Market to Market (January 17, 2020)

Jan 17, 2020  | 27 min  | Ep4522

Coming up on Market to Market -- “Promises kept” … but what’s in the details. Renewed optimism over biofuels. And commodity market analysis with Naomi Blohm, next.

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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. 

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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 17 edition of Market to Market, the Weekly Journal of Rural America.

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Hello, I’m Delaney Howell.

Two trade deals were sealed this week. Thursday saw the USMCA agreement make it over the last political hurdle after receiving assurances on environmental protection and labor safety.

The day before, in the shadow of impeachment, President Trump and Vice Premier Liu, signed a historic trade pact between the world’s leading economic super powers. The peace treaty of sorts addresses a laundry list of concerns including a battle over intellectual property rights.

Agricultural lobby groups in the U.S. largely applauded both efforts.

Peter Tubbs has our coverage.

After nearly two years of posturing and ever increasing tariffs, the United States and China signed Phase One of a trade deal.

Donald Trump, U.S. President: "This is something that's going to be so special, however, to our manufacturers, our farmers, our bankers, our service people. Nobody's ever seen anything like it. This is the biggest deal there is anywhere in the world by far. And that's good. We're doing another big one next week. But this is the biggest deal anybody's ever seen."

The trade pact puts a pause on the boiling struggle of issues between the two countries. Some of the duties placed on Chinese imports over the last 18-months are expected to be lowered, but two-thirds of those imports from the Asian nation remain under tariff. Most Chinese tariffs on American exports also remain in place, including those related to agricultural products.

Liu He, Vice Premier of China: “This is a mutually beneficial and win-win agreement. It will bring about stable economic growth, promote world peace and prosperity and is in the interest of the producers, consumers and investors in both countries.”

Experts on Chinese trade believe that many structural issues that were part of the negotiations - such as Chinese subsidies for certain segments of the economy - remain unaddressed.

Sen. Charles Grassley, R - Iowa: “So let me say to you that That what we have a kind of a shotgun behind the door is we haven't taken all the tariffs off. We've taken some tariffs off because of this phase one. But we're keeping tariffs on to get more negotiation, but also if they aren't living up to what we can impose tariffs.”

The agreement requires China to purchase $40 billion in American agricultural goods in each of the next two years, but analysts are concerned that the terms allow too much leeway and lack an enforcement mechanism. While American tariffs have reduced the import of Chinese goods by an estimated $150 billion a year, American consumers and importers have paid $40 billion in fees since the trade war began in July of 2018. Exports to the United States now represent roughly 4 percent of the Chinese economy.

The deal includes language to improve market access for meats and seafood, and promises to streamline the certification process of agricultural biotechnology. But new language also provides each country to leave the deal with only a 60-day notice if disputes are unresolved.

Sen. Charles Grassley, R – Iowa: “They Yeas are 89, the Nays are 10, the bill is passed.”

A mile and a half up Pennsylvania Avenue, the U.S. Senate approved USMCA by a vote of 89-10. The long negotiated treaty between Mexico, Canada and the U.S. now heads to President Trump’s desk for a signature. Mexico has already officially approved the deal leaving Canada as the last country to ratify the agreement.

The dairy business sees opportunity in both deals.

Tom Vilsack, President, U.S. Dairy Export Council: “For most of agriculture it’s maintaining the status quo, which in uncertain times is important. Tough to put a number on exactly how much more business there will be. Once it’s fully implemented, the USMCA, it will take several years for those tariff quotas to be increased, but once it is fully implemented, the expectation is somewhere between $200 and $300 million dollars of additional business opportunity, which is important.”

But Vilsack is skeptical that the Chinese will follow through on every term of the pact.

Tom Vilsack, President, U.S. Dairy Export Council: “The Chinese are famous for promising, not so famous for delivering. And so it’s going to be important in this agreement to be sure that we monitor performance on a regular basis.”

Analysts warn it may take several months to determine if both sides are following the terms of the new deal.

For Market to Market, I’m Peter Tubbs.

Bloomberg is reporting that Secretary of Agriculture Sonny Perdue expects to make the last tranche of MFP 2 payments even if the Chinese hold up their end of the bargain.

The trade war with China did little to stop us from buying slightly higher priced holiday gifts. --

The consumer price index rose 0.2.

Core CPI, which removes the volatile food and fuel sectors, rose 0.1 percent.

Overall, our purchases were up 0.3 percent in December, but the figure was tempered by downward revisions for October and November.

When the price of cars and fuel are cut out, retail sales rose a half percent.

The Creighton University Rural Mainstreet Index remained above growth neutral for the fifth month in a row as rural businesses were hiring despite lower farm prices.--

The ethanol industry has been taking it on the chin as the Whitehouse and the EPA put out conflicting messages over annual output. This week, ethanol producers and lobbyists were surprisingly upbeat.

John Torpy has more.

A bitter cold wave in the Midwest couldn’t keep attendees away from a Midwest biofuels summit where industry insiders are looking into the future with renewed optimism.

Monte Shaw, Director, Iowa Renewable Fuels Association: “You know, we're hoping that 2020 is going to be the year where we get things back on track with the renewable fuel standard and we begin to reestablish some trust and rebuild the bridge with, with EPA.”

Last fall, officials with the renewable fuels industry expressed frustration over a decision by leaders of the Environmental Protection Agency to follow ethanol blending suggestions from the Department of Energy, instead of the Department of Agriculture. The DOE proposals contained hardship waivers for oil companies, known as small refinery exemptions, which cut the amount of ethanol blended into the nation’s fuel supply. This move, along with the U.S./China trade war, helped cut commodity prices, shutter multiple ethanol plants across the Midwest, and leave a bad taste in the industries mouth.

Geoff Cooper, President and CEO, Renewable Fuels Association: “We think EPA has a real opportunity here in the first part of the year to show the industry that it was serious when it said it's going to follow the Department of Energy recommendations on small refinery exemptions. And that it was serious when it said it's going to enforce, uh, the law that Congress gave it on renewable fuel standard.”

But this week in Altoona, Iowa, industry leaders carried a more optimistic tone into the Iowa Renewable Fuels Summit. The assembled crowd was supporting politicians in Washington D.C. with their passage of the USMCA, the ratification of year round E15 and an extension of the biodiesel tax credit. The highest praise came for President Trump’s signing of the Phase One 1 trade deal. The potential for $40 billion in sales of agricultural products to China has industry officials looking closely at the potential for the reopening of channels closed for that past 18 months.

Monte Shaw, Director, Iowa Renewable Fuels Association: ”For us, we're specifically looking at the ethanol export potential and the distillers grains potential and the Phase 1 does seem to open that door. Now. How will the market respond? What will the details be? Will, will it be a little crack in the door? Are they going to swing it wide open and really be a big player? We don't know that yet.”

Geoff Cooper, President and CEO, Renewable Fuels Association:” China was once our third leading market. We sent 200 million gallons of ethanol there in 2016. Uh, we can get back to that volume and, and well beyond it very quickly. Uh, and that would absolutely turn the tide, uh, for profitability and just the general outlook in the ethanol marketplace. And at the same time, if we have EPA following through on the president's commitment to strictly enforce the RFS, uh, yeah, 2020 could be a great year for the industry. And, and, uh, we deserve one after what we've been through in 2019.”

Despite the positive outlook, Bunge North America sold its share in an Iowa ethanol plant and industry leader ADM, one of the largest players in the ethanol business, has put some of its ethanol facilities up for sale.

Even as these producers see a different outcome for their share of the industry, Renewable Fuels Association President Geoff Cooper sees bright days ahead for biofuels.

Geoff Cooper, President and CEO, Renewable Fuels Association: ”We're going to see some different players and some new players. And, and some of the folks that have been in the industry for a long time may not be around. Uh, but we do know that a demand for ethanol is going to continue to grow over the longterm. Uh, and we are very bullish about the future of the product and about the future of the industry.”

Iowa Governor Kim Reynolds praised the Hawkeye states resilience in the fight for renewable fuels.

Governor Kim Reynolds, R – Iowa: ”There is no state that benefits more from biofuels than Iowa, which is exactly why we'll continue to lead the charge in defending the RFS and holding the EPA to the terms of the deal. Negotiated with president Trump back in September with over eight. Thank you. We're now going to stop.” (applause)

What’s next for the industry will come into view this March when the EPA calculates production numbers for the Renewable Fuel Standard.

For Market to Market, I’m John Torpy.

Next, the Market to Market report.

“Buy the rumor, sell the fact” gave way to concerns that China has some wiggle room in their $40 billion part of the deal. For the week, March wheat gained 6 cents. The nearby corn contract battled back from early week losses to gain 4 cents. The March soybean contract lost 16 cents largely on skepticism over the Phase 1 deal. After closer examination, language in the agreement revealed China only needs to buy grain from the U.S. if the price is in their best interest. March meal lost $2.90 per ton. Cotton ended a 7-week rally as the March contract lost a penny per hundredweight. Over in the dairy parlor, February Class III milk futures rose 50 cents. The livestock sector was mixed, again, as February cattle shed $1.08, March feeders cut $2.45 and the February lean hog contract put on 43 cents. In the currency markets, the U.S. Dollar index was up 30 ticks. February crude oil dropped 48 cents per barrel. COMEX Gold added 70 cents per ounce. And the Goldman Sachs Commodity Index dropped more than 4 points to finish at 426.55. Joining us now to offer insight on these and other trends is one of our regular market analysts, Naomi Blohm. Naomi, welcome back. We certainly have a lot of things to talk about this week.

Blohm: We sure do. Thanks for having me.

Howell: Naomi, I want to kick things off here by asking because we got a lot of social media questions around the sentiment of why did we not react positively after this U.S.-Chinese trade deal was signed when we've been putting so much emphasis on it for so long?

Blohm: It was absolutely great news that the deal was signed, it's wonderful news of the amount of potential business that we're going to be receiving. But what the deal did not spell out and what the trade wanted to see is how much and when is it going to be happening and we didn't see that for any commodity specifically. So therefore the market said not good enough and prices fell lower. We were up near resistance levels for corn, beans and wheat, then everything fell down to support levels until finally gaining back some ground on Friday's trade.

Howell: And it really doesn't seem like we're going to see the amount of agricultural products that they're going to purchase.

Blohm: It still is in question, it's a substantial increase and it would have to be every single facet of agriculture that can have an increase in demand. Now, if those things could actually happen, wonderful, absolutely amazing for U.S. agriculture. But in the short-term it feels like it's the same old broken record that we've been hearing for a good year.

Howell: And March wheat has been doing pretty strong, it pulled back this week as you mentioned there. But overall they're up near that key resistance, they broke through $5.70. What is your new upside target?

Blohm: We are still up near the recent highs, the $5.75 area with that March contract and it is going to be a stare down as far as which way price goes. We need some additional friendly news to get that market through resistance. The funds are holding onto their long positions, open interest continues to grow so that suggests that the buyers want to be there. But we need to see increased demand show up on weekly export sales, we would also need to see further confirmation of global production falling and we're starting to see that. The French planting acres are going to be down 10%. Of course this crop in Australia continues to get smaller. Our crop here in the United States is going to be the smallest ever pretty much in history. And now there's concern that Russia all of a sudden said they might actually reduce some of their exports, they're considering this. And so that is really interesting when global ending stocks of wheat are supposed to be at their largest ever but yet all of these little things are happening around the world that makes you wonder what is really going on and especially that the funds are digging in their heels and staying long, to me that tells me that there's other things at play.

Howell: Is Russia saying that might cut exports, is that more of a rumor type of thing or a way for them to mess with the markets? Or do you actually think they would follow through in that?

Blohm: That's what we're trying to figure out because the Russian production is supposed to be quite substantial. But they are having a warm winter and so there would be concern of the crop having winter kill if winter actually shows up in earnest within Russia. So we're not sure because that was definitely a wild card out of nowhere and we're all wondering why would they actually be doing that. But if they do that would be great for the U.S. because that would be an increase potentially for our export market.

Howell: Naomi, tell me what happened in the corn markets this week on Friday. Was it just a correction for the losses that we had seen earlier in the week?

Blohm: Yeah, corn futures after the trade deal was announced and we didn't see the DDG news or the ethanol news we were hoping for prices fell down and they hit support levels on daily charts. Those support levels held and I saw a rumor on Twitter that there was going to be I think two cargos that actually got purchased of corn that is going to go to China out the Pacific Northwest. So that is what the market chewed on and that's the reason that we went back higher. We’re at a short-term resistance area again on the chart. If the March contract can push a little higher yet $4.06 is the next upside objective, that's the 200 day moving average on the daily charts. But if we don't have any confirmation of that news of a Chinese purchase I would expect us to stay in a pretty simple trading range where $3.75 is support on the March and then $3.90 resistance.

Howell: Yeah, and corn and soybeans both have been trading in some small ranges here for quite some time. We placed so much sentiment on the U.S.-China trade deal and now we have one but nothing seems to happen. We've got a question here from Andy in Minnesota on Twitter wanting to know, is there anything that can jumpstart the market, corn or beans, aside from some problems in the spring? It said, signing of the trade deal seems to have minimal effect.

Blohm: We need to see purchases made very soon from China and continued strong export sales for both corn and beans. The other reality is that our cash market continues to tell us a very different story and demand is strong for those markets but also we are seeing I think the light test weight becoming an issue already because the basis is strong and it's January and the market is acting like it's summer and we're running out of crop. I know in parts of Wisconsin our basis is positive and we don't ever have that. We're running out of corn in some parts of dairy country already and it's January and we don't have enough corn to get us through until the end of summer. So there's a lot of issues coming to head and if the USDA could be more forthright on the yield that is I think still not out there we'll have some marketplace rally. But the USDA said they're not going to do a resurvey until spring so that might mean it doesn't show up until maybe a June report.

Howell: It's very frustrating to see some conflicting opinions here when you look at the commercials obviously saying they need the corn and USDA saying we're not going to adjust acres or production for a while.

Blohm: Exactly, exactly. We are stuck with these numbers for a little while longer but the cash market is saying that the crop is not there.

Howell: Naomi, when it comes to the soybean markets they fell to a one month low after that signing where again we've placed so much importance on it and then we saw them finally pick back up towards the end of the week. Is the path of least resistance from here back down?

Blohm: I actually would say sideways because again the market I really feel believes and knows that the crop isn't quite as large as what the USDA is saying. At the same time our ending stocks according to USDA are at 475 million bushels. Now going forward people are already talking about what is going to be planted in the spring of 2020. Let's say it's 84 million acres which kind of seems to be the ballpark that is out there, if that is the case and if we have trendline yield then our ending stocks go from 475 just to 425 and that is what would still be viewed as comfortable and would keep us in that trading range. But now here's the kicker, if we actually see some additional Chinese demand in the export market and if we can even get export numbers back up to the 2017 levels where we had over 2 billion bushels going, then you're going to see the ending stocks number drop down to 225 million bushels. That is a game changer. That is over $10 soybeans. So the marketplace is well aware of the demand that really could be there, the lack of supply that we might have because of this old crop being as tight as what we all think it is. So sideways I think is the answer because there's still too much uncertainty.

Howell: Okay, but it sounds like friendliness could be in the cards for the soybean market.

Blohm: Yes.

Howell: Naomi, we've got another question here I wanted to ask before we talk about livestock coming to us from Shane in Bloomfield, Nebraska. He said, commodities fall but the stock market surges after the trade deal. Is this all money flow? And when the stock market runs out of the bull feed will we see a large buy back into the commodity sector?

Blohm: We were actually just talking about this at our office this week, same topic, same wondering of when does the euphoria run out of the stock market or how long does it stay there? And then when it does run out will the money come back to commodities? I'm not sure is the answer. But I would say that with the funds still buying aggressively in wheat and they're a little bit more neutral with the soybean market there is potential there for money to come back into commodities. Seasonally we're still looking at the time of year where grain prices usually start to work higher into late February or early March. So I think there's still some potential there but again we're just not going to know for sure until it happens.

Howell: Okay. Naomi, the live cattle markets have been sustained at these levels and they did pull back this week. But how much longer are we going to be at this $125, $126, $127 area?

Blohm: I have been wondering the same thing. I thought we would have given one way or the other like a month ago. So the market is really supported by steady cash. Cash prices are still near $123 or $124, we have a futures price with February cattle at $126. Exports are really decent without question but yet we also look down the road at bigger production levels coming. But now with this China deal they're saying that they're going to ease up their restrictions on the age of cattle and things like that so there might be some increase in demand. So we're going to continue to trade sideways and it's going to be a matter of can the cash market continue the strength or not, it could also be a difference of do we see just a quick technical sell off because sometimes when the market gets bored you see those selloffs happen. But overall I think the trend for cattle is supportive. I don't look for any humongous rallies to the upside but I think we are well supported overall.

Howell: Is it supported in the feeder cattle markets? Will this I'm going to call it snowmageddon this weekend add any positive undertones to our feeder cattle market?

Blohm: Yeah, demand for feeder cattle has actually been strong. The feedlots seem to be anxious to replenish inventories. So we're seeing the cash markets there stay firm. But again it's the same story of people are I think a bit cautious to make sure that demand is going to be there but at the same time the outlook in the cattle market really actually is optimistic.

Howell: Naomi, looking at the lean hog market do you think now that we've got this trade deal done China was just waiting for it to be finalized before we see them start to pick up on pork exports?

Blohm: Our exports have been fantastic. That's very clear and it is expected to continue in the future. Last year China imported about 2.1 million metric tons of pork. Some analysts are thinking that it's going to be as much as 3 million into next year, some are thinking it could be higher. Now if that's the case wonderful for the U.S. farmer because we have plenty of product to export overseas. So I'm always cautious though because if for some reason the export market falters, boy we have overproduction here in this country. But at the same time because of the reality of the situation in China I do think that the outlook for hogs does look good for quite frankly another year until they are able to replenish their herd.

Howell: And when can we expect to see maybe getting up over this $70 closer to $80, $85 that we saw earlier this year?

Blohm: It is solely in my opinion just dependent on the pace of the exports and that's all we can do right now is just keep an eye on that.

Howell: Naomi, we've got to save dairy for last here. They had such a strong rebound there for quite some time heading up near $20. We've pulled back pretty substantially. What is going on?

Blohm: That rally was all led by cheese demand heading into the holidays. Once cheese demand was met for Christmas season prices all set back to the downside. So now though we're seeing cheese demand pick up again a little more in tune with the playoffs for football and just some winter demand that way and for the Super Bowl. But the other part that is happening with the dairy market is that our power exports have been fantastic and China said that they're going to be wanting to have more of our powder which makes a lot of sense as their population continues to grow. The other thing to be mindful of is that dairy production has been kind of stagnant lately. But looking forward, again I think the last time I was here we talked about the feed issues and here in Wisconsin on the eastern part of the state we're feeding wheat because we are out of corn. And so that should keep milk production levels higher. But the problem is going to show up in milk fat. And so we're going to see lower levels of milk fat and deferred contracts of milk actually made new highs this week. So the outlook for milk is still looking good.

Howell: All right. Naomi Blohm, thank you so much, always a pleasure.

Blohm: Thanks, 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. Subscribe to our YouTube channel to watch our extended interview with Tom Vilsack. Search “Market to Market.” Join us next week when we’ll look at a job retraining program that focuses on economic and personal development. So until then, thanks for watching and have a great week!

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Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa PBS or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

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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