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Coming up on Market to Market -- After years of delays, extensions and partisan gridlock,
the Farm Bill is signed into law. The Obama Administration releases a key environmental
report on the Keystone XL pipeline. And facing a drought of epic proportions, California
ranchers begin liquidating their herds. Those stories and market analysis with Don Roose,
next. This is the Friday, February 7 edition of
Market to Market, the Weekly Journal of Rural America.
Hello. I'm Mike Pearson. For the second consecutive month, a surprisingly weak jobs report raised
concerns this week that the U.S. economy appears to be slowing.
The Labor Department reported Friday that U.S. employers added just 113,000 positions
to their payrolls in January. That's more than 40 percent below the 2013 average monthly
gain of 194,000. But solid job creation in some sectors boosted
prospects for future expansion. Mining and drilling companies; construction firms; and
manufacturers added a total of 76,000 new workers last month, and that helped push America's
unemployment rate down one-tenth of a point to a five-year low of 6.6 percent.
In the wake of a crippling government shutdown last fall, President Obama called on Congress
to do its part in speeding the economic recovery by approving a budget, reforming immigration
policy and passing a long overdue Farm Bill. Congress did reach a deal on the budget, but
immigration reform is stalled in the Republican-controlled House, and the president got his wish on the
third directive Tuesday, when Congress -- finally -- approved the Farm Bill.
After years of setbacks, the Farm Bill -- a measure authorizing nearly a $100 billion
in annual federal spending finally emerged from Congress.
Debate stretched over two days as Senators from both sides of the aisle argued for and
against approval of the conference committee report.
In the end, however, lawmakers praised the compromise.
Senator Debbie Stabenow, D - Michigan: "This farm bill contains the greatest reform to
agriculture in decades. We have finally ended direct payment subsidies which are given to
farmers in good times and bad. Instead we shift to a responsible risk management approach
that only gives farmers assistance when they experience a loss. The bill also ends farm
payments to millionaires, addresses a loophole that allows people who aren't farming to get
payment limits and caps on payments and for the first time includes all commodity title
Thad Cochran, R - Mississippi "The risk management policies in the bill recognize the regional
differences in priorities of agriculture production throughout the country. The commodity and
crop insurance titles of the conference report in how congress can work effectively in support
of agriculture and at the same time be responsible to taxpayers."
North Dakota Senator John Hoeven also praised and stressed its importance to all Americans.
Sen. John Hoeven, R -- North Dakota: "It is important to every single American and beyond
for these simple reasons; the farmers and ranchers we have in this country produce the
highest quality, lowest cost food supply in the world."
One of the biggest shifts in policy was the demised of direct payments which paid farmers
regardless of prices or yields. Instead, lawmakers approved a more market-based crop insurance
support program. Most of the $4.5 billion annual cost would kick in when a farmer has
losses. One of the biggest opponents to the bill was
the American meat industry. It wanted the removal of a mandate requiring packers to
implement mandatory COOL standards. Sen. Jon Tester, D -- Montana: "And it continues
strong country of origin labeling so is consumers know where their meat was born, raised and
processed giving them the option to buy U.S. made meat if they so choose."
The legislation was not without opposition in farm states. Republican Senator Charles
Grassley, a farmer from Iowa, said too much of the bill was done behind closed doors.
He also cited the removal of language that would have reworked subsidy eligibility and
accurately defined who should be considered a farmer.
Sen. Charles Grassley, R -- Iowa: "Frankly, when farmers that shouldn't be getting big
payments from the farm program get them, subsidizing large farmers to get larger, in my estimation
is wrong." Arizona Republican John McCain took issue
with spending to improve the marketing of sheep and the maple syrup industry, catfish
research, and even a tax on Christmas trees. Sen. John McCain, R -- Arizona: "How are we
are supposed to restore the American people's confidence with this monstrosity? The only
policy that gets bipartisan traction in congress is Washington's desire to hand out taxpayer
money like its candy." Sen. Tim Johnson, D -- South Dakota: "This
conference report certainly isn't perfect. As with any legislation, that is this important
and far reaching, it is impossible to fully satisfy everybody, but this is a reasonable
compromise." The deal also drew criticisms over where cuts
were made to provide savings. Overall spending of the life of the bill is
$956.4 billion and nearly 80% of the funds will go to the Supplemental Nutrition Assistance
Program, or SNAP. The program formerly known as food stamps,
currently helps one in seven Americans. Nevertheless, one southern lawmaker says the farm policy
bore brunt of the cuts. Sen. Jeff Sessions, R -- Alabama: "But you're
cutting $8 billion from the 20% of the program and the other $8 billion from the 80% of the
program and that's not balanced." Senator Patrick Leahy of Vermont said the
nutrition spending cuts should not have been a question up for debate.
Sen. Patrick Leahy, D -- Vermont: "Feed children in America so they may actually learn when
they are in school? Oh, we can't afford that. Come on, feeding those hungry children is
an investment in the future of this great nation."
In the end, very little drama occurred in the vote as the bill passed by a margin of
nearly 2-to-1. "The ayes have it 62-38, the conference committee
report is adopted." President Obama signed the Farm Bill into
law Friday in Michigan where he also announced a new "Made in Rural America" initiative designed
to boost exports. But plans to import oil from Canada through
the proposed Keystone XL pipeline continues to be a hot potato for the Obama Administration
Canada is America's top foreign supplier of crude oil, so it's not surprising that President
Obama's initial rejection of the controversial plan went over poorly with our neighbors to
the north. Since the pipeline would cross a U.S. border,
the State Department must approve its construction. And late last week, the agency reaffirmed
that it has no major environmental objections to the project.
Late last week, the State Department announced that it has no major environmental objections
to the proposed Keystone XL oil pipeline from Canada.
The latest review -- the fifth released on the project since 2010 - acknowledges that
development of oil sands in Alberta would, in fact, create greenhouse gases. But the
report makes it clear that other methods of transporting the oil - including railroads,
trucks and barges - would release more pollutants. Once completed the Keystone Pipeline could
transport as much as 850,000 barrels of crude per day from oilfields in Canada and North
Dakota to refineries in Texas. The State Department announcement has been sharply criticized by
environmentalists who believe the Obama administration's position is in direct conflict with the president's
promise to fight climate change. President Obama (State of the Union January
28th, 2014): "The shift -- (applause) -- the shift to a cleaner energy economy won't happen
overnight, and it will require some tough choices along the way. But the debate is settled.
Climate change is a fact." The Keystone pipeline has been problematic
for Obama, who continues to push green energy alternatives while also advocating an all-of-the-above
approach to reduce America's dependence on foreign oil.
But the administration also must balance environmental concerns with economic benefits. Over 1,000
miles of new pipeline would need to be built in the United States. Proponents say the project
would create thousands of construction jobs and help modernize the aging network of U.S.
pipelines. Lee Weidner, South Dakota Farmer: "Every bit,
every bit of gas and diesel fuel that we use in this area, or awful close to every bit
of it, comes up from the South in pipelines that are somewhere as near as old as I am."
Farmers and ranchers in the six states the pipeline would cross are mixed in their assessment
of risks and rewards. John Harter, South Dakota Farmer: "TransCanada
got the right to this property through eminent domain. I did not sign onto it free and willingly.
If it contaminates an area, the impact it could have on that area could be big, as far
as jobs lost and people having to move and relocate and such."
Lee Weidner, South Dakota Farmer: "We need the fuel. We need to get away from buying
the fuel from overseas." Obama has pledged not to approve the pipeline
if it would mean increasing carbon pollution. While the State Department report seems to
have cleared that obstacle, the agency opened a 30-day public comment period this week and
the White House is not expected make a final decision regarding the pipeline before May
or June. Further west in California, farmers and ranchers
might be more receptive to a pipeline -- especially if it contains water.
Amidst the state's driest year on record, California is locked in yet another year of
drought and bracing for unemployment to soar, sending farm workers to food lines in a place
famous for agricultural abundance. In the Central Valley -- a region known locally
as "America's Salad Bowl," one-third of the jobs are related to farming. But with mountain
snowpack at just 12 percent of normal, farmers probably will not get the irrigation water
they need, and ranchers are already liquidating their herds.
Mark Cowin/Director, California Department of Water Resources: "We should all be clear
by now that this is not a coming crisis, this is not an evolving crisis, this is a current
crisis." Well known for its commitment to environmental
issues, the nation's top agricultural state now sees the natural beauty it has long sought
to protect showing an ugly side. Governor Jerry Brown / (D) California: "Make
no mistake, this drought is a big wakeup call and a reminder that we do depend on natural
systems. It's not all just going to the store and see what we can buy."
California finds itself amidst a historic -- and seemingly endless -- drought rooted
in 2013, one of the driest years on record. During the height of what now should be the
state's rainy season, a severe lack of precipitation has led several anxious communities to ration
their water supplies. And many residents of the northern California town of Willits have
adopted rather inconvenient methods of coping with the problem.
Andrea Onstad/Willits, California: "Turned off the toilet. I haven't washed my hair for
two weeks." California's Department of Public Health says
17 rural areas including Willits — a town of about 5,000 people that usually sees about
50 inches of rain a year — are dangerously low on water, and officials expect that number
to grow. Traces of rain did fall in limited areas of
the Golden State late this week, and were predicted to last through the weekend. But,
the National Weather Service forecasts the California drought will "persist or intensify"
for at least the next few months. California's $45 billion agriculture industry
is responsible for nearly half of all fruits and vegetables grown in the U.S. Filling the
nation's grocery aisles takes a wealth of inputs, and some 80 percent of California's
water supply is consumed by its farming sector. Should the dry conditions persist, some crops
may not be planted this spring. The lack of water out west is creating more than a few
headaches for producers and their wallets. Darrel Sweet/Alameda County, California: "I'm
thinking when I see dusty roads and no grass in January that we're in a lot of trouble."
Among the first to experience the economic bite of extreme drought were ranchers. While
January is normally a slow month for cattle sales in California, perennial blue skies
have given way to dying grasses. And the arid conditions have brought some cattlemen to
the auction block. Unsuitable natural forage has forced producers to purchase expensive
feed that packs only a fraction of the nutritional punch found in normally green pastures. Several
livestock owners have chosen to simply keep the best and sell the rest.
Richard Walker/Monterey County, California: "Oh no, this was not part of the plan, no.
I've got some show heifers, some fancy heifers that I'm selling today that I normally would
keep." While some rural areas have the ability to
tap underground wells for temporary relief from California's water shortage, residents
of Willits have no such luxury. The small town's nearby reservoir is almost
empty, with water levels at just four inches. Bruce Burton/City Councilman, Willits, California:
"We would expect this to be full right now. If it were, we'd be standing in maybe two
feet of water." Lawn watering and car washing are subject
to mandatory restrictions in Willits. And local restaurants are using paper plates to
cut back on dishwashing. Some establishments are even pouring drinking water by request
only. Anna Kenny/Willits, California: "Everyone's
a little worried and a little panicked." Officials are racing to develop two groundwater
wells within city limits, but available water sources are polluted by naturally occurring
arsenic and other minerals, so the city needs an expensive treatment facility to make it
potable. Jim Harden/Willits, California: "It scares
us. As a homeowner, we worry about property values."
While California's public health department is testing the water to help determine what
kind of treatment is needed, nervous residents hold out hope for the saving grace of Mother
Nature. Jim Harden/Willits, California: "If I wanted
to live with rocks around my house, I'd move to Arizona. I don't want that. I want our
annual rainfall to come back." Next, the Market to Market report.
Wheat prices rallied this week as the trade pondered drought on the southern plains and
deteriorating winter crop conditions. For the week, March wheat gained 22 cents while
the nearby corn contract moved 10 cents higher. Big week over in the soybean pits as scorching
temperatures in southern Brazil and strong demand powered a weekly gain of 49 cents.
Nearby meal followed suit and settled $20 higher per ton. In the softs, cotton also
rallied this week as the March contract improved by $1.60 per hundred. In the dairy market,
February Class III milk pulled back slightly from last week's record highs but still hovered
near $23 per hundred weight. Over in livestock, the April live cattle contract lost 2 cents.
Nearby feeders declined by $1.60. And the April lean hog contract gained 2 cents. In
the financials, the Euro gained 14 basis points against the dollar. Crude oil advanced by
$2.40 per barrel. Comex Gold improved by $23 per ounce. And the Goldman Sachs Commodity
Index gained nearly 10 points to settle at 630.55.
Pearson: Here now to lend us his insight on these and other trends is one of our regular
market analysts, Don Roose. Don, welcome back. Roose: Thank you, Mike.
Pearson: We did have a big move up in the wheat markets this week. Talk to us a little
bit about what happened there. And have we put the low in?
Roose: Well, the wheat market was one that was poised for some kind of a bounce. We went
down to, very much like a lot of these grains we went down to big support zones down around
the $5.50, $5.60 on Chicago wheat, funds heavily short. Really the news was stale. And so what
we did is we started to move higher. A lot of it comes back to the harsh weather that
we've had so far and I think that started to make some of the funds nervous. We moved
through some technical areas and we had a sharp technical bounce.
Pearson: Alright. Now, is the market really getting concerned with winter kill? Is that
starting to play into the thoughts? Roose: Well, we're really not going to know
until we come out of dormancy how serious it was. But on the backdrop, remember we did
of the planted acres were down about a million from what we had anticipated earlier, so I
think really where we're at is we're still in a supply bear market. The United States
stocks are tight, very similar to the soybeans, U.S. stocks are tight but not the world's
stocks. So I think all we did is we just really moved up to some levels of resistance. We're
probably going to need a new catalyst to move higher.
Pearson: Do you think this would be a good time to make some sales? Or do you hold off
and wait to see if we get a catalyst? Roose: Well, I think when you look at it right
where we're at right now technically the charts are still positive. We're overbought. We could
have another 25, maybe even 35 cents to the upside. So I think here you're a scaling seller.
But remember on Monday we're going to have the monthly crop report is probably going
to be a little bit positive, exports probably up and then we're going to have the ag forum
the 21st of February. So that's the next two big news items that we have ahead of us.
Pearson: And there's nothing in either of those two news items that the trade is very
nervous about? As far as we know there isn't any terrible news that could come from either
of those? Roose: No. I don't think so. But I think when
you look at it we've got a lot of world competition. India is trying to sell wheat in the world
market. Who would have thought? We have some political unrest with the biggest wheat buyer
in the world, Egypt. So there's some question marks on the demand side and on the supply
side. So I think it's a market that in order to move into a more positive situation it
is probably going to have to be weather dominated. Pearson: Alright. Keep an eye on the skies.
Roose: Right. Pearson: Now, let's take a look over at the
corn market. Also saw a little bit of a rally this week, 10 cents up in the nearby. Where
is corn headed? Roose: The corn market has been up 7 days
in a row and is very similar to the wheat. We reached down at some low end of the charts.
We were oversold. Funds were short about 160,000 contracts. And so we spent a lot of time short
covering. And really what happened is the stocks in all positions report told us that
our feed usage was more than we thought so rather than having a 2 billion bushel carryover
at one time we thought, we're now close to 1.6 billion. So very much similar to the wheat
market. All we did is move up to some tough resistance, March corn $4.45, $4.50, new crop
corn $4.60, $4.65 and so those are areas that we're going to need a catalyst much like wheat
to power through those and then we're going to have those same two reports coming up here
that are going to give us a little bit of direction but we're still in a supply bearish
market. But, again, it's weather, it's the tough transportation. We haven't been able
to move stuff efficiently this winter. And so we've got a little bit of an artificially
tight situation and overall very adequate supplies.
Pearson: Alright. Now, as we watch the old crop corn market I believe we're at about
91% of the USDA's export forecast for the marketing year. Is that going to provide support
over the summer as we hopefully continue to export?
Roose: Yeah, and that is a good point because our export pace has grown. And like you said
we're at 91% of our total export pace. Soybeans were 106%. So it's all about the exports have
supported us on this rally and to the upside we've got competition when we move higher.
We're not the cheapest corn in the world anymore. We were at one time. Ukraine is tough competition.
We've got Argentina and Brazil, their crops are going to be coming at us here soon. So
I would say that there's still an abundance of world corn that is available.
Pearson: Alright. But still, probably better selling opportunities down the line.
Roose: Well, I think it depends on what you're really looking at because I think it's more
of we've had a nice rally, we've got a push to some very tough resistance areas. In order
to push past this $4.60, $4.65 on December corn you're probably going to have to have
some kind of a weather type of catalyst. The charts do look positive. We had a key reversal
on corn January 10th and since then we have been moving to the upside back up to this
resistance. Pearson: Okay. Well, now let's take a look
over at the beans. Talk about a surprising move this week. 50 cents to the upside. What
is driving that? Is it primarily South American weather?
Roose: Well, the real driver is the fact that our export pace is strong. Like we alluded
to, we sold 106% of our total export commitment. Previous years we have seen China cancel some
of their purchases or roll them forward. So far they haven't done that. So the trade is
starting to get concerned that we've got our stocks to use ratio is historically low. We
have to see China start to make a move on some of the beans that they purchased, cancel
them otherwise we're going to be in a precarious type situation. I think they probably do start
to cancel. Those rumors are abundant all the time. South America soybeans in Paraguay port
to port are about $1.00 cheaper than we are. So there's a good incentive to switch at some
point in time. Pearson: Okay. And so far they're able to
get them out of the ports in South America with the little harvest they've had done so
far? Roose: That may be the reason that China hasn't
canceled so far because I think they want to see -- last year remember it was a real
bottleneck. And so I think that is probably what we're waiting for. The port congestion
looks much less than it was last year. It looks like it's going to be a very efficient
movement this year so we think that is probably, China does probably start to cancel maybe
even next week or forward move some of their beans.
Pearson: And then that would create big selloff in the old crop bean market? Are we just riding
on weather, excuse me, on exports? Roose: I think it's just really an export
committed market because we have an abundance of world supplies. What we really have is
excess canola stocks in Canada, we have excess *** seed wheat in Europe, we have big supplies
out of South America. So it's really only the U.S. that has a precariously tight situation.
And we're probably going to rely on some imports this next year also.
Pearson: Alright. Well, now let's take a look over at the livestock market. Fat cattle have
been hot now for two weeks. This week seemed to settle down a little bit. We saw the cash
trade pull back, a lot of scattered reports kind of all in the mid $140s. Where do you
see this trade headed? Was two weeks ago just a one off when we were seeing $150 trade?
Roose: Well, what really happened in the cattle market is we just plain spooked the consumer.
Since the first of the year we spiked up, in one month we moved box beef, the beef at
the consumer level up 20%. It was just too much too fast. So I think what happened is
the packer was making about $100 a head as the beef spiked up there, he paid like you
say $150 for cash cattle in Nebraska, $147 in the southern plains and since that timeframe
we have seen the box beef retreat. It has retreated now, it's going down about as fast
as it went up. It's going back down to the level, the high level that we were last year.
So I think it's still very much a positive market, it's a bull market but I think it's
one that we went up too fast, we lost some of our demand, now we're starting to rebuild
it and so watch for the box beef to stabilize somewhere between probably $207, $211 and
then we should have resumption of the upside again.
Pearson: Alright. Still historically high prices very much so on the choice box beef
side. Roose: Yeah, the box beef is still historically
tight and on Friday we did have a positive technical move on cattle. So I think it's
one that how much do we move to the upside to lose demand? When you're talking about
beef down 6% for the year we're still going to be positive all the way through the next
year. Pearson: Alright. Now, let's take a look at
feeder cattle. We did see a little bit of a selloff this year primarily driven by the
corn rally. Roose: Yeah, the feeder cattle we still have
a positive situation and that's going to continue for the next couple of years. In the last
cattle inventory report we have 700,000 less feeders outside of the feedlots than we had
a year ago. So the demand is going to stay. I think it's really a question mark if the
corn moves higher feeders probably move lower and vice versa. But overall the feeder cattle
probably caught in this $160 to $175 trading range, a big wide range. It's going to probably
be tighter between around this $170 both sides. But overall feeder cattle are positive and
they're probably going to stay positive. Pearson: Alright. Now, let's take a look over
at the hog market. Nearby not much of a change here in April hogs, hovering around that $94
mark. Is there any strength left in that contract? Roose: Well, the big thing that you have with
the hog market is the upfront month, the cash mark is very much different than the back
months. The April hogs probably have a $10 hundred weight PED premium, virus premium
in it, the summer months about $8. Seasonally slaughter should start to go down but the
weights have accounted for the last several months about an extra 2% to 3% of the overall
slaughter. So the weights are going to have to come down and we're going to have to see
the slaughter come down, we're going to have to see the PED virus really start to show
up. That is the big debate that you have out here in the industry.
Pearson: Now, does that mean as we look at the June, this mid-summer contract at that
$105 level, time to make some sales do you think?
Roose: Well, $107.47 is the old all-time high. And so I think when you look at these levels
most definitely risk management makes some good sense, particularly when we talk about
it's all about what do you think the disease factor really is? Remember the government
in the last report, we'll see what they say in the report on Monday, but they had the
high for the summer hogs around $89 to $90 so there's a big difference.
Pearson: Big difference. Alright. Well, thank you so much, Don, appreciate you being with
us tonight. Roose: Thank you, Mike.
Pearson: That wraps up this edition of Market to Market. But Don and I will continue our
discussion and answer some of your questions in our Market Plus segment online. You'll
also find audio podcasts and streaming video of our program as well as links to our Twitter
feed and Facebook account exclusively at the Market to Market website. And be sure to join
us next week when we'll further examine the impact of persistent drought in California.
Until then, thanks for watching. I'm Mike Pearson. Have a great week.
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