Market Plus with Sue Martin

Yeager: This is the Friday, October 7, 2022 Market Plus. Here is Sue Martin. I have to stick to my word at the end of the show, Sue. I always feel bad when I interrupt you in the middle of a story. But time just is never our friend. You were discussing something that I did have down as a question possible. China is about to embark on, I don't know, we can't really call them elections but it's a Congress. Xi is expected to be put in for another term. I think I set you up in how far you had gotten so far.

Martin: Well, the situation in my opinion when Xi gets solidified or his final approval on the 16th that he is going to be in office for another five years, which is totally expected, I believe what's going to happen is he's going to start to loosen up on the whole country and they're going to start coming out of lockdowns completely. And all of a sudden it's going to be Katy bar the door with their economy putting people back to work, factories running, which is going to prop up the price of crude oil. And in the meantime, for example, cotton, right now cotton exports are, actually the commitments of exports for the year thus far this time of the year is 67% of the total and normally they'd be 57%. China has the largest book of cotton sales that they have yet to take but 1.8 million bales. But here's the thing, what I think is going to happen is when this occurs and China starts setting everybody back, well first off, demand for food. It's kind of like look at us. And what happened? Only they're going to be on steroids because they have been so locked down to the point where sometimes they nailed their doors shut. And I think we're going to see the huge demand for raw commodities like we just haven't seen.

Yeager: Okay. I buy that, I totally buy that. But has the world changed in two years since we went into COVID where we make things or get things differently and don't rely on China as much, that maybe that will buttress some of that and it might not be that economy on steroids that you're referring to?

Martin: Well, we might not have had a choice that we couldn't get them out of China because they weren't working.

Yeager: And quickly we'll go back to the cheapest option for anything?

Martin: Well, factories are, you're seeing factories leave China. Some are staying a little bit there but going into India, Vietnam, Mexico. So we're seeing a shifting in that light. But I believe the one thing that is just in the move hasn't fully been able to get where it wants to be and it's building of reserves around the world. These countries have really come to the realization that just in time inventorying isn't the cat's meow and I don't think they're going to get caught in this again. But it takes time to get there, a little bit longer than I would have given it when I first started talking about high prices. But I think it's still coming and I think inflation next year is one of our thorns in our side.

Yeager: No matter what we do domestically, globally it's going to be an issue because of China?

Martin: Well, remember I'm a girl from the old days.

Yeager: The '80s, we'll just say the '80s.

Martin: Yeah, the '80s and maybe before. But I remember when the dollar got to $165 back in '85. I remember when interest rates were 20%. 4%, 5% interest, is that high? Not really. It's just we've been spoiled with low interest like 1.9% or whatever. And when it comes to food, I know everybody says oh the demand is going to slow. Really? When you have to feed all your people and they're protesting and they're not happy campers are you going to let them go? No, you've been handing out money anyway, just print more of it and turn around and buy it.

Yeager: You're talking here or over there?

Martin: Well probably both.

Yeager: Oh okay. Let's go to meats for a minute in China. So are they going to want to buy U.S. pork? Are they going to want to buy U.S. beef?

Martin: Oh absolutely, in fact they've already been taking a huge amount of beef. Just recently they were in our market for the month of August. They were our largest buyer of beef. I think they bought 10.1 million pounds.

Yeager: Okay, so that props up the beef industry in the U.S. So let's talk feeders specifically, we ran the cattle chart in the main program. Expansion is tough in areas because they don't have the place to feed, the feed is expensive. But how do I make my pencil work to expand a feeding operation right now, to lean into what you're talking about, Sue?

Martin: That's a tough one and I don't see any expansion right now because of the fact that you've got the feeders, we're in liquidation of cows and some of these cows at some of the auctions actually were even younger cows that have come in. I see a change, a shift in the industry. I think some who maybe wouldn't have, if things stayed so rosy and easy, wouldn't have gotten out but they're to the point where they were tired of fighting and said I'm done, I'm going to just be a grain farmer and move on and retire.

Yeager: And that's what we heard in the piece from the Oklahoma cattleman, he was saying generational. It was code for I'm done, I'm moving on, I've had enough stress in my life.

Martin: Exactly. And I will say this, I go to the dollar and the dollar of course has been pretty strong and it had a hard break and turned right around and put everything of it back on. I think the dollar still has room to go and cyclically I don't see a high before 2024 or 2025 and I'm thinking more 2025 is cyclically where we should see a higher. $120, $121, I think it's a piece of cake. But in the meantime, what does that do when that dollar rallies? Well, in the old days you'd pull more cattle from Canada into the U.S. to be processed. You might catch some cattle coming in from Mexico. But you'd be bringing animals in. Same way with hogs, you'd be bringing hogs in from Canada down to be processed and whatever. And it was more doable, more profitable for them to do that. So when we talk about tighter numbers into this next year I'm wondering will we be as, we might be domestically tight on some numbers, but will it be as tight for supplies when we look at what we're importing in for animals?

Yeager: Okay, the control room is going to be mad at me because I'm going out of order. But you bring up Phil in Dresden's question in Ontario. He's asking, scenario setup that you just said. So he's asking, how will this foreign exchange advantage and the strong U.S. dollar affect global grain production? Let's talk grains for a minute.

Martin: Well, again, everything mostly around the world trades in dollars and there's nothing better than the Brazilian farmer likes than to have the real falling and the dollar going up and the price of beans going up. That is like the cat's meow for those guys. So what are they going to do when they see these high prices? They're going to pull more hectares into production. And that is just what they're doing. We're going to see 3 more million hectares coming into production. The old saying, the cure for high prices is high prices and it's because all of a sudden at some point it will become sexy and everybody wants part of it and they try to expand. The problem is, Europe, what did they have? Drought. Their corn production in France down sharply. China has had their share of issues around the Yellow River. I would say in China some beans affected in that area, maybe more wheat and rice, especially rice, but not so much corn. And then you look at Argentina, they're dealing with dryness. You just, Pakistan was having issues. You just look around the world and there is so many, Australia has been blessed. They maybe are getting a little too wet but they have been blessed. But they needed to be --

Yeager: They had terrible years for a number of years. Okay, so given what you're saying, that leads into John in Kansas' question where he's asking, this is to help everybody at home, Sue. How in the world do you manage your risk when there is so much of this volatility that you're referring to, the inflation, interest rates and weather out there, and do it affordably?

Martin: Well, the problem is everything has moved up so much in price, cost. And this next year is going to be a tough one for the farmer to manage his margins because you're going to have the inflation, you're going to have the higher interest rates, which is a cost to him now. It has always been a cost but it's going to be a bigger cost. And he's already gone through marketing supplies that he had on hand that he had held onto. So he got that big first jump and then maybe this year he sort of held okay. He had certainly opportunities to be marketing very well this year when you look at basis and what have you. Next year is going to be a little tougher. And his margins are going to be tighter. So what he needs to, definitely first thing know exactly what your cost is for your inputs and the end result and what you have to have. Then start looking at margin spreads, call, put options. If you've already marketed and you're feeling like geez, what if this takes off and goes or I have a drought or whatever, then you do call spreads. But in a situation where you've got some marketing that crop is going in the bin, you maybe didn't sell all of it, maybe you have half of it sold and half not for the next year. Now, you look at new crop for next year and it's quite a bit under the market compared to where we are today on the front months. Usually it gives you an opportunity to market that crop and it's usually like you're coming into a year of a 3. Usually it's in, okay this year and last year, we hit our highs pretty close both corn and beans, especially soybeans a couple of days apart. Next year I kind of wonder if we aren't looking at July highs. But keep in mind that weather is going to be your huge driver. And so when you get these chances, and by the ability of knowing what your bottom line is, protect yourself. Make sure you use that as a hedge to floor your prices and don't do any more than what your crop insurance will allow or you're going to get -- that leaves your topside open so that you aren’t feeling so bad but yet if the market goes down -- and if you're doing put spreads you've got to manage those but it'll cheapen your cost a little bit.

Yeager: Good advice. Good perspective. And good to see you. 

Martin: And I gave them so many ways to go.

Yeager: You did.

Martin: Boy I danced around that one didn't I?

Yeager: That's all right, dancing is part of the job, right?

Martin: Yeah.

Yeager: Thank you, Sue. Good to see you.

Martin: Thank you.

Yeager: Appreciate your time and your insight. Next week we're going to give that government report the panel treatment with Elaine Kub, Don Roose and Jeff French. I'm Paul Yeager. Thank you for watching. Have a great week.

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