Market to Market - Mar. 4, 2022
Coming up on Market to Market -- The worldwide repercussions of Russia’s invasion of Ukraine. Supply chain bottlenecks remain even as COVID cases drop. And market analysis with Don Roose, 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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This is the Friday, March 4 edition of Market to Market, the Weekly Journal of Rural America.
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Hello, I’m Brooke Kohlsdorf. Paul Yeager is on assignment.
After a week and a half of fighting, the Russian military continues to capture ground. Ukrainian forces - including civilians - are pushing back but it appears to be just delaying the inevitable. There were 44 million people living in this agricultural superpower but some have fled. President Biden warned this week that if dictators do not pay a price for their aggression they only cause more chaos.
Josh Buettner has more about the far reaching effects of the war in Ukraine in our Cover Story.
President Joe Biden: “Tonight, I say to the Russian oligarchs and the corrupt leaders who built billions of dollars off this violent regime: No more!”
Shockwaves from Europe’s largest military conflict since World War II reverberated in President Biden’s first State of the Union Address this week. In addition to highlighting gains on jobs, the economy, and legislative victory on infrastructure, the chief executive dropped an exclamation point on growing global condemnation of Russia’s unprovoked incursion into neighboring Ukraine.
President Joe Biden: “A Russian dictator invading a foreign country has costs around the world. And I’m taking robust action to make sure the pain of our sanctions is targeted at Russia’s economy. And that we use every tool at our disposal to protect American businesses and consumers.”
The United Nations declared 1 million refugees have fled Ukraine since war broke out, and over 200 civilians have been killed largely due to artillery shelling, rockets and airstrikes.
While all ports were closed due to the invasion, this week Ukrainian officials confirmed Russian forces had seized the strategic Black Sea port of Kherson, with other seaports under siege or encroached upon – reminiscent of Russia’s 2014 military annexation of Crimea.
Despite a glaring disparity among military casualty estimates between the U.S., Ukraine and Russia, sanctions have been strong and swift.
Western nations have frozen assets tied to Russia’s central bank, blocked international money transfers and energy projects, banned import and export of goods, services and technology to Russia, and restricted Russian airlines from entering their airspace. The U.S. and EU also have sanctioned Putin himself, Russian high officials, and billionaires associated with the regime.
While the actions and more announced by businesses and sports organizations to shun Russia have served to devalue the ruble by 30 percent and cause indefinite closure of the Russian stock market, more is brewing in Washington.
Sen. Lindsey Graham/R – South Carolina: “We’re failing to hit Putin where it hurts the most. Forty percent of the revenue of the Russian economy comes from oil and gas. Republicans are asking Democrats to do this. It will increase prices here at home. There’s no doubt.”
Mid-week, Senators called attention to the 600,000 barrels of oil the U.S. buys daily from Russia, and hinted an aid package was forthcoming as oil prices spiked into record territory.
Sen. Joe Manchin/D – West Virginia: “We have to step up to the plate. That means basically reversing some of the decisions that have been made with no leasing, not drilling, and basically, cutting back. We need energy independence more now than ever before.”
The West left Russia a sanction loophole by continuing to allow access to hard currency via sales of its vast oil supply.
President Joe Biden: “The United States has worked with 30 other countries to release 60 million barrels of oil from reserves around the world.”
Though Biden pledged a flood of 30 million barrels of oil from domestic coffers would blunt rising gas prices, financial pundits called the measure a short-term fix.
Amanda Robinson/Arena Wine & Spirits – Columbus, Ohio: “It’s not going to be an economic impact for us. It doesn’t move a lot for retail or wholesale. The bars don’t buy it, so it kind of sits on a shelf anyways and gathers dust.”
Even as the president touted a new semiconductor factory outside Columbus to combat automobile supply chain and price tag woes exacerbated by COVID - Ohio, along with several other states with government-run wine and liquor suppliers, ceased the purchase and sale of Russia-sourced alcohol.
Another of those states was Iowa, whose Republican governor gave the rebuttal to Biden’s State of the Union.
Governor Kim Reynolds/R – Iowa: “Instead of moving America forward, it feels like President Biden and his party have sent us back in time.”
While the Biden Administration has been plagued by the highest inflation rates in 40 years, the President called on companies to lower costs, not wages, and focus on American infrastructure and innovation, while lessening reliance on foreign supply chains.
Even as the Federal Reserve is expected to raise rates in the next few weeks to help combat inflation, analysts are sounding the alarm that the Ukraine crisis could cause stagflation – marked by rising costs and limited economic growth.
As a result, some investors are bearish on stocks, and have started to favor safe havens like gold and silver, along with a move into commodities and buying up grain contracts.
Ukraine accounts for 16 percent and 12 percent of respective world corn and wheat exports, while Russia supplies 17 percent of wheat across the globe, and planting season is just around the corner.
Livestock producers would feel the downside of rising feed costs, but one of the largest agricultural impacts, long term, could be on fertilizer markets. Russia is a key world player, and sanctions could choke supplies of ingredients like potash. But only time will tell how current world events trickle down to the farm.
President Joe Biden: “We’re the only nation on earth that has always turned every crisis we’ve faced into an opportunity!”
For Market to Market, I’m Josh Buettner.
Despite 40-year highs in the inflation rate, a drop in COVID cases has gotten more people to venture out for a shopping spree, eat a meal in a restaurant or get a job. --
The unemployment rate shrank to 3.8 percent last month as the number of jobs created hit a robust 678,000. This continues a 6-month trend of creating a half million jobs every four weeks.
The number of people who said they avoided job hunting because of concerns about COVID fell to 1.2 million in February - down 600,000 from January.
Friday’s hiring figures were collected before Russia’s invasion of Ukraine.
The war has sent oil prices over $100 per barrel and gasoline prices to an average of $3.84 per gallon - 27 cents shy of the 2008 record.
Inflation and the war in Ukraine have Fed Chair Jerome Powell poised to tap the brakes by proposing an increase in the short-term interest rate. -
The squeeze on supply chains remain even as COVID cases drop across the country. But the fix isn’t as easy as flipping a switch.
Peter Tubbs has our story.
Manufacturers of consumer goods in America are still struggling with supply chain issues that have increased shortages of raw materials that feed U.S. production lines. The bottlenecks that are cutting supply at the plant have reduced the selection for shoppers across the country.
Katie Denis, Consumer Brands Association:
“I think across the board, the industry is experiencing challenges. I don't think it necessarily matters if you're making cereal or paper towels. There's a lot of common issues that we're seeing across categories in the industry. Packaging is a big part of it. Packaging material has been not only more expensive, which it absolutely has been, but sometimes it's availability. And that's a bigger issue, really. Now, I think we all experienced what happened during Omicron. You had massive labor shortages that were short term due to people being out for quarantines and the like.”
Increases in the price of everything from oats to aluminum have raised production costs for consumer products and food across the retail spectrum, and manufacturers are having to pass along the increases to maintain their margins.
Katie Denis, Consumer Brands Association: “And then these companies have reached the limit of what they can do on their own. If there is any efficiency to wring out of the system to make this easier or cheaper for consumers, they've reached the limit.”
A shortage of workers in general and a lack of truck drivers specifically are straining an economy already pushing to meet high consumer demand.
Katie Denis, Consumer Brands Association: “And I think some of the greatest change we've seen is, one, demand has continued to escalate at levels that were unexpected.”
The economy also is adjusting to many of the permanent changes consumers have made in their habits. Even with restaurants reopening, households are still preparing a majority of their meals at home and telework has shifted purchase patterns for the long term.
The invasion of Ukraine has only added to the problem. Energy prices have spiked globally, putting price pressure on both producers and consumers, increasing the difficulty to forecast when the crimps in the supply chain will smooth out.
Katie Denis, Consumer Brands Association: “So I think we don't know when this is going to end. We all want it to, but there isn't a clear timeline on when we'll see some easing of this pressure.”
For Market to Market, I’m Peter Tubbs.
Next, the Market to Market report.
The war in Ukraine has increased worldwide concerns over tight supplies of fuel, seed, fertilizer, spare parts and labor. For the week, the nearby wheat contract skyrocketed $3.49, or 40 percent, while May corn improved 99 cents. A drought that cut output and the war in Ukraine pulled the May soybean contract 76 cents higher. May meal added $17.70 per ton. May cotton shrank by $2.21 per hundred weight. Over in the dairy parlor, April Class III milk futures added $1.14. The livestock sector had another down week. April cattle shed $6.15. April feeders cut $7.50. And the April lean hog contract declined $3.23. In the currency markets, the U.S. Dollar index jumped 185 ticks. April crude oil gained $23.51 per barrel. COMEX Gold jumped $78.90 per ounce. And the Goldman Sachs Commodity Index soared more than 20 percent – or 134 points - to finish at 783.15.
Kohlsdorf: Joining us now to provide some insight is Don Roose. Hi Don.
Roose: Glad to be back, Brooke.
Kohlsdorf: Yeah, good to see you. All right, so the big story is Ukraine. We've been watching the images, hearing the updates on TV. It's heartbreaking. You've been doing this a few years. Are we living history? Is this a big story that we're going to look back on in years to come?
Roose: You know, it is, Brooke. It's a historical timeframe, there's no doubt about it. It goes down to the Russian grain robbery of the '70s, it goes to the droughts of the '80, '83, '88. It goes into the financial problems that we had in 2008 where crude went from $150 a barrel to under $30 in the fall. So it is. And I think the importance is that Black Sea Region is one of the breadbaskets of the world, it accounts for 24% of the world grain trade, 29% of the world wheat trade, 19% of the world corn trade. So it's just a huge area and basically the Ukraine ports are shut down and bottom line nobody really wants to trade with Russia with Putin with all the issues. So consequently a dislocation of a lot of the grain and we're trying to figure out where, who wants to ship and all the issues that go around that. So that's the real problem.
Kohlsdorf: So, speaking of wheat, there was a historic run on wheat this week. Are we done going higher?
Roose: Well, we're in some historical times. Wheat last week was under $9, down the limit on Friday. This week we moved up over $13, $13.40 on March wheat, the highest we've ever been in history is just under $13.50 on Chicago wheat. So these are historical times. I think the one thing from an overall market standpoint, corn got caught up following it also. We had a time where nearby wheat was up the limit, 75 cent expanded limit, and December wheat was down the expanded limit. So it just tells you the dislocation. But where we're really going I think is if anything cools down from a cease fire standpoint, a cool down, things look more peaceful, the market unravels very fast. If not, if we still continue war attitudes, the momentum is still underneath the market. So it's a very dicey situation. The bottom line is there's no shortage of wheat in the world, it's just dislocated today.
Kohlsdorf: So what happens in Ukraine could potentially bring it down. Or is the market, is it overbought?
Roose: Well, definitely. Historically we keep overbought indicators, we've never really been this high in history other than Minneapolis wheat in 2008 when it went from $6 to $25 back to $6 all in a short amount of time. So yeah, I think the wheat market is one that it is very dicey, very dangerous up in here. But we also have issues now, Ukraine they have hard red winter wheat they're going to be harvesting here, same as us in the hard red winter wheat area. Can they get it harvested? And can they get their crops planted? What is the yield going to be? So there's just a lot of uncertainty. We're talking about the supply now, but what is the production going to be as we go into the spring and forward?
Kohlsdorf: Yeah, so many unknowns. So the WASDE report comes out next week on Wednesday. Given everything that has happened, what do you expect to see in that, that is different than say a month ago or two months ago?
Roose: Well, the big trade was focused on South America and the drought. We lost about a billion bushels of soybean production, 500 million bushels of corn production down in that area, and that has taken a backseat actually, the soybean market is now a follower. So, to answer your question squarely, the report I think the trade is going to look what are the exports? Is the government telling us that with all these issues we're going to have to increase corn exports X amount? Wheat exports? Soybean exports? So I think the trade is going to look at that very close. There's just a lot of unknowns out here, Brooke, and that means that you add risk premium to the market and that is what we've been doing. But we always say you take the stairs up, the elevator down. So you've got to be very careful when you're a producer looking at marketing, scaling marketing at these levels.
Kohlsdorf: Well, speaking of unknown, the situation in Ukraine and fear of the unknown pushing corn prices higher. What specifically are the unknowns?
Roose: Well, I think in the corn market one of them is Ukraine has 550 million bushels of corn unshipped between now and the 1st of September. Half of that goes to China. So are they going to ship the corn? Or does that get diverted to the U.S.? Does the U.S. end up shipping? Then does Brazil ship more corn? Now, Brazil is also right now planting their second corn crop, their big crop, their safrinha crop. Are they going to plant more corn? What's our acres going to be March 30th? Are we going to find more acres or not? And I think you've got to be very careful, Brooke, right now because the government can come up with some strange things that change the dynamics of this thing. Even on Friday rumors that the Biden administration looking very close at maybe reducing their RFS, renewable fuel standard. So that took soybean oil down. Also rumors that maybe they're going to start to look at CRP acres coming out, 22.8 million acres there, big unknowns, probably a low bet. But Europe is looking at that very close too, bringing some of their equivalency or pay acres out. So when you're at these lofty areas the dynamics can change and they can change on you very quickly. As we know it is a cyclical business.
Kohlsdorf: Yeah, it sure is. Well, in the State of the Union Address this week there wasn't much to suggest that President Biden wanted to back off some of the green initiatives. So how will that impact ethanol and corn?
Roose: Well, you say that today, and he says that today, and the pressure mounts and the political pressure can really start to change the dynamics. So I wouldn't be so sure. As we know even right now that we have some of the big oil companies that could produce more than they're doing right now, they're just not because they're afraid that if they start producing the oil will come down and they'll have the production started and they'll have to slow down. So I think the whole world was looking at this as a short-term situation but it is very much turning into a dicey long-term situation. So hopefully we don't look at the RFS, that is one that should actually be going up, not down. And that is -- agriculture is very much in the green hunt doing their job.
Kohlsdorf: Well, let's move on. So we'll cover soybeans. So this was a good week for U.S. exports, one of the best weeks that we've seen in a while. There's talk of less rain now in Brazil. And we have been asking this same question for a while. Is the crop larger than everyone thinks?
Roose: In South America I think when you look at it, it's very much like we have in the Northern Plains. We had a dry drought situation in the Dakotas. When we went to harvest the yields were bigger than we thought. In South America it was very popular to talk about how small the crop is, getting smaller even today, but the thing that we've had change is the weather pattern there has changed more favorable. The dry areas, Southern Brazil, Northern Argentina now have been getting some rains, in fact some big rains like 1.5 to 4 inches here over the next 10 days. So is that enough to change some of the late planted beans? I think so. The safrinha corn crop, the second corn crop, the big crop that they're going to plant looks like they're going to get well-watered. So maybe bigger acres and bigger yields. We'll see. So the cure for high prices, Brooke, is always high prices. I mean, that's the thing we always have to remember. So, just things change, you get world produced more, you use less. Somehow this magical thing, the supply demand balance, stays in line.
Kohlsdorf: Okay. So, we'll move onto meats now because I guess we're kind of running out of time here. So cattle, let's start with cattle. The higher corn prices pushing cattle prices down. So is this the only reason why?
Roose: Well, the cattle market got up to about $150 on April cattle. And I think really what happened in the cattle market, we dialed in all of this bull news, all of the cyclical bullish news that the numbers aren't going to be there. And then I think what happened, like we get in some of these black swans, things started to change. I think the biggest thing probably is the fact that the economy is starting to change. We're talking about interest rates going up, the consumer dollar spending may be less, we've got crude oil going up, gasoline going up. So I think it's the dollars in the pocket of the consumer that is changing and that is changing the market. We put a key reversal in cattle February 10th. Since then we've been rocketing lower, down almost $16 a hundred weight.
Kohlsdorf: Yeah, and you mentioned to me that boxed beef cutouts were down. But we're ramping up for the big grilling season. So is that the economy?
Roose: Yeah, we're coming into the best demand time of the year on beef and that is from now, grilling season, into Memorial Day, then you have Father's Day and Mother's Day, so this is a big demand timeframe. The good news is the boxed beef has been down like 7 weeks in a row. So you're getting to an area where we should buy some demand.
Kohlsdorf: All right, well what about feeders? Where are they headed?
Roose: Well, the feeder cattle just has an issue with the corn, the input costs. It's almost every day if the corn price goes up, the input cost goes up, the feeder cattle come under pressure. So it's a struggle. We're still liquidating cows yet. On the cycle we go usually three and a half years up, three and a half years down, we're liquidating the herd for four years in a row. That's good news for long-term building the herd back up.
Kohlsdorf: Okay. So we'll end with hogs. So production still lower. Where do you see this market headed in the short-term and the long-term?
Roose: Well, the hog market is one that the supply is just incredibly lull. They were down 8% on the slaughter in January. We're only supposed to be down 4%. It's really just all about the disease issues. The numbers just aren't there. We probably got a little bit ahead of ourselves, we went to $122 almost on June hogs. We've only had 2 times in history that we've been over $110. That was 2014 and then last year. But I think it's back to the consumer and the dollars. Two sides of the equation, you can have the supplies but then you also have the demand side that has to pick up the lower supply.
Kohlsdorf: All right, we covered a lot of ground today. Thanks, Don.
Roose: Thank you.
Kohlsdorf: Always appreciate you being here on the show with us. That will do it for this installment of Market to Market. We will talk more in Market Plus so be sure to join us there. You can find it on our website of MarketToMarket.org. Also, we are entering the time when public television stations like this one are asking for your support. We may also be airing in different time slots to accommodate for some of the changes in schedule. If you value the work of this program and of your station, please consider making a gift of support now. Next week, we take a look at the continued effect of the war in Ukraine on the rest of the world. Thanks for watching and have a great week.
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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.
(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.
(music)