Market to Market (May 29, 2020)

May 29, 2020  | 27 min  | Ep4541

Coming up on Market to Market -- As America opens back up, supply lines adjust, again. Spring planting may be done, but new challenges emerge. And market analysis with Angie Setzer, next.

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What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

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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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This is the Friday, May 29 edition of Market to Market, the Weekly Journal of Rural America.

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Hello, I’m Paul Yeager.

April showers are meant to help May flowers, but all April 2020 will likely be known for is a doused economy. However, there are some signs flowers may be budding.  --

New home sales increased 0.6 percent – defying industry expectations of a 22 percent loss. 

Durable goods plummeted 17.2 percent in April as the Commerce Department reported on big-ticket items.

When the transportation sector is removed, the rate fell 7.4 percent.  

Consumer spending had a record-setting drop of 13.6 percent as cutbacks hit clothing sales, doctors’ appointments and haircuts. ---

As businesses re-open, their suppliers are having to adjust – again – to a dramatic shift in demand.

Peter Tubbs looks at the food industry trying to balance filling commercial kitchens and grocery store shelves.

To date, over 1,000 animal processing plants in the United States have seen COVID-19 infections among their employees. Twenty-six of those plants are in North Carolina, the second largest producer of pork by value, and the third largest producer of chicken.

While the backlog of animals waiting for slaughter was not as severe as in the Midwest, processing in the southeast is 20 percent behind 2019. Producers are adjusting to the bottleneck

Todd See, North Carolina State University: “Initially, you know, um, a lot of things are done to kind of slow the growth, changing the nutritional profiles, hold them back. Um, you know, we're seeing a lot of changes in terms of, of breeding practices, trying to take pigs out of the flow cause we really expect that this is going to go easily through the fall and probably into early next year.”

That means a reduction in the 17 million hogs that are raised in North Carolina each year. As production on the farm is delayed, a potential shortage of pork is being created in the second half of the year. But a reduction in the overall size of the pork herd may not improve the bottom line on the balance sheet.

Todd See, North Carolina State University: “Profitability is going to be dramatically affected. If we're not going to be breeding as many or producing as many pigs, it means each farmer's going to be producing less pigs. And you know, a lot of animal agriculture is a low margin, high volume business. And so the profitability really hinges for most producers on that ability of throughput and volume and that's going to be the disadvantage for the rest of this year.”

On the other end of the supply chain, consumers have adjusted to an increased amount of cooking at home. The Chicago-based food research company IRI has found grocery store customers are trying unfamiliar cuts from the meat counter as replacements for their standard recipes.

According to IRI market research, the meat department in many grocery stores has struggled to find gains in recent years. Since the pandemic forced lockdowns in major cities 10 weeks ago, sales from the cooler have risen 48 percent.

The shift away from restaurants and other venues continues to stress the food industry, but while grocery store sales are up, the time when Americans will return to eating in restaurants is unknown.

Chris DuBois, Prepared Foods Research, IRI: “The big question is how much more will people go out to eat? You know, do they go back to the regular patterns of going up the Friday, Saturday night, or even during the week and, and take out or will it be restrained? I don't have that answer. Everything in our consumers surveys say it's going to be a slower recovery back into food service.”

DuBois sees one positive effect on the industry as a whole that has been brought on the closure of places to eat and various stay-at-home orders. 

Chris DuBois: If I think back to my 30 years in the business, almost every meeting in an association had been around how do we get people to cook more at home? How do we get them to have family meals around the table? How come, how can they only track three or four dishes and only buy three or four cuts of meat?And the answer is yeah, it's hard. So the whole industry has been working on recipes and innovations and how to make it easier for the consumer. They've worked so hard. And then, you know, this has become everything the industry has wanted, but just people are cooking at home.”

It remains to be seen if the industry can build on the shift in demand as the country begins to lift restrictions used to control the spread of COVID19.

For Market to Market, I’m Peter Tubbs.

Planting progress is way ahead of last year’s pace, but does lag behind in North Dakota, Pennsylvania and parts of Tennessee.

Mother Nature proved again she’s in charge as heavy rain fell from Texas to Nebraska and east to the Atlantic.

Josh Buettner has our weather wrap.

Fresh off the holiday weekend’s unofficial kickoff to grilling season, Mother Nature cooked parts of California, the Great Basin and southwest with temperatures 15 to 25 degrees above normal. 

Tornadoes raked parts of the Hawkeye State for two days where roof debris, ripped from an eastern Iowa barn, crashed onto a swine nursery, and caught fire – killing 300 hogs inside.

Across the corn-belt, excess rain put a damper on an above-average spring planting run.  Wet fields sidelined some heavy machinery as river levels rose.  Still, a spring harvest must wrap in states like North Dakota before new seeds can be sown as growers are running up against crop insurance deadlines.  Early snowstorms left last year’s crop in the field and a wet spring has hampered many efforts to reap the final bushels.

The National Weather Service warned of potential flash floods from the Mississippi Valley eastward, and severe thunderstorms across the Gulf.  In Florida, a historic commercial endeavor was scrubbed due to weather.

NASA Official: "Dragon SpaceX, unfortunately we are not going to launch today.”

SpaceX, billionaire entrepreneur Elon Musk’s project to ferry astronauts to the International Space Station, was rescheduled for a weekend liftoff when meteorologists have predicted more optimal flight conditions.   According to NASA, a Wednesday launch with too much electricity in the atmosphere could have triggered lightning.

Bryan Gay/Valdosta, Georgia: "It's better to be safe. I mean, you know, we all remember Challenger - people my age. Nobody ever wants to see that go through that as a country. We all knew that this was a possibility, especially seeing the weather."

In South Florida, rain levels rivaled those last seen during Hurricane Irma in 2017.  And in South Carolina, Tropical Storm Bertha made landfall, flooding the streets of Charleston and other areas before being downgraded as the pattern moved inland.

Forecasters expect more rain and severe weather in the Northeast, some cooling out west and patchy rain and higher temps throughout the Midwest.

For Market to Market, I’m Josh Buettner.

Next, the Market to Market report.

The relations involving Hong Kong and China kept traders' attention for much of the week before a hot and dry forecast changed focus. For the week, July wheat gained 12 cents and the nearby corn contract gained 8 cents. The Chinese purchased several cargoes of Brazilian beans leaving a cheaper U.S. product in the bins. The July soybean contract rallied 8 cents. July soybean meal declined 90 cents per ton. July cotton lost 2 cents per hundredweight. Over in the dairy parlor, June Class III milk futures added $1.30. In the livestock sector, August cattle expanded $2.27, August feeders jumped $6.55 and the July lean hog contract improved $1.13. In the currency markets, the U.S. Dollar index weakened 139 ticks. June crude continued its run up with a $1.52 gain per barrel. COMEX Gold rose $9.40 per ounce. And the Goldman Sachs Commodity Index increased 4 points to finish at 300.15. Joining us now to give us some insight is our market analyst, Angie Setzer. Angie, welcome back, good to see you again.

Setzer: Thanks for having me.

Yeager: Let's talk about -- we have all sorts of things hanging over the top. The weather of course has played a factor. And that became a story this week in the wheat market. Now, at first there was this thing about oats, there's this old saying, oats knows. But you and I both know there's just not that many people trading oats, it doesn't mean as much as it used to. But there this thing about feed grains and food grains and wheat is one of those. So what is the bigger move here in Kansas City? Is it the weather? Or is it this food issue?

Setzer: I think a lot of it is the weather. I think we're starting to see a lot of that frost and freeze damage become evident. Everyone said at the time that the crop was a little bit delayed when the freeze really happened and so there was a lot of uncertainty as to what that would mean. Well, now the crop is just about ready to be harvested or it will be ready to be harvested pretty soon and everyone is recognizing that we are in fact seeing some pretty significant production loss because of that freeze event that took place. And also at the same time no one ever wants to see significant amounts of rainfall take place, the areas that are exceptionally wet now you're to the point where we don't really want a lot of rain on that wheat crop either. So I think the concern is that production could be significantly lower than what we've seen and what we were expecting. And then the question always is, what is the quality going to look like in that crop as well if we do run into a situation where we've had some irreparable damage with that heavy rain that has fallen.

Yeager: You and I talked about in the lead up to Josh's story about Texas to Nebraska and to the points east, that whole area was an inch to two inches of rain. And in Texas and Oklahoma where it's been dry, you're right, that's the last thing you need as you're coming down the home stretch. You talk about the frost. But let's talk about the colder areas in the Dakotas and into Minnesota. They're still struggling to get that crop out of corn. There has been some planting of spring wheat, it's majority in the field. What is going on with that crop?

Setzer: That's the other thought process is what are we going to see there in some of these areas that are still exceptionally wet but they're still struggling to get the corn crop off, the conditions may not have been that great to get the crop planted and on top of that we've really been kind of beating the hard red wheat, both spring and winter, down. Chicago wheat I feel like we've been spending most of our time euphoric with pricing with the opportunity of $5.94 at one point on July and September Chicago wheat here. It's not every day that you have the soft red wheat market, which we call it the fun stuff, donuts, pastries, things like that, it's not all that important to your diet from a staple standpoint. And so to see that really outprice Minneapolis and Kansas City wheat throughout the winter months was kind of an amazing sight. So I think a lot of folks have really been kind of playing up this idea that we just have too much of hard wheat and we're going to continue to have too much of it when the reality is it only takes one year and in Kansas City wheat it's been a couple of years, let's be honest. We've had a couple of years of poor falls, we've had a couple of years of not as great a production as we anticipated once we get there. And so I think we're going to kind of recognize perhaps that we don't have that wheat crop there that we've always liked to count on.

Yeager: Let's put you on the spot here. Are you making a sale? You did rally 12 cents on the nearby contract. Does this thing have some more legs up? Or is it time to pull the trigger and make a sale?

Setzer: I think if you don't have anything sold after seeing the price kind of recover a little bit it always makes sense to look at getting started at some point in time. Hopefully it's your lowest sale. And so it's something to pay attention to. We tend to seasonally see wheat have some strength May through June. For me with the Chicago wheat we tend to look at really heavily marketing the next year's crop towards the tail end of June ahead of harvest for the current year. So I think we're working our way into a seasonally strong standpoint and so I would be just kind of cognoscente of what you have sold. If it's nothing then take advantage of any sort of price recovery. If it's something and it's at a lower price or your average isn't as great and you want to see what happens I think from a seasonal standpoint you can probably get away with that.

Yeager: Let's move to corn, Angie. We have a question that came in and we know a few people know who you are on Twitter and we always appreciate your interaction there. And if you want to hit up this show it's @MarketToMarket. This question came in from Eric in Moville, Iowa. We like this one. Planting was early most everywhere which favors strong corn acres versus planned. Eric says, I'm now seeing that manifest, especially with big acre outfits. Western Corn Belt anomaly? Or is Corn Belt-wide happening, things happening in the Corn Belt-wide this year?

Setzer: Yeah, I think outside of the areas that have struggled with wet weather. Let's pre-outlay the fact that yes, there are going to be some areas that are going to be struggling with the wetter weather, southern Ohio and the Delta, Kentucky, the Dakotas in some spots. But if you're talking Iowa, Nebraska, Minnesota, Kansas, even Michigan here I think that is a true concern. I think it's going to be big time in the Western Corn Belt that you're going to see it happen. Traditionally in the past is exactly what Eric had said, you get corn planted quickly, which if you look at Iowa planting pace, basically that crop went into the ground across most of the state in about 5 days if you talk to an agronomist, maybe 10 days if you look at it realistically speaking. There wasn't a lot of time to switch intentions. On top of that I kind of hit up the Twitter poll just to see, now granted it's not a scientific based answer to go off of necessarily but it gives you an indication and 70% of respondents, there was over 1,000 people, 70% said they didn't change their plans from March 1st. So my opinion on this whole thing all along is kind of like my neighbor's crop is terrible but mine looks really good. So everyone always assumes it's their neighbor that is making the switch because economically speaking why wouldn't you, right, that's what we're reading everywhere. I just do not think that we necessarily saw that switch away. Now I think we will potentially have lower corn acres because of the prevent plant. I think you could see a lot of folks that have the capability too that may have intended to put soybeans but have the ability to declare prevent plant via corn that will do that. So I think you could see actually the intended acres on corn go up, which is going to make everyone's head explode because they don't agree with the 97 to obviously we couldn't have 99. But I think you could have a bigger pie to kind of pull corn out of. And I'm of the mindset that maybe we lose a couple million but I still think we're going to come in around 95 million or so.

Yeager: All right, that's the new crop. I probably should have waited, I'm going to go out of order now and go back to the old crop. What is going to move this thing out of the bins because if you get a rally because wheat pulled corn along this week if you buy that theory, or if you buy that there's an ethanol demand coming up, what else do you think is going to chew through some of this old crop that is sitting around?

Setzer: Time. The calendar, date on the calendar. The reality is, let's be honest, the crop is in the ground across much of the country, we're going to wake up tomorrow and be ready to harvest it, that's how summer goes. Especially if you grow what, it goes planting, spraying, wheat harvest, harvest and your summer is gone and it's Christmas. And so I think a lot of folks are going to recognize the fact that we are running short, especially in these areas that did get the crop planted early. If we see some heat which we're expecting, which was part of the reason the market rallied, but we really need it throughout the month of June to get some heat after this rainfall that we've been seeing in a lot of these areas. So I think once we really get through pollination especially you'll see the bins kind of crack open whether people want to open them or not. I think right now one of the things that we have seen is that ethanol use has recovered. This week you were basically looking at ethanol demand was up about 6 million bushels versus last week, it's up about 19 million versus the low that we had seen. But we're still about 32 million weekly usage below where we needed to be. So these ethanol plants are getting back up and running, they need corn. They weren't even anticipating buying corn. Everyone had kind of written ethanol's eulogy throughout the month of March into the first part of April. So you're seeing some aggression from a bid standpoint, you're seeing some aggression in spreads and you saw a little bit of a rally this week in corn. And so I think for a lot of farmers they see that and they say, everyone told me the corn price was never going to go up again and basis was going to be poor forever and it's not so I'm just going to wait because it's got to get better next week. Right? And so I think it's important to kind of be cognoscente of what we're seeing take place. We're seeing chick placements down, we're seeing the hog supply down, we're seeing cattle placements probably a little bit higher this month but still down year over year. And ethanol is really great at producing itself out of profitability. So if you're looking at a whole bin of corn and you’re looking at some aggressive bid structures from your ethanol plant locally, don't be that person that waits until you absolutely have to move it because typically what I see in this market structure especially is when you're forced to make a decision it's a decision you don't want to make.

Yeager: Right. And here's a decision I don't like to make and that is quickly put you on the spot. Are you selling the old crop or the new crop contract right now? And at what target?

Setzer: I really think the biggest thing for a grower to be looking at is talking to his buyer about some of the other structured type products that they can use and that's what we've been using for our growers. We're not necessarily buying calls but we're making sure that we have some upside. We have our downside risk covered but we have some upside open, the upside potential open because it's really hard for me to say puke it all and get rid of it. My guy tells me we do work lower as we work our way through the summer but seasonally we should see some strength coming in. So I would talk to my buyer about some of the products that you can use in that sense, maybe sit tight a little bit and see what you can come up with here over the next couple of weeks as the weather kind of unfolds. But just be in a seller's mood and be looking to put in hard target orders at levels that are 10, 15, 20 cents higher if we do get that rally. But also make sure that your downside risk is covered in some way, shape or form, especially with old crop because I think you could see basis and futures fall apart.

Yeager: I've got to interrupt you again. Soybeans. The President just before we went out to record we thought he was maybe going to talk about Hong Kong and he did but not to the sense that trade was impacted, it was after the market had closed. Is that trade issue going to be weighing on soybeans or is there something else at play?

Setzer: Oh, it's going to continue to weigh on soybeans. We saw this week we had 10 to 15 cargos of sales, obviously the U.S. had a verbal agreement so to speak with China. The Hong Kong tweet came out and that's the rumor on the street. We were up big for soybeans, we started higher and then we closed lower the one day and that's what it was, we had put some business on the books Oct/Dec like we needed and China basically instructed their traders at that point in time to change the origin because they were angry about this conversation about Hong Kong. And so they went and we saw it inked for Brazil and we kind of derailed that rally train that we had established. So it's definitely going to be something that we're going to continue to watch. I do think Brazil is going to need to buy, excuse me, China is going to need to buy U.S. soybeans. If Brazil keeps it up they're going to need to buy U.S. soybeans too because they're just shipping soybeans to everybody. And I think to a certain extent we've seen it happen before, especially with corn, where they get really excited about making the sales, their currency has told them to make sales and so the physical product all of a sudden doesn't necessarily show up like they thought it would and so I'm actually surprised that they sold Oct/Dec like they did just simply because I think by the time we get there we're going to talk about how tight they are on domestic supply availability.

Yeager: Talking about a supply that has run out a little bit, the price anyway when I go to the store to buy hamburger or some type of beef has gone up. We are slowly coming back online except there was a hog plant that went offline, there could be a beef plant that we just don't know about as things move so fast. What is pulling cattle higher?

Setzer: I think the idea that we are seeing relatively significant demand. We've been down like we were, we were down so hard for so long basically I think we really, really, really overdid it to the down side. You have seen a little bit of boxed beef but that beef demand is still there and it remains strong. I think the consumer, I think the idea that the consumer is going to move away from beef because they were cooking at home was a false one. People like beef. You'll figure out how to grill a steak if you don't know how. Hamburger to butter in a skillet, you know what I mean, you can make a pretty good steak at home if you want to. And so I think that is really kind of what we recognize there is that the idea that this beef demand, beef is only consumed via restaurants was kind of a false idea.

Yeager: All right, feeders. Are you still hearing about backups in lots? Or has anything changed there?

Setzer: It's interesting and very situational is what I'm hearing from the feeder standpoint. I've had a lot of people tell me stories about folks looking for 700 pounders, they want to finish them. I think there has been a lot of direct home sales so I think there's been a lot of, I oversold my inventory sort of situations that are taking place and I've seen a few folks talk about feeder's values actually improving relatively significantly just in that regard. So I think feeders stay somewhat strong. I think we're going to start to open things back up too so the restaurant side of things, that demand is going to come back. But I think the person at home is going to be continuing to eat that beef as well.

Yeager: Okay. Hog wise, you have 30 seconds, Angie. We saw this market take a little bit of a breather and then we saw a run up. So do we have more breaks ahead or more buys ahead?

Setzer: Flip a coin. I think the hardest part with hogs right now is what is taking place from a cutout standpoint, what is taking place from a processing standpoint but the reality is we're seeing some significant cuts to supply. That is the one thing that we really should have been or have been concerned about is what does it look like when you are kind of doing away with the supply availability of these hogs? There's talk right now, you look at Chinese pork imports, they're up 70% year over year in the month of April, but you also are looking at hog production expected to drop about 1.6 billion pounds is what they're saying. So you're seeing sow liquidation take place, you're likely to see that kind of continue. So I think hogs have found a bottom and I think they kind of continue to see some gains.

Yeager: I was waving at her, I wasn't wrapping her up, but I am now. Angie Setzer, thank you.

Setzer: Thanks for having me.

Yeager: That will wrap up the broadcast portion of Market to Market. But there's still more to talk about. We'll cover it in Market Plus where we'll answer more of your questions. You can find it on the Web at MarketToMarket.org. The MtoM podcast has talked about onions, mental health and potatoes. Subscribe today to never miss an episode that premieres each Tuesday. Join us next week when we’ll look at the increasing crush at the ethanol plants. So until then, thank you so very much for watching. 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.

What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

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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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