Market to Market - Oct. 22, 2021

Coming up on Market to Market -- Deere workers walk over wages and pensions in a tight labor market. Mexico and U.S. agricultural leaders meet in Iowa. We talk trade, workers and meatpacking with Secretary Tom Vilsack. And Market analysis with Angie Setzer, 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, October 22 edition of Market to Market, the Weekly Journal of Rural America.

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Hello. I’m Paul Yeager

The economic outlook for rural America could be described as both profitable and perilous as producers are caught between higher grain prices and higher input prices.

- The 10-state Creighton University Rural Mainstreet Index advanced slightly, remaining above growth neutral last month. The majority of bankers surveyed indicated farmers were in a strong cash position but faced transportation bottlenecks in the future.

Despite higher prices, sales of existing homes moved seven percent higher last month as buyers watched mortgage rates tick higher and decided to take the plunge.

The recovering economy has helped reduce the U.S. Budget Deficit. However, at $2.77 trillion it’s still the second highest on record. --

Many business owners are still waiting for workers on the sidelines to re-engage with employment opportunities after expanded unemployment benefits were cut-off. For those who working throughout the pandemic, increased profits and higher CEO salaries have pushed many employees off the assembly line onto the picket line. 

Case in point, Deere and Company and the UAW.

The United Auto Workers strike against John Deere entered its second week as workers demand pay increases and the end to a two-tier wage structure.

Deere is the largest farm equipment manufacturer in the United States, and has avoided a general strike since 1986. 

Ninety percent of union workers rejected a contract offer from Deere two weeks ago, and talks between the UAW and the company restarted this week. The offer had proposed a 12 percent raise over four years. Over 10,000 workers at 14 plants have walked off the job.

Charlie Wishman, Iowa Federation of Labor, AFL-CIO: “All they want is to get their share, of what they believe to be the fair share of the wealth that they have helped this company create throughout the pandemic.”

The strike comes on the tail of 15 consecutive profitable years for Deere, a period that saw highs for both revenue and profit. Deere has booked over 3 billion dollars of profit in each of the last three years.

Unionized Deere workers received a 17 percent raise over the six years of the 2015 contract, while Deere profits have risen 51 percent over the same span.

Many of those profits were fueled indirectly by federal dollars sent to rural America by the Trump White House to make up for crop prices depressed by a tariff war with China. Market fundamentals are now driving multiple year highs in most commodities, yet net farm revenue for 2021 is expected to be lower when compared to 2020.

Organized labor is leveraging a tight labor market into other strikes. Fourteen hundred Kellog’s cereal workers entered their second week walking picket lines in four states. That dispute centers on proposed changes to wages, vacation days and mandatory overtime. 

For Market to Market, I’m Peter Tubbs

Eighty percent of USDA’s budget is used for nutrition programs. In recent months, SNAP users saw the largest percentage increase in their benefits in the history of the department.

The other 20 percent of the Department’s budget supports agriculture. USDA has used this slice of the pie to help jump start or support rural ventures including recent months where billions have been poured into increasing access to broadband, supporting conservation measures, and helping kickstart new packing plant ventures. 

This week, I sat down with the head of USDA to discuss what’s facing agriculture producers today, 

Paul Yeager: Secretary Vilsack, you're here in Iowa, you're playing tour guide a little bit. Why is it important to have a good relationship with Mexico?

Sec. Tom Vilsack, USDA: “Well, it's important to have a good relationship first and foremost with my counterpart in Mexico, because you have to have the ability to pick up the phone or visit face to face and have Frank and trusted conversation. So that relationship becomes important to build. I actually have a relationship with Secretary Villalobos for some time. So it's been a little bit as you it's important for the US - Mexico relationship, because so much of what we trade so much of what we what we sell overseas, if you will, in our export. One of our number, top three markets is Mexico for many of our products, in some cases is our number one market. So it's important, obviously, to make sure that we continue to have a good relationship. We continue to address identify the problem areas in the relationship and try to work through them.

Paul Yeager: USMCA was, you were familiar with NAFTA from your previous time USMCA comes along? That was a big goal of the previous administration. How have you sorted through some of those changes and conversations you've had with Mexico and you can throw in your Canadian counterparts, too?

Sec. Tom Vilsack, USDA: Well, I think the conversation with Mexico has been a little bit easier as it relates to USMCA because the problems we have there, I think we can work through for example, while it is accurate that Mexico has taken a pretty hard line in terms of genetically engineered crops that are grown in Mexico, it has not prevented that country from continuing to import into the country corn that's grown here in the US using GMO technology. Our friends and candidates a little different situation. One of the principal reasons why Congress voted in favor of the USMCA from an agricultural perspective, was the belief that Canada would in fact open up its market for us dairy, we are still having conversations with our Canadian friends about that. And we've actually triggered the consultation process or began the consultation process that is provided for the USMCA when you have a difficulty or a disagreement that's not getting worked, work through. So that's one of the benefits of USMCA that there's actually a mechanism for putting something on the table when you have a disagreement with your trading partner. That's really important.

Paul Yeager: The American worker in the food system right now has gone through many different changes in the last year and a half since COVID. The meatpacking industry has said they can't get enough workers in trucking industry. We don't have enough drivers, manufacturing plants, we don't have enough worker, is this anything to do with NAFTA offshoots from years ago? Is this a worker training issue? What do we see come to a head other than simple supply and demand?

Sec. Tom Vilsack, USDA: Well, I think there was a major disruption for the pandemic, I mean, look at it, we shut down a substantial portion of the economy of the country. As a result of pandemic, we've, unfortunately, tragically lost. Hundreds of 1000s of our fellow citizens and millions of them have been sick, there has been a major disruption. And it causes, I think, a lot of soul searching on the part of a lot of folks. And there may very well be people that were contemplating retirement or contemplating a change in opportunity before the pandemic, and maybe this basically accelerated their timeline. At the end of the day, what you have to do in a disruption is you basically have to figure out strategies to cope into and to deal with a disruption until you get to a more stable and secure place. I think it does emphasize the need in this country, to continue to look for ways in which we can honor those who not only work with their head, but also with their hands. And if there's any long term issue here, I think it's the fact that for far too long, we didn't understand or appreciate all those folks who, who work with their hands.

Paul Yeager: Last week you were in Congress, talking about the Meatpacking industry, is there a stomach politically to try to break up big companies? You talk about competition earlier at the event? There's been programs to help smaller processors, is this administration looking at more of that help, or more of a break up of these large players?

Sec. Tom Vilsack, USDA: Our focus right now is on capacity and competition. And I think they go hand in hand. If you expand capacity, you're also going to expand competition. How do you do that? Well, the first thing you do is to take a look at your existing processing capacity, existing processing plants and ask the question, Are there ways in which you've been expanded? Are there ways in which you can create new market opportunities? The answer is yes. And yes. So we're providing resources in the form of grants and loans to be able to expand to change market opportunities to expand market opportunities. Is there a way of reducing the cost for existing facilities so they stay in business? Answer Yes, we're providing research To reduce the cost of inspection, but is there also a way in which we can use resources to expand new capacity or to build on significantly to existing capacity? And the answer to those questions is yes. And we're doing all of that. And I think we want to see how that works. And I believe that over the course of the next year or so, you're going to begin to see investments being made processing being expanded. And what this is going to do is it creates competition, that it also creates resiliency. And part of the challenge here that we found with having too few processing facilities, when one shuts down, it creates chaos in the market disrupts the market, we've got to have more, more capacity, we have to have the ability to shift, because this is the last disruption that we're going to be faced with. It may be drought, it may be fire, it may be COVID, it may be something else, but but we know that these disruptions don't occur. So the focus now is on not just great efficiency and productivity, but also on on resiliency. And with resiliency, it means expanding capacity. And we're investing in expanding capacity, we're also making sure that we strengthen the rules and laws governing the relationship between the producers and the packers, right. There may be circumstances and situations in some industries, where, where the playing fields, not quite level. And that's why we get into the packers and stockyards act. It may also be that we need to have better discovery, we bet better understanding what the price actually is there. So, so few cash transactions, that it's sometimes you begin to wonder whether or not the price that you're being quoted is really the price it should be quoted. So more price discovery, so a variety of things that need to be done and are being done.

Paul Yeager: If only another two days, we'd get into price discovery for the rest of the conversation. Secretary Vilsack, thank you so much for the time. Thank you.

Tuesday's MTM podcast will include the Secretary's comments on China infrastructure and the UAW strike against John Deere.

Next, the Market to Market report. Good export numbers were met with technical resistance in the trade. For the week, the nearby wheat contract rallied 22 cents while the December corn contract added 12 cents. The largest week of exports in a year helped stabilize the soy complex. The November soybean contract improved 3 cents. December meal gained $10.80 per ton. December cotton expanded 93 cents per hundredweight. Over in the dairy parlor, November Class III milk futures moved higher by 26 cents. A selloff in the livestock sector. December cattle dropped $2.65. November feeders shed $4.53. And the December lean hog contract weakened $4.95. In the currency markets, the U.S. Dollar index dropped 34 ticks. December crude oil increased $2.18 per barrel. COMEX Gold gained $27.80 per ounce. And the Goldman Sachs Commodity Index feel more than 2 points to finish at 589.65.

Yeager: Now here to provide insight is market analyst Angie Setzer. Hello, Angie.

Setzer: Hi.

Yeager: Good to see you.

Setzer: Yeah, good to see you.

Yeager: It's been a while since we've had you in-person, but we've kept in touch via this technology thing so it's crazy.

Setzer: Isn't it great? Yeah.

Yeager: So, people keep in contact with you all the time with questions. I have like 12 pages of gifs and questions that came via Twitter. We'll try to get to as many of them as we can. The first one involves wheat. What the heck is going on with wheat?

Setzer: Oh, it's my favorite commodity. Well, from a global standpoint or from a carryout standpoint we've seen wheat basically low prices cure low prices. So, if you remember it's only been about a year or so where we were sub-$5 wheat and in some places sub-$4 cash wheat and so you really saw this reduction in planting and production and that held true the world over. And then you throw in some issues with production and some of those other things and suddenly we're short wheat. And in addition to that you have some gains we've got with Russia, what Russia is doing and you have some domestic indications of continued demand and we fed a lot of wheat not recognizing that potentially we were really cutting into what we needed for the year ahead. It's just, I think wheat has just got a whole plethora of stories depending on which class, which type of wheat you're looking at and that's not something that is going to go away any time soon because we're not going to really replenish that pipeline, aside from what is going on in the Southern Hemisphere, until we get into May and June of next year.

Yeager: You mentioned global. Wheat explodes today on Russian export grain tax increase, there didn't seem to be much of a reason for the drop yesterday. But you had a new contract high in Minneapolis, tight world milling stocks and we still have tight stocks in general. So it's not just limited to one class.

Setzer: No, it's all of them.

Yeager: Is anything going to solve this issue?

Setzer: More production, but then you look out the window in some of these areas and we had for some reason all of a sudden China is going to give us wheat planting progress for the first time this year. That was interesting. But they are half of what their normal rate is. And then soft red wheat areas, my home state of Michigan, we can't buy a string of dry days. And so for a lot of the guys that were looking at a 10% to 15% increase potentially in acreage we might be scraping by to get to where we were a year ago. Maybe we do see a little bit of that increase in some of these spots. But the closer you get to November, Halloween tends to be our drop dead date, and we caught another rain yesterday and looking at another one on Sunday. And so some of these guys may put the planter away here before much longer. But from an overall standpoint, every class, and you have the Russian issue and then you saw 1,100 plus contracts of Kansas City wheat cancelled yesterday on the delivery side of things. And so that basically is pulling that out of the cash market to a certain extent and indicating some demand.

Yeager: Given all that, real quick, are you making any sales or are you holding for a little bit longer?

Setzer: We've been making sales. I mean, my job as a risk manager is to make sure that we acknowledge the fact that $7.50 wheat from a historical standpoint -- a lot of my customers come to me and they're like, I just want to be able to sell in what tends to be the top portion of the market -- and so you look at a 20, 30 year chart and we're still in the top portion. Now, where a year ago we may have been like, let's see 50% to 60% of your expected production at $7.50, we might be more like let's sell 30% and see what happens this winter. We look like we'll see decent production out of Argentina and Australia but that's not going to be enough to replenish the pipeline. The biggest question is going to be what Russia is going to end up exporting and what you're seeing from a production standpoint there.

Yeager: You mentioned acreage battle, you mentioned production, that is impacting corn as well because there is going to be this major battle of acres and it might not be for the wheat story impacting corn as it is inputs. We're already worried, let's not talk about deferred yet, let's talk about this nearby contract first. Why is that bouncing back? Is this some kind of technical wave pattern?

Setzer: Just looking at a chart of ethanol margins right now, they're the highest almost on record. If they're not on record they've got to be close. And so you're seeing this real strength of spilling over from the energy sector and obviously ethanol, soybean oil, all of these things are going to contribute to supplying what we need to meet our gasoline demand. In addition to that, the inflation story has not gone anywhere. So if you look at lumber, if you look at energies, if you look at metals, if you look at grains, a lot of this stuff has recovered and buyers have come back in to really kind of put their foot on that gas pedal to get the Fed, we've got to force some of these hands of these central banks to figure out what we're going to do with this monetary supply because otherwise inflation is going to be out of control. And so until that is solved, whatever it takes to make that happen, you're not going to see this market get too far out of where it has been simply because of the fact that we're going to have that support that comes from that inflationary side of things.

Yeager: So, is the inflation story bigger now in this December contract? And is March impacted by input rises? You're talking range bound. Help me understand this, Angie.

Setzer: I really feel one of the things we're forgetting about here is the market's job is not to guarantee a margin. and so everyone seems to think that if for some reason whether it's fair or not, this Dec corn price for '22 has to increase because it's going to cost me more to produce it. No one that is trading this market structure right now outside of folks that are like, well will we see a reduction in acres or not, no one is really asking the farmer, is this an okay price? Are you going to make enough money here because we're worried about that? That's nothing that has ever been done before. And so yeah, the market needs to incentivize planting but it doesn't necessarily have to do it by shooting to $5.50 or $6 in the Dec '22 contract. We can see soybeans Nov '22 back off eventually if that is what needs to take place in order to encourage some solid, some more corn production.

Yeager: All right, I'm going to ask Eric in Moville's question then right now that came via Twitter. He was asking, with all of the supply chain uncertainty, why shouldn't holders of nearly every commodity be tremendously bullish?

Setzer: I can't say you shouldn't be outside of the fact that from a supply and demand economic standpoint, fundamentally speaking at this point in time, we have far more comfortable stocks at least on paper. Now, a year ago the USDA was at far higher levels than where we finished this year. And so I can understand the idea that, well I'm just going to continue to hold. I'm old enough to remember the transition from oh my gosh inflation is going to be the death of us to 2009. There's a lot of economic indicators that I would be concerned about. We've seen cranes, the level of cranes in the world indicating construction projects and things of that nature, they're down 5% from Q1. You're starting to see to where you cannot suspend economics entirely. High prices eventually cure high prices. When that is, no one knows. So I understand the idea of being bullish commodities long-term and I'm not going to sit here and tell you I'm bearish at all. But I don't know necessarily if we need to see a move to new highs from where we've been unless we start to see an increase in demand.

Yeager: Are these the same factors in soybeans right now?

Setzer: I think so. Soybeans are a little bit scarier to me. You’re looking at, we've had some really strong Chinese demand, which has been great, but we saw some further indications this week that China is continuing to buy beans out of Brazil for November and December.

Yeager: Which was to be expected, right?

Setzer: To a certain extent because of the Gulf, but we are back up and running. But with the logistical hiccups that we're seeing now you're talking about beans that are loading out of the Gulf the end of October that are going to land the end of January. And so they're looking at it like, well the end of January sure, that's spring festival. You don't want to bring in a whole bunch of beans when we're all shut down and we're not crushing. So the million dollar question in soybeans is going to be that export demand. We know that crush demand is going to increase, we know that we have an exponential amount of crush projects that are on the table that will grow domestic demand in the next 5 to 10 years. But is that going to offset our loss in exports due to the fact that we are looking at a potential increase out of Brazil this year production wise of another 300 million bushel. And they're cheaper and they're able to produce it cheaper and their currency is helping them sell better and so China is going to use U.S. beans to get by until they have that large amount of Brazilian production. Granted, we could run into a dry period from a weather standpoint. But right now you look at the last two weeks and the next two weeks, we're off to one of the second fastest paces on record when it comes to planting and they look to be able to continue to see adequate rainfall.

Yeager: Is the soybean story with the hog story, when you mention China and the crush versus exports that they're taking in, what's the biggest factor? We've had two straight weeks here now of hogs moving dramatically lower.

Setzer: Yeah, and honestly on the hog side of things I think we were anticipating this massive increase long-term in Chinese imports. We were afraid that they had decimated their hog herd and they weren't going to get back online and we had encouraged increase in production. We were trading at some record high levels in hogs as well earlier this year. And so the thing with hogs that is a little bit different than cattle obviously is that your cycle in growth, when it comes to increasing your supply availability in the hog sector, is far greater than what you'll see in cattle. And so I think that we, again, high prices cure high prices, it's literally the only job of the market is to figure out what a fair value is for the buyer. And so if we aren't seeing this massive increase in demand as we were anticipating 6, 8, 10, 12 months ago we're going to have to chew through a lot of this demand. And so you're going to have to -- or a lot of this supply, excuse me -- you're going to have to get prices low enough to where you're encouraging an increase in demand.

Yeager: Cattle on feed came out today. What did you see?

Setzer: It looked bullish to me. Marketings came in far below expectations, placements were down, the on-feed number is relatively decent. I think margins there will continue to improve to a certain extent. And honestly when you're at the grocery store, yeah your prices have creeped up a little bit, but you're still able to access beef for a relatively decent price comparatively speaking versus chicken and pork. And so I think that demand stays strong. I think we've got to encourage the cattle producer to continue to fill that pipeline. And, like I said, it takes a heck of a lot longer to make that happen than it does with poultry or hogs.

Yeager: In the feeder market, so that was going to be my question, if you're someone with some space in a feedlot right now are you expanding?

Setzer: I think you see long-term support on the beef side of things. But I think when it comes down to it you have to look at the individualized margins. You have to know where you're at when it comes to sourcing feed right now, especially.

Yeager: Given the wheat story that we talked about.

Setzer: Exactly and if you're in an area where you're going to be competing with an ethanol plant when it comes to buying corn or maybe you're going to have to transport it a heck of a lot longer than you typically would, there's a whole lot of additional extenuating circumstances that have to come into play when it comes to making those decisions now than what you would have seen even six months ago.

Yeager: The feed story, I want to go back to that just quickly, because wheat has dropped down. We had a discussion point either last week or two weeks ago about the pastures and their damage because of dry conditions, hay issues. Is there any of those all in the factor of expansion in these feedlots?

Setzer: I think all of it has to be. If you're in an area with an isolated drought and if you're going to be paying exponentially higher than what you typically would to access your hay or access your corn or you can't access wheat or something of that nature I think you have to make smart decisions because it's not going to be just a short-term pinch, this isn't something that goes away. If you were in a drought stricken area it's not something that is going to go away in three months. It's going to take until we get into next year's production and it's not going to be first or second cutting that's going to fix it, it's going to have to be third or something of that nature. The same can be said as what we say in grains, the pipeline, if you have an empty pipeline it takes a lot longer to fill than what you ever anticipate and the same could be said on the feed side.

Yeager: Thank you, Angie.

Setzer: Thank you.

Yeager: That will do it for this installment of Market to Market. The conversation continues in Market Plus so join us, find that on our website of MarketToMarket.org. Information comes from all different sources and we have compiled many of the stories we're reading into a Flipboard magazine called Market to Market Reading Material. Click on the capital F on the homepage of MarketToMarket.org. Next week we explore how a dry weather bet paid off for some grain farmers. Thank you for watching. Have a great week.

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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.  

(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.