Market to Market (November 12, 2021)

Nov 12, 2021  | 27 min  | Ep4713

Coming up on Market to Market -- Another run at leveling the playing field in the packinghouse. The climbing costs of inputs. Remembering a voice of the Farm Crisis. And Market analysis with Matthew Bennett, 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, November 12 edition of Market to Market, the Weekly Journal of Rural America.

Hello. I’m Paul Yeager.

The new $1.3 trillion infrastructure bill passed the House last week. The president is expected to sign the measure Monday.

The spending bill news was overtaken by measures of inflation.  --

At the wholesale level, the producer price index rose 0.6 percent over the last month and 8.6 percent from the previous year.

Consumers also experienced the highest year-over-year increase since 1990 at 6.2 percent. The monthly measure was up 0.9 percent.

The high cost of items is a global problem. China’s Producer Price Index jumped 13.5 percent - a level not seen since July of 1995.  ---

The farm sector is riding the input price rocket ship this fall as well.

Natural gas, the key ingredient in many products, hasn’t been at this level since the cold winter of 2013 that rolled into 2014.

The October spike is now trickling down to those looking to do some fall field work.

Colleen Bradford Krantz has more in our Cover Story.

The Ory family usually waits for spring before applying nitrogren-based fertilizer to their fields, but the recent spike in anhydrous ammonia and other fertilizer prices convinced the Earlham, Iowa row crop and cattle producers to make time last week.

Daniel Ory, Producer, Earlham, Iowa: “Fertilizer has gone through the roof, and that’s kind of why we are going after it as fast as we can now. To make sure we get what we locked in to try and help secure profits or make next year more profitable.”

Ory says they pre-purchased anhydrous ammonia in the summer, anticipating a supply crunch, but that price lock was dependent on application being completed before year’s end.

Daniel Ory, Producer, Earlham, Iowa: “That’s kind of why the rush now: You know with what prices have gone to, it makes it pretty difficult to get excited about next year….The ones that I talked to who hadn’t locked in seemed a little nervous, hoping for some better stuff in the spring.”

The USDA’s Illinois Production Cost Report from Nov. 4 shows that anhydrous ammonia, a nitrogren-based fertilizer, hit an average of $1,205 per ton, just exceeding the prices reported in 2008. Prices for other fertilizer ingredients and blends have also climbed dramatically.

Ben Bruggeman, Landus Cooperative: “Starting out in June, when we had pre-season prices, they were already high. Then going on throughout the season of pre-pay, trying to get people to commit to a price, and they just kept going up and up and up. Most of the growers I deal with haven’t seen this in their lifetimes.”

The commodity prices in most of the major grain markets have helped better position farmers to face this kind of financial challenge but Bruggeman, with Landus, says many are analyzing spreadsheets as they decide how to balance against increased input prices, particularly if chemicals and seed prices also run high in the spring.

The uncertainty of government support going forward makes planning even more difficult. U.S. net farm income in 2020 featured the highest percentage of government funds in recent history at 39 percent. That number is projected to be down in 2021 as COVID-related payments fall off, but the plans for 2022 support remains uncertain.

Ben Bruggeman, Landus Cooperative: “The things that they can focus on are their input costs, you know, anywhere from fungicide to your fertilizer, your seed. You have got to have all that down pat because that is something you can control. And the uncontrollables, like government subsidies and Mother Nature, you just kinda gotta roll with the punches on those.”

The owner of another retail provider of agricultural fertilizer and other supplies, AgHub Midwest, based near Menlo, Iowa, and Landus Cooperative’s Bruggeman say farmers are at least discussing planting less corn, a crop where nitrogen application is more critical.

Titan Immel, Ag Hub Midwest: “A lot of guys are taking a look at crop rotation, maybe not doing corn-on-corn, or maybe looking at a few more soybean acres.”

However, both men advised not rushing decisions.

Titan Immel, Ag Hub Midwest: “There’s a lot of instances that are, you know, three times the cost per any unit and you know it’s a big sticker shock. I’m just trying to work through that with growers… to regroup and put together a plan versus, you know, just fear buying.”

Samuel Taylor, executive director of research for farm inputs at Rabobank, said the pattern shift began in the spring.

Samuel Taylor, Rabobank: “Right up until about May of this year, there was quite a nice trend line where commodity prices and fertilizer prices moved in a relative lock step. I’d say since May, you’ve seen a fall-off in the corn and soybean prices and at that point you’ve seen a relative dislocation between the price of fertilizers and the price of commodity. …And that’s kind of shifted the affordability of these inputs.”

Taylor, based in New York, said most of the causes are related to various public policies decisions, both in the U.S. and elsewhere.

Samuel Taylor, Rabobank: “You look at things like sanctions on the Belarusian potash production, which accounts for about 13 million metric tons globally. You look at other threats or risks of countervailing duties to products. You look at energy costs, so that’s both in China and in Europe, particularly on the nitrogen side. And then you look at other issues, like the export limitations on phosphates and urea. So you’ve gone from let’s say August of last year to May of this year, shifting from a demand-driven market, and since May of this year, you’ve really gone into a supply-constraint market.”

The market for natural gas, which accounts for 60 percent or more of the cost of producing anhydrous ammonia, is one of the key factors indirectly driving up nitrogen prices.

Samuel Taylor, Rabobank: “What you saw in Europe was high natural gas prices curtail massive amounts of production. Millions of metric tons of capacity coming offline. I think it’s something like 12 percent of ammonia production in Europe come offline and 25 percent curtailed.”

Taylor says farmers may be able to shift money they’ve set aside for new farm machinery if it’s unavailable due to supply chain or labor issues. However, he also encourages farmers to explore new options for boosting income, whether that’s trying an alternative crop or participating in the government’s carbon sequestration programs.

Samuel Taylor, Rabobank: “Farmers – and I include my septuagenarian father in this – like to do what they like to do….and sometimes you need kind of a glaring opportunity … There is still the potential for growers to basically be rewarded what they do best with historical things. If you look at the scorecard system for carbon sequestration rewarding you for no-tilling, well farmers have been no-tilling for a long time. Why not get a little bit extra on something like that?”

Samuel Taylor, Rabobank: “I could try to say something positive for the season. Let’s hope for good weather. Should we say that?”

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

The open market for livestock producers and buyers is a dance that fewer have been taking part in as contracts and integration have taken much of the volatility out of the marketplace.

That didn’t change much in 2020. In 2021, a group of lawmakers joined forces to introduce another attempt at leveling the playing field at the packing house door.

Josh Buetter reports.

This week, a bipartisan group of four U.S. Senators announced a compromise on steps to improve cattle markets by combining parts of previous bills into a new forthcoming Cattle Price Discovery and Transparency Act.

The move comes on the heels of pandemic-driven meatpacking supply chain labor issues which reverberated down to livestock producers. 

Sen. Chuck Grassley/R – Iowa:  “How do you justify making such low bids when you're turning such a significant profit?”

Senator Chuck Grassley of Iowa, a proponent of the bill, has accused the nation’s four largest meatpacking corporations of operating in the shadows.  Grassley has instigated several recent hearings to highlight the plight of declining cash markets for independent cattle producers, who have wanted to leverage volatility into robust price discovery, while meatpacker-driven contractual agreements grow – the likes of which dominate other sectors like hog and poultry production.  But the bulk of such formula pricing is based on previously negotiated cash prices.

The new proposed legislation takes a regional approach, by establishing mandatory minimum thresholds of negotiated cash and grid trades based on each region’s 18-month average trade and requires USDA to create and maintain a public catalog of marketing contracts between producers and processors while maintaining confidentiality.

The American Farm Bureau and The National Farmers Union are among a number of state and national organizations which have thrown their support behind the measure.

For Market to Market, I’m Josh Buettner.

Next, the Market to Market report.

The tightening of world stocks of wheat, a bigger corn crop and a USDA report influenced the trade. For the week, the nearby wheat contract jumped higher by 51 cents while the December corn added 24 cents. The USDA report painted a smaller yield picture for soybeans along with a reduction in exports as the January soybean contract improved by 39 cents. December meal added $29.40 or nearly 9 percent per ton. December cotton expanded 82 cents per hundredweight. Over in the dairy parlor, December Class III milk futures gained 6 cents. A mixed week in the livestock sector. December cattle added 33 cents. January feeders fell $1.87. And the December lean hog contract shed 67 cents. In the currency markets, the U.S. Dollar index improved 80 ticks. December crude oil decreased 44 cents per barrel. COMEX Gold expanded $50.50 per ounce. And the Goldman Sachs Commodity Index fell added almost 2 points to finish at 582.45.

Yeager: Now here to provide insight is market analyst Matthew Bennett. Hello, sir.

Bennett: How are you doing, Paul?

Yeager: Good to have you here. We had a report this week. Were you surprised by anything that came out of there?

Bennett: Yeah, yeah I was a little bit surprised.

Yeager: Which part?

Bennett: I was a little surprised by the soybean yield quite frankly. I think the trade was surprised too. I don't think Chinese buyers maybe got what they wanted there. I think most of us felt like this was a big bean crop that was going to get bigger yet. And so with your average trade guess at 51.9 most producers we talked to said that they had record yields or really, really good yields. Now, you get into the eastern Corn Belt and I think there was a bit too much rain and we kept hearing that trend towards the end. So kind of took the shine off of it maybe getting to 52.5 or something like that. But we certainly, we guessed 51.75, Ag Market did, and 51.2 was a little bit lower than what we would have thought that it would be. But still your carryout was 340, it was up 20 million bushels.

Yeager: Let's stick with soybeans then in that story. It is a smaller crop, less export demand. When you say the Chinese maybe caught the buyers you're saying the Chinese are thinking there was going to be a drop on report day that they could come in and swoop and buy?

Bennett: I kind of feel like they thought the crop was getting bigger which meant that they didn't have to be in a huge hurry. It seems to me like world buyers have been a little lackadaisical here and then also of course the Brazilian crop went in the ground a little bit earlier than what we saw a year ago or even what we see a lot of times, we're talking about Brazilian soybeans being ready to go here by the end of the year on the export market. So I think a lot of these folks were thinking hey, it's a big crop, we've got some time and I'm not so sure that they felt that way after the report came out.

Yeager: So the meal was up almost 9%, 10% this week. Is that a driver in this story?

Bennett: Yeah, huge surge on Friday and you get above your 100 day moving average. And so obviously on meal I think it's just another factor that kind of helps this soybean market stay strong. Friday was a really good day. But on a percentage basis meal surged much more than what soybeans did. So I don't know that I would say I'm a huge bull as far as beans are concerned, but I do think that this week it certainly put an underpinning under the market that we didn't have coming into this week, not by any means.

Yeager: A lot of green towards the end of the week. Does that give you pause for putting any sales on the books?

Bennett: Yeah, I think that someone who is sitting around saying, I wish I would have gotten more beans sold, you rally 35, 40 cents and you've got to stop and ask yourself what are you looking for now if you're not making that sale because there's no doubt that, there's a chance you could go on up, I'm not bearish necessarily. But at the same time it's still a big bean crop and you still have the expectation that there would be a huge crop coming out of Brazil, 144 million metric tons is a huge expectation. But with that being said, maybe there is some potential here because we are counting on the weather to be awfully good in South America.

Yeager: Weather has been pretty wet in Australia impacting their wheat crop, we're seeing a tightening of the world global stocks. What does that mean for the American producer of wheat?

Bennett: It's interesting because I don't think we got enough soft red winter wheat planted, first of all. Second of all, the growers that planted it that we talk to are saying they don't like how it looks for the most part. It's obviously not rated overly well. And so I think the wheat complex in total, $8.50, $8.50 wheat at times this week and then you're still looking in places, like for instance St. Louis market 20 cents over for next July wheat. To me those are awfully good levels. Are we going to see this go on up from here? I think it's anyone's guess. But at the same time I think this wheat market has been, has performed extremely well. I think you have to keep Minneapolis wheat well supported on down the road because we're going to need a fair amount of spring wheat acres.

Yeager: So, the top of this chart says $8.40 for a range. Is that range going to get bigger, higher?

Bennett: I kind of think so. This wheat market looks awfully strong to me. Last year what you had was a lot of cheap feed wheat that got fed. And so I don't want to talk wheat and corn at the same time, but keep that in the back of your mind where we talk about feeding stuff. But at the same time, this wheat market, what is going to stop it at this point? To me you've got much smaller world stocks, much smaller domestic stocks and quite frankly I've got to think that your production situation is enough of a question right now that it's going to be hard to kill this wheat market overnight.

Yeager: You won't mix wheat and corn, but I'm going to. Is wheat tied to corn and influencing corn's movements? Or are the two independent right now?

Bennett: I think to an extent. I don't want to try to dance around it. But essentially I think that the corn market is a different animal than what the wheat market is for the most part. I think when you look at corn a 1.5 carryout got dialed down just a little bit this week. Of course you take yield up to 177. But when you've got a record yield and you're still looking at basis overs like we're seeing all around the Midwest, not everywhere, but in my back yard we've got a 30 over basis right here on the heels of harvest and you just had a 177 record yield. That's not something you typically see.

Yeager: So what does that tell you?

Bennett: That tells me that we came in extremely tight, first of all. Second of all, I don't feel like end users have originated as many bushels as what they wanted to get, first of all. Second of all, ethanol grind has just been fantastic. So every day that they're able to run full capacity they're making very good money.

Yeager: Well, and ethanol had a little couple of stories this week about maybe production was off a little bit. But was that just a breather or is that an indicator?

Bennett: I think there's logistical issues on trying to get rid of the ethanol. And I don't know that anybody --

Yeager: I thought fuel demand was --

Bennett: I think fuel demand is good. I just think there's a lot of issues with some of your rail situations being able to get your ethanol and get it shipped out. To me they're going to run full speed ahead if they can any way, shape or form. But I think some of them aren't able to if they can't get rid of the ethanol because they're hitting some stop gaps.

Yeager: The rail industry had not really reported many of the logistical challenges that say the trucking industry had. But you're saying that maybe the system is starting to have some back-up somewhere and that is trickling back in?

Bennett: It's definitely more than just trucking. In my opinion you've got more issues than just trucking. But the trucking goes over a whole host of things, it's not just ethanol, you're talking, for instance, anhydrous ammonia, trying to get people to haul anhydrous ammonia is just tough right now to be able to source trucking really for anything.

Yeager: All right, before we move onto this question, corn. You indicated a couple of indicators. Are you holding right now because a lot of things that you just mentioned get me thinking that we're heading a lot higher?

Bennett: Yeah, I don't want to sound too bullish. I've got to think though that the holder of corn, if they call their end user and the end user says hey, we're posting a 30 over bid but I’ll give you 50 if you get it here by next Wednesday, then they call me and say should I take $6.10 or $6.20, I'm not so sure that I should sell there. I'm going to say, why wouldn't you sell some corn there especially with some of the yields. So if you've got a national yield at 177, Paul, that means that a lot of people had record yields. So if you had record yields and you're getting gun-shy about selling $6 corn we need to take a bit of a reality check.

Yeager: Okay, you've said a whole lot of things that kind of, you've danced around this question because I told you ahead of time, but Jeremy in Lanark, Illinois asked you on Twitter, what will be the biggest impact on the acreage battle between inputs, demand structure, large South American crop and fewer Chinese exports?

Bennett: I think that a whole host of those things are going to play in. Here's how I'm going to answer Jeremy's question. Right now you're looking at a 1.5 carryout, just a little bit under that, 1.493. In my opinion, ethanol grind would suggest to me that that's going to, you're going to have more demand there. Is the crop going to grow a little bit? Possibly. I think feed usage could grow just a little bit here too. Exports is probably fair for where it should be right now. But say you're carrying a 1.35 next spring you need over 90 million acres and this fall has not been conducive to really good field work, first of all, second of all, anhydrous run. So if you don't get a good anhydrous run, as we talked about the last time I was on the show, that poses serious issues, especially with the logistical problems we're having. So it's not so much input prices because you can make good money at $5.50 Dec corn even with $1200 anhydrous. I know it's not what we did for '21 so people might get a little ouchy when I say that. But you can still make really good money at $5.50 Dec corn with $1200 anhydrous. I'll say that all day long.

Yeager: Does that corn price translate to anybody in the livestock industry making money, the feeder?

Bennett: Right now in my opinion the feeders had kind of a rough week, relatively speaking. But feeders are still hard to come by and get a pretty good deal on them because people are wanting to feed. In my opinion, feeders are still going to be able to make pretty decent money because I'm fairly friendly whenever I look at fat cattle and I have been for a while. Whenever I look at April I think that we could get into the mid-140s, maybe even up to 150. And so I do think that better days are ahead. Demand is awfully strong. This BSE issue in Brazil is something that a person has to keep an eye on. And then who was our number one importer of beef this week? China. And I don't think that that's something that is going to go away any time soon. As their diet changes they're going to continue to look to buy beef and I think we're their number one place to go.

Yeager: And China buying beef is news in the last year. That was something that when we saw that come on that was a big deal. So China also, let's stick with live cattle, you kind of talked about that, I'm going to move quickly into the hog industry. Which one, is China buying both beef and pork from us in the United States?

Bennett: Yeah, by in my opinion if you don’t get them to buy a whole bunch of pork that is whenever, in my opinion, we really struggle to rally, especially when we get over $100, you start to back off some of that export demand into China. But in my opinion if you're comparing the two where is the most increase likely? It's going to be beef. I think that you continue to see their per capita consumption of beef increase and I think that that's going to keep them quite interested in buying U.S. beef.

Yeager: What about the hog market then here? Let's talk solely about that. You excited?

Bennett: I don't know that I'm excited. To me I've been fairly bearish hogs for quite some time and we got into the triple digits. To me that was a tough place to be friendly hogs. You get into the $80, $85 hog talk and I'm still just a little, I still feel like we're a tough rich. And so do I think that we're going to go drastically lower? Not necessarily. As long as we can have really good exports again I think that it's going to keep your hog sector fairly well supported and I think prices could hang out in these $80 levels.

Yeager: All right, real quick last thing, are you expanding either a hog lot or a feeder operation right now?

Bennett: I think if I was going to expand one it would be a feeder operation. And I know that it's tough whenever you're feeding expensive corn. But at the same time beef demand has been awfully strong through thick and thin over the last couple of years and I think that it spells good things to come, especially whenever your cattle on feed are not overly burdensome levels.

Yeager: Matt Bennett, thank you so much, good to see you.

Bennett: Good to see you.

Yeager: All right, before we go tonight, we lost a frequent interview subject and Farm Crisis expert last week. Dr. Neil Harl served through Iowa State University in many agricultural economic roles and provided insight and guidance through the 1980s Farm Crisis. Tonight, we leave you with part of the 2013 Iowa PBS documentary on the same subject, which includes comments that make us take notice of today's landscape.

           

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Narrator: So, what do current conditions mean for today's farmers? Some experts say farmers are much less leveraged and as fate would have it, agriculture helped lead the nation back from the economic abyss during the latest recovery as farm exports, commodity prices and net farm income all soared to record highs. Rural land values also have climbed to unprecedented levels in recent years, fueling talk of bubbles and prompting some to wonder if history will repeat itself.

Dr. Neil Harl: You don't know whether it may occur in 2020, 2030, 2040 or earlier. But it's likely to happen again when people forget the lessons learned in the 1980s. Right now agriculture is doing very well. But I do urge everyone in the agriculture sector to think twice and to run in their business plans a worst case scenario, not just a best case scenario.

It isn't just somebody losing their job or losing a business, this was a whole, it was whole families that were involved and it was generations of families that were involved. And I think that that's important not to lose sight of.

Mark Pearson: You can't borrow your way to prosperity, the markets are going to change, and you have to be diversified. You have to be able to have, you have to have cash, but you need to keep debt low and not high and not overleverage. And I think that has been the big lesson of the 1980s. What we need to have on an ongoing basis is an ability to compete in the world. If you give the American farmer the chance to compete in the world, he'll take out everybody.

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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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