Market Analysis: Chris Robinson and Ernie Goss

Market Analysis: Chris Robinson and Ernie Goss

Nov 23, 2021  | Ep4715 | Podcast

Podcast

Hello, I'm Paul Yeager. The economy is a constant work in progress. Inflation, higher inputs and supply chain issues have been the biggest topics the last few months. And we are producing this program on Tuesday and again are taking this opportunity to look at a broader view of the economic landscape. Dr. Ernie Goss is the Director of the Institute for Economic Inquiry and a Professor at Creighton University. And Chris Robinson is owner of Robinson Ag Marketing, a division of TGM Institutional Investor Services. Gentlemen, good to see you both.

Good to be here.

Yeager: Ernie, you send these reports out twice a month. I looked at the one last week. There is something buried in there that we didn't really talk about or we don't talk about much on the show and it is sentiment and opinions. What is lurking in these reports that maybe aren't making it in the first few lines?

Goss: I don't know if I'd say lurking, but it's definitely there and everybody is talking about it is supply chain disruptions, of course. And it's true for agriculture, true for farming, true for both the inputs and the outputs for agriculture. So it's a big, big issue. And as you said, our sentiment index was down significantly even as the economy, the rural Main street economy is continuing to expand. This part of the country, if you look at what is going on in this part of the country you're talking about GDP, we're back above pre-pandemic levels. But when you look at the jobs we're still 3% below what we had in pre-pandemic levels. And that is true for Iowa, that's true for the states that we survey whether it's Nebraska, South Dakota, North Dakota, almost all the states are still below pre-pandemic levels.

Yeager: The day before we taped this Jerome Powell was given another term, or at least nominated again. There's theories that his way of managing this economy has been, he has been trying to get us to full employment. Has that been a good strategy?

Goss: Well, I call it a sentence -- I don't think so. In other words, we're talking about inflation running year over year, over 6%. We're talking about the Thanksgiving dinner is up 14% from this time last year. And that is a lot to do with what the Federal Reserve has done. In this case they have, we used to call it helicopter Ben, I'll call it helicopter Jerome. He's up there in the helicopter throwing money out to all of us and we're now of course spending that and it's resulting in higher and higher inflation. So no surprise now he has decided he's going to pull back on some of that, but in my judgment not fast enough.

Yeager: But there's a theory that came out just middle of last week towards the end of the week that a lot of this inflation might be tied to energy and oil. Do you subscribe to that? It doesn't sound like you do.

Goss: No, it's certainly a portion of it. And, by the way, we economists we subtract out energy and agriculture and get the core index and the core index has been rising as well. And as you know the President has just now indicated they're going to take from the strategic reserves to cool the prices. Now think about this, we're talking about cutting -- the Keystone XL pipeline, shut it down, shut down new drilling on federal land, shut that down, and that is for climate change. And then we go to Saudi Arabia to cut a deal for them to produce more oil. Now, I believe we breathe a lot of the same air the Saudis do. We're talking about some crazy things going on.

Yeager: The environmental policy has been part of that. The Keystone, though, and other pipelines maybe not a major portion of the oil output. I seem to remember oil not that long ago was at zero. What has happened? What has changed?

Goss: Well, we're talking about demand is significantly up and that's what we're talking about across the globe and we're talking about supply down, lower and lower supplies. It's all about supply and demand. When demand is up and supply is down prices go up and that's what we're seeing. We're seeing energy, gasoline prices, for example, up as much as a dollar, over a dollar a gallon, it depends on the area of the country you're in.

Yeager: Chris, I know you discuss a little bit about supply and demand in one of these commodities that we're going to talk about later. Do you see the oil and gas story as a supply and demand issue as the biggest driver right now and why prices have been higher?

Robinson: Yeah, I think at the end of the day that's the number one driver. It always comes down to supply and demand. You have disruptions and obviously shutting down the economy, that was something we had never done before, and that is when you saw crude oil drop to actually negative. Going back to then, we had never gone below about $9.40. That was back in 1986. So historically that was unusual. But yeah, you also saw a huge jump this year, really in the past year in natural gas. Natural gas went from a $1.50 to $6.50 just vertically. And that is demand driven. And that has really negatively impacted farmers and producers because the fertilizer prices have doubled. And I think that is going to be something that is going to be, not going to be fixed quickly and it's going to impact the acres that are planted this year.

Yeager: You've been cheating, you've been looking at my questions ahead of time, Chris. That's coming up in a little bit. Farmers are really curious about that acreage battle. Dr. Goss, when it comes to asking questions on either of your surveys or any of your research, do you rotate questions in and out about like what Chris just talked about, about the higher input costs? And what are either those bankers telling you or what are they hearing? What is coming across in those surveys?

Goss: Well, we have fundamental questions that we ask each time. But then we do, as you say, rotate in and out. And what they're telling us is fully that these supply chain disruptions are having significant impacts and the primary one that is reported, these are bank CEOs in rural areas of 10 states, the number one factor is transportation whether it's getting at the ports in LA and Long Beach or in the interior of the U.S. Domestically we're talking about truck drivers, finding truck drivers to carry whether it's corn to the ethanol plants or ethanol from the ethanol plants. We're talking about finding those truck drivers and just simply supply chain disruptions whether that is other factors that have disrupted that transportation. That's a big issue.

Yeager: You were talking, the video we just ran were of all these container ships, Port of Los Angeles, Long Beach, wherever they were at. When you see all these pictures what goes through your mind?

Goss: Scared, frightened. In other words, you see that in some cases we're talking about prices up significantly because of these delays. And you're talking about now a lot of your audience out there is going to be of course going into holiday and Christmas buying. And are you going to get any bargains? The answer is no, you're going to find a lot of empty shelves out there. So buy early and plan well because you may find that that store that was open at 9:00 p.m. in the evening, no they're closing at six o'clock or they may even close at four o'clock. So plan well and you'll be rewarded for doing that in terms of out there in the retail stores.

Yeager: My family and I went shopping last weekend and we went to a larger mall in the Des Moines area and I have never seen that mall that busy ever in the years we've been over here. It didn't look like anybody was scared to go shopping. I asked at the furniture store, it was going to be, oh are you at the 9 weeks, 10 weeks? No, 8 to 9 months to get a piece of equipment. What does that do to an economy long-term when you hear numbers like that on a return of something I ordered?

Goss: We're talking about pushing up prices, there's little doubt about it, and what that does to the availability. Also when shoppers are out there you've got to get ready for longer lines in terms of checking out, you're talking about service availability in the stores less and less. We're talking about in addition to the transportation issue bottlenecks, I didn't talk about the shortage of workers. The availability of workers to fill these jobs, we're talking about across the board. But in agriculture as well, the bankers we survey report that that's an issue in agriculture, in manufacturing and those two industries I guess you could say, except for agriculture and manufacturing we're okay. Well those are two very important industries, especially for this part of the country.

Yeager: Chris, how many customers that you talk to of yours were in need of some hired help this year? And did they find them?

Robinson: I think everybody that needed to find it, they did eventually find people. A lot of kids were, a lot of them were actually hiring kids that were in high school that were home anyhow because of the pandemic. So that kind of worked out. I think that in the other parts of the country where it's really labor intensive, like in California where it takes a lot of manual work to do that, that is really where it has been probably more of a pinch. A lot of what happens here in the Midwest is obviously mechanized at the end of the day. But I think I agree with him totally, you have definitely a supply of available labor, a shortage of supply of available labor.

Yeager: When you see the pictures of the high stacked container ships what goes through your mind?

Robinson: What's inside of them? No, in fact, I used to have a contact that was in the Port of LA. I've lost touch with him but he used to call me all the time and talk to me about the backups and I have not heard from him probably since pre-pandemic. The interesting thing was that used to be its own little micro economy where they actually would try and predict what they were going to need, especially with their frozen containers. But I think that with the amount of material that is sitting at the Port of LA alone I don't know how long it's going to take to get those containers back. And the other key is getting those containers back to China. So I think it really wasn't so bad in the beginning of the pandemic. I think it was the Delta variant really kind of threw things of the whole supply chain. I think they took that first hit but then the Delta variant really messed up the supply chain. And I think it's going to take a while for it to work itself out. Regardless of who is in charge or what they say, at the end of the day the market is going to have to work it out on its own.

Yeager: There is no such thing as a new normal. But when do we return to our regularly scheduled hours in business?

Goss: I'll say it like every economist does, about six months out.

Yeager: But in honesty that is what it has been.

Goss: That's exactly it. Janet Yellen, the Secretary of the Treasury, that's what she says. I think we will see some relief in the second half of 2022 in terms of the supply chain disruptions. And when J. Powell, the head of the Federal Reserve, says transitory, the inflation is transitory, it depends on your timeframe and the timeframe we’re looking at we're now moving into something that is not transitory, it's sort of sticking with us. And we will see prices pull back. But we're at right now 6.2%, as I said, year over year. Pulling back to 4% and 5%, that's twice the Federal Reserve's target that we had two years ago. So all of a sudden we're accepting more and more inflation, that's the new Federal Reserve, and some could call that modern monetary theory where you just print more and more money and no consequence. And as the head of the -- he was Herb Stein back in the Eisenhower administration -- his point was if something can't go on forever, something can't go on forever, it will stop. In other words, we just don't know sometimes. But we are looking at at least six months, well into 2022. We're looking at short-term interest rates rising perhaps as early as the first half of 2022. Long-term interest rates have already begun rising.

Yeager: Chris, do you see an impact in the ag sector if interest rates start ticking back up. Is that good or bad?

Robinson: I think higher interest rates makes borrowing money more expensive. So if you're worried about especially the tender, the tender is really kind of like the benchmark for mortgages and car notes and things like that. The big worry is four years ago the big worry was what happens if the tender gets to 4%? Now it's what happens if it gets to 2%? And that is going to be the interesting thing. I think we're about 1.6%, 1.5% right now creeping up. Is that going to be enough to derail the market? I think the person, he just got reappointed, God bless him, but he has the worst job in the world because it's almost like no matter what he does with the interest rates there is a danger of a blowback. If they don't do it fast enough we have higher inflation. If they do it too fast you could tip into a recession. So yeah, I would be concerned if I'm a farmer or a producer and I've got to borrow money, if you can borrow at interest rates today and they say well it's only going to go up a half a point. Well a half a point starts to add up if it starts getting more aggressive. So that would be the worry longer term is what happens, how fast do the interest rates go up? And nobody knows that answer. We're going to have to wait and see. And I think the only thing you can do is watch that tender because the market I think will probably tip its hand before even probably the chair of the Federal Reserve will.

Yeager: Okay, I have one more question for you in just a moment but I have to do a little business here. So sit tight for a minute. Again, we are taping this discussion on Tuesday. And for the two days of trading let's close the markets for you. The nearby wheat contract added 33 cents while December corn improved a dime. The January soybean contract also gained ten cents. December meal shed $9.60. March cotton shrank by 77 cents per hundredweight. Over in the dairy parlor, December Class III milk futures lost 2 cents. A green week in the livestock sector. December cattle expanded $1.87. January feeders put on $3.45. And the December lean hog contract increased by 40 cents. In the currency markets, the U.S. Dollar index improved 49 ticks. January crude oil gained $2.78 per barrel. COMEX Gold dropped $62.20 per ounce. And the Goldman Sachs Commodity Index added more than 11 points to finish at 578.70.

Yeager: Chris, let's start with wheat. Because of the global nature, the supply keeps getting eaten away. We asked you about supply and demand earlier. Is that the biggest story in wheat?

Robinson: We've known about the wheat issue really for the past three or four USDA reports, you go back and look, especially for the high protein wheat. And it was ebb and flow, but you saw that big move especially with Minneapolis spring wheat. That is what led us up, now you've got Chicago and KC at 8 year highs. And also now you're starting to see the money start to chase it. You've got money managers coming in and they see that because when you're at 8 year highs it's like, all right, they want to get in on this game, it's an inflation hedge, people want to own physical assets. But wheat, out of all the grains, wheat actually has a really bullish story because there's not enough supply and even though Australia had a very good crop this year they're having problems with being too wet. So they're concerned about that. Every day we come to work we always wait for Russia to say when they're going to start eliminating or dialing back their exports. So that is always something to keep watching. But I look at it this way, if you're a wheat producer these are great, great -- it's a great opportunity, the best prices in 8 years.

Yeager: Well, and you just kind of stole what I was going to say. Is this one of those -- I think someone wrote this week or today that I said, you're looking a gift horse in the mouth?

Robinson: Yeah.

Yeager: You'd be making some sales right now if you had some wheat?

Robinson: Absolutely or setting a hedge. You're not calling a top but we all have seen how volatile these markets can be in the past certainly year, year and a half. And that's the other thing, we're coming out of the previous seven years where we didn't have a whole lot of volatility. We were kind of flat. We had a trading range market. Things completely got reset with 2020. So I don't play the game of saying it can't go here or it can't go there. All I know is you’ve got an opportunity. In the last six weeks alone wheat has gained almost two bucks, in six weeks.

Yeager: In corn it keeps following the others. When is it going to have its own story?

Robinson: It depends on what happens in South America and also you're already starting to see 2022, you kind of have a disconnect between old crop corn and new crop corn. New crop corn is trending higher. It made a new contract high today, $5.60, $5.70. So that market is already out there buying those acres and if you're a producer, if you haven't looked at 2022 next year those are really good prices. And again, setting a hedge or making a cash sale, you're not locking in, you can manage that risk after the sale. A hedge doesn't mean you're calling the top. You just don't want to wake up and say hey, we had a $1.50 rally here, we did nothing about it, we just lost half of it, we could have done something. So that's the key.

Yeager: In soybeans, is this a supply issue or a dollar driven issue in what's driving this market?

Robinson: Well, right now our beans are more expensive than South America. South America even was sending it to China, it's less expensive than our beans. So that is a factor against us. They have planted a huge crop in South America. So far there hasn't been a weather issue. I know this is La Nina year and everybody is hoping and looking for a possibility of a drought issue to drive prices higher. Nothing like that is coming out of there yet. So you've also see that I think with the Chinese buying. They have kind of been folding their arms, they've kind of been waiting. They bought a little bit when we were at nine month lows last week. But they're waiting to see what happens with South America as well and that is key. So I think that the fact with the U.S. dollar being at one and a half year highs certainly doesn't help our exports, but I think the bigger thing is what happens with the supply in South America?

Yeager: Do you see the dollar still as a big story?

Goss: Absolutely, you've got to think the dollar is going to rise and of course that puts downward pressure on agricultural commodity prices. And with the Federal Reserve raising interest rates people will say well they haven't done that. They will do it. I think we're looking for two rate hikes in the first half of 2022. That's a half a percent. That will put upper pressure on the dollar. We're talking about in this month the Federal Reserve is pulling back on their quantitative easing, that is buying bonds, long-term bonds. That is going to put upward pressure on the dollar. Now, it's not going to be as dramatic as perhaps I'm saying, but we will see in my judgment a higher valued dollar, which would put downward pressure on agricultural commodity prices.

Yeager: All right. Let's get back into livestock. The dollar is playing there a little bit on exports. Is export the biggest story in the live cattle market right now?

Goss: The exports have actually been pretty good. They haven't been as good as a lot of people want but we've had a nice recovery after coming off of about a three or four month low just not that long ago. So if you look at the feeder cattle versus the live cattle I would say this, I'm less concerned about the near-term markets. The deferred markets are all bid, they're all bid across-the-board, especially in the cattle out in the futures. So you may see that type of spreading moving forward. Now, as far as what the demand is going to be in the next three to six months your guess is as good as mine. So far it has held up pretty well. It has certainly come back a long way from where we were pandemic lows. And not that long ago we were at contract highs. So all in all I think the cattle market looks pretty strong. You're starting to see the cash market finally catch up with the futures market, which is one thing people look for. And we continue, I think we're going to talk about it later on, with the prices of food at the grocery stores, box beef continues to hold up relatively strong compared to what it has been in the past two or three months. So that to me, there seems to be good support underneath the cattle market.

Yeager: And would you be expanding your feedlot right now?

Robinson: If I'm going to expand my feedlot I'm going to make sure that I've got some risk management on for the possibility that corn goes through the roof. If corn goes through, if you've got Dec '22 corn goes north of $6 that is going to completely change that business decision I think. So if you want to expand I get it, but you've got to take into account the risk that if we have much more expensive meal or corn prices it's going to affect your bottom line.

Yeager: All right, are you long hogs right now in the sense of are you expanding --

Robinson: I look at the deferred months, that's a great opportunity. All these markets in the deferred months are buying, have a lot of buying interest and that is giving great opportunities. In the near-term months you've seen some pressure in lean hogs, mostly because I think number one, technical reasons, money flow. Money flow continues to want to come in though and own physical, not only the grains, they're long all the grains, but they have stepped in and they're long cattle. So that is also I think supportive. But I think for lean hogs the nearby month has been under some pressure. Dec. hogs have been under pressure. But when you look out to Feb and longer they all have pretty good bids on them.

Yeager: Dr. Goss, your freezer, how full is it of meat? Have you been stockpiling?

Goss: Paul, I have. Yes, I have.

Yeager: Do you think many consumers are doing the same thing?

Goss: In fact, I bought today.

Yeager: Before you heard what Chris said?

Goss: That was before I heard what Chris said, yes. We're talking -- economists and farmers have this in common, we're always very cautious and well it could have been better. And that’s what we're talking about now. This agricultural income, farming income this year, net farm income would be the highest since 2013. And our surveys show that well that's the good part. The negative part is we're going to see higher, we're seeing already the best farm land price growth that we've seen in our surveys since 2012 and '13. You say, well that's a good thing. Well, farmers aren't in the business of selling farm land, they see what grows on the farm land, and that means higher property taxes. And as Chris said and you've brought up as well, Paul, is what about natural gas prices? We're talking about other fertilizer costs, all those cost increases, yet the price, the commodity price whether it's corn, wheat is a bit different, soybeans down, the profitability is less now -- even though net farm income is going to be up this year. But still there is some significant pressures on the cost side for the farmers.

Yeager: All right. Dr. Ernie Goss from Creighton University, thank you so much for contributing to our discussion. Chris Robinson, thank you so much. I've got a whole bunch of questions just for Chris coming up that you submitted. We'll talk those in a moment. When we go, leave this broadcast because that is the end of our Market to Market TV show. We'll do more talking in Market Plus so you can join us there. Find that on our website of MarketToMarket.org. And this program was available first via our website and YouTube. If you subscribe to our channel, you will be the first to know when we publish our individual stories, the Market Plus and the full program. Subscribe today by searching Market to Market on YouTube. Next week we look at shaking up a niche market with a fresh, local supply. Thank you so very much for watching. Have a great week.

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