Market to Market - November 24, 2023

Market to Market | Episode
Nov 24, 2023 | 27 min

As you assemble around your table, we do the same to check economic conditions everywhere from Main Street to the fields of America. Dr. Ernie Goss and regular Market Analyst Chris Robinson are our guests on this edition of Market to Market.

[ Recorded: November 21, 2023 ]


Paul Yeager:  Coming up on Market to Market as you assemble around your table. We do the same to check economic conditions everywhere from Main Street to the fields of America. Dr. Ernie Goss and regular market analyst Chris Robinson, next.

Announcer 1:  What's next? Doesn't happen by chance. It happens when researchers and farmers work together to solve tomorrow's agronomic challenges. We're committed to creating what's next because at Pioneer. Our name is our mission tomorrow.

Announcer 2:  For over 100 years, we've worked to help our customers be ready for tomorrow. Trust in tomorrow. Information is available from a Grinnell Mutual agent today.

Announcer 3:  This is the Friday, November 24th edition of Market to Market, The weekly Journal of Rural America.

Paul Yeager:  Hello. I'm Paul Yeager. The Thanksgiving holiday features the dinner table as the centerpiece of sharing stories of thankfulness and the year that was. This week, we are holding our own table discussion about the economy and rural and Main Street America. Ernie Goss is the McAllister chair and professor of economics at Creighton University in Omaha, Nebraska.

Chris Robinson is managing director of Agriculture and Commodities at TJM and a regular market analyst on the program. Good to see you both. We'll talk to you in just a moment. Good to be. Stand by. We are recording on Tuesday, shortening an already abbreviated trading week for the week. The nearby wheat contract added $0.04 while December corn gained $0.03.

Continued hot and dry weather in South America put a damper on the soybeans crop size as the January contract improved $0.37 and December mail strengthened 590 per ton. December cotton shrank by a dollar 58 per hundred weight over the dairy pilot. December Class three milk futures decreased $0.28. The livestock market was lower. December cattle fell $0.75. January feeders cut $0.17 and the December lean hog contract lost 280.

In the currency markets, the US Dollar index shed 35 ticks. December crude oil added a dollar 93 per barrel. COMEX gold put on 1890 per ounce. And the Goldman Sachs Commodity Index improved more than nine points to settle at five 6550. Let's bring back now Dr. Doss and Chris Robinson. Chris, I'm going to start with the economists for a minute.

All right, Ernie, give me, as we look at this Thanksgiving holiday, a chance to pause and reflect what's the state of the economy in rural America right now?

Ernie Goss:  It's weak and weakening a bit more. We're seeing the interest rates, the higher interest rates beginning to take, taken a negative impact on the rural Main Street economy, as we call it. And we do a monthly survey, as you know, of banker bank CEOs in rural areas of ten states, including Iowa, Nebraska, North Dakota, South Dakota, right down the middle of the country, and even west of Colorado and Wyoming. So they're reporting not such good conditions. A third straight month of below growth neutral readings. Concern about the interest rates also in certain states. Of course, the drought is having some still having some impacts in the in the farm sector and it's causing some real concerns. Our confidence index. We asked to look out six months. The bankers are not very optimistic. In fact, it's the worst confidence index that we recorded since 2006 when we started the survey. So that's the that's the bad news. There was some good news. I guess we'll get to that later. But it comes we we tend to focus on the the negative news, you know.

Paul Yeager:  Well, I read your reports, the two that come out.

Ernie Goss:  And thank.

Paul Yeager:  You. And they're yes, there has been a strong sentiment downward. Is it only tied to interest rates? That was one of the things you mentioned.

Ernie Goss:  No, no. We're talking about a global economy. Of course, it's we can we talk about now GDP, of course, within the US last week. And of course he's he won't admit it that there's a recession going on in China and that's telegraphed back here to the Midwest and midsection of the country. We're also talking about a Europe slowdown there, recession in Germany that's been that has some negative impacts and and again, some weather related issues in agriculture and Chris would know far more than I would about that.

Paul Yeager: Well, Chris, what he said sound consistent with what you are hearing?

Chris Robinson:  Yeah, I think the overall picture, I think people are concerned certainly about the the rise in interest rates. The Fed in 17 months they they hiked rates 11 times, you know, five 525 points. That was a huge, unprecedented move. And now you're starting to see its effects the last couple of times with the unemployment numbers and the inflation numbers. So they're starting to see a little bit of a blip down in inflation and a little bit of kind of what I think what they were looking for. They were looking for a decrease in unemployment because the employment market's been on fire. That's the odd thing about economics, right, that the bad news is good news. Vice versa. So the positive thing I would say about that, you mentioned interest rates was the fact that looks like we've potentially that the Fed might be done raising rates. So if that's true, that may help people moving forward because rates may come down. You've already seen a big correction in the ten year. The ten year is the kind of the the benchmark for all borrowing. And so that might be one positive thing to look ahead of if the Fed is done. Maybe the worst is behind us.

Paul Yeager:  Well, I'll give you a chance then to answer that question. And Shane in Nebraska has a question for you, too, Dr. Goss. What would prompt the Fed to start lowering interest rates? Is it a possibility that Fed rates could be a couple of points lower over the next two year span?

Ernie Goss:  They will be they will be lower, but not much lower. They can't we can't revisit these low rates. These are record low interest rates. And when we talk about high interest rates today, we're comparing it to back to 2008, nine forward look back even further. I mean, when I bought my first house in 1983, I paid ten and a quarter percent on that.  Now we're talking about 8% on the same loan. So the what we're talking about now is almost normal. Now, the normal over the last 50 years, for example, the funds rate, that's the one that the Fed sets is about 4% now. Now, as Chris said, now it's five and a quarter to five and a half. So we're not much above that so if they do and I expect them to raise interest rates as early as the middle of 2024, you're probably talking about no more than 2%. That would be my expectation. Probably not even that, because we don't want to go revisit this, putting so much pressure on the economy, these inflated values all the way across the board, whether it's stocks, whether it's ag land, farmland, all those have been inflated because of these ultra low interest rates that are just not sustainable. Those are unsustainable. Look at the credit right now. Look at the credit of everyone that's college students. That's the US government, the federal government. All this. Too much credit out there. And now they're paying. They're having to pay the price for that credit.

Paul Yeager: But we consumer prices dropped, producer prices dropped. Some of these inflation measures have retreated, but then retail sales retreated. Back to what Chris is saying about the unemployment number, mixing these two together. Are you saying that we're probably at the the new normal for interest rates?

Ernie Goss: We're above a little bit above the. A little bit.

Paul Yeager:  Above. A little bit about what we have at a new norm. What would it be.

Ernie Goss:  A new norm would be about in terms of the, say, the mortgage rate, 30 year mortgage rate would be about seven, 7%. Instead of 8% in terms of growth in retail sales we're looking at for this buying season, Holiday and Christmas buying season, I expect 3 to 4% increase. About 3% of that is inflation. So we're talking about unit sales, if you want to call it unit sales, almost flat to 1% increase. So we need to adjust our thinking because it is it's a new normal and the new normal is going to be higher interest rates. The idea that what happened after 2009 is the Fed, the Federal Reserve pushed rates to abnormally low levels and we are all now paying the price for that. And guys and gals in my class are like, Whoa. And I'm like, 'Get used to it. It could be worse.'

Paul Yeager:  You've seen it. You've seen it worse. Sure. So from a decision making on the farm, we've heard this notion here in the last couple of months of maybe some people are making sales to not pay storage because of interest rates. Are you hearing that? Absolutely.

Chris Robinson:  I mean, you basically have free money for 15 years, roughly in general. I mean, and, you know, depending on when you were born, when you went to high school, it's been a shock to see things move up. So it's people are adjusting and it's going to affect everybody. Your operating loans are going to be different and your bankers probably going to have a different conversation with you right now and your spreadsheets are going to be more and more important. I think that that's something that's going to, you know, continue. If you're if you're in farming, I don't care if you're a producer or if you're a rancher, the cost of money is never going to be zero again. So that's something we're just going to have to deal with.

Ernie Goss:  All right.

Paul Yeager:  Let's dip into the commodities for just a minute here, Chris. I'm going to go to wheat for a moment because that has been an earning. You get to talk about the wheat states in a minute. This market continues to each week. I seem to ask the same question, is it only Black Sea? But what's the domestic wheat story doing to our. Well, as we closed on Tuesday at 555 on December.

Chris Robinson:  We're at two and a half to three year lows, depending on which of the three contracts you looked. We had one rally in July, which that was about it. And then since July we've had a I call it a horrendous selloff. Really, if you're wheat producer and if you had no hedges on to drop $2.50 to $0.03, depending on if you're talking spring wheat, Chicago wheat or the KC wheat, we are at or near, you know, contract lows, two and a half year lows. And the last numbers that the USDA gave us, there's there's plenty of supply. So we'll have to see what goes on. The other thing is, too, you've seen a huge supply really, that's come out of Russia. They've continued to sell. They've hit every bid. And I think that's what's most surprising thing about 2023. If you say what's surprising, if I told you all the geopolitical stuff was going to be going on, you'd think, my goodness, you know, wheat and corn would be super more expensive because every weekend we were concerned about what's going to happen in the black Sea, what ship is going to get hit, how is it going to affect And it really hasn't. And I think that's the one surprise that the the the geopolitics really didn't affect the fact that, you know, at the end of the day, there's plenty of supply out there. And the interesting thing was a year and a half ago, two years ago, I came out an exact way it was. But when this all started with the Ukraine, the U.N. famously said, oh, we have six weeks left of wheat. And that was literally the stone cold high. So there's a danger of trading headlines, Experts, I think a lot of experts missed this.

Paul Yeager:  Headlines in many of your states that you survey are wheat states. Are they telling you in any of your results paying attention to the Black Sea or are they just hyper focused on it? Has it rained? I I'm struggling on a a cheap crop out of Russia. What are those farmers in those wheat states telling you?

Ernie Goss:  Well, we're serving the bankers and they're telling us what the farmers are telling them. So and I'm a bit removed from what the farmers are saying, but I do go out and speak to farmers, so I'm not completely cut off from that. But right now, their concerns about more domestic, for example, Iowa, I was a pork production is very important. Number one, pork producing state in the US and of course Proposition 12, that's and we the bankers report every month I get reports about well concern about hog production concerned about selling. And Massachusetts of course now has implemented some proposition on what it's calling Massachusetts. But nonetheless that's there's more of domestic that's that's what the bankers are telling me and us Creighton University about what's going on.

Paul Yeager:  You do have an anecdote about hog production in Iowa, a significant loss. I think one of the banks told you in the in the survey this week.

Ernie Goss:  Yeah there's there's is significant loss in in and just as a result of just just regular day to day production sales. So that I couldn't give you the exact quote but it was not positive. And the reports, particularly in livestock, has been more about pork production. Our hogs and not so much about cattle and of course poultry as well. So and now we're approaching, of course, Turkey three, you know, a couple of days before Turkey day.

Paul Yeager:  A lot of corn farmers are done. We're, I think, 93% complete. As we sit here right now, Chris, they're going to be able to enjoy maybe a holiday, but are they going to enjoy the price?

Chris Robinson:  It depends on if they did any forward selling or if they hedged anything. You have a lot of opportunity this year if you count the number of days or weeks where year north of $6 corn are actually high. You know, was that June, July spike? I think a lot of people thought, oh, here we go, we're going to go back to $7. And so it just depends. If somebody did some marketing, you had opportunities there. If you've done nothing, you know, you do the math. 629 -461 to dollar 60 and change. That's, you know, that's a that's a revenue bump if you did nothing. So now people are going to store it. The question is, do you have to pay for storage? Is it on farm storage? There's some carry in the market, but it depends on how much it's cost you to store that corn. We were talking about interest rates. A lot of wheat producers are looking at carry again, but it depends on your balance sheet. It depends on what it costs you to store because farmers will hold it until they absolutely, positively have to sell it. And I think moving ahead, we we're going to wait and see. Are we going to get a South American market or we get a bump up and they get a chance to hopefully this time sell into the rally instead of waiting.

Paul Yeager:  So the time machine's broken for many led last I knew. Yeah. If you've missed this window, what do you do? I mean, you just kind of said maybe Hope Hope's a tough marketing strategy.

Chris Robinson:  S.O.S. sell on strength and keep them cheap. Put under the time for expensive insurance is one more at six $36. That's when you had something worth protecting. But at $5 or for 60, I think you keep a kind of a disaster floor under it and look for rallies to sell. If you don't have to pay for storage, you're in a different group and somebody does. I think if you have to pay for storage, you have to do the math, right? That makes sense. So you could see a capitulation here. The farmers that will have to sell, and I can tell you, is going to be pulling the trigger on a lot of these sales. It's going to be their bankers, because these gentlemen and ladies are going to have to go in and say, hey, I'm looking at an operating loan for next year. And they're going to say, okay, well, where are your assets? What are they worth? Not what what were they worth in July? It's what they are worth right now. So I think that's going to be the decision. It's going to be a business decision.

Paul Yeager:  I'm going to go to a question that a little bit inspired, I think, by your former boss and a frequent guest on this show, Mark Gold and Tim in Minnesota's asking a question. And this this is all seriousness about what happened, but in many ways, are Brazilian beans as overheated as fans? At a Taylor Swift concert, an Argentine crops? Is their drought broken is the question. And the reason I. I find this to be legitimate is what Marc said. He says there were a lot of people at this concert and it was a 140 degree heat index where this concert was. Was this an actual data point to some traders to say, oh, it really is a serious deal in Brazil because we talk about it every week in beans?

Chris Robinson: I think it depends on how how the impact is. We really won't know until they start harvesting their beans. A lot of people thought we had lost a big chunk of our crop this year when it was hot and dry and the yields end up coming in a lot better than people thought. So I think as a as a point, it's going to be a point of discussion. It certainly gave producers who needed to move soybeans here in the U.S. a good rally we had an outstanding rally rally of 2015. Certainly the Chinese came in and bought on those five month lows. We had one of their biggest sales on all year in quite a while from China. So again, you're going to see end users buying dips. And I think if you're a producer, no matter what it is in the headlines, if it's a weather issue, if it gives you a bump up, take a look at rewarding that with a sale.

Paul Yeager:  $14 seems to be though that heavy resistance.

Chris Robinson:  Yeah. For a spot month for the.

Paul Yeager:  Spot month ahead. So am I waiting to see what's going to break it through? Is it a continued hot, dry story or is there have to be something in the United States that that causes us to to go higher?

Chris Robinson:  I think you have to see continued buying from the Chinese number one. And number two, it's going to have to be hot and dry. Story is and you'll see it. We've already seen tremendous volatility. One change in the weather forecast. You know, we in two days we rallied $0.50 and then today, which is Tuesday, we dropped $0.25 and then we came back. So you're going to continue to see that movement with every changing weather forecast.

Paul Yeager:  Ernie, I'll get your thoughts on livestock in a moment. You've already kind of teased us a little bit on something, but I want to finish up on live cattle because we had a little bit of a story last week with cattle on feed deemed to be a neutral to maybe possibly bullish. But this live cattle story is a consumer story, has been, it appears, in the last 8 to 12 months looking at that price. And the clothes on Tuesday tell you that we are now headed back lower.

Chris Robinson:  I think if you look at that chart and you got to remember for three years we went how much higher we get, how much higher we go. So we've had our first really serious correction. I would say this, if you're looking at these prices, you know, 170 is better than 140. So rather than worry about, you know, are we going to go back to a rally another 15, 20 bucks higher, make sure that you don't let it get any worse and stop the the kind of the monkey business of trying to say, well, this is the low. This is the high. I think the market's going to continue to move. And we talked earlier about the overall economy. The first thing people do if there's a this is if this is going to be a soft landing or a hard landing. And again, it depends. The first thing people will do if they're if they experience a hard landing, they're not going to buy steak.

Paul Yeager:  So, Ernie, the story we can't say that You always say that the the the economy is not based on the stock market, but all of a sudden, the equities certainly responded last week and it flipped the script on hard landing. Soft landing, like Chris said, Shouldn't have. It shouldn't have, No. Why not?

Ernie Goss:  Is it? We're talking about seven, the Magnificent Seven leading the whole stock market. If you look at the Russell 2000 small, you know, a small company index, it's not up that it's up 1 to 2%. I mean, the stock market's not the economy, nor are these seven companies, the stock market either. I mean, in other words, it's investors are going they're too far in. I think. In other words, this is too much optimism for so little. I mean, I'm not saying the economy's not in recession. I'm just saying this market is overheated, at least those seven stocks. And this evening, one of the this in video will be announcing and based upon artificial intelligence, I was there when we had browser Internet. The Internet was going to do well. It didn't at first. It took time. This is going to take time. Don't over. We're getting too excited about something that's May is not going to happen for a while. The impacts, the positive impacts of that. But the stock market.

Paul Yeager:  On the stock market, livestock wise in again your bankers and your do you know of heavy anecdotes yet of calling notes on some of these livestock producers after just a short amount of time after being so high for so long.

Ernie Goss:  Now here's the positive the bankers aren't that they're not that concerned about the condition of the farmers. The farmers, even though we've had a 2023 income as farm incomes down from 2020 to 2024 is projected to be lower by USDA from 2023. Yet the farmers are not in critical condition like some of the businesses on what we call rural Main Street. Those that's where the problems are. And we're we're seeing that. And the farmers there are they have increased some of the collateral requirements, but not much. Look at what's going on with farm land prices, according to our survey, continue to grow despite despite these higher interest rates. And we're we're seeing some impacts on farm equipment sales now, farm equipment sales down for five of the last six months, according to the bankers. So there are some issues out there, but it's not nearly as dire for the farm economy is more of the rural economy where the these bankers reside, I would say, and and I.

Paul Yeager:  Get that.

Ernie Goss:  No delinquencies, not much farm loan defaults, almost not not there right now. Now, we have to look ahead now, again, where are interest rates going up? The 90% of our bankers said no to another rate hike. The Fed meets again on December the 12th and 13th. There will be as we sit here today, there will be no rate hike on that that was two days.

Paul Yeager:  Which means, Chris, does that do you think somebody is going to start expanding their feedlots or have they missed their window on on getting back into this feeder market?

Chris Robinson:  Well, you just the contract, depending on which contract you look at for live cattle, I mean, it's it's a dip to buy if you're if you're a person that you think that, you know, we're going to be higher and the economy is going to be fine. But I will tell you this, ranchers are not going to buy animals unless math works, period. So I don't care if you're a cow-calf or something like that. So it's going to come down to the numbers and we'll see a lot of it's going to have to depend to and what the price of corn is that your inputs, soybean meal is just gone through the roof with the issues in South America. And that really impacts you were talking about the hog producers because a lot of that is, you know, directly meal related. So yeah, I think if the numbers work, you know, the ranchers will will keep, you know, trying to grow the herd.

Paul Yeager:  But on a drop like that it it makes you think that maybe that is an opportunity. But you're saying it doesn't look like we have evidence to to the contrary.

Chris Robinson:  No, I think.

Paul Yeager:  The positive there.

Chris Robinson:  I would say based on what we've seen, yeah, there might be some words to go.

Paul Yeager:  Final minute here on Hogs. Again, a continued story in just two short days of trading lower. Again, this is just there's not been a positive. Is there any positive coming in hogs.

Chris Robinson:  Contract lows or about the front month? The positive look at the thirds go out July, August. I was looking at that, talking to some clients today, they're still 95, $0.96 out there. So there's a there is an opportunity out there. The other kind of negative piece of news we got yesterday, the Chinese economy is slowing down. They had 42% more hogs right now than they did this time last year. So they have an oversupply. And that's again, it all trickles down at the end of the day, a big part of the demand comes from China. So I think that was something where people push down and we'll see how that works out. But at the end of the day, we still have a pretty good size herd.

Paul Yeager:  Okay, Very good. Chris Robinson, good to see you. Thank you. Thank you so much, Dr. Goss. Thank you. Hang around for just a couple of minutes, will you, please? Will do. We have to we need to hear more from him. Thank you, gentlemen. And we're going to pause our analysis, as I said, and continue our discussion about these markets and more in our Marketplus segment. You can find both analysis and plus on our website of market to market dot org. It is card writing season. So how about you spend some time telling us about the first time that you watched our program? Send us an old fashioned email to market to market at Iowa and we'll open up a conversation next week. We'll look at how US poultry producers are working to handle recent outbreaks. Thank you so much for watching. Have a great week. 

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Announcer 2: What's next doesn't happen by chance. It happens when researchers and farmers work together to solve tomorrow's agronomic challenges. We're committed to creating what's next because at Pioneer. Our name is our mission.

Announcer 3: Tomorrow. For over 100 years, we've 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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