Market to Market - August 12, 2022

Coming up on Market to Market -- When is a recession a recession - The chair of the Chicago Fed speaks. Drought crushes crops both foreign and domestic. A fight over water rights in the High Plains. And market analysis with Naomi Blohm, 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, August 12 edition of Market to Market, the Weekly Journal of Rural America.

Hello. I’m Paul Yeager.

Several markers used to determine the state of the economy are pointing towards a cooling of inflation.

The producer price index for July was down 0.5 percent, mostly on a drop in energy prices. The annualized rate went up 9.8 percent but it was lower by 1.5 percentage points when compared to June.

Core PPI, which strips out food and fuel, rose 0.2 percent, but this is also a lower rate than last month. The annual rate is up 5.8 percent and it too was advancing at a slower rate than in June.

That same cooling of inflation was seen on the consumer side of the equation. The data is under increased scrutiny by federal officials everywhere from Pennsylvania Avenue to the 12 Federal Reserve Banks located across the country.

John Torpy has our report.

President Joe Biden: “I just want to say a number: zero. Today we received news that our economy had 0% inflation in the month of July. Zero percent. Here's what that means. While the price of some things go up went up last month, the price of other things went down by the same amount. The result? Zero inflation last month.” 

This week, President Biden shared economic news filled with optimism in the ongoing nationwide fight against high inflation. The Bureau of Labor Statistics released what some analysts have called surprising data for last month’s Consumer Price Index where the CPI remained unchanged for the month of July. With an annual inflation rate now at 8.5 percent, Biden was upbeat about the nation’s economy.

 President Joe Biden: “When you couple that with last week's booming jobs report of 528,000 jobs created last month and 3.5% unemployment, it underscores the kind of economy we've been building.

One economist watching inflation rates closely is Federal Reserve Bank of Chicago President Charles Evans. Evans was in Des Moines, Iowa sharing his insights on recent economic findings. 

Charles Evans, President, Federal Reserve Bank of Chicago: “So it's natural to ask the question when you see growth stall or be negative, or is this the beginning of a recession? And I think the answer to that is ‘no.’ Um, we are tightening monetary policy at the moment and, um, you know, we're at about two and a half percent on the short term policy rate, that's a neutral level. And that's because we've got very high inflation.”

Evans noted, statistics in the latest CPI report help support his cautious optimism for what the economy might have in store for the remainder of 2022.

Charles Evans, President, Federal Reserve Bank of Chicago: “It is an unusual economy and inflation is high for unusual reasons. Supply chains have been difficult. They've caused, uh, uh, higher prices. Relative prices have gone up, and labor force has been slow to come back. But saying that businesses are hiring, uh, vacancies are continuing to be up and people who are looking for a job, can find them, even in the environment with rising rates. And so I'm optimistic, the economy will continue to grow, grow well in the second half, so that we'll definitely have positive growth this year. And that we'll continue that into next year while inflation is coming down.”

For Market to Market, I’m John Torpy.

Precipitation varied across the U.S. this week, bringing some relief. But for those who missed the rain, their conditions worsened. 

The domestic drought is only part of the global weather snapshot as Josh Buettner reports. 

As years-long arid conditions grip the western U.S., producers in Europe are enduring their continent’s worst drought in decades.

Bizza Walters/Farmer and Rural Advisor - Shropshire, United Kingdom:  “We’re really worried, especially for the eight months time when the sheep are in for lambing.  If we’re feeding our winter rations now, we run the risk of running out – and across the country people will be doing the same.  So, in the spring, it’s going to push demand up and it’ll push the price up.”

England has been thumped by months of low rainfall and a record heatwave.  France has declared their worst drought on record as crops from soybeans to lavender have suffered.  Irrigation bans, drinking water shortages and temporary power cuts to river-cooled nuclear power plants have followed.

Ninety percent of the Bosnian corn crop has been damaged, reportedly, due to severe drought in the Balkans – exacerbating cattle feed concerns. 

Tinder-dry vegetation has given way to wildfires in France, Spain and Portugal – where over 600 firefighters have been mobilized.

Officials in Germany say Rhine River water levels could reach a critical low any day, making transportation of coal and gasoline increasingly difficult.

Andrea Toreti/Senior Researcher/European Commission Joint Research Center- Varese, Italy:  “Our analysis indeed is pointing to extremely low flows affecting almost all the European rivers.”

At least 30 percent of Northern Italy’s rice crop has already been lost as the salty Adriatic Sea has creeped nearly 20 miles into the dwindling Po River – a crucial irrigation source.

Bobby Costa/Costa Farms – Tracy California:  “That’s salt up there.”

The plight is echoed domestically, in the California Delta, where decreased snowpack has given way to increased salinity from the Pacific Ocean – leading to a bump in crooked produce unattractive to retail outlets.

Bobby Costa/Costa Farms – Tracy California:  “We just try to hang on and hope the water quality gets better. But, I mean, basically, we’re paying our bills with 75%, if we’re lucky, of our income.”

For Market to Market, I’m Josh Buettner.

Water rights are constant stories in California. But senior and junior allotment holders farther east in Colorado and Nebraska are facing some of the same issues.

John Torpy reports in our Cover Story.

Commissioner Kate Greenberg, Colorado Department of Agriculture: “At the Colorado Department of Agriculture we are eyes wide open that we are dealing with, with a real climate crisis. And agriculture is among the first impacted.”

Colorado Commissioner of Agriculture Kate Greenberg is well aware that this climate crisis has impacted farmers in the eastern part of the state. Each year, those farmers play a waiting game to learn how much water will be in their allotment. 

Marc Arnusch is a third generation eastern Colorado farmer working the land purchased by his grandfather who emigrated from Austria in 1952. 

Marc Arnusch, President, Marc Arnusch Farms: “The underpinning water supply that we depend upon year-over-year is from the South Platte River. And imagine not knowing what you could do on your farm, because you didn't know what your allocation was for water.”

The start of that waiting game goes back to 1923 when Colorado and Nebraska ratified a water sharing agreement involving the South Platte River. One section of this interstate compact allows Nebraska to develop a canal in Colorado to divert water from the South Platte River for irrigation on farms in the western part of the Corn Husker state. As the megadrought scorches the High Plains and Western U.S., water officials in Colorado closely monitor flows on the South Platte River to ensure farmers and ranchers in both Nebraska and Colorado are getting their fair share. 

Kevin Rein is the director of the Colorado Division of Water Resources. 

Kevin Rein, Director of the Colorado Division of Water Resources: “The compact recognizes that during the irrigation season, that is between April 1st and October 15th, we'll measure that flow. And if that flow is above 120 cubic feet per second, then there is really no action to take.”

But with no end in sight for drought conditions, both states are laying claim to the precious resource that stretches through three states. In this year's legislative session, Nebraska lawmakers passed a bill greenlighting the construction of the Perkins County Canal, which is the source of the dispute between the two states.

Governor Pete Ricketts, R - Nebraska “Obviously we’re going to be praying for rain here to be able to help us out, but again it just emphasizes the importance of these projects, especially this Perkins County Canal Project, that we go forward with this to ensure that we will continue to have the water resources for the future. If we allow Colorado to take our water, that is that much less water we’ll have for Lincoln drinking water.”

There is a hierarchy for water in the two states with Senior Water Rights, all operations with allotment agreements started before 1897, and Junior Water Rights, all those operators who started after that year. Drought conditions can interfere with the seamless allotment of obligated water as the Compact puts a priority on farmers with Senior Water Rights.          

Kevin Rein, Director of the Colorado Division of Water Resources: “If the flow drops below 120 cubic feet per second. Then Colorado needs to curtail water rights on the lower end of the South Platte. If we curtail those water rights, then we are in compliance with a compact during the irrigation season.”

One season of cutbacks in water allotments can seriously affect a farmer's bottom line. 

The agreement arranged between Nebraska and Colorado is one of nine interstate water compacts the Centennial state has with neighboring states.  

Commissioner Kate Greenberg,Colorado Department of Agriculture:“We're a headwater state, we're responsible for delivering water to many states and the country of Mexico down river from us, that adds yet another layer to our responsibility, uh, as a headwater state and to the challenges that we see, uh, with hydrological drought here in the headwaters.” 

Officials with the Colorado Department of Water Resources note when drought conditions are low, these water sharing agreements rarely become an issue long drawn out.

With drought conditions in Colorado extending their stay   in 2022, farmers continue to worry about how much water will be available for this, and future growing seasons. 

Marc Arnusch, President, Marc Arnusch Farms: “We have a lot of competing interests for our water here in Colorado, not just amongst commodities, but even with the urban rural divide that we have here within agriculture, we try to add value to our of water, uh, whether that's, um, growing a value added crop, uh, being a little bit divergent in the marketplace, but here on our farm, we're trying to add value by creating markets.”

Creating those additional markets can be a struggle when farmers have to fallow fields and still attempt to make the remaining acres cover the loss.

Marc Arnusch, President, Marc Arnusch Farms: “When we Idle acres, it's like a death by a 1,000 paper cuts, you know, we're, we're, we still have those overhead costs. We still have taxes to pay. We still have the carry cost of that land for, for that year. And yet we're not gonna have a crop until the following year, but it helps us be better managers. It helps us be better planners. And it helps us to think out two and three years, instead of just trying to, you know, provide that crop this year.” 

Marc Arnusch, President, Marc Arnusch Farms: “Drought is something that I've had to deal with almost my entire farming career that, that goes with farming in the high Plains of Eastern Colorado. We rely upon snow melt. We rely, a rely upon a lot of, uh, weather from time to time. So in the 25 years that I've been farming, drought seems like it's just right around every corner.” 

Arnusch and his family farm around 2,200 acres in what’s called Prospect Valley, a diverse agricultural area located 45 miles northeast of Denver. Arnusch has been forced to change the makeup of his row crop farm nine times to adapt to the changing climate.

Marc Arnusch, Owner – Marc Arnusch Farms: ” You know, water touches everything here in Eastern Colorado and, and the way our, our rules and regulations have changed over time in Colorado are really impacting my farm.”

Noting changes in the amount of available water, Arnusch has changed his business plan to growing certified seed wheat, certified seed grains for the spirit and beer industry, and value added feed ingredients.

Marc Arnusch, President, Marc Arnusch Farms: “We're trying to be different in the marketplace. I, I wouldn't say niche, I would say value added, but the things that we do on our farm that are rewarding us and rewarding, the value of our water.” 

With a La Nina weather pattern currently calling the shots for the remaining months of summer , farmers and ranchers in eastern Colorado may have to continue the same kind of flexible approach.

Commissioner Kate Greenberg, Colorado Department of Agriculture: …as a state of Colorado it's complex and our agricultural community is at the front lines of all of those issues, climate change, persistent, ongoing drought, and making sure we are meeting our obligations to other states in the country of Mexico, uh, in a way that also helps preserve and advance agriculture.”

For Market to Market, I’m John Torpy.

Next, the Market to Market report.

Weather stressed the corn crop and market this week before USDA cut the outlook for the harvest on Friday. For the week, the nearby wheat contract added 30 cents, while the September corn contract improved 30 cents as well. The soy complex sold off initially after a raised yield projection, but was not enough to offset weather rallies that happened earlier in the week. The nearby contract put on 72 cents. September meal increased $27.20 per ton. December cotton surged $12.46 per hundredweight, that's actually 13 percent. Over in the dairy parlor, September Class III milk futures rose 60 cents. The livestock market was mixed. October cattle added 62 cents. September feeders dropped a nickel. And the October lean hog contract put on $1.63. In the currency markets, the U.S. Dollar index shed 91 ticks. September crude oil rallied $3.03. COMEX Gold expanded by $27.50 per ounce. And the Goldman Sachs Commodity Index rallied by more than 22 points to finish at 677.30.

Yeager: Joining us now to provide some insight on our markets, Naomi Blohm. Welcome back.

Blohm: Thanks for having me.

Yeager: Report day. So we'll start with a question from Glen in Ohio. How about that?

Blohm: Perfect.

Yeager: He takes all my work for me. Glen wants to know, since we had the Field of Dreams game this week here in Iowa, he wants to know if the report was a pitcher, if it was a pitcher, which pitch did the USDA just throw at us? Was it a fastball? A breaking ball? A change up? Sounds like it was a get me over type pitch to just get us to the next at bat.

Blohm: Yeah, the four seam fastball to just get it over the plate kind of a thing is definitely what the USDA gave us on this report. A lot of the things were expected. A few little pop ups of oh, that's a little bit surprising, were there. But ultimately no big dramatic changes. So they lowered the planted acres for corn, soybeans and wheat and I think for soybeans we were looking for that increase to happen. So that was a little bit of a surprise. And on corn they did lower yield, as people were thinking, pretty much in line with pre-report expectations so not a big surprise there. And for soybeans the bigger surprise was that they actually increased the yield just a little bit. So going forward we're in a situation where in the bigger picture yeah, the ending stocks for corn are a little bit tighter than they were last month and the ending stocks for soybeans are now a little bit bigger than we were last month and the wheat ending stocks now are a little bit lower than they were last month. So it's enough of a dramatic non-event that the market is going to keep I think marching sideways similar to what it did last year. So going forward we'll keep watching weather but this report today did not give us enough new fresh bullish news to justify any price breakout higher. And at the same time, if we see prices kind of set back a little bit lower they should be well supported as we go into fall.

Yeager: Let's start with wheat then more specifically not as much of a headline for wheat in that report. But we've had headlines this week, thoughts about being oversold, we've had some stochastics that were in a certain area, the carryout. What was the biggest driver for you this week?

Blohm: Well, I did like that the USDA lowered the U.S. carryout number, that was a little bit of a surprise. So that just really echoes the fact that our supplies are lower. They did on the report raise wheat exports and they also said that they're going to be needing more wheat for food demand. So domestically that number is a little bit stronger. So the wheat market does feel like it's trying to bottom between all three cities. It's trying to bottom but I don't think it has enough news yet to justify a breakout higher, especially when we're hearing reports that the grain from Ukraine is moving, it's getting exported and the USDA increased the corn numbers for Ukraine and for Russia. So the global supplies, it's not building, but it's not falling apart either.

Yeager: And given the story we had about the weather in Europe, that also is playing a factor. But is it more wheat or more corn is the story there with European weather?

Blohm: Well, I think it's a little bit of both. The weather has affected their crops in general. I know that right now the price of corn had been higher than the price of wheat. And so we always thought well maybe is there going to be a need for Europe to be importing any of our products? So that is something to monitor of course going forward. But the bigger picture right now I think for this grain market is again that this report did not give us any over the top bullish news so it's going to be hard for our U.S. grain prices to go a lot higher from here, especially with wheat we've got the Russian market cheaper than the U.S. market and for corn we've got the Brazilian corn cheaper than U.S. corn right now. So I'm almost wondering if prices need to actually move a little bit lower in the short-term. Do we see that seasonal pullback where prices work a little bit lower into the end of August? And I know that folks are thinking hey, this crop is still burning up and it's not made out there yet. But remember folks, the USDA isn't going to give us those friendly bullish numbers that we're all hoping for until the January report. And so the boots on the ground for surveys are going to be of course watched as we have those surveys happening. But we're not going to get those bullish numbers, not yet.

Yeager: Not yet. We're getting not bullish weather reports, specifically on that soybean -- well I guess you could say in the soybean we are. Hot and dry is what you expect with soybeans. But we're pretty hot and dry.

Blohm: Yeah, so we're hot and dry with the beans market and then with the yield there. But there's also chances of rain next week and so if those materialize it again just kicks the can down the road because you never know with beans what is really out there until you're actually harvesting. But I think that is the USDA's way of saying it's not an emergency issue for right now and the world is going to be able to get by. And so let me just be blunt, if people are waiting for $7 or $8 corn or dramatically higher prices, we're in a point right now of reset or pause and all of those stars that aligned so perfectly last year to give us $8 corn, they're behind us. So now going forward we're at the pause here and markets probably trade sideways until we can get to know some more information on demand, on yield. So for prices to go higher from here, from all these people who are barking about why prices should go up, let me tell you, you're going to need a lower U.S. dollar, you need confirmation that this corn crop is below 170 bushels, you would need confirmation that the soybean crop would be lower than probably 45 bushels, you're going to need to see demand pick up, you have to have early frost and then compromise by all of a sudden wet late harvest. So I guess what I'm trying to say, for the stars to align from here to get those higher prices it's probably not going ot happen in the short-term.

Yeager: Okay, December corn, I'm not going to put you on the spot for September, but December we're still at $6.42 is what we closed at today. Give me a quick range for the next three months on that.

Blohm: Yeah, $6.50 is going to be big resistance in that market, $6 is good support. Step back though and look. Even though our carryout is lower from last month on corn, it still is 150 million bushels higher than it was last year at this time. Last year at this time the price of December corn was $5.75. So we have more corn carryout and the USDA increased old crop carryout. So I know people are not wanting to hear this but I'm telling you I don't think fundamentally at this moment we have a reason for December corn to get higher than $6.50 and it will be a struggle for the November soybeans to get higher than $14.50. We would need, again, bad weather to happen or some big export news to come out to get prices to go higher.

Yeager: And $14.50 that is really what we're at with November right now, $14.54 today. Quickly on dairy, we've seen some resurgence in that crop, commodity.

Blohm: Right, so the dairy market, so we had our summer highs of 24, we've pulled back to 20 and now we're hanging out there. So what happened, we had the cheese prices come down. The block barrel average is hanging out right now hear 180 so that is actually a really good support level for the block barrel average. Our exports are still great, they're really doing well. But on the most recent dairy production report milk production was up .2% and that was the first time we saw a year over year increase. So that weighed on things a little bit. But like all commodities, everything is just sitting on these long-term uptrend lines and we're waiting for some more news and that is just where we're at right now.

Yeager: Well, live cattle has done that too. They're the highest in three months right now.

Blohm: Yeah, that market of course still supported by the idea of the fact that production is going to be down fourth quarter, down I think 5% from a year ago, first quarter production is supposed to be down 7% from a year ago and going into second quarter of next year production down almost 10% from year ago levels. So we know that it's a friendly story there. I would caution though with cattle and even with hogs they've gone up so much and they are where they're supposed to be priced but it wouldn’t surprise me if we see a little bit of a correction or some profit taking. But overall it still is a friendly story, unless we see demand falter, but right now our exports for beef are just phenomenal, the best they've ever been and as long as Americans are not getting laid off and they're still working I think you're still going to see the demand there.

Yeager: Well and I have a hog note here. Mexico has been buying, China has been buying some things. Is that what is propping up the hog market?

Blohm: A little bit of that. Our exports have been okay. They're behind where they were last year and the year before that but the pork cutout values have been really strong, the cash market has been strong and we've had really good demand overall this summer. So we're getting into that timeframe with heading into Labor Day that prices probably see a little bit of a pullback here. But what is interesting is that our hog numbers they're down a little bit from year ago levels and actually our weights are the lowest that they have been since 2017. So our production isn't going to be as triumphant going forward, we're still going to be scaled back a little bit. So that should keep the market supported.

Yeager: Losing weight there in the hog market, huh, is that what's going on? I mean, is that a little offset of the feed issue?

Blohm: Yeah, that's exactly what is going on. Higher priced feed is there and I think producers are just, they're very smart knowing that that herd in China had been rebuilding so they did a great job of controlling their inventory and kudos to them. They've done a fantastic job.

Yeager: You're going to be a hit in the hog barn this year at the Iowa State Fair with comments like that, Naomi Blohm. Thank you so very much for your time, appreciate it.

Blohm: Thank you.

Yeager: All right, we are going to put a pause on this analysis here and we're going to continue with Naomi and answer more of your submitted questions in our Market Plus segment. You can find that on our website of MarketToMarket.org and that is in both podcast and also on You Tube and all of these resources, as a reminder, are free. We've also isolated the Market Analysis, which you just heard, the Market Plus, which we're about to record and wasn't on TV and the MtoM, these are all three different podcast offerings that we have for you each and every week. And next week, we're going to look at the partnership shoring up and shortening up the grain chain. Thank you for watching. Have a great week.

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Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa PBS or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa PBS which is solely responsible for its content.

What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

Sukup Manufacturing Company -- providing equipment and buildings to store and condition grain to help farmers adjust to market swings. We build drying, moving and storage equipment designed to preserve the quality of their crops. Sukup Manufacturing -- store now, profit later.

(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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