Market to Market (July 31, 2020)

Jul 31, 2020  | 27 min  | Ep4550

Announcer: Coming up on Market to Market. Congress searches for common ground with agriculture hanging in the balance. Pairing established businesses with the next wave of ownership. And market analysis with Sue Martin. Next.

Announcer: 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.

Announcer: 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 Sukup Manufacturing. Store. Now profit later.

Announcer: Tomorrow for over 100 years, we've worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell mutual agent today.

Announcer: This is the Friday of July 31 market to market the weekly journal rural America.

Paul Yeager: Hello, I'm Paul Yeager. And this week we're coming to you from the fields of Webster County, Iowa, the economic sugar rush, the country experienced as it reopened in may is being followed by the inevitable sugar crash. Americans continue to stay home in large numbers and the ripple effect is visible all the way to rural America. GDP in the second quarter, dropped a record 32.9%. Fed officials say they will keep interest rates near zero well into the future. The one bright spot was a 7.3% increase in orders for durable goods. Without big ticket items like aircraft, orders for core capital goods climbed 3.3%, but the excitement isn't expected to last. Inside the beltway, Congress is still working on another round of relief for beleaguered Americans in both urban and rural settings. Josh Buettner has our report on the torrent of emotions that both sides must navigate to reach common ground.

Josh Buettner: This week, U.S. Senate Republicans unveiled the health economic assistance liability protection in schools or HEALS Act, a $1 trillion proposal that would provide another round of national aid in the wake of the coronavirus pandemic.

Senator Mitch McConnell/R-Kentucky/Senate Majority Leader: Every bill has to start somewhere. The Republicans are in the majority in the Senate. This is the starting place, and we'll get you all. We'll have plenty of stories to cover along the way. As we have these discussions back and forth across party lines and with the administration.

Josh Buettner: The debate comes months after the U S house of Representatives passed its HEROS act, a COVID-19 followup relief package authored by the Democratic majority that tips the scales that over $3 billion. Democrats panned the Senate's initial offer ahead of this week, looming unemployment assistance cliffhanger.

Senator Chuck Shumer/D-New York/Senate Minority Leader: We had hoped that the, uh, there'd be a bill. And instead in the ha in the Senate, they put together a little pieces here and there and everywhere. It's pretty clear. They don't have 51 votes in the Senate among the Republicans for a proposal. And it's frustrating because they've dithered for three months.

Josh Buettner: With the virus, death toll climbing and over 4 million infections nationwide, both parties are eager for a deal

Representative Nancy Pelosi/D-California/Speaker of the House: Right now. We're at a time when children are food insecure in our country, people are hungry who never thought they'd ever go to a food bank. People are being on the verge of eviction because they can't pay the rent.

Josh Buettner: While the Republican plan excludes more funding for food and nutrition programs, various commodity groups lauded the farm tailored aspects for the next incarnation of the Paycheck Protection Program. However, there were mixed reactions to the Senate framework that added another $20 billion for agriculture. Democrats had proposed just $16.5 billion in direct aid to farmers, but their plan would allow expanded USDA lending at a 45 cent per gallon payment to ethanol producers.

Senator Chuck Grassley/R-Iowa/Senate Agriculture Committee: We're going to continue the economic impact payments that were made in April and may. Uh, that means that the average family of four will, uh, we'll get it, another payment of $3,400.

Josh Buettner: Congress must hash out the legislative details before an August recess. GOP deficit Hawks, and the Trump administration are expected to see daylight between current stimulus and past criticism of similar democratic action. During president Obama's tenure,

We need to, uh, put people to work.

Paul Yeager: From Market to Market. I'm Josh Buettner.

Paul Yeager: Current economic hardships, many not seen since the great depression have hit main street in a big way. No matter how difficult times may get those who own the businesses that have withstood the test of time will eventually go looking for the right person to take the wheel in the future. Last year, Peter Tubbs discovered a forward leaning program that pairs established operations with the next wave of ownership.

Peter Tubbs: 50 pounds bags of pig feed are filled at Valley Feed and Supply in Bonner Springs, Kansas. The business had been owned by the Stubbs family for 90 years, but was sold in 2018. New owner, Matt Laipple, wanted to apply his farming and engineering experience in an agricultural business, but wanted to avoid the risks of starting a business from scratch.

Matt Laipple, Owner, Valley Feed and Supply: The good thing about that is, you know, if it's successful business, you're not reinventing the wheel it's already there. We just have to, to continue to keep that wheel turning

Peter Tubbs: The transaction was assisted by Red Tire, a project managed by the business school at the University of Kansas.

Wally Meyer, Director of Entrepreneurship Programs, University of Kansas: Red Tire is the link between retiring business owners or those who want to exit their business, and those who are qualified and capable of taking over the business with the benefit to the community of retaining the essential services of the community, which is key to retaining quality of life in that community.

Peter Tubbs: The loss of businesses like medical practices, ag related businesses and light manufacturing can be debilitating to the viability of rural towns. Red Tire facilitates the purchase of companies by a new owner, often an experienced professional, looking to be their own boss and control their economic future. One challenge for businesses looking to sell is arriving at a fair evaluation of their business.

Denton Zeeman, RedTire Program Manager, University of Kansas: We can build out a range of value for our valuations. And we, because we're working with both buyer and seller, we don't like to produce a valuation that is called the conclusion of value or a price point valuation. Instead we give a range of value to help with negotiation between buyer and seller basically.

Peter Tubbs: The negotiation also includes a transition period where the seller works with the buyer for a designated period of time to transfer the knowledge of how the business works. This transition period dramatically improves the odds of success for the new owner.

Wally Meyer, Director of Entrepreneurship Programs, University of Kansas: Businesses fail during a transition, most commonly because customers get forgotten or the process gets manipulated in a way that is not appropriate for the business. And so it's the handoff period between the seller exiting the business and the buyer taking over the business, where businesses tend to fail.”.

Peter Tubbs: Red tire has completed 60 transfers since it start in 2012, all 60 are still in operation.

Dr. Deedra Truschinger bought a dental practice in Auburn, Kansas in 2017. The retiring dentist spent more than a year on staff introducing her to patients and teaching how the practice operated. Now on her own, Dr. Truschinger has seen her patient list increase enough to require the remodeling of a century- old bank building as a new, larger office. But the financial side of her business was the intimidating part of the purchase.

Dr. Deedra Truschinger, DDS, owner, Auburn Dental Clinicr: I did not do a whole lot of research, and I think that's a Testament to how awesome red tire is because they did so much research for me and provided so much data. I didn't feel the need to go outside and get five different appraisals on what this practice was worth. They were working both sides very honestly. And just trying to make a good, realistic picture of what this, what the value of the practice was

Wally Meyer, Director of Entrepreneurship Programs, University of Kansas: For many of our participating companies, 175 of them, they need to get themselves to the psychological and emotional point that they're able to walk away from the business and something that they have devoted a 20 or 25 or 30 years of their life to, now all of a sudden they're going to turn over a or the relationships with their customers and of course the machinations of running their own business to somebody else. So having that emotional security to be able to do that, being at the right time of life, to be able to make that transition, that’s really important.

Peter Tubbs: For Neil Stubbs, finding a buyer with the financial ability to buy the feed mill was only half of the equation and understanding of the work with an even bigger hurdle.

Neal Stubbs, former owner, Valley Feed and Supply: He seemed to know, he definitely has an interest in agriculture. He seemed to to understand, um, the type of work we do here better than a lot of people do. And uh, being a farmer himself, you know, he's familiar with heavy equipment, which is kind of what our mill out here is.

Peter Tubbs: The business at Valley Feed & Supply has evolved over the last 20 years. Situated in the corridor between Kansas City and Topeka, the demand for hog and cattle feed has declined as sales of horse and chicken feed has risen. It is also the type of business that is well suited for the RedTire program: a sole proprietorship with good cash flow and a track record of turning a profit. RedTire estimates there a 10,000 businesses of this size in Kansas and Missouri alone whose owners are nearing retirement and lack a succession plan. Much of the work of finding the valuation range of the businesses looking for new owners is done by students in the Business program at KU. Their salaries are paid by a grant from the U.S. Economic Development Administration, and allows RedTire to be a free service to both buyer and seller. RedTire also provides a level of transparency for the buyer that is uncommon in a typical broker-driven transaction. That transparency helps smooth the sale from one owner to the next, keeping a rural business going that otherwise would have closed. .

Neal Stubbs, former owner, Valley Feed and Supply: It was in our family for 95 years. So it was not the time I wanted to drop the ball. We, we did everything we could, you know, to make sure everything went smoothly. I think it did.

Peter Tubbs: For Market to Market I'm Peter tubs.

Announcer: Next, the Market to Market report.

Paul Yeager: Improved crop conditions, pressured the market despite big sales to China. As of noon on Friday, September wheat fell 9 cents for the week while the nearby corn contract lost 11 cents. Soybeans waited on China to move into the complex. The September soybean contract dumped 10 cents August soybean meal lost two 30 per ton. December cotton found $2 and 10 cents per hundred weight. In the dairy parlor, September class three meal, future's decreased a $1.43. A mixed week in the livestock sector, October cattle climbed $2.05, September feeders also climbed $2.05 and the October lean hog contract lost 85 cents. In the currency markets, the U S dollar index dropped 99 ticks September crude slid $1.32 per barrel. Metals. Well, that was a little different story. As Comex gold jumped a $68.80 per ounce and the Goldman Sachs commodity index lost $2.30 to finish at 338. 70. Joining us now to give us some of her insight is one of our regular market analysts, Sue Martin, Sue. Welcome.

Sue Martin: Thank you, Paul. It's nice to be here.

Paul Yeager: Well, here is such a relative term. We really are in two different places and that's just the way it's gone. So let's start with wheat. Brutal start to the week, uh, in that market. Is that going to continue?

Sue Martin: Well, I think the wheat market is catching so much nice rain through Kansas and Northern Oklahoma. And that is part of what's weighing on the wheat market. Uh, this is just unusual in the month of July. Seasonally, as you move into August, wheat tends to decline into September. And so not that it has to happen, but it does tend to do that. And there hasn't been an awful lot of news other than we keep seeing, first Russia's prompts doing a little better than the yields are not as good and they start downsizing their production, but it still, when you look around the world, whether it's France, Germany, um, and of course, Ukraine and Russia, uh, production is looking like it's not as good as they had hoped. It would be all in on the

Paul Yeager: Go ahead, keep going.

Sue Martin: Well, the Australian crop is better, but you don't hear a lot of talk about that. It's just a, it's so focused on Russia. And of course, Russia tends to be getting a lot of, um, Egyptian business right now, Ukraine too.

Paul Yeager: Last week, Mark Gold talked a lot about the dollar's relationship to wheat and that dollar keeps moving lower. Uh, do you see that as the commodity that's being influenced the most by the dollar?

Sue Martin: Well, I think as the dollar is moving lower, it's making us commodities in general, very competitive and cheaper. Um, you look at a wheat, you take and adjust that by the dollar or you take corn, you know, looking at corn, we're running right about just a little over $3 a bushel. Um, so the dollar is having a huge impact on the decline that is seeing, uh, in the meantime, you know, demand is good, but you know, we test had some pretty good export sales this year or running ahead of a year ago. Uh, so, you know, that's not negative news. So I would have to say, yes. The one thing about wheat is that we could be looking at a situation where the farmer may be entertaining about more wheat acres, winter wheat acres, this fall

Paul Yeager: In corn this week, Sue, we had a weather report that delivered rain, unless you looked at the radar and it looked out your window and the two didn't match, we got apparently enough rain for the, for USDA to say that crop is improved. That was a big, big weight on the market, despite everything that China's done, which one's going to win out, moving forward?

Sue Martin: Well, I think that we do need to see more Chinese business, but, um, I think weather is key. Uh, those crop condition ratings improving 3% was better than the trade was thinking. They were looking for steady to maybe 1%, 2% better. And so 3% improvement. The third week of July is a pretty unusual thing. And of course, uh, in, um, 2010, a year that this year is very similar to, we had, uh, the same crop conditional ratings then as we do now. And so, you know, it just basically at 72%, you know, the crop is doing well. You're through the end of July now. Uh, it thought that we'd have to go through the whole month of July to fulfill all of the pollination. That's done. Nothing has been jeopardized. So, you know, they'll say 90% of your yield is in pollination. And so the attitude is, is weighing over the market that we're going to have a good crop. And so we'd expect yields will probably increase in this August report.

Paul Yeager: As the yields continue to go up the price, not where anybody wants, what happens if we don't have these sales from China? Are we really hurting right now?

Sue Martin: Well, ours, our exports are a little bit behind a year ago, but we're catching up. In the meantime. Uh, you know, we need the export business because we're also dealing with less ethanol production compared to a year ago because of COVID-19. And so, and it's not just in the U.S., it's in Brazil, they're not using as much ethanol or biodiesel either because people are not traveling like they normally would. And so, you know, we're competing against fuel, crude oil, what have you, um, we're just in a very negative atmosphere, I guess, I would say. But all in all, when it comes to corn, I think the bottom line is going to end up being the weather, 'cause remember, acres are much less than what we originally started with thinking we were going to have and March on the prospective plantings to where that number came up,

Paul Yeager: Let's move in on weather, because that's a good transition to what's going on in China. And we got a viewer question that came, uh, one came via our Facebook page and it's, uh, John and Rice Lake, Wisconsin. He's asking, "When is the massive flooding and China going to influence the markets? It seems like it's a pretty bad situation there. And there doesn't seem to be a lot of talk about it. "

Sue Martin: That is true. You know, the river basin, the Yangtze River Basin has had their share of flooding, uh, over the next week, week and a half. They should start to settle down and maybe see more favorable weather. Uh, but that area should start after the 10th of August to see another surge of horrific rains. The monsoonal rains in China have been record. And so they're catching plentiful rain. It's heavy rains moving into the Northeastern part of the grain belt, or you do see a lot of corn, some soybeans being raised. That's not good for that, but in the meantime, it's also moving into the southeastern part of the country as well, or the southern part of the country. Here's the thing though, if these rains, um, that they're worried about the Three Gorges Dam and other dams that also feed along the tributaries and what have you, but should these rates continue to kick in and remain heavy, and we start to see another resurgence of these rains coming downstream to that Three Gorges Dam, the fear is that there could be a black swan situation in China where you could have earthquakes set off and they could be a five magnitude on the Richter scale, something like that, uh, because of all the weight of this water that is sitting on top of these tectonic plates. And if that was to happen and breach that Gorges Dam, you would have 480 million people in China, jeopardized, they would be lost. And so you'd lose a generation of people, but more, not more importantly, but a concern is China's agriculture would just be lost. It would be horrible for them. And that's a black swan event. It may not happen, but if it does, and you put that at the same time that we're running with, COVID-19 here running with Phase One and they have to be buying all of a sudden, is there enough to take care of them if that black swan event was to happen .

Paul Yeager: Right. Well, and that is a little bit of the concern, a little bit of the concern in the corn market that maybe China's out of corn. Cause that's why they've been buying Brazil, maybe out of beans. So real quickly. So in 30 seconds, soybeans in the United States, if you're a producer, are you buying or selling a right now that contract?

Sue Martin: Well, I think right now, um, I would probably be marketing a little bit on the rally. We're going to close higher for the month of July on beans and we're moving into August on being month. But in beans, I'm looking at the year in 1980 and I think we're patterning after that. And interestingly, the year of 2010 on corn and the year of 1980 on beans, we made higher highs for the year in November. And I think if we can keep this pattern, what I believe is in August, it's going to be very serious as to what the weather does because we may see a drop in yields from August to September and from September into October. But with the less acres in corn that we've got, you know, and the demand that we've got. And then if you were to put a black swan with it, oh my goodness, that would just be horrific.

Paul Yeager: We have a lot of weather to watch and a lot of things to watch. We're also looking at the weather in the Plains when it comes to feeder lot conditions or pasture conditions, but let's talk live cattle first. And, uh, they've been kind of back on the rally here. Is this still a COVID-thing or is this something else?

Sue Martin: No, I think cattle, if you remember, we had low placements for several months and, um, I think though the weights of a, or 120 days or more cattle on feed, I think that we have a tighter supply there in that timeframe. Um, I also think that once we kind of get our, our, the concern is that restaurants and that type of thing, school lunch programs they buy. Um, but on the same token, this market looks to me like it's building more of a premium of where, what we used to have, where cash would be discount to the futures. And, um, I think that you're going to see the situation here where the box beef has bottomed, and that's going to help us out. Packer margins, maybe aren't going to do as well, but they're not going to be a disaster. I, they, the packers are really in a fortunate situation. I think that October cattle have potential to go to $115. Maybe it takes us into October. I think in cattle, we're looking at a year similar to the year of 2015.

Paul Yeager: You look at the October chart when it comes to the feeders. And that one was a little bit of newsworthiness, this week. We had a little website after cattle on feed from Friday is my neck sore from looking at that. And will it continue while I get some relief next week?

Sue Martin: Well, my indicators are, we're a little over done and turns negative. We caught a quick, quick break, um, both in fats and feeders. And then we started and we were moving very quickly on my indicators that I, it's not normal to see them move so quickly, but they were. So we're now turning and pushing. But the one thing that I will say, the weekly indicators that I use are very vulnerable. Now, not none of them are negative yet. They're still positive, but when those turn negative, I'm going to be a little concerned, but that could take us all the way through August into early September. Um, I think that we have a market demand for feeder cattle. So very good. We're current in the north for fats. Um, one wonders. I hear both sides of the story that maybe we are backed up with cattle numbers as we once thought. And then you have the pasture conditions are absolutely wonderful in these, you know, in Kansas and Oklahoma, we have to be, uh, thinking that that's also a blessing for this cattle market and those pasture conditions turned hot and dry. That could have been the disaster for the feeder market.

Paul Yeager: Do we have any blessings in live hogs?

Sue Martin: Well, they haven't showed up yet, but I do think that the hog market, when you go back and look at October house, and this is more of a technical thought, but when you go back and you look at October hogs and take a monthly chart and put a Bollinger Band on there, whenever you, since 1971, since August of 1971, whenever the hog chart, the hog price has dropped through the lower Bollinger Band, doesn't spend much time there, it's happened, I think eight or nine other times and we've always turned and came back and we add towards the 20 multiple of an average. As many times, we even eventually get up to the upper Bollinger Band. I think we're in that mode and I'm, I'm just waiting for, um, my trending indicators to start to turn positive. But, uh, I wouldn't be selling hogs down here. They're too cheap. Um, you know, look at pork adjusted in dollars here again, cheap

Paul Yeager: Sue. My timer just went off. Thank you so very much for joining us here in Market to Market. That will do it for the installment of the program. We will continue our discussion in MarketPlus. So join us there. You can find it and podcast form or video form at markettomarket.org. Next week, we'll look at how the livestock sector is studying pain management in food animals until then, thanks for watching and have a great week.

Announcer: Market to Market is a production of Iowa, PBS, which is solely responsible for its content.

Announcer: 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.

Announcer: 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.

Announcer: Tomorrow. For over 100 years, we've 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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