Market to Market (January 24, 2020)

Market to Market (January 24, 2020)

January 25, 2020 0 By Luis Garrison


Coming up on Market to
Market — The President launches trade
barbs at the EU. Reactions in the global
economy from last week’s trade deals. A job retraining program
that focuses on economic and personal development. And commodity market
analysis with Arlan Suderman, next. ♪♪ Pioneer Hi-Bred
International is a proud sponsor of
Market to Market. Sukup Manufacturing
Company – providing equipment and buildings to
store and condition grain to help farmers adjust
to market swings. We build drying, moving
and storage equipment designed to preserve the
quality of their crops. Sukup Manufacturing,
store now, profit later. ♪♪ Tomorrow. For over 100 years we
have worked to help our customers be ready
for tomorrow. Trust in tomorrow. Information is available
from a Grinnell Mutual agent today. ♪♪ This is the
Friday, January 24 edition of Market to Market, the
Weekly Journal of Rural America. ♪♪ Hello, I’m
Delaney Howell. Nearly four years after
making the campaign promise, the Trump
Administration is proposing removal of the
controversial Waters of the U.S. rule. While EPA Administrator
Wheeler says states are free to step in with
their own protections, environmental groups and
some state governments are promising legal action. The WOTUS roll back was
well received by several farmers, ranchers and
agricultural lobbying groups. In the days before the new
rule was announced, the President spent part of
the week in Switzerland underscoring his
economic victories. Paul Yeager has
our trade coverage. Global economic leaders
and government types assembled this week in
Davos, Switzerland for the World Economic Forum. Business was on the
official agenda for most, but the topics for
sideline meetings included troop positions and
climate change. President Trump opened up
another trade front with the European Union as
threatening to add tariffs on European imports as
France looks to tax U.S. tech giants like
Google and Amazon. Donald Trump: “They have
trade barriers where you can’t trade. They have tariffs
all over the place. They make it impossible. They are, frankly, more
difficult to do business with than China.” The
president continued in his press conference to air
grievances about the WTO. Donald Trump: “The World
Trade Organization has been very unfair to the
United States for many, many years. And without it, China
wouldn’t be China. China wouldn’t be
where they are now. China, that was the
vehicle that they used. And I give them
great credit. And I also don’t give the
people that were in my position great credit,
because, frankly, they let that all happen.” One
of the most contentious issues for the U.S. is labeling of China
and India as developing countries, allowing them
to use a different set rules in the WTO. The topic was a frequent
discussion point in meetings like this
one in Switzerland. Roberto Azevedo, Director
General, World Trade Organization: “And there
is a lot of debate from one side, from the other,
concerns are expressed and I think this issue is
not going to disappear. We have to face it and how
we’re going to square the circle is something that
we have to figure out.” Phase One between the U.S. and China may be signed,
but that didn’t mean the global economy
has stabilized. Officials with the
International Monetary Fund said last October the
global economy is slowing down but that describe the
situation differently. Gita Gopinath, IMF Chief
Economist: “While there are signs of
stabilization, the global output outlook remains
sluggish and there are no clear signals of
a turning point. There is simply no room
for complacency, and the world needs stronger
multilateral cooperation and national- level
policies to support a sustained recovery
that benefits all.” One factor in the North
American economy is the USMCA agreement,
which left the U.S. Senate this week bound
for the White House. Canada’s Prime Minister
emphasized his hope for the House of Commons’
approving the new NAFTA. Justin Trudeau, Canadian
Prime Minister: “Passing the new NAFTA in
parliament is our priority. Millions of Canadians
depend on stable, reliable trade with our largest
trading partners from farmers in Alberta and
autoworkers in Windsor to aluminum producers and
stagnate and entrepreneurs in St. John’s or in
Vancouver.” Mexico ratified the agreement
reached in 2018, but not the version the U.S. signed off on last week. Attendees to Iowa’s Pork
Congress this week in Des Moines were briefed on
trade updates in China, USMCA and the number one
market by value, Japan. Mike Paustian, President,
Iowa Pork Producers: “They’ve been a great
customer of ours. But once once the US
pulled out of the TPP we started to fall behind
in some of our export competitors. And so securing that trade
deal with Japan that that kicked in on January 1
will win bring us back to that level playing field. So, so that that was a big
win for us going forward to because, you know, we
were concerned that we would start to lose market
share there and now we’ll, we’ll be able to continue
to have access to that market.” For Market to
Market, I’m Paul Yeager. Nearly one hundred years
ago, coal was the major power source for much
of the United States. At that time, there were
800,000 coal miners – about 2 percent
of the workforce. A portion of that group
was the force behind economic growth in the
Appalachian Mountain. Today, according to
the Bureau of Labor Statistics, there are just
over 50 thousand people making their living
digging coal from the ground. Job loss across the region
has found miners and others, looking for new
ways to make a living. Producer Peter Tubbs found
one job retraining program that focuses on economic
AND personal development. Two new carpenters
learn mortise and tenon techniques in the wood
shop at Coalfield Development in Huntington,
West Virginia. They have recently joined
a three year program with Coalfield that will teach
them more than practical carpentry skills. Originally a general
contractor, Coalfield found that employees had
needs beyond a paycheck. Brandon Dennison, CEO,
Coalfield Development: “But as we hired our first
crew, we realized that the life challenges our crew
members were facing and that the people of
southern West Virginia generally are facing
are just very, very overwhelming: financial
challenges, health challenges, physical
health and mental and emotional health
challenges.” Workers at Coalfield Development’s
multiple businesses work an unusual week: 33 hours
at their job, 3 hours of personal development
classes, and 6 hours of community college. All on the clock. Brandon Dennison, CEO,
Coalfield Development: “One person at a time, you
know, we’re not going to bring in a hundred people
for a week long seminar. It’s crews of three to
five, but we really get to know them. We really get, we earn
their trust, we trusted them and they trust us. And we just work through
life challenges as they arise one by one, until
slowly but surely we see a person start to really
reverse a generational poverty cycle, which is
transformational for our region.” One of Coalfield
Development’s companies is a t-shirt manufacturing
and printing business. The shirts are made from
recycled plastics, and customers can order
individualized designed that are mailed directly
to their homes. Barbara Mason previously
worked in fast food, but now helps design
and print shirts. She finds the personal
development classes helpful in her life
away from work. Barbara Mason: SustainU:
“Well to me they’re kind of like therapy. Um, they really help with
our everyday, everyday work, material and stuff
like that and really helps us all through struggles
like budgeting, stuff like that.” Much of Appalachia
and West Virginia is struggling economically. While the unemployment
rate is under five percent, the contraction
of the population since 1950 has stunted economic
growth and opportunity. For a century coal mining
was the largest and highest paying industry. But mechanization and
cheap natural gas has reduced the number of coal
jobs in the state by 85 percent, leaving a region
struggling to reinvent itself both economically
and psychologically. Brandon Dennison, CEO,
Coalfield Development: “It is a powerful industry,
but it’s employment base every decade after decade
has, the trajectory has been very clearly
on a downward trend. And so, uh, we are
working on economic diversification because
we have to, if, if our communities are
going to survive. And so coalfield
development is trying to pioneer and model what
a diversified, more sustainable economy can
look like.” The very home of Coalfield Development
is part of the reinvention. A century old factory
on the west side of Huntington, West Virginia
is slowly finding new life. Coalfield is renovating
the 90,000 square feet to house its businesses as
well as other businesses and nonprofits
from the area. The building provides
lots of work for the construction side of
Coalfield Development, which leads to personal
and educational improvement opportunities
for the staff. Drew Endicott, Coalfield
Development: “Yeah, well, I started out, I came
straight out of, uh, a coal dock. I was a Sample man. And, uh, my building
construction from teacher and high school. He just called me up one
day and asked me if I wanted the job and said,
well, I’m looking for one. So he sent me to Brandon
and I was the second hire Coalfield ever made. I’ve seen you grow. Just, uh, just like
realizing like, it’s not just us, it’s everybody. It’s like community. It just teaches you a
lot about respect, uh, volition. I mean, just all the
grit, just everything. And I just, it’s just nice
that there’s a company out there that does this
stuff.” The businesses under the Coalfield
development banner have spun up organically
as needs have been identified. The group has also opened
businesses growing vegetables and teaching
small-scale farming techniques, as well as a
solar panel installation company. Ultimately, employees have
gained benefits from the 33:3:6 model, moving
towards higher work skills and better life habits. John Ratliff, Coalfield
Development: “Because when I’ve worked five or six
different jobs, I haven’t found the right
one for me. But, uh, when I came in to
coalfield, coalfield has taught me what actual
respect was because I’d never had a childhood, uh,
grow up like at when I entered Coalfield. Coalfield taught me
everything that I needed in life and Coalfields
the job for me. So I’ve been with them
for about eight months. I learned everything from
Coalfield.” For Market to Market, I’m Peter Tubbs. Next, the Market
to Market report. The commodity markets
faced weather in South America and traders
waiting to see if Chinese buyers would make good on
their Phase One promises. For the holiday shortened
week, March wheat gained 3 cents and the nearby corn
contract lost 2 cents. Higher U.S. soybean prices and the
fact that Chinese demand has yet to materialize
pushed the March soybean contract 28 cents lower. March meal lost
$2.30 per ton. Cotton continued its
decline falling $1.90 per hundredweight. Over in the dairy parlor,
February Class III milk futures climbed 49 cents. The livestock sector
ended on a down note, as February cattle shed
$1.50, March feeders cut $5.32 and the February
lean hog contract dropped 45 cents. In the currency
markets, the U.S. Dollar index
was up 28 ticks. March crude oil fell
$4.40 per barrel. COMEX Gold added
$12.40 per ounce. And the Goldman Sachs
Commodity Index plummeted more than 21 points
to finish at 405.45. Joining us now to offer
insight on these and other trends is Arlan Suderman. Arlan, welcome
to the table. Suderman: It’s
good to be here. Howell: Arlan, I know you
look at the markets a little bit differently
than some of the other analysts we have on the
program so I’m going to let you just share how you
look at cash markets maybe as opposed to futures. Suderman: Yeah, in 2015 I
was hired to develop our market intelligence
department and under Dodd Frank the regulators tried
to put a China wall we call it, a separation
between research and the brokers, so that research
couldn’t guide the brokers and the clients the way
they wanted them to do it. We took a little
different route, another alternative, and that is
allow me, myself and my team to be on the trading
floor with the brokers so we have more grassroots
oriented work, fundamental work that we do. The tradeoff of that
is we can’t forecast derivatives. But we work quite a bit
in the cash and the basis markets and it allows us
to do fundamental market intelligence that is more
beneficial then to our customers. Howell: All right, so
we’ll take a focus today very heavily on the cash
markets starting off here with the wheat markets. We’ve seen futures
especially continue to soar and we’re finally
seeing cash start to catch up here. Will we see those tighten
as we continue on? Suderman: Well, we are
seeing a lot of strength in the wheat market and a
lot of it has really been driven by the algotraders,
the computer traders that are right now trading
momentum into the upside. It paused and hesitated
now over this past week. And fundamentally they’re
looking at the fact that the Black Sea region has
been very dry, very little snow cover there, but they
have been mild, no real threat. We’ve got a lot of dryness
in the Southwestern Plains, obviously the
Australian drought is well known. But frankly this is a case
where momentum started on the upside and they’re
looking for fundamental reasons to justify it and
there’s some hope that we’re going to get some
business with China. One of the things
throughout the Phase One trade agreement was that
it holds China’s feet to the fire with their TRQ
requirements from WTO. And that could require
them to buy another 5 to 6 million metric tons of
wheat that would be new business on the
global market. Howell: So it really
sounds like we’re going to have some sort of, have
to have some sort of fundamental catalyst to
move cash higher here. Suderman: Exactly right. And a lot of times the
charts will show a move before we know what the
fundamental reason is but those are some of the
things that we’re watching that could provide the
fundamental justification. Howell: All right, Arlan,
you mentioned this week in your newsletter referring
to corn I think specifically that farmers
are remaining as reserved sellers. A two-part
question for you. Is it time to make
some cash sales? And what’s it going to
take if we don’t see farmers making
those cash sales? Suderman: Well, we’ve seen
strong basis this year obviously and it has been
pretty much above average across the Midwest largely
because farmers have been small sellers, they’ve
had several market facilitation payment
programs to help pay the storage bill while they
wait to see if China creates the demand. That really hasn’t
happened yet. We did sell over the last
couple of days, a little over 11 million bushels to
unknown destinations, it may be China, some of our
sources indicated that China had approved
some purchases. We don’t know if that’s
actually happened yet or not. We have seen an increase
in farmer selling after the new tax year started
and so that has come up a little bit. But still the movement of
corn has still been less than what the processors
need and so they’ve had to continue to have
pushes into bids. It pays to ask for pushes
and a lot of times you’ll be able to get it,
particularly if you have quantities to sell. Howell: Share with me, I
know you follow basis a lot over the Midwest,
share with me some of those numbers
that we’re seeing. I know we’re definitely
above where we usually are at this time of year. Suderman: Well, a good
example, in Northwest Iowa, Northeast South
Dakota, even into Eastern Nebraska we typically have
a sharply negative type basis well below the
futures contract and over the past week we’ve seen
plus 5, plus 10 cents on that basis, giving some
opportunities, flattening out a little bit, still
a few pushes out there. The concern would be if
we do get a rally in the board and we do see a
sharp increase in farmer selling that we could
see that basis break. Howell: And basis
obviously is a very good indicator of what the
commercials are wanting or needing. We’ve got a good question
here that got emailed into us today from Merrill in
Illinois wanting to know, what are your thoughts
concerning current tight basis and the
carry for corn? And what are your views on
soybean basis and carry as well? Suderman: We’ve seen the
carry change a lot over the last week as we saw
the spreads start to narrow in the corn market
while widening in the soybean market
over the past week. And some of that is
through increased demand. We’re anticipating that
export demand is going to improve. Right now South America
is starting to run out of exportable supplies. We still have decent
ethanol demand here in the United States
despite the margins. Livestock feeding
is strong. The other factor is with
this crop is a little lower test weight, a
little lower protein than most crops and so that
requires a larger volume to feed in order to get
the desired ethanol production, livestock
production so it requires more than a quarter
billion bushels per week to really go through the
system, 250 plus million bushels to go
through the system. Farmers aren’t
selling at that pace. That is what is
holding us up now. If we get that rally on
the board and the farmers do start selling we could
see that basis fall apart. There’s a lot of low
quality corn that needs to be moved before spring
and so the clock may be running out. Howell: And what about
when you look at the soybean basis? Suderman: Soybean basis
been holding up there as well but with soybeans if
a farmer needs cash he’s more likely to sell
soybeans than corn, it generates more cash. And so we’ve seen a little
bit more weakness start to develop there and a little
less undermining strength. Howell: Is cash at these
current levels in the soybean complex
undervalued? Suderman: Well, the cash
market, the basis overall has been stronger than
normal, obviously farmers would say yeah it’s
undervalued, we want more. Fortunately they got
the market facilitation payments. President Trump recently
said no more payments after this last run of
payments, that the Phase One trade deal is
going to solve it. Now farmers want
to see that happen. And I’m afraid they’re
going to have to wait a while because African
swine fever has killed a third of the world’s hogs. You can’t have that big of
a drop in demand without hurting it and most of our
customers in China say they have booked the next
several month’s needs out of Brazil so we’re going
to have to wait a while. We are seeing some good
processor demand though. The largest soy meal
export sales in almost 30 years reported by USDA on
this Friday morning and that was largely because
we have Vincentin, the big crusher in Argentina, is
facing financial problems and we’re getting some of
that business so oil sales were strong as well. Howell: And you mentioned
African swine fever there. I know also a new disease
that has kind of hit the line this week is
the coronavirus. Is that impacting the
soybean market in particular? Suderman: Yeah, I get a
lot of questions on social media about why would
coronavirus impact our prices. The markets are dominated
by the funds and price is still a function of supply
and demand but is modified by the flow of money so it
changes how the markets operate. And with coronavirus it
brings back a lot of fears of the SARS virus in 2002
and 2003 where people quit traveling, commerce slowed
down as a result and therefore it was a drag on
the global economy and so the funds, they don’t know
a lot of specifics about the commodities, some do
but a lot of them don’t and so they’ll say oh,
slower global economy, less demand for
commodities. So when coronavirus hits
the headlines, sell commodities. Howell: Okay. Arlan, let’s move on here
to the protein markets. We had the cattle on feed
report here on Friday. Was there anything
to report there? Suderman: Pretty
neutral report overall. We saw marketings in
December up about 5% as expected, on feed numbers
were up a little over 2%, placements a little over
3%, no real surprises. One of the interesting
things that we’ve watched in this and confirmed in
this is we’ve seen higher cow slaughter here in
recent months than what we would anticipate and a
little higher mix of heifers and heifer calves
in the feedlots and that suggests that we’re
shrinking this, we’re looking forward to the
cattle inventory report coming out shortly to see
if we’re shrinking this at a time when the world
protein market is tightening up. Howell: Arlan, we’ve got
a question here, another social media question
coming to us from Bradley in Upland, Nebraska. He said, looking at the
chart activity in live and feeder cattle is this
market signaling a top in current prices? Suderman: Well, this is a
time where seasonally we struggle a little bit. It’s head of barbeque
season and the packers start slowing down the
speed of the chains in order to improve their
margins, which we have seen them do, and that
tends to pressure the cash a little bit and the
board will follow. Then as we get closer to
barbeque season we see more demand for
the products. We have seen their margins
improve but the cash market overall has held
pretty well so I’m frankly pretty encouraged. There is some downside
risk near-term but we’re already seeing the effect
of African swine fever on this beef industry as
we’re getting fewer imports in from countries
that are going to China instead of coming to
the United States. That is helping tighten
up our market and I think we’ll see more
of that in 2020. Howell: You mentioned
risk near-term. How near are we talking? Suderman: Over the
next couple of months. Last year we stayed cool
into the spring, how about if we change that and we
warm up here as we get to the first of March and
everybody get in the mood to light up
their barbecues. Howell: Definitely. Definitely. It’s also barbeque season
is a big thing that impacts the
lean hog market. We had the Iowa Pork
Congress this week. I had lots of pork
producers saying make sure you spend some time
talking about the lean hog markets. Arlan, tell me about the
discrepancy going on right now between the
cash and futures. Which is going to give? Suderman: Well the futures
market obviously has an export premium
built into it. The expectations for the
last 15 months has been big exports to China. China increased their
exports about 75% in 2019 over the previous year but
that doesn’t even come close to filling the
deficiency of protein that they have. Will they start increasing
more from the United States? Our industry has ramped
up and has the production available. We’re among the cheapest
supplies in the world. We need to get those
tariffs waived now. Phase One should allow
that to happen but with China you can have
everything ready but they still may or may not do
it, we need to see them actually come in and buy. Howell: Yeah, and we had
another question here on social media. I’m throwing a curve ball
at our producers today. I’ll paraphrase for it. Wanting to know looking at
we’ve got a big domestic supply going on, we’ve got
incredible export demand, so which will win at that
tug of war in the lean hog market? Suderman: Well, if in fact
China does come in and I talked to someone who is
in the industry and works a lot with the export
market here in the United States, and I said it’s my
sense that if China wants the pork that they will
bid it away from the U.S. consumer. And he smiled at me and he
said, that’s exactly what they will do and they
will push the U.S. consumer toward more
beef and poultry. And so it’s now, it’s a
measure of the will, how much willpower does China
have to go ahead and buy that pork from us in order
to lower prices, which right now are several
times the normal price. They have 20% food
inflation in China and I think they’re going to
want to pull that down. Howell: How will we
see that impacting our domestic prices then for
consumers at the grocery store? Suderman: Well, so far
retailers have been trying to absorb the higher
prices that they have to pay at the
wholesale level. But if that becomes more
sustained they’re going to be passing that along. And as the consumer sees
higher prices for pork, don’t take away our bacon,
but for other pork cuts, then they’ll start looking
at the beef and the poultry and we’ve seen
this in China, we’re seeing it in Europe right
now, which is aggressively exporting to China and I
think we’ll see it in the United States. Howell: All right. Arlan Suderman,
thank you so much. Suderman: Thank you. Howell: That wraps up
the broadcast portion of Market to Market. But we will keep this
conversation going on Market Plus where we’ll
answer more of your questions. You can find it
on our website at Market-to-Market.org. Subscribe to our YouTube
channel to find our stories and some extended
interviews by searching “Market to Market.” Join
us next week when we’ll look at how a group of
beekeepers are using groundbreaking methods
to fight colony collapse disorder. So until then, thanks for
watching and have a great week! ♪♪ ♪♪ ♪♪ ♪♪ Market to Market is a
production of Iowa PBS which is solely
responsible for its content. Pioneer Hi-Bred
International is a proud sponsor of
Market to Market. Sukup Manufacturing
Company – providing equipment and buildings to
store and condition grain to help farmers adjust
to market swings. We build drying, moving
and storage equipment designed to preserve the
quality of their crops. Sukup Manufacturing,
store now, profit later. ♪♪ Tomorrow. For over 100 years we
have worked to help our customers be ready
for tomorrow. Trust in tomorrow. Information is available
from a Grinnell Mutual agent today.