Market to Market (September 21, 2018)

Sep 21, 2018  | 27 min  | Ep4405

Coming up on Market to Market…

 

Two economic super powers trade more tariffs…

 

Offshore winds of change blow through the renewable industry.…

 

And market analysis with Elaine Kub and Walt Hackney, Next!”

 

Pioneer Hi-Bred International is a proud sponsor of Market to Market. 

 

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. 

And by Accu-Steel, offering fabric covered buildings specifically designed for the cattle industry since 2001. The next generation of cattle buildings. Information at accusteel.com. 

 

Pioneer Hi-Bred International is a proud sponsor of Market to Market. 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.  And by Sukup Manufacturing Company. Offering a full line of grain drying and storage equipment and steel buildings, Sukup Manufacturing is on a mission to protect and preserve your crop and the tools that produce it.

Hello, I’m Delaney Howell.

The foundation of the middle class may be weakening.

Home ownership is proving to be a challenge as listing prices have been rising faster than incomes for nearly five years.  --

In August, the sales of existing homes were unchanged as a shortage of houses under $250,000 has become a drag on the market.

Demand is falling on gasoline keeping the price steady. According to AAA, the data follows the seasonal trend while the average price remains stable at $2.85 per gallon.

The Rural Mainstreet Index stayed above growth neutral for the 8th straight month even as the overall rate fell more than three points. The Creighton University snapshot revealed the economy outside of agriculture is expanding in the 10-state region surveyed. --

Late Thursday, Canada’s Foreign Affairs Minister returned home after NAFTA trade talks failed to deliver a breakthrough.

As the U.S. and its northern neighbor struggle to agree on dairy market access plus a dispute settlement mechanism, another major trading partner is responding to action taken by the White House.

Peter Tubbs reports.

The United States and China each took another step down the Tariff Trail as the world’s two leading economies added new tariffs to an already long list of taxed imports.

The Trump Administration added a 10 percent tariff on another $200 billion worth of Chinese goods, which is scheduled to increase to 25 percent in January 2019.

China retaliated Tuesday with duty increases on $60 billion worth of imports from the United States. Both countries already have tariffs on $50 billion worth of selected imports from each country.

The Trump Administration has threatened to add tariffs to an additional $267 billion of imports from China, which would cover virtually all of the $517 billion the United States imports from the Asian economic behemoth.

The value of the Chinese yuan has dropped in relation to the U.S. dollar since January when the one-for-one exchange of tariffs began. The cheaper yuan also has helped China withstand the added costs of American tariffs.

Chad Hart is an Associate Professor of Ag Economics at Iowa State University. Professor Hart has noticed a change in the Chinese response to new tariffs.

Chad Hart, Iowa State University: “Now that we’ve reached this level that we are talking about $200 billion dollars on our end, well that swamps actually what we ship them in total. And so they switched from dollar to dollar proportional to percentage wise. So they looked at that $200 billion dollar amount and said, OK, that’s forty percent of what we ship you, we’re going to hit 40 percent of what you ship us, and so that worked out to about $60 billion.”

 

Hart believes the tariffs placed on imports from China to the United States are going to become more noticeable to the American consumer.

Chad Hart, Iowa State University: “The tariffs up to this point have been in those process goods, so the consumer doesn’t feel them directly. Now we’re getting to the level where you’re talking about taxing 40-50 percent of all the trade, yeah, you have to get into those consumer goods, where the price transmission becomes much more transparent. We’re watching companies like Wal-Mart try to figure out, OK, do we pass this additional cost off on our consumers, do we try to absorb that somehow, or some combination in between?”

 

He expects lost farm income is expected to the slow growth the growth of local economies, as farmers curb their spending.

Chad Hart, Iowa State University: “We’re probably looking at a 1-2 percent decline in the state GDP because of this tariff disruption.”

 

For Market to Market, I’m Peter Tubbs.

 

The EPA unveiled a Renewable Fuel Standard waiver tracker on their website in addition to releasing monthly data on biofuels credit trading volumes.

The National Corn Growers Association called the move a good place to start, but said even more questions need to be answered on EPA’s justification policy.

Another homegrown source of energy that sprouted in the Midwest is now branching out to offshore locations.

But as John Torpy reports in our Cover Story, time is running out to take advantage of some governmental assistance for the wind industry.

The number of whirling blades scraping Midwestern skies has grown steadily across the nation’s midsection in recent decades. That growth may soon have to contend with the loss of a primary building block - the Energy Production Tax Credit.

Nat Sound Break

In the early 1990’s, the tax-deferred program passed through Congress, helping stabilize and expand the use of renewable energy. The credits helped companies like Iowa-based MidAmerican Energy to begin investing heavily in wind energy production. In 2016, nearly half of the power provided to customers was produced by wind turbines. The company plans on achieving a goal of having 100 percent of their power portfolio be renewable by 2021.

Those same tax credits spurred growth in the industry and helped wind power producers update aging infrastructure without having to pass the costs along to customers.

Spencer Moore, VP of Generation, MidAmerican Energy: ”What the repowering process is essentially, a opportunity for us to go ahead and put more efficient equipment on existing assets that we're already own/but as we look at the project, the real benefit for our customers is that we're going to get a million, about a million megawatt-hours a year of additional energy out of these existing projects.”

 

By upgrading the equipment on over 700 existing towers, the company is increasing the amount of energy it captures, while maintaining as small an economic footprint as possible.

Spencer Moore, VP of Generation, MidAmerican Energy: “On days like today, where the winds a little bit lower, the turbines cut in a little sooner we get a little more energy at lower wind conditions. And that really helps us pick up more energy from existing assets.”

 

MidAmerican, like other wind energy providers, is working on a tight timetable. With passage of the Bipartisan Budget Act of 2018, wind energy businesses may be witness to the curtain call for Energy Production Tax Credits. Wind energy projects starting construction by December 2019 are eligible for the full credit. Projects starting after 2019 will see the credit shrink by 20 percent per year until the program expires in 2022.

Those companies working to expand their production capacity also face hurdles in communities where the towers are being erected. Some landowners charge that sight and noise pollution hurts property values as well as creating a potential health risk. Environmental groups contend the turbines are a threat to bats and birds.

However, according to U.S. Fish and Wildlife data, the number of birds killed by buildings is 1,500 times greater than the number of birds killed by wind turbines. Further, a 2014 National Institutes of Health study revealed noise and visual complaints had more to do with who was receiving economic benefit from nearby wind farms. And three university studies showed wind farms had no impact on housing prices.

A half-hour ferry ride off the coast of Rhode Island stands the nation’s first offshore wind farm. Constructed by Deepwater Wind, the Block Island Wind Farm began construction in 2015 and went online in 2016, with a price tag of almost $300 million dollars. For the 1,000 plus year-round residents of Block Island, the towers brought stability to an otherwise uncertain electrical infrastructure.

Jeff Grybowski, CEO, Deepwater Wind : “We came across Block Island for a few reasons. One, of the island had this really urgent energy need. They had old diesel generators that they were looking to replace but we're struggling to find a solution. At the same time the state, the larger State of Rhode Island, was looking to be a pioneer and offshore wind energy. So it was a perfect marriage.”

 

Offshore wind turbines dwarf their inland counterparts. At the tip of the blade, Block Island turbines stand at just over 600 feet as opposed to the standard 270 feet found across the Midwest.

Jeff Grybowski, CEO, Deepwater Wind : ”And so with the further offshore you get, the stronger the wind tends to be, and the further offshore you get fewer people can see them. So you reduce the potential, you know, negative potential skepticism of these projects by putting them out of sight.”

 

The offshore wind industry faces some of the same hurdles as onshore producers. The same tax credits helping advance the industry technologically, will gradually fade away, increasing costs for future projects.

Deepwater Wind also has contended with objections from some fishermen and mariners who claim the company has infringed on fishing grounds and damaged equipment.

 Jeff Grybowski, CEO, Deepwater Wind : ”we have to work in our industry, the offshore wind industry, with commercial fishermen to make sure that we can all co-exist out there. It's a big ocean and there are ways that the two industries can work together but we have to be sensitive to the fact that we've got an existing industry out there that used to using the ocean. So that is the real challenge is we're new neighbors out in the ocean and we have to learn how to work together.” 

 

The work by companies like Deepwater Wind has gained some attention by officials in Massachusetts, Connecticut, New York and New Jersey where land is at a premium.

Jeff Grybowski, CEO, Deepwater Wind : ”...that combination of having this big dense Coastal population really close to a huge offshore resource is the magic behind our business and that's the reason why we think offshore wind be such a big thing in the US.”

 

For Market to Market, I’m John Torpy

 

Delaney Howell:  Trade winds and harvest bins coupled with export transactions, powered the sale of commodities. For the week, December, we gained a dime while the nearby corn contract increased six cents. Expanded sales to Europe along with Argentine buying pushed the November soybean contract seventeen cents higher. The December soybean meal contract added twenty cents per ton. December cotton declined 2.70 per hundred weight. Over in the dairy parlor, October class three futures again moved lower by twenty cents. A mixed livestock market as the October cattle contract declined seventy two cents. October feeders shed eighty cents while the October lean hog contract jumped 4.07. In the currency markets, the US dollar index lost 71 ticks. Crude oil continued it's bull run with a gain of 2.01 per barrel. Comex gold rose twenty cents per ounce and the Goldman Sachs commodity index expanded 10 points to settle at 473.50. Joining us now to offer insight on these and other trends are two of our regular market analysts, Elaine Kub and Walt Hackney. Welcome back guys. Thank you so much for being here. Elaine, let's start here with the wheat market. Bring me up to date on what's going on with the Russian wheat market and how that's impacting our prices here in the US.

Elaine Kub:  The Russian thing is currently sort of a bearish idea...this is going back to the WASDE report of, you know, a week and a half ago or two weeks ago, When USDA comes out and increases their, their Russian wheat export projections and that sort of had a bearish thing on the wheat market. But as you mentioned in your recap of the commodity prices, actually was an up week for wheat and it was really more tied to Australia than Russia. It's just all across the globe this year, right? There's always something going on in wheat. They had a weekend frost and I know a lot of times in the US if we get frost in Kansas or something, the market kind of poo-poos it because you know wheat is pretty resilient, but that Western Australia wheat crop was looking beautiful and the frost was serious and some of the wheat was still in boot stage and might still pull out of it, but a lot of it will be put up for hay and will be lost and so it was just another supply shock in the wheat market and the wheat market responded.

Delaney Howell:  Let's talk about how the wheat market is responding here in the US then, Elaine. What are we expecting to see for...let's talk December contract specifically.

Elaine Kub:  Well, they all have followed along so that they have just been in lockstep with the Paris contract. Australian prices and the, the three US wheat prices, they all moved together this week. So it wasn't necessarily one story about, you know, Kansas hard red winter wheat planting. It was just all wheat globally moving up together and I feel that that's probably priced in now and I don't know that we would expect that rally to continue.

Delaney Howell:  Okay. Elaine, when you look at the grain industry as a whole, is the wheat market pulling corn and soybeans up with it this week? Absolutely not. No. Wheat is doing own thing and it's a little bit unusual. Usually you do see them moving together, but it's harvest time for the row crops. They've got their own weather story going on for the harvest timeframe and wheat is just off doing its own thing.

Delaney Howell:  Okay. Let's talk about corn because we have started corn harvest here. What are you hearing from growers out and about? Are we going to have a record yield or USDA's projected yield this year for corn?

Elaine Kub:  I think it's entirely possible and I think the USDA had data from ear weights and ear counts and farmers certainly have been increasing the populations that they plant these cornfields at, so I think it's legitimate to expect that 1.80, or above 1.80 average yield that the USDA came out and projected and harvest reports, you know, just anecdotally there's poorer ones coming out of the southern plains so that those poor harvest reports will be frontloaded this year as they come up from the south. But in the heart of the corn belt, yeah, we are seeing, you know, anecdotes that support this idea of a very large corn harvest, but it's just going to be kind of stuttered here in the next week because of rain delays.

Delaney Howell:  Let's talk about harvest lows. We had a low put in this week at 5-20 something 24, 26 something or 3-24, 25...?

Elaine Kub:  Yeah I wish it was 5 something.

Delaney Howell:  Do you think that that is our harvest low? I mean I feel like a broken record. We talk about this every week on the show and we just keep putting in new lows.

Elaine Kub:  It would be unusual to have a harvest low in September, but it is possible, especially given that this harvest is going to be early in 2018 and given that the market has known that all along, but the expectation will be that farmers will be selling this corn because they need the cash. They'll be selling that cash corn off the combine this year more than most years because they won't be selling the cash soybeans, which means they go to the elevators, the elevators hedge that with short futures position and there will just be continual selling pressure on that December corn contract.

Delaney Howell:  Typically we rally in October. I was reading a report today at 13 percent, 20 percent, 37 percent in years past. Are we setting ourselves up to do that this year or not?

Elaine Kub:  It would be very easy for the row crops to rally if something happened to change...

Delaney Howell:  Corn specifically?

Elaine Kub:  NAFTA, NAFTA, you know, if we had some positive news there or positive news about the RFS. I think the speculative side of the market is inclined to come in and buy these relatively cheap prices and these commodity markets. But as of right now, I don't see any reason for that to happen.

Delaney Howell:  Walt, I want to ask you a quick question here, when we look at corn prices right now, we just put in a new low this week. What's that doing for the cattle markets?

Walt Hackney:  It doesn't have a lot of effect on it as we speak, Delaney. Um, of course the cattle feeder is always looking toward a lower price ration cost and uh, he's been adequately policed with his cost of production. However, the price of the feeder cattle themselves coming in as replacements have way more than offset cheap feed. And they are a loss leader in the feedlot industry right now.

Delaney Howell:  Tell me a little bit more about that. A loss leader, how?

Walt Hackney:  Well, simply-spoken the feeder cattle are high enough in price that $8, or, uh, $3 corn is not going to make them work. And in fact the current price of the yearlings and then again the calves, the current market price on those way more than offsets cheap rations. And as a result, the cattle feeder, unless he can come up with a risk management program with some price protection, uh, he's looking at...oh 100, $150 a head net loss in the cattle regardless of the ration costs.

Delaney Howell:  Okay. We're going to come back to that because I want to talk about the cattle on feed report specifically, Walt. Elaine, transitioning to soybeans, why did we see such gains this week in the soybean markets?

Elaine Kub:  Well, I mentioned, you know, this, the willingness of the market to be very enthusiastic and to rally very quickly if there's ever any idea that the poor trade relationship with China would change. And I do think that the big move we saw on Thursday, just looking at the timing of it when it happened in the session, was related to a rumor that China might perhaps do something about it's import tariffs. And it's, it obviously doesn't actually affect the physical soybean market because we didn't see basis bids change at all due to this strange rumor. We didn't see the very wide futures spreads that are showing that merchandisers are expecting to have to store these physical soybeans for months and months because the trade relationship has not changed and I think it was just a boost in, in rumor based buying.

Delaney Howell:  Okay. Elaine, I wanted to ask, I saw today the EU was reporting they're buying, I mean record shipments and soybeans because US soybean prices are so attractive and comparatively so low to Brazil and Argentina. Will that add support or because they're so attractive right now at these lower prices, will that keep them locked in at these prices?

Elaine Kub:  It's helpful and they are getting a heck of a deal on pretty quote unquote cheap soybeans because of the Chinese tariffs. But uh, so the European, the EU's buying of us soybeans is up 133 percent I think compared to what they would normally be expected to do. But even at that pace, if it continues, that's only a fifth of the business we would usually expect from China. So it's nice. It's helpful, it's good for them. It's a little bit good for the US soybean industry, but that's not a fix. I mean there's going to be strange things happening with all of these, you know, trade problems in all of these markets, pork markets, soybean markets, but that's not enough to fix it from compared to our big customer.

Delaney Howell:  Right. You mentioned earlier corn producers are going to be taking cash prices, so are you suggesting producers hold on to soybeans if they have the possibility?

Elaine Kub:  Yes. I think these are just profoundly unappealing cash prices for soybeans right now. You're talking about $6.30 as some bids in North Dakota and Minnesota...

Delaney Howell:  Basis. Yeah.

Elaine Kub:  That's just horrible. And why would anybody want to sell that price right now? And you don't necessarily want to accept these poor basis bids and it's going to be a mess to try and store these soybeans for months and months and months to store them in bags potentially, which is not generally suggested for a long period of time, but, and I don't want to say that the prices couldn't get worse or that I couldn't get lower, but it kind of couldn't get worse. So you sort of feel like you have to just wait and see if there will be some very quick market recovery. Hopefully if this trade thing ever gets resolved only.

Delaney Howell:  Elaine, let's continue this discussion in Market Plus. Walt, I want to make sure we have time to discuss the cattle-on-feed report. You mentioned to me before the program, you see a couple of wrinkles in this report. Tell me what those are.

Walt Hackney:  Well, we look at extraordinarily high placement factor, for instance, around of 106 or 7 percent, and immediately the, the world looks at that as a bear market. What we're forgetting is that a large percentage of that 106 percent that came in unexpectedly due to the national drought from West Texas to Wyoming has created an exodus of calves and short yearlings offer the grass pastures and the wheat pastures and those cattle have had to go to the feed lot. They had no choice.

Delaney Howell:  Because there was no grass available?

Walt Hackney:  That's right. And a lot of those cattle went prior to their, uh, if you will, their finished time on growing rations and they're 100, 150 pounds lighter than usual as they've gone into the feedlots, the feedlots have simply put them on a maintenance growing ration and it's carrying them. They're not going on feed as finished cattle and it might lead some people to become extraordinarily bearish of that 106 when really it isn't. It needs to be analyzed. And those light cattle that came in unexpectedly need to be taken into consideration.

Delaney Howell:  Absolutely. I agree. A hundred percent, Walt. I want to ask a question too, from social media that we got this week. It's a great question from Lexi in Iowa. She says, Walt, with the October live cattle contract finally breaking through the 20, 50 and then 100 day moving averages, what trends can we expect to see in the fourth quarter of this year?

Walt Hackney:  Well, I don't think that we need to, although I don't know that there's a correlation for October with our cattle-on-feed report, as you're totally aware. A lot of those placement cattle, a lot of those on feed cattle will come in later October going into November and, and um, the fact remains: It isn't going to be that wall of finished cattle coming at us that some of the analysts are wanting or willing to predict.

Delaney Howell:  You don't think we're going to see that at all?

Walt Hackney:  No, that's kind of an abrupt statement, but I don't think so. Uh, and I'm no authority, but that's the way it looks.

Delaney Howell:  Tell me why.

Walt Hackney:  Well, the reason being we're at a buck 10 cash, that's losing magnificent amounts of money for the cattle feeder. That cattle feeder is not going to stay as aggressive on replacement cattle physically of the weight, uh, 7 and 1/2 to 900 pounds going into the feedlots. He's not going to be aggressively on those as he was this last go round and as a result of that, we're not going to have that wall of cattle.

Delaney Howell:  Okay. Walt, Elaine, I want to continue this discussion and save hogs for market plus. Thank you each for being here today. Thank you. That wraps up the broadcast portion of Market to Market, but we will keep the conversation going on Market Plus where we'll answer more of your questions. You can find it on our website at iptv.org/mtom. Twitter was our first social media love. The 280 characters help us share links to our stories, photos and questions for you several times a day. Give us a follow at Market to Market. Join us again next week when we assemble another panel for an in-depth discussion on the commodity industry. So until then, thanks for watching. I'm Delaney Howell. Have a great week.

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

 

Pioneer Hi-Bred International is a proud sponsor of Market to Market. 

 

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. 

 

And by Accu-Steel, offering fabric covered buildings specifically designed for the cattle industry since 2001. The next generation of cattle buildings. Information at accusteel.com.

 

Pioneer Hi-Bred International is a proud sponsor of Market to Market. 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.  And by Sukup Manufacturing Company. Offering a full line of grain drying and storage equipment and steel buildings, Sukup Manufacturing is on a mission to protect and preserve your crop and the tools that produce it.

 

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