Market Plus: Arlan Suderman

Jan 24, 2020  | 12 min  | Ep4523 | Podcast


Howell: This is the Friday, January 24, 2020 version of the Market Plus segment. Joining us once again is Arlan Suderman. Arlan, welcome back.

Suderman: Good to be back.

Howell: You've got your first Market to Market broadcast under your belt now, very exciting.

Suderman: I feel like a veteran.

Howell: (laughs) Well, you definitely are when it comes to analyzing the commodity markets. One commodity we did not get to touch on during the main program, Arlan, was the cotton markets. They've had kind of a down week this week being really beat up it seems.

Suderman: It was a rough week for the cotton market and trading around that 70 cent level now on the board. And there's a couple of stories that are related that are really impacting this market is farmers in the South are getting really close to finalizing those planting decisions. And certainly one would be the Phase One trade deal with China. China is definitely going to play a role in the global cotton market. How much are they going to be purchasing? And what are we going to see them purchase from the United States? But related to that is the coronavirus story. If coronavirus becomes a significant problem in China a couple of aspects that plays into it, first of all means that it slows down commerce in China, is a drag on their economy which is struggling anyway, could pull them into a recessionary situation and some of those purchases that contain cotton in them would be considered maybe discretionary purchases, might slow down as purchases. You also look at the crude oil market that broke hard this last week, partially because of coronavirus, because if people aren't traveling they're not consuming oil, they're not consuming energy and we obviously know that one of the big alternatives to cotton is the polyesters and some of the manmade fibers. And so as they become cheaper then that becomes more competition for the cotton. So really China related, coronavirus related, need to keep an eye on what's happening there.

Howell: Okay. And you also mentioned that we're waiting to see kind of where acres sum up for the 2020 year. It's crazy that we're already talking acreage when we still don't have some acres harvested in the Dakotas and what not. But Arlan, what are you looking at, I know Informa released some acreage numbers that seemed pretty high compared to other expectations. Where are you putting acres for corn, soybeans, wheat and cotton for the 2020 growing season?

Suderman: I think we could see cotton come up a little bit in here again those final few percentage points can shift depending on what the market does here over the coming weeks. But when we look at corn and soybeans between those two crops we have really been right around 178.7 million bushels acres for the two combined over many recent years with the exception of last year obviously. I anticipate us trying to get back to that level. And I was at about 92.2 million acres, then December corn hit the $4 level and I raised up to 94 million, which is lower than some. But I'm not quite as aggressive, I don't think farmers are going to be as quick to expand above that as what some do. That puts soybeans at about 84.6 million bushels, million acres combined. So that increases the soybean supply, increases corn supply, puts the requirement that we do get some more demand in there in order to have a reason to sustain a rally, be looking to China for that. Wheat I thought we would come down a little bit more than what USDA says. I was about a half million acres below where USDA said. I think we still may see that. We've got a lot of problems still in the Southwestern Plains where we may not get harvested, some wheat still trying to sprout or waiting for moisture to sprout, could be a problem and we'll really need to see what happens in the spring wheat belt as far as acres. You mentioned the corn that is still not harvested in the Northern Plains, we could end up with the heavy snow pack they have some of that maybe not be harvested until April or even May if some of the weather forecasts we see kind of hold out true. I hope that's not the case.

Howell: Yeah, I hope so too for those farmers' sakes. But Arlan, you mentioned USDA there, so we've got a question talking about just that. We've got a question here from Ken in Nebraska. He said, what is your take on the revisions USDA did with corn, feed and residual from previous growing seasons and what it might mean for grain markets moving forward?

Suderman: Yeah, I've been a big defender of USDA NASS. There's two divisions of USDA to put out the numbers. There's WASDE, which is given permission to use judgment and we'll argue with the judgment at times. USDA NASS is really stuck behind their numbers. I may disagree at times with the processes they use to get those numbers but they had a system in place and they've always tried to stick to the integrity of the process and report the numbers as they come. They deviated from that somewhat in this last report when they went and backward revised down the September 30 stocks report 107 million bushels because they thought the feed usage number needed to come down. They didn't really have data to back that up, that came from surveys, they just thought it needed to be so they used judgment and that is a deviation. And I asked Lance Honig, head of the crops division, when is the last time this has happened to this extent. He says, well I can't remember another time when we did. And that makes it more difficult to defend them in that process. I would rather they stuck with what the numbers said. I do think that WASDE is underreporting feed usage, a lot of people want to say last year's crop, or the '18 crop was smaller than what USDA reported. I think the bigger issue is the size of demand. I think feed usage is actually larger and that means that tighter stocks to use ratio and would have a better more positive impact on prices.

Howell: Arlan, since you mentioned demand there obviously that is one of the biggest drivers of prices and we've got a question here from Steve on Twitter wanting to know what will be the signs of real demand in corn and soybeans?

Suderman: On soybeans first I think if we're going to have hope of real demand in the next six months we need to look to the domestic market for the crush. The problems with the crusher in Argentina having financial problems is sending more business our way. We are seeing tighter oil supplies. And then related to this, I'll move over to corn now, I don't expect to see massive sales of corn to China. It could happen but I don't expect that, maybe 1 or 2 million metric ton, which would be 40 to 80 million bushels. That is really not going to change the marketplace. But the opportunity is there for significant ethanol and DDG sales to China. If they do that that would obviously help margins in the ethanol industry. But we were exporting really a couple of years prior to the trade war we were exporting up to 7 million metric tons of DDG's to China. If we would go back anywhere close to that level that would dramatically increase the demand for soy meal here in the United States. So that's what I'm really watching for. I think that is the key is watching for DDG and ethanol exports to China, that will help both corn and soybeans.

Howell: Arlan, I know you guys have a lot of offices all over the world. Tell me a little bit more about why you don't think China will be importing any U.S. corn any time soon.

Suderman: Well, China first of all doesn't want to if they don't have to because one of their main objectives is raising the income level of their rural population. So they want higher prices in China and they have been looking at $7, $8, $9 corn prices there. They want to keep that. If they flood the market with U.S. corn then that suppresses their prices and farmers quit producing. But the other hand is African swine fever is hurting demand. They are still consuming more than they produce and so their supplies are coming down. USDA a little over a year ago upwardly revised the size of China's stocks, we had talked to them prior to that, they overdid it, went too far. We believe the size of China's reserve is about 56 million metric tons, about 2.2 billion bushels, similar to U.S. stocks and that is really pretty small relative to demand and I think once they start stabilizing livestock production there demand is going to be there but also demand for ethanol.

Howell: So there's definitely some differing of opinions between the USDA and the commercials, that is indicated with basis and a little bit with what you're saying as well. We've got a question here from Mitch in Hull, Iowa. He said, if we really produced the corn crop the USDA says we did why are cash basis levels so tight?

Suderman: Well, one reason cash basis level is so tight, the other argument would be is that farmers are cash flush from the government so they don't have to sell so they're not. And we need to have over 250 million bushels per week to feed the supply pipeline. But I think it's both. I think the crop is smaller but we can't focus our marketing decisions on what we think, the market is going to trade what USDA says. Going back to 2009 we had another late, wet, low test weight crop and in that year in the June 30th stocks report we had a bullish surprise in the stocks report that inferred that feed usage was over a half billion bushels larger than normal during that preceding quarter. And I think we're looking at a similar surprise in either the June 30th or the September 30th report or maybe split between the two this year because first of all you take a wet, low test weight crop, and I presented this to USDA back at that time and they actually did a study to see if they wanted to change their procedures and I talked to Lance Honig in November, he said no we didn't change anything, we're just going to do the best we can again. You take a low test weight, wet crop and put it in the bin, you take a lot fewer bushels out because there's a lot of shrinkage in that bin than when you dry it. And so farmers are reporting more production than they really had in actuality. The other factor is it's low test weight because it has a low starch content. That requires more bushels to make the livestock gain or the ethanol produced. One livestock producer is telling me he's having to feed 2% more corn in order to get the gain that he needs and I think we're going to see that and that wasn't even the lowest test weight corn. I think we're going to see higher demand and lower stocks come out as we go through the year.

Howell: Okay, Arlan, I've got a good kind of softball question then to end things on for today. We've got a question from Matt in Amherst, Wisconsin wanting to know which commodity has the most hope and which has the least hope for the 2020 season?

Suderman: I put that question out in one of our Twitter surveys and it came out pretty well evenly split among farmers and what they think. Because of African swine fever I'm less optimistic about soybeans unless we can sell a lot of DDG's to China and increase consumption of soy meal here in the United States sufficiently and continue to have problems in Argentina. Wheat I think will see some increased business but we've got a bigger supply there and a lot of competition in the Black Sea. So I think corn has the best opportunity and what I'm really watching for again is whether China makes large purchases of ethanol. Our ethanol freighted to China is a little over $2 a gallon. That is almost half their gasoline prices. So the math works for them to do it. It's just will they do it. And we know our buyers over there saying they want our DDG's if China will just allow them to have it.

Howell: All right, Arlan Suderman, thank you so much.

Suderman: Thank you.

Howell: Join us next week when we’ll look at how a group of beekeepers are using groundbreaking methods to fight colony collapse disorder and Elaine Kub will sit across from me at the Market to Market table. Until then, thanks for watching, listening or reading. I’m Delaney Howell. Have a great week!

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