Market to Market - January 27, 2023

Paul Yeager:  Coming up on Market to Market -- producers need more than sharpened pencils this crop year. Tornadoes tear along the south from Texas to Florida. Plus, going beyond the niche in the meat locker, post-COVID and market analysis with Shawn Hackett next.

Speaker:  What's next doesn't happen by chance. It happens when researchers and farmers work together to solve tomorrow's agronomic challenges. We're committed to creating what's next because at Pioneer, our name is our mission.

Speaker:  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.

Speaker:  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.

Speaker:  This is the Friday, January 27th edition of Market to Market, the Weekly Journal of Rural America.

Paul Yeager:  Hello, I'm Paul Yeager. The Federal Reserve's Monetary Committee is slated to meet Tuesday and Wednesday. They now have new data points to help drive a decision on the key interest rate. The Fed's preferred inflation gauge, the personal consumption expenditures price index, was up 5% on an annual basis in December. The PCE declined two-tenths of a point from November and 2 full points from June's peak.

Paul Yeager:  The core PCE fell three-tenths of a point to 4.4% when removing the volatile categories of food and energy. The fourth quarter GDP released this week shows a 2.9% annual growth, capping a year of high inflation and a signal for a return to a more traditional price movement. The cost of doing business is always on the mind of producers, as natural gas trades in the lowest range since May of 2021, the fallout on inputs for farmers appears to be short on relief.

Paul Yeager:  Peter Tubbs reports.

Speaker:  The University of Nebraska released their farm production cost budgets for 2023 and estimated increases in almost every input category. The spike in energy costs in 2022 are expected to keep the prices of both diesel and fertilizer elevated in 2023. We say that budgets have increased on corn like 23 to 25%, soybeans 13 to 19%, depending which you're doing.

Speaker:  Wheat on the average is about 20% increase and so forth. Growers of nitrogen hungry corn may need to adjust their application rates in light of continued high prices for the popular fertilizer. The cost of nitrogen is expected to increase 38% from 2022.

Speaker:  You might want to lock in your fertilizer costs for 2023 here if it looks like you got a pretty good price on it.

Speaker:  Now you may want to go ahead and lock in that price and make sure that you get it. And then if you tie down more of those expenses, then you can look at future markets and whether you want a forward contract or hedged to arrive or many other options in marketing.

Speaker:  Supply chain problems and a surplus of buyers resulted in increases in equipment prices, especially combines. The university's budget estimates a jump of 275% in the cost of owning and operating a combine to $207 per hour, up from $55 per hour.

Speaker:  The increase is being driven by a rise in the cost of the machines, spikes in the costs of parts and repairs, and a $1 per gallon climb in diesel fuel prices.

Speaker:  As you use budgets and so forth, compare your cost to what we have in the budget and then when you see that you're kind of out of line on an item, you know, investigate that farther and see why your cost is so much higher than our costs. Klein advises that the difference between the high cost producer of a crop in a region and the low cost producer often comes down to the rate of fertilizer application and the amount of capital committed to equipment. Given the jump in expected input costs, the nation's farmers will likely face challenges to maintaining their margins in 2023. From Market to Market, I’m Peter Tubbs.

Paul Yeager:  There has not been measurable snow in New York City since December 15, 2020. Other locations in the country have been inundated with snow this week as thousands of flight delays and car crashes along with tornadoes were part of the weather pattern. David Miller reports.

Speaker:  An F3 tornado hit the Houston, Texas area this week. The destructive storm devastated the eastern suburbs of Pasadena and Deer Park as the National Weather Service confirmed the winds reached 140 miles per hour. On Tuesday, 16 tornadoes touched down in the Lone Star State. The system also brought more than four inches of rain. This area of central Alabama was in the path of severe weather.

Speaker:  Residents took refuge in shipping containers, bathtubs and sheds as the storm headed their direction. At least nine people died in storms that cut across Alabama and Georgia. Flight delays were common in Detroit as heavy snow caused a full ground stop. Road crews prepped for several days and spent several more cleaning up after the snow stopped falling. A foot of snow in parts of Missouri and Arkansas knocked out power to more than 100,000 customers.

Speaker:  There was another week of improving conditions in the drought monitor from the University of Nebraska. Soil moisture has increased by almost two points as areas from the west to the Central Rockies were recharged by recent weather. However, long term drought conditions persist in this part of the country. Above normal precipitation fell from the Mississippi Valley all the way to the East Coast this week as the West finally started to record lower rainfall amounts.

Speaker:  For Market to Market, I'm David Miller.

Paul Yeager:  Federal and state governments were in concert on some COVID relief packages. Once that sinked, helped assist local meat processors. In 2021, Iowa enacted a bill to assist local butcher shops with the handling of a pandemic backlog of processing. Now some of those meat lockers that were able to pick up the slack have continued to grow and in a few cases, expand.

Paul Yeager:  Josh Buettner has our cover story.

Speaker:  While the coronavirus pandemic ravaged the global economy, the repercussion carved into rural America was its own animal. Advocates say unemployment, mental health and food security issues hammered many areas already in the midst of long term decline.

Speaker:  When we look here in Iowa, we have seen a population drain, especially over the past 40 years. And we've also been watching that drain not only from a statewide perspective, but within the state. We have seen our rural communities getting smaller and our urban and suburban communities are where we've seen tremendous growth.

Speaker:  Dr. Chad Hart is an agriculture rural economist at Iowa State University. He worked the family meat locker back home in southwest Missouri and says the sticker shock of hefty retail prices back in 2020 due to COVID hobbled workforces at corporate packing plants, revealed an edge for nimble operations like where he grew up.

Speaker:  When you go into your big grocery stores, everything's prepackaged. You're sort of buying what they want you to buy. Whereas when you're working with a small meat locker, oftentimes you can custom order. It's like, okay, you want your steaks? How thick? You know, you want your hamburger in half pound, pound, 2 pound packages. And that's something that a smaller business does have some more agility to do.

Speaker:  Last spring, the Biden administration announced a roughly $1 billion investment to help strengthen meat supply chains. A lame duck Congress and the White House followed up early this year with millions more to stir competition and boost more small processors.

Speaker:  Every move that the government makes has some tradeoff to it.

Speaker:  Hart says rural businesses should build on pandemic related momentum because urban centers offer more goods at lower prices to consumers accustomed to driving long distances.

Speaker:  We make everything homemade, fresh. There's not too many places like this anymore, really. We still do it the old fashioned hard way.

Speaker:  Some have turned that exodus on its head for decades, drawing an array of customers by focusing on value added niche markets.

Speaker:  Between fresh cut steaks and counter lunch meats and different kinds of sausages and bacon jerky. I would say we're probably pushing 2,000 pounds a week.

Speaker:  Josh Dreps is a sixth generation co-owner of City Meat Market in New Albin, Iowa. Grocery and other businesses have closed up shop here over the years as distributor Faber drifted to nearby La Crosse, Wisconsin. Dreps Family Store in operation since 1882 has endeavored to plug some of those food related gaps while diversifying their traditional meat offerings, which have captivated carnivores for generations.

Speaker:  Word of mouth has really helped, and I would say that's our greatest advertisement. It's a dad that brings a son in and then his son comes back with his dad in a wheelchair and he's bringing his grandson along. But, you know, a lot of times there's people that we've never seen before. And what brings you here? Oh, nothing.

Speaker:  We just heard that this is a good place to come, so we decided to make a day trip. So, you know, we get people from all around. We're still sending packages from Florida to Texas, Washington, everywhere in between.

Speaker: 

Speaker:  The locker plants that have survived up to this point oftentimes aren't just locker plants by themselves. They are doing something else that's helping draw those customers and keep those customers with them for the long haul.

Speaker:  The backlog is tough. I mean, we're booked out almost through 2024. Try to leave a little room for some that we missed or people forgot, The quarters and halves and whole beef, a lot of different people buying them now that never did before. It got big.

Speaker: 

Speaker:  Elma Locker and grocery in Elma, Iowa, has bucked the trend as well. Co-owner Roger Merrick says business has skyrocketed since 2020, but input shortages and rising labor costs have ridden shotgun. His skilled crew motors through some 20 head of cattle and 30 hogs per week, along with seasonal wild game.

Speaker:  Good beef, good Iowa corn fed beef, good burger. It's just tough to book beef two years in advance, and you still don't even have the bull bought yet.

Speaker:  Some 15 years ago, a previous locker and separate grocery store folded, so Merrick left a good job with a local co-op to partner up in offering both essential food businesses under one roof. The community has supported them through the Great Recession, COVID and inflation.

Speaker:  Groceries are 30%, 40% higher, and a little store like this, it's a little bit tougher for us to get our volume and low prices. Profit margins are pretty low on the grocery because we're probably a little higher to start with.

Speaker:  Traditionally, meat locker market advantage lies in affordable bulk meat prices driven through multiparty client deals. Both Elma and New Albin have gone against the grain, slowing population losses to a drip over the past decade. Observers claim such novel approaches could help stoke more resilient Main Streets elsewhere. But many scratch their head about what the future holds.

Speaker:  Virus changed a lot of things for folks, and we're trying to figure out which changes are going to stick with us in the long run, and which changes are going to fade away. Are consumers willing to deal with less choice, possibly higher cost, in order to keep that local business viable and running? Or will we fall back and say no, we like the convenience of buying from those regional centers or buying online and having that brought to us.

Speaker:  For Market to Market. I'm Josh Buettner.

Speaker:  Next the Market to Market report.

Paul Yeager:  Global forces and forecasts provided activity for both the bears and bulls in the trade. For the week the nearby wheat contract improved $0.09 while the March corn contract added $0.07. Some seasonality, along with rains in Argentina, impacted the soy complex. The March soybean contract gained $0.03, while the March meal contract increased by $9.80 per ton. March cotton expanded by $0.19 per hundred weight. Over in the dairy parlor February Class three milk futures shed $0.18.

Paul Yeager:  The livestock market was higher with April cattle up $0.90. March feeders added $2.50 and the April lean hog contract strengthened by $0.72. In the currency markets the US dollar index lost four ticks. March crude oil cut to 33 per barrel. COMEX gold well it added $0.50 per ounce and the Goldman Sachs Commodity Index finished more than a point lower to close at 610.30.

Paul Yeager:  Joining us now, regular market analyst Shawn Hackett. The road warrior. You've been all over the place, Shawn.

Shawn Hackett:  I have been, two weeks of crazy traveling, but wonderful to be back here.

Paul Yeager:  You're in Iowa, this is Iowa PBS, Market the Market TV show across the country. Just to let you know where you're at. Is that good?

Shawn Hackett:  That's good.

Paul Yeager:  Across the country, we saw we talked about weather, talked about tornadoes in January in a lot of places, including some here last week. But we have this cold snap coming for wheat country. Then there's a forecast change on Friday and not as bad. Are we really dependent on weather already in wheat?

Shawn Hackett:  Well, this time of the year, always still worrying about winter kill. We think we had a pretty nasty spell, at least for soft bread, winter wheat that we think is going to show up when we come out of dormancy. So we're always on the lookout for snow cover versus cold air coming in. It looks like there's going to be a fair bit of snow cover.

Shawn Hackett:  It doesn't look like this one will have a bite to it like the last one. But it's very hard to pinpoint those kinds of timings until right now.

Paul Yeager:  So folks have sat in your chair recently, have been talking about it's not necessarily a wheat story as a United States story. Have you seen stability in relations between Ukraine and Russia enough to stabilize this market?

Shawn Hackett:  I think things are getting worse. We went from a period of hyper worry a year ago to mass complacency today. We had a period where they worked this corridor deal that allowed a lot of that was above ground ending stocks to be coming out of Ukraine ended the supply shortage for a while. But I actually think now they have to sell only what they're producing.

Shawn Hackett:  We were talking with our largest producers there a week ago, 50% down in acres for the foreseeable future. I think the big shortage issue that the market traded a year ago is coming up later in ‘23. I think it's a big surprise and the market's going to have to put some pricing back on.

Paul Yeager:  All right. So give me a little range in that price putting back on.

Shawn Hackett:  What we've seen in the past, when we fire up Russia, Ukraine worries. We've tended to put a nine handle on the wheat market. That's just kind of what we've been doing. The chart pattern has liked to do that, and I wouldn't think that that would be an unrealistic expectation if we really got some escalation there and worry that maybe this -- everyone thinks this corridor deal is going to keep getting renewed all the time.

Shawn Hackett:  And, you know, it may not. We’re worried about Ukraine popping up again.

Paul Yeager:  Let's go back to the weather question and this one is a social media question that we received this week. This is from Vance in Nebraska. He asked this on Twitter. He says, there’s a lot of talk about weather changing to be favorable. Is this mostly based on California? He says Nebraska and South Dakota have gotten some snow. But can snow break a drought?

Shawn Hackett:  It can't break a drought. I mean, it certainly can help. But you still need spring and summer weather patterns to deliver. The reason everyone's getting feeling weather is going to improve mainly is because all the weather models and all the forecasters are saying El Nino is coming for spring summer. El Nino means cool wet weather for the US which tends to produce record yields.

Shawn Hackett:  We disagree. We did an analysis going back to 1850 for where we are with La Nina, Southern Oscillation Index, some of these other indicators, and found that the chances for a El Nino to arrive by spring summer of this year is very, very remote. We don't think it's going to happen. We think we're going to get more of a neutral reading and droughts reemerging can happen if you have La Nina or neutral. And that's what a big change in our forecast.

Paul Yeager:  So how is that impacting corn?

Shawn Hackett:  Well, if we start off with our other forecast is an early start to the planting season means we get off to the gate good. As you said, we had some moisture this winter. People get all kind of bearish about the grain markets, but we think we could get a reemergence of this drought in the spring into the summer.

Shawn Hackett:  And of course, the corn market is the first one to really feel a renewed drought cycle. Remember, 2012, we had a very nasty set back on early planting to only find, you know, the market going back up as drought emerged. We're really, really worried about drought this particular year because of a Gleissberg, 89 year cycle that we've been following that we verified for 11 centuries.

Shawn Hackett:  That's coming up for ‘23, ’24, ‘25 and it has to be a year that's not El Nino. So we're kind of really wanting to make sure our customers are thinking about and preparing for what could that look like? How may they alter their cash marketing, hedging?

Paul Yeager:  Well, what's that make the December contract look like? Because that would be when we always think of a crop. And to me that that should be screaming much more volatility, given what you just said.

Shawn Hackett:  Yeah, Americans really gotten complacent. I mean, we've all we were looking at option premiums the other day. I mean, they're just about as cheap as you're going to get because the market has gone to sleep. You know, we think with the weather risk we just talked about and the geopolitical risks that we talked about, we think the market is not ready for some of these big changes that are coming.

Shawn Hackett:  And we think that when you look at a sleepy December contract that's been you know, we're slobbering around, I just think there's an opportunity there, especially once we price in the early spring weather. It might be an opportunity for livestock producers to get some cash feed bought.

Paul Yeager:  Real quick range then. Do you like that December contract to be buying or are you holding out a little bit?

Shawn Hackett:  Because of our early spring forecast, we still think there could be some downside into that March, early April timeframe. We're not sure we fully priced in that kind of bearishness, but we're looking for that timing window to get our cash purchases made for our livestock producers.

Paul Yeager:  Tuesday, we were almost at a point there was talk of you should be reowning some soybeans. And then it kind of changed as the week went on. Do you see soybeans having any more strength to them or was this just a little blip this week?

Shawn Hackett:  You know, we traded the Argentina drought. We've gotten some rains. I do think drought is probably going to come back. But, you know, it's hard to get the weather market going again once you break the back of the psychology of the market. At the same time, when we look out at the renewable diesel demand that's coming for bean oil later in the year into ‘24 and I look at the numbers, they don't work.

Shawn Hackett:  They don't add up. We're talking about having 14 million more acres. You know, our exports having to drop significantly. How much are buyers going to let the new crop soybean prices go down when we're already in the 13 level, the 13s? I don't know. I just everyone seems to be thinking there's bearish soybeans. I just feel that once again, if we get an early start, soybean acres might be down, weather problems come back.

Shawn Hackett:  I just think soybeans are likely more favorable at this point on the new crop than people are suggesting.

Paul Yeager:  Favorable to bounce back. Because the chart we just showed that you saw how it fell out of bed there in the last two weeks and then a bounce back up. So you're favorable. What's a range then on that November contract?

Shawn Hackett:  Well, the chart has a strong, strong support level at 12. Doesn't mean it has to go there, by the way. But I mean, I am I feeling as if we've got ourselves beared up on the weather problem is over, we got the big crop coming from Brazil and we get an early start to the crop. If we saw a 12 handle on soybeans, I'm thinking that's a place for end users to be looking at cash purchases and needs.

Paul Yeager:  All right. Livestock, live cattle, this is a continued consumer. We keep hearing about inflation pulling back. Maybe the consumer -- the consumer has been buying beef this whole time. What's the live cattle market telling you at least chart wise?

Shawn Hackett:  We’ve started to weaken, you know, in both hogs and cattle. I just don't think the demand is going to hold up. And even though the animals are thinning out, the cattle feed continues to show the cattle numbers coming down. I still feel there's a mismatch with demand versus supply, at least going in to the second quarter. Once we get beyond that, you know, and the China has the reopening that we think is going to cause a boomerang for demand and the effects of the Fed rate hikes kind of get in the rearview mirror.

Shawn Hackett:  And of course, those animals continue to thin out we're pretty optimistic the back half of ‘23 into ’24, we could see that retention, herd rebuilding cycle like ‘13, ’14.

Paul Yeager:  Well, you could make a case last week's cattle on feed said that maybe we'd already turned that corner. Do you think we have on the feeder market?

Shawn Hackett:  I don't think we've quite turned yet. I think we're really, really close to doing it. I think it like, once again, the issue I have is if we're correct about drought coming back, there still could be a little more that drought effect liquidating animals. And I want to be very careful about not, you know, jumping the gun here.

Shawn Hackett:  I'm really confident about drought coming back. And I think the more probabilistic forecast is to say later in the year is when that's really going to hit the road.

Paul Yeager:  Hog market, I've kind of shorted it the last couple of weeks. I need to spend a little more time there. You mentioned China reopening. Is that going to be a savior to this market? Is that why we saw finally an end to some of these tough weeks we’ve had?

Shawn Hackett:  Hog prices in China which we watch very closely have really started to rebound significantly. Cotton prices in China have really started to rebound very, very strongly. Stock market in China is up big. The currency, Chinese currency up big. I think the capital is getting ready for this boomerang effect in the back half of ‘23. Obviously, pork demand is going to be beneficial to that.

Shawn Hackett:  As much as we have not been really rebuilding the herd here, we still need Chinese demand to get the excess off the top.

Paul Yeager:  Do you see an expansion of the hog herd in the United States and is that a good economic decision to make?

Shawn Hackett:  I would have thought we would have seen it by now. I've been kind of wrong on that thinking we would have seen the expansion by now and all we've been doing is adding weights and keeping the animals the same. I have to believe we're going to start to see some kind of a movement in the upward direction as we approach the latter part of the year.

Shawn Hackett:  But it's supply and demand, and if China's there with bated breath to buy that excess or increase in the herd may not be a bearish factor.

Paul Yeager:  Final few seconds. Let's talk energy. We hear this. We're going to rebound up to $4 again on gasoline. We hear it we saw it earlier in Peter’s piece about inputs. I have a great question about selling ahead and not clearing a profit right now. We'll get to that in Market Plus. But I'm asking you this question is Shawn, which do you like better?

Paul Yeager:  You mentioned biodiesel or ethanol or crude oil. What do you like better in the next quarter here of ‘23.

Shawn Hackett:  In the energy complex? I mean, I really like energy as a whole. When you look at the Strategic Petroleum Reserve selling ending, you look at the inventories in the US falling off a cliff, you look at potential geopolitical escalation and Russian supply coming off. I really feel that's the energy complex is looking for some better prices here.

Paul Yeager:  And we'll continue that in a moment. Shawn Hackett, good to see you. Thank you.

Shawn Hackett:  Thanks, Paul. Always glad to be here.

Paul Yeager:  All right. That will do it for this analysis. We're going to pause it for a moment. We'll continue that discussion, your questions and our Market Plus segment. You can find that on our website of markettomarket.org. Winter days and nights can be filled with a little reflection and learning. Head back to school with our market to market classroom project.

Paul Yeager:  Go to markettomarket.org/classroom to get enrolled today. Next week we talk to one producer about finding life and work since they've returned to the family farm. Thank you so much for watching. Have a great week.

Speaker 5 Market to Market is a production of Iowa PBS, which is solely responsible for its content.

Speaker:  What's next doesn't happen by chance. It happens when researchers and farmers work together to solve tomorrow's agronomic challenges. We're committed to creating what's next because at Pioneer, our name is our mission.

Speaker 3 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.

Speaker 4 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.