Market Plus: Arlan Suderman

Yeager: Hello everybody and welcome in to the Friday, March 18, 2022 Market Plus. Joining us again is Arlan Suderman. Arlan, we could easily talk basketball but that's just more you and me. We need to get something that is huge right now and the movement in the cotton market the last two weeks is, if my math is close, we're almost at a $10 move. I remember all the way back in 2021 when we couldn't break through 100. What's going on there?

Suderman: It's similar dynamics to what we're seeing in a lot of the commodities. There is a fundamental story and then there's a lot of money chasing an inflation story. And in cotton we've been seeing a step up in Chinese buying like we've seen in some of the other commodities as well, some concerns about overall stocks. And then when you look at okay, higher prices buy acres and the expectations were that maybe we'd see as much as a 10% increase in acreage to cover that demand but now we're looking at a shortage of chemicals needed for the crop inputs and that may limit the amount that we're able to expand acreage this year. So we're cutting our expansion estimates now saying instead of maybe adding a million and a half acres, maybe we add half of that. So suddenly that makes cotton a little bit more attractive to the funds and of course the funds are really chasing these markets and amplifying the moves.

Yeager: I heard a story earlier I think it was last week and it's something that we've talked about in our M-to-M podcasts about the movement of cotton north, especially in Kansas. That's where this story was. Are you seeing -- do we know yet maybe how some of these new places planting cotton are going to impact? You just said we think one, could be another, is it too early to tell that yet?

Suderman: You know, I was an agronomist in Kansas before I had the job that I have now back a couple of jobs back and I helped bring cotton into Kansas, helped do public meetings and stuff and you can grow some good profitable cotton in Kansas. Mostly it's below south of Highway 50 but we do have some as far north as I-70 as well, needs to be a little bit shorter season, but really likes it, it performs well relative to other crops in the dryness. When we look at that region though it's going to be competing hard with grain sorghum, with double crop soybeans. Depending on the soils, if you've got some questionable soils that is where cotton may compete a little bit better.

Yeager: Okay. I need to also move through, let's stick in Kansas, the feeder market. Again, tied back to weather, what are we seeing here specifically with feeders?

Suderman: Well, first of all, we need to say that we've been selling cows now at a high pace for the past year reducing the supplies of feeders. And so that's a concern. Now, cheaper corn prices to close out the week certainly helps some demand at the end of the week finishing feeders strong. But overall that's that optimism that we're going to see stronger demand for the fats and helping support the feeders, the protein complex has that sense of optimism. But I think long-term we go back to the fact that we've been slaughtering cows at a rapid pace and it's not just where the drought is, we've been slaughtering cows at a heavier pace pretty much across the country. So there's some profitability issues at the cow calf level there that are fueling it as well.

Yeager: All right, thank you on that. I need to get to a question from Phil in Dresden, Ontario that I meant to ask during the program but we got going on wheat and corn there. With old crop stocks to use ratio very tight, we're talking soybeans here, where are we at regarding potential new crop sales? A preliminary USDA soybeans acres estimate at 88 million seems not enough. Do we hold off more new crop soybean sales until July 4th?

Suderman: It is very intuitive that saying that 88 million acres is not enough and frankly I believe that's evidence of how USDA develops those numbers for their outlook forum, it's not with surveying farmers or industry people, it's simply kind of working through the economics of it. And frankly there's a lot more interest in soybeans out there than that and I think we're going to be closer to 90 million acres. But, to answer the question on export sales, for corn and wheat we're near the top end of the range of new crop sales from where we normally are this time of year. For soybeans we're at record highs, about 308 million bushels of new crop sales that we're aware of. Most of that, 291 million bushels of that is China and unknown destinations, most of which is probably China as well. China has really been stepping it up. That says they're concerned about tight supplies.

Yeager: Well, and that's what our next question is about is China. And it's Jared in Nebraska wants to know via Twitter here, do sanctions on China pose a major risk specifically to the downside to U.S. commodities?

Suderman: It's the opposite of Russia. Yes, Russia is a major exporter so sanctions mean they don't export as much therefore tightening up supplies in the rest of the world. China is a major importer so therefore sanctions put on China on commodity imports would decrease the amount of shipments and increase the supplies offsetting some of the other factors that we're seeing from Russia. So while one is bullish the other would be bearish. Let's just hope we don't get into that sanction situation against China.

Yeager: Well, I kind of cut you off at the end of the program talking about hogs. I think you said China might be a little plenty of supply right now of U.S. pork so their lack of buying isn't necessarily tied to sanctions but tied to we've got enough, we're good?

Suderman: Yeah, as I look at the numbers it looks to me like production in China is down about 7% from pre-COVID levels. But when you look at what the high prices in China did during the African swine flu epidemic is we saw that a consumer shift away from pork. And so the market niche that pork has is smaller now, therefore demand has fallen so they're looking at surplus production even at 7% below pre-ASF levels.

Yeager: Okay, we need to get into some economic topics that are going to impact commodities but very specifically we mentioned it, Bradley again in Upland, Nebraska has a good question. And this one is, did the Fed raise interest rates enough to curb inflation this week?

Suderman: Good question, Bradley. And I would say no. If you look at market expectations, as you mentioned earlier in the show, expectations are 25 basis points in each of the remaining meetings of this year but the market is expecting one of those meetings to see a 50 basis point rate hike. It's interesting that Bullard, who is President of the St. Louis Fed, made his comments after the meeting that he felt like we needed to take overnight borrowing up to 3% this year in order to curb inflation. And I don't know about the 3%, but I do think we need to be more aggressive. I think that the Fed is afraid of hurting the economy and that fear is what is going to allow inflation to get further out of hand.

Yeager: Fear. And how do you fight fear?

Suderman: Well, and I should say inflation is actually good for commodity prices because we can show a statistical relationship when the market believes inflation is going up they put more money into commodities. But that also means crop input prices as well. I think in order to combat that fear we need to take more solid action. And the Fed right now is leading from behind.

Yeager: Okay, you bring up something, I'm going off topic a little bit. Technically, say that money you're just mentioning comes into commodities and all of a sudden it exits and goes somewhere else, we look at these technical markers, if we get below this that opens the door to lower prices. The run-up didn't follow the playbook of before. Do we think that the fallout of prices and the fall down of prices is going to follow the same traditional playbook? Or are we just kind of stuck guessing?

Suderman: Well, to some extent this is unprecedented because first of all the Fed has created an unprecedented situation and not just the Fed but Congress as well. In fact, if I quote Tom Hoenig who was President of the Kansas City Federal Reserve, he said they've created a situation they've never been in before and they're going to have a difficult time getting out of this type of a situation. And with that money that has come in, there's roughly $6 trillion of stimulus that is in the system right now, about $1.6 trillion in surplus cash just floating in the system right now. And until they start shrinking their ballot sheet, withdrawing that stimulus, that is still in the system, that's in the markets. They haven't started doing that yet, they haven't even agreed on how they're going to do that yet, although they say we need to do it but they can't agree on how to do it. When they start doing that, that starts pulling money out of the markets. That is one of the things to watch for. When inflation starts coming down the funds will also be pulling money out. We haven't seen that yet. Right now we're looking at yields on treasuries as being negative in real terms because they are below what the inflation rate is. And so as long as we're looking at that type of situation we should see the funds really trying to hedge their inflation risks into commodities.

Yeager: All right, let's talk one last economic question and this one is about oil. Again, Bradley he had three great questions and this is the last one. If China starts buying Russia oil without using the U.S. dollar, will that deflate the U.S. currency and help export sales?

Suderman: And I think we started seeing some of that at the end of the week when the dollar started breaking lower. It had been a safe haven currency because of the war and as the Euro fell and that is the other component, the dollar and the Euro go in opposite directions. But as China starts talking about doing business with Russia in yuans rather than in dollars we start seeing that demand for the dollar start to back off and the dollar start to erode. That does historically mean that it's positive for the commodities as well, as Bradley indicated, and so another factor to keep an eye on.

Yeager: All right, Arlan, appreciate the time, good to see you and we'll talk to you again soon.

Suderman: Thank you.

Yeager: All right. We want to let you know that that was Arlan Suderman. And I also want to let you know that next week Elaine Kub will be back with us and we're also going to talk about a look at a land lease program in Colorado that is benefiting schools. We'll see you next time. Thanks for watching. Bye bye.

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