Coming up on Market to
Market — Coronavirus extends its shadow
over the economy. The EPA seeks a different
path on ethanol. And commodity market
analysis with Elaine Kub, next. ♪♪ Pioneer Hi-Bred
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Friday, March 6 edition of Market to Market, the
Weekly Journal of Rural America. ♪♪ Hello, I’m
Michelle Rook. Paul Yeager is
on assignment. The stock and commodity
markets have spent the week sizing up the impact
of the coronavirus. Congress passed a bill
putting $8.3 billion towards the battle with
COVID 19 and President Trump signed the
measure Friday. Peter Tubbs has our
coverage on the impact of the coronavirus on
everything from domestic goods to agricultural
products. The
continually expanding economic shadow of the
Coronavirus reached around the globe this week. Kristalina Georgieva,
Managing Director, IMF: “What we are wrestling
with is uncertainty and that defines our
projections, which at this point lead us to state
that global growth in 2020 will dip below last year’s
levels.” 2020 Global GDP growth is estimated
to hit 3 percent. The United States saw 2.3
percent growth for all of 2019. Kristalina Georgieva,
Managing Director, IMF: “What we know from
experience in similar crises is that about
one-third of the economic losses from the disease
will be direct costs from loss of life, workplace
closures and quarantines. The remaining two-thirds
will be indirect, reflecting a retrenchment
in consumer and business behavior and a tightening
in financial markets. In other words, the impact
of uncertainty.” Economic retrenchment can be seen
in parts of China as residents shelter at home
to avoid the virus, which first appeared
in late December. The fear of public spaces
has slowed factory production in the country,
which is now rippling outward into countries
that depend on low-cost Asian labor for
economic advantage. Sean Pate, spokesman,
Zenni Optical: “Zenni’s manufacturing model is
completely reliant on Chinese production, and
so any slowdown or work stoppages there affect our
ability to deliver on time to our consumers.” West
Coast ports are also seeing a slowdown in
container traffic. Noel Hacegaba, Deputy
Executive Director, Port of Long Beach: “For
the month of February. We’re projecting that we
will sustain another 6 percent decline
year over year. We attribute all those
declines to the corona virus situation that’s
emanating in China.” Airlines around the world
are reducing scheduled flights in response to a
drop in travelers and have cancelled trips on routes
to areas with high rates of infection. As of Friday morning,
the CDC is reporting 99 confirmed cases of
coronavirus in the U.S., with 10 deaths. The slowing Chinese
economy has raised doubts that the $40 Billion
in agricultural trade promised in the recent
“Phase One” agreement will be purchased. Secretary of Agriculture
Sonny Perdue tamped down questions of another round
of Market Facilitation Payments. Secretary of Agriculture
Sonny Perdue: “I’m telling farmers to do what they’ve
always done and plant for the market. I’m telling farmers that
if we get the export, we get the trade, and we
don’t see prices increase, then Market Facilitation
Program was not a price support program. It was a trade disruption
program, not price support. If we see trade increase,
and prices don’t go up, that’s a market signal to
farmers not to produce so much.” For Market to
Market, I’m Peter Tubbs. The U.S. economy is in its 11th
year of expansion. COVID 19’s recent effect
on overall growth has been under the watchful eye
of the Federal Reserve. — This week, the Fed
cut interest rates a half point to help contain
fallout from the virus. Despite the move, Wall
Street had volatile week finishing barely above a
week ago Friday’s close. Before the coronavirus
began to sweep through the economy, 273,000
jobs were created. The unemployment rate fell
back to its 50-year low of 3.5 percent. The nine-state Mid –
America Business Index fell 7 percent as supply
managers reported negative impacts of the
coronavirus. The Index is still above
growth neutral despite the drop. — For nearly 5 years,
the ethanol industry has been battling to keep its
share of the motor fuel market. President Trump has
publicly supported ethanol and had a handshake
agreement with the ethanol industry to preserve
federally mandated blending levels. That deal has been largely
ignored by the EPA and has only served to anger
ethanol producers and U.S. farmers. Josh (BIT – ner)
Buettner has more. ########## This week,
EPA Administrator Andrew Wheeler appeared before
a House Appropriations Subcommittee and fielded
questions about the rising cost of Renewable
Identification Numbers or RINs – credits which allow
oil refiners, unable to blend a percentage of
biofuels into their final output, to remain in
compliance with EPA’s Renewable Fuel Standard. Rep. Chris Stewart/R-Utah: “As
I think you probably know, there is no economic
benefit from the production of RINs. They’ve gone up something
like 400 percent in the last year. They affect a couple of
refineries in my district, small refineries. That has enormous
influence. Can you give me some hope,
very quickly, on RINs and your awareness of that? And if there is something
we can do to reduce the upward pressure on those?” Administrator
Andrew Wheeler/U.S. Environmental Protection
Agency: “They’ve gone up in the past couple of
weeks because of the 10th Circuit court decision
on the small refinery exemption.” In late
January, the U.S. Court of Appeals for the
Tenth Circuit struck down 3 small refinery
exemptions improperly granted by EPA. The ruling stems from a
2018 challenge brought against the federal
agency by a handful of agriculture and
biofuel groups. USDA tacked onto that
momentum this week as well. Sec. Sonny Perdue/United States
Department of Agriculture: “We’ll be doing a higher
blends infrastructure incentive program of
$100 million in helping retailers to move to
infrastructure that can support ethanol – E15 and
B-20 and higher.” But Bloomberg News reported
late this week the Trump Administration is expected
to appeal the 10th Circuit ruling. And for some in the
renewable industry, past performance at EPA is
no indication of future results. Monte Shaw/Executive
Director – Iowa Renewable Fuels Association: “You
know, there’s lies, damn lies and then there’s
statistics.” Monte Shaw is the Executive Director of
the Iowa Renewable Fuels Association, which
advocates for corn-based ethanol and
soy-based biodiesel. Monte Shaw/Executive
Director – Iowa Renewable Fuels Association: “The
oil guys don’t want to let any higher blends in. This is a market-forcing
mechanism that says hey you’re going to have to
allow consumers the option of these higher blends. Some will buy it. Some won’t. And the RINs are basically
the market incentive to do that. RINs are still probably
half or less of what they were before these illegal
exemptions were granted. So are they more than they
were when the entire RFS was being gutted out
the backdoor by these exemptions? Yes, but they’re
supposed to be. That’s the economic
incentive and reward for the people who move us
forward and comply with the law.” For Market to
Market, I’m Josh Buettner. Next, the Market
to Market report. The commodity markets
chewed on weather and currency values in South
America, limited Chinese buying and the continued
effect of the coronavirus. For the week, May wheat
lost 9 cents and the nearby corn contract
rose 8 cents. The May soybean contract
lost only 2 cents after trading as much as 18
cents higher earlier in the week. May soybean meal lost
50 cents per ton. May cotton bumped up
$1.30 per hundredweight. Over in the dairy parlor,
April Class III milk futures lost 16 cents. The livestock
sector was mixed. April cattle dropped
$1.83, April feeders shed $2.65 and the April lean
hog contract put on $3.65. In the currency
markets, the U.S. Dollar index
plunged 215 ticks. April crude fell $3.82 per
barrel as OPEC and Russia failed to make a deal
on production cuts. COMEX Gold skyrocketed
$98.80 per ounce. And the Goldman Sachs
Commodity Index dropped more than 14 points to
finish at 344 even. Joining us now to offer
insight on these and other trends is our one of our
regular market analysts Elaine Kub. So good to have you back. Kub: Sure thing. Rook: So it was a very
volatile week in terms of the outside commodity
sector and the stock market because of the
coronavirus, the Fed cutting interest rates. When does the ag
commodities sector divorce itself from all
of that noise? Kub: There’s that argument
to make that no matter how sick anybody is anywhere
in the world you’ve still got to eat, right, that
you would still have these food commodities, ag
commodities be relatively resilient to some of that
influence that the stock market certainly
responds to. As Peter’s story suggested
we have entire supply chains being disrupted. So to some extent I do
think that commodities are oversold during
this panic. But there has also been
some legitimate demand destruction and I think
it really just depends commodity by commodity we
have to go through and really evaluate how much
demand destruction is real based on this coronavirus
story and how much of it is just an oversold or
a panic-based scenario. Rook: So we do have a
question from one of our viewers, Mitch from Hull,
Iowa, wants to know where you see the biggest
opportunity once the coronavirus fears maybe
subside in the commodity markets? Kub: Biggest opportunity
other than refinancing your mortgage at record
low interest rates, as far as a real trading
opportunity I like looking at the meat
complex right now. I think if we talk about
this idea of a commodity market, a food commodity
market that really doesn’t have domestically
demand destruction from coronavirus yet, you could
argue perhaps that folks aren’t going out to eat at
restaurants quite as much, but we don’t have
evidence of that. I think that the meat
complex has been severely oversold and a lot of
that has been speculative activity. Rook: So we have a USDA
report, WASDE numbers coming out next Tuesday,
do you think there’s any demand adjustments for
coronavirus that will be put in the report? Kub: I would be
very surprised. I think that would be very
out of character for the USDA to kind of step out
on a limb without any really up-to-date or
really certain numbers to base that sort of
adjustment on. I think the expectations
of all the analysts going into that report suggest
that they would be cutting the ending stocks and so
we are not expecting to see that sort of an
influence on that March USDA report just yet. Rook: Great. All right, so let’s talk
about the wheat market, Elaine. From the January 22nd
highs we’ve dropped about 75 cents in May Chicago
wheat, down 62 cents in Kansas City wheat. I know the funds have
been liquidating a long position that
they had there. Is there any reason for
them to stop doing that? Kub: Well, again, in my
opinion if we’re looking by commodity, which is
justified to react to these scares, wheat is
actually a staple grain and your price demand
elasticity for wheat is much less than it would be
for certain other foods. So wheat in theory
should be more stable. You can also look just
sort of fundamental supply and demand issues. But this time of year it’s
sort of tricky to do that for wheat. Rook: So we also have an
inverted market both for Kansas City and Chicago. What is that telling
us right now, Elaine? Kub: Well, it would tell
you, and this is true for corn also, is that there
is real demand for feed grains right now and that
the prices have not really reflected that on the
futures market to reflect the same degree that the
cash market is really demanding to see that feed
grain come physically to the market. Rook: And let’s talk
about corn as well. We’ve had a little rebound
off the contract lows last Friday. We had a little bit
higher weekly close here. But that market is, the
funds are short, and they keep kind of pushing
that side of the market. What do you see ahead? Kub: Corn has really
bounced along with whatever the headline
of the day has been. During the coronavirus
when crude oil was falling so drastically corn
really followed along. And then when we had the
Fed rate cut that brought stock markets bouncing
back up just a little bit this week corn seemed to
follow along with that, which again is not really
justified for corn as a commodity. Commodities in general
should not respond to interest rates
to that degree. Other asset pricing does,
certainly if you’re looking at a future income
stream, any future income stream for land or a house
or any sort of asset like that, it certainly does
respond to a cut interest rate. That’s just arithmetic. But commodities should
in theory only trade according to their
supply and demand. And like I mentioned, the
actual demand for feed grains, certainly as
you suggested with that inverted structure, and
for feed grains just generally when we have a
world where in the United States certainly we
haven’t had big culls of animals, we still have
just the same amount of animals eating this feed
grains, corn should not be responding to those
headlines to this degree in my opinion. Rook: So let’s talk about
another disconnect, Elaine, the futures versus
the very strong cash basis levels that we’ve had
for weeks now, months. Kub: This has been the
case ever since, the countryside seems to
believe that we don’t have as much corn and the cash
buyers are apparently not able to get that corn from
the farmers or not to see as much of it in the
supply chain as they would like to see. And you do see it
reflected not necessarily in the futures market but
the cash bids are inverted all the way past May, all
the way to the new crop. So that suggests to me
that certainly there’s not as much corn out there as
people would like to see or have their hands on. And it’s very interesting
to drill down exactly where that is happening. You see the most appetite
for that cash grain certainly still in the
Eastern Corn Belt where you’ve still got basis
values of plus 20 over the May contract and some
pockets of the Western Corn Belt too where
there’s a heavy amount of animal feeding. There’s a lot of appetite
to get that physical grain to the end users. Rook: Plus we had late
test weight corn and so we’re probably feeding
more aren’t we? Kub: Yeah, so when you
talk about the supply and demand reports I don’t
think this is something that will show up on the
March report, it could be until next January,
but there’s certainly opportunities for the USDA
to have to go into their tables and total readjust
the volume and the weight of the grain that is
actually out there. Rook: So soybeans, the
biggest thing besides coronavirus this week has
been the record low the Real has had to the U.S. dollar and that has really
been crushing that soybean market in our
competitiveness hasn’t it? Kub: Yeah, continually a
record low and we’ve had a series of record lows,
it just keeps lower and lower. But this week that trend
of lower trade in the Brazilian Real
really steepened. There was two days when it
lost 3% in just two days. So absolutely when
you look at the competitiveness of
soybeans coming out of the port in Brazil, they’re
going out of there pretty fast, they’ve got a record
large crop and those prices are really
favorable on the international market
simply because of that currency trade. Rook: So let’s also talk
about the fact that the February crop insurance
revenue prices were set here and in fact soybeans
at $9.17, that’s down 37 cents from a year ago,
corn at $3.88, down 12 cents. What does that incentivize
in terms of farmers when they go to plant
this spring? And what about the
corn to soybean ratio? Talk about that as well. Kub: Yeah, just to do
pure arithmetic from the numbers you gave that is a
2.36 to 1 price ratio of soybeans to corn. Ordinarily, just
historically, statistically you’d expect
to see more like 2.45 to 1. That would be the usual
relationship which accounts for the different
yield scenarios, it accounts for the different
feed values of those two crops. So to see soybeans at 2.36
to 1 compared to corn suggests that soybeans are
not going to be your big buyer of acres as we go
into this battle for acres scenario. And I will just say one
more thing about those crop insurance reference
prices, before we had this coronavirus, that issue
that brought down grain prices right at the end of
February, that last week of February because it had
gotten into Europe all of a sudden the commodities
started responding, before that the corn crop
insurance price would have been $3.90 and the soybean
crop insurance price would have been like $9.19. So we did lose in my
opinion about 2 cents on our crop insurance
reference prices, which are important for the
entire year of trade, not just a miniscule
period of time. Those are going to be
with us all through this marketing year and we lost
2 cents on each of those crops due to this
coronavirus scare. Rook: Yeah, this is the
lowest level since 2016 I think. Kub: Yeah, these are
not really encouraging. Rook: No, not at all. So the cotton market has
also been embroiled here in the coronavirus
concerns as well and I know USDA at the Ag
Outlook Forum thought that ending stocks might be
actually a little bit lower but that export pace
would be pretty decent for the year. That is going to be pretty
hard to meet though isn’t it with coronavirus? Kub: Right. Cotton is absolutely a
poster child of reacting to the international
supply chain issues and the international
coronavirus concerns. We are seeing basically a
one-to-one daily pattern of cotton following along
with the stock market or the equity markets’
concerns about coronavirus. Rook: What about cattle? That was a train
wreck of a week here. Live cattle futures on
Friday gapped into new contract lows again. How much father do we have
to go here in this market lower do you think? Kub: I can’t put, I don’t
want to step in and catch a falling knife and
I can’t really put a timeframe on it but you’re
right about them being super low. These prices are actually
lower than they were after that Holcomb, Kansas fire. We have dropped down to
lows that in my opinion are not justified
whatsoever by the real supply and demand of U.S. domestic beef consumption. Rook: And in fact that has
pulled the cash market down. Kub: Absolutely it has. It’s the futures traders
going in there, the volume of futures trade this past
week is something like 133% higher than it was
during that same week last year. It has been a huge volume
of speculative money market, managed money
going in there and trading these livestock futures,
bringing them down because of the coronavirus,
sure, that’s fine. But I think that then it’s
the tail wagging the dog when the cash traders go
out there and their prices are $113, $180 dressed. That $180 dressed price is
$4 to $6 lower than last week. So a $4 to $6 drop week
to week, that’s a big movement in the
cash market. Rook: So the funds are
pretty much out of all of their length and probably
short now in this market, Elaine? Kub: I didn’t get a
chance to see the Friday afternoon numbers. But yeah, it could
certainly go that way given that huge
volume of trade. Rook: Now, feeder cattle
the cash market has held up a little bit better out
in the country versus the volatility that we’ve seen
in the futures, right? Kub: Right, because
legitimately the ability to go out and fill a
feedlot right now is not being affected here in the
United States yet by this coronavirus story,
it shouldn’t be. So we do see some sales. There was a sale in Kansas
that I think was $1 or $2 higher than last year. There are sales up in our
home state of South Dakota where you had a weighted
average of $142 and of course you’ve got
northern basis. But the CME cash index is
$133, not great, but still better than how extremely
the futures fell apart here on Friday. Rook: Yeah. So let’s also talk about
the hog market holding up better actually than the
rest of the commodity sector. What all do you
attribute that to? Kub: Well, number one,
against legitimately in the United States
domestically there is still demand for hogs. You’ve got daily slaughter
rates of 495,000 a day, just huge, certainly still
bigger than they were last year at this time showing
the expansion of that industry. So that is great. But it may also be, in my
opinion, I think that the speculative story for hogs
might be a little bit bullish. You might have funds and
investors looking at the possibility of China
coming in and buying U.S. pork or certainly buying
North American pork eventually. Three months down the
road, six months down the road, I know we always
say this about hogs, it’s always a story for six
months down the road, but I think that might be why
you’re seeing some of the support in the
futures market. Rook: Do you think that
premium is justified, especially in the deferred
months, because that is where we have been
putting it and we haven’t necessarily seen that
China business come to fruition? Kub: I know and it just
keeps on being this kicking the can
down the road. But we do see animal culls
going on in China, not just hogs but also
chickens because they cannot get the soybean
meal logistically through their supply chain
where it’s needed. So there’s just eventually
when the Chinese consumer comes back and needs
protein, needs to go to the market and buy
protein, they will need to get it from somewhere. Rook: So do you get a big
relief rally after the coronavirus goes away
in both cattle and hogs because of that
meat demand? Kub: I would like to see
all of the meat futures markets have a recovery
before we see the coronavirus go away
because the coronavirus could be with
us for a year. Who knows how long
this may take. Rook: We’ve got a lot of
gap areas on the charts. Do we go back and fill
those in cattle and hogs too? Kub: Yeah, so I’m about
the most skeptical skeptic there is about technical
trading things, but the gap things, those are
a mechanical reasons. There’s going to be bids
and asks that are just left there hanging, that
the market or the chart does need to come back
up and fill those gaps. Rook: All right. We always appreciate
your time. Thanks so much,
Elaine Kub. That wraps up the
broadcast portion of Market to Market. But we will keep this
conversation going on Market Plus where we’ll
answer more of your questions. You can find it
on our website at MarketToMarket.org. A reminder many PBS
stations are in fundraising mode. Please support your local
station that carries Market to Market. You’ll be investing in the
news, reporting and timely market analysis you trust. Join us again next week
when we’ll continue to explore the effect of
the coronavirus on the commodity markets. So until then,
thanks for watching. Have a great week. ♪♪ ♪♪ ♪♪ Market to Market is a production of Iowa
PBS which is solely responsible for
its content. Pioneer Hi-Bred
International is a proud sponsor of
Market to Market. 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. ♪♪ 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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