Market to Market (May 3, 2019)

May 3, 2019  | 27 min  | Ep4437

Coming up on Market to Market -- The trade fight continues on multiple fronts. A heartland water battle brews between urban and rural customers.

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This is the Friday, May 3 edition of Market to Market, the Weekly Journal of Rural America.

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Hello, I’m Delaney Howell.

It appears our general willingness to part with our hard earned cash has put the nation on track to have the longest period of economic expansion in U.S. history. ---

U.S. employers added 263,000 jobs last month.

The expansion cut the unemployment rate to 3.6 percent – the lowest level in nearly half a century.

The Dow Jones Industrial average digested the news and grew more than 150 points.

Fed governors have been satisfied with the speed of economic growth and left interest rates untouched for another month. ---

The tariff battle that has raged for nearly a year continues to aggravate many in rural America. Flooding has failed to put the fire out as millions of acres remain unplanted. As trade negotiations ramped up, the head of USDA brought his talking points on trade and floods to the Midwest.

Department of Agriculture Secretary Sonny Perdue toured a central Iowa manufacturing plant earlier this week. At nearly the same moment, Treasury Secretary Steve Mnuchin and Trade Representative Robert Lightheizer arrived in China for another round of trade negotiations.

The three administration members were on a similar mission, to help shore up support for the president’s goal of a better trade environment for America.

Secretary Sonny Perdue: “So it's a huge potential. I just don't raise expectations as a done deal. I mean, I wish it was done today based on the numbers we see, but so there's a lot of work to be done. Hopefully President Xi and President Trump can come together and seal the deal, later we're optimistic but cautiously optimistic.”

One of the president’s biggest trade deals to date is the agreement to replace NAFTA. The USMCA pact still needs Congress’ approval.

Republican Senator of Iowa Charles Grassley wrote in an opinion piece for the Wall Street Journal that a significant roadblock would be lifted if the president remove tariffs on steel and aluminum. Adding quote: “If these tariffs aren’t lifted, USMCA is dead. There is no appetite in Congress to debate USMCA with these tariffs in place.”

Secretary Perdue was a little more diplomatic in his comments on the issue.

Secretary Sonny Perdue: “I just hope Congress will put, once again, politics aside and vote for America and ratify this. I believe the President at some point. If that's the case, could be persuaded to use and go back to the quota system, where he's concerned about the steel industry and revitalization of the steel industry, which he has to be in an overall economy. But as you know President Trump doesn't feel very much with threats.”

Delaney Howell: “Besides comments on trade, Sec. Perdue also offered his comments on flooding impacting the Midwest.”

 

Secretary Sonny Perdue “Flooding there’s total devastation, river, some people lost everything. It’s not really an insurable opportunity through USDA program. That’s what we really need. The safety net the farm bill provides is one thing, but it doesn’t contemplate total devastation, hopefully can get some help.”

Whiskey is for drinking and water is for fighting. The quote attributed to Mark Twain often gets cited when we talk about farming and ranching in the West.

Midwesterners would agree it applies to them when their livelihood is on the line.

John Torpy reports our Cover Story.

Over the past several years, the city of Wichita has been preparing for the next drought. Part of that planning involves securing sufficient groundwater for the community of 400,000. But a recent proposal has residents in the surrounding eastern Kansas counties crying foul. They are worried the city’s plan only takes care of Wichita and leaves the regions farmers and the environment high and dry.

The rules governing water rights in Kansas are complex. In the summer of 2005, the City of Wichita started a program along the Little Arkansas River to collect, treat, and inject surface water into the Equus Beds Aquifer for future drought mitigation. City officials want to redesignate the water so it can be used for Aquifer Storage and Recovery credits or ASR’s.

Joe Pajor, Deputy Director of Public Works, City of Wichita:”What makes ASR different is we're bringing new water to the discussion. We're taking this excess surface water, cleaning it, injecting it into the aquifer, and that's the water that we can recover from our ASR credits, not the native groundwater, not the native groundwater rights that we and others have in the area.”

Low levels in the city’s wellfields during a drought in 2011 created concern about aquifer recharge credits. In 2018, the city of Wichita had the opposite problem. Water levels in the wellfield were so high the city was limited on how much water could be put back into the aquifer. Currently, ASRs can only be acquired when there is room in the aquifer.  It was these two events that prompted the City of Wichita to suggest the creation of a new designation for water credits.

Joe Pajor, Deputy Director of Public Works, City of Wichita:” And what we have proposed is aquifer maintenance credits. We would take the surface water, treat it, take it to town, treat it again, use it to meet customer demand in these, in between years and years between droughts and during that time, each gallon of surface water that we take through our plant and into town leaves a gallon of groundwater in the ground to keep those full aquifer conditions. That's what we're trying to get to.”

Wichita officials believe the change will increase the amount of water available to the city in times of drought, and the ability to collect credits even when they are blocked from injecting water back into the aquifer.

Joe Pajor, Deputy Director of Public Works, City of Wichita:”So the 1% drought, the 1930s level drought, and as a result of that, now we need to collect credits over the long term for use. Very infrequently. That's a big change. The second big change is that we need to figure out a way with a full aquifer to still be able to produce credits because we've got to produce credits every year in between droughts so that we have credits available to use during the drought. So we need to have a way to be able to do that.”

But Kansans living outside of Wichita are opposed to the idea, saying the city is trying to use water farmers and ranchers rely on. Each operator is allotted a specific amount of acre feet to use on their crops or water their cattle. Bill Carp is an area farmer concerned with the recent proposal.

Bill Carp, farmer, water rights holder:” The whole purpose for these changes to the, to the agreement is because they can't get water rights added up. So since they can't get them to add up, they've come up with an idea that will send the water to Wichita. And since we're sending it to Wichita, it'll be just the same as putting it in the ground. We just won't have to go through that extra step. Well, you and I both know that if you've got a cup over here and you don't put water in it, you're not storing it for later.”

Carp is also a member of the not-for profit group Citizens for the Conservation of the Equus Beds which is opposed to the rule change for environmental reasons. Other groups offering resistance to the city’s new plan include the Harvey County Commission and the Kansas Farm Bureau.

Groundwater Management District Number 2, a division of the Kansas Department of Agriculture, is charged with overseeing water usage for agricultural purposes around the area of the Equus Beds Aquifer. The Halstead, Kansas based group and its board of directors also opposes Wichita’s request to change the rules saying the move could harm the aquifer.

The Kansas Department of Agriculture, which will make the final decision, has held public gatherings for groups to voice concerns on the plan. Last December, members of Citizens for the Conservation of the Equus Beds, along with other rural water users, packed a meeting room in Wichita to lend their thoughts to the city’s proposal.

Nat sound from town hall

State officials hope, with more open dialogue, a better understanding of what the city is asking for can be reached.

Chris Beightel, Program Manager, Kansas Dept. of Agriculture: ”It's their duty and their job to, to plan for these droughts to make sure their citizens have water in times of need. Um, so you're, you're playing that against, you know, the irrigators and the homeowners out in the area who have wells that they rely on and they're concerned about water levels dropping or, or a water quality deteriorating. And, you know, it's, uh, those are all valid concerns. And the way to make it right, I guess, is to make sure that all the terms, conditions protect everyone while fulfilling everyone's need to the extent possible. So that's what we're pursuing here.”

The Kansas Department of Agriculture is conducting a study to determine the effect of the City of Wichita’s plan. A final decision on the proposed changes is expected by fall of 2019.

For Market to Market, I’m John Torpy.

Next, the Market to Market report.

Wet fields, an announcement that a trade deal was close and a lower priced South American product were a mixed bag for the grain markets. For the week, July wheat fell a nickel while the nearby corn contract bounced a dime higher. Another week promising the end to the trade war, coupled with lower priced Brazilian soybeans continued to drag prices lower. The July soybean contract plunged another quarter. July meal lost $5.50 per ton. July cotton fell $2.02 per hundredweight. Over in the dairy parlor, June Class III milk futures improved 23 cents. The livestock market returned to mixed conditions after last week’s sell-off. June cattle dropped $1.62. August feeders shed $6.47. And the June lean hog contract rebounded $4. In the currency markets, the U.S. Dollar index lost 49 ticks. June crude oil retreated $1.02 per barrel. COMEX Gold cut $8 per ounce. And the Goldman Sachs Commodity Index slumped nearly three points to finish at 441.20. Joining us now to offer insight on these and other trends is one of our regular market analyst Darin Newsom. Darin, welcome back.

Newsom: Thank you, Delaney.

Howell: Darin, Kansas is the topic of discussion, apparently there we just had that cover story, and they also have been hosting the Kansas Wheat Tour this week. What have you been hearing from that tour?

Newsom: I haven't been hearing anything because I wasn't paying attention to it. But I do know that at least through the grapevine the crop is supposed to be better than it has been over the last few years. But we've had moisture, looks green, so that's one thing in its favor. So it sounds like we're going to be starting harvest here before too very long in the far southern reaches of the Southern Plains. It sounds like the hard red winter crop is going to be larger than it has been. We'll see how the market takes that news long-term.

Howell: Yeah, it has really been one of the commodities that has been thriving in all of this wet weather. The opposite, the counter partner there, the spring wheat crop has not. When we look at planted acres we're at 13% in the latest report versus 33% on the five year average. When do we start to see some of those acres switch to corn or soybeans or another commodity?

Newsom: Well, if we do then is it 13%? Or is it 50%? Maybe 67% has actually been planted. So the percentages are, as I tell everyone who asks me, the percentages are completely irrelevant. The real concern is, and you're absolutely right, is that we've got two very distinct situations going on here where we may have a larger hard red winter crop and we have no idea what's going to get planted or what size the hard red spring crop is going to be. But what's interesting is that if you look at the new crop July Kansas City and the new crop September Minneapolis contract the patterns are very similar. They both went to new contract lows this week, they both are really struggling at this point and if we look fundamentally at the July Kansas City, regardless of what anyone says the crop size is going to be, right now we've got a 71 cent carry in the July contract, from the July contract through next May. That's huge. And so it's bearish.

Howell: And that carry indicates what to you, Darin?

Newsom: That carry indicates to me, right now what it tells me is that nobody wants you to sell any wheat nearby, new crop wheat, they don't want it nearby. Everyone says oh yeah, well it's bullish because what they're saying is they'll pay you more later on. No, they don’t want to pay you anything now for it. And if we use the standard amount of carry it's actually above total cost of commercial carry, it's 104%. But we have this funny thing called variable storage rate in the wheat and we've argued about that here before, that makes it only 71%. That's still bearish. It's still a 70 cent plus carry. It's a bearish situation. The market knows there's too much wheat on hand and that we're going to grow more.

Howell: Okay, Darin, let's continue with this weather discussion when it comes to corn and soybeans. We've got a great question here from @FarmerDave1853 on Twitter. He said, we're seeing the Mississippi River bids spike due to high water conditions on the mid-Mississippi. What advice do you have for folks still setting on old crop corn and soybeans? And also what are your thoughts on developing a new plan for marketing new crop corn and soybeans?

Newsom: Well, I don't know all the facts about the first part of that question for the old crop. If they're hedged let's say and they've rolled their hedges on and on and on and they're out sitting in the July contract at this point, the game is now how much longer will basis in both old crop corn and soybeans continue to push higher? We are seeing some river problems. I saw something where the CME is declaring force majeure along some ports along the Mississippi River and Illinois River. This could cause a short-term spike in basis. Others are saying, it's one of those things some are saying it's going to cause a spike in basis, others are saying it's going to wreck basis. I think right now we could continue to see some basis appreciation. So if I'm sitting on some hedged grain, old crop grain, I'm probably going to roll the dice, see how much I can milk out of this thing and can let it continue to appreciate into my hedges. If I'm unhedged what we have to hope for here is the old rule of basis thin spreads and then the futures, hope for some sort of futures rally. We started to see a short-term move in corn and old crop corn but we're not seeing anything in the old crop beans right now. So if you're unhedged you're going to have to try to get some sort of rally in this futures market and then just unload. As far as new crop, we could sit back because if you sell now you're basically selling in a hole. Again, Nov beans went to a new low this week. What you would be betting on if you're going to change your game, your strategy right now, is some sort of weather scare. Maybe we don't --

Howell: Are we having that? When will we have that weather scare?

Newsom: Maybe it is right now because of the flooding. It's very possible this is our weather scare. So this could be our opportunity. And, again, we went to a new loan in November beans because of all the talk that we're going to see more bean acres planted. If we can get Dec corn moving higher, and we might again next week, it certainly looks like at least on the short-term daily charts that it should move up. So I think it's going to provide us some opportunities. Could we approach $4 again? It's an outside shot, but depending on how excited everybody gets and if we start to see some serious non-commercial shortcovering then yes, we could possibly make that run at $4 again.

Howell: Old crop corn this week moved off of that July low. Is that indicating to you that maybe we are factoring in the weather concern? Or is that just, that was really the only positive this week when you look at the grains.

Newsom: Yeah, the old crop July is not going to really reflect the weather all that much, except for the flooding and the port closings and all of that sort of thing because there's going to be a push to try to buy some nearby grain to get supplies to meet what little demand there might actually be out there and we continue to see our export pace slow down from week to week. So I think it's a real tricky game right now. I think it's a short-term uptrend on the futures. Fundamentally old crop corn is still bearish. We see a stronger basis only because everyone is holding tight. But once folks start to let go of that cash corn it's going to be who sells less because whoever holds it the longest is probably going to pay the price.

Howell: Could that possibly be the funds then?

Newsom: No, the funds are perfectly comfortable being short and if we go back to the March 29th quarterly stocks report where USDA said 8.6 billion bushels, the funds know it's out there, they can look at the old crop spreads and they can see that the market, the commercial side of the market is bearish as well. So they're perfectly comfortable. We could see a little bit of covering over the next couple of weeks. But they are very comfortable in their short position right now. And until we get through the old crop market, once we get into new, that might be what triggers some selling if we continue to see some commercial buying coming in the new crop.

Howell: Okay, Bearin, let's talk about -- that's a thank you to Ed Duggan by the way.

Newsom: Yes, that was very good.

Howell: Let's talk about old crop soybeans. They posted four or five closes down in a row here on the session. How much more downside potential does old crop have?

Newsom: I'm going to surprise everybody here.

Howell: You're going to be bullish today?

Newsom: I am going to be extremely bullish, well at least by my, exactly, in saying that we may have seen, we may have seen the low this week and it's all from a technical point of view because we look at the fundamentals, soybeans, old crop soybeans should continue to go down, no doubt about it. They're bearish, they're going to stay bearish, they're not going anywhere. But from a technical point of view we may be seeing the possibility, and it's going to depend on what happens next week, of a two week reversal, bullish reversal. And the reason why I say that is because we fell down to a new low this week, we closed near that low and often that is the first step that you have to see from a technical point of view for a two week reversal is to get that new low and close,, near it, then the next week you rally and close near the high. We've got stochastics, weekly stochastics that are in sharply oversold situation. This could start to bring some money in or some shortcovering in except for the fundamental problem. We have so many beans on hand. It's going to take some shift in the perception of the old crop soybean market.

Howell: Which could be maybe a trade deal.

Newsom: No. I don't think so. I think that ship, that's kind of a pun, that ship has sailed. I don't think an announced trade deal right now is going to have any effect on the old crop soybean market and I don't think one is going to happen. The next talk is June.

Howell: It's hard to keep track honestly.

Newsom: Exactly, I've kind of lost track. So I'm not really sure that's going to be it. I think we have to see some sort of dramatic decrease in expected U.S. ending stocks. But then we get into the problem of okay, if we see that the spreads are still bearish. So who's right? They could both be right. We could still lower our ending stocks projections and still stay bearish the market. So I think that's probably the most likely scenario is that we start to bring our ending stocks guesses down, that's certainly seasonally what tends to happen with USDA guesses starting with next week's report because everybody is focused on new crop, on the initial numbers that we've already seen before a couple of times, and they lose focus, they lose sight of the old crop numbers and that gives an opportunity for USDA to continue ot lower its old crop ending stocks.

Howell: Okay. Darin, let's save the cotton discussion for Market Plus. We've got to talk about the cattle markets, live cattle and feeder cattle have had nine to ten straight closes lower. How much lower are the trends indicating now?

Newsom: I think there's still some room to the downside. We took care of a lot of the technical space in there this week in both the June live cattle and August feeders. But I still see some room to the downside. We can lose, well I've forgotten my chart targets, but we've still got some room. We're not oversold yet, which is a key thing to me. But if we can find some buying, if we can rally, if we can hold this week's low and start to rally, it might give us a chance to bump up for a couple of weeks then turn down to new lows. So I think next week is a very important trade. If we can keep the cash market, if we can start to firm the cash market again that might be enough to bring some buying back into the cattle market, particularly the live cattle market. At that point we might get this little recovery bounce then head off to a new low here within the next two or three weeks.

Howell: Why did we see this trend start to head to the downside in the first place?

Newsom: We've got a lot of cattle. We've got the spreads --

Howell: Are we just now kind of maybe pricing in this wall of cattle we keep hearing about?

Newsom: It's very possibly because we look at the June-August spread and it's not bullish. We're seeing the June lose ground to the August contract. We've seen the actual cash market start to soften in some markets. The monthly cattle on feed reports continue to show a 3%, 4%, 5% increase over last year and last year's numbers were huge. So we've got plenty of cattle on hand. We still have strong demand, there's no doubt about that. We've still got a lot of disposable income. We've got a lot of domestic demand. We've got foreign demand. So if we continue to sell off, I'm not looking for it to be long-term, pull it back here over the next month or so, then maybe get some late summer buying coming back into the market.

Howell: Okay. Darin, there is this notion that has been floating around, I'm interested to get your take on it because beef is usually the premium cut, it's at a premium to pork. But what has been going on in the lean hog markets? This week we had another rebound. Will lean hog prices help pull back up cattle prices?

Newsom: I'm not convinced that they will. I think what we're seeing in the hog market this week is what we'll probably see in the cattle market either next week or the week after that. So they're moving in very similar patterns were we've seen a sharp selloff in the hogs, we kind of ran out of selling and that allowed them to rally back at the end of the week. So I think next week hogs probably stay stronger, see if the cash market comes in and helps support it again. Then, again, it would not surprise me to see the hogs turn lower, cattle follow a couple weeks higher and then move lower as well. I'm not sure that we're going to, that this rally in the hogs is going to directly affect the cattle market other than the fact it kind of shows them what way to go.

Howell: Okay, but lean hogs you think holding steady for another couple of weeks before we see them head down again?

Newsom: I think so. I think next week we could trade hogs higher again, maybe even one more week after that, get into mid-May would not surprise me for the market to start heading lower.

Howell: Even with the African swine fever taken into the equation?

Newsom: It's built in. How much worse is the story going to get coming out of China? We don't know that, it could get worse. But we had the big emotional spike, which looks to me, it's the same thing that we used to see in grains when it would get hot and dry for seven to ten days. It's just a normal short supply spike. And those usually don't last very long, you get them to pull back, then you have to see if the next wave comes in. If we get this next round of scares, this next round of headlines it drives it even further, brings the buyers back in. Right now we're not seeing it.

Howell: Okay, Darin Newsom, thank you so much for your analysis today.

Newsom: Thank you, 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 Market-to-Market.org. Did you miss part of the discussion this week? Subscribe to our YouTube channel and get notified when the program and Market Plus are online. Join us again next week when we’ll explore how high school students manage the local grocery store. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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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. 

 

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