Market Plus: Arlan Suderman

Aug 7, 2020  | 14 min  | Ep4551 | Podcast


Yeager: This is the Friday, August 7, 2020 version of the Market Plus segment. Joining us again, Arlan Suderman, from that wonderfully redone basement just in time. It's better to be lucky than good, right Arlan, to have that thing timed out just right?

Suderman: That's right. We had no idea when we did our basement we'd be using it so much because of the pandemic.

Yeager: And that's just the way some people are able to work and others are continuing to grind through it. And the cotton market has been in the South, we've been dealing with an outbreak but they still have a crop that's coming to market right about now. You've seen some wonderful pictures, just beautiful to see those cotton fields. They're seeing good news right now. There is continued support for that market. Why? And will it continue?

Suderman: Yeah, we've seen a nice recovery. We had gone from 72, 73 cents all the way down to about 48 cents and now we're back up around 61 cents or so, a nice recovery. And ultimately what we're going to need is to see some demand go into China to be able to sustain that and keep that export demand going. And that's the big question mark and everybody is going to be watching what comes out of next Saturday's meeting between Robert Lighthizer and the Vice Premier from China. I think that we're going to see some positive things on trade there. I think both sides have an interest. The rhetoric won't necessarily indicate that but I think that both have incentive behind the scenes to continue to provide some support.

Yeager: You opened the door to China. Let's just talk about it now. You mentioned it during the main analysis segment and it was a story you had told before we had even rolled. Last week a couple of officials from China took road trips, field trips out into rural China. What does that tell you when the President and the Vice Premier are going out to look at farms, specifically corn farms?

Suderman: Yeah, when you look at what is challenging the Communist leadership right now they're facing the greatest challenge for their leadership in the 70 years of their existence probably. And out of the middle of that, President Xi Jinping and then a few days later his Vice Premier tour a corn farm and then this past week we see the state-run media run a story again about the need to be self-sufficient in the grain industry. Corn and, excuse me, rice and wheat are, they are more than self-sufficient there, although they import some quality to blend with some lower quality for milling wheat. But on the corn side they say they're 95% self-sufficient, it's probably closer to 90% based on our boots on the ground say there. And when you look at what it takes, U.S. corn goes into the port in China about $6.10 to $6.20 per bushel right now. They have been selling their reserve corn, which is lower quality 2015 corn, for about $7.40 per bushel now. Some internal domestic corn prices are anywhere from $8.50 to $9.50 in the south part of the country. So you think it would make mathematical sense for them to import our corn but to flood our market with our cheap corn would hurt their rural poor. And one of their primary objectives as a Communist Party is to lift their rural poor out of poverty. So they don't want to do that. They can import it into the reserve and auction it off every week and help control the price that way and they can make money on us. And you'd think from a capitalist standpoint why wouldn't they do that? But people in China tell me there is one good reason why they may not, by keeping corn prices high that is helping their rural poor and helping stimulate production which is their primary goal towards self-sufficiency and it's not causing food inflation. You say, how's that? Pork prices are already very, very high because of African swine fever. This last week I looked and the average feeding margin was $370 per hog. That's like hitting the jackpot in China for a farmer. And so the corn price isn't going to change the price of that hog at all. So they are not seeing the effect on food inflation, they're helping their rural poor, and so it's a win-win for them. They still may have to increase their imports because of dryness in the North China Plain this year may reduce their crop more than they currently think. But long-term they want to focus more on self-sufficiency.

Yeager: And that opens up the door for the United States to maybe import, export less to them because as they try to become more self-sufficient. So again, always more to a story. And one of the stories you mentioned in the analysis segment was about restaurants and we're seeing certain states, you mentioned California, one of the reasons Class III dairy has been rising is because we've been eating more cheese. Why the collapse now?

Suderman: Well, the dairy marketing system is fairly complicated. We saw big recovery in the board but the cash never really reflected that. So I think the board is starting to come back down to more reflect what was happening in the cash. We still have a lot of issues. We saw some exports of some dairy products go up as well and that was also helping. But we're nowhere close to getting our food service back and we're having more and more school systems now saying that they're going to remote learning once again. That is a big disappointment to the dairy industry. That is a big source of demand for their milk. And some of the restaurants that are being shut down more again, another big use of dairy products. So that is a big problem and I think the market is reflecting that disappointment.

Yeager: Well, that is something that we do watch and you just don't always think about. I want to get to a few questions. We've got some great ones this week. I want to start with Merrill in Iowa. He was asking about basis. Where do you see basis levels returning, Arlan? Are you thinking as wide as 2018 levels for corn and soybeans?

Suderman: Depending on what the board is going to do, in the 2018 we had a crop that really kind of surprised us as well as far as the size of it goes. And right now the futures market is focused on the size of the crop. And as I said earlier in the segment, once the futures traders feel like they know what the size of the crop is, then they'll start taking their profits on the short positions and the board can bounce back but the basis has still got to price it in. And we have a lot of farmers in need of cash that will probably do DP contracts, the deferred pricing contracts, which makes that corn available to the market without the farmer having really priced it yet. But that means that the end user doesn't have to bid the basis up in order to get the grain. So that can allow basis to continue to weaken. If we see more government checks coming then that pays the farmer not to release the grain. But with next year not being an election year, once we get past the elections I don't know that we can count on more additional supplemental government payments and so we may see the farmer having to dump more grain in order to make payments, he's going to have more grain to sell, looks like these big crops and so basis is going to continue to be vulnerable a little bit longer.

Yeager: And that’s regardless of which outcome it might be for whatever reason. Phil in Dresden, Ontario, Canada wants to know, Arlan, June is always one of those months where you might be able to make some money. He says, in retrospect there wasn't great opportunity to price Dec. corn, looking back. When was the best time, looking ahead now to gauge 2021 December corn pricing opportunities? Is it June of next year?

Suderman: Yeah, if you look back at the spring of this last year we had some opportunities on our rallies. You look ahead to 2021 if in fact we do get the big crops and lack of government payments, we start building those spreads again, you could start to see that July and December contract trade at a larger premium in order to encourage storage of that crop so it's not all dumped on the market at one point. And I think over the next couple of months we'll get a big feel for that, how much grain gets dumped on the market, how much goes into storage, how much the market wants held in storage and once that carry starts to establish yourself that's the time to start looking at what opportunities are those deferred contracts including December of next year offering you and that is the time to start looking at it.

Yeager: Russ in Postville, Iowa is asking a question and this one is an anecdotal one that I've heard about as well as these corn piles that we see in grain areas are gone and maybe there's something to it. He's asking, how accurate do you feel our current demand estimates? Local mill is grinding 35,000 corn per day due to changes in livestock rations. This is a big increase and I wonder if it's happening in other areas? And being fully accounted? We didn't talk about the, government report that is coming up that is going to address some of this. So answer the question and also give us a little bit of a look ahead at that report next week.

Suderman: Yeah, I think the key report is not this next week but it's the quarterly stocks report on September 30th. And when we harvested last year's crop, this is part of the big debate. What's the size of it? Is it as big as what USDA is saying? And then much of it went into the bin wet and low test weights where you tend to have more shrinkage and it requires a lower energy content to it, a lower protein content, particularly in the Northern Belt. That means it takes more bushels to get the same amount of ethanol and gain from livestock. And so we saw in March how USDA had a lower stocks estimate than expected. In June not so much. We could see it again in September. I do think that we'll see that, probably not enough to erase the overall surplus though largely because of the shutdown of the ethanol plants that we saw this spring. That really counteracted what we could have seen otherwise as a positive market response and the big crop coming here. So yes, I think the USDA is overstating stocks a little bit but not enough to be a market factor any more thanks to that ethanol big crop.

Yeager: I can't take credit for the question, but Kevin in Atkins, Iowa can. It sounds like you're talking about a Great Grain Robbery here almost. Are we experiencing a Great Grain Robbery now? If so, is that what we need to get through these burdensome stocks?

Suderman: Well, I remember the Great Grain Robbery of the 1970s and Russia came in and bought under the cover of night, so to speak. And that is why Congress demanded that we have regular daily reporting rules on when grain purchases have to be reported. And so it is much more difficult to have a grain robbery today than what it was then. So my answer would be no, we are not having a Great Grain Robbery. May China come in and buy a lot more? It's possible. But we will know about it. It won't be the in the dark of night like what it was in the '70s.

Yeager: Last question, Arlan, and this one is a biggie. So, again, Tiffany, I apologize, who transcribes all of this. I know she always goes, Paul, when you get over a certain time I'm in trouble. And she says, even when I apologize to her, Arlan, right now that's still not enough. But I'm going to do it anyway. This one is about gold. Gold topped 2027. So Roger in Hancock, Iowa is asking, with gold near highs and the dollar dropping, which we're still at 93.415 today, that usually signals inflation. When is that going to hit commodity markets?

Suderman: It is hitting commodity markets. It's hitting gold right now, it's hitting cocoa, it's hitting lumber, it's hitting a number of different commodities, we mentioned cotton earlier, but not the food-based commodities. And rather it looks like what we're seeing is a lot of the investment funds are shorting the food-based commodities against many of these other commodities and against the equities because the food-based commodities are right now focused on large supply. At some point that may reverse and I am one that believes you cannot increase M1 money supply like what we've done in recent months and continue to do without eventually paying the price inflation and in other ways. So I do think it will eventually happen. But the ags don't have to participate in it. From a farmer background and my heart is with the farm, I hope that day comes and I think it one day will, but it may not be this year, it may not be next year or the year after but I do think it will come. But it doesn't have to, don't put all your eggs in that basket.

Yeager: Diversification, hedging, sounds like some good advice, Arlan. Thank you so much. That will do it for our Market Plus. Good to see you, Arlan. Next week we'll take a look at how the Federal Reserve takes the economic temperature of the Grain Belt and Mark Gold and Ted Seifried will be here for a virtual roundtable to analyze the markets in the wake of next week's WASDE report. I'm Paul Yeager. Thank you so very much for watching, listening or reading. Have a great week.

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