Market to Market (August 2, 2019)

Aug 2, 2019  | 27 min  | Ep4450

Coming up on Market to Market -- Turning up the heat on China. Raising the stakes on USMCA. The view of rural America from on top of Capitol Hill. And market analysis with Darin Newsom, next.

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This is the Friday, August 2 edition of Market to Market - the Weekly Journal of Rural America.

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Hello, I’m Delaney Howell.

Farm country continues to push through hard times even as the nation is experiencing the longest period of economic growth in its history. However, there are signs that things are slowing down. ---

Creighton’s Mid-America Business Conditions Index fell 3 points indicating economic growth is weakening in the 9-states it surveys.

While Department of Labor data shows the unemployment rate held steady at 3.7 percent only 164,000 jobs were created last month – down from last year’s monthly average of 236,000.

The Fed has been watching and voted to give the economy a kick-start by lowering the interest rate it charges banks by a quarter point - the first cut since the George W. Bush administration. ---

The softening world economy is a backdrop to the current U.S. trade war with China. More tariffs have been threatened but this is only one deal the Trump Administration has on the table.

Paul Yeager has more.

An American delegation spent part of the week in China talking trade ending in what both sides called a “constructive” session.

However, the only agreement from the 12th round of discussions was to have more talks in September.

Senator Charles Grassley, R – Iowa: “Well, the only way you can read it is it's got to be considered very positive, because we weren't talking would never get an agreement.”

But just hours after U.S. Trade Representative Robert Lightheizer and Treasury Secretary Steven Mnuchin left for home, the president tweeted.

President Donald Trump: “But when my people came home they said we're talking, we have another meeting in early September, I said that's fine. But in the meantime until such time as there's a deal we'll be taxing them.”

His comments were seen as a way of applying pressure to the Chinese with an additional 10 percent tariff on the remaining $300 billion of Chinese imports beginning September 1.

The president has already implemented 25 percent tariffs on $250 billion in Chinese products while Beijing has countered by taxing $110 billion in U.S. goods – the majority in the agriculture sector.

The latest round could impact more consumer products than previous enactments. The news came just after the White House confirmed China’s intent on buying American farm products.

Tom Vilsack, CEO U.S. Dairy Export Council: “I suspect that if they do purchase agricultural products in the U.S. is only because they actually need those products, not because they're negotiating in good faith. You know, the Chinese almost never purchase product because out of the goodness of their heart, they do it because they fundamentally need the food. And I think with the devastation that they're currently seeing with their pork industry, they have a need for protein.”

Former USDA secretary and current CEO of the U.S. Dairy Export Council, Tom Vilsack, was on the trade circuit this week, first as a witness in a Senate Finance Committee hearing on the United States Mexico Canada Agreement. The USMCA still needs to be ratified by the House before it ends up in the Senate.

Sen. Charles Grassley, R- Iowa: “Surely nobody could consider NAFTA to be better than USMCA. And nobody, and let me emphasize this, nobody should dismiss the importance of a half-trillion dollar market for U.S. exports.”

 Vilsack says the administration is anxious to get a win and hopes the pact between the three major trading partners is complete before the end of 2019.

Tom Vilsack, CEO U.S. Dairy Export Council: “Trade agreements are always hard. They never are won by large margins. So it is important, I think, to get it done as quickly as we possibly can. But to get it done right, in a way that people are genuinely satisfied. This is better than NAFTA.”

For Market to Market, I’m Paul Yeager.

The Family Farmer Relief Act of 2019 passed Congress this week giving farmers more of an opportunity to use Chapter 12 of the bankruptcy code if they need it. Previously, only farmers with a maximum of $5 million in debt could qualify for relief but the bill raises the limit to $10 million. The measure is on its way to the president’s desk.

The legislation was created as an answer to constituents looking to modernize the 30- year old bankruptcy standard. Last week, I was in Washington D.C. and spoke with House Agriculture Committee leaders and USDA officials.

Our Cover story is a look at some of what they’re watching in rural America.

American dairy prices have been under siege for several years due to production outpacing demand and a blockade to expansion in Canadian markets. Wisconsin, the country’s number two dairy state, has seen its herd size fall 40 percent over the past decade as more farms consolidate or bow out of the business. 

House Agriculture Committee Chair Collin Peterson of Minnesota says the stress on dairy producers competing in world markets is hurting the small town way of life.

Rep. Collin Peterson, D -- Minnesota: ”We're competing against New Zealand and other places that are very low cost producers. Uh, the way the industry has, has moved ahead. They have a world market, you know, that we now have to compete in and that's forced, um, the prices to be more competitive. Uh, so you have to, it's made it difficult for small producers to be able to compete because they have higher costs per hundred weight than a large producer just by, because of economies of scale./ But in my part of the world and in Wisconsin and places like Vermont, uh, some of these small towns would cease to exist if those small producers were not there. You know, so that's why I made it my mission to get a program for us all producers, they only produce 14 percent of the milk, so they're not going to collapse some market, you know, and it's, um, a way to try to maintain that way of life out in rural America.” 

The problem is hitting more than just the dairy industry. Farmers producing corn and soybeans have been riding a roller coaster of bad news for over a year. Grain prices tumbled this week on news of good growing weather and threats by President Trump of increased tariffs on Chinese goods. The President’s threat was motivated by China failing to make promised purchases of U.S. farm goods. The move sent commodity prices into a steep dive shortly after the announcement. 

The trade war with China has brought tough times for many producers. USDA officials have offered farmers assistance through Market Facilitation Program payments. House Agriculture Committee Ranking Member Mike Conaway of Texas sees MFP payments as necessary but only as a short term fix.

Rep. Mike Conaway, R – Texas:” So Times are hard in production agriculture, which means you're going to be hard in rural America because you've got it's a symbiotic relationship between, uh, producers and how profitable they are as well as how then they're able to spend their money within their communities and, you know, help prosper rural America so hard times. But we've got a, we've got a safety net in place that thank goodness that uh, will help alleviate some of those issues. These market facilitation payments will be a good shot in the arm, but it's a relatively a one time deal, although there may be three payments associated with it. It's not something you could count on year after year after year, but it'll certainly help, uh, yeah, near term with respect to the folks who get those checks in August.”

The latest edition of the Market Facilitation Program was announced last week and has already seen many producers heading to their local FSA offices to complete the signup. However, the question of how much grain will be harvested this crop year remains uncertain for growers and commodity market traders.  

Undersecretary Bill Northey- “Large parts of this country are having challenges. I have been to some areas in the northeast where we have a tremendous looking corn crop right alongside a crop that, uh, only waist high in July, uh, and has a long ways to go. So it's really hard for me in my anecdotal piece, either in conversations or in seeing the crop to be able to have a good analysis of where those challenges are. But we have challenges in large parts of the country to our crop. While we have some good crops, uh, and in many, the places of the country, we also have some real challenges.”   

The 2018 Farm Bill contained landmark provisions allowing hemp to be grown for profit. While Kentucky Senator Mitch McConnell, a Republican, has wholeheartedly endorsed the alternative crop, Conaway has reservations.

Rep. Mike Conaway, R -- Texas:”I worry that we opened Pandora's box. And so we're trying to get as much information as we can.”  

Next, the Market to Market report.

President Trump’s announcement of increased tariffs and growing weather across the country pressured the commodity markets lower. For the week, September wheat fell a nickel while the nearby corn contract plummeted 15 cents. The President’s threat to enact tariffs on another set of Chinese goods on September 1st sent the September soybean market on a 33 cent tumble. September meal fell $10.40 per ton. December cotton declined a $5.12 per hundredweight. Over in the dairy parlor, September Class III milk futures fell 20 cents. The livestock sector took it on the chin. October cattle cut $2.07. September feeders shed $5.87. And the October lean hog contract plunged $13.72 cents. In the currency markets, the U.S. Dollar index gained 13 ticks. September crude oil lost 76 cents per barrel. COMEX Gold rose $22 per ounce. And the Goldman Sachs Commodity Index declined more than 9 points to finish at 407.20. Joining us now to offer insight on these and other trends is market analyst Darin Newsom. Darin, welcome back.

Newsom: Thank you, Delaney.

Howell: Darin, I'm surprised you didn't wear black today.

Newsom: It would have been appropriate.

Howell: It would have been. We had really all the commodities close down as we just mentioned there. Starting off here in the wheat markets, they have really been playing follow the leader with the corn market it seems and corn broke through some major resistance this week. So where does that leave wheat?

Newsom: Wheat right now is just kind of stuck in limbo. It really has no reason to go up. But what's interesting is what happened on Friday in the wheat market and where we saw the Chicago market, the September contract went up 15 cents today, or on Friday, and the December was up 10 cents. There was a lot of commercial buying coming into the wheat market, Chicago wheat market, the lower quality wheat market at the end of the week. And what this might be telling us is that problem with the heat wave in Europe is getting worse and so when you close out of Friday like that sometimes there is an asterisk involved. But it certainly means we need to keep a close eye on it come Monday, Sunday night into Monday, to see if there's any follow through buying, to see if there actually is some commercial interest if there's some concern, if there's an idea we're going to see better demand for U.S. wheat because of the problems in Europe.

Howell: And if we do see better demand, will demand keep prices here or allow prices to get a little stronger?

Newsom: Wheat doesn't mind divorcing itself from corn and soybeans. Corn and soybeans can go kind of crazy so wheat will go off on its own crazy path every once in a while and it likes to do that. So even if corn and soybeans struggle, let's say the weather forecasts are fine for corn and soybeans once we come out of the weekend and go into next week and we still see some commercial support in the wheat market they won't mind going up. Long-term, still a lot of wheat that we're dealing with. We're dealing with ample supplies to meet demand. But we could see a little bit of a bounce in here.

Howell: Okay. Darin, we've got to talk about what's going on in the corn markets. We mentioned there went through key resistance this week. Is it forming a head and shoulders formation? Has it already? And where do we head from here?

Newsom: No, it's not a head and shoulders formation. I know there was a lot of talk about it but it wasn't the actual pattern. And the reason why is because one of the, the right side of the neckline before we started the shoulder actually dipped below the left side. That's a very technical reason. Bottom line, it wasn't a head and shoulders pattern. What we had was a -- what we had, have, whatever you want to call it, is a secondary downtrend on the weekly chart. Why? Non-commercial traders are selling. Why? Because fundamentals have gotten a little less bullish. Fundamentals are still bullish in the new crop market, that hasn't changed. But they're not as bullish as they were before because the last two or three weeks have seen better weather. So we've backed that off a little bit. We did some down to some support, we blew through $4.18 and a half, we went through $4.05 and a half and then came back and closed above that level. So I think that was a semi-bullish sign going into the weekend, I think the market wants to maybe stabilize now, see what the weather does this weekend, see what the weather forecasts are for this week and then low and behold before we know it August 12th will be upon us and then things will get fun again.

Howell: You don't pay attention to the reports though, Darin.

Newsom: I don't, no, but a lot of folks do. They're ridiculous. I could go off on a rant, as you well know Delaney, but folks will be watching on August 12th.

Howell: But we have a good question actually from one of our analysts who hasn't been on in quite some time but you know her very well. Angie in Michigan @GoddessofGrain on Twitter. She sent in a pretty good question. I think you guys were having a Twitter discussion about it. She said, you've always questioned the USDA and its inability to accurately report the situation on the ground. Moving onto the question she said, what would he suggest we look at for a better idea of what is actually taking place when it comes to overall supply and demand?

Newsom: My answer has been the same as it has for the last 20 some years, it's not about accuracy because accuracy is impossible. With the way USDA is set up and its process is set up there's no way the numbers are going to be accurate. What I'm wanting, what I have always suggested, what I've always suggested is a nice way of saying demanded, is that USDA not even release their guesses because people are foolish enough to look at them.

Howell: But USDA aside, what are you watching then on a supply and demand --

Newsom: What I always have, basis and spreads. I just talked about how corn isn't as bearish as it used to be, excuse me, as bullish as it used to be, but it's still bullish. How do I know that? The forward curve in the new crop market, still bullish. It's the same no matter what market we're looking at, you look at the spreads, you look at basis, it tells you everything you need to know. You don't need to know acres, you don't need to know yield guesses, you don't need to know any of that because it's all just guesswork. All we need to know is what the market's opinion is and that is through basis and spreads.

Howell: Well, tell me then what's going on in the spreads when you look at the soybean old crop versus new crop?

Newsom: That's apples to oranges. Toss that out. There's a lot of people, a lot of traders like to look at the Dec-Dec, December 2019-December 2020 corn spread, that's fine. But you're talking about two different fundamentals situations. Same thing in soybeans. I heard you mention September soybeans earlier. September soybeans are one of those weird months where, one of those weird contracts where there's very little open interest and you don't know if the commercial side is under the September contract right now, under the November contract right now. So basically the September is out there on its own and the only fundamental read we can get on the September market, the September contract is through basis. Basis has been strong but this week is the week it normally tops out and then it starts to work lower. As far as the new crop forward curve, it has been going down. We've seen the carry continuing to get stronger. It has moved from a bullish situation to neutral at best. That means there's getting to be more concern over the supply and demand situation long-term and that tells me more about any trade war than all of the made up headlines coming down from Washington and trade talks and all these things. It's not going to get done. We still have a problem. And supplies continue to grow even if we have a crop problem. That is what the new crop forward curve is telling us.

Howell: When you look at new crop then from a technical perspective and on the chart, are we going to go back down and fill that gap made earlier this summer?

Newsom: On the spreads or on the futures?

Howell: On the futures.

Newsom: On the futures. On the corn market?

Howell: Soybeans.

Newsom: Soybeans, excuse me, I got my markets twisted around there. We certainly could. Technically we are still in a secondary downtrend. We broke out this week, as you said we're down 30 cents. We broke out of a consolidation pattern. Usually that means more than one week down. And we're seeing selling coming from both sides of the market, both commercial and non-commercial. So really unless the weather changes, unless we start to see weather forecasts saying it's going to get hot and dry again, weather forecasts stay relatively benign, yeah I would look for continued pressure in the soybean market.

Howell: Okay, how much further down could we head?

Newsom: Yeah, I had somebody ask me if we could get to $8.50. I think we're around $8.70, $8.80, something like that, $8.50 is not that far away given the slide that we've seen. We closed at a new weekly low in the November to July futures spread. So if that continues $8.50, $8.30, maybe even a little lower, maybe we could approach those lows from May around $8.20.

Howell: I've got one more question for you, Darin. As you look at heading into the harvest season here do you think we're going to have a harvest or post-harvest rally in the soybean market?

Newsom: Why would we? We can't sell them. We're not selling them. Yeah, we hear all this chatter that trade talks are going great. So they're going so great we're going to throw more tariffs at China. Yeah, we can't sell the soybeans we have. We've got a more bearish, or less bullish supply and demand situation. I don't see, we could have a counterseasonal harvest rally but there's no, I don't think it's going to be one of those things where we really blow out the top. There's just no backing for it from either side of the market at this point.

Howell: Okay. Darin, we've got to talk about what happened in the cotton markets, over $5 loss from last Friday. What's going on there?

Newsom: It's the same thing, look at the list that you read, every commodity was just pummeled this week. Cotton just got caught up in it. It's the same thing. It's commercial selling. We saw the December lost over $5, we saw the March contract lose more than $4. So the commercials are loading up and selling on the nearby contract. We don’t have any demand. Maybe we have a crop problem. We don't know. But we have no demand and it's the same thing down the line everywhere we look, a lack of demand. Any why do we have that? We're having all kinds of trade problems. The more trade problems you have the less demand you have, it just goes hand-in-hand. As long as we continue to do that these markets are going to struggle. 

Howell: Is the picture any brighter when you look at the livestock market? We got headlines out just after the market closed that we have a new or an increased trade amount with the EU on beef. So does that change the story? Will they react to that on Monday's opens?

Newsom: They could. I'm not overly enthusiastic about it. We saw the daily chart turn bearish here at the end of last week, early this week, so that is one of the reasons why we were pushing cattle lower. Didn't see a lot of commercial selling in the cattle market. So long-term they could try to climb back up. I don't think we're going to see any huge rally in cattle. But I think there is going to be a buying opportunity to take a short-term shot at this thing. Flipping the coin, look what happened to hogs. Hogs were down $11, $12 this week. It was quite literally a blood bath in the hog market. And that was a market that was trying to show some signs of getting better, of getting more bullish, gaining some momentum, the commercial side coming back in. Everything just blew up this week. So they have to start over, if we're going to start rallying that market again they've got to start from scratch next week.

Howell: Darin, why did we see such a blood bath going on in the lean hogs markets this week?

Newsom: There is just no demand right now and when you have no demand for the hogs, you see the cash markets coming down as well, spreads are falling apart, there's just no demand for hogs right now and when that happens and you can't get anyone buying the sellers are more than willing to jump in.

Howell: How much of the African swine fever or the lack of demand from African swine fever is playing into the lean hog market right now?

Newsom: I still think that's weighing on things. We don't hear as much talk about African swine fever as we were before a few months ago but I still think it's weighing on the market. And so we played it up and it came back down, now it has tried to rally a little bit and the bottom fell out.

Howell: Okay, Darin, I want to go back here to feeders. We kind of jumped ahead, jumped over feeders. But they had a roller coaster ride this week. They closed almost limit down in the October contract. Are they trying to test for a new low?

Newsom: Of the three, I shouldn't say out of the three, between live cattle and feeder cattle, feeders may want to try to go to a new low and the reason why would be if for some reason corn starts to find some buying interest again. If we see a weather change and if the sentiment in the corn market starts to get that we're going to start tightening things up again, we see the commercial buying coming back, that could put some pressure on the feeder cattle market. So of the two markets between live and feeders I do think feeders are the ones that probably have some more downside to them.

Howell: Darin, how much is the dollar's highs this week impacting what's going on in our exports? They've already been pretty dismal --

Newsom: We're not exporting anything.

Howell: Is it because of the dollar we've had?

Newsom: No, no, the dollar just keeps going up. What's interesting is we cut rates this week, the dollar goes up. That's counterintuitive, that just normally doesn't happen. So the dollar right now is one of those markets that just won't go down. I don't really think it's playing into the exports right now because we're not selling anything and we're certainly not shipping anything and we can look at the weekly export shipment pace for that. So I think they're acting more on their own right now. But what is interesting is as the dollar is going up we are seeing the Brazilian real also weakening and I think that's playing a part in it. Until Brazil completely runs out of soybeans it's certainly making their supplies that much more attractive. So I guess in that respect it's probably still playing a role, the strength of the dollar is still playing a role, it's just that the strength of the dollar isn't necessarily pushing the real lower, the real is just working lower right now.

Howell: Darin, you didn't wear black, so we know you're not maybe quite that gloomy as usual. Is there anything to be positive about?

Newsom: Can't you tell by my sunny disposition? If you want sunny, look at what gold did. Gold was incredible, it's up challenging its previous high. But let's flip that coin. Why is gold so, why did gold rally $50 off its low just on Thursday? Because the world if falling apart. We're escalating the trade war and we backed out of a nuclear treaty with Russia. There is concern all over the world. We saw triple digit losses in almost every global equity market. Where are they going to go? They went over to gold.

Howell: All right, Darin Newsom, thank you so much.

Newsom: 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 Market-to-Market.org. Subscribe to our YouTube channel. You’ll get notified when the program and Market Plus are online. Find us at Market to Market. Join us again next week when we explore a farmers market that gets to set up in the Library of Congress. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa Public Television or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

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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. 

(music)

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

(music) 

Sukup Manufacturing Company – providing equipment and buildings to store and condition grain to help farmers adjust to market swings. We build drying, moving and storage equipment designed to preserve the quality of their crops. Sukup Manufacturing, store now, profit later.  

 

Grinnell Mutual Insurance
Sukup
Accu-Steel
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