Pearson: Hello, I am Mike Pearson. We're going to depart from our usual format on "Market to Market" this week to examine the rural impact of the worst drought in half a century. We've assembled an expert panel and will address some questions submitted from viewers this past week at the "Market to Market" website and through our social media channels, Twitter and Facebook. Joining me now are some ofAmerica's leading experts in key sectors of the rural economy.Iowa's Secretary of Agriculture, Bill Northey, is a fourth-generation farmer fromSpiritLake, who is in his second term asIowa's top agriculture official. Creighton University Economist Ernie Goss examines the conditions in about a dozen states to compile his monthly Rural Main Street Index. Sue Martin is President of -- excuse me President in Ag Investment Service inWebsterCity. Sorry, Sue. And has been a fixture on "Market to Market" for decades. And Jamey Kohake, a relatively new addition to our stable of analysts. Jamey is Branch Manager for Paragon Investments inTopeka,Kansas. Folks, thanks for joining us on this special edition of Market to Market.
Pearson: Secretary Northey, I'd like to begin with you. You are a farmer. You're alsoIowa's top agriculture official, so you travel the state quite a bit. What are you seeing out there on the ground as you travel aroundIowaspecifically?
Northey: It varies. Every place is hurt. Every place is hurt because of the dry weather and the heat. It's as much the heat as it was the dry weather, but there's a lot of variation, so you have little spots where rain came through, and that coin corn is still green. It's probably not going to be normal either, but it's better than the worst spots. As I hear around theMidwest, we hear the same thing. There are certainly some areas that are mostly tough for that very little good crop.
Pearson: What kind of sentiment are you getting from farmers in the field?
Northey: They want to get into it. They want to see what's out there. They want to be able to move from 2012-2013. And forget this year. Certainly the crop producers are appreciative of crop insurance. That lets them to sleep at night. On the same token, they want to harvest rain. They are used to harvesting grain. They want corn and soybeans, and certainly livestock producers want to make sure there is as much grain as possible so we do not see this market go to another level yet. Those folks are very nervous, as they're trying to make decisions about whether to shrink their herds or stay at the same size.
Pearson: I know elevators are looking for grain as well.
Northey: They are. There is some concern about grain quality out there as well, so that's on people's minds.
Pearson: Sure. You bet. Professor Goss, what do you see in your survey? What kind of responses are you getting back? What is the outlook looking like for the next 6-9 months?
Goss: It is not original to me. It is sort of like a flash drought. It came up in -- our June survey results weren't bad. We surveyed bank CEO's in ten states. The average community size is 1,300. The June numbers looked okay. July, not good. August, much worse. The bank CEOs are telling us and reporting for the rural areas that things are looking tough out there. For example, agriculture equipment sales back to their recessional levels. Of course, that is not good. Farmland price growth is coming down, but it's still positive. That not a bad signal. A lot of the bankers reported liquidation of herds. For example, in June 13 percent reported liquidation of herds -- significant liquidation. In August, it moved up to 50 percent. You see that real change between June and August. Now most of the changes were negative. The review positive changes in our survey.
Pearson: You have been conducting this survey since 2005. How does the July and August numbers stack up against numbers and the pass?
Goss: Well, they look a lot like what we saw in a recession back in 2008 and early 2009, which were not good, of course. But there were some not so bad signals. For example, home sales were still good. Retail sales fell off the table. Of course, we expected that with the drought when you see things not looking so good, you pull back on your purchases. We did see that. Of course, people said what about the future. Well, it's got to do with weather. I have a tough enough time with the economy, let alone delving in weather. Again, as one banker reported, he said it feels a lot like the dust bowl but I ain't moving toCalifornia. Even though it's tough right now, it is better here than what we are seeing in other parts of the nation. We do a survey inCaliforniaas well. It's still better here even with some negative numbers right now.
Pearson: Thanks, Ernie. Those trying to gauge the severity of this year's drought need not look further than the markets. This week, however, mixed reports coming in from the Pro-Farmer Crop Tour. Grain prices traded sideways. For the week, December wheat lost a nickel, while the nearby corn contract moved a penny higher. The real action this week was in the soybean pits, where soared to contact highs on Wednesday. Despite a pullback, the November contract settled Friday with a weekly gain of 85 cents, while the nearby meal prices move $17 higher. Sue, let's begin with you. The Pro-Farmer Crop Tour this week revealed a few surprises. Yields are expected to be well below last year's. How much of an effect has that had on bean prices this week.
Martin: It certainly did help with some realization. Soybeans are harder to tell as to what's really going to be there, because they can fool you. This year we have to remember that you had heat and dryness moving in awful early. We were very dry in March and on through into June. Then in July and August became quite aggressive. August basically started to cool down a bit and maybe give us a little chance of showers. In some areas those showers weren't going to do anything. The crop was stressed and it was pushed ahead of normal, even though beans do tend to mature in daylight hours. It was pushed ahead. Blooms were aborted. Pods were aborted. Unfortunately, the podding wasn't as aggressive as we had hoped for. The beans weren't as tall either. You get out there and look in the fields, and they can be green. You can get out in there and it's a real disappointment. Everyone was kind of apprehensive. We went in from the July highs where we were really hot into this cooler weather in August and the market started moving into what we would call am ascending triangle on the charts. That is a very bullish chart formation. Also wheat was gravitating -- wheat did have a flag formation as well. All of those are bullish indicators. Still, it was a sign of uncertainty. Everyone was trying to assess the bean crop and didn't really know what to make of it. With the cooler temperatures, it didn't feel as hot, not as uncomfortable. You basically thought things could be better and the market went in for a good, healthy correction. The market was very clean. Therefore, I believe soybeans, while they can still have another little correction here -- of course, little could be 70 or 80 cents, you know, in a heartbeat. I think we're not done yet. The bean market has got much higher to go.
Pearson: All right. Jamey, lets talk a little bit about wheat. The drought has intensified in several farm states this week, and the international grains council cut global coarse grain production estimates. What is your outlook for wheat prices?
Kohake: Short term I'm a little bit bearish wheat right now, looking for a little more downside. What the market has been moving off of pretty much is news out ofUkraine,Russia: isRussiagoing to put an embargo back on or not; how small is the crop in theUkraine- area? A little bit of dryness down inAustraliaas well. I think that will be further in the fall until the market starts to -- if they have a drought or how small of a crop. The big key right now is pricing versusBaltic Sea. We're about $40-$45 a ton higher than wheat coming out of theBaltic Seaarea. So I think we'll grind a little bit lower in here short term, along with the other two grains and then creep back up higher later this fall. By the time we get more competitive worldwide, I think the easiest path is to see a little more profit taking.
Pearson: What are you seeing in corn? We talked beans and wheat. What do you see in corn?
Kohake: Corn didn't see the technical follow through beans did. Beans raised to new highs. Like Sue was saying, corn never got through 849 December. That's the key point there, to bust through and then hold. I think corn, too, short terms sideways to a little bit lower. There's not a whole lot of fresh news out there until the September Crop Report. I think we are waiting on yields from producers to come in. I think profit taking would be the key. I think long-term, just more update. We'll probably be somewhere, 10-5, 10-3. We are not doing a very good job of rationing. Ethanol numbers are good. Export numbers are good. I think longer term we'll be back higher than where we are right now. Short term I'm looking for us to get back down below 8 and run some stops out.
Pearson: All right. Sue, on corn, are your thoughts similar to Jamey's, or what do you think?
Martin: Yeah, they are. I think the corn market priced itself out when it got to 850. I think that it has the potential with rationing to come back higher and take a look at 850 again and possibly exceed it. The problems is -- what we're telling our clients or subscribers is from 850-920, follow that market and watching it very closely and use it for selling, not to buy into it, but to use it for making sales. On the bean market, I think beans has to be your leader here. That market isn't even close to rationing. Of course, if they do something with a renewable fuel standards, that just puts more pressure on soy meal. You've gotChina, a very avid buyer. They've bought 55,000 metric of soy oil this past week. Back in June they had a pretty aggressive sale. Part of that sale they bought this week is for almost immediate delivery. It's old crop. I think that tells you their need. They're not having the best weather either, although they'll tell you every year that they've got a record crop. It's still on the hook here as to just how high we can go. I think you're going to see 19 -- 1880-19, $20 beans.
Pearson: Would you be willing to put a timeframe on that? How long are you thinking, roughly? I don't mean to put you on the spot.
Martin: Roughly, to be honest with you, if we rally into October 4, I'd take a good, hard look at that. But whenever we get to that price level on the November contract, I don't want to be a game player anymore. I want to be out of it and I want to sell the market. Now, I think you'll have higher highs again next year. But there's going to be a dandy little pullback somewhere in here to cleanse the market again and set the stage for next year's market. I don't think you're going to seeSouth Americaplant beans early this year. They've got an issue with El Niño starting in. The problem with that is that they will be too wet in the southern or the southern most eastern parts of the country and intoArgentina. In fact, Argentina for the first time in ten years, I think only one other time in ten years in their winter have they had rain. They had 8 inches in August. I think that as we look at the bean market here going into the fall, we're going to get some more rallies. But then I think you pull back. We watchedSouth Americaand how well they plant, because the northwest part of that country tends to in an El Niño become very dry. That's over half of their beans that is a major thing that we have to watch if this is a typical El Niño. It's very weak at first. It probably will be dry through September. As you get into October and on forward, by the end of December we should be in a much more moderate, at least, El Niño. That's going to have a big impact on them. What it does, though, is it keeps them from planting early. That expands our export window, which is very good for our farmers. But we're already, what 55, maybe 56, -7 percent sold for what's estimated in the 2013 crop year. So I think we have to do some crop rationing.
Pearson: All right. Now, Jamey, with that in mind, are you advising people to pursue any sort of option strategy? Is there anything out there farmers should be doing to plan for the future?
Kohake: I haven't here lately. Plus, producers are still trying to decipher how small their crop is. They may be oversold -- or not oversold; too scared to do any additional selling. They don't know how many bushels they have, so they're holding off. We will be making some additional sales here later this fall. I agree with Sue. I think there is more upside on the longer-term. --South America, we're sharply higher.
Pearson: So for right now, it's just wait and see what actually comes off the combine.
Kohake: I think it's just going to be more of a technical flush out. It's not a game changer. The highs reported for the year on next year's crop, there's still more upside to be seen, but to have a healthy flush out this fall would be nice. It would be nice to start next year higher.
Martin: You know, Mark, there's one thing -- if we have time, there is the concern -- and -- is becoming more and more in the news. Farmers need to realize --theUniversityofIllinoisput out an article on the -- a very good article. I'm sure if they go on the website or something, they can find it. The one thing farmers need to realize is that they need to get their insurance adjusters out there before they take their crop out of the field, because if they take it out of the field, take a chance and refused at the elevator or whatever, and they put it in their bins, they have no protection on price. Their federal crop is no good.
Pearson: All right. So, definitely something to keep in mind. Secretary Northey, we wanted to kind of come back to you a little bit. What is the Department of Agriculture doing inIowa? Or if you can speak to it, what do you know of what other departments doing to help with livestock producers in this tough time? There is so much available for row crop producers.
Northey: Crop insurance is so important to row crop producers. Not everybody has it, but everybody had the chance. They measured their risk and decided that they were going to do. Livestock producers are really suffering through this. The cattle feeders, others that need roughage. We're really short of roughage all over the country. There have been efforts to free up any CRP ground, any state and Department ofTtransportation along the ground, along our highways.Iowaeven opened up some state land and wildlife lands. There is a lot of effort to do that. You know, in theMidwestwhere there is corn, a lot of that forage is happening because people are chopping silage. That helps get people through this shortage of hay that is needed through this winter. The USDA has done a lot of work to try and free up some of the CRP land and even some wetland reserve land out there as well. They have nibbled at those edges and done about what can be done. Some things that could happen in a farm bill that would affect livestock producers, but mostly they are caught paying these high prices to feed the livestock that's out there and not getting any more for their livestock.
Pearson: All right. Ernie, I want to talk to you a little bit about ethanol and the renewable fuel standards, with ethanol consuming about 40 percent of production. What would changing or removing the renewable fuel standards --do you think I would have any effect?
Goss: I'm not sure it would, Mike. We asked our bank CEO's last month -- in June actually, what with the possession of ethanol producers at that time. We are talking about $8 corn $8 and above corn. That puts pressure on the ethanol producers. They reported 66 percent -- two-thirds of the ethanol producers had cut back or closed temporarily. So right now, you're seeing some -- I think some pain out there among ethanol producers. But a lot of it depends, of course, on government policy and what happens. But right now, in my judgment, a lot of the renewable fuels producers are getting to the point where it's sustainable, in other words without necessarily government support. In some cases the government is getting in the way actually. A lot depends on, for example, the mandate -- the ethanol mandate. I went to legislative physical summit last week. No support for removing the mandate. All the legislators that I listened to said no. The mandate is going to remain in place. Of course, that's supportive of the ethanol industry right now in this window that we are talking about right now. Overall, if you look nationwide, there's a heck of a lot of folks. When the Wall Street Journal and the New York Times agree on something, you've got some problems. They believe -- their belief is there's too much support going for ethanol. I don't agree with that but that's what they view it. They are wanting to pull any support, whether it be the mandate or whatever in terms of food for energy. There's a lot of, I will say. Lack of support for ethanol outside this part of the country.
Pearson: Sure. Now, if -- looking at it from the other angle, if the mandate goes away, is that going to change the price of gas for consumers at all?
Goss: It's hard for -- I'm not certain. I don't know if I can't answer that question. But in my judgment, at least, without knowing a lot more about the details, I don't think we are talking about big changes right now. I think, again, the industry is much more mature than it was four or five years ago. We're seeing sustainable growth. We're seeing -- what happens, in my judgment, again, being on -- is government policy, big changes there. That's where the hurt comes. In other words, when you have certainty in federal policy or state policy, I think that's what the ethanol producers need. I think it's what the farmers need. I think it's what the states that we survey need. In other words, there's not just this flip-flopping -- I'll call it flip-flopping in terms of federal policy where there is energy or farm policy.
Pearson: Well, let's go back to livestock a little bit. This market was mixed this week, as October cattle lost 82 cents. Nearby feeders advanced by nearly a dollar, and the October lean-hog contract declined by 377. Sue, what are you seeing in the livestock industry for both cattle and hogs looking forward.
Martin: I think that the cattle market --I think that once we get in toward October the price is going to get a little better. It depends a lot on our winter. You know, if we have an El Niño winter, the South tends to catch more moisture and then we tend to be a little more open. I think that that could be something that also helps out the cattle market to create prices to push back higher. I think that the demand has kind of picked back up here. You start getting past the hot days of summer that we've had and demand slacks off, and now we're starting to pick back up. I think that weights have peaked. Hog weights I'm not so sure. They should have peaked. They're still up there too pretty aggressive. I think that right now we've got more numbers than we need coming maybe to market, for the cattle, but I think that's going to change. But as you start to see through the South and Southeast, we'll see cattle moving that direction. As far as the hog producer goes, I think he's in trouble. I think that the hog producer hasn't done enough yet to do liquidation. We basically have to shave 10 percent off of our feed demand. It's in the livestock sector of the poultry that you have to do it. The cattle guy has gone through a bunch of it already by force over the last two years. So I think that it's the hog man and the poultry guy that's going to feel it. They need to be pushing hogs and getting them to market. And there is going to be 140,000 killed this week on Saturday. It's expected. Gosh, I think we haven't been over 100,000 since April, so that's good. The weights are just too high. Also, we have to worry aboutJapan. Their economy is slowing. China's economy is also slowing. That's a concern.Chinais our third largest buyer.Japanis number one.
Pearson: Jamey, I want to talk to you about feeder cattle, as well. As we go forward, I know a lot of it's going to depend on the weather and what comes off the combine. What do you see in feeder prices for the next three months coming up?
Kohake: I would be selling the rallies very short-term, like up around 148. 5. We're seeing a little bit of a bounce, a little bit of a correction. Corn is still rebounding after a little bit of a technical fall to the downside in the cattle -- over in the feeder cattle. I would be selling dollar-and-a-half to two-dollar rally here in the next few weeks.
Pearson: Okay. Do you see that continuing on through next year?
Kohake: I see the winter contracts, the first quarter next year live cattle hogs firming up in here -- up in here soon. I think the tighter supplies will help out coming into next year with the meats.
Pearson: All right. I want to talk to you guys too a little bit about what has come up this week. The QE3, quantitative easing, the third round of Ben Bernanke possibly putting that back on the table, and next Friday potentially being an announcement one way or the other. What are your thoughts? Jamey, I'm going to go to you first on this? What are your thoughts on quantitative easing? Would that have any effect if it's implemented?
Kohake: I think it will have a little bit of an effect. We saw some this week when the rumors came out; the dollar sold off really hard initially, and that supported the raw commodities. Silver is back about $30 an ounce. Gold rallied hard. But I think by the time this will go into effect, it should be factored in by year end. -- had over a 10-percent rally this year, so that will probably be factored in. Probably be some profit taking in late November or December time period, but it will be bullish. The more rumors we've got coming out --
Pearson: Ernie, do you agree with that?
Goss: I do but I think also it's sort of like a third cup of coffee. The first one gives you a real jolt. This second one gives you a little bit less. The third one, this is QE3, even less. Let's see what time it is we have to look at the time. The market is going yes QE3 no QE3, yes. I think -- I think it's to a large degree overstated the impacts. I think there's a lot to be said for just staying put in my judgment. If I were Ben Bernanke I would say, no, you've had your last sugar high.
Pearson: Now, Sue, that brings me to my next question. If Ben Bernanke follows Ernie's advice and next Friday comes out and says no, QE3 is off the table, would you see the lack of a QE3 having any effect? Would that lead to any softening in the markets; do you think?
Martin: I think it could just temporarily. But again, I think too, the blue moon effect, you know, I think that it will probably allow the market to step back, but I don't think it's a long lived --I think we'll move back on. We're going to focus on the elections. Stock markets tend to rally in elections, especially with a republican potential. I think that's what we're looking at more than anything. Our focus will just switch back to the election.
Pearson: All right. Bill, what's your biggest concern heading into harvest?
Northey: Well, I think we certainly are nervous a little bit about grain quality and what happens, as well as how much corn there is out there and how many soybeans. I think there is a lot of nervousness around soybeans, because they are so hard to predict. I mean pro farmer counts pods, and you can tell a lot by counting pods. If they're not there, they're not going to be beans. But even inside those pods, the size means a lot. I think we have a lot to see yet. We can certainly have some significant reactions based on that. It's really more for the livestock producers. As I talked to many corn farmers -- corn and soybean farmers, they say we're already down into crop insurance territory. They're able to sleep at night. They know their bottom dollar. They may be getting that from crop insurance more than the market. They may get it from the market more than crop insurance. The livestock folks are the folks that are losing some sleep right now.
Pearson: All right, guys. We've got about a minute left. Any final thoughts, Ernie?
Goss: Well, I think weather. Certainly -- as I said, I have a hard enough time with the economy. Weather -- but if this continues, there could be some real hurt. Also the businesses -- we need to be concerned about the businesses that are connected to agriculture. Not just the agricultural sector, but the businesses.
Kohake: I'm looking for a little bit of choppiness in the grains, a little bit of profit-taking, and a late year rally that they'll be able to sell into.
Martin: I think that one of the concerns too is that agriculture has been the darling holding up exports for theU. S., and that's not going to be the case because if you don't it, you can't export it. And the other thing is the quality -- the quality of the soybean is going to be really down, and that means you chew right through what we do have. It doesn't take long. You have to ration these prices, and the only way you do it is by shoving the price higher and not dropping it back.
Pearson: All right. Thanks. Bill, real quick.
Northey: We need some recharge in some of the soil out there as well. We've got some wells that are down. And certainly as we look toward 2013, we're going to need some water.
Pearson: I hope we get some rain. Folks, thanks for watching us. That wraps up this special edition of "Market to Market," but if you'd like more information from Sue or Jamey on where these lofty markets may just be headed, visit the market plus page at our website. You'll find expanded market analysis, audio podcasts, and streaming video of our program, as well as links to our Twitter feed and Facebook account, all free a the "Market to Market" website. Be sure to join us next week when we'll explain how a trio of brothers inKansasis showing how they grow it. Until then, thanks for watching. I'm Mike Pearson. Have a great week.