Market to Market - August 19, 2022

Coming up on Market to Market -- The two-decade old drought in the West takes its toll. Maintaining export markets and opening new doors abroad. A partnership that shortens the grain chain to a few miles. And market analysis with Arlan Suderman, 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.  

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.

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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, August 19 edition of Market to Market, the Weekly Journal of Rural America.

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Hello. I’m Paul Yeager.

It is hard to discern in real-time why something is happening in economics. Traditionally, a slowing housing sector bodes poorly for the overall economy. But it’s hard to tell in the face of lower unemployment and falling gas prices. —

Existing sales dropped 5.9 percent for the sixth-straight month - the longest slide in more than eight years.

New home starts fell 9.6 percent in July as the pace slowed to a rate comparable to early 2021.

Retail sales were flat last month as consumers spent more cautiously. When autos and auto parts were removed from the report, the rate went up 0.4 percent.

President Biden signed the Inflation Reduction Act this week.

The measure injects $44 billion into rural America. Members of the administration traveled beyond the beltway to tell Americans what’s in it for them. They found producers who had messages they wanted taken back to Washington.

Peter Tubbs leads off our coverage.

This week, USDA Secretary Tom Vilsack and U.S. Trade Representative Katherine Tai met with representatives from commodity trade groups in Woodward, Iowa. While speakers voiced the concerns of Iowa commodity producers, their worries are common throughout American agriculture.

Steven Noah, Farmers for Free Trade- “Since the United States pulled out of the Trans-Pacific Partnership, the trade world has not stood still. Our competitors have been entering into trade deals left and right. Those agreements are now putting U.S. food and ag products at a competitive disadvantage.It’s hard to sell your products when farmers and producers from other countries can compete on price.”

 

Daniel Heady, Iowa Farm Bureau: “One of the things that we are really pushing the Administration to do is reduce those import tariffs on necessary products. We’re all for building American, and having local, domestic production of ag inputs, but it takes a while to do that, and a lot of money, and until we can get to that point we need to allow the free movement of ag products through the world.”

Aaron Lehman, Iowa Farmers Union: “We support ‘Product of the U.S. labeling for beef as well,  that label really needs to mean something to our farmers and our consumers. And having a label that we don’t have full trust in, that doesn’t truly reflect what our customers are getting, those are really important issues to us.”

United States Secretary of Agriculture Tom Vilsack: “I’m really familiar with this issue, because we tried three times to get COOL through the process, through the WTO process, unsuccessfully.” 

United States Trade Representative Katherine Tai: “I think we are very focused on bringing a balance and a trust back to the way we do trade. At USTR, tariffs are kind of our bread and butter, they are our traditional tool, and there are a lot of different types of tariffs. So there are rebalancing tariffs, tariffs that are meant to level the playing field when there is unfair trade going on. That is the theory behind a lot of the China tariffs that we have put down. Also the anti-dumping and countervailing duty tariffs that we put on. There are also times that tariffs are put down as a punishment to express our displeasure.” 

For Market to Market, I’m Peter Tubbs

A month and a half of increases in drought intensity ended this week with a slight improvement in the overall Drought Monitor.

Even as weekly rainfall wins and losses are counted, the long-term pattern of dry conditions is forcing some drastic measures.

John Torpy has more.

Seven states in the Western U.S. face a second year of water restrictions as a megadrought continues its hold on the region.

This week, the Bureau of Reclamation announced another round of water curtailments for the states sharing resources from the Colorado River.

Deb Haaland, U.S. Secretary of the Interior: "The worsening drought crisis across the West is not just bad for business and farms. It's an existential threat to our communities and to our livelihoods.

The cutbacks are the result of a failure by officials in the affected states to reach a consensus on how to make an additional 15 percent cut in their annual allotment of Colorado River water.

Camille Calimlim Touton, Bureau of Reclamation Commissioner: “These are difficult decisions. These are absolutely difficult decisions and they're difficult conversations to have.”

Nearly 40 million people will be affected by the cuts including farmers and ranchers in the region. 

Federal officials hope a recent multi-billion dollar allocation of federal funds will expedite new water saving technologies as well as kick off more than a few conservation projects for the parched states.

Camille Calimlim Touton, Bureau of Reclamation Commissioner: "The good news we can share with you today is that through a once in generational investment of $8.3 billion with the Biden-Harris infrastructure law and $4 billion that the president just signed as part of the Inflation Reduction Act, the federal government will have the resources in hand with our partners to solve these challenges."

Unless the seven states affected by the Bureau of Reclamation’s water reduction mandate come to some kind of agreement, the curtailment will go into effect in January of next year.

There was some good news for portions of the West contained in this week’s drought monitor. Mid-August monsoonal rains helped improve dry conditions in New Mexico and Arizona.       

In the High Plains, only Colorado and Nebraska saw drought relief, albeit on a limited scale. The remainder of the High Plains states continue to see drought conditions intensify.

For Market to Market, I’m John Torpy          

The pandemic of 2020 heightened the understanding of how and where our food comes from.

However, some suppliers and users were ahead of the curve in shortening the distance from gate to plate and cornering a market advantage in geography.

Peter Tubbs reports in our Cover Story.

Twenty-five pound bags of all-purpose flour are being filled at Farmer Ground Flour in Trumansburg, New York. Each bag marks the halfway point of the journey for grain grown in New York State to the plate of consumers in the Northeastern United States. The circuit for this grain from field to table could be as short as 15 miles, which is exactly as the owners intended. .

Thor Oechsner, Farmer Ground Flour: “My grandfather was a German immigrant. He was a baker. And when I was a kid, I used to run around in the bake shop covered in flour - And when it dawns on me that his main gig was flour, I thought, oh my gosh, I should try and look at producing flour from the grain that I grow on this farm and in that way I can increase the the value of it. So value added.” 

The first challenge in Thor Oeschsner’s flour project was discovering that grinding flour isn’t a hobby to be done as a home business. Flour is a food product that’s regulated by the State of New York. Milling flour requires a facility. A facility requires scale. That  scale has come slowly.

Greg Russo, Farmer Ground Flour: “So originally I thought I was going to be an organic farmer, got sucked into flour, milling, and I'm happy I did. I really like it. I still get to work with farmers a lot, have an understanding of agriculture and all that stuff.” 

Greg Russo met Oechsner as a student at Cornell University in nearby Ithaca, New York. As both men discovered the demands of flour milling, Russo took charge of the mill full time. The early grinds were performed by manually pouring grain from a bucket into the mill. Demand has driven multiple expansions and the adding of staff. The mill now runs 14 hours a day seven  days a week producing over a dozen different products. But working with grain from New York State has its own set of challenges. 

Thor Oechsner, Farmer Ground Flour: “95 percent of the Bakers said this ‘you cannot grow food grade wheat in New York. It's going to be crap. We can't grow good bread, flour, here. You guys are nuts. This is never going to work.’ And, you know, we were so stupid that we did it anyway.”

Two hundred years ago, Rochester, New York ground more flour than any other city in the world. Flour milling soon migrated to the western Plains, which is better suited for wheat.  

Greg Russo, Farmer Ground Flour: ”Any Miller will tell you there's a big difference between hard wheat grown on the Western Plains and hard wheat grown on the East Coast. So but upstate New York does happen to be a pretty favorable little pocket for for growing bread wheat. So that's that's sort of central to our identity and mission statement sourced locally.”

Their flour finds its way into commercial bakeries throughout the Northeast, forming the base of a broad range of breads and pastas. Another part of the mission of Farmer Ground Flour was to provide flour to Wide Awake Bakery three miles away. 

Steffan Sanders, Wide Awake Bakery: “It turns out that stone milling or milling is an extraordinarily complicated business and to make a really nicely performing flour takes a lot of expertise that is really not taught anywhere. I mean, I know that there are places to learn milling, but again, this is all large scale industrial roller milling. There simply isn't the knowledge base for stone milling. It's died out. That is gone.”

A dinner with Russo and Oechsner convinced Sanders to open a bakery. The farmer and the miller now had a baker as a partner. 

Steffan Sanders, Wide Awake Bakery: “I thought he was crazy, but two bottles of wine makes crazy look better. And so it started to look pretty good. So that was kind of the instigation.” 

The community around Ithaca is key to the partnership’s success. Many households in the region buy locally produced food or participate in a CSA during the growing season, so the addition of a bakery with locally grown and ground flour was an easy sell. 

The niche where Wide Awake Bakery sits is focused on a high quality product that can’t be produced on an industrial scale.

Steffan Sanders, Wide Awake Bakery: “It's a craft work, which is very satisfying to some people. It's not for everybody; it takes a tremendous amount of dedication. It's a very long road to learn how to make great bread. You know, any, any fool can make good bread. But to make great bread is actually extremely challenging.” 

The partnership between grower, miller and baker provides the opportunity for feedback to each part of the process.

Thor Oechsner, Farmer Ground Flour:  “It was this giant feedback loop where we were making flour. I was growing wheat, and we were getting back information from the end user the baker, and they were telling us what we needed to do and us making the mistakes, doing the experiments, getting some victories slowly over the years, all these different little tricks that we learned over time has slowly improved our flour to the point where you know, people really think it's good flour.”

The techniques of organic production limit the amount of grain available each year, but also provide the opportunity for more farmers to market their grain through Farmer Ground Flour.

Greg Russo, Farmer Ground Flour:  “And a lot of the farms we work with are at the about a thousand acre scale. But since they're organic, they have all these crop rotations and you can't plant your whole farm to wheat. Right. So of any of these farmers, we're only buying a fraction of their total acreage, their total crops, which is why we you know, grow from or pull from seven or eight farms.” 

Farmer Ground Flour sources grain from farmers over a 150 mile range of Upstate New York to reduce its weather risk each year. Rainfall can vary enough across the region to limit the number of acres that meet the specifications for high quality bread production in any one year. Grain that can’t be made into bread is often sold to distillers or breweries, which have different grain requirements. 

Thor Oechsner, Farmer Ground Flour: “It's been really rewarding to be able to work with these farmers and a sort of teach them about growing food grade grain. But we were also able to because we've created our own market, we set our own prices. I'm able to supply our market to these farms at a way higher price than they're going to get anywhere else. 

For Market to Market, I’m Peter Tubbs.

Next, the Market to Market report.

The flood of grain into the Black Sea eroded support while domestic drought added early dents to the corn crop. For the week, the nearby wheat contract dropped 51 cents, while the September corn contract sold off 14 cents. China’s buying despite rhetoric over Taiwan helped stabilize the soy complex. The nearby contract sold off 46 cents. September meal decreased $16 per ton. December cotton surged again, this time $7.42 per hundredweight or 7 percent. Over in the dairy parlor, September Class III milk futures weakened 18 cents. The livestock market was mixed. October cattle added 75 cents. September feeders put on $1.37. And the October lean hog contract shed $6.90 or 7 percent. In the currency markets, the U.S. Dollar index jumped up 252 ticks. September crude oil lost $1.31. COMEX Gold contracted by $56.10 per ounce. And the Goldman Sachs Commodity Index dropped by more than 8 points to finish at 669.15.

Yeager: Joining us now to provide some insight is Arlan Suderman. Hey, Arlan.

Suderman: Good to be back with you, Paul.

Yeager: Good to have you here. Let's start right in your back yard. This wheat thing with Russia -- the wheat fields of Kansas, they're watching what goes on in the Black Sea. Why is that such a drag because all this grain is coming to market? Is it any more difficult than that?

Suderman: Actually there's been very little wheat move out of there. That's the perception that there's been a lot of wheat moving out but there's been little wheat now that is going to start increasing in the weeks ahead. Most of what has been coming out to this point under the agreement has been corn and other crops. But if you look back to the marketing year that started July 1 they have exported through their ports just a little over three, actually total exports have been just a little over 3 million, a little under 3 million metric tons. That is half of what they did a year ago -- it's about a fourth what they need to be doing and what they can be doing. And so we're still seeing a real limit. If a year ago we would have told you this is all they're going to be able to export over the coming years at the current pace it would have been considered very bullish. So prospective changes I think it's still not enough. And if you really look at it longer term, yeah we have a big crop in Russia but it's very poor quality and they're having trouble exporting it. I think USDA is way too high on their export target. And farmers there are very upset. They're getting a cheap price. They're having trouble shipping it. And they're talking about reducing what they plant for next year. Ukraine officials who have been very optimistic, they've been eternal optimists since this war started, but they're saying wheat acres for the 2023 crop will probably be down 30% to 60%. So we're talking about the bread basket of the world now. I know we like to think we're the bread basket of the world but not anymore. Ukraine is the big wheat grower in the world. And we're going to see probably a sharp reduction in what is planted for next year in addition to the export problems.

Yeager: I'm sitting there listening to what you're saying and I haven't heard anything -- that to me sounds like this market should be reacting in a different way. Are we factoring ahead? Is that what has happened here?

Suderman: I think the markets -- for the last six weeks prior to this past week we traded sideways because the trade was trying to figure out okay, what is our supply situation? We know we have a drought in Argentina, we have a short crop in the United States, we pretty much know what that is. We have some problems in Europe. We have the export problems in the Black Sea with the war associated. But everything seems to be in balance. And I left out the problems in India as well where they may actually start importing wheat instead of exporting. So the market was just kind of going sideways trying to bide some time trying to figure it out and then all of a sudden we broke lower and we broke through support and it became largely technical selling in nature. And the algos just piled on with sell orders and drove it down. And then coming into the weekend we found some support in a bounce and really profit taking on that technical short covering as reports start coming out about this nuclear plant in Southern Ukraine, the largest nuclear plant in all of Europe, and it's the central focus of a skirmish between Ukraine and Russia right now. Now, we don't know that anything bad is going to happen there but all it would take is one misfiring and you could have a leak like what we had with Chernobyl back in the 1980s.

Yeager: We've got more geopolitical to get to in soybeans but I need to get to corn for a minute because you've been talking global stories here so far. Is corn only dominated by what's going on in the United States right now?

Suderman: It's getting some support from the short European crop, USDA came down 8 million metric tons, they probably have that much more to go down if not more than that. So that raises the stakes with the U.S. crop and the trade is starting to hear more reports of ears not filling as well as what we'd like to see. I think this next week's industry crop tour will go a long ways towards giving us a feel of how widespread are those anecdotal reports of problems and how widespread are those anecdotal reports of good crops? But I think we're probably looking at a shorter crop than USDA currently sees.

Yeager: Anecdotes are one thing, private estimates are another. You kind of have the pulse on one big private estimate. I can't make you give all the company secrets away. But do you agree with the thought the privates are going to be a little lower than what the USDA is saying on how big this corn crop is?

Suderman: I think USDA is going to eventually come down as well. I had no problem with the August 1 estimates. The corn crop usually looks good on August 1. It comes down to how does it fill during the month of August? And one of the big things I'm concerned about this year with the weather pattern we've had west of the Mississippi River were the over half of the crop is grown is seed size. I think we're going to end up with small seed size. I'm saying that as a former agronomist. How small is still the question. So I'm not looking for a crop failure overall for the national crop but I do think we're going to end up closer to that 170 and somewhere in there, maybe even below it depending on how we finish the month of August. And if we do that that leaves us with a very tight balance sheet for the next year, especially with Europe having a short crop.

Yeager: Right. I need to get to the algos of soybeans that you talked about. I believe at one point we dipped below the 200 day moving average. Was that the big indicator of a selloff or a reason for a selloff in soybeans this week, technical only?

Suderman: Yeah, we had the rally early in August. I never was convinced of the conviction of the funds. And you can't sustain a rally in this market without the conviction of the funds and it just wasn't there. So as soon as the temperature is moderated in the Midwest they started selling once again and there are concerns about Chinese demand for the year ahead and those are legitimate concerns. But this crop, if we just shrink it about 5% we basically use up USDA's surplus for the coming year and the market can't allow that to happen, the pipeline has to still have something in it. So the trade found a little bit of support to end the week just trying to make sure that let's see what the pod counts are in next week's tour.

Yeager: So again looking at that. You mentioned a little bit of some historic things. I'm going to ask you a historic perspective question here that came in via social media this week and it's from Evan in Devils Lake, North Dakota. He wants to know, what are your thoughts on chart comparisons of ag commodities now versus '08 going into the housing crash? We talked about the housing numbers off the top of the show. Do you think outside macro markets could do the same currently?

Suderman: Well, they certainly could. The big problem, it's much more complex than what it was in '08. We were talking about the possible global collapse of the financial system. We're not looking at that now. Our problems are too much stimulus created demand that exceeded the supply and even if you look at the drop in home sales the supply of homes is still very tight. The problem is with interest rates going up and with the uncertainty and near record low consumer confidence the consumer simply is backing off. Money supply is still very high so this economy could back off. But we've got to restore confidence in the consumer. The problem is if that happens there's still a lot of money in the system that we could reignite inflation once again.

Yeager: Real quick I need to slip in cotton here because we've had a big run the last couple of weeks and I see another big amount of rain headed to some of that cotton area now. Is that going to further impact prices?

Suderman: Yeah, two extremes, one to another. First drought, we're looking at abandonment of around 43% according to USDA. That is going to result in a tremendous amount of wheat being planted after these rains. But these rains are not going to be good for the cotton that is in the field because the bulls are starting to open and so if we get the heavy rains that they're calling for that is going to do additional damage to the crop.

Yeager: All right. We had a cattle on feed report that came out just before we started rolling. On feed 101% of a previous year, placed way above trade estimate at 102. What did you see in that report?

Suderman: More evidence of the drought in the south. Like I said, we're going to have a lot of wheat pasture here soon over the next six or eight weeks once this rain ends if it verifies in that region that will help. And then we're looking at a shortage, cow slaughter remains very high. We're finally going to start seeing these on feed numbers drop off in the fourth quarter of this year. We're looking at beef production next year down about 6.5%.

Yeager: So are you in the buying mode of a feeder right now if you can, if you have the ability?

Suderman: Yeah, I think that's going to be the challenge is the tight supply of feeders as we go forward. Right now we're not looking at the record highs that we set back in 2014. But we're certainly moving higher as the supply tightens up. Feed is really the problem. We're looking at tremendous new crop basis a buck fifty or more over December futures right now in the southwestern plains and there's tight supplies of wheat in that region as well. So they're having trouble coming up with feed.

Yeager: And that was a story I heard a lot at the Iowa State Fair this week, a lot of people asking about feed and directions of that. The hog market though very converse to the rest of the meats there. Much more damage to come?

Suderman: Yeah, and if you look at the feedlot belt where we feed our cattle we're going to be down about 450 million bushels of corn and grain sorghum productions from last year. That is going to have to flow from the east to west so there's a lot of grain in Iowa that is going to be wanting to flow west.

Yeager: All right, Arlan, I appreciate it. We'll expand a little bit more on livestock. Sorry to short that again. I got chewed out at the Fair for that. I'm sorry. So I'll put you on the spot in just a minute, okay?

Yeager: Thank you, Arlan. We are going to put a pause on this analysis and continue with Arlan and answer more of your submitted question in our Market Plus segment. You can find it on our website of MarketToMarket.org. It's both in podcast form as well as YouTube. And all of these resources, they're free. Now, whether one social media platform falls in or out of favor we always leave the inbox open. Send us any story ideas or feedback to the program in an email to markettomarket@iowapbs.org. Next week, we look at the Native Americans taking more control over how their food dollars are spent. Thanks 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.  

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.

(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.

(music)