seen in our 30-year history, just the massive rationing effort that has to come about over the next 13 or 14 months.

So the USDA as of February, has lowered south America’s combined corn and soybean production to 357 million tons. Now that is down 23 million from initial estimates. But based on what we saw from CONAP last week and our estimates in Argentina and Paraguay, we think that this is still the 30 million tons overstated. And so down 53 million tons from prior estimates or initial estimates based on trend yield and normal weather, this is something, again, we have not seen before in the history of this company. The problem is that again, we’ll walk through the step by step. So soybean demand domestically in South America is trimmed slightly when you have low crop sizes, but not significantly. So the red bars on this graphic reflect production changes, the green reflect changes in domestic consumption. And so pale and comparison to what we lose in crop size is what we lose in domestic use. In the case of corn, corn consumption in South America never goes down. It has grown in every single year over the last two decades.

And so this is important because South America must keep domestic stocks adequate by a collapse in exports. So this is how we think the grids will play out. And some of this is very much based on numbers, but it is very important as you’ll see. So we think we’re down 15 million tons of corn demand in South America. That is 600 million bushels of corn demand that must be shifted from South America to the U.S, or delayed until next year’s South American harvest in March, April, or eliminated entirely. And all of those scenarios is bullish Chicago Board of Trade prices. And if it comes down to having to eliminate global demand as a whole, I don’t know what price gets that done. It is probably something like a test of the current record hides in both corn and soybeans. Our soybean grid has a gap of 515 million bushels.

And again, global demand does not slope based on South American crop loss. South American demand does not slow based on crop loss there. So all of this demand must be given to someone else delayed or eliminated, 515 million bushels. And because South America has been drawing on reserves for a couple of years now, they have a nine-year low beginning stocks of corn and soybeans. So South American corn stocks today are 8.6 million tons that is down from 11.7 a year ago and the lowest since 2012. Soybeans are similar. We’re down nearly 4 million tons year over year in terms of stocks available in South America today. So new harvest will change total supplies there, but we can’t draw on existing supplies in South America to meet spring export demand. We have to wait until harvest are completed. So taking it another step further, how is this thing get solved?

And this is the trade matrix at it exists currently and how we think it will evolve or what has to evolve in the next several months to really 14 months, 16 months. This assumes that other exporters, scrape the bins cleaned and export a record 18 million tons of corn. This also assumes that global trade of corn will be record large, but down from the USDA’s current estimate. So what we’re left with is 9 million tons lost in Argentina, 6 million tons lost in Brazil, and 1.5 million lost in Paraguay. The only way this hole is filled is if the U.S. exports 73 million tons in crop year 2021-2022. That is a 450 million bushel difference, assuming demand is cut by a bit. This gives you final U.S. corn exports of something around 2.8 billion bushels. Remember, the USDA is at 2.4.

So this is what the market is readjusting to currently. And again, some of this demand has to be eliminated or delayed until South America’s harvest next year. And that all of this requires much higher prices. So it means it’s a little more dire. So based on slight contraction and demand, other exporters, such as Canada, clear their bins clean and export maximum amounts of bushels, we’re still left with something like 69 million tons of U.S. soybean exports to fill this hole. Now, some of this too will be spread into a new crop position. So it’s just going to impact the old crop balance sheet, but this just shows you the sheer size of readjustment that’s needed in trade flows. And so this is something the market is catching up to, but I don’t think is fully realized and priced just yet.

And this is kind of how we end up. We think we’ll be evolving to get to this point. Again, I don’t think we can export 2.8 or more billion bushels of corn this year. So demand has to be ration. This will be ration through price. I do think we’ll get to 2.7 billion bushels, which leaves up with just over a billion bushel in stocks. If last year as a template at all is clear, the market will not really allow anything less than 1.2 billion bushels without seeing $7.50 to $8 corn. And it’s difficult to predict the future precisely, but here are the numbers that we’ve got. Similar in stocks this year, the concerning thing for corn, and really all of these commodities is that we assume that in the case of corn, we’ll lose some acres because of high fertilizer. That is 50/50. We’ll see. But with that assumption, or really almost any acreage assumption, normal weather trends and domestic use, we’re left with even less corn next year.

And so there is some wiggle room, maybe acres or stocks next year will be 1.2 billion bushels, but that keeps corn in this kind to $5.50 to $7 range for the foreseeable future, which goes back to our idea that we’re in this new era of food prices, and this new plateau that we have found that can only be changed with consecutive years of perfect weather, production exceeding consumption by a pretty wide margin. We don’t know how the 2022-2023 soybean balance sheet can be solved given this surge in exports. So again, most of this shift in demand will occur in a new crop position. We know Brazil is going to sell whatever it can over the next four or five months. But based on that, we think they will run out of exportable soybean supplies by August. Between August and the following January, almost the entirety of world soybean demand is given to the U.S. exporter.

So we’ve raised exports for our crop a little bit. We’ve raised crush from the need for veg oil supplies and even meal currently. And so we’re left with about 200 million bushel in stocks this year. Now we assume because fertilizer prices are high, we gain over 2 million acres of soybeans next year. Let’s assume normal weather trend yield, we need higher crush next year. Exports will be a record 2.35 billion bushels. Assuming normal weather, we are left with 100 million bushel in stocks in 2022-2023. I don’t think the market will allow it to get that low. And so the final piece of this puzzle is price. What price does November or March 23 soybeans guarantee us soybean reserves at the end of the year?

The old crop market has been a little more waffling as we digest sharply lower Brazilian production that has been printed by government agencies down there. But the new crop market I think is significantly undervalued, or at least the upside potential, there is massive. None of this breaks until we know that we’ve got record yield, and that doesn’t occur until July or August at the very earliest. And yet we still have threats. And I think we’re shifting focus from Brazil where we would basically, the market has crop size right to Argentina, which the market does not have crop size right just yet. This is the 10-day forecast from February 10th to the 20th. And you can see that dryness has returned. This is also very classical La Nina. Notice that dryness expands into Southern Brazil. This is all very much expected.

But because La Nina is now forecast to linger really into the latter part of 2022, this is the most likely setup for precipitation in the month of March. I’m sorry, in the next four weeks. And so this is logical given La Nina strength, and so very, very abnormal dryness in Argentina and most of Brazil, over the next 30 days. And so the issue too, is that at today’s soybean prices, we’re still very, very profitable. There’s no end user losing money, or at least the big time industry end user’s not losing money at $16 soybeans. And so as the market gets more volatile, as we react to even marginal changes in South American production, we want to highlight that there’s no sign that demand is slowing or will be slowing over the next several months. Value is relative, and to us, there are still incredible value in current corn, soybeans, and even soy oil prices where they are giving crudes to rally. And as global vegetable prices, rally sharply.

Canola oil in Western Europe is close to 80 cents per pound. So in that sense, importing soy oil makes good sense. And even ethanol, with margins have plunged in the last couple of weeks, because in mid fall, the margin had to accomplish the goal of getting to about 93% to 95% of capacity. And that was a big job. And so that took margins $1.50 a gallon. But even today, after the collapse in ethanol prices, and our best guess is we’re still above variable costs. And so I guess theory would say, if you’re above variable cost, you continue production. And so I don’t think there will be a material slow down on corn industrial use anytime soon. And ethanol probably is getting cheap relative to gasoline. So over time how this evolves is that ethanol rises to match gasoline prices, which in turn produce profitable ethanol margins again, perhaps even above all costs by spring and summer.

And so think about the competition for the supplies that we have currently. Everyone wants it. Everyone is making money, whether that’s the ethanol person, the crusher of soybeans, the exporters, particularly, will be making lots of money over the next 6 or 12 months. The feeder, the dairy operator, all of these people competing for finite supplies, which is bullish futures in cash markets on the margin. So we will have very volatile markets, but thinking about price channels, those price channels will continue to point upwards. Like I mentioned before, La Nina forecast of chains, such that now this thing is expected to continue as far as the forecasting period goes. And there is model agreement until May or June. And so that both poorly for South America during the remainder of its growing season, like the 30-day forecast, the forecast for the month of March. With everything we know today is that normally dry across the entirety of Argentina and really that central part of Brazil where that winter corn crop will need regular rains between now and really the first part of May. And so there are a lot of crop risks left in the market.

La Nina also really negatively infects mostly the far Southern Plains in Southwestern U.S, but it also, this drought is starting to creep into Nebraska. And so this shows the current drought monitor as well as the change over the last two months. And it’s pretty clear to see that we’re improving things along the west coast, but that is being replaced by drought expansion intensification across the plains. So does this act as fuel for spring, summer drought? And Mother Nature is fickle. It’s difficult to have confidence and long range forecast, but I’ll give you the consensus of where things stand today. This is the weather services latest March, May precipitation anomaly forecast. And it really just shows you that where drought exists today, it will continue to exist on May 31st. Other more sophisticated models which project evaporation rates based on soil types, what has grown in those regions, long term climate models precipitation and temperature.

This is where drought is forecast to grow. And so it really starts to encompass the entirety of the plains, important pockets of the Midwest. The probabilistic drought forecast, which is separate from the graphic on the left is also showing drought expansion in the medium term. And so these consensus could change, but with everything we know now, it does look like drought gets worse and bigger before it gets smaller and improved. And so the insight that we have too, is that this is a multi-year thing still, right? I highlight wheat because it’s the first crop that will grow and we’ll know the most about in the next 90 to 100 days. But our research would say that even if we gain acres, we have trend yield in using trends in global consumption, which is 1%, 2% demand growth every year.

We can’t out produce consumption. The exporter cannot grow enough wheat to meet import demand in 2022-2023, even if weather is normal. And so on the left, you see just the broad correlation between exporter wheat stocks to use and Chicago prices. It’s clearly very strong. And so we think that we’ll lose exporter stocks again this marketing year. And so this wheat market that’s really been into bull trends of 2016, this bull market will be extended another 12 months. Same is true in corn. I think we’re looking for record of low exporter stocks as a percent of use because of production loss in South America. So this upward price trend will continue another 12 months as well. I do want to highlight the 2011 to 2012 period in that we saw consistent, steady erosion in exporter stocks. And so we have this sort of two and a half year period of corn prices above $6. And I think that’s what we’re in the beginning of today.

And so until those bar charts, the bar on its graphic start to increase first, but then get back to 11% or 12%, we will see a similar price pattern evolve over the next year to year and a half. If there are any threats of weather, whether that is in Brazil’s winter crop over the next 60 to 90 days, or in anywhere in the Northern hemisphere of the U.S. specifically, or there are hints of sub trend yields, I think this thing could get very, very exciting very, very fast. And so again, we don’t want to place huge bets on $8 corn, but I do think the ingredients are there today for new all time record prices. Mother Nature will determine that, of course, but we just wanted to highlight the upside risk that exists, because we have nothing in reserves today, corn, wheat, or soybeans.

And so that is what we see as dynamic, exciting, unfolding market that we’ll have in the next 12 months. Summer will be very, very interesting. So that is our spiel for this week or this year really. It’s going to be exciting. It will be volatile. I think we’re all prepared for limit up moves and limit down moves in the same week. But overall, again, upward price channels is the message. Inflation continues. There will be challenges, but as long as we’re proactive in managing input costs, it should be a very, very good year for the farmer and for farm income as a whole. If you have any questions about anything presented here or anything ag market related, please send me an email to this email address. Hope you all have a wonderful night, and a very prosperous 2022. And we’ll talk to you next year. Thank you.

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