Market Plus with Arlan Suderman

Yeager: Welcome into the Friday, August 19, 2022 Market Plus. Again with us is Arlan Suderman. Arlan, since we got done recording the show to the Plus I've been taking weather reports. We've been talking a little bit about it back and forth here. I asked Naomi last week about when it rains in a certain area, doesn't rain in another area, it's one thing to be frustrated if you're not getting the rain, don't tell anybody that you got the rain. What does it do from an analysis standpoint of how good, how bad, how indifferent a crop is when these weather systems this year specifically have been so gradient, so narrow in where the rain falls and doesn't?

Suderman: Yeah, and obviously you can get excessive rain but assuming we're not talking about that, we're just talking about good rains here but a few miles away they don't. Soybeans are the crop that can benefit most yet. Those last couple of weeks of August, first week of September can make a tremendous difference in soybean production filling out those last pods on the top or if they don't get the rains aborting those pods at the top and that could really make a big difference in yield. For the corn it's just about filling the kernels, length of kernel, that's where the difference is going to be. So you can add a few percentages to your yield or take it off if the rains don't come and then of course it depends on how dry your soils are coming into this and what temperatures are etcetera. But this is still a very key time for crop production.

Yeager: All right, that's crop production, we've checked that off the list Now let's get into politics, shall we? I want to start with Gary in Franksville, Wisconsin. He tweeted at you, Arlan. What in this new climate bill could help grains? And what in the bill could hurt grains?

Suderman: Well, it's interesting to note that with high inflation and fears about food shortages, Europe which remembers going hungry more than we do here in the United States has really been backing off somewhat on the biofuels support and the food for fuel argument has been much bigger. Here in the United States it's a totally different picture and this bill that has passed gives a tremendous amount of additional support to the biofuels. Now it also supports the EV cars and is a big support for EV, electric vehicles, which ultimately will reduce the amount of fuel that we have to blend with. But I think particularly renewable diesel is the big winner here and probably sustainable aviation from an ag standpoint. Where are we going to hurt? Not speaking as a politician, speaking as an economist, this is going to add to inflation, this is going to add to the problems that we have as far as high input costs. And that is a real concern going forward. It doesn't answer some of the problems we have in that area. So that would be the negative.

Yeager: All right, I have to go out of order. I'm sorry, Julie and everybody in there in the control room. We're going to go to Mitch in Hull because, Arlan, what you just said ties into his question. He's asking, what is your outlook for interest rates? And can this inflation be tamed without the Federal Reserve raising the rates beyond current inflation readings?

Suderman: We have never tamed inflation in the United States without positive real interest rates. In other words, interest rates above the rate of inflation. We're nowhere close to that yet. And if you look at what the Fed futures trading is doing it is suggesting that inflation is going to come down to 3.5% and that is all the higher the Fed needs to raise rates. The Fed has been saying something closer to 4.25%. But even that is below where the rate of inflation is. And the real question is, what is inflation going to do? We haven't fixed the problem yet. We've only seen a cooling because commodity prices collapsed so much in July but they could go right back up. We haven't fixed the problem that made them go up in the first place. The real question that I'm watching is natural gas prices in Europe this winter, December to February. That is the canary in the coal mine. And if this Ukraine war results in a shutting off of their natural gas and if they have a cool winter and don't have enough natural gas we shut down more fertilizer production, production of crop chemicals that are exported around the world, then we start impacting food production for next year and we have a bigger problem next year than what we had this year. It's a lot of ifs but that is still a big risk ahead of us for inflation.

Yeager: Those are ifs with huge implications if they all go. And we've already seen some of those chains all line up. What about Taiwan and China in all of this? That's a different part of the world, different problem, but yet same in the sense unrest. What do we make of what is going on with the sabre rattling and the people of China hearing one thing, the rest of the world maybe hearing a different story? What do we need to be watching there?

Suderman: Yeah, the situation with Ukraine and the war there with the Russian invasion, that was bullish the commodities because that is a major exporter of commodities there, food and energy commodities. China is a major importer and so one of the things that the west likes to do when there is a conflict that it doesn't like is create sanctions. Well, sanctions shut down exports from the bread basket but they shut down imports into China. So first of all, the question if China goes into Taiwan to take control over Taiwan and we have sanctions then that would shut off a major customer of soybeans and also corn and wheat and grain sorghum and beef and pork. And so we'd probably see a tremendous drop in values for those commodities at least initially. So that is the risk. So what is the risk of China actually doing this? China is very committed to reunifying Taiwan, unifying is their term they like to use, and they are speeding up their calendar for doing so. They're tired of the problems of the west, they're tired of Taiwan accepting visitors from the United States and other western nations. I don't expect it to happen before their congress meets to vote Xi Jinping back in for another four years as president. And right now they don't give the dates of that but it is expected that will be in late October. Our elections are right after that. I wouldn't be surprised if we see more aggressive action right after that. But probably increasingly tightening the noose around the island nation between now and then.

Yeager: It's hard to keep track of everything that is going on. And I guess Mark in Humphrey, Nebraska's question, I'm not even sure it's possible to do what he's saying given some of the European stories. He's asking, should we lock in fertilizer for next year? I guess the second part of that question should be, can you even do it? Is anybody going to let you do it?

Suderman: There are ways to hedge your fertilizer costs but they're usually not very conducive for the individual producer so it means working with your supplier to maybe pool some of the needs and then you can use some of the derivatives that are available to try to mitigate that risk to some extent. But again, I'll go back to what I said earlier about natural gas prices in Europe in December to February, if they're able to get through with their gas supplies and our analysts in London think if they don't have a cold winter and if Russia doesn't reduce supplies any more than they have that they can get through the winter and then we should be able to get through with tight supplies of fertilizer again next year but be okay. But if all that falls apart and it's going to be, as you said, a lot of ifs and a lot of opportunities there for something to go wrong, then all of a sudden Europe is a major exporter of fertilizer as well as other crop chemicals and all of a sudden we tighten the supply up even tighter than this last year. And if you look at the fertilizer production in Europe now they're at 60% of normal capacity when they should be building supplies and that is only because the government are subsidizing it trying to make sure we can maintain food production because right now the price of natural gas there would suggest that they would be having to pay probably close to double what we're paying for fertilizer prices now. That's not a prediction our fertilizer prices are going to be double, but that does suggest that there is a lot of upside risk if something goes wrong this winter in Europe.

Yeager: Okay, I want to continue on this global tour of things. This has been very informative. We're going to change the name of this segment to global Market Plus, Arlan. Kevin wants to know, he's talking about South America and he says, if South America, Brazil, Argentina, have a subpar growing season, where can March beans go to? $18, is that possible?

Suderman: Well, the first piece of the puzzle is what are we doing to the U.S. crop right now? And the second part of the question is, what happens to the South American crop and the impact of prices? And yes, right now China is paying over $20 a bushel for soybeans and I could see that going higher, I could see new record highs if those scenarios play out. I don't have any problems seeing the funds take prices to those levels if that scenario were to play out. You look at South America, we are in a La Nina, third year of La Nina. Typically that would leave southern Brazil dry, Argentina dry, Uruguay, Paraguay, as we've seen this past year and the year before. There is right now strong tradewinds, I had the conversation earlier today with Eric Snodgrass, many of you know Eric, and he said strong tradewinds right now over the Atlantic Equatorial region that may start the monsoon early in Brazil despite La Nina. If those rains start to fail then we could end up dry well into October and maybe push the planting in Brazil back to mid-October several weeks late which would extend our export season. If in fact those winds do hold up then we could have an early monsoon in Brazil, we could see early planting and so they would have early exports as well as good yields. His bias right now is on the dry side but that is the risk we need to watch.

Yeager: Okay. Man, I'm going to have to do a chart with all these ifs, Arlan. I want to finish with Aaron in Ocheyedan. I said in the show we'd go back to the cattle and the livestock. And he's asking -- it's seasonally unusual for cattle to keep rocketing straight higher from June until the end of the year. Could this year be different? Or will resistance up in here prove a great sell ahead of a substantial correction?

Suderman: The question could it? Absolutely it could. Will it? We'll probably have a little bit of a setback to start the week after this cattle on feed report because of our upfront supplies, because of drought, placements higher, etcetera. But as we go into fourth quarter we're going to be tightening up supplies. As we go into next year as I said we're going to see beef production drop about six and a half percent. Carcass weights are well below previous year into normal levels for this time of year. And so we're cleaning things up and this last week we saw cash cattle trade at $142 in Texas. That is above the August futures contract which is expiring. We haven't seen that in a long time. We're finally getting supplies cleaned up. That is a big positive right now. And so outside of this somewhat bearish cattle on feed report the longer term outlook looks better as long as we can maintain consumer support and that is tied to the economy.

Yeager: A lot to chew over there. I think I'm going to have to rewind a few things that you said, Arlan. Thank you.

Suderman: Thank you, Paul.

Yeager: All right, good to see you. Next week, we're going to look at Native Americans taking more control over how their food dollars are spent and Ted Seifried will join us to analyze the markets. I'm Paul Yeager. Thank you so very much for watching and have a great week.

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