Market to Market - June 17, 2022

Coming up on Market to Market -- Using trade talks to ease world hunger. Sweeping changes to the landscape at Yellowstone. Climate takes center stage on Capitol Hill. And market analysis with Ted Seifried, 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.  

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.

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

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Hello, I’m Paul Yeager.

The year was 1994 - NAFTA was signed, Jeff Bezos founded Amazon and the Federal Reserve raised the key interest rate by 75 basis points. 

The Fed dusted off the nearly 30-year old playbook to fight the highest inflation in over four decades by tightening monetary policy. 

Spending weakened in May as retail sales fell 0.3 percent. A large drop in vehicle purchases played a big role in the reading. 

The Rural Mainstreet Index dipped below growth neutral for the first time since September of 2020. A reading of 49.8 was reported by the monthly survey of bank CEO’s in rural areas.

While the Federal Reserve tried to cool the demand side of the ledger by making borrowing costs higher, Congress worked to ease the supply side.  

President Biden signed the Ocean Shipping Reform Act into law this week - aimed at reducing export backlogs and logistical costs. 

Global trade is more than just sea-going vessels, but some see it as a rising tide which could lift all boats.  David Miller explains. 

The World Trade Organization met this week for its 12th Ministerial Conference. Issues on the table included everything from intellectual copyright for COVID-19 vaccines to negotiations over agricultural subsidies.

As the week ended, an agreement on subsidies for fisheries seemed close at hand.

Ngozi Okonjo-Iweala, WTO Director-General Director – General "We all know that a healthy, productive, sustainable blue economy is one where our oceans are replenished, where our fish stocks are also healthy, and where fishermen and fisherwomen who depend on such resources continue to earn a decent living…I just want to say that we have come quite a long way. And even that to me, I can see today, I cannot have imagined we would move along so fast a year ago. So there is considerable advance and we hope we can land this.”

 

After more than 20 years of negotiations on the issue, more than a few diplomats were optimistic about reaching an agreement.

Director General Ngozi Okonjo-Iweala was also hopeful about the possibility of further discussion on agricultural subsidies. Any kind of agreement has remained elusive since the failed attempt to make a deal during the Doha negotiations more than a decade ago.

Ngozi Okonjo-Iweala, WTO Director-General Director – General “A trust deficit has existed dating back to the breakdown of the Doha round, and even before, took its toll.”

The WTO chief insisted that trade has lifted 1 billion people out of poverty, but poorer countries – and poor people in richer ones – are often left behind.

In other trade deals across the globe, several countries have joined together to help mitigate food price inflation. The United State Meat Export Federation is reporting that South Korea has joined Mexico, the Philippines, Taiwan, Vietnam and Brazil in lowering or eliminating a few food-trade tariffs. Some of the cuts build on previous agreements already in play.

Erin Borror, Vice President of Economic Analysis, USMEF: Mexico eliminating tariffs on beef, pork and poultry, that’s a bigger step than we’ve seen from them in the past.

Korea’s announcement is a duty free quota on pork that is expected to be 50,000 metric tons. The move will help many nations, several of which have yet to negotiate Free Trade Agreements or FTAs with the republic.

Erin Borror, Vice President of Economic Analysis, USMEF: Brazil and Mexico are expected to be the potential big beneficiaries of that duty free pork quota that’s been announced. That’s because they pay the 25 percent tariff on frozen, 22.5 percent on chilled, which is relevant just for Mexico, and even for Canada that has an FTA with Korea, their 8.6 percent tariff this year.

U.S. producers already benefit from the 2012 Korean U.S. trade agreement or KORUS. The tariff for U.S. pork imports to South Korea are now zero while beef imports to the Southeast Asian country are charged a 10.5 percent duty. Provisions in KORUS will cut that tariff to zero in 2026.

For Market to Market, I’m David Miller.

Hundreds of cattle died in Kansas this week due to heat stress. 

More than a dozen tornadoes touched down in eight states.

However, we start our weather wrap with significant flood damage in the nation’s oldest national park. 

Here’s Josh Buettner. 

Floodwaters at their highest level in nearly a century swept through Yellowstone National Park.

This cabin on the bank was swept away into the torrent of water and into the Yellowstone River. Roads were washed out making much of the northern part of the park inaccessible for the remainder of the summer.

Much of the region here has been locked in drought for months even as days of rain and rapid snowmelt wrought havoc on southern Montana and northern Wyoming.

The look at weekly rain shows continued precipitation in the Upper Plains, extending east towards Ohio.

In Iowa, a heavy band of showers flooded fields as some locations experienced five inches of rain in just a short period of time. This area near Ames was inundated mid-week.

Just hours before, extreme heat hit the same region. Temps nearing the century mark were common with more in the forecast. More than 100 million Americans were under advisement to stay indoors in regions from the Gulf Coast to the Great Lakes and east towards the Carolinas.

Drought is still a main concern for the West as conditions have gotten worse. However, the entire continental U.S. had the lowest reading of drought since September with just over 57 percent of the country in some form of drought.

For Market to Market, I’m Josh Buettner.                 

Southwest monsoon season kicked off Wednesday and runs until the end of September. 

This time period is usually responsible for half of the annual rainfall in the region.

But it is going to take a lot of weather events to change the water story and habits of those living under severe drought. 

Peter Tubbs reports.

This week, the Senate Energy and Natural Resources Committee held a hearing on the growing drought in the western third of the United States.         

John Entsminger, Southern Nevada Water Authority: “What has been a slow motion train wreck for 20 years has been accelerating, and the moment of reckoning is near.”

The two-decade old drought has dropped the depth of the nation’s two largest water reservoirs, Lake Mead and Lake Powell, to levels unseen since the reservoirs were first filled over 60 years ago. The dwindling flows of the Colorado River are making it more and more difficult to meet the contractual commitments of water service to various cities and states in the region. 

Camille Touton, Bureau of Reclamation: “But in the Colorado River basin, more conservation and demand management are needed in addition to the actions already underway. Between two and four million acre feet of additional conservation is needed just to protect critical levels in 2023.”

An acre foot of water is roughly equivalent to the annual water usage of a family of four. 

Scientists have estimated that the current drought is the worst in the region over the last 1,200 years.

Much of the discussion centered around future water usage.

Maurice Hall, Environmental Defense Fund: “We do have options, but, we have to manage for the rain and snow patterns that climate scientists tell us we are in for, not for the patterns we long for.” 

Patrick O’Toole, Savery, WY: “I graze my entire operation in the National Forest. It is dead. It is not generating water. The headwaters of the Colorado River is not generating near the numbers of acre feet that it should be because the forest isn’t functioning.”   

Sen. Mark Kelley, D, AZ: “If basin states cannot reach an agreement, is the Department prepared to take actions to impose restrictions on other states without regard to river priority?”

Camille Touton, Bureau of Reclamation: “Yes we will protect the system. But we are not at that point yet.” 

The struggle between thirsty crops and thirsty city residents was the crux of some of the testimony. 

John Entsminger, Southern Nevada Water Authority: “Congress needs to make massive investments into agricultural efficiencies. I agree with Mr. O’Toole that we need to prioritize food security, but we can’t balance the structural deficit by evacuating cities. So we are going to need to make our ability to grow the same amount of food with less water a priority.”

Sen Mike Lee, R, UT: “What can you tell me about the Bureau’s priorities moving forward as they relate to water levels at Lake Powell?”

Camille Touton, Bureau of Reclamation: “What we are prioritizing right now is short term. What actions to make up for that 2-4 million acre feet in the basin, to help protect Lake Mead and Lake Powell. Because all of the actions that you mentioned, of the 1 million acre feet that we did this year, buys us a year, and we cannot be in the same place next year where we are talking about critical levels to protect power pool.”

The National Weather Service expects drought conditions in most of the Southwest to worsen through the summer.

For Market to Market, I’m Peter Tubbs. 

Next, the Market to Market report.

Weather took over most market headlines this week as hot and dry baked much of the grain belt. For the week, the nearby wheat contract dropped 37 cents, while July corn improved 11 cents. The bulls that dominated the soy complex were hard to find after last week’s rally. The nearby soybean contract fell 44 cents. July meal jumped $9 per ton. July cotton shrank $1.61 per hundredweight.  Over in the dairy parlor, July Class III milk futures lost $1.01. The livestock sector was mixed. August cattle put on 38 cents. August feeders decreased $1.53. And the July lean hog contract improved $5.52. In the currency markets, the U.S. Dollar index dropped by 47 ticks. July crude oil weakened by $10.81 per barrel. COMEX Gold lost $40.20 per ounce. And the Goldman Sachs Commodity Index fell just over 41 points to finish at 754.30.

Yeager: Joining us now to provide some insight, Mr. Ted Seifried. Hello, sir.

Seifried: Hey Paul. How's it going?

Yeager: Hot and dry, that's how it's going.

Seifried: Yeah, it's a little warm out there.

Yeager: It's warm for June. But it's warm and hot in wheat country but they're used to it at this time of year. Winter crop is coming out below expectations or below average in some parts of Kansas. Is that a bell weather for the rest of the Wheat Belt when it comes to winter?

Seifried: Yeah, it should be. Any time you have lower production like that it should be supportive for prices in the market. But we're already at some very, very good prices. We were quite heavy on Friday. So the question is, harvest pressure, when are we going to be done with that? I would think that in a year like this where as you said yields are coming out well less than, when you say expectations --

Yeager: I shouldn't have said expectations. Average.

Seifried: Right, what we were thinking when we planted. How's that? This crop is a lot smaller than what we were thinking, what we were intending to have. So when that happens you've got a fair amount of wheat that has already been sold so it doesn't have to go, when it comes to town the cash doesn't have to go to market. And whatever you are doing, whatever is getting sold, it's probably going to dry up sooner than it usually does. So I'm thinking by the time we're 40% to 50%, maybe 45% harvested that harvest pressure should probably be done. In a normal year you say 60% to 70% harvested, that's when the harvest pressure lifts and we start to get that post-harvest rally. This year I think that happens earlier. So it might be within the next week or so. But, again, that kind of depends on what is going on with row crops I think and it also kind of depends on what is going on with the whole macroeconomic climate that we have as well.

Yeager: We're going to get to the macro everything here in a minute. But wheat has been this, I won't say accordion, but it has kind of been the same 30 to 40 up one week, back down the same amount. We know volatility is here more. But why is that such a story?

Seifried: You know, we found a level that really I think we were sort of value priced in wheat and without seeing a huge increase in exports it's tough to say that the initial spike that we got from the Ukraine or the Russian invasion of Ukraine, it's hard to say that was really justified. In fact, at the time it was a short squeeze. It wasn't really fundamentally justified in my opinion. Now, since then we've had some bullish things happen for the wheat, obviously drought, obviously low yields, production issues not only here but in other places as well, that have kind of come in to justify some of these higher prices. But whether we go higher or not I think really hinges on hey, are we going to see this influx of business coming for our wheat export program? And we haven't seen that so far. I think you have to have really big doubts about that. So yeah, again, I think wheat can recover after we get past the harvest pressure. I think there can be some more upside but it has to come from strength in the row crops. I think at this point wheat would be the follower.

Yeager: Is corn the leader then this week?

Seifried: I think corn and soybeans really kind of trade off being the leader. You go back a couple of weeks and soybeans really were the leader and the cash market in beans was really very tight. But then this week you saw that the basis at the Gulf and everything really started to kind of fall apart, or cool off, pretty significantly for beans. Crush margins have cooled off very significantly for beans. But then when we look at the weather forecast, corn kind of takes that leadership role because that is the one that we look into a climate prediction center outlook for July of above normal temperatures and below normal precip for much of the growing area and we know July is the key month for corn, the yes, corn is going to take the lead.

Yeager: And if you believe the photos that you see on Twitter or online, wilting crops in Illinois, good corn country, Indiana, nothing growing in Ohio if we believe what Glen is showing us. We know the story in North and South Dakota, Minnesota. There's a part of Iowa that didn't get the rain this week. They're going to see 100 degree temperatures real fast. This is June. Is that a problem?

Seifried: Yeah, so you kind of touched on a couple of different things there. The planting issues that you had in North and South Dakota and Minnesota, that is something that is a problem. I don't think we're going to get the intended corn acres, which was down from what we really needed anyway. So I'm worried that maybe we don't have that 89.5 million acres of corn. But as far as the heat that we're having in June, we were behind on this crop. We needed the heat to come in to try to catch up. And yeah, you're pineappling a little bit in the evenings and there are some areas that are going to have problems, we have this every year. June is not the month that we really focus on as far as weather. That is all going to happen in July. I really don't see this hot and dry that we're having right now as being a major problem for the corn crop unless it continues into July, unless those climate prediction center outlooks are correct with above normal temps and below normal precip. If you're following a month like this up with a month like that, then we really do have a problem. So it all depends no the forecast. And after we come back from a three-day holiday week we'll see what that forecast has to say and that will really dictate what we're going to do. It's almost just like a second 4th of July holiday weekend that we're having two weeks, it's a dress rehearsal for the 4th of July holiday weekend.

Yeager: I want to ask you a question about something I've asked you before but it's a follow up that came in from Mitch in Hull, Iowa and we thank you for all of your Twitter and Facebook questions that come in. Mitch is asking you, Ted, how do you feel about marketing 2023 new crop corn and/or soybeans given uncertainty on input costs that far out?

Seifried: Yeah, input costs are starting to come down as sort of predicted. And if you're a believer that we're going to see an inflationary bubble burst happen between now and next growing season, that would suggest that we're going to be paying quite a bit lower for input costs. It would also suggest that corn prices could be quite a bit lower by that time too. So I'm really urging a lot of my guys to be between 15% and 25% sold for '23 already at this point and we're looking for ways to kind of get a little bit higher numbers there by the time we get past the 4th of July. I want to be careful because I do realize that there is fairly significant upside potential in the short-term based on weather forecasts, based on a blow off top in the inflationary climate of the market. But I really worry about where we're going to be even going into this harvest and then for the next following couple of years. This time last year, Paul, being here I was not really very bearish for harvest of the following year. I really thought this was going to stick around for quite a while and it has. But now you see the cracks coming in the foundation in the form of what is happening with the stock market, what is happening with cryptocurrency. A lot of the wealth and money flow in the economy that has created this inflation has kind of disappeared, gone away because of the wealth destruction that has happened in other markets and we have to take notice of that. We have to realize that over time that, along with higher interest rates, will really go a very long way to not only busting this inflationary bubble but really taking us to a period of deflation possibly.

Yeager: We have a couple of questions about inflation that we'll get into in Plus but I'll just ask you right now, what is the impact of a I think you said blow off top or we're back below 30,000? What does that mean for commodities?

Seifried: Commodities are directly impacted by inflation because that's the thing, when there's more money in the money supply then the money is worth less and commodities have to be worth more. That is really the definition of inflation. But the thing is, when you're taking money out of that money supply, that leaves that inflationary bubble at risk for bursting. When it does what happens is the products that you use these commodities to make, i.e. beef, i.e. ethanol, things like that, in an inflationary climate it's okay to have high priced inputs because the products are high priced and people are willing to absorb that. But when you have that inflationary bubble burst and people are not willing to absorb those higher prices and pay those higher prices for the products, that demand starts to, that's what we call demand destruction, demand starts to go away. Then the inputs have a problem because they can't be high priced if the products that they're making, if that demand is going away, so the demand for the inputs goes away, i.e. corn. So yeah, inflation goes away that's a big problem for grains. I'm going to argue there's probably about a dollar to two dollars of value in corn, of the price in corn that is 100% tied into inflation and if you take the inflation away and even if you're still looking at the same balance sheet or possibly even slightly more bullish, I still think there is a very sizeable down draft that can happen in corn prices just because of inflation. Go back to 2007, 2008 and 2009 and you'll see what I'm talking about.

Yeager: You've touched a lot on beans. Real quick, are you doing anything right now with beans? Are you buying? Are you selling? Changing positions?

Seifried: I have a hard time being bearish old crop beans. And like I said, I think there is this one more big inflationary push and I think one more potential big weather push as long as the forecast doesn't change over the three-day holiday weekend. So I'm being a little bit patient. New crop beans same thing as corn, I'm asking guys to be 60%, 65% sold for new crop. I think you can have sold old crop bushels laying around just to see what happens towards the tail end of the marketing year where we're supposed to be running out of beans. But you've got to be fairly aggressive at these prices pretty much across the board. You've got great prices, take advantage. If you want to reown with call options I'm all for something like that. But don't just sit on the risk of a $2 drop that could happen at any given time. Look at crude oil on Friday.

Yeager: Well, energies in general, we could talk about that. I need to get into cattle. I mentioned the deaths in Kansas in the feedlots. Is that pulling live cattle down? Is that impacting live cattle in any way, this weather story? That's the reason they're in the feedlot in the first place. It's more of a feeder story when it comes to inputs. But what is the big story for you here on cattle?

Seifried: I think my biggest takeaway because there's a lot of rumors and speculations swirling around that event, I'm not going to partake in that. But what I will say is that it really highlights what these very warm temperatures very early in the year can do. So you've got to be a bit worried about weights I think going forward. You've kind of had this sort of push pull thing going on in the cattle where we're worried about hot temperatures and weights and what the production and supply is going to be but at the same time we're really worried about demand because we see the stock market pretty much down every day and big unprecedented plunges that we've had since the beginning of the year. So we're worried that our 401Ks aren't as robust, so people aren't going to go and spend those high prices for beef at the grocer's counter. I think we are going to keep doing that for a period of time here, Paul. People want to go out and act like it's 2019 where we're unrestricted. A lot of people were still very restricted last summer. People want to go out and live that lifestyle again and they'll do that until at least the 4th of July if not mid-July. It's the later half of the summer when the consumer starts to pull back, that's when I worry about cattle prices, then corn prices, really just the whole board I think gets really dicey towards the end of the summer into the fall.

Yeager: And with feeders you kind of touched a little bit on that. I need to get into hogs because they are, again, like what wheat has been doing, way up, way down, kind of the same thing. $5 back up this week after $5 last week. What's going on? How do you make sense?

Seifried: I mean, quite a bit better than expected export sales this week. That was really good to see. Cutouts started to raise again, that's really good to see. And I'm sort of frustrated with the hogs because I can see the hogs trading higher prices, I really think domestic demand is going to be rather strong. If we're talking about people balking at going to their grocer and paying $24 for a one pound ribeye, for example, well then just look right next to it and you've got pork chops at really very low prices. So if we're saying that demand in beef is going to get cut because of the drop in the stock market, well then what are people going to look at for an alternative? And you've got a cheap pork product sitting right next to it. I think the pork demand is going to really get stronger and stronger throughout the course of the summer. I think you're going to see a shift away from those high priced steaks into pork chops and things like that.

Yeager: Thank you, Ted, good to see you.

Seifried: Always a pleasure, Paul.

Yeager: All right, that's going to do it for the installment of the TV show Market to Market. We're going to keep going in Market Plus because I cut Ted off so we have to keep going. Find it free on our website of MarketToMarket.org. Now, YouTube has something for everyone including full episodes, stories and our Market Plus. Subscribe by going to our page of MarketToMarket. Ring that bell to be notified each time that we post. Next week, the future of greyhounds after the race is over. Thank you 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.  

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.

(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.

(music)