Market to Market (June 4, 2021)

Jun 4, 2021  | 27 min  | Ep4642

Coming up on Market to Market -- An attack on a meat packing giant exposes more vulnerabilities. A study reveals possible fallout from food production. The legal battle over California's livestock housing rules. And market analysis with John Roach, 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.  

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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 4 edition of Market to Market,  the Weekly Journal of Rural America.

Hello, I’m Paul Yeager.

Like last year’s hunt for a swimming pool, this year’s elusive item is the worker.

U.S. employers added 559,000 jobs in May according to Friday’s release by the Labor Department. The unemployment rate dropped 0.3 of a point to 5.8 percent.

However, finding someone to fill any openings has proven challenging. The speed of the economic rebound has put hiring managers in scramble mode to assist returning customers or fill orders.   

Producer sentiment dropped by those surveyed in Purdue University’s CME Group Ag Economy Barometer. The reading was down 20 points on concerns over potential tax code changes and rising input costs.

Creighton University’s Mid-America Business Conditions Index stayed above growth neutral at 72.3 -- even as labor shortages and supply bottlenecks are restraining growth.

The biggest meat processing company in the world was slowed this week from a different challenge - a cyberattack.

As JBS tried to get back online, the hack exposed the vulnerability of industry inside and outside of agriculture. 

Josh Buettner has the story.

Joan Ruskamp/J&S Feedlot – Dodge, Nebraska:  “Ok first it was oil, now it’s agriculture. What’s next?  In Grand Island alone, that’s 5,000 head, each day, and the stores, the restaurants that they supply, that’s their supplier.”

Early this week, nearby cattle futures plummeted to session lows following a Memorial Day cyberattack on the world’s largest meat processing company.  The electronic assault prompted Brazil-based JBS to temporarily close several of its U.S. and Australian operations. 

Attributed to a Russian criminal gang, the supply chain disruption came one month after a similar hack shutdown the Colonial Pipeline, which delivers about 45 percent of the East Coast’s fuel supply.

Christopher Krebs/Former U.S. CyberSecurity Director/Trump Administration:  “They went after our gas and they went after our hot dogs.  No one is out of bounds here.  Everyone is in play and every single corporate executive needs to be convening their cybersecurity teams today to understand what their continuity plans are.  How are they going to recover from a hack?”

The growing list of ransomware attacks on U.S. businesses and infrastructure has government officials, current and former, on alert.  The White House said President Biden would address the issue with Russian President Vladimir Putin in a summit in Geneva, Switzerland this month.

Jen Psaki/White House Press Secretary:  “We’re not taking any options off the table, in terms of how we may respond.  We’re in direct touch with the Russians, as well, to convey our concerns about these reports.”

Cattle futures rebounded and it has been reported all domestic facilities owned by the country’s second largest processor of beef, pork and chicken were up and running by week’s end.  Academic experts estimate a one-day JBS shutdown cuts nearly one quarter of the nation’s beef processing capacity.

For Market to Market, I’m Josh Buettner.

Agricultural practices are frequently put under a microscope. The inputs and outputs have to be factored into how we produce food and fiber.

A recent study compares the emissions from production of items like carrots and beef as well as its geographical location.

Peter Tubbs dives into the study.

Several scientific studies have revealed that feeding the world comes with costs, one of which is deteriorating air quality.

A white paper released in May by the University of Minnesota, shows that, of the 100,000 premature deaths in the U.S. each year from particulate matter, nearly 18,000 of them can be attributed directly to agriculture. 

Jason Hill, University of Minnesota: “So we know that the reduced air quality is the largest contributor to, um, reduce human health from environmental causes in the U S and globally. And we also know that agriculture is a major contributor to reduced air quality, but what people haven't known is how individual foods or diets contribute to reduced air quality. So we set off to fill in the gap of knowledge.”

The study used data from the Environmental Protection Agency and the United States Department of Agriculture to calculate emissions from agriculture on the county level, based on both the type of crops and animals grown as well as their proximity to the nearby population.

The study also estimated that agricultural activities near densely populated areas have a higher impact on human health than those located in sparsely occupied regions of the country.

Three different computer models arrived at similar results. Ammonia was estimated to be the largest source of atmospheric particulate matter from agriculture. 

The authors of the study believe consumers can drive a reduction in particulate production by changing their eating habits. 

Jason Hill, University of Minnesota: “And we point out in the paper, well, you get most of the benefit, uh, just by, uh, either changing the type of animal products you're consuming or by consuming a little less. (edit) So you can get, you know, 80, 90 percent of the way there just by making those, those, um, those, I don't want to say subtle, but, but substantive changes in your diet, but without having to, um, take sort of an absolutist approach to, to what you eat”

The National Cattlemen’s Beef Association told the Washington Post the study was riddled with data gaps and the methodology was questionable.

For Market to Market, I’m Peter Tubbs. 

California’s economy is the sixth largest in the world. The agricultural sector alone accounts for two percent of the state’s revenue -- about $47.1 billion dollars.

So when a major policy change is set to happen in the Golden State, the rest of the industry takes notice.

A change to livestock housing rules under Proposition 12 is just months away from taking effect in California.

Colleen Bradford Krantz looks at the potential impact of Prop 12 in our Cover Story.

Terry Wolters expects the sow buildings, in which he has partial ownership, will have to be reconfigured to allow more space for each animal if a California statute known as Proposition 12 is implemented in six months.

The Pipestone, Minnesota farmer doesn’t think it will matter that he’s not a resident of California.

Terry Wolters, National Pork Producers Council, President-Elect: These regulations set a precedent that a state law is now going to mandate how we have to produce that product... And so if one state has one regulation and one state has another regulation, I only have one pig. I can’t make my pig meet everybody’s regulations individually.”

As of January 1, 2022, the rules for food products sold in California would require all egg-laying hens to be raised in a large-pen setting with at least one square foot per bird, all calves raised for veal must be provided at least 43 square feet, and all sows must be raised in an area that is a minimum of 24 square feet. While the egg industry had already adjusted somewhat due to an earlier California statute, the impact would be newer to the hog industry, and require most typical sow stalls to be enlarged by about a third over the current average of 18 square feet.

Packers will face the choice of either losing the significant California market - which consumes an estimated 15 percent of the nation’s pork - or only buying from producers who comply. And one study suggests less than 4 percent of the nation’s sow housing would currently be considered compliant.

The National Pork Producers Council sent a letter to Secretary of Agriculture Tom Vilsack last week asking for his help. It argued that California’s Proposition 12 will lead to “catastrophic” costs for the nation’s pork producers.

California officials argue that the rule, first proposed by the Humane Society of the U.S. and approved by the state’s voters in 2018 with 63 percent in favor, is simply the expression of their citizen’s.

Sec. Karen Ross, California Department of Food and Agriculture: “It is a law that passed by very popular vote and it is our job to implement it and ensure the integrity of the program going forward.”

Several national meat industry groups, convinced the California law will affect farmers nationwide, have been pursuing legal challenges to Proposition 12. They argue the statute violates the legal doctrine known as the Dormant Commerce Clause, which prohibits state legislation that discriminates against interstate or international commerce.

In an April appeals hearing in California federal court, lawyers for the National Pork Producers Council and California state government explained their respective stances.

Matthew Wise, Deputy Attorney General, California Dept of Justice: “Proposition 12 controls only the sale of pork products in California so it is analogous to Walsh and you know that’s the common … states have always been permitted to exercise their sovereign power over sales within the state.”

Timothy Bishop, attorney, National Pork Producers Council: “The result of that is that those immense costs - $3 million for just one of our declarants to conform to that - are going to be borne by every single market hog born to that sow….They are going to be sold in Illinois and in Michigan and lots of other states where the consumers do not want to pay for California’s preferences for sow housing.”

At least one agricultural policy expert is doubtful those challenges will succeed as a similar attempt failed when California passed Proposition 2 in 2008. That earlier statute, effective in 2015, required owners of California’s egg-laying poultry, sows and calves raised for veal to provide enough room for each animal to fully turn around and extend their limbs. It initially applied only to those animals raised in California, but when the state’s legislature realized they were putting their own egg producers at a disadvantage, the statute was expanded to all eggs sold in the state.

Aleks Schaefer, Michigan State University: In response to Prop 2, some attorneys general from some of the big egg-producing state tried the same thing: to get the Supreme Court to strike down Prop 2. And the Supreme Court declined to do that. The reason kind of on the face that they said they wouldn’t do it was because the attorneys general weren’t egg farmers. So they didn’t have the right to criticize this law. I think in reality that’s sort of just trying to dodge the issue.”

Michigan State’s Schaefer helped conduct a study that showed the older statute - Proposition 2 - did increase egg costs across the country. The increased prices, he concluded, hit the nation’s lower-income consumers the hardest. The fallout from the measure also increased the speed of consolidation as some poultry farmers left the business rather than spend the money to rebuild their laying facilities. Schaefer expects Prop 12 will do the same thing to the hog industry. He would prefer to see livestock housing changes come from economic pressure that start in the grocery store rather being directed by a single state’s popular vote.

Aleks Schaefer, Michigan State University: “If we care about animal welfare, I might buy animal welfare-friendly egg or animal welfare-friendly pork. This is a different thing, right?…Those people who said ‘no,’ they now don’t get the option to vote with their wallets anymore. And so that is definitely going to negatively affect - or has already affected - the poor people who really on these kind of staple proteins to feed their families.”

California Agriculture Secretary Ross would have preferred a legislative debate.

Sec. Karen Ross, California Department of Food and Agriculture: Our proposition process, you know, just really restricts that exchange of information and the kind of sometimes very detailed and precise scientific information that’s hard to convey when it ends up being in a campaign about, you know, 30-second soundbites.”

For Market to Market, I’m Colleen Bradford Krantz.

Next, the Market to Market report.

Technical trades around rainy, hot and dry weather impacted the commodity markets this week. For the holiday shortened trade week, July wheat gained 24 cents while the nearby corn contract jumped 26 cents higher. The bulls appear to be leading the bears in the soy complex as soy oil serves as the biggest influence in the pits.  The July contract added 53 cents. July meal improved 70 cents per ton. December cotton rose by $2.56 per hundredweight. Over in the dairy parlor, July Class III milk weakened by 13 cents. A mixed week in the livestock sector. August cattle shed 52 cents. August feeders dropped $1.42. And the July lean hog contract increased $1.25. In the currency markets, the U.S. Dollar index added 11 ticks. July crude oil expanded $3.17 per barrel. COMEX Gold decreased $10 per ounce. And the Goldman Sachs Commodity Index gained more than 5 points to finish at 526.50.     

Yeager: Now here to provide insight is senior market analyst John Roach. Hey, John.

Roach: Hi, Paul. How are you?

Yeager: I'm all right. I want to start with wheat. And you were excited about wheat this week from Roach Ag Marketing. These contracts though are very different because it's not across the board that each one of these is doing well. The southern crop, yes, has gotten rain. The northern crop not so much. So what is happening as a whole in this complex?

Roach: Well, the wheats are differentiating themselves and the spring wheat is in the area that is having difficulty getting moisture and as a consequence we've had a very poorly rated crop there and on the other side in winter wheat country we've actually had more than normal rainfall through a lot of the winter wheat country. So we have winter wheat that is kind of dragging a little bit and a little worried about protein values out forward and we have spring wheat that pushed up to new highs today.

Yeager: Well, there is, as I kind of alluded to a little bit in the opening question, we have another question that came in, this one via Twitter from a viewer in Canada. Ken in Canada wants to know, with no real measurable rain in the forecast is the drought in the Dakotas and the Canadian prairies factored into the prices already?

Roach: The answer to that question it certainly is. I didn't mention the Canadian dry conditions. They are suffering as well. But that is something that the market is watching on a daily basis and probably driving the market more than anything else right now. What is the forecast and how will that impact the crop? And we come into this weekend with the hottest forecast we've had in some time and not much rain and it's going to impact all the markets but spring wheat is the crop that has been hurt the worst so far if you look at the ratings that were given to us on Monday.

Yeager: So what do we do here if we're in this market, we're knee deep in it? What are we doing?

Roach: Well, there's only one way to bring home high prices. You actually have to sell them. We have a sell signal right now in spring wheat and we've had it for two days and our recommendation is that you be making some sales of both old crop if you have old crop left and an increment of new crop. Think about another sell signal coming later on in the summer. This may be the peak or it may not be the peak. It will depend upon what the weather is and what the crops are really doing at that time and how the demand has been impacted. But we're selling into the strength in the spring wheat at the end of this week.

Yeager: It was upper 90s in North Dakota at Noon on Friday, 96, 97 Bismarck, Minot, in that area. A week ago it was ridiculously cold, so much so in the Dakotas, Minnesota, parts of Iowa we had frost on the corn. A lot of the pictures have come in, it looks like corn has improved. Did corn dodge the bullet in a weather scare? And is that what moved the market early in the week?

Roach: According to the crop ratings we saw on Monday, yes, corn appeared to have dodged a bullet although normally those reports are a little delayed because you can't tell how much damage was done by frost in one day or two days, it takes longer than that. But most people that we have talked to think that the crop was in a small enough state that although it was injured a little, probably did not reduce yield substantially.

Yeager: All right, so with the near contract and the deferred in December, we're almost getting to the point these two are very close to alignment. But they were very different in how they responded, one up 4%, the other up 8%. Why is December continuing to rally like it is?

Roach: We've already put a lot of premium into the old crop corn, July corn was much stronger and still is stronger through all of the higher price levels and even when the price is declined, the July corn stayed above the December. Well now we're getting to the point where July corn is about a done deal and we're now focusing out on the new crop, elevators are focusing out on the new crop as well with their bid structures. And so we've had strength come into the December relative to the July and again, it's mostly weather and we're getting through the end of the old crop.

Yeager: All right, so I'll ask the same question that I did in wheat. What do we do here? To sell is one option. Does that hold for corn?

Roach: Get ready to sell, we're not quite at sell signals yet, although we're close. We think we'll be there Monday, Tuesday. It just depends on how much follow through that we can get and what kind of weather forecast we have on Sunday when we start to trade the Sunday night markets. We think you sell into the strength here. The weather is usually traded into the market. We trade at least a week out if not two weeks. Now, there are some people saying there's going to be this ridge is going to lock in here solid, there's some cold ocean temperatures off the West Coast and that is going to move the jet stream around a little bit and so there's others that completely disagree with that. Nobody expects much rain and so we're dealing with dry. It's just a question of how dry and how long and whether it has a big impact on the yields. At the moment it hasn't had but it sure can.

Yeager: And it's almost the same story in soybeans too.

Roach: It's exactly the same story with one exception and that is the buying continues to be relatively strong in corn. We've got export sales out today, we sold some more old crop corn and we thought we'd see cancellations actually. But the bean business has really gotten slow. That has all moved down to South America and we just haven't seen much bean business. And so the bean market does not have that demand component that is working in favor of the corn market right now.

Yeager: I need to get into this JBS story and its impact on live cattle. Does this have a long tail impact in livestock, like say the fire at the Tyson facility in Kansas a couple of years ago? Or is this just a one, two week thing?

Roach: We don't know the answer to that exactly but we think it's just a one or two, a couple day thing. The slaughter numbers this week as I recall were down about 14% on cattle and 19% on hogs. They'll make maybe some of that up over the weekend but we think they'll be operating full steam here the first part of the week. But what we are seeing is a concern about the ability of somebody to come in and take out, our oil business or the pipeline business take out our ability to produce beef and pork. Those are scary kind of things. And the scariest part for me as a business person is my government tells me that I’ve got to defend against that. When I know that I'm fighting against the biggest people in the world how is a small business or even a bigger business such as JBS, how are we supposed to compete or fight against the most powerful nations in the world attacking us? I think that we need the federal government to step up and to help industry be able to fight off that kind of attack.

Yeager: The labor story that we talked about earlier in this broadcast, there are employers that are incentivizing workers to come back, bonuses, increasing wages. Is that what is going to maybe have to happen to maybe level up some of this field of the packer margin?

Roach: Possibly. The main thing that has happened here is that the demand for beef has been very strong and the packer has not been able to get enough animals and so they have been able to really widen their margins. And so we need to have everybody back to work in order to move the numbers through the system.

Yeager: All right, through the feeders quickly, John. Are you expanding any herds right now if you're a feedlot operator?

Roach: We're actually telling people be careful in here. These corn prices are high. Feed prices are high. Feed prices are likely to stay high for a little while here. So you really have to understand your numbers and understand how you can make this all work at these higher feed costs.

Yeager: That doesn't seem to be impacting the hog market though.

Roach: Well, the hog market is off on a race. The market closed at new highs here today and we have a sell signal, we're on the 7th day of a sell signal on hogs, so we're selling into the late summer and the fall hogs, we don't want to go past that. We think these are good price levels. We think people need to be a little bit careful, notice that the Chinese futures, pork futures today were down 4.4%, the Chinese are struggling with overweight hogs that have been held because they had losses in them, now farmers are starting to go ahead and move those hogs into the system, it is breaking their market quite aggressively and so remember, they have a lot more hogs than what we do. And so what happens there we can't ignore it. So when we're looking at very high price levels here and we're seeing theirs decline, we need to follow our sell signals and get our margins protected.

Yeager: John is teasing ahead to the global discussion we'll have. We'll talk about China in Market Plus. John Roach, thank you so much.

Roach: Thank you very much, Paul, appreciate being on.

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 MarketToMarket.org. And we've been in the Twitter camp sharing links to our stories for a long time asking you questions and retweeting items of interest. Give us a follow @MarketToMarket. Next week we look at some of the monumental impacts on western stakeholders. Thanks for watching.

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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.  

(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.

 

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