Market to Market (March 8, 2019)

Mar 8, 2019  | 25 min  | Ep4429

Coming up on Market to Market -- The deadliest tornado outbreak in years slams Alabama. High snowpack could lead to record flooding in the Heartland. The Secretary of State comes to the Midwest to mend fences. And market analysis with Elaine Kub, next.

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This is the Friday, March 8 edition of Market to Market, the Weekly Journal of Rural America.

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Hello, I’m Delaney Howell.

More people are going back to work, but the options were fewer in the month of February.  --

According to the Labor Department the unemployment rate ticked down 2 tenths to 3.8 percent last month.

The government report revealed 20,000 jobs were added, well below the three month average.

Wages increased 3.4 percent - the highest pace since April of 2009.

USDA predicts net farm income to rise ten percent in 2019 even as trade wars play out with China.

The U-S Trade deficit hit a ten-year high this week. According to the Commerce Department, December’s shortfall was up nearly 19 percent to $891 billion dollars.  --

River levels are also rising as the U.S. suffered through the wettest December to February time period on record. Winter storms put 130 percent of the normal precip on U.S. soils.

The Deep South is dealing with a different kind of damage and the president spent part of Friday surveying the devastation.

Paul Yeager reports.

The first big storm of the season swept through the South early this week killing 23 in Alabama.

Cold air slammed into a warm front spawning 34 twisters across several states. Winds in Alabama topped 170 miles per hour and cut a mile-wide swath stretching 70 miles. Alabama’s governor asked for, and received, federal disaster assistance as more than 100 homes were destroyed in the southeastern portion of the state.

Sunday’s storm was the deadliest since the Moore, Oklahoma tornado in May of 2013.

Cold air remained in Alabama following the storm as another Arctic blast gripped much of the country.

Even more snow fell late in the week as another weather system prompted advisories from Montana to West Virginia.

The National Weather Service issued a flood advisory this week for areas along the Mississippi River north of St. Louis. As snow piles stay high in the northern Corn Belt and High Plains, the recent weather events only add to the potential for widespread flooding. The NWS issued a flood warning and adds much of the mainstream river has a high chance of reaching flood stage levels that could hit previous record crests. The severity will depend on the rate of snow melt combined with a weekend prediction for spring rains.

Moderate to major flooding is already occurring along the Mississippi from Cairo, Illinois to the Gulf of Mexico.

For Market to Market, I’m Paul Yeager.

Iowans are used to having high profile political figures winter in the state.

Traditionally, the Secretary of State sells the country in foreign lands.

This week, Mike Pompeo took the administration’s trade message to a domestic location closely watching the trade story unfold.

Peter Tubbs has more.

The slow pace of trade negotiations between the United States and China continued this week. While both sides have hinted an agreement is close, analysts are beginning to measure the damage the trade war has left in its path.

A study by the Federal Reserve Bank of Atlanta found the tariffs had caused U.S. companies to cut their spending on large equipment by 1.2 percent, or $32.5 billion, last year.

Consumers are estimated to be paying $1.4 billion per month in tariffs on household purchases, and the added duties are costing American businesses an additional $3 billion per month.

Additionally, a stronger American dollar is making U.S. exports more expensive on foreign shores.

The drop in Chinese purchases of American grain, high tech gadgets and other products has helped widen the trade deficit, which hit a record $419 billion in 2018, which is a 10-year high.

On top of a record trade gap with China, the imbalance reached new peaks with Mexico

 at $81 billion, and the European Union at $169 billion. The United States also ran a record surplus last year with South and Central America.

This week, Secretary of State Mike Pompeo, at an appearance before Iowa Future Farmers of America members, reiterated the administration’s commitment to negotiations with China.

Mike Pompeo, United States Secretary of State: "The President concluded, and I think rightly so, that it's time. We need to be serious about that. That we ought to do this in a professional way, engage in deep communication and negotiation with the Chinese about this so we can get to a place where Americans can sell their goods on a fair, simple reciprocal idea that says if you have no tariffs and we'll have none."

Across the Pacific, Chinese manufacturers are also feeling the effects of the trade skirmish. GDP growth has slowed to a 30-year low of 6.6 percent as both internal consumption and international exports slowed.

 Sock manufacturer Chen Renyong has idled most of the knitting machines in his factory because of retaliatory U.S.  tariffs. American clothing buyers have switched sources for footwear to other locations in Southeast Asia, avoiding both tariffs and China’s relatively high labor costs.

Chen Renyong, President of Hemaosheng Socks Co. Ltd: ”This has a big impact on us. The impact will get bigger if the trade war between China and the US escalates, mainly, as in the number of the orders, which will greatly affect us.”

The lever in the trade dispute may be American soybeans. The U.S. currently sits on nearly a billion bushels of beans from the 2018 crop, which is double the previous record. China had been the number one destination for those soybeans over the last decade, but purchases have slowed to a trickle over the last six months. The Chinese market may have been permanently altered.

Kirk Leeds, CEO, Iowa Soybean Association: “I think the damage from the trade tariffs and the counter tariffs have done long term damage to the US soybean industry, I think it's going to take us a very long time to recapture this market.  Lots of Federal officials are tired of talking about soybeans, but the Chinese know that soybeans are probably their strongest weapon to use to try to persuade this government to move forward on trade.  

Later in the week, Ambassador to China Terry Branstad told the Wall Street Journal that a further narrowing of gaps was necessary before Presidents Trump and Xi would meet and that no deal is imminent.

For Market to Market, I’m Peter Tubbs.

Next, the Market to Market report.

Weather is known to move the market this time of year. However, with heavy snow preventing early field work, it was the lead up and results to USDA reports that had the real impact. The numbers were mostly bearish. For the week, May wheat continued to plummet, this time down 18 cents while the nearby corn contract shed 9 cents. Traders appear to have tired of trade rumors and are waiting for facts between the U.S. and China before buying again. The May soybean contract declined 16 cents. May meal dropped $3.70 per ton. May cotton fell 36 cents per hundredweight. Over in the dairy parlor, April Class III milk futures weakened 32 cents. The livestock market was a green scene this week. April cattle put on 13 cents. April feeders improved $2.65. And the April lean hog contract jumped 7 percent or $4.15. In the currency markets, the U.S. Dollar index rose 82 ticks. April crude oil rebounded by 27 cents per barrel. COMEX Gold was flat. And the Goldman Sachs Commodity Index dropped 1 point to finish at 419.75. Joining us now to offer insight on these and other trends is one of our regular market analysts, Elaine Kub. Elaine, welcome back.

Kub: Thank you.

Howell: Elaine, we had quite a few government reports come out today, the WASDE being one of those, not particularly bearish when you look at the wheat markets, however, we finished higher on the day.

Kub: We sure did and that might just be a mechanism of who has been participating in the wheat market. The speculators have been very net short in grains overall and I feel like they've been piling onto that trend in wheat, but we have not seen any evidence of that change. We did see wheat prices bump up today and that could just be a reaction to the report. But I think there's incredible danger in that wheat market of just continuing to fall because on a chart there's no real resistance levels for it.

Howell: So are we due for a bounce back? What goes down has to come back up at some point.

Kub: Eventually, but there's nothing fundamentally, if you look at the actual business that is being transacted physically, wheat being sold to other countries, everybody who has wheat, every country that has wheat is willing to offer it at fairly cheap prices. So there's nothing that I can see on the forecast that would be a boost to the prices. And if you look at the chart they could continue falling another 40 cents before anything really has to change.

Howell: So what fundamental news do we need to see to have wheat's story changed?

Kub: Well, this is an interesting have, have not scenario between winter wheat prices, which went their own direction today, and spring wheat prices went the opposite direction. And I think that might be something is if you start looking at the acreage picture, and this is an argument for corn acres too, but all of this snow cover that is on Minnesota, the eastern Dakotas, the areas that you would expect to see large increase in spring wheat acreage planted in 2019 because soybean prices are so unappealing, economically we expect it to go to spring wheat, but logistically if this snow doesn't melt, if the polar vortex persists and we just physically can't get into the fields there might be a surprise for spring wheat acres I think in the next six weeks.

Howell: Okay. A surprise in seeing more acres? Less acres?

Kub: Less acres. If this polar vortex, if we don't get rid of the snow and folks physically can't plant the spring wheat then all of that bearish idea of spring wheat acreage goes away.

Howell: What do those acres transition to then, Elaine?

Kub: Soybeans I suppose eventually even though the prices aren't appealing. If there was a scenario where folks can't get planted in the timeframe that they want to get planted and they can't get the corn planted eventually you end up putting them into soybeans, or sunflowers, but probably soybeans.

Howell: Since you're opening the gate there on the planting story, prevent plant acres especially in the corn markets, is it too soon for that to be a story for the markets to react to?

Kub: It's too soon I think to react confidently but it's time to start expecting it, or it's time to start really watching the climate models for the next three or four weeks if we don't get some serious melting here and problematic melting as mentioned in the previous story about the flooding it will be problematic. But to get these fields cleared off and dried off that needs to happen.

Howell: Okay, Elaine, let's talk about the WASDE report from the corn market's perspective. We saw ending stocks lowered by a hundred million bushels, ethanol exports, is the story there bearish now because of today's report?

Kub: I think it was those bearish adjustments. And the ethanol adjustment I think is legitimate, to say that there will be less corn being used for ethanol, because the ethanol situation is not all that profitable lately and we're not seeing the million gallons per day being produced anymore. So I think that is legitimate, a legitimate bearish change to those tables in the WASDE report today. But the corn market didn't react in an overly strong manner. We were just down a few cents. So I think we just shrug it off and move on.

Howell: It was down a few cents on the day but we broke through a major area of resistance. We had a question here from Brian in Iowa sent into us via email. He said, it's been a tough week for corn. Has corn reached the bottom? Do we still need weather to drive that price north?

Kub: I think weather will, if folks are sitting here waiting for a rally and not taking advantage of the prices that we had, 20 cents ago would have been a better opportunity when it was at that $4. $4 psychologically is a nice price for farmers to put some targets in or maybe have some standing offers at their local elevator. So if we see that come back and get that $4 level I think it pays to be aggressive because there will be perhaps an opportunity from weather but not a $5 opportunity. I think we need to forget about that kind of aggressiveness.

Howell: Where do you see prices heading when we start planting here? Hopefully planters rolling sooner rather than later but weather is of course a factor.

Kub: Yeah, if there was this late spring and idea of disrupted corn acreage possibilities I believe you'd have a rally more like a 50 cent rally and so that could be a short-term opportunity that folks would have the chance if that weather, like I mentioned, persists. That would be a short-term opportunity to take advantage of because ultimately I believe American corn farmers can get a lot of corn planted in a week, all you need is one good dry week and you could get it planted.

Howell: How delayed do we have to see though for that potential 50 cent rally to happen?

Kub: I think if you were at the halfway point, if you're at that May 15th date and you have not the usual number of acres planted, that's when you start to see yield effects in university trials.

Howell: Okay, May 15th, that's the date. All right, Elaine, let's talk soybeans. We saw lowered ending stocks for the U.S., 10 million bushels, not a huge decrease, yet the soybean markets reacted horribly today on the close, down I think 7 or 8 cents at the end of the day.

Kub: Could be worse, there are times, Delaney, when soybeans would go 60 cents on any given report day. So 6 cents is a good mild reaction I think in historical terms. But we have to remember that 910 million bushels ending stocks, any ending stocks above 900 million bushels is a lot, that's twice as much as there was last year. So we just don't have the markets, the places for these soybeans to go that we wish that they were going to China obviously.

Howell: Right, to China. What about when you look at the Brazilian side of things? I know estimates got changed in today's report as well for Brazilian production.

Kub: Yeah, I think I would quibble with USDA's projection for Brazilian soybean production at 117.5. I think private estimators on the ground there suggested it would be smaller than that, that it could be a slightly more bullish number. But I don't think we should get really bulled up about the Brazilian soybean scenario right now because Argentina is coming in with definitely more soybeans than Brazil has lost after this weather and there are some logistics problems, some roads that are muddy that I believe American farmers will get to experience in the next few weeks of muddy roads, but not bad enough to impede the shipment of Brazilian soybeans to China.

Howell: Let's talk about the shipments of U.S. soybeans to China. Elaine, you and I were looking at this chart and I think we're going to pull it up here on the screen, that season now we're seeing here seasonally we're way below on the chart.

Kub: There's a big gap of what we would like to see. And there was an export announcement of 600 and some thousand metric tons being sold to China today and that is good. But looking at that chart, that's about a tenth of what you would need to fill that gap that we didn't see during that harvest timeframe which is when we typically are shipping out a bunch of soybeans. That just never happened so we just have a big gaping hole of soybeans that are still sitting around.

Howell: And when you look at that chart, March is really the month where we kind of see all of those years really come together. Are we going to see this year's even lower than that? Are we going to see March and onward reflective of that chart for normal time of year?

Kub: So now the Brazilian soybean harvest is over halfway done, China could switch to Brazil and not buy from the U.S. I think the export announcement we saw this week or any export announcements going forward is just a sign of good faith of the trade talks, of being a good trading partner, a gesture made that way. But we've seen headlines that the trading talks are not going to be finalized in March, they're going to be kicked down the road farther. So this process continues.

Howell: So, Elaine, I think really the question that comes to mind then when you look at today's report, you look at that chart we just pulled up there, you look at continued dialogue or maybe no dialogue with China, USDA didn't lower exports in today's report again. Why?

Kub: Well, they've got most of a marketing year to still work with, perhaps it's just a hope or an expectation that it will recover.

Howell: But this time of year is when we're supposed to get all of those soybeans out the door.

Kub: Yeah, logistically if it hasn't happened, exactly, if it hasn't happened by now when the Brazilian market becomes available it doesn't have to happen.

Howell: All right, I guess there's nothing more to say on that. We can't predict what the USDA is saying unfortunately. Let's talk about the cattle on feed report. What was your synopsis of it today? I know you were working on some market commentary related to the livestock markets.

Kub: Yeah, well it seems very neutral. So the total cattle and calves on feed was just barely slightly above last year at this time. What's a little more interesting is the placements was 95% of last year at this time. It wasn't outside of expectations so there should be a fairly neutral reaction. But 95% I think is a reflection of the weather logistics that the industry has experienced here in January. So, again, you might be kicking the can down the road in this market too, there might be a scenario when the weather clears or when the shipments become a little more reasonable to make, the feeders might really come into the calf market enthusiastically.

Howell: And the feeders this week had a pretty great week. $2.65 on compared to last Friday. Do we continue to chug right along here? That $147, $145 mark, we keep holding in there.

Kub: Yeah, that would be my expectation going forward is for the feeder cattle to move back up to correct the lower trend that they've been seeing and at the same time the live cattle market to go back down, for these markets to come back and converge back towards a normal spread just because the weather will eventually clear and the cattle will move where they want it to go.

Howell: So, where will April live cattle head back down to if we're converging?

Kub: We are at some pretty lofty prices. And furthermore, the speculative side of the market in the live cattle market is extremely net long, they've got nine times as many long positions as short positions. So I think if we decide that there is a top here, we're not going to put in a new top on that April contract you're talking about, it could collapse fairly quickly except that the cash business has been steady, there is still some bullishness, or like I mentioned neutrality, but at some point I think there could be volatility in the futures trade.

Howell: Elaine, I've got to prompt you a little bit more, you say fairly quickly if we see a collapse there. Are we talking a week? Are we talking a month? Can you put that in a timeframe just a little bit for me?

Kub: Well, I don't know about a timeframe. I just think on a day-to-day basis you could see limit sized moves if you had the speculators all of a sudden get spooked that the top is in and they don't want to be holding such a strong net long position.

Howell: Okay, Elaine, let's talk about the hog markets. They had a great week, $4.15 on the April contract, finished strong on Friday not limit up but definitely putting some cents back on the board. What's going on there?

Kub: Yeah, very cool. A majority of that movement was on Friday but a good week overall and I think the timing of that is interesting. I think it was a reaction to the cold storage report on Thursday which showed that the overall supply of frozen pork is down 3% from a year ago. And think that we've been expanding this herd, we've been expanding the industry.

Howell: We're just chewing through it.

Kub: We're just chewing through it and the supply keeps dwindling down presumably because of exports, there's lots of good export stories to talk about in pork too. So I think that was the wake-up call for the entire hog market to see that the February lows might be a floor in this market and that really motivated this upward movement this week.

Howell: You mentioned export stories. What are the ones that you're watching that are moving the hog markets right now?

Kub: Well, we didn't see new Chinese pork exports in this week's export sales report but the overall progress so far this year China has been good, it has been a good story, they got about twice as much bought than they did last year at this time, they're roughly the same size of business as Japan, getting towards the South Korea type size of business and we keep on worrying about that African swine fever so it could be bigger and bigger months down the road.

Howell: How much bigger are we talking?

Kub: I don't know. Nobody knows, nobody can predict with a pathogen moving through a herd like that. It's impossible to predict.

Howell: It is impossible to predict. Elaine, let's talk cotton, impossible to predict what is going on there for export side of things but we plummeted 36 cents on the week. Are we going to continue to head lower next week?

Kub: I think if you're just on a chart basis the cotton looks very stable, it's very rangebound. And again there is a market that received bearishness from the speculators, they are net short in cotton the way that they are in a lot of commodities. That might be what was going on this week. I would expect it to recover back towards a --

Howell: And Elaine, when the specs are net short tell us what that means.

Kub: It means that more people have gone in and bought bearish positions with the expectation that prices will go down versus the number of positions that are there long with the expectation that prices will go up. So it's just sort of a measure of the overall sentiment of the people who are speculating with investment money.

Howell: Elaine, give me your 15 second synopsis of the oil market.

Kub: Not terrible, holding in steady. I think it's very vulnerable to downward movement because we've seen such strength in the dollar. The dollar was skyrocketing this week and the commodities didn't fall apart yet so that might be a delayed reaction when we come back on Monday.

Howell: All right, let's talk about the dollar in Plus. Elaine Kub, thank you so much.

Kub: Thanks, Delaney.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at MarkettoMarket.org. A reminder, many PBS stations are in their fundraising mode and this program may be shifted to different time slots. Please show your support by calling the station that carries Market to Market and invest in accurate information and timely market analysis. Join us again next week when we visit a family making the move from the city to the country. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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