Market to Market (October 8, 2021)

Oct 8, 2021  | 27 min  | Ep4708

Coming up on Market to Market -- Livestock leaders are called to Congress. The new administration keeps some of the old ways on China trade policy. Supply chain challenges in a COVID world. And market analysis with Arlan Suderman, 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, October 8 edition of Market to Market, the Weekly Journal of Rural America.

Hello, I’m Paul Yeager,

The inconsistency of the job recovery added another data point in September. ---

U.S. employers added 194,000 jobs last month with gains in transportation and warehousing - and losses in local government education jobs for positions like bus drivers and cafeteria workers. 

The unemployment rate dropped to 4.8 from 5.4 percent a month earlier. 

The trade deficit widened in August as imports greatly outpaced exports to open the ravine to $73.3 billion dollars.  ---

Agriculture has been one sector that has enjoyed healthy exports like beef and pork.

This week the Biden Administration added an additional $100 million dollars to an already funded $500 million program designed to help small and medium sized processors. USDA says the loans are designed to help those operations upgrade facilities, with the intention of expanding slaughter capacity industry wide.

John Torpy reports on a hearing aimed at some of the bigger players in the meat market.

Sec. Tom Vilsack, U.S. Department of Agriculture: “The goal here is obviously to strike a better balance between supply and demand between processing capacity competition with greater transparency, so that we can have a stable, independent and fair market.”

USDA Secretary Tom Vilsack appeared before the House Agriculture Committee this week as part of a hearing looking at the state of the livestock and processing industry.

Sec. Tom Vilsack, U.S. Department of Agriculture: “There's no question that we are short on capacity, which is one of the reasons why it's more difficult for farmers to get a fair price for what they're raising.”

Over the past few months Vilsack has continually called on Congress to revamp the rules of the Packers and Stockyards Act in order to level the playing field between producers and meat processors.

Senator Charles Grassley of Iowa also testified before the committee, highlighting the lack of market transparency.

Sen. Charles Grassley, R-Iowa: “Reauthorization of the mandatory price reporting is the vehicle available, where we can add additional price, transparency, and price discovery majors, and that's what I'm advocating.”

Witnesses appearing before the committee point to consolidation among the largest beef processors has created an unbalanced market for producers. 

Todd Wilkinson, Vice President, National Cattlemen’s Beef Association: “But I will tell you this. From an CBA standpoint, we don't want that money that you're given out to go to the four large packers. They don't need any more money. We need that to go to the small producers and the medium size regional plants, because they can make a difference for us.”

Work stoppages at processing facilities brought on by the global pandemic exacerbated the existing bottleneck problems in the livestock processing industry. Producers were left waiting with livestock at the packing house door, causing a price decline for farmers and ranchers. Meanwhile, the cost for consumers climbed at the meat counter.

Mr. Scott Blubaugh, President, Oklahoma Farmers Union: “Between 1980 and 2020, the retailer's percentage of the beef food dollar has grown by sixty five percent. And the packer shares increased even more by seventy percent. During the same time the farmer and rancher share has fell by more than forty percent. I asked you how fair is this?” 

A representative for the North American Meat Institute countered, pointing out the fluid nature of the industry.

Francois Leger, owner, FPL Food: ”So, the cattle and beef industry is driven by supply and demand. And the cattle market is cyclical. Not long ago, the cattle market was a reverse of today. In 2013, 14 and 15, the herd was small and producers were making record profits while Packers were losing money.”

 For Market to Market, I’m John Torpy.

The Phase One trade deal brokered during the Trump Administration called for China to buy American to the tune of $207 billion. 

As of August 1, the Chinese are 30 percent behind pace according to the Peterson Institute for International Economics.  

The biggest sector of Phase One is manufacturing where only half the goal of $123 billion has been met. More than $43 billion in agricultural purchases are called for, and, to date, 92 percent of the target.

After more than eight months in office, the Biden Administration concluded their review of trade deals with China - signaling the intention to reduce tensions, albeit in a subtle manner. Here’s Peter Tubbs.  

Katherine Tai, United States Trade Representative:  “We continue to have serious concerns with China’s state-centered and non-market trade practices that were not addressed in the Phase One deal.  As we work to enforce the terms of Phase One, we will raise these broader policy concerns with Beijing.”  edit  “And we will also directly engage with China on its industrial policies. Our objective is not to inflame trade tensions with China.”

 While the Biden White House is monitoring China’s adherence to the Phase One agreement negotiated by the Trump Administration, the current White House has already scrapped plans to negotiate a second trade deal. U.S. Trade Representative Katherine Tai said this week the U.S. will be lowering tariffs in areas where China has met goals while maintaining duties in sectors under dispute.

The administration is also promoting more domestic spending to improve the global competitiveness of the United States, focusing on education and infrastructure.

Katherine Tai, United States Trade Representative:  “Durable coexistence requires accountability and respect for the enormous consequences of our actions.  I am committed to working through the many challenges ahead in this bilateral process in order to deliver meaningful results.But above all else, we must defend – to the hilt – our economic interests.”  

For Market to Market, I’m Peter Tubbs

Supply chains disruptions have become a new normal for manufacturers, retailers and consumers.

Those managing the supplies are left to juggle daily and hourly changes in what’s available or has arrived for assembly.

Industrial and agricultural manufacturer Vermeer Corporation is based in Pella, Iowa and has dealt with those same supply problems.

I sat down with CEO Jason Andgringa this week to hear about what hurdles they’ve had to clear.

Jason Andringa, CEO, Vermeer: This sort of COVID leading into the supply chain challenge is something that's unprecedented in the last quarterly meeting that we had for our team members at Vermeer. You know, I said, we can't even look back and say, it's not been this bad in 10 years, or 20 years, it's never been this bad. So you know, we've been around for 73 years. And the supply chain challenges have never been this challenging. And you know, our suppliers are doing the best they can, we're having very transparent, straightforward conversations with them, it's just a matter of COVID caused companies to pull back. And instead of demand for goods tapering back, it actually accelerated. And we've been playing catch up ever since. And very much driven by workforce shortages. And the other thing, which is kind of hard to get your mind around is, you may have the you may have 95% of the components to build a machine. But it's not done till you have 100%. And so you you have a you have 95% of what you need, and you're waiting on that 5% and that 5% keeps changing. It's not consistent. What is that final 5% that you need to finish a machine? And those are the challenges that our supply chain team are working on, literally not daily, but hourly, trying to make sure that we're getting the components in that we need.

Paul Yeager: That 5% is there any you talk about it shifting and evolving? Is there ever a part where you've said, Well, why can't we just do that 5% because is Vermeer one of those companies that you didn't make everything here, you would bring in some supplies, like a lot of the bigger ones have done that now, they don't make everything in house that they used to. So if you had a discussion where you've said, Well, maybe we're going to have to start doing some of these things ourselves.

Jason Andringa, CEO, Vermeer: We have had some of those discussions, it's interesting with regards to doing work with sheets of steel, we're actually quite vertically integrated as it is we do a lot of our own bending machining, turning welding, a lot of the operations that have to do with the steel that makes up our equipment, and is ironic, even though the price of steel has gone up like crazy, we have really not had significant challenges with regards to steel. But when we think of some of the other components, it's not as easy as just thinking that we're going to make them because our suppliers have supply chain constraints. So if we decided that, you know, we were going to do what this supplier is doing, suddenly, we would have the supply chain challenges that they already have.

Paul Yeager: What's been the biggest frustration in all of this?

Jason Andringa, CEO, Vermeer: You have huge demand, you have the facilities to do it, you've got the team to do it. And you just can't get in all the components you need to build the full machines. If we instantly had all the supply that we need, then we would instantly need to hire a lot more people. And you know, we're really tailoring the rate at which we hire people based on trying to make sure we can keep work in front of those team members. So that's the biggest challenge is just knowing that customers are going to wait months to get their hands on a piece of Vermeer equipment that they need. And we desperately want to build it faster and we just can't. 

Paul Yeager: I heard you give an interview recently, where you said we normally stock our equipment in a certain spot kind of is like a launching point? 

Jason Andringa, CEO, Vermeer: No. And, and that has been another challenge. You know, so far, there has been you know, a couple hurricanes that have hit the United States and caused damage, and it's not easy to kind of build up a stock that can be immediately deployed after a hurricane, but we we like to try and you know, this year that has been more challenging than ever before. And so a hurricane strikes our dealer will inform us of how much equipment they think that they will need to to help and support and you know, get into the hands of their customers to do this work. And and we can't supply to them and they can't supply to their customers. 

Paul Yeager: Give me two products that have been a challenge for you maybe before and after, you know, as you talk about the evolving 5%.

Jason Andringa, CEO, Vermeer: Yeah, and it once again, it keeps changing. So at times, it feels like you know maybe hydraulic componentry is our number one issue at times, it feels like wiring harnesses are number one issue engines, components that go into track systems, hoses for radiators and other hydraulic componentry. So it honestly it just keeps changing. But at the same time, you know, once again, you know, I feel as though our suppliers are, you know, doing the best that they can to, you know, get the workforce they need to try to plan for it to try to accommodate us. We have very constructive and transparent and straightforward conversations. It's just when the pandemic broke, everybody kind of pulled back and we've we've been playing catch up ever since. And for a while it felt like we were not too far away from starting to eat into our backlog. And now the past few months, it's gone, you know the wrong direction again, where our ability to build to meet demand just keeps falling farther behind. And we're not alone in that, you know, we we know from other manufacturers in Iowa and around the country. We're all in the same boat. It's all over the news. But, yeah, it's just it's just frustrating when you know, customers are desperate to get their hands on a new piece of equipment. And they've got months of backlog.

Paul: The full interview will be available Tuesday through our YouTube and MtoM podcast feed.

Next, the Market to Market report.

Traders took a tepid response at news of export sales to Mexico while harvest pressure carried more weight and a return of the “oats knows” comments. For the week, December wheat lost 21 cents while the nearby corn contract decline 11 cents. China appears to be back buying U.S. soybeans while the Brazilians intend to plant more of the crop. The November soybean contract dropped 4 cents. December meal shed $8.20 per ton. December cotton added $5.88 per hundredweight. In the dairy parlor, November Class III milk futures moved 50 cents higher. A mixed week in the livestock sector. December cattle added $5.05. November feeders gained $8.25. And the December lean hog contract weakened $3.68. In the currency markets, the U.S. Dollar index improved 3 ticks. November crude oil added $3.78 per barrel. COMEX Gold fell 60 cents per ounce. And the Goldman Sachs Commodity Index improved almost 19 points to finish at 581.10.

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

Suderman: Good to be back with you, Paul.

Yeager: So, we could just talk wheat and just talk about Minneapolis and how good of a week it was for there but there's much more to that wheat story. What is in play here?

Suderman: Well, we've really tightened up the supplies of major exporting countries and that is where the bulk of the milling wheat supplies come. And I think the Minneapolis market has kind of become the poster child for that because obviously we had a short spring wheat crop on both sides of the border, both in Canada and in the United States. And so that is leading the way higher. And overall we're still trying to stay competitive. It depends on which class of wheat you're in. We saw the winter wheat market struggling a little bit through the week while Minneapolis was making new contract highs. But it still comes down to a smaller crop in Russia, smaller crop in the United States and the Northern Plains, smaller crop in Canada, some issues in other producing areas of the world as well.

Yeager: So is this one of those pauses before we move higher?

Suderman: Very possibly. It really depends on where we go from here. I think we've got priced in now the current known fundamentals. So now as we look at how many acres are we going to plant in Russia there's a sense that we're going to be down on acres there. By how much? And then look at the Southern Hemisphere crop, Australia and Argentina we've got some areas there where we're dry and Argentina's crop ratings have started to decline again as they started to dry out again.

Yeager: Let's do the weather report here, Arlan. I think in your back yard it is low 80s. It's low 80s here. But there is a change in the weather pattern in say the Upper Plains, which will impact any wheat planting or in the Southern Plains I should say. How quickly does weather become a story when you transition from wheat to say corn?

Suderman: Well, we are moving back into a La Nina pattern. That is more of a factor now for South America, especially dry for Argentina and Southern Brazil. Short-term what we're watching is these rains in the Northern Plains here in the days ahead. That could be a problem for unharvested soybeans in particular. If you go wet, dry, wet, dry, you cause the soybean pod to swell and to shrink, swell and shrink and it pops open, you have beans on the ground. So that would be a concern that we'll be watching there. Some heavy rains anticipated over the next few days. So it's certainly something to watch there. Brazil it's really hard to say now whether we're going to have a short crop or not because the correlations are weaker. Southern Brazil is at the highest risk and Argentina, the new European models that came out, the monthly models that came out this week look quite dry for the growing season for Argentina. So that could be a real concern going forward.

Yeager: Let's stay in the soybean discussion here for a moment. Harvesters are rolling, probably going to see a big percentage come Monday. But you have this concern, I don't know if it's concern, this return of China to the market. Earlier in the week, no no, we don't want any. Now we're back. When it comes to soybeans, you mentioned South America, I mentioned China, what do you mention as the big story in soybeans?

Suderman: It really comes down to the lack of demand right now in China. Hog feeding margins are very low right now and so while we're seeing power outages that are shut down over 20 crushing plants, as I talk to my sources in China they said, yeah that's a problem but the bigger problem is the lack of demand for meal because of these poor feeding margins. And we have a very narrow window in order to get our business done with China because once Brazil starts harvesting its new crop after the first of the year because the currency exchange rates they're going to be the cheaper source. So we have to do our business now between now and January. And so we need to see the shipment pace pick up and one of the reasons it's not is because of the weak meal demand near-term because those poor feeding margins.

Yeager: Soy oil has been a story. But let's flip over to crude oil and its impact on the corn market. Crude has had one of those weeks where it fell out of bed mid-week, came back a little bit. I think we reported here on the week over week a 5% gain. What is crude oil doing to the corn market? Is that the biggest influencer right now in corn, Arlan?

Suderman: Well, it's certainly one of the major factors. Crude oil is moving higher, 7-year highs, certainly a factor kind of challenging or instigating the inflation focus once again simultaneously with yields going up about 30 basis points over the last week or 10 days kind of reflecting that inflation expectation. Crude oil, natural gas, coal at record high prices, natural gas as record high prices in some parts of the world, not there yet in the United States but certainly high. We're shutting down some fertilizer plants. That is starting to reduce projections for corn acreage next year. But the high energy prices of the fossil fuels is also increasing the focus on the new renewable fuels and soy oil is certainly a big part of that, palm oil hit record highs this week because of that, canola oil being supported and also corn oil. Corn oil is also very attractive, more attractive than soy oil really for use in these new renewable fuels. We just don't have as much of it. That's all kind of providing support.

Yeager: I did not have corn oil on the bingo sheet for this week, Arlan. But what I Did have was oats. What is oats knowing? It's trading above corn. Is this going to be a long-term, short-term, I don't know what term impact on wheat or corn or soybeans moving forward?

Suderman: Yeah, those of us who have been around a while like to use that phrase, oats knows. I'm not sure that the fundamental connection is what it used to be. But Canada had a poor crop. U.S. imports the majority of the oats that it consumes. And because of the drought in the Southern Plains and Canada, Canada had a short crop and some quality issues, that means fewer exportable supplies to come south of the border into the United States. That means that those feeding oats have to look for other feed. So it's part of that overall feed equation right now helping support the feed grain complex.

Yeager: We'll get to the story of livestock in a moment. I've got a viewer question I really want to slip in here that's important. Ryan in Rapid City, South Dakota was asking us, with corn and soybean yields coming in seemingly higher than expected have the chances of a harvest rally gone out the window? Or might we see a bump in prices towards the end of the season?

Suderman: I don't think a rally has gone out the window. I'm not going to forecast it by any means. But what I'm seeing and what we're seeing as we survey our people across the Midwest is that corn yields nationally are coming down a little bit. They were higher than expected in the western belt where it was so dry, that's the good news for those farmers. But in the east where they were expected to be record high, and in some locations they still are, they're not quite as good as expected. Too wet, a lot of variability in the fields, late season disease pressure, the crop didn't finish well, didn't fill well so we're seeing lower yields in the east. And so nationally we're seeing corn yields ratchet down a little bit, soybean yields have been better than expected almost across the Midwest. Again, a lot of variability. But I think we'll see soybean yields go up on Tuesday, corn yields come down a little bit.

Yeager: All right, feeder market, up $8.25, that's 5%. What is the big pull here in feeders? Is it what you talked about with the feed issue?

Suderman: Yeah, of course the cattleman is always optimistic, things are always going to get better. We're seeing a little bit more strength in the fat cattle opportunities going forward and some optimism there so they feel like they can pay more for the feeders. We're also seeing some rains in the forecast for the Southern Plains. We're going to have to see that actually happen. We've really been drying out in Oklahoma and in Texas. Our cow numbers have been declining for the last six months so the supply of feeders is going to be declining, supply of fat cattle eventually will be declining. That is part of the optimism in the live cattle market as well. But again, it's part of the money flow and the optimism and the inflation and just the positive put money into the commodities type of mindset.

Yeager: This hog market last week a huge story, this week gave a little bit of it back. What is the pull in hogs?

Suderman: Well, we have a problem in hogs and expectations that we're going to see supplies increase faster than demand. Demand has been really good but seasonally goes down this time of year. But supplies haven't been what USDA says either, our pig litters haven't been -- we've had some disease problems in the United States this year that have negatively impacted litter size. When you look at demand and exports, we've had a lot of good exports, but China is the big focus and they've really been declining with their prices. In fact, in the last monthly data that just came out we sent China more beef than we did pork. I don't know that that's ever happened before.

Yeager: That is a story that we will talk about. One thing that we'll unplug real fast, you've got about 10 seconds to say cotton, has it hit its peak?

Suderman: Well, there's a lot of factors that could take cotton higher right now and it is battling with other crops for acres. China is really buying cotton right now and that is really driving it.

Yeager: Good job. We'll expand on cotton when we get to Market Plus. And also, Arlan, you also want to talk about inflation and China national day. So a lot to come up here in Market Plus. Thank you, Arlan.

Yeager: That will do it for this installment of Market to Market and the TV show. We will talk more in Market Plus so join us. Find that on our website of MarketToMarket.org. We are so very close to a milestone on our YouTube page. Will you and your ringing of our bell put us over the top of 5,000 subscribers? Click subscribe at MarketToMarket when you search that on YouTube and be in our inner circle of knowing when the stories, Market Plus and full program are ready for viewing. Next week, a panel of analysts returns to look at some peaks and valleys in the commodities around government reports. Thank you so very much 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.  

(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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