Market Plus: Arlan Suderman

Apr 24, 2020  | 14 min  | Ep4536 | Podcast


Yeager: This is the Friday, April 24, 2020 version of the Market Plus segment. Joining us now, Arlan Suderman. Arlan, good to see you. Biggest question I have looking at your basement is, are the folks of Kansas, the Kansas State fans, are they really wanting sports? Are they like everybody else, they just want to have some sense of normalcy? Do you want to go see the Wildcats run out there in Manhattan this year?

Suderman: Absolutely. I think all of America is waiting for sports to come back and I know we're particularly anxious for football to get going here in Kansas.

Yeager: Well yeah because you just won the Super Bowl too. Monday was a weird day, Arlan. I asked Tomm Pfitzenmaier here a couple of weeks ago, I said, how low does oil go? I said teen? Low teens? We skipped teens and went backwards. How many people have asked you this week what on Earth does negative, how is that possible?

Suderman: Yeah, and it's really a function of the markets working. We had somebody carry a long position or an ownership of oil into the last couple of days before required delivery and expiration of the contract. And so they had to get rid of it then, a speculative position that they weren't prepared to take delivery of that oil and their contract was going to require that they accept delivery if they wrote it all the way out to expiration and they couldn't do that so they had to unwind it one or more contracts, how many we don't know. And so they got caught in a long squeeze and the market made them pay for it. Well, the job of the market at that point was to find a price at which somebody would take it off their hands and do so in an environment where there's no storage available. So whoever had to take it had to have some storage available and that's in very tight supply right now. The market -- it meant paying somebody to take it off of their hands. That's what negative prices are and the market found that and then recovered the next day going into expiration.

Yeager: I was trying to explain that to my kids this week. It was not the easiest of discussions. They said, you can pay us to take anything you want. The thing about I think you said you're about 4 hours from Cushing, Oklahoma. That's where we hear about. Is there any room in any of those tanks left?

Suderman: There is but it's all spoken for and it is being filled by the people who spoke for it basically on land storage prior to this and it is a market driven factor on storage. About 35 to 70 cents per barrel per month whereas floating storage on ships is running around $1.20 a month per barrel so obviously the on land was the first to be taken up and the fact that we have so much floating storage already being utilized upwards of 160 million barrels already means that the on land is already spoken for and being used.

Yeager: Rate all the weeks that we've been in this. So let's go to the middle of March. What has been the worst depressing week of things you can pick just understanding this? I feel like we're in the stages of grief. Which one of these weeks has been the worst? This one has to be up there, right?

Suderman: Yeah, but I really go back to when we saw the ethanol industry collapse, that first week when we saw those margins collapse and plants starting to shut down. So the futures market for corn was breaking hard as was the basis market. When you see basis drop 35 to 40 cents at the same time the board is dropping sharply that's where my heart goes out to those farmers. Yeah, you can say they had a chance to sell ahead of time but you and I have all been in that situation having grown up on a farm and it's painful, no other way to say it.

Yeager: I cannot tell you how many times I heard, if we can just get $2.25 corn. Now we might unfortunately, if things get worse that might be considered a good thing if it keeps falling. All right, we need to get into one of the depressing stories and the reason I bring up maybe this week was one of the worst, it's about the food industry. Bradley in Upland, Nebraska asked us via Twitter, and we appreciate all the questions that come in via Twitter, Facebook and Instagram, he is asking, how much slaughter capacity, including the shutdowns and enforcing social distancing rules could we lose to COVID-19? You talked short-term on the show, Arlan. Let's talk long-term when it comes to this question.

Suderman: Well, long-term they're going to find a way to get the capacity up there to handle the demand. So, first of all you can start doing things, they're more costly, but putting partitions between people, personal protective equipment, etcetera so they can work closer together. But if we have to add more capacity we will. That takes time to happen. But they will build the capacity and they will expand it in order to meet the demand that it out there in the world.

Yeager: All right. You have clients that are different than what some of our other analysts do, you don't necessarily speak to the farmer directly on the farm, you have other folks that do that, but I need your help though in putting yourself in the place of helping those that are reading your information. Chris in Wisconsin is asking us a question here via Instagram. With prices below cost of production for all sectors of agriculture what if things get worse? Meaning, what should producers do to mitigate greater losses? Give us a little help here.

Suderman: Yeah, the producer will generally keep planting because that's bred into him is he farms in order to grow and to produce and he's going to do that as long as the anticipated revenue is greater than the variable costs. So if there is something left over to go towards fixed costs we'll try to cut those costs as much as possible, that is where they can work with their agronomist, etcetera in order to look at all the various inputs and different types of fertilizer, different types of product they put on to control weeds and insects, etcetera, look at the anticipated return per input cost. Some of them are going to have higher returns anticipated per cost unit than others. But you don't want to cut back on one of your inputs that gives you your highest return. If you've got to cut back, you'd want to cut back on one of them that gives you a lower return. That may be one of the pesticides or something, depends on what part of the Midwest you are, what your particular challenges are that you have to protect against.

Yeager: So it's good to pick up the phone and dial somebody to help walk you through this, it's kind of hard to do this on your own?

Suderman: Absolutely. Get that assistance, there's many different sources of that information out there via the agronomists they already have or with the local land grant university and the extension service.

Yeager: We heard some of that those folks already here on the main program if you want to go back and watch those stories. All right, we talked about wheat and dry conditions in Russia but we didn't talk about the Black Sea as much. Brent in Oklahoma, right there in the heart of wheat country, he's asking, have the poor crop conditions in the Black Sea area factored into wheat price yet?

Suderman: I would say not fully. They have provided some support. One of my observations over the years is that the U.S. wheat market tends to trade fundamentals from Europe and the Black Sea region more than they trade our own fundamentals and so that tends to be a bigger driver of price. It has been very dry, some of the driest that they've been in the last 40 years over the past month and a half in really southern Russia and southeastern Ukraine and now spreading into much of the northeastern half of Europe as well. But the Black Sea really sets the world what price and I helped set up a farm, was on the farm when Boris Yeltsin came back in 1994 and spoke to farmers there and said, you get your wheat from us, the genetics came from us and your yields are three times ours and we will take you over one day and we will become the bread basket and they have done that and they set the world price. So they have a shortfall, they in addition to the dryness affecting yield they are also looking at raising the amount of inventory that they maintain because of coronavirus meaning exporting less as well.

Yeager: You're familiar with Norman Borlaug, right?

Suderman: Mm-hmm.

Yeager: So there was a program on PBS on the American Experience this week about Norman Borlaug and he talked about some of those exact same things that were in play when he was trying to develop the Green Revolution and it's amazing to think how generations, some of those things they haven't changed, they're still here.

Suderman: Yeah, absolutely. Very rich ground in that Black Sea area, some tremendous potential, also highly variable in weather because of the geography and where they are. So they've had wide swings in production challenges, they've invested billions of dollars equivalent in rubles in building infrastructure to handle it.

Yeager: It's a global business now and let's look ahead to 2021. Andy in Mantorville, Minnesota is asking us via Twitter here, he's asking, are we heading in the direction of a return to set aside acres for 2021 and are we back to a feed and export market or will ethanol return to make an impact?

Suderman: I hope as an economist that we're not going back to set aside because what that does when we have currency exchange issues like we do in the world is simply give momentum to our competitors to expand their area even more. If you look at the pasture land available in Brazil where their BRL set new record lows versus the dollar this week so it's highly profitable to grow corn and soybeans there now, the amount of pasture land that they can break out for crop production is equivalent to the Great Plains of the United States stretching from the Canadian border to the Texas Gulf Coast, 200 million acres that can still be broke out. We don't want to give them any more advantage by cutting back production here in the United States. We want to increase our efficiency so we can continue to produce and do so at a more cost efficient way and compete with them.

Yeager: And still continue to produce a lot of grain. I did not push you enough probably on a question earlier when we came to short-term and long-term for a definition. Here Jerod in Oklahoma is going to help me out with this one with a question. He said, when you add up all of the supply chain disruptions, the ASF problem in China and the economic relief that is happening simultaneously across the globe, what will the animal protein market look like this fall? So let's talk about fall in these markets and I'm going to say that that's probably what you meant long-term, what you and I both meant long-term.

Suderman: Yeah, exactly right. And there's a couple of variables here that really matter and the first is when do we reopen America? And then the second is when are people comfortable after that going back to the restaurants? For example, as I talked to our Shanghai office this week they said that the metro in Shanghai is packed, and Shanghai had relatively few cases of COVID-19. The metro is packed now, everyone is back to work and China -- about 95% pollution levels would seem to support that data, manufacturing is about 95%. But the restaurants are very slow to open and people just aren't comfortable congregating yet. Now, they shut down more intensely in China and for a longer period of time and that is what we need to avoid in the United States because the longer we're shut down the more longer it takes before people are comfortable again being back in the restaurant and that is where we get our greatest amount of demand in that protein complex. If we can get that turned around and start reopening states in the month of May and get our economy going in the month of June then I think by fall we can have our domestic meat demand back up to around 90% and put together with what we have in export demand to China which is robust right now I think we can absorb much of the surplus and get back to some reasonable prices.

Yeager: You know us Americans, Arlan, we're sure good consumers. What can Mike and Jane consumer do to help out one of these hog markets, or hog producers or beef producers?

Suderman: If it was a problem of demand not being there for meat, and I just said restaurant demand isn't there, but that's not the primary bottleneck right now. If that was it I'd say go to your local grocery store and buy more bacon, buy more pork chops, buy more steaks on the beef side as well. But the problem is the bottleneck from the producer and unfortunately in our system yes there may be a few small locker plants who might be able to buy an animal off of a farmer and slaughter it for you to fill your freezer, that would help. But unfortunately that's such a small percent of the overall need it might help an individual farmer but not the ,industry as a whole.

Yeager: Arlan Suderman, thank you so very much for joining us. Good to see you, and hopefully next time in person.

Suderman: Yes, very much so.

Yeager: All right. That's Arlan Suderman joining us today. Thank you so very much. Next week we'll explore how COVID-19 is sinking the seafood industry and Elaine Kub will join me to look at the trends in the commodity markets. And this is a quick opportunity I'm going to take and say you're stuck with me, folks. The folks at Iowa PBS have made me the permanent host of Market to Market, the fifth in this show's history. I'll do my best. Please continue to reach out to me if you have any questions, comments or concerns. I've been the social media guy for a number of years, it's been me talking to you anyway. So now let's have some conversations. And we hope you join us each and every week here on Market to Market. We'll see you next time. Goodbye.

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