2022 grain market outlook
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Mike:
We are going to be talking about a number of topics. Number one, the 2022 grain market outlook. And under that umbrella, Al, a lot of things fall. We're going to be trying to pick apart the corn and soybeans, mainly. We can also talk about wheat as well, but as we head into this new year of 2022, farmers have a lot of decisions to make. And maybe they've already made some of those decisions, but it seems like the goalposts keep moving on them. I think mainly it's about the fertilizer prices and the input cost, but I'll let you talk about that.
Mike:
But let's start off, just give me your feel for how we ended 2021 and what it looks like is we head into 2022 regarding the farm markets.
Al:
First of all, I'll do a little bit of compliance work that I am a series three commodity broker, and whether I'm doing a seminar, webinar, or podcast, I have to let the listeners all know that if you're taking this advice, trading futures and options, there is the risk of loss. And also I'm a series three broker with Wedbush Futures. What I'm saying today represents what Al Kluis thinks, not necessarily Wedbush. So think I've got my compliance taken care of.
Mike:
Okay.
Al:
Now, to answer your specific questions, Mike, we ended up 2021 with a lot of volatility. We're looking at changing weather conditions in South America. We're looking at rapidly changing fertilizer and input costs and even some question about the availability of being able to get fertilizer delivered when you need it and also, some of the different crop input. So we have higher prices and higher profits. I did some meetings in late December and as unusual, I talked to farmers that this year we came into the fall harvest with very good futures prices, good basis levels in most areas, really good crops.
Al:
So the revenue per acre is there. The real frustrating part for a lot of farmers is they look ahead to next year paying anywhere from five to 10% more rent, input cost jumping by I've seen 12% up to 20% that when you look at the new crop board prices hovering around 5.40 to 5.50, December 12 corn, around 12.40, 12.50, November beans. There's a slight profit in there, but it, it's not all that great. And you have to really crunch numbers, manage your inputs very carefully and the pricing decisions that you make. And so I think that a lot of farmers were able to get inputs bought in the third and fourth quarter back in 2021. And certainly the earlier they bought it, the better those purchases look.
Al:
And so for the remaining fertilizer and other input costs that they have to do, I'm suggesting patience. We're seeing the natural gas spiked up to 6.50 per BTU in October. Recently, it's dropped by almost half. And so I know that fertilizer prices are not going to come down immediately because natural gas prices has gotten a lot cheaper, but I think that we're going to see the trend in the next spring of more availability, and eventually by the third or fourth quarter of next year, lower costs. So some of the farmers that I've talked to that want to plant corn didn't want to pay up for the expensive anhydrous are looking possibly at side dressing next year.
Mike:
Well, let's pick apart the whole issue of the fertilizer prices, skyrocketing, some of the reasons why and what power that farmers have in this kind of market because I know for years you have talked about, there are some things that you can control as a farmer as far as locking in prices on inputs, and there are some inputs that farmers don't have control over. I think it's industry-wide known that the seed prices are out of the control of farmers. Farmers have very little control of locking in those seed prices, but LP prices, there's a little more control there for farmers to lock in those prices. The fertilizer prices I want to talk about now, I think in the past the farmers, the ones that do forward price and lock in some of those inputs maybe have had a little more control than they do now, but I want to have you address what are some of the reasons why the fertilizer price has shot up? And there are rumors out there as to why we're at these high levels that we are, but I'm curious, what do you hear?
Al:
I think there's three major things I'm looking at, Mike, with kind of a perfect storm that all came combined together. First of all, we're seeing a very high new crop wheat and corn prices. And so this has affected the acreage intention, not in just the US but around the world. And so you look at Ukraine, Russia, India, Eastern Europe, all of those countries are really ramping up production for next year, and that's coming. So there's a big increase in the demand for fertilizer across the world. So the demand is there. At the same time, you had some energy problems that really started in Europe and moved over to the US. The price of natural gas at some of the hubs in the Netherlands jumped by 800% in a matter of three months. And so a lot of the anhydrous some other, the natural gas that was scheduled to go to fertilizer manufacturers instead was diverted over to home heating and heating of commercial buildings.
Al:
So you had this out of nowhere natural gas price explosion, and then a lot of countries are becoming very concerned about their own domestic food inflation. China, Belarus, Russia, all large exporters of fertilizer, especially phosphate. And all of a sudden they started saying, "Hey, if our fertilized prices and food prices are going way up, we better restrict our exports to keep more of that supply at home, make sure our farmers get adequate fertilizers supplies for 2022, that they grow good crops so that we can grow as much wheat and other food grain and feed grain as possible." So then you take the combination of increased demand, explosion in natural gas prices and then also some of the export restrictions that were put on by some of the countries that typically export a lot of fertilizer into the United States. And all of those just basically tripled the price of anhydrous in about six months.
Mike:
There's a group of farmers that are trying to find out if there's some manipulation of prices. And I think the government may be trying to look into. For those listening, we're speaking with Al Kluis of Kluis Advisors. And this, for the listener, it's probably fair for them to know that this is being recorded towards the end of the year of 2021. So a lot could happen in the first of the year as far as the government or anybody else looking into why the fertilizer prices have gone as high as they have. And I think those areas that you just covered seem to be the reasons why most people believe that the fertilizer prices are where they are. I might also mention that some of the sources that I talked to have mentioned that natural gas here in the US has been exported quite a bit because of the demand worldwide. And those that produce natural gas can make more money across the world. So they're naturally going to ship it out of here to make more money, and that might play into it as well.
Al:
That certainly is a good point, Mike. I think a lot that LNG, Liquified Natural Gas, they've got the big tankers down at Galveston, Texas. They load those ships and send it overseas and they're buying it at three or $4 per BTU, shipping, selling it over there for eight to 12. So there's some good margins. And I don't really blame people for doing that. They're in the business of making money on natural gas. So we produce a lot of grain and ship, a lot of grain overseas, which causes higher prices. You have to let the market forces work, but I agree that there should be some investigations into that because if natural gas prices go lower and stay lower, eventually I would think that market forces should drive the price of nitrogen fertilizer lower. And if they don't, I should like to know why.
Mike:
Let's take a look at the corn market first off and its outlook for 2022. Start with the first half of the year, a short- term outlook, if you could, if you've had a chance to look at the factors that might play into moving this corn market. Frankly, we end the year fairly strong with the new crop 22 contract trading around 5.45 or 5.46. As I've talked to some farmers even in South Dakota, their basis prices, as you mentioned to start with, the basis prices is pretty strong. I mean really strong. It's sometimes over a dollar under the Chicago price, but yet they're seeing some very firm basis prices at the end of 2021, anyway. We'll see if that lasts into the new year, but my point is the farmers have had some pretty good opportunity to price corn at the end of the year. What will happen as we start here the first couple of months of 2022?
Al:
There's several really key dates that we're looking at, and that'll be right at the end of January when you get that first report from the government on grain stocks and final crop production. I think there's a good chance when you get the report. I think it's on January 13th that we might see slight uptick in harvested acreage in both corn and soybeans in that report. So, that'll be important to watch. I think the real day to day market factors, I kind of sit glued watching the radar in South America in the extended weather forecast. And again, this year they started out with really wildly optimistic projections for the size of the corn and soybean crops in both Brazil and Argentina, many private analysts, people that I respect have taken, now, some of the big forecasts for of the Argentine crop down initially and the Brazilian crop down as we've moved into late December and early January.
Al:
A lot of this is just kind of something to talk about each day. The real key weather period right now is from the middle of January through the end of February. Think about in the US, the weather from the middle of July through the end of August. So that's mid-January to the end of February in South America. So day to day, week to week, are we going to pop the corn market back up to 6.50 to 6.80, I don't think $7 realistic, but if we have a weather problems in South America, they need to get the soybeans harvested early and get the double corn planted on time, something that didn't happened last year. In about two thirds of Brazil, it looks like you're going to have a very early soybean harvest and set the stage for a pretty decent double crop corn market. So it'll be important to watch that.
Al:
And so the weather in South America is going to be the driving factor. And then we have the major USDA reports on January 13th, January 31st. And looking ahead to March 31st. So there's a lot of moving pieces in here tied to international markets. The potential conflict in the Ukraine is real wild card. I think that I hope it does not happen for humanitarian reasons, but as I work advising farmers managing risk, I have to look at if it does happen, what's the result. And so it's a Black Swan event. It's a wild card. Personally, I think it would be short term. It would be quite bullish. You'd probably take prices sharply higher for a few days, but long term, the toll that that would take on our US and Western Europe and global economy, I think would be pretty negative to both the stock and commodity markets.
Mike:
And I also hear that Ukraine is expected to export a lot more corn this year to China. So that would cut into our market share a little bit. We've been trying to get more corn over to China obviously, but if they have that market locked up and like you say, if something does happen between Russia and Ukraine, then that could maybe change things. So we'll have to keep an eye on that. The demand here in the US for corn for use for ethanol seems to be at a pretty nice level after plateauing for a little bit. Ethanol plants are making some decent money. And so that could play. And of course, everybody's talking about the big elephant in the room and that is going to be the acre adjustments. And we'll get to that in just a moment, but let's go to soybeans now. What seems to be the outlook for soybeans as we head into the first couple months, first half of 2022?
Al:
It's similar to corn in that the domestic processing margins on soybeans are really, really large so that the people that are crushing soybeans into meal and oil have near record profits, and they can go out and lock in good board profits all the way out. So the domestic demand, crushed demand is very strong. Exports have been okay, but certainly disappointing compared to last year. Also with the early harvested soybeans in South America, typically Brazil would start having beans available and compete with us in February. It looks like that's going to be two to four weeks earlier this year. So right now, if you're a global soybean buyer and you're trying to line up your needs for January, you're probably not going to be buying US soybeans. And so I think that seasonally, we used to have a seasonal lodge chart, Mike, that you bottom soybeans in the month of October, but I've always been talked about bottoming soybeans during the world series.
Al:
I've written about that quite often. Then you would generally trend higher to a peak in late May, early June, and then you'd roll over and you'd go down into October. Now that pattern is evolved into more of what I would call an M where you still have the October lows actually came in August of this year. You go up to a December, January high, if you've got big crops in South America. You pull back in that harvest to a February, March low. You get a secondary high out into May, June. So the question is for a lot of growers, do you want to hang on to very much inventory into that Brazilian harvest when there's no carry in the market and odds are exports, which are disappointing now are going to really drop substantially when the crushers are the only people that are bidding for beans, Mike. I don't think you're going to keep the future price up here at 12.80 or 12.90 a bushel.
Al:
And so the outlook, unless you have weather problems in Brazil, I think is not all that great for soybeans. And we've got a lot of beans sold. We've got some ‘22 hedges on, and with the futures alignment right now, they're not paying you hardly anything to store beans. I'd rather see the guys just cash in all their beans, buy some August soybean calls or bull call spreads, take the money to the bank. What do you want when you're farming? You want a good crop. You want a good price. You want a good basis. You got it all. Don't make this hard than it has to be. Okay. Take the money to the bank, and if you want to participate and hope that beans are going to shoot up to 14, 15 or $17 this next year, you won't keep the current good basis you have in place.
Al:
Those calls or call spreads can add to the profitability of your farm in the event some black wan event comes along on and you take soybean futures, seems funny to say this, all the way back down to $10 a bushel. You're going to lose that call option premium, but you're going to be glad you sold those cash beans at 12 or 12.50 a bushel. The loss in the call options are pretty minimal. So not only talking about market outlook, but what is the right financial move for your farm. What's the right grain marketing move for your farm? And a lot of these people I'm afraid they're making it more complicated than it really needs to be.
Mike:
Yeah, you hope that they don't get lulled to sleep with strong markets that we've had and think that they just don't have to do anything and just let this market keep going up because it always won't go up. Real quick on the wheat market, it's interesting years ago, I had an analyst. He'd always say, "You tell me where the corn market's going. I'll tell you where the wheat market's going." And this past year we've seen the wheat market as the leader a number of times. Do you see that in 2022, and what's your outlook here for the first couple months or so?
Al:
Okay. The band is certainly there. We're in a very much tighter stock use ratio than we were a couple of years ago, but it's still, when I look at wheat, corn and soybeans, we have a lot larger supply and a lot larger projected inning stocks of wheat in the world, in the US, in the major exporters in what we've had. So we have a lot of this year's wheat sold. If we would take the Chicago or KC wheat futures back up in the area of $9 a bushel, I probably moved to at least 80% sold on wheat. I'm looking at the July '22 wheat futures up in the area up over $8. We hedged a bunch of it, we get another shot up there. Selling $8 wheat ahead has just about always worked. I'm looking and expect, USDA indicated this too, Mike, about a 5%, a one to 1.5 million acre increase in winter wheat in the US at the harvest of 2022.
Al:
Spring wheat, we have a lot of customers up in North and South Dakota that have went pretty much a hundred percent corn and beans, but they're going to take a quarter, a half section and plant spring wheat. A lot of those guys have got it hedged up over $9 a bushel into the September, December '22 Minneapolis wheat futures. If we would tank wheat into February, March, they've said they'd take the gain on hedge and then plant corn or soybeans. But bottom line, I think you're going to have one and a half, 2 million acres more spring wheat if we have a normal spring. You're going to have one and a half, 2 million acres, more winter wheat. And other than the Southern plain, say Colorado, Kansas, all the way down into New Mexico, it's been terribly dry in that area. They may take some hit in the yield. The soft red winter wheat yields really look excellent. And from a moisture situation, both the US and Canadian prairies have really improved their moisture profile. So I think odds are pretty good. We're going to have more of a normal North American wheat harvest next year. And if we do, you're not going to have $8 futures.
Mike:
We are now ready to talk about what every anybody else has been talking about to end 2021, anyway. That's what will farmers plant this spring? How much corn? How much soybeans? How much wheat? What are the acreage estimates that you're looking at, Al? I know that the general idea going into spring is that maybe planting less corn and more soybeans, but I've always believed, I've always heard anyway, and I witnessed that corn is king and it takes a lot for farmers not to plant corn.
Al:
Yeah. I see the trade estimates, Mike, and consistent with what you said, one and a half to 2 million acres, less corn. And the thought that that one and a half to two, I've seen guesses as much as 3 million acres being shifted over to soybeans. That's not impossible, but I don't think it's very likely. We do our own crop and acreage surveys. We're hoping to work with you on doing some of these surveys as we get into 2022. And a lot of farmers were able to purchase their fertilizer ahead, inputs ahead, seed ahead, and they're going to grow corn. When you look at the current corn to soybean ratio, and as we're speaking here in late December, it's about 2.27 to one. So the price of November 22 beans is 2.27 times the price of December 22 corn. That's going to get more corn acres. That ratio is telling people to plant corn. A lot of times two farmers will make decisions, mike, based on what made them money last year, and last year, they made good money in both corn and soybeans, but corn profitability was anywhere from 30 to $50 per acre higher than soybeans.
Mike:
I might also add here, Al, hate to interrupt you, but the fact is over the years, psychologically, farmers just like to plant corn more than they like to plant soybeans. A lot of them have told me that personally.
Al:
Guys have told me, they think of soybeans as a damn weed.
Mike:
Yeah, exactly!
Mike:
I'm glad you said it.
Al:
I'm a former employee of American Soybean Association. They'll probably disown me for saying that, but the other side...
Mike:
This is true. This is true though.
Al:
But they also heard the guys down south call them money beans.
Mike:
Yes.
Al:
And that type of thing. So, you got different attitudes, but if you're talking the central corn belt farmers, they're in pretty much a rotation. They've got the equipment, the fertilizer, everything for corn and soybeans. So any big change in the acreage I think is going to have to come in the Dakotas or the Southeastern part of the US where they might be going more cotton, less cotton, that type of thing. If you take what I call the Interstate 80 run from Indianapolis down to Omaha, you go north and south of that, certainly Des Moines, Iowa, right in the middle of that, those farmers tend stick pretty much to their rotation and it's going to be hard pressed.
Al:
They might switch a quarter section or a half section if they have... But the biggest factor that'll impact, Mike, is going to be what kind of spring weather we have. When I've done this for 40 years, if you get early spring weather, you get more corn and more spring wheat, okay? You get a late wet spring, you get to at the end of may. And we only have half of the corn planted, you'll end up then having more soybeans. And so analysts, we can do all the fancy spreadsheets and prognostications we want, but mother nature will still decide how many acres of corn and beans we're going to get.
Al:
The other real wild card, besides spring planting weather, is prevent plant. Last couple years, we've seen 2020 early spring, almost ideal planting conditions across Dakotas, Missouri, some of the areas that have historically had a lot of prevent plant, and we have no indication of that. They've got a good soil moisture profile rebuilt across most of the Dakotas, in fact, across most of the corn belt. Other than the Southern Plains, if you look at the US drought monitor, you see very few orange, red spots on that map. And so as we come into next spring, we could have, I think, about 181 million acres combined of corn and soybeans. There just isn't more land. I mean, where are you going to find it? But when I drive outside of Des Moines or I drive outside of Minneapolis, or I drive west of Chicago, we're losing 60 to a 100,000 acres a year to urbanization, unfortunately.
Al:
And so I think we're going to be really challenged in the future. Also when I crunch the numbers, and I just put a lot of work into an article that's going to be coming out in about four weeks in Successful Farming on the different acreage, and yield is a big thing too. I mean, if you imagine, with last year's crop conditions, Mike, we had a record national corn yield. What will the yield be next year if we have normal weather? Right. So whether we have one or 2 million acres, more corn or less soybeans, that type of thing, long term is not as important as what yield do we get on that crop in 2022. And at this very early stage, we're coming into next year with a lot of fall tillage done, a lot of fertilizer on and a much improved soil moisture profile. So we have the makings to have not only 90, 91 million acres of corn and beans, but at this early stage, we have everything in place to have a very good yield again next year, but I'm not a weatherman. And I reserve the right to change my opinion as we get into March and April.
Mike:
Great points about the weather, and that will be the ultimate driver of acre adjustments in 2022 in the spring. And as far as that yield comment, I have heard that one of the things that might bring yields down would be if farmers actually do decide to put less fertilizer on, but I'm in your camp. I think a lot of those decisions have already been made.
Al:
Yeah. When you got $5 corn, Mike, they're going to put fertilizer on. It's not like a few years ago and we were struggling with $3 corn and got out in Dakotas and you had a 80 cent or dollar basis. The people now have very good in incentives. Also, I mean, it's fun to get out during the spring and summer and just see what a really good job they've done. We've put a lot of tile in, again, this fall in the upper Midwest because of the beautiful fall weather. We had people putting in tile in Minnesota, almost unheard of right up into the middle of December. And so the productivity that we have, the varieties of seed that we have, we can grow a good crop in really challenging conditions. And we talk about some of the seed varieties and improved yields. There's another factor is that we have more consistent yields. If we'd had this dry weather 10 or 20 years ago, we had in the summer of 2021, there's no way we would've had 177 bushel national average yield.
Mike:
We want to jump out to the outside factors real quick to end this, Al, and that is inflation. It's the highest it's been in 30-some years. And I'm curious about your thoughts on how this impacts the farm markets.
Al:
Inflation is kind of like some critical decisions recently announced by the federal reserve board where they're going to be tapering their bond purchases. They're going to be raising interest rates twice, three times in 2022. And so the inflation is present. I stopped in the gas station the other day and picked up a snack, and I thought, "Holy cow, this used to be 99 cents. Now it's 2.89."
Mike:
Yes.
Al:
And I go to the grocery store, not complaining about it, but I certainly see it being a factor for farmers that are having to buy fuel. Farmers are paying 12 or $1300 dollars per ton for their few last loads of anhydrous. Inflation is there. Landowners are wanting a bigger rent check for next year. And so you're going to have inflation. How you manage that, I think is a very important decision and trying to work with your suppliers, trying to lock it in. The guy that's selling you the retail product, he's in a very competitive environment and he wants to work with you to keep your business.
Al:
And so working with them is a key. A lot of the landlords have went to more of a flex rent type program where if the revenue exceeds X number of dollars per acre, the landlord's going to get 30% of it. And so that type of thing to set up kind of a win-win contract. I can't control the price of fertilizer that I'm going to have to pay for my ‘22 or ‘23 cost. But as a producer, I can stay aware, number one, of what the prices are. And also when I make the pricing decisions, I can also decide if I'm going to offset some of that risk by selling some crop ahead. I think I talked with you back in August '21. We bought fuel and fertilizer ahead for the '22 crop. Simultaneously, I had some December '22 corn, right at 5.20 a bushel and had some new crop wheat ahead at around 7.80 bushel.
Al:
As we're speaking that new crop corn hedge is about 27 cents underwater. I mean the market 27 cents higher than where I put the hedge on, but the price of anhydrous, I had the dollars there to do it. The ratio was right. and so when you're looking at input expenses, you have to, first of all, try to manage them, but the other is, if you're buying high price fertilizer, make sure you're offsetting some of that risk by also selling some new crop ahead. And I'm not talking the whole crop, but generally, if you look at wheat, it's about 10 or 15% of your crop. On corn, it's 15 or 20% of your crop. Book the inputs at the right time, sell ahead at the right time, and year in and year out that ratio type thinking has worked really well for me.
Mike:
Well, you're giving some great advice here today, Al, as you always have, and if you have farmers out there listening that would like to contact you for even more advice, how do they reach you?
Al:
First of all, we look forward to seeing a lot of them down at the Commodity Classic. I'll be speaking at the Successful Farming main stage right at the open of the trade show. So, that's always a lot of fun. I see a lot of customers that I've never met face to face from all over the US. You can get a trial subscription to our newsletter just by going to the website, KluisCommodityAdvisors.com. 30 days, get the information three times a day, a morning report, noon update, afternoon report, a very detailed newsletter. So try it for 30 days. See if it works for your farm. If you like the type of information that I write about in Successful Farming, you're probably going to like the work that we do on a daily basis.
Mike:
Yeah. Again, for those that may not know, Al does write a monthly article for Successful Farming magazine. It's called Your Profit, and he's a monthly contributor to the Successful Farming product. And also you can find his articles on Agriculture.com. Al, again, it's always a pleasure to visit you and good luck in 2022.