Market to Market (January 3, 2020)

Jan 3, 2020  | 27 min  | Ep4520

Coming up on Market to Market -- A truce in the trade war as the calendar flips. Another state adds legal cannabis to its economy. Trade deals, weather events and ethanol troubles, a 2019 rewind. And commodity market analysis with Ted Seifried, next.

Pioneer Hi-Bred International is a proud sponsor of Market to Market. 

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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. 

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.   

Accu-Steel, offering fabric covered buildings specifically designed for the cattle industry since 2001. The next generation of cattle buildings. Information at accusteel.com.     

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This is the Friday, January 3 edition of Market to Market, the Weekly Journal of Rural America.

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Hello, I’m Delaney Howell.

The announcement of a truce in the U.S.-China trade war has yet to produce any fine print. Officials on both sides of the Pacific are holding to the expectation China will double agricultural imports and reduce tariffs on pork products. The news added fuel to the markets.

Stocks around the world rose on the news but fell back at the end of week after an American drone strike in Iraq.

In December, as rumors of a deal came to light, the Mid-America Business Conditions Index moved just above growth neutral even as the trade war slowed the rural economy.

The Institute for Supply Management’s Manufacturing Index also showed effects of the trade war as the index slipped for the fourth month in a row to levels not seen since 2009. --

The new year brings new laws.

As some states raised non-farm minimum wages, another turned to marijuana to help their tax mix.

Legislators in Illinois added recreational cannabis on Wednesday. The first day generated nearly $3.2 million in sales.

Along the way, the Governor of Illinois erased the records of more than 11-thousand people convicted of marijuana-related crimes.

Josh Buettner has more.

Illinois rang in the New Year with inaugural sales of recreational marijuana in over 30 locations across the state – though heavily concentrated in Chicagoland.  Hundreds lined up outside existing medical dispensaries who’ve transitioned to first wave commercial vendors.

Man Exiting Chicago Dispensary: “Super happy.  Finally.”

The Land of Lincoln joined Michigan, where legal sales began December 1, 2019 as the first Midwest states to follow 9 others into legalization. Illinois is the only state to do so by passing a bill into law.

Gov. J.B. Pritzker/D – Illinois: "Illinois is establishing itself as the first state in the nation to legalize in a way that truly puts equity first.”

In addition to expunging criminal records for marijuana arrests and convictions, the law’s architects added provisions to empower communities whose law enforcement was previously charged with the combating the substance.

Neighboring states expect an uptick in interstate commerce and impaired driving incidents – as non-residents are able to purchase limited amounts in weed-legal states. 

For Dubuque County Iowa Sheriff Joe Kennedy, public safety is number one. 

Sheriff Joe Kennedy/Dubuque County, Iowa: “We’re bound by our law.  It’s pretty black and white.  It says you’re not allowed to have it here.”

Officials warn black markets - not subject to new regulatory fees - will persist regardless of marijuana’s legal status.

But for Ashlee and Jacob Bainbridge of Galena, Illinois, the opportunity arose for them to return home after being part of the industry in Colorado.

Ashlee Bainbridge/Botanicanna/Galena, Illinois: “Yeah, absolutely.  It was perfect timing.”

Now growing hemp, legalized nationally under the 2018 Farm Bill, the couple sells non-intoxicating CBD oil extracted from the plant’s flower.

Ashlee Bainbridge/Botanicanna/Galena, Illinois: “So we knew from the beginning, vertical integration is key.  So we knew that we had to do farm to sale.”

The Bainbridges are part of a second wave of legal sale hopefuls looking to grow, sell and process recreational pot.  But new applicants won’t get the word on anything until late spring.

Jacob Bainbridge/Botanicanna/Galena, Illinois: “They’ve got to start growing the plant from scratch and that’ll take, you know, six months just to grow the plant – and then get the facilities, we’re probably looking at 2021 - January before sales for all the new licensees will actually be selling.”

For Market to Market, I’m Josh Buettner.

President Trump tweeted that he would sign the Phase 1 deal with China on January 15 in Washington, D.C..

Rumors of trade deals were a recurring theme during 2019 as farmers continued to take the brunt of the trade war.

The big stories for rural America last year were centered on just a few topics.

Paul Yeager has the 2019 rewind in in our Cover Story.

The biggest stories impacting rural America in 2019 could be summarized to three words – trade, ethanol and weather.

The government was closed for business when the ball dropped on 2019, as federal agencies tried to figure out who was essential and would remain open during the impasse.

The administration found money to keep supporting nutrition assistance programs like SNAP and WIC afloat. However, by year’s end, the USDA would announce a reduction in eligibility for those receiving benefits. Secretary Sonny Perdue announced an increase in work requirements for those applying for assistance. 

A spring outbreak of severe weather started with tornadoes in the South.

High snowpack prompted the National Weather Service to issue flooding advisories from St. Louis north to the Canadian border.

Then, a Bomb Cyclone went off and covered territory from Colorado to South Dakota in early March. The massive low pressure system shuttered interstates with a blizzard. Then a quick-thaw freed ice chunks which jammed rivers. Heavy rains added more water to the problem falling on frozen ground and running straight into rivers.

Damage estimates quickly topped $1 billion dollars as disaster areas were declared in several states along the Missouri and Mississippi Rivers.

Vice President Mike Pence: “We’re with you.’ And the American people are going to stand with the people across the Nebraska, across Iowa, across all of the eight states that have been impacted by the severe weather and the flooding.”

Many flooded areas along the Missouri River would go without a crop as several rounds of rain washed out any chance to plant in 2019. The same was true along a line from southern Michigan, through Arkansas to New Orleans. USDA estimates put more than 19 million acres in prevent plant, up nearly 300 percent from the five-year average of 4.8 million acres.

Those that were able to finally get into the field were delayed on both ends of the cycle as wet weather seemed a part of the story at every key point of the growing season, including early snowfall in major corn and soybean producing states.

June’s World Pork Expo was cancelled as organizers cited an abundance of caution in trying to stem the African Swine Fever from spreading to the United States. Producers in China have dealt with the bulk of cases that have hammered herds. The National Pork Producers Council event attracts 20,000 visitors annually from across the globe to Iowa.

President Donald J. Trump: “A few days ago we lifted – (applause) – right? We lifted the restrictions on E15 just in time to fuel America’s summer vacations. We just made it. (Applause.) We just made it. (Applause.)

President Trump made a victory lap on E15 during a trip to Council Bluffs, Iowa in June. Even as the president was declaring a win for renewable fuels, refineries were closing or limiting production as the EPA continued to hand out Small Refinery Exemptions.

Geoff Cooper, President and CEO, Renewable Fuels Association: “We cannot afford to see this victory on E15 undermined by more exemption for small refiners from the RFS.”

Biofuels supporters touted their own victory over SRE’s after an Oval Office meeting with President Trump in September. Iowa Senator Charles Grassley said what transpired in that session was a win for all sides, but he still wanted the deal in writing.

Senator Charles Grassley, R – Iowa: “We left that meeting satisfied that if it comes out on paper, because EPA writing it and you know, I think a big oil has too much influence in EPA. But if it comes out on paper, the way that we orally had a discussion with the president and everybody seemed to be satisfied.”

Grassley and other renewable fuels supporters would spend the rest of 2019 on this same message appealing to the president to keep his word.

Congress reached a deal in late December announcing a five-year extension of the biomass-based diesel tax credit.  Days later, the EPA set 2020 levels at 15 billion gallons of conventional biofuel volumes. Renewable industry champions said the government will still have too much wiggle room in deciding waivers for oil refiners in 2020.

Monte Shaw, Iowa Renewable Fuels Association: “We're very disappointed, frustrated, and quite frankly, a lot of people I talked to her a little bit angry.”

That same day of December 19, Congress voted to approve the USMCA. The replacement for NAFTA was met with mostly cheers in the deal between Canada, the United States and Mexico as issues over labor, manufacturing and agriculture had finally been sorted out.

The ups and downs of this trade deal had drug on for a good portion of 2019, much like the on-going negotiations with China.

The war between the U.S. and China escalated as breakthroughs failed to materialize which would have allowed the ending of tariffs on thousands of items. A Phase One deal was announced in late December with official translation and signing set for early 2020. 

The loss of markets with a major trading partner was cause enough for the government to put together the Market Facilitation Program. MFP payments were aimed at assisting farmers suffering from trade damage done by retaliation by foreign nations. The announcement of the MFP came in May. Calculations for payouts were based on previous production volumes and the money was doled out over the rest of the year.

The effects from the deals or “no deals” reverberated throughout 2019 in the markets both commodity and financial.

And 2019 was the year two strong voices of agriculture on this program went silent with the passing of Doug Jackson and Walt Hackney.

Both appeared on this program over several decades as market analysts.

Jackson died in May at the age of 67.

Hackney was 81 and passed in April.

For Market to Market, I’m Paul Yeager.

Next, the Market to Market report.

Optimism over the China trade deal met head on with anticipation of the size of the 2019 crop for most of the week. The drone strike in Iraq created risk off conditions by the final session. For the week, March wheat fell 2 cents, while the nearby corn contract dropped 4 cents. Tensions in the Middle East, and anticipation over the January 10 crop production summary, kept the March soybean contract even. March meal gained 80 cents per ton. March cotton expanded 28 cents per hundredweight. Over in the dairy parlor, February Class III milk futures fell 13 cents. The livestock sector was lower. The February cattle contract cut $1.97, March feeders dropped $2.12 and the February lean hog contract shed $2.03. In the currency markets, the U.S. Dollar index was flat. February crude oil improved $1.29 per barrel. COMEX Gold jumped $32.90 per ounce. And the Goldman Sachs Commodity Index expanded more than 4 points to finish at 440.50. Joining us now to offer insight on these and other trends is one of our regular market analysts, Ted Seifried. Ted, welcome back.

Seifried: Hi, thanks for having me, Delaney.

Howell: Ted, we had a very interesting day on Friday with the trading sessions there, kind of maybe a black swan event and I'm going to let you elaborate whether or not that is going to be a black swan event there talking about of course the bombings happening, or drone strike happening. Give us your quick tweet thought on this and why it affected the commodities today.

Seifried: Well obviously as you said in the intro, risk off, so panic selling, any of the speculators were running for the doors. It wasn't just soybeans, it was really happening all over the place, lean hogs were limit down. The thought process is if this escalates into a conflict China is an ally of Iraq's, they're allies, so is it possible that if this escalates China is going to say no more trade deal because you're fighting with one of our allies? I guess that was the concern. I don't really think that's founded. I think China really wants this trade deal, needs this trade deal. I think that is going to go forward regardless and I don't know if this is going to escalate into a greater conflict in Iraq, I'm not a political analyst. But to me it seemed like a knee jerk reaction in what would have been some fairly low volume markets due to the tail end of the holiday season and just sort of panic selling. I think we're going to rebound pretty significantly early next week as long as there isn't an escalation of this conflict with Iraq this weekend or early next week.

Howell: Ted, I want to get to that, but first looking at the wheat market they have had, aside from today, really strong movement upward touching some of those new highs in the Chicago contract. How much steam is left in that engine?

Seifried: That's a good question. I think there's more upside potential for wheat. A lot of it is going to kind of depend on what happens with row crops too. But I think there's more upside potential in wheat. We've been saying for years there's so much wheat in the world, we're going to need a production issue in not just one but two or three major growing areas and we actually have that this year. Look at Australia, Argentina, us to some extent, there's some concerns about the Black Sea area. If the dollar can continue to go lower, which it started to break out to the downside this week but then Friday kind of really threw a wrench into that, we'll see how that plays out, but if the dollar continues to the downside that should do really good things specifically for our wheat exports but also for commodities as a whole.

Howell: Ted, I want to follow up now again then because I'm guessing corn and soybeans are going to be one of the players hopefully that rebound after Friday's selloff. What do you see happening on Monday when we open especially in the corn market?

Seifried: Well, if you tell me what happens this weekend. When we left it on Friday Iraq was talking pretty strongly about retaliation and things like that. If that happens this could get worse, gold and crude oil continue to go higher, commodities as a whole continue to go lower as risk off continues to happen. But if that doesn't happen, if we have a clean weekend, no escalation, everything is okay and into early next week then I think yes, we will find our footing and we'll say okay, we were really overdone, this panic selling was a bit much on Friday, let's get back to trading the fundamentals that we had and that is we've got a January WASDE report which is going to give us not just production for last year, not just our normal supply and demand update, but also quarterly grain stocks, which is a big deal not getting a lot of talk right now. And I think in anticipation of that report there's some pretty bullish ideas out there especially for the production number, soybeans and corn in particular. So I think that's going to bring in some, I think there's buying in front of this report.

Howell: So I think that sets us up nicely here, Ted, for a social media question coming to us from Mitch Hemesath on Twitter. What percentage sold of old and new crop corn would you want to be at by planting intensions report.

Seifried: Hi, Mitch. How's it going, buddy? Hmm, old crop corn I think we want to be pretty much sold on that at this point. We had our chances, we really did. And if you missed those chances I think you had opportunities to make some sales because of such a strong basis and then come in and reown those bushels one way or another. As far as new crop corn, by the time we get into planting intentions, I'd say by the end of January into early February I'd like to see guys 30% to 40% sold on new crop corn. A lot of that kind of depends on what happens because we set out price targets every year and we have percentages that we want to sell at those price targets. We haven't hit enough to be 50% to 60% sold per se. But yeah, I'd like to see guys 30% to 40% sold by that timeframe.

Howell: Okay, Ted, changing tracks here to talking about the soybean markets, we had Philip Shaw write in a question, I'm not going to read you the whole question, but he went back and verified that you said in a previous episode we were going to see $10 soybeans in the January contract. We haven't yet seen that, Ted. Are we still going to?

Seifried: Yeah, we kind of ran out of time for the January, but I think we will see that going forward, say March for example. There's reasons why we ran out of time. We did get the trade deal, it hasn't been signed yet, January 15th, we all know that. But there's just so much skepticism in the market about this trade deal, whether it actually ends up happening, whether China follows through with it. But really does it even mean anything good for U.S. agriculture or not? And part of the problem there is because when we're talking 40 to 45, even 50 billion in U.S. agriculture it's very difficult to imagine that, it just seems like a crazy number. That's not the point. I think the market for the most part is missing the point, that if China even tries to get to those numbers, and let's say they get to 32 or 34 billion, that's new records across the board. And when the old records were set, they were set when soybean prices were trading almost twice as high as they are right now. So that's a lot of soybeans. But that can really potentially put our current soybean ending stocks to zero or below pipeline. So that means price rationing, that means higher prices. So yeah, I absolutely think that there's not only a good shot, I think it's highly likely that we're going to see $10 beans at some point in the relatively near future as long as things continue to move smoothly with the trade deal.

Howell: Ted, it sounds like you're saying that it's going to take us to actually move some agricultural products before we start to see that $10 in the soybean contract.

Seifried: Yeah, I think as far as the market is concerned we've been burned on the idea of hey we have a deal only to find out that it falls apart. So we've become jaded to the positive news on trade deals. And yes, once we start to see that in action it will be a realizing market, I think the market will start realizing hey, okay, this is actually happening, oh my they're buying more, and really get surprised by how much they're buying to the point where it's like okay, now we have to worry about our domestic usage and now we have to start to price ration to ration exports or ration the crush or I don't know if we'll be able to ration exports if they have to buy. So there is, for 2020 there is firework potential, explosive upside potential for soybeans if things go the way that are being talked about right now.

Howell: We can continue talking about that on Market Plus, Ted, but we've got to talk about what is going on in the meat markets. Obviously they also had a selloff on Friday. But we've got a question here from Matt in Amherst, Wisconsin wanting to know, are fat cattle running out of gas here yet?

Seifried: Yeah, hi Matt. Yeah, so a lot of analysts for the last two months have been calling for a big correction in cattle and so far we haven't seen it. That being said, we are getting into seasonality where we can see some pressure now and you do have more of a topping sort of formation in the cattle market. On the other side of that, you have seen the funds or the speculators come in and buy really any of the dips so it has been fairly well supported. I kind of do think we see a bit of a correction now. I haven't been saying that I think we'll get a correction until very recently, it didn't seem like it wanted to do it. Now I think we can get that a little bit and Friday's activity kind of helped with that. But ultimately I'm still fairly bullish. Domestic demand is really very strong. I do think that we are going to see better exports going forward whether it's to China but also Japan, Mexico, so on and so forth. So yeah, I'm bullish but a healthy correction wouldn't be a bad thing. And I do think it's a good time for producers to take a look at some risk management at this point.

Howell: And do you think cash can also sustain at these levels?

Seifried: Yeah, packer's margins are pretty good. We have seen boxed beef prices kind of cool off a bit over the past month or so. But yeah, I think cash can sustain higher prices. Again, you've got a market that has gotten tired so I wouldn't be surprised to see a break. But overall, yeah, I do think we can sustain higher cash prices.

Howell: Ted, when we look at the lean hog market, China is gearing up for their Lunar New Year. Does that give you some optimism that they may actually come through with some big export purchases?

Seifried: Well, on Friday with the delayed export sales they had a pretty sizeable cancellation. That was not good news. That on top of the drone strike risk off climate that we walked into on Friday morning, also not good news. And even before all of that happened you had lean hogs running into some very key resistance and failing. So, hogs, I don't know when China is going to start buying in the big massive quantities we need them to do that. But in order to move the cash market higher, which is ultimately what is going to move the futures market higher, we're going to have to see that happen. So until it does I think we're just kind of stuck in this sideways range for hogs. Now, I don't think we're going to be limit down Monday, Tuesday, Wednesday unless there's something that happens beyond what we know right now as far as the conflict is concerned. But I also don't think we're going to be limit up three days in a row either. So I think we're kind of stuck in this range, we just found sort of the top of the range for now. We can try to go higher into the 74 to 76 level at some point but that's about as high as I can see us going without a big move in the cash market being driven by exports to China.

Howell: Okay, Ted, I also wanted to ask you before we wrap up today's show about the oil markets. Obviously they were one of the winners on Friday's announcement. Where do you see oil heading from here?

Seifried: Well, if we're talking in just the next couple of days it really depends on what the talk is coming out of Iraq and so on and so forth. But okay, so for 2020 oil outlook overall I think we're starting to get very overpriced in crude oil because when you have OPEC holding back, when you have Russia holding back, when you have us our rig count could go higher, the higher prices are going to start to bring on more production, OPEC deals tend to fall apart at higher prices when they see the dollar signs, they see the opportunities. I think we'll start to oversupply the market pretty aggressively at these prices and short of a major conflict with Iraq or other things, global conflicts happening, I see downside potential. I think we could probably get back into the mid-to-lower 50s at some point during this calendar year.

Howell: And should producers wait to lock in fuel needs if they haven't done that yet?

Seifried: It's always good to manage risk and if you haven't done it already then yeah, I suppose you might want to do something now just in cast this escalates further. But no, overall for my longer term needs I want to look for some lower prices.

Howell: Okay, Ted Seifried, thank you so much.

Seifried: Pleasure's mine, Delaney.

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. Check out our Instagram feed where you can find the images we’ve gathered from rural America and a few a behind-the-scenes shots. Search our new address at “Market to Market Show.” Join us next week when we’ll look at the debate over protein levels in livestock feed. So until then, thanks for watching and have a great week!

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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. 

(music)

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. 

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.   

Accu-Steel, offering fabric covered buildings specifically designed for the cattle industry since 2001. The next generation of cattle buildings. Information at accusteel.com.     

 

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