New Data Negative For Rural Economy
According to the Commerce Department, new housing starts fell nearly 13 percent in April to their lowest level in 50 years. The drop reflected a 46 percent plunge in construction of multifamily units and indicated homebuilding remains a drag on the economy. However, single-family housing starts rose nearly 3 percent, signaling that the more important sector of home construction is beginning to stabilize.
Meanwhile, The Conference Board announced this week its index of leading economic indicators, designed to forecast activity in the next three to six months, rose 1 percent in April marking its first gain in seven months.
Many analysts believe the recession will end sometime in the second half of this year but expect the nation’s unemployment rate -- now at a 25-year high of 8.9 percent, to keep rising into 2010.
It’s not uncommon for the rural sector also to lag behind the broader economy during recoveries. And key developments this week revealed the longest recession since World War II is making an impact in farm country.
Financial lending restrictions on agricultural loans in the Midwest have tightened according to the Federal Reserve Bank of Kansas City. The regional Fed Bank says its quarterly survey discovered a record high percentage of lenders raising collateral requirements for agriculture. Additional data showed agricultural loan repayments fell for the second straight quarter.
Tighter credit markets may be hampering some the nation’s largest farm equipment manufacturers. Deere and Co., the world’s largest maker of farm equipment, said this week its 2nd quarter profit dropped 38 percent. Citing a global recession and lower crop prices, Deere and Co. also downgraded its 2009 profit outlook by 27 percent.
While much of the global recession has centered on the home foreclosure crisis in urban America, new data from the Bureau of Labor Statistics shows rural sectors may be worse off.
Citing Labor Department data, a recent University of Missouri Rural Policy study indicates unemployment in rural counties is growing more than 20 percent faster than metropolitan counties.
Speaking to farmers in Missouri recently, USDA Secretary Tom Vilsack acknowledged problems in rural sectors. Vilsack added that expanding the biofuels market could stimulate the economic engine of Rural America.
Obama Approves New CAFE And Greenhouse Gas Emissions Standards
Motorists will be greeted by higher prices at the pump. According to AAA, unleaded gasoline is selling for 2.39 per gallon nationally. That’s up 40 cents in the past month alone, but well below last Memorial Day weekend when the average price stood at a lofty $3.83 per gallon.
Still, with about 5 percent of the world’s population accounting for roughly a quarter of global demand for oil, critics claim America’s unquenchable thirst for crude threatens long-term economic prosperity, and national security.
This week though, President Obama unveiled rigorous new fuel economy and emissions standards designed to lessen the nation’s dependence on foreign oil.
President Barrack Obama: "For the first time in history, we have set in motion a national policy aimed at both increasing gas mileage and decreasing greenhouse gas pollution for all new trucks and cars sold in the United States of America. (Applause.)"
The drive to this historic decision began in 2005 when California environmental officials enacted laws forcing car companies to comply with greenhouse gas reductions beginning in 2012. The major automakers sued the state of California. At the same time, thirteen other states and the District of Columbia were preparing to adopt California-style rules. On Tuesday, the Obama administration intervened.
President Barrack Obama: "Ending our dependence on oil, indeed, ending our dependence on fossil fuels, represents perhaps the most difficult challenge we have ever faced -- not as a party, not as a set of separate interests, but as a people."
In an unprecedented move, the unlikely partners worked together to create a proposal that imposes the toughest fuel efficiency standards in history. The mandate also requires a reduction in automobile greenhouse gas emissions.
Currently, every vehicle sold in the United States must have an average fuel economy of 25 miles per gallon. Beginning in 2016, the new Corporate Average Fuel Economy Standard -- or CAFE Standard -- will be 35.5 miles per gallon -- four years earlier than the one contained in the Energy Bill signed by President Bush in 2007. The new standards require passenger cars to achieve an average fuel consumption of 39 miles per gallon and light trucks an average of 30 miles per gallon. In exchange for the rigorous federal rules, the car companies agreed to drop their lawsuits and the individual states agreed to delay moving forward with new rules of their own.
Major car company CEO's praised the agreement saying it created certainty on federal guidelines in the near future.
Alan Mulally, CEO, Ford: "We're going to be best-in-class in fuel efficiency, in addition to quality and safety and that every year, year after year, we're going to improve the fuel mileage going forward and reduce the CO2."
California Governor Arnold Schwarzenegger was pleased with the compromise.
Gov. Arnold Schwarzenenegger, R-California: "The car manufacturers, you know, needed money. They need the taxpayers' money. They need the federal government to help them. So in order to get that help, I'm sure that President Obama said, "OK, we're going to give you the help, but here's what you need to do."
And renewable fuels proponents applauded the move because they believe it will help achieve a cleaner environment while reducing dependence on foreign oil.
Bob Dinneen, Renewable Fuels Association: "We think it's a very good step. We applaude the administration for taking it. The fact of the matter is we need to be moving toward greater fuel economy in this country. I think that some of the factors in there, taking a step toward a carbon standard is part of that, makes a great deal of sense and we see opportunity for ethanol as this moves forward."
Unlike previous incarnations of the CAFE standard, automobile manufacturers will not be allowed to use fuel efficient hybrids or electric cars to skew the final figures to achieve compliance. All sizes of passenger and light trucks must comply with the new rules.
Senior administration officials are predicting the measure will reduce oil consumption by 1.8 billion barrels and reduce greenhouse gasses by 900 million metric tons over the five-year life of the rule. An amount they claim is the equivalent of taking 177 million cars off the road or shutting down 194 coal-fired power plants. The Obama Administration acknowledges the measure will increase the cost of new vehicles by $1300, but those expenses are expected to be offset by savings at the pump.
Produce Unit Train Links West Coast Farmers with East Coast Food Distributors Part 1
According to the U.S. Federal Railroad Administration, the term high-speed rail applies to trains traveling more than 90 mph.
While Obama’s plan focuses primarily on passenger transportation, freight railroad efficiency has increased dramatically over the past 25 years.
A case in point can be found on the west coast where a pair of train routes collectively known as the “Fresh Express” is connecting farmers to consumers on the east coast. Laurel Bower Burgmaier explains.
Jim Kleist, Railex, LLC: “We may be doing something that’s going to change the way food is moved forever in the United States, at least part of the food.”After years of battling untimely, inconsistent long-haul methods of transport, an innovative platform called Railex was created in 2006. It remains a cutting edge way to link the needs of farmers, shippers and manufacturers with retail and food distributors.
Jim Kleist, Railex West: “Railex is a concept that our owner Andy Pollack was looking at. He purchases a lot of produce on the east coast and he has sites up and down from Florida to Maine and he was trucking or railing mainly potatoes. A lot of it came from the Columbia Basin here in Washington which is fed by the Columbia River and we have a fantastic growing season. So, how do we get this product in an alternative method besides trucking it cross country or shipping it conventional rail to the east coast? What they were looking for was a guaranteed number of days across country.”
In 2005, Railex officials began negotiating with two Class 1 railroads, Union Pacific in the West and CSX Transportation in the East, to establish an exclusive service route.
Lori Loschen, Union Pacific Railroad: “We got together and developed this really as a team about how can we give customers multiple options of taking their produce where it’s grown and basically shipping it across the country to a very high populated location.”
This produce unit train, often referred to as the “Fresh Express,” is the first and only nonstop rail unit for perishables that guarantees a maximum five-day cross-country
delivery.
Jim Kleist, Railex, LLC: “You’re giving people something they haven’t had before and that guarantee of 55 trains leaving at this time. If Railex isn’t able to get that product off and delivered in as good as condition as we received it, we won’t exist. So we’re able to do that.”
Railex has built the infrastructure to load, ship, receive and then ship again an entire trainload of 55 refrigerated boxcars carrying perishable products in one cycle. Its state-of- the-art refrigerated distribution centers are located in some of the most fertile growing regions in the country; and are designed for product consolidation and just-in-time delivery.
Greg Barness, Agri Pack, Inc.: “The end user of our product will be restaurant chains, wholesalers who serve the food service industry as far as restaurants and processing uses. Also, retailers, you’re grocery store that you buy your groceries. They’re our customers for our finished product both onions and potatoes.”
When products are ready for shipment, they’re delivered to the west coast receiving facilities –located in Washington and California. The produce is loaded from a cooled, indoor center into sealed, state-of-the-art, 64-foot railcars. From this point, the temperature is consistently monitored by GPS tracking and adjusted to each customer’s unique specifications all the way to New York, its final destination.
Jim Kleist, Railex West: “We can track these cars anywhere across the United States. We can change the temperature on these cars. We can turn them off and on –We meaning Railex and our partnership with UP. What you have is a box going across the country that you can continually take a look at. We can pull it up to see exactly where it is, what’s running and what the temperature is. We know the product in it because everything is RF labeled and scanned and all that kind of stuff. It’s a different level of technology than the railroad used to have. This is the newest generation.”
Lori Loschen, Union Pacific Railroad: “What we guarantee Railex as well as the customers utilizing the Railex Service, we guarantee them transit. We’ve already had 170 plus train starts. We’ve been late four times and those times have been acts of God. It’s been flooding, snowing or something like that. So, we have a great success record on getting this train from start to destination with in the time.”
Railex differs from the conventional rail system by avoiding multiple rail yards, not having to disengage and reengage rail cars to realign routes. Thus, the products avoid shifting, bruising, temperature issues and time delays. All 55 cars of the Railex train stay intact as one unit throughout its entire route.
In addition, one railcar holds the equivalent of 3 to 4 truckloads of product. Officials claim the Railex train is capable of moving 200 truckloads weekly to major markets in the East. And it does so more efficiently and consistently than over-the-road
trucks.
Greg Barness, Agri Pack: “With the trucking industry being what it is today, particularly with fuel prices, transportation is expensive, truckers have that pressure of additional expense. They’re pushing freight rates and they will migrate where they can get the best price for their miles traveled. So, that makes the availability of tracks sporadic. So, Railex with their volume weekly has a stable availability of transportation from Washington into the Northeast area.”
Jim Kleist, Railex, LLC: “What it’s done is given the farmer who’s sitting there with low margins an alternative method to get his goods to market.”
With Railex, shippers get guaranteed transportation from the Pacific Northwest to the highest consumption area in the Northeast, all within a period of 124 hours or less.
Jim Kleist, Railex, LLC: “What you’re doing is really taking care of moving a precious commodity. We have to feed ourselves well and compete price-wise with the rest of the world. And we produce some wonderful crops. How to get those crops from Idaho from Oregon and then all that stuff grown in California year round to the consumer at a reasonable price in a nice, safe, clean way? We think we found the answer.”
Next week, we’ll follow the train to the end of the line in New York, and examine other innovations ensuring the “Fresh Express” lives up to its name.
For Market to Market, I’m Laurel Bower Burgmaier.
Market Analysis: Darin Newsom talks about the Markets
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For the week, July wheat gained 35 cents, and the nearby corn contract was up more than 13 cents.
The specter of a reduced crop in South America sustained the rally in soybeans, as the July contract gained more than 35 cents and the nearby meal contract was up $16.75 per ton.
In the softs, cotton surpassed the 60 dollar level again with the December contract posting a gain of $1.31.
In livestock, June cattle gained 15 cents. Nearby feeders were up 27 cents. And the June lean hog contract posted a loss of 53 cents.
In other markets of interest, it was a rough week for the dollar as the 16-nation Euro gained a whopping 542 basis points against the greenback. Crude oil soared to a 6-month high en route to a weekly gain of more than $4.50 per barrel. Comex Gold was up $27.00 per ounce. And the Goldman Sachs Commodity Index gained 20 points to close at 420 even.
Newsom: Thank you, Mark.
Pearson: I don't know, I kind of thought last week we were maybe on the other side of the economic turn around, at least here in the United States, and for that matter globally but this week things have kind of turned. As you look at the leading economic indicators and how those all line up and how they affect us in agriculture what are your thoughts broadly on the world economy tonight?
Newsom: I think all the talk that we've reached the bottom and it's nowhere but up from here I think is a bit premature. We're not seeing this consistent string as you talked about earlier in the reports, we're not seeing these consistent string of reports, these bullish reports coming out, they keep getting mixed up and chopped up with these more bearish numbers that continue to come out. So, while we should continue our spring and summer rally it would certainly seem logical that we could up through say July, August, but I think once we start to turn to fall I would not be that surprised at all to see the market start to come under pressure again.
Pearson: You're talking the general equity markets.
Newsom: Exactly, Dow Jones as a whole, the overall economic feel of the United States, I think we start to see some pressure building in the late third, early fourth quarter.
Pearson: You talked about a turn around back in February when we saw copper prices start to turn as kind of an early indicator of what's happening, the canary in the mine shaft if you will, for prices starting to turn maybe this economy starting to turn. Copper prices, what are they doing now?
Newsom: We seem to have run up against some resistance, I believe it was up around 124 level and since then what we've also seen is the spreads are starting to weaken again indicating that the commercial buying that helped to push us higher is starting to dry up, that we're not seeing that type of fundamental support in this market. And so what we're seeing is starting to back off and it's handing the baton off now to the gold market and that is one of the other metals but from an economic point of view rally in copper is bullish, rally in gold not so much.
Pearson: And, of course, it's Memorial Day weekend, people are out driving again. This is a seasonal time, isn't it, for gas prices to go higher, crude oil has gone sharply higher as well?
Newsom: Right, it would not surprise me at all to see the gasoline futures and the cash gas price go another 40, 50 cents higher pushing that national average cash price up to about $2.80. I think we'll see crude oil approach that $70 level but, again, the fundamentals just don't support much beyond that unless we see some dramatic change between now and the fourth of July weekend. That's normally when this thing peaks and starts to come back down.
Pearson: Speaking of that, as we look at crude oil, we look at the world economy the dollar, big fall off this week.
Newsom: It was, we saw it move through some key support right around the 80 point level, certainly looks like now it's going to drop back down below 78 and I think we're going to continue to see this pressure building. The dollar, again, has been needing to come down, the talk that all this money being traded is going to create some inflationary talk, dollar doing what it should do should continue. If it gets weaker it should continue to support commodities.
Pearson: Absolutely, let's talk specifics here, let's talk about the wheat market. Worldwide plenty of wheat is what everybody keeps telling me.
Newsom: Right, we have an abundant wheat supply right now, not just U.S., but as you pointed out wheat is a worldwide crop. So, world ending stocks are bountiful and we're not going to run out of wheat any time soon. I think the rally that we saw here this week has more to do with the non-commercial side of the market squaring up, adding a little bit to their net long position, they've been short for quite some time but there's also this little skirmish going on over the wheat between Russia and Egypt, the quality of some of the wheat that Russia has been shipping. There is a hope out there that this is going to lead to some better exports for the United States as we get into the new crop. We're still so overpriced in the market that if we start to combine that with the dollar coming down there is some hope out there of better export demand for U.S. wheat.
Pearson: Are you in a hurry to sell wheat right now then?
Newsom: I think I'll hold off a little bit. I want to see -- we've been looking for this post-harvest rally for quite some time and if the other grains can stay strong I think there is a chance that the wheat market could certainly follow them higher.
Pearson: A friend of mine in the seed corn business said a lot of short season corn is headed to my home state of Illinois this weekend, a big load of it in fact, maybe not the switch to beans, maybe the switch to shorter season corn? Is that kind of their thinking in the corn pit now?
Newsom: It is, if we look throughout this spring and even the late winter we were watching these new crop corn spreads and new crop bean spreads for any sign that we were going to see this huge switchover that everyone is talking about and it just isn't there. We've still got a pretty stout carry going on in the Dec. and March corn and a very weak carry almost going into an inverted situation in the November and January beans certainly hinting at they're going to try to keep these acres in the corn market, certainly looks like at this point that the interest is still in corn, we've had a nice week, possibly stretches out to ten days, two weeks of relatively benign weather throughout the Corn Belt and we should see a lot of progress made as far as corn planting goes.
Pearson: So, selling standpoint, what do we need to do here?
Newsom: The old crop I think we could still see this thing push over the next few weeks up to about the $4.45 to $4.60 level in the July contract. In the new crop I think we're going to see a little more than that, possibly up to $4.65, $4.80 because there's going to be all these weather threats and so on. So, I think there's still some room both seasonally and looking at the trends and the way these markets are setting up that we could push it a little bit. The one thing against it, again, is the fundamental spreads aren't really going to be providing much support so I think we're going to see increased selling along the way and it's going to make it a much more difficult rally than what we've seen in some of the other markets.
Pearson: So, maybe take advantage of it when we get to those levels. Let's talk about the soybean market and what you see happening there, obviously that's the flip side. You have heard a lot about the seven million acres, you heard about acres switching over in northern wheat country, in spring wheat country, acres switching over elsewhere and maybe looking like a pretty burdensome supply in 2010. Do you agree with that?
Newsom: No, I don't. Again, if we look at that November/January spread and it's already going inverted that's telling us that the market believes that we're looking at a pretty bullish situation. I think Argentina is dropping dramatically from what they were, down 32, 33 million metric tons right now. U.S. ending stocks, the market is just now catching wind that this thing could drop down to that 100 million bushel level again. I know we've been talking about it since last December of that possibility happening. Export demand remains strong, we're on a record pace. That is going to cut into the beginning stocks of '09, '10 and I really don't think we're going to be looking at ending stocks for '09, '10 being up above that 200 million bushel like everyone is projecting at this point.
Pearson: Again, still relatively tight numbers.
Newsom: They are, we start dropping that back below 200 and there's a very little margin of error then in the new crop because it's not that large of ending stocks.
Pearson: Old crop beans are $12 this week, new crop is up there, you don't want to make sales here?
Newsom: No, I'm still holding back because we normally see beans rally up into early July so I think there's still some room. Again, the spread is inverted. I'm not going to tell anyone not to sell at these levels, certainly very good prices but I think there's still some more to come.
Pearson: Let's switch gears, let's talk livestock and this has just been tough, this cattle and hog business, dairy, it's just been frustrating, no money for eighteen months in the hog business, fed cattle market has been lousy, dairy has been a debacle. Talk fed cattle for us, where do you see that going second half of the year? Maybe these economic underpinnings we'd hope arrive haven't arrived?
Newsom: Well, a couple of things that bother me in the cattle market right now, usually you see the summer buying end about the time we move into summer around Memorial Day so that's this week. Buyers start to come back, they've done all the buying that they need so if that is indeed the case then we really never saw the cash market move, that's kind of a gloomy outlook then for the cash if the cash buyers actually start to move back away from this market. Secondly, if we are nearing the end of this economic recovery or at least the short phase of this recovery and we start to see some pressure coming from that side of the market as well then all of a sudden we've got both sides of the market bearish and it could mean some lower numbers for cattle as we go forward. So, the fed cattle market is not looking all that bullish, we didn't get the rally in the cash market that we were really needing to support this thing and now if that goes away there's not much to fall back to at this point.
Pearson: No hedging opportunities?
Newsom: I wouldn't be too wild about doing it. What I would do is if we see the Dow continue to pull these markets higher and get them a little higher than maybe we're anticipating right now then look at starting to lock something in.
Pearson: Real quick, calf market, what do you see happening there?
Newsom: Calf market, I think it's going to stay a bit more stable than the fed cattle market has. Again, it hasn't been that good over the last six months to nine months but hopefully we can still get this little bit of a late spring, early summer bounce to get some better prices here over the next 30, 60 days.
Pearson: A lot of people talking about 2010 will be the livestock year, do you think that might happen?
Newsom: I think it's very possible because at that point we should see the Dow and the economy as a whole starting to get some footing, make a bit of a beach head and really start to make a serious rally rather than just this recovery rally that we're seeing at this point.
Pearson: And hopefully that will spill over into the dairy sector too.
Newsom: Yes, the dairy market is giving some indications that in time it could start to get better, it's starting to trend a little bit more sideways now than just this freefall that we've been in, that's always a good sign. The bad thing about that market, the bearish thing about that market is we're coming to the end of the school season so we might have to wait again until August or September for buying to become interested in that market again.
Pearson: Real quick, the hog market, what do you see?
Newsom: The hog market is kind of ugly, has been for quite some time, cash market really hasn't been any help. The biggest thing we could see in the hog market is if cash starts to strengthen next week, weather stays good, farmers are more interested in planting and field work, hogs aren't coming to town we could force the hands, we could force the packers to bid up a bit.
Pearson: And what are you thinking?
Newsom: Hopefully we can start the week with calls of $1, $1.50 higher. I think that is the first step is get through this weekend. We have a short week next week. If we can see those bids on Tuesday come in $1, $1.50 higher I think that's going to give us a good sign.
Pearson: Very good, Darin Newsom, thank you so much, we appreciate it. That's going to wrap up this edition of Market to Market. But if you'd like more information from Darin on where these markets just may be headed please join us for Market Plus, it's at our Web site, you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free at our Web site. Of course, join us again next week when we'll journey to the end of the line on the Fresh Express, the unique train route that saves fuel and reduces greenhouse gas emissions. Until then, thanks for watching. I'm Mark Pearson. Have a great week.
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