Market to Market - Jul. 2, 2021

Coming up on Market to Market -- The mercury rises as much of the Corn Belt nears pollination. The High Court passes on Prop 12. Pulling back the curtain on the data, surveys and economics at the USDA. And market analysis with Shawn Hackett, next.

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What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

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

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Hello, I’m Paul Yeager.

This Fourth of July holiday will look different with bigger crowds in leisure spots and more staff in places like amusement parks, hotels and bars.

U.S. businesses added 850,000 jobs in June, beating the three-month average, as the service sector is filling jobs left empty by the pandemic.

However, the unemployment rate rose less than a tenth of a point to 5.9 percent as the loss of jobs during the pandemic is still pulling on the economy.

The pickup in jobs and foot traffic is pointing to potential growth in the next six months according to the Creighton University Mid-America Index. As the index pushed slightly higher, labor shortages and supply bottlenecks continue to drag on expansion.

This summer holiday has a reputation for being a scorcher and this year will be no different for many parts of North America. The heat is getting the blame for hundreds of deaths in British Columbia, Washington State and Oregon.

The record high temperatures and dry conditions have a ripple effect across the country.

John Torpy reports.  

There was a weather “tug of war” this week, as pop-up thunderstorms tried to pull back the drought that continues to creep across the country.

According to the U.S. Drought Monitor, several rounds of rain eased dry conditions in parts of the nation’s midsection. Soil moisture levels improved in the lower part of the Midwest, but much of the rain bypassed locations to the north increasing the level of concern by many farmers and ranchers over what might be next.

In the Pacific Northwest, a heat dome locked-in record setting high temperatures as another week of dry weather intensified the drought that is persisting in the West. Temperatures in Oregon and Washington hovered around 30 degrees above normal. A rise in electricity demand for fans and air conditioners led to rolling blackouts.

The expansion of drought conditions and record high temperatures have increased the potential for wildfires. The National Interagency Fire Center reports lightning strikes started fires in California and Oregon, scorching over 18,000 acres.

President Joe Biden: “Governor Brown, if you'd be willing, you could give us an overview of what the challenges are you Western governors are facing and what you think we should be doing and can do to help.”

On Thursday, President Biden and several of his cabinet members met virtually with Governors from eight western states to discuss the current drought and wildfire conditions.

Gov. Kate Brown, D-Oregon: "Just this weekend, my state of Oregon experienced three consecutive days of record breaking high temperatures across the Willamette Valley, reaching upwards of a 117 degrees. It is unprecedented and unfortunately, it follows one of the most devastating wildfire seasons in our state's history.”

According to federal weather forecasters, the Pacific Northwest is predicting some relief from the heat in the comings days. Even with the change in weather patterns, temperatures are predicted to remain above normal which is expected to sustain the drought well into September.

For Market to Market, I’m John Torpy

Those pushing back against Proposition 12, the California law which requires more living space for food animals, were given another sign that the law is still on track to go into effect on January 1, 2022.

Peter Tubbs has more.    

This week, the United States Supreme Court denied a petition to hear a challenge to California’s Proposition 12, which requires hog, egg and veal producers to end certain confinement practices by the end of 2021.

The North American Meat Institute filed the challenge in February of 2021, arguing that Proposition 12 violates the Commerce Clause regulating interstate trade.

The California law passed with 63 percent support in November of 2018, and has survived multiple legal challenges over the last two and a half years. 

The Institute released this statement: 

“We are disappointed our petition … was denied. We will be considering other options to protect consumers and producers from Proposition 12, which will cost both millions of dollars, according to economists and the state of California’s own analysis”

The Humane Society of the United States countered that the law is constitutional and just: 

“The Supreme Court’s outright rejection of the meat industry’s challenge to Proposition 12 is significant, and consistent with prior court rulings affirming that states have the right to pass laws protecting animals, public health and safety...The meat industry should have focused on eliminating its cruel caging of animals rather than filing hopeless lawsuits trying to overturn extraordinarily popular, voter-passed animal cruelty laws.”

For Market to Market, I’m Peter Tubbs.

The goal for those compiling survey data for a USDA report like the WASDE or this week’s NASS acreage report is to give a snapshot of what’s impacting U.S. farmers at that moment in time.

Seth Meyer has been on the lockup side of the reports when he compiled the World Agricultural Supply and Demand Estimate. After spending time at the government agency and in the academic world, he’s back as Chief Economist of the USDA.

As part of our upcoming M-to-M podcast, I asked Meyer about the heat the agency takes when they are boiling down data points and what he thinks are the big stories for the rest of 2021. Excerpts from our conversation are this week’s Cover Story.

Seth Meyer, Chief Economist, USDA: “I think the greatest challenge is pulling in all these bits and pieces of information. So you know, when we think about the US, we really do we have NASS and NASS is unique among statistical agencies around the world, they really are unique around I mean, the level of detail, you know, I know folks like to poke and jab at them. But there's not anything else like that around the world in terms of agricultural statistics. So you have that, but you have to pull in all these other details at the board, you have to pull in satellite imagery, you pull in detailed weather information, you have reports from the embassies, you know, USDA has folks around the world and key agricultural markets that send reports back. So you've got to synthesize all this stuff into a report. You know, you, you, you, and anyone explaining it to people is also another element. I don't think that that's necessarily what I want to say the difficulty is but synthesizing all this information and bringing all these this expertise across USDA, the group I ran was only, you know, 25 people, right? But we drew resources from all these other huge agencies, the Foreign Ag Service, Economic Research Service, bring all these folks together, sit him in a room, go over all these intense details. I had five meteorologists who work for me, bring them over. Tell us what you think's going on. What do you see? And synthesizing that? That's to me a challenge but a an awesome challenge. I'm one of these people that loves to talk about, what does the wheat crop in the Ukraine look like? I could go wheat. You know, we, I love those kinds of conversations.”

Paul Yeager: “Why does Ukraine wheat, Brazil, corn, Brazil beans, Argentinian beans matter to the US farmer in Scott County, Iowa, Clinton County, Iowa or DuPage County, Illinois?”

Seth Meyer, Chief Economist, USDA: “No, absolutely. You know, the WASDE is a public report, right. So the whole purpose of this is to once a month kind of put us all one equal footing in terms of market understanding. We're in that exporter of agricultural goods. So clearly, I mean, look at the corn market today, you saw a run up in corn prices in the US as questions started to arise about the size of the Brazilian crop, right. And then, as we adjust to Chinese demand, that's the other element of this where we see big runs on corn, soybeans and hogs. So clearly, you know, I'd like to say, hey, this is a global public good. And it is. But we do this because it helps the US folks market their grains effectively overseas. And if you go back in history, it's to try and limit the ability of some other countries to make moves into our market without, without everyone knowing what's going on. I mean, this goes the origin, this report goes all the way back to the Soviet Union buying up a bunch of wheat, right? So let's try and make that transparent. So, so producers are not at least once a month are not at a disadvantage in what the market information is.” 

Paul Yeager: “You mentioned 2012 as a as a year, is 2012 and 2021, looking, matching, lining up similarly.”

Seth Meyer, Chief Economist, USDA: “Oh, so I don't, I, I think what I have to distinguish here is, is, is we have a lot of very serious drought conditions in the West, right in like historic drought conditions, drought conditions where folks die. You know, this is the worst drought in right where you actually have records. We have incredible drought conditions out there. I know we have some dryness in the US in some places. I mean, we were talking about Iowa, maybe northwest Iowa, not getting the rain that southeast Iowa has been getting. And certainly here in Missouri, we're getting plenty of rain. So I don't think comparisons to 2012. In terms of some of the crops that we talked about in Iowa, I don't think that comparison is there yet. But I do raise some I do have concerns about dryness we observe in North and South Dakota, Minnesota, northwest Iowa, and we're clearly keeping an eye on that.”

Paul Yeager: If I'm a producer in Illinois, Indiana, Ohio, South Dakota, North Dakota, wherever I'm in, what are the three biggest storylines? I'm watching here for the next for the rest of this year? From an economist standpoint? What are the ones that are going to impact me the most?”

Seth Meyer, Chief Economist, USDA: ”Okay. Some things you can do some things that nobody can do anything about, like weather. Obviously, that's that's one of the the big elements here. Right? And I don't mean just our own weather out and also our own weather. Obviously, that's the biggest short term of Chinese demand. How does China follow through on this watching what those export demand are? I think one of the stories one of the big stories here is China's taken a whole bunch of the crops that an Iowan produce and livestock like hogs. I think the other element of that is other demand, export demand hasn't backed off. So that's a good story. So watch that second. ASF in China, do we if we had another outbreak, that might be very negative for your producers in Iowa, both from a corn and soybean export? We'll take off what's been pretty insensitive to the price demand, the Chinese seem to be buying it no matter what the price is. Is that two? Does that get me to you need one? And then the third one? I think the third one I'm going to say is something that I think folks overestimate, it's important in the short run. And then I'll say is biofuel policy exactly where the EPA ends up here on on some of this pending legislation? Do I think biofuel policy is important for Iowa grain producers? Absolutely. I knew. Okay. I think in the short run some of these actions, folks, folks tend to take the short run actions as being more important to the market than long term stability. And I don't know that we've had long term stability, oh, for quite a while, right. So I think that that folks absolutely need to take an interest in the short run, because those policy levers are important for the long run. It's not necessarily the bump you get this year. It's kind of that long run demand picture.”

Next, the Market to Market report.

The excitement from a bullish acreage report faded at week’s end as an appeals court vacated an EPA rule on selling E15 year-round. For the week, September wheat added 12 cents while the nearby corn contract jumped 62 cents or nearly 12 percent. The soy complex responded with substantial moves higher on an unchanged acreage report before giving way to some profit taking. For the week, the August contract gained $1.31. August meal increased $32.60 per ton. December cotton shed 21 cents per hundredweight. Over in the dairy parlor, August Class III milk added 11 cents. A mixed week in the livestock sector. August cattle fell 80 cents. August feeders shed $2.50. And the August lean hog contract rebounded for a 45 cent gain. In the currency markets, the U.S. Dollar index improved 38 ticks. August crude oil expanded $1.36 per barrel. COMEX Gold added $11.60 per ounce. And the Goldman Sachs Commodity Index increased by more than 11 points to finish at 535.75.

Yeager:  Now here to provide insight is market analyst Shawn Hackett. Hello, sir.

Hackett: Hey, Paul. How are you? No better place to be than with you talking ag and weather.

Yeager: And we welcomed you with good humidity but only 90 degrees. We've been a little bit warmer lately.

Hackett: Yeah, I need a sweater.

Yeager: The weather has caused all sorts of problems. We've talked about it on the show before with several analysts. When a story becomes front page news in say a national media outlet that food prices are going higher because wheat is going higher does that mean we've hit the high of prices, the top for wheat?

Hackett: Often times that is the warning sign that the psychology of the market has priced it all in. We may disagree and think, well it hasn't. But often times when it gets to that level of awareness that is when the market has priced it all in and one has to be worried that maybe we are going to be shifting gears to something else and that is always a thing to be looking at.

Yeager: We're in the middle of harvest in the Wheat Belt right now, bushels looking good, if you can get it out. Parts of Kansas are so wet they can't roll right now. Is that going to have any impact?

Hackett: Any time you really need a supply -- right now feed wheat is in high, high demand around the world and in the U.S. because of the corn shortage that if you can't get it out when you really need to and the market wants it, it just backs the system up. It also hurts the quality of the crop. So we know the minute spring wheat crop is in trouble, high quality wheat, we know that there is a downgrade in the KC wheat crop, low quality wheat is going to be in pretty good supply. But the shortages in the higher quality part of the market, that is where we think the story has not been priced in yet.

Yeager: So what are we doing in wheat then to protect ourselves?

Hackett: We think that the spring wheat market is the best way to look at this and that the KC market will be a follower to that. But when we look at everything we see, the worst crop rating since 1988, and if we keep going the way we think we are we may actually tie the crop ratings from 1988, that was a half a crop that year, 50% down from what was expected. I'm not forecasting that for sure. But the next two to three weeks if we don't see a material change we could be looking at something like that and I don't think the market in the 8's has priced that in yet despite some of the media talk about it.

Yeager: The big talk this week was USDA acreage report. We have been pointing at this June 30 thing for a long time. It's finally here. Below the expectation, market responded limit up on Wednesday. Was the response to Wednesday's report a bigger story to you or what happened Thursday/Friday?

Hackett: I was not surprised that the market reacted that way, at a time where we already have very tight stocks to lose that kind of acres in the expectation of the market justified that kind of a move. I'm really not surprised we pulled back. There is a trend with these reports, you go guns blazing when the report comes out and then you have the buyer's remorse fade. We talked about this to our customers that we will likely see a fade into the end of the week, especially have a long weekend that is notorious for changes in trend when you get back form the 4th of July. So I just think it's just the way short-term trading operates and the short-term psychology of markets.

Yeager: I didn't exactly ask Ken's question but I got real close. This one came in via Twitter. Ken in Michigan. Corn limit up and then died the next day. Why? Anything different than what you just said?

Hackett: No, it's really the same thing. You get these short-term rushing and the moment they see any loss of momentum because they're only in it for short they just immediately sell out and then once you clear that sentiment you now can go back and trade something different again and that has probably took place the last couple of days.

Yeager: On this December contract, are we trading weather from here on out?

Hackett: We are.

Yeager: How long is the weather the biggest story on this trade?

Hackett: For corn it's going to be into the end of July. When we look at the numbers, how quickly the crop was planted in the short two week window, a very, very high percentage of the crop is going to pollinate between July 15th and August 1st this year, the normal. So the bullseye is that last half of July. And if we're correct about our weather analysis from our algorithm it says hot and dry is still in front of us for that period of time. The market needs to put more weather premium in than it already has.

Yeager: Can we put another 11% in this market next week or the week after? Or is this high in in corn?

Hackett: If we have a hot, dry forecast for the Midwest, not just the Northwest but if it moves more into the center of the country and we believe that's what is going to happen, it's hard to imagine that we have priced it all in. We think that we could go up considerably more given that we lost a few million acres from what everybody thought. What we're looking at, Paul, is this. If we have a crop that is 175 yield with the acres we have and you assume the demand being what it is -- are what they are today for next July.

Yeager: Right, but I saw someone's yield monitor on Twitter this afternoon that said, I dealt with a combined 4 inches of rain over 2 months in July and August last year, I got hit by a derecho, I got this, I got that, I still turned over 200 bushels to the acre. We can grow a lot of corn. Look at the areas not dry right now, those are some pretty good corn producing states.

Hackett: But last year's national average was still 172 despite it all. And the way we look at it, we're actually thinking -- we believe the yield can be similar to last year. That's a good crop, by the way. That's not a terrible crop. But in a year with a margin of error so thin, yes there's some great yields out there, but when you put it all together we are big on looking on temperature, we were 3.3 degrees above normal in the month of June in the Corn Belt. The way this temperature model works and allowed us to make the forecast last year for 10 bushel below trend for August is if you're 2 degrees above normal in June and 2 degrees above normal in July you're not going to have an above trendline crop, you're going to have a below trendline crop. And the only thing moisture does is modulate is it just a little bit below or a lot?

Yeager: Do we have any room for error in soybeans?

Hackett: Well, I think it's a similar situation. I'm a little more worried about the demand side on soybeans than I am on corn because we lost so much production from corn in Brazil. We lost a billion bushels of supply out of Brazil, but we had this massive, massive crop in Brazil for soybeans. And the African swine fever has re-emerged in China, they liquidated the herd, their prices crashed there. So we think they might have overbought the soybeans for a while and they may be pulling back and not buying as much from the U.S. as everyone is anticipating. That could be a problem if we start getting expectations for record acres being planted in South America here in another couple of months.

Yeager: What are you doing in soybeans if you have something to do?

Hackett: Our overall strategy, Paul, we've been talking about this since the beginning of the year is we've been expecting that we would have a final blow off top in grains in mid to late July based upon the peak of the drought cycle. But of course managing weather markets is extremely difficult. You wake up one day and don't like the weather model, it's down 15. We would just say figure how many old crop bushels you have left you want to sell, figure out how many new crop bushels you want to sell, this is for corn too, and just start averaging the next four week's sales and I think that average you'll do yourself a world of good from what we see happening in the fall.

Yeager: You mentioned ASF, let's talk hogs first here in the livestock discussion. What is that impact for an American hog producer in the next 3 weeks?

Hackett: Well, remember that last year we had all this demand from China that helped keep that price buoyant and now with the crash in the price in China and the pork price crashing their imports are backing way off. Now, we had a rest but we had this reopening of the U.S., we had the re-filling of the freezers, the food service, all this pent up demand and it's starting to fall. Well now if we lose that demand, and of course we're getting some hog weights doing better and we don't get the Chinese demand back, that is why we've had the initial crash off of $120 and $96 in a very short order. We're not very constructive hogs into the fall for that reason.

Yeager: What about in the cattle market?

Hackett: We kind of feel the cattle market has taken everything it can take. The fire, you had the JBS hacking, you had -- and that day where it wouldn't go limit down that day and it immediately turned up, we should have been limit down three days in a row and it didn't. And then we get the cattle on feed report that starts to tell us we're looking at smaller animals ahead, we think we might finally have gotten the animal supply in balance with the through put problem that we have been dealing with. And so we think once we get this corn blow off top, this grain blow off top out of the way, we think the cattle price can actually show some buoyancy because it has been being held back because they couldn't bring these animals through.

Yeager: But processing is still an issue with labor. We hear the job report, there's still not a lot of people lining up to work at the packing house.

Hackett: That is the problem, but we think that the supply is starting to get into a better balance with that. And we do believe these incredible margins that they've been having for quite some time and there is some capacity coming online here in the fall, that should be enough to take the backing up of animals away and at least allow for a more supportive market going forward.

Yeager: The feeder has had a hard time penciling out higher grain. Are they sitting out for a couple of weeks here before they start buying again?

Hackett: They're going to have to sit out until the end of July until we get this drought cycle out of the way. It's going to be really -- if we get a dome and hot and dry for pollination and we get the corn market really to rock and roll they're just going to sell that thinking it's going to go into August until we get the big pattern change. So it's going to be a tough sledding. But there will be a big opportunity once that pattern change comes and everyone realizes the top is in.

Yeager: In 10 seconds, when is the best time to go to the sale lot and buy some feeders?

Hackett: The first week of August.

Yeager: The first week of August. I'll see you at the sales barn then. The lunches are always good. Thanks, Shawn.

Hackett: Thank you.

Yeager: That will do it for this television show we call Market to Market. This is the broadcast part but guess what, we also do something online and we call it Market Plus. So join us. You can find that on our website of MarketToMarket.org. And remember, we answer your questions in Market Plus. And as you head into the 4th of July holiday, be sure to take a picture in your corn field or your neighbor's corn field or somebody else's and tag it with this hashtag #kneehigh4th on Instagram. You can also tag us when you find us on our feed of MarketToMarketShow. We'll share as many as we can there at our feed of MarketToMarketShow. Next week, we see what is bringing rural, urban and downstream parties together on nutrient reduction. Thank you so much for watching. Have a great week.

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

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

What's the most complex industry on Earth? It's not genetics, or meteorology, or logistics. It's a business that involves them all. It's farming. Thank you, farmers, from Pioneer.  

(music)  

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.