Ep. 17 Review of 2022 Commodity Markets

[00:01] Intro/Outro

Welcome to Relevant Risk from the Fryar Price Risk Management Center of Excellence presenting conversations and analysis about risk and risk management for food and agriculture supply chain decision makers from farmers to consumers and everyone in between. This is Relevant Risk.

[00:19] John Anderson

This is John Anderson, Director of the Fryar Price Risk Management Center of Excellence at the University of Arkansas with the Relevant Risk podcast. Here today with some familiar guests for probably our last podcast of the year, we’re recording this in mid-December and I’ve got with me Andy Mackenzie. Andy, how are you today?

[00:39] Andy McKenzie

I’m doing good, John.

[00:40] John Anderson

It’s good to see you again.

[00:41] Andy McKenzie

Yeah, it’s a busy time for everybody, but yeah, looking, looking forward to this.

[00:45] John Anderson

James Mitchell, our Livestock Economist here with us again.

[00:49] James Mitchell

Thanks for having me again, John. Just we’re in that kind of phase of trying to wrap up the semester and get those grades in.

[00:55] John Anderson

Yeah. James teaches in the fall semester, so it’s an especially busy time for you, I guess.

[01:00] James Mitchell

Busy for everybody.

[01:03] John Anderson

And Hunter Biram. Hunter is joining us by Zoom from Little Rock State Office. Hunter is our Extension Economist out of Little Rock, Hunter, how are you today?

[01:11] Hunter Biram

Doing well, John. Thanks for having me.

[01:13] John Anderson

Absolutely. So we’ve got a fairly large panel today because we’ve got a pretty big topic. What we want to talk about today is basically what we always talk about at the end of the year in commodity markets, and that’s kind of the year in review. And 2022 was a fairly active year, if you think back on it. A lot happened and most of it wasn’t very good actually, as commodity markets go. Gentlemen, if you recall when we were about this time last year, the big topic that we were talking about with our stakeholders and among ourselves was input prices. And primarily concerned about fertilizer and fuel and we really started the year with a lot of angst, I think, about how expensive the crop was going to be. Again, mostly thinking from right now from a crop perspective, how expensive the crop was going to be because of diesel and fertilizer prices, and Hunter, I guess I’ll start with you. You know, I know you’ve looked at enterprise budgets and looked at profitability. We look back at 2022, we really did have a big challenge with input prices.

[02:24] Hunter Biram

Absolutely. Just looking at these budgets, diesel costs were up 70% over last year and not looking to wane very much, looking like those are going to be staying very high. So that’s a big deal for us in Arkansas because we irrigate all of our rice acres, most of our bean acres, and most all of our other crop acres, and that’s been a big driver. Interest costs are also going up. We know that interest rates have been going up as the Fed attempts to cool down the economy, and we’re feeling that in the ag economy as well, with interest costs looking to be about 70% higher than they were this time last year as well.

[03:03] John Anderson

So we were looking at this time last year, we were looking at really high fertilizer prices. It looks like fertilizer prices have remained fairly high, and certainly we took a hit in 2022. You know, as we as we look ahead to 2023, it seems like those of at least stabilized. Is that a fair statement?

[03:19] Hunter Biram

That’s a very fair statement from what I’ve seen, the prices are actually forecasted to go down about 5% or 6%, but it’s all relative, right? So relative to 2022, they may be down, but relative to 2021, those are still going to be still going to be higher relative to 2021. So those prices are still up. They are down relative to 2022, but we’re still feeling the pain there.

[03:43] John Anderson

Yeah. So we took a fairly large hit in terms of fertilizer and fuel prices, both in in 2022, particularly with respect to fertilizer, at least those prices have stabilized. But we’re at a historically high point there, which will be something that I think in 2023 we’re still talking quite a bit about. In addition to input prices, as we were looking at those high input prices, I remember very distinctly, Andy, we had some conversations. I think we even did a podcast where we talked about how expensive the crop was going to be and the hope at that time, and it was purely a hope at that time, as we’re thinking about prior to planning even, that we would have a good production year so that we could make a good crop, even if it would be an expensive crop. As it turned out, it wasn’t a great production year. We started the year and I think a lot of us forget this, I had to go back and remind myself of this, but we started the year actually with planning problems due to excess moisture. And Hunter, I know you’ve looked at that some. What can you tell us about 2022 losses early in the season due to moisture?

[04:55] Hunter Biram

In total, we had about $171 million worth of losses and we say losses, what I’m saying there is those are going to be indemnities that have been collected or indemnities distributed by the risk management agency. So those are going to be RMA recorded indemnities, and so that’s $171 million total for Arkansas, $151 million of that, so 88% of that is attributed to rain. And most of that is going to be early season, those are mostly early season rains where we’re seeing a lot of prevent plant. So of those rain related losses that I said, almost 90% of those are prevent plant which is just crazy, that is a crazy amount of prevent plant. And you know as I talk with producers, you know we had we had a Farm Bureau convention not too long ago and we’ve been having some of their presentations that we’ve been in some other places that we’ve been going, hearing about how maybe there will be a couple of days that is dry. And just as soon as those farmers are getting their equipment ready to get out to do some field work, there comes a rain and then it might dry off for a day, and then they think about it, get real optimistic we’re going to get everything together again, then comes a rain again. And so there just were those spotty rains, it wasn’t like we were having torrential floods, but it was just the timing of those rains prevented farmers from getting out in the field.

[06:18] John Anderson

Yeah, and let’s be clear, those indemnified losses probably don’t catch total losses. That’s right. So, there’s a deductible concept at work there, at a bare minimum. So those indemnified losses are actually much lower than the losses that farmers probably realized from that. As I looked at the crop progress numbers from this year in anticipation of this talk, I was struck again by how it looked like corn and rice had the most significant delays in planting. Soybeans, maybe a little less so. And then cotton seemed to mostly be planted fairly timely, at least according to normal crop progress, although people quibble with those numbers all the time, it’s not a bad benchmark to use to kind of see how the cross-commodity effects play out. So we went from wet and having trouble getting the crop in the ground to actually not having any rain at all. And James, I know you and I worked quite a bit this year, mostly you, on drought losses related to the livestock sector. So, tell us a little bit about the drought impact on our livestock producers.

[07:33] James Mitchell

Yeah. So, I think I when I was prepping for the podcast, I was thinking a little bit about, okay, what, what were we kind of thinking what’s going to happen in 2022 and what has actually happened in 2022? And you couldn’t have more opposite scenarios from what we expected to what actually occurred. So, you know, early in the year I was thinking, and I think a lot of us were, you know, take a deep breath we’re not talking about pandemics anymore. Great. But then we saw prices for inputs come up, and we’ve had a drought in the state that we haven’t seen really since 2011, 2012. A lot of our listeners will certainly be very familiar with what happened in 2011, 2012. And so, as you talked about, you know, myself, I drove probably every corner of the state July, August, mainly doing drought programing talks. And so those impacts are really twofold, the first is you’ve got drought, you don’t really have a whole lot of grass to graze cattle on. And so, we were faced with having to cull a lot of cows, early wean calves and market them at an earlier time period than we expected to. And we also had a pretty poor and a pretty expensive hay crop. So high inputs to produce hay this summer and didn’t get nearly the production that we thought we were going to. So, you know, some estimates put us down maybe 25, 30%, as much as 50% for some people in terms of hay needs versus hay realized.

[09:08] John Anderson

So, alternative feeds are not easy to find and fairly expensive right now as well.

[09:17] James Mitchell

Yeah, I mean that’s what we’ve talked about you that’s really reflective of just the corn market, corn market pulls feed prices up. All commodity feeds were up, and they were harder to find this year. And so, we lacked forage, we lacked hay, and the next best alternative was pretty dang expensive. So, like I said early weaned a lot of calves, sold off a lot of cows, you could really see those numbers in those cows hit markets pretty heavily in July. So, it was a less than ideal summer. If there is a silver lining or any piece of good news, it’s that, you know, we can’t really control a pandemic, but hopefully we can do a better job controlling our own costs and trying to manage through a drought. As you know, one of my colleagues, Dr. Jennings, likes to say, he says, I promise after this drought, it’s going to rain. So, if there’s anything I can be certain of, it is that it’s going to rain. And when it does, how do we set ourselves up for success?

[10:20] John Anderson

So, I think the conversation about drought is interesting in that it’s a difficult challenge for all producers, whether you’re talking about crops or livestock. Everybody suffers in a drought. Everybody has a problem with a drought. On the crop side, you get through the year, you get your harvest. It’s probably disappointing, obviously there are losses associated with a drought. You clean the equipment up, you put it in the shed, you’re done for the year, and you hope for a better year next year. With livestock, and that’s a gross oversimplification, but my point with that is with livestock, you don’t really have that situation, right? You have to continue to manage the effects of the drought, even after the drought has ended. And a couple of things there that you alluded to that I wanted to drill down on just a little bit, one is lack of hay. You know, we’re really into feeding season right now and we’re going deeper into the feeding season. You know, how are farmers dealing with that and how is that likely to affect the decisions that they make through the next couple of months?

[11:29] James Mitchell

You know, yeah, so everything that as an industry that we do during the summer, it’s to set ourselves up for the winter, right?  We’ve just weaned a calf; we’re trying to get cows back up and through the winter, get them re-bred, and so, we’re trying to feed hay, and we don’t have very much hay. And so again, you’ve got two options there, you can sell more cows, or you can go buy hay. And so, a lot of producers are kind of in that. That’s kind of the mode they’re in right now where they’re looking for hay. And there’s more than just availability challenges there. There’s just many challenges with trying to get it to get trucked to you, right. Like that’s as hard as it is just finding it. A lot of our big hay producing states that we would normally depend on to bring in hay, Missouri, Oklahoma, Texas, for example, Texas had the biggest hit in terms of hay production, in terms of drought impacts. So, the usual places that we would rely on to go get hay probably aren’t there right now.

 

[12:32] John Anderson

Right. And so, they would be looking to us for hay.

[12:36] James Mitchell

Yeah exactly. Exactly.

[12:38] John Anderson

And so, you know we talk about during the summer we had conversations about this, and I know this was something that you worked on is, you know, how do you make that decision of whether to sell or whether to try to hold on? And that decision is not necessarily over for our producers because we’re in the middle of feeding season and hay is short and they’re still trying to make that decision of how many cattle do I try to carry? How many do I hang on to?

[12:58] James Mitchell

Yeah, I would say looking at kind of the slaughter, the cow slaughter data as an indicator of culling decisions, we’ve actually seen some of those numbers back off. So, I think that we liquidated and culled extremely hard to get us back into a balance. We’re hopeful we’ve got the hay with the cattle numbers that we have to get us through the winter.

[13:20] John Anderson

So that the adjustment has primarily been made?

[13:23] James Mitchell

Yeah, in large part, I think this summer, early fall, I think the adjustment has been made such that, okay, we know how much hay we’ve got, we need to get numbers down to accommodate that because we know it’s not available for purchase necessarily.

[13:36] John Anderson

So that’s the second thing I want to drill down on, based on your earlier comments, drought forces liquidation. And you mentioned Texas, massive cattle producing state obviously, more affected by the drought than we were, liquidation was a huge factor in their market and really throughout the southern plains last year. So, let’s look ahead a little bit and talk about what does that imply for the market. I know some interesting USDA numbers came out in the last day or two about that.

[14:06] James Mitchell

Yes. So, you know, there’s a natural, kind of cyclical nature to cattle numbers, largely driven by cattle prices and profitability. Drought is just an added component that’s kind of just pushed the industry further into kind of a liquidation type scenario, so contraction of the herd. You know, in terms of beef production, things almost have to get worse before they get better, right? So, what happens when you have to early wean calves and you’ve got to cull cows? Well, that’s more beef that’s being produced today, that is not going to be available for us to produce tomorrow. And so, if you look at December’s WASDE report, that’s exactly what their numbers are suggesting that, you know, we had to slaughter a lot of cows because of the drought that added to beef production. We, for those reasons, couldn’t expand our herd, so all of the heifers that we have available to us, we’re selling those and sending those to feedlots, which is adding more to beef production. If you don’t have grass, there is only one other place you can send calves and that is to feedlots. So those are also going to add to beef production, so in a sense, we’ve just borrowed and borrowed and borrowed from the future, and so when you look at the decline in beef production in 2023, it’s rather significant. It’s because of that scenario that we’ve just elevated production in the near term, production will get tighter next year. And again, that is very, very bullish for cattle prices.

[15:37] John Anderson

Right. And just a quick note for the listeners, James mentioned WASDE, that’s the World AG Supply and Demand Estimates Report, monthly comprehensive report on commodity production and use put out by USDA World AG Outlook Board. And it’s kind of the gold standard, I think, for market information, fundamental information.

[15:55] James Mitchell

Yeah, I’d say markets move to that information. It’s kind of a report that everyone in the industry monitors very, very closely.

[16:03] John Anderson

And it’s been very apparent in there that they’ve kind of dialed up 2022 production on beef and dialed down 2023 production based exactly on a scenario you just described where we’ve pulled cattle ahead into the current market at the expense of the future market.

[16:16] James Mitchell

Yeah, I think you are seeing kind of supplies line up better in terms of cattle supplies versus beef supplies. We’ve had cattle numbers that have gone down since 2018, that has not been reflected in the beef production numbers. And so, really, we know how tight of a situation where we are in with cattle numbers. So, 2023 is reflecting beef production starting to reflect that.

[16:43] John Anderson

Yep. Yep. Good, good points. So, moving through the year, massive drought, a big challenge for production across the board and so that excellent production situation that we hoped we would get to maybe alleviate the high production cost situation we were in, did not pan out. It was a tough production year, and the crop was very expensive to produce because, as Hunter said, we had to pump a lot of water. Kind of moving back to the crops side of the ledger for a little bit, the crop that we got was, I’d say overall, a pretty good crop, all things considered Hunter, but it came at the expense of a very intensive resource use. Is that a fair summary?

[17:36] Hunter Biram

Yeah, for the most part, you know, if we speak in terms of yields and trend yields, most all crops were at or above trend yield except for corn, which is an interesting case. So, we could probably spend the whole podcast talking about that. But for the most part we were just at yield trend or above for all crops in Arkansas.

[17:57] John Anderson

Yep. So, you know, irrigation works, but irrigation costs money, so good crop, but an expensive crop and we get that crop to market, or we get to harvest time and are looking at that harvest time market. And Andy we had a really interesting harvest time market in Arkansas because of the drought and the kind of knock-on effects of that drought on the Mississippi River. So, give us a little commentary on what we saw at harvest time with respect to our marketing infrastructure.

[18:29] Andy McKenzie

Yeah. It was the worst-case scenario, because basically with the drought conditions, the Mississippi dried up, barges couldn’t get down to New Orleans. So basically, all the river elevators, they were holding off on buying basically because they couldn’t move it. So that meant for farmers their prices had to drop on what we call basis, the difference in cash and futures went real negative. And for Arkansas, I think we saw a dollar under at different points of time for both corn and beans. And, you know, it’s some somewhat funny to think about it, but basis we also had earlier in the year, John, the Ukraine War impact on wheat basis. And we saw that drop, you know, a large amount at the time that we had the Ukraine War start up. And again, that’s to do with the fact that elevators are not able to actually use or get that commodity through the supply chain. The flour millers, they didn’t want it because prices went through the roof. And so you had this sort of like elevators saying, no, we’re not going to pay. And again, the basis dropped because they didn’t demand the commodity. Again, same thing analogously on the river. They couldn’t use it. They didn’t demand it. So, basis dropped down and farmers ended up with lower prices at harvest. So, the worst time that could have really happened.

[19:49] John Anderson

Right. And again, on top of a very expensive crop where you want to get all you can and you see the cash market erode and you know, farmers had priced some of the crop throughout the year, I’m sure. It’s always difficult to get a handle on exactly how much crop is priced in advance of harvest. But given the fact that we had a drought and there was so much uncertainty about what production levels were going to be, I think booking had been fairly conservative, that is, people probably hadn’t booked as much as they ordinarily would have. And so, we had a lot of underpriced commodities hitting that weak market and the market was weak because of the river situation. So almost everything that could go wrong, that could go wrong in terms of your marketing plan just about happened in 2022.

[20:39] Andy McKenzie

Yeah. I mean, the only silver lining, you know, was that futures prices were high on the output side.

[20:44] John Anderson

Correct.

 

[20:45] Andy McKenzie

But we did have that negative basis impact there.

[20:47] John Anderson

Yeah. I think it’s a good reminder of this, you know, this marketing system that we have for commodities is phenomenal. I mean, it is a remarkable system. And it’s one of the things I know we all study that market in very fine detail. And to me that the marketing system for commodities in the United States, as well as things that the more I study it, the more I’m amazed by how complex it is and how that complexity generally works fairly well. But that system is designed to take product from the farm and move it with almost hyper efficiency through the processing system and ultimately to a myriad of consumer products. When that system gets slowed down by something like a transportation bubble, it’s a bad situation.

[21:36] Andy McKenzie

It is. And, you know, in a way, though, it the market is providing us with signals and it’s just reflecting that drought condition and the fact that barges couldn’t get down there. It’s not like there is some mafia, they’re sort of fixing the price against farmers. It’s just reflecting the actual situation in the market at that point in time. But you’re right, John. I mean, it’s obviously a  negative impact for farmers on what actually happened.

[22:01] John Anderson

No. And that’s a really good point. I mean, if I’m in an elevator on the river and I can’t move product out of that elevator, how much more product do I want coming in?

[22:12] Andy McKenzie

Yeah.

[22:12] John Anderson

You know, my appetite for grain is satiated pretty quickly if I don’t know when, I’ll be able to move it. And that’s what that weak basis reflects.

[22:22] Andy McKenzie

Yeah. I mean, you’re not going to give the farmer a better price to encourage more coming into your space when you don’t even, can’t even get it out. So that’s the problem.

[22:30] John Anderson

And so, you know what a lot of our listeners probably don’t know is, you know, the University of Arkansas has a very well-respected program for training people in grain merchandizing and Andy Mackenzie’s has been for many years the cornerstone of that training program. And so Andy’s got alumni out there in the grain merchandizing world all over the country, but in a lot of these river markets and I know you talked to some of them through the summer, what was their experience like through that situation?

[22:59] Andy McKenzie

Yeah, I talked to James McWard and it was really his first year out there and it was a real baptism of fire for him because, I mean, he was down there in the New Orleans area and he’s trying to get things moved and you’ve got all of these, you just couldn’t get barges moved, basically. So, he’s having to deal with that supply chain logistics side, and be able to explain to farmers why they’re not getting the price that they would want. And so, yeah, just a very difficult situation.

[23:26] John Anderson

A frustrating situation for the merchandizers because they’re looking at an end user market that’s really hard to get product and looking at a good price and they’re looking at farmers that see that and really want to sell, and you can’t move product because the infrastructure just won’t handle it.

[23:41] Andy McKenzie

Especially when the farmers have seen the futures prices doing good at the same time.

[23:44] John Anderson

Exactly. So, it’s just incredibly frustrating situation, I think, for everybody involved in it. And this is again, when we were talking about this in the, you know, the drought in June and July, I did not anticipate river market effects. But, you know, when they showed up, it’s understandable, but it’s fairly straightforward to understand what’s going on. But that doesn’t make it any easier to take, I think, for people who are involved in that market.

[24:12] Andy McKenzie

I think maybe one thing it does show for farmers is if you do have storage space yourself, then that gives you a little bit more marketing flexibility that you could have sold off rather than deliver at harvest and wait for a better price.

[24:22] John Anderson

And you’re making a good point here because basis did snap back pretty quickly, actually.

[24:28] Andy McKenzie

Yep. And you know, if you could have locked in higher forward contract prices with elevators a couple of months down the road after harvest as well, you would have also benefited by holding off on supplying to the elevators.

[24:40] John Anderson

So, to the extent that farmers were really negatively impacted by this, where the farmers didn’t have anywhere else to go with unpriced grain and just had to take what the market was giving in the middle of that, in the middle of the worst of that transportation disruption is that fairly accurate?

[24:56] Andy McKenzie

I think that’s a really good description. Yeah.

[24:59] John Anderson

So that kind of leads us I think, to the end of the year and I think this is a year that most of our farmers would probably say good riddance to this year. Hunter, I know you and James both were just down at Farm Bureau and I was there as well, that was kind of my consensus of what we’re hearing from stakeholders there. Do you want to elaborate on that any or is that kind of confirmation of what you have been hearing?

[25:28] Hunter Biram

Oh, absolutely. I mean, if anything, we can be learning from 2022 and think about risk management going into 2023. I know on the crops side of things; we have county production meetings. I’ve been coordinating with our county extension agents and the staff chairs in those county offices. And one thing that they ask is, you know, can you talk about where inputs might be going? Can you talk about input marketing and talking about crop insurance? Can you talk about farm bill programs? You know, we have the 2023 farm bill coming up. And so, yeah, we’re reflecting on 2022 and we’re learning and we’re figuring out, okay, what can we do about it? Is there anything that we can do or are we just going to be flat footed all the time? And I think moving forward, there are going to be some risk management strategies that we can use, such as pricing grain and using grain storage, using crop insurance in conjunction with that to allow a farmer to be more aggressive in their pricing strategies. And so, there are multiple things to be thinking about and doing. And as much as we hated 2022, I still think we can learn from it.

[26:32] John Anderson

Good point. James, what about on the livestock side?

[26:35] James Mitchell

I’m sticking with the sentiment of our producers and saying good riddance. I guess reflecting on the year from both my perspective and the perspective of our producers, first, from my perspective, I hope that you as extension folks, as UADA, during those tough times, we were able to get information to our producers that was timely. Hopefully, it was useful and hopefully it led to some sound decisions. You know, from the perspective of our producers, hindsight is 20/20, but as Hunter mentioned, there’s a lot that we can learn about our operations. And, you know, what could we have done in 2020, 2022 excuse me, that might have lessened those impacts on our producers? And so, what could we have done differently? Are those things that we should be doing differently in 2023? At least on the on the beef side, most are willing and are bold enough, and I’m certainly one of them, too, that’s willing to say we’re getting into scenarios where prices are going to look as strong as they’ve looked since 2014. And so, when times are better, those are the same times when we can make those improvements. It’s a lot better to manage things when times are good than it is to try and manage costs and risks when times are bad.

[28:00] John Anderson

Excellent point. And that’s probably a good point to stop on. Gentlemen, thank you for being with me today. Thank you, listeners, for joining us. This is John Anderson signing off at the Relevant Risk podcast.

 

[28:15] Intro/Outro

Thanks for listening to the Relevant Risk Podcast, a production of the Fryar Price Risk Management Center of Excellence in the Department of Agricultural Economics and Agribusiness within the University of Arkansas System. The Fryar Price Risk Management Center of Excellence carries out teaching activities through the Dale Bumpers College of Agricultural, Food and Life Sciences at the University of Arkansas in Fayetteville and research and extension activities through the University of Arkansas System Division of Agriculture. Visit fryar-risk-center.uada.edu for more information. Thanks for listening.