Market to Market (April 2, 2021)

Apr 2, 2021  | 27 min  | Ep4633

Roads, bridges and rural broadband highlight a new play on infrastructure. Changes in the supply chain after a year of COVID. And market analysis with Arlan Suderman, next.


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.  


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.


This is the Friday, April 2 edition of Market to Market, the Weekly Journal of Rural America.


Hello, I’m Paul Yeager.

One of the many rites of spring across the country is road construction. As far back as the Roosevelt administration, presidents have tried to make infrastructure a tool for improving the nation by proposing big projects and hyping the large number of jobs that would be needed to make those projects a reality. 

This week, the new Biden administration offered up their version as part of the Build Back Better program. This project has more to it than the traditional improvements to roads and bridges, but it was met with a familiar resistance from the opposing party.

John Torpy reports.

Joe Biden, U.S. President: “Is it Big? Yes. Is it Bold? Yes. And we can get it done.”

This week, President Biden travelled to Pennsylvania to promote his American Jobs Plan.

Joe Biden, U.S. President:”It’s a once in generation investment in America. Unlike anything we’ve seen or done since we built the interstate highway system and the space race decades ago.”

In a “nothing’s off the table” approach, the President’s broad sweeping proposal covers a variety of projects. He believes an investment of roughly $600 billion in highway, bridge, and road improvements, a nearly $100 billion boost in nationwide broadband expansion and a like amount of money for green energy upgrades to the electrical grid will make the nation more competitive on the global stage. The administration plans to pay for the eight-year, $2.3 trillion dollar spending package by increasing the corporate tax rate and closing business tax loopholes.

Last Thursday, Secretary of Transportation Pete Buttigieg appeared before the House Transportation and Infrastructure Committee to lay out the administration’s priorities.

Sec. Pete Buttigieg, Department of Transportation: “We see other countries pulling ahead of us with consequences for strategic and economic competition. By some measures, China spends more on infrastructure every year than the US and Europe combined. The infrastructure status quo is a threat to our collective future."

But Republican lawmakers are critical of the scope and cost of the project, saying the piece of legislation has the potential for the addition of unrelated measures.

Rep. Sam Graves, R -- Missouri: "After providing unprecedented levels of COVID related relief this past year, we need to carefully consider what goes into a transportation package. The more massive any bill becomes, the more, you know, bipartisanship suffers."

For Market to Market, I’m John Torpy.

There is still economic optimism among those managing the manufacturing sector in the nine-states that are used to calculate Creighton University’s MidAmerica Index. Despite a slight dip, the index maintained a 10-month streak above growth-neutral. According to those responding, the biggest problem in the foreseeable future will be delays in the supply chain.

Bottlenecks that slow the delivery of goods have been under the watchful eye of Professor John Anderson who heads the Agricultural Economics and Agribusiness Department at the University of Arkansas. A year after our first meeting, I spoke with Professor Anderson about the new normal for supplying and purchasing everything from steel to peanut butter. Our conversation is the subject of this week’s Cover Story.  

John Anderson/Chair, Agricultural Economics – University of Arkansas: “The big disruption was this, this the separate optimization that we had for our food service versus our grocery retail supply chains, and that is a very efficient system. It's still an efficient system, it has a lot to recommend it but in the very specific circumstances of COVID it became a liability at least for a time and honestly, I think having to re-direct that you mentioned dairy right having a fluid milk processing facility set up to only produce half-pint cartons was disastrous in COVID. Right? Because all the schools were closed and nobody wanted half-pint cartons, right? But what do you do with crates full a half-pint cartons when schools are closed, you know, cheese facilities that were set up to do 40 pound blocks of cheese and only 40 pound blocks of cheese when all the retail grocery store wanted, you know, one pound blocks of cheese. I mean, those were the kind of things that really were disruptive and even toilet paper I joked about toilet paper a second ago, but having paper mills that were set up to produce, you know, huge rolls of toilet paper to go in commercial facilities versus regular rolls of toilet paper like you use at home that was disruptive in the specific circumstances of COVID. And I think there were a lot of other things that were happening, obviously, having to deal with social distancing in a in a, in a, in a, in a physical plant, right, where you're doing some kind of processing or some kind of production operation that was disruptive to so there were lots of things that contributed. But I think we're all caught a little bit flat-footed by how much difference it made that we basically had two parallel supply chains. And one of those chains basically lost its market overnight.” 

Paul Yeager: “Okay, you mentioned a couple of things that I think let's see if I'm paying attention, right in class. You're, you're mentioning pivots in production. Yes, that's one thing that happened right away. But now we've come to the point where the pivots happened. And all of a sudden, the hose that we used to have coming in as the supply has been disrupted in many things, like somebody had storage of certain items. And now all of a sudden, it's gone, whether that's food, whether that's making camping gear, or whatever the thing is, how have those supply lines been able to weather and why have supply lines become? Or why are they still a story?”

John Anderson/Chair, Agricultural Economics – University of Arkansas: “Well, I think they're a story because we're still trying to figure out now what optimum looks like, right? What, what, what is optimal now in a post COVID world? We had an optimal arrangement, pre-COVID hyper efficient, you know, everything just in time. very lean operations, really, throughout the supply chain, a minimal number of suppliers, because the fewer people you got to deal with the better so very little redundancy in those systems. And so we had a system that was optimal for the pre-COVID world. And I'm not prepared to say that it's that it's not optimal. Now, it certainly wasn't optimal in 2020. But there are a lot of advantages to that kind of system. It's a very low cost system. It's very efficient. It drives down costs throughout the system. There's a reason that we had that system, right. And those reasons haven't gone away. We're just having to change our calculation a little bit, how much do we need to change our calculation based on the possibility of something like COVID? And so why that's to answer your question of why that's still a story is I don't think that's an easy question to answer. How much do we need to recalibrate based on the experience of COVID? And I think reasonable people can really disagree on that. I don't think it would be unreasonable for somebody to say, you know, we don't need to change at all. This was a black swan event. I mean, let's don't organize our whole system around a black swan, let's find ways of being prepared to mitigate that risk. But but but keep the advantages of these low cost efficient systems. Let's don't change anything. Anything. I'm not saying that's my answer. But I don't think that's crazy answer. You have people on the other side who say no, COVID showed that this is a disaster, that the potential costs of this and the disruptions are too great a burden to bear. And they affect too many people in too many negative ways. So let's completely change the supply system. Let's get shorter supply chains, let's get redundancy built in our system, let's get spare capacity online so that we're not running so lean all the time.”

Paul Yeager: “I think if I look at my notes efficiency translates in the factory world to making money. That's why we have efficiencies. That's right. There could be fewer companies making money because efficiencies are what helped them become, and become profitable.

John Anderson/Chair, Agricultural Economics – University of Arkansas: “That's what efficiencies are, obviously make a contribution to the bottom line efficiency means lower cost. Lower cost means more money. Now more money might mean more profit to the companies operating in that supply chain. Lower costs might also mean a lower retail price to the consumers who are buying those goods. And I don't hear and again, I'm I lean more toward thinking that we're probably going to go back to something that looks a whole lot like what we had pre-COVID probably won't be exactly like it, I think that there'll be a lot more work to, to understand the reliability of upstream suppliers, for instance, and the vulnerability of downstream markets, I think we'll do a lot more investment in understanding our supply chains and having kind of plan B, or C or D in place. But I think Plan A is going to look a lot like what we had pre-COVID in it is because efficiency is so powerful. We understand this in agriculture, right? I mean, we're a hyper efficient industry. We understand economies of scale, we understand the value of technology to drive costs down. And that efficiency, again, keeps you in business, and it keeps your end product prices down. Consumers are not clamoring for higher prices. And they never will.”

This is only part of the conversation. The full interview will be released Tuesday as part of the MtoM podcast which can be found via our YouTube channel of Market to Market or wherever you get your podcasts.

Next, the Market to Market report.

A report from USDA that shocked traders, jolted the market higher as the prospective plantings report came in way below expectations. For the week, May wheat lost 2 cents while the nearby corn contract added 7 cents. A limit up move on Wednesday was fueled by fewer than predicted acres and a lower than expected carryout. It was barely enough to keep the shortened trading week in the green. May soybeans gained 2 cents. May meal improved $6.20. May cotton shrank by $2.43 per hundredweight. Over in the dairy parlor, May Class III milk futures expanded 88 cents. A mixed week in the livestock sector. June cattle expanded 77 cents. May feeders dropped 65 cents. And the June lean hog contract increased 73 cents. In the currency markets, the U.S. Dollar index improved 16 ticks. May crude oil added 46 cents per barrel. COMEX Gold shed $4.70 per ounce. And the Goldman Sachs Commodity Index gained less than a point to finish at 474.15.   

Yeager:  Now here to provide insight is regular market analyst Arlan Suderman. Hello, Arlan.

Suderman: Hello. Good to be back with you again.

Yeager: Good to have you here. I only have two words. What happened? I mean, seriously. You could ask that about anything. Let's start with expectations. Was the herd wrong? Why was the herd so wrong on acreage?

Suderman: Well, we'll find out on June 30th how wrong the herd was. USDA has become famous lately for making these backward revisions and changes with future surveys. So I anticipate we'll see that once again. I've been asked a lot, what happened to all those extra acres? And I said, I have a funny suspicion they're going to push that on down the road and I think that will happen depending on weather for planting here. But doing these surveys doesn't mean all the numbers come in and all of a sudden an answer pops out. There is a methodology to it. And USDA has been overestimating acres the last couple of years. Maybe -- some adjustments. I don't know. But it still doesn't add up, doesn't make sense. We had roughly 8 million acres of prevent plant from corn and soybeans last year, we had a couple million acres of CRP contracts that were not renewed that were available as well. We should have had 10 to maybe 11 million acres available to increase for all principal crops and we went up 6 million.

Yeager: So the math is funny. But the farmer reaction was hey, USDA got it right because the market went up. But I'm listening to what you say and maybe USDA didn't get it right. Is that what I heard you say?

Suderman: Well, if you look at the error, just this typical error that you might get in doing a survey like this you can probably -- within the range of error. But that has huge price implications, particularly when stocks are tight like they are right now and especially for soybeans because these numbers essentially mean that unless something happens to demand, and there are some possibilities there, we're going to be rationing corn and soybeans for the next 18 months. So it is a big deal. And the markets certainly reacted that way.

Yeager: Let's stick with soybeans then. Was that the biggest impacted commodity of the report yesterday?

Suderman: Yeah, I would say so. Obviously both corn and soybeans went up the limit, pulled back from that then on Thursday to close out the week. But the implications are the largest for soybeans.

Yeager: All right, and so the spread though between May and November, November still put on a 57 cent gain for the week, almost 5%. Why did the deferred, the November contract, not quite fall as hard on Thursday's trade like some of the other ones did?

Suderman: Yeah, we really on Wednesday it was all about buy anything and everything because of this bullish report. On Thursday it became, well wait a minute, the stocks numbers really weren't bullish for the three commodities, maybe friendly for corn, but this was really about a new crop story, so let's buy the new crop and spread it against the old crop. So that really became the story. And if you look at the two days put together, May corn still gained 20 cents on the two days put together and soybeans still gained 35 cents on the two days put together and we still had net gains for the week for corn and soybeans for the spot contract. So it was still positive. What I didn't like from a technical standpoint is the lead May contract closed just below some previous levels of resistance on the charts that had been holding us for quite a while. And the bulls would certainly like to see us climb back above those levels as we go in the week ahead.

Yeager: Well, we really just, we closed Friday last week right at $14, shortened trading this week, $14.02. Is $14 ahead for next week in soybeans? Are we in that pattern or in a range?

Suderman: Well, I think the question is whether old crop contracts go back to simply trading the range and whether the story is the new crop contracts or whether we break out. And I think a lot of that is going to have to do with the forecast. Here in the next few days over the coming days here this coming week we're going to get some major forecast updates that extend into the summer and some of the forecasters that we work with have been raising alarm bells about this summer. And so if these larger models do start forecasting problems for the Midwest for the summer then I think we could see old and new crop contracts go up because if new crop is going to be dramatically short you've got to ration old crop to carry over more into the new crop marketing year. But if they don't raise alarm bells then it's probably going to be mostly a new crop contract and in the spreads.

Yeager: All right, I've done enough dancing around. I need to get back to the business at hand. Let's talk corn before we get back to wheat. Weather would also impact the corn market, kind of some of the same things you're just saying there, if we have a shorter growing season. But this growing season we're off, we're supposed to see a very warm start to April. What is that going to do for corn in the near-term and deferred?

Suderman: Well, we're very dry in the northwestern Midwest. We're supposed to get some showers and hopefully those will come. But overall it looks like a very favorable forecast for planting. And the typical farmer, if the corn is going in the ground good he puts in some additional corn, corn acres go up two or three percentage points or so. That is a possibility. So I still feel good about my 92.85 million acres of corn. And if the weather stays good then you can also increase soybeans. For that to happen we really need to have a rapidly advancing winter wheat crop so that we can harvest it, matures in good time, harvest it, turn around and double crop soybeans. That will be where we get a lot of our acres. That is going to be critical because available acres are largely in the Plains for just single crop. So we can take both of these numbers higher if the weather cooperates.

Yeager: Let's get to wheat and a question that came in from Ukraine. Elena was curious via Twitter this week. Arlan, she's asking, higher than expected stock plus higher areas, good weather and Russian duty, wheat is dead? In that case, where will the spread be between wheat and corn?

Suderman: Yeah, following the numbers that we got this week the job of the market is to put more wheat in the feed bunk and we're certainly doing that. We were expecting to see aggressive feeding of wheat this summer when the feedlots could buy it right out of the field and not have to pay elevator charges. But we started seeing a lot of old crop wheat go in and that simply increased after this week's report. I anticipate we're going to see a lot more of it. I think this will be a big year for wheat feeding. That is helping offset some of the increased production estimates from the rains that we've been seeing during the month of March in the winter wheat belt.

Yeager: Well, there was a thought before the report on Wednesday that maybe the wheat market was trying to signal something to corn and soybeans, the canary in the trading pits. Do you buy that, that wheat is going to maybe be an indicator of whether it's the weather or the feed issue?

Suderman: The old adage was oats knows, wheat follows and then corn and beans are behind it. I think that is less of a factor now because of how integrated our livestock industry is for corn and soybean demand and their biofuels programs. And so they are divorcing corn and soybeans a little bit more from wheat. They're still tied in, corn is particularly still tied in, but corn can also be a leader of wheat. And so it's not just wheat leading corn any more like it once was.

Yeager: Well, okay we talked about feeding. Let's get into livestock in the sense I want to go backwards the norm again, might as well. The feeder, the cattle feeder this week took a pretty big gulp on Wednesday and do you have any words of encouragement for those who are trying to feed livestock right now?

Suderman: Demand is fantastic for meat. Some of it is restocking the pipeline because we have a number of food services that are opening up. We started baseball season here in the last few days and we're going to have fans in the ballpark. That means those food chains have to be refilled. We're opening a lot more restaurants than what have been, opening capacity, and so there's some pipeline refilling. And also we're seeing some significant numbers of reduced pork production coming out of China due to another variant of African swine fever. And so it looks like our exports of pork and beef are going to remain stronger than we expected this year. So you've got strong domestic demand. That will probably slow down. We've got barbeque season going right now plus this refilling. We'll probably slow that momentum later in the year but it's still very solid. And it looks like our exports are going to be stronger than expected as well. So I feel real good about the demand side of the equation. We've got fewer hogs out there than what were expected, we saw that play out in the last quarterly hogs and pigs report and USDA finally catching on that there's fewer numbers out there. And so I still feel good about the support beneath this market but that also means that we can afford to pay higher prices and we're not rationing demand for feed like we would have been if the demand for meat wasn't there.

Yeager: There is a concern in the live cattle market a little bit, maybe not as much optimism because there were some herds that were culled. We just don't have as many heifers there. We don't have -- you've got commercial lots that are bidding up some of this inventory. The chart is heading up. But do you see as much optimism in the live cattle market as you do maybe these other two you just mentioned?

Suderman: I don't want to get overly optimistic in the cattle market. But I do think that there is a good floor in the market or a good support base from the product demand standpoint and particularly if we maintain this strong demand for pork. If we look at the weekly export sales this last week, China I believe it was 5600 metric tons of beef going into China. That's not near as much pork as what they bought, but it shows a significant increase. And as I talk to our people in China they think this is demand for beef that people there are acquiring a taste for U.S. beef, some of our grain fed beef versus the grass fed beef that they have been eating and they like it and they think it is sustainable demand.

Yeager: Interesting. And it has been kind of a head scratcher too to understand a little bit of this livestock market. You mentioned optimism there. You mentioned some optimism in the other places. I'm going to throw everybody here, one last question, Arlan, before we go out. Matt in Amherst, Wisconsin asked us via Twitter this week. He said, Arlan, everyone seems to be bullish. What are the reasons not to be bullish right now?

Suderman: Well, we always have to watch for the black swan events. We saw over the last year what a black swan event can do and pull the rug out from underneath prices very quickly. We have to keep our eye on this new variant of African swine fever that China continues to refuse to acknowledge is there. But it certainly does seem to be based on what we're seeing. The other thing we always have to be cognizant of is the possibility that we could get a new variant of COVID-19 that could shut us down once again. I don't expect it, but it still is a possibility that could happen and something we need to guard against.

Yeager: The variants are out there. We are showing a little bit of the hog market. I guess I need to ask a very specific question here in relationship to the hogs. Do you see or how long does this run higher look like, how much longer are these legs? 30 days? 3 months? Through grilling season?

Suderman: Yeah, the market has done a good job of anticipating the demand so we need to be careful about getting overly bullish from this point forward. I would rather argue the support underneath of the market from the demand than arguing how much higher things could go. If I was a producer, particularly with the possibility of these black swan events, I would still be treating it as a business and be taking advantage of the margins when they're offered and grow the business.

Yeager: Arlan Suderman, thank you so much. Thanks for the time, appreciate it.

Suderman: Thank you.

Yeager: That will do it for this installment of Market to Market. We will talk more in Market Plus so you can join us there. Find that on our website of Now, streaming of this program is possible through the PBS app as well as the YouTube app. Our YouTube feed is full of things that you don't see on the broadcast version. Subscribe now and also click that little notification ballot, Next week we assemble our roundtable of analysts to look at the bulls and bears now that the commodity markets are loaded with new information with more reports to come next week. Thank you so very much for watching. Have a great week.



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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.  


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.


Grinnell Mutual Insurance