Tip:
Highlight text to annotate it
X
Coming up on Market to Market -
Washington's failure to enact a
Farm Bill leaves dairy producers
in limbo.
A barometer of the Midwest
economy declines for the third
consecutive month.
And record-breaking heat fuels
lethal wildfires as the drought
intensifies in the southwest.
Those stories and market
analysis with Alan Brugler,
next.
Funding for Market to Market is
provided by DuPont Pioneer,
working with growers to match
the right product to the right
acre.
Science with service, delivering
success.
This is the Friday, July 5
edition of Market to Market, the
Weekly Journal of Rural America.
Hello.
I'm Mike Pearson.
American businesses went on a
hiring spree last month, making
it more likely that the Federal
Reserve will slow its bond
purchases before the end of the
year.
The Labor Department reported
Friday that employers added a
respectable 195,000 positions to
their payrolls in June.
The national unemployment rate
held steady at 7.6 percent as
more people started looking for
jobs.
Average hourly pay rose 10 cents
last month to just over $24 per
hour.
Over the past year, wages have
risen 2.2 percent, while
consumer prices have only risen
about half that amount.
Despite the solid pace of hiring
in June, the economy continues
to grow sluggishly.
It expanded at a 1.8 percent
annual clip in the first quarter
and most analysts expect roughly
the same performance this
summer.
Even less certain are prospects
for federal farm programs.
While large and complex, Farm
Bills, typically, enjoy
bipartisan support.
But not this time...
The Democratically-controlled
Senate approved a five-year,
$500 billion Farm Bill in June
with broad support from both
sides of the aisle.
But the Republican-controlled
House rejected its version of
the bill.
And as the clock winds down to
yet another self-imposed
deadline, some are concerned
that Washington's failure to
enact a Farm Bill could push
milk prices above $6 per
gallon...
Unless Congress acts before
September 30th U.S.
agricultural policy will revert
to the Agricultural Act of 1949.
Why 1949?
Because that was the last time
Congress authorized federal farm
programs on a PERMANENT basis.
If the policy is allowed to fall
back 64 years, farmers will
watch most of their heavily
negotiated "safety net" slip
away while America's dairy
producers would see a marked
INCREASE in profits.
If Congress fails to pass a new
Farm Bill by September 30 -- or
extend key aspects of existing
law - provisions kick-in that
would double milk prices to over
$6 per gallon.
Most dairy producers only see
trouble if the six-decade old
law is allowed to take effect.
Some farmers are already selling
their milk at -- or below -- the
cost of production and are
concerned consumers will stop
buying dairy products due to
inflated prices.
Both House and Senate
Agriculture Committees proposed
changes to the dairy safety net.
There were two in the Senate
version of the 2013 Farm Bill
that passed last month.
The first was a margin
protection program to pay
farmers when the price
difference between milk and feed
shrinks to a certain point.
And the second was a market
stabilization program that would
require farmers to either reduce
the amount of milk produced when
prices drop too low or give up a
portion of their margin
protection payments.
USDA would divert the money to
purchase and donate dairy
products to food banks.
Both provisions were originally
part of the House version of the
bill but Republicans on the
House Agriculture Committee
voted to remove the market
stabilization program.
Ranking member Congressman Colin
Peterson, a Democrat from
Minnesota, said the change
soured several Democrats on the
omnibus bill and the measure
failed to pass.
Despite any political wrangling
that will inevitably take place,
the clock is ticking and
Congress has less than 90-days
to come up with a solution.
In its latest report on global
trade, the Commerce Department
reported this week that
America's cavernous trade
deficit widened in May to its
highest level in six months.
The U.S.
trade deficit rose to $45
billion in May.
That's up more than 12 percent
from April and the largest
imbalance since November.
Imports rose nearly 2 percent as
demand for foreign-made autos
and auto parts jumped 3.1
percent to a record of $26
billion in May.
Exports of U.S.-made autos and
auto parts also set a record in
May of $13.1 billion.
But demand for U.S.
wheat, soybeans and corn all
declined pushing agricultural
exports to their lowest level in
nearly three years.
And, the impact of a sluggish
global economy was confirmed
this week when Creighton
University Economists reported a
key barometer of the rural
economy declined in June.
Leading economic indicators for
the Midwest declined in June
declined for the third straight
month according to the
Mid-America Business Condition
Index.
The index, compiled by Creighton
University includes data
gathered from supply managers
and business leaders in nine
Midwest states.
Despite the decline, the report
projects continued economic
growth - albeit slower -- over
the next three to six months.
Professor Ernie Goss: "Even
though the index is coming down,
nothing like what's going on
with the national number, of
course a lot going on in
agriculture and those businesses
tied to agriculture.
Even though it is slowing it's
still a lot better than what we
see in the national economy and
I expect that to continue.
We're likely to see growth
slowing in the weeks and months
ahead but there's still going to
be positive growth."
According to the report, a five
percent increase in the value of
the dollar and slower economic
growth in 2013 has lowered
inflation at the wholesale
level.
While prices are not expected to
increase in the immediate
future, economic optimism has
plummeted over the last three
months.
The majority of supply managers
felt that spending cuts and tax
increases mandated by the
sequester have had little impact
on their outlook, but most
believe higher interest rates
could have profound
consequences.
Professor Ernie Goss: "The big
impact for this month was the
interest rates.
A thirty year mortgage rate up
significantly.
Other interest rates up as well.
Of course that's going to have
some impact on the economy and
that will be a negative impact
on the Mid-American economy.
Even with that the construction
industry is still growing.
Even with these higher mortgage
rates I expect the construction
industry to continue to expand."
Job growth remains positive but
has slowed in the first part of
the year to 1 percent compared
to 1.5 percent over the same
time last year.
Regional job growth is expected
to remain positive but sluggish.
And, as is always the case in
rural America, much of the
economic outlook will be
determined by commodity prices.
Professor Ernie Goss: "There are
some real issues in terms of
agricultural commodity prices
coming down.
A lot of that we can trace to a
stronger dollar but also we got
record yields out there, record
crop coming to the market.
That's going to push prices down
and that's going to have some
negative impact on businesses we
survey but even with that the
agricultural sector is still
quite strong."
Officials say U.S.
wildfires are charring twice as
many acres annually as they did
40 years ago, and the
combination of persistent
drought, record-breaking heat
and increasing populations in or
near wild areas is adding up to
increasingly dangerous fires.
That point was driven home
dramatically this week in
Arizona, where a lethal blaze
fueled by dry brush and shifting
winds in excess of 40 miles per
hour resulted in the worst
firefighting tragedy in more
than a decade.
At one point, the blaze advanced
four miles in just 20 minutes.
Firefighters had contained 80
percent of the blaze by Friday,
but not before the flames
resulted in a tragic loss of
life.
The wildfire season of 2013 took
a deadly turn this week as 19
firefighters were killed in the
line of duty.
The elite crew members were
overtaken as a quick moving fire
blazed near the central Arizona
town of Yarnell.
In the deadliest single day for
U.S.
firefighters since 9/11 and the
worst wildfire disaster in
decades, nineteen members of
Granite Mountain Hotshots
perished.
Based in Prescott, Arizona at
the city's fire department, the
specially trained crew would
often hike for miles into the
wilderness to build lines of
protection between people and
fires.
Mike Bracon: "You know this fire
was very radical in its
behavior.
The fuels were very dry, the
relative humidity was low, the
wind coming out of the south,
it's turned around on us because
of monsoon action this
afternoon.
That's what caused the deaths,
it's the change and the radical
behavior of the burning fuels.
They were just caught up in a
bad situation."
The fire was caused from a
lightning strike on Friday and
blackened 2,000 acres in just
two days.
By week's end, more than 13
square miles had been scorched
and 600 firefighters were
deployed in the battle.
In many cases residents escaped
moments before the flames
destroyed hundreds of homes.
Chuck Overmyer: "We had to drive
through the flames to drive out
of our gate.
It was already that bad.
Within two minutes, I'd say if
we waited another two or three
minutes, we wouldn't have gotten
out of there.
It was that fast coming in."
Last year, wildfires charred
more than 9 million acres.
In the wake of what was the
worst wildfire season in U.S.
history, the Obama
administration is proposing a 31
percent cut in funding for the
government's central fire
prevention program.
This week, a bipartisan group of
U.S.
senators from the region urged
the Obama Administration to
prioritize wildfire prevention.
The coalition favors preserving
funds for programs that clear
potentially hazardous dead trees
and brush to fund efforts to
fight the increasingly
destructive blazes.
Eight of the most destructive
wildfire years in U.S.
history have been since 2000.
Officials say at least 65
million acres of federal land -
an area larger than Oregon - is
at risk for fires.
Drought, rising temperatures and
an increasing number of people
residing in heavily timbered
areas are expected to increase
that risk.
One factor contributing to the
wildfires, is recording breaking
heat.
The mercury hit a recording
breaking 129 degrees in Death
Valley, California Sunday,
setting an all-time mark for the
highest temperature ever
recorded in the month of June,
anywhere in the United States.
Las Vegas finished last month
with a high of 117 en route to
that city's hottest June on
record.
And what happened in Vegas
didn't stay in Vegas this time
as Phoenix endured a four-day
stretch of temperatures above
115 degrees.
While the tinder-dry conditions
are readily apparent in the
latest Drought Monitor, this
week's survey revealed continued
improvement elsewhere.
Currently, 50.8 percent of the
contiguous U.S.
is gripped in drought.
That's the smallest area since
January of 2012.
And last year at this time, more
than three-quarters of the
nation was locked in the worst
drought in half a century.
Nevertheless, most of America's
row crops are in average
condition.
But cattle grazing areas ---
particularly in the southwest,
are withering.
In Arizona and New Mexico, 99
percent of the pastures and
rangeland are rated fair to very
poor.
Commodity markets were closed
Thursday in observance of
Independence Day.
And during an abbreviated
trading week grain prices were
mostly flat to lower this week
as the trade reacted to a
surging U.S.
dollar.
For the week, September wheat
gained 2 cents, while the
September corn contract moved 22
cents lower.
Old crop soybean prices,
however, traded sideways, as the
August contract gained a penny.
Nearby meal prices, however,
lost $6.15 per ton.
In the softs, cotton pulled out
of its recent slump with an
upward move of $1 per
hundredweight.
In the dairy market, July Class
III milk lost 50 cents while the
August contract moved 25 cents
lower.
Over in livestock, the August
cattle contract lost 7 cents.
Nearby feeders advanced by
$2.35.
And the August lean hog contract
posted a weekly gain of 30
cents.
In the financials, the Euro lost
190 basis points against the
dollar.
Crude oil soared to a 14-month
high Friday capping a devilish
weekly move of $6.66 per barrel.
Comex Gold lost $11 per ounce.
And the Goldman Sachs Commodity
Index gained more than 20 points
to settle at 633-even.
Pearson: Here now to lend us his
insight on these and other
trends is one of our regular
market analysts, Alan Brugler.
Alan, welcome back.
Brugler: It's always a pleasure
to be here.
Pearson: And we're glad to have
you.
Alan, there's been a lot going
on, on the world stage.
As we look over to the Middle
East, as we look at Egypt and
the recent events that have
transpired there, talk to us a
little bit about how that is
playing in the markets,
particularly in crude.
Brugler: Well, you got a big
break out in crude oil prices
this week, both the Brent and
the WTI that we trade here,
basically out of concern that
supplies either -- the domestic
production, which isn't that
large in Egypt, or more
importantly the flow of the oil
through the Suez Canal.
If that gets interrupted, Brent
crude in particularly, becomes
affected.
That is the European market.
There's some question if that
were to happen if the U.S.
would start to export some of
our crude back to Europe or to
the other countries that are
affected there.
Obviously that would have an
impact here so we did see a big
jump in crude oil prices this
week.
Pearson: And this spike in
prices, obviously it's fear
trade, probably going to
continue until things settle
down, until Egypt, the riots
sort of stop or at least slow?
Brugler: Well, certainly there's
uncertainty, okay, and yes it
could continue, technically with
the break out we could go to
$114 a barrel pretty easily.
So there's potential for it to
go up if the uncertainty
continues there and in fact
something happens with the Suez.
Pearson: And with nothing on the
horizon we'll just keep trading
until we see some news, until
that uncertainty becomes
certainty one way or another.
Brugler: Yes.
Pearson: Well let's take a look
at the wheat market.
As we saw, the September
contract climbed a little bit
this week.
Harvest is ongoing.
What are your thoughts?
Brugler: Well, what we're seeing
is that the soft red winter
wheat, which is traded in
Chicago, has continued to show
very good yields.
Harvest has slowed down a little
bit because of the rain in the
eastern Corn Belt, Ohio, Indiana
area particularly.
But the yields have been as
advertised with those high crop
condition ratings.
The hard red winter wheat was
drought inflicted, as you know,
and yields are a little lower
there.
You are getting some positive
yield reports but it's mostly
from people who had very low
expectations.
We did get a report from one of
the major consulting firms this
week that lowered their hard red
winter wheat production, they
are 50 million bushels below
USDA now and we'll see next week
with the USDA report if they
agree with that private
assessment.
Pearson: And with that in mind,
what is your trend for prices?
What is your advice to producers
out there?
Brugler: Well, normally we get
some kind of a seasonal low for
Kansas City and Chicago wheat
during the month -- it can
happen anytime between May and
September but frequently it is
in middle to late July.
The market is technically
oversold so I'm looking for a
low here in the next week or
two.
Could get extended if the global
situation deteriorates but we're
thinking the low pretty soon
here in those two classes of
wheat.
Pearson: Alright, and the best
way for a producer to capitalize
on it?
Just look at selling?
Brugler: Well, you lift your
hedges, when you find that low
try and ride a bounce back into
September and then decide if you
need to sell some more.
Pearson: Alright, well let's
take a look at the corn market.
We still have that inverse
continuing with July obviously
going, expiring and the
September contract still trading
as new crop.
We've seen it continue to drop
in this recent sell off.
What are your thoughts on folks
with old crop corn -- let's talk
that first of all -- with
anything left in the bin?
Brugler: Well, you're counting
on the basis to bail you out
there.
The September is clearly not
following the July.
Sometimes you get a little kick
up as July goes off the board
but we don't anticipate
September would try to go off,
up where July is at.
The inverse will be maintained.
But what you are seeing is the
basis against the September is
improving, we were gaining three
or four cents on flat price this
week even though the September
board was going down.
So the market still needs that
old crop corn.
Sometime late July, early August
your end user is going to decide
he is covered, he's got enough
to make it, he's feeding wheat
or something and then you tend
to break the basis and slide
into a harvest low.
Pearson: Alright, now as we look
at new crop potential out there
as now we've got a 4 in front of
December corn.
What is your advice to
producers?
How do you handle this?
Brugler: What I've been
characterizing it as is it is a
bear market, the bear is running
towards $3.80 or $4.00.
We're shooting at him, okay.
He's got -- there's three
bullets.
The first one he dodged which
was the crop report on the 28th
of June.
The second one would be
pollination in late July, early
August.
The crop is running late.
In fact, the forecasts right now
are for cooler than normal temps
for the next couple of weeks
which will not help it catch up.
The third one is that you have
some kind of an early freeze or
even a normal freeze that causes
some loss of production.
If he misses, if we miss with
all three bullets then we're
going to be in that $4.00,
perhaps even sub-$4.00 range for
the fall low.
If one of those bullets hits
because of pollination or an
early freeze we can still see
$5.80, $5.90 prices at some
point.
Pearson: Okay.
So for producers who maybe
haven't sold as many bushels as
they would have liked to as they
were hopefully, as they were
waiting for that crop report
maybe to spark the bulls into
action, hold off?
What is the best way to market
in this uncertainty?
Brugler: I think the market is
oversold at this point.
It could go down another 15, 20
cents potentially but we've got
the crop report this week and,
of course, a tendency to get
more nervous as we get into
August and into that late July
pollination period.
So we've recommended you buy
$5.40 Dec puts or at this point
you'd probably buy $5.00 puts to
try and put a floor under the
price if you don't have enough
sold and then just kind of wait
it out.
Pearson: Until we get a scare,
something to potentially push
the market higher.
Now, as we take a look at
soybeans, we're still seeing a
fair amount of international
demand for beans.
How is that shaping prices as we
work through the rest of summer?
Brugler: Well, as you point,
we're getting good demand, even
on old crop.
We've sold another hundred and
some thousand tons last week on
the export sales report for old
crop.
And that means that we are going
to be very tight on supplies
right up into the end of the
marketing year.
And we will start to see some
limited new crop harvest in
August, in beans particularly.
But I think things are going to
stay tight.
You're going to see August be
fairly well supported as a
futures contract because getting
delivery of August beans is
still, means you can still use
them before the next marketing
year, okay.
Corn, with September corn, it's
too late by the time you get the
deliveries.
So I think you'll see some
pretty good support there.
The meal export sales continue
to run very strong.
We're at 102% of USDA's forecast
for the year in terms of
commitments and that means the
crusher has to keep trying to
buy these remaining old crop
beans.
Pearson: And that's going to
continue.
We're not seeing any signs of a
slowdown in meal demand looking
to the future.
Brugler: Yeah, you're seeing a
little bit of resistance.
They're trying to find ways to
blend in some DDGs or a little
bit of feed wheat or something
to ease the dependence, if you
will.
Probably the biggest threat to
beans would be if we start to
see a big import program out of
South America that supplements
the U.S.
supply before the end of the
marketing year.
And there's definitely been
attempts to do that but they
have been kind of stymied by the
delays in shipping.
Brazilian shipping is still 60
days behind, Argentina about 30
days.
Pearson: And that's been the
story all summer coming out of
South America.
Now, as we look at new crop
beans what is your thought
there?
Brugler: Well, it's bearish if
we get the kind of crop that
everybody thinks we have.
All I hear is, yeah, they look
pretty good.
Okay, I'm sure somebody will
call in and say no, they don't
here.
But for the most part the crop
is in pretty good shape.
The private estimates are 3.3 to
3.4 billion bushels.
If that happens we'll have a 250
to 300 million bushel carryout
and that does lower the price
estimate.
Having said that, the Chinese
are clearly having another small
crop.
They're already fairly
aggressively buying new crop.
It looks like they'll probably
buy at least 6 million tons more
this coming year than they did
the past year.
The rest of the world market is
still trying to deal with the
balance sheet of the U.S.
and South America having big
crops simultaneously.
But I think it will be fairly
well supported.
The long-term trendline in
soybeans is around $12.00 or
$12.20.
We could go below that because
of new crop supplies being
abundant.
Pearson: Okay.
As we look at exactly how this
harvest and how this marketing
year is going to play out.
Now, advice to producers?
Again, maybe they haven't sold
everything that they'd hoped to.
Would this be a good time to --
Brugler: Well, we've been more,
actually more aggressive in
selling soybeans than we have on
corn and wheat just because of
this, the fact that South
America is such a big competitor
compared to the U.S.
At this point, again, my best
solution is probably a put
spread of some kind to put a
floor under it and then wait for
something to happen weather wise
either here or in South American
planting next fall.
Pearson: Get some margin
protection in place and then
wait for a potential --
Brugler: Protect the margin
while you still have some.
Pearson: Certainly, certainly.
Well now let's take a look at
livestock.
As we look over at live cattle
futures we'd been on a bit of a
run recently, past two weeks,
we'd seen a nice rise in live
cattle futures.
This week seemed to stall out a
little bit.
How would you interpret what
happened this week in --
Brugler: Well, two things.
Well, really three.
Fundamentally we have a problem
with cash trade at $119 and the
board is now ahead of the cash
whereas for most of the spring
we were inverse, we had strong
basis.
Secondly, export sales have not
been that good.
This strong dollar is hurting us
there.
And then third was technical.
We got up to the 100 day moving
average, the market was
overbought after that run up
that you mentioned and we just
need to let a few of the longs
out of the market and kind of
ease off the overbought
conditions.
So I think the market takes a
little bit of a breather here
but we're still fairly positive
and the market is too.
If you look at the futures for
December they're considerably
higher than the August or the
October.
So we're still anticipating
fairly tight beef supplies in
the second half of the year.
Pearson: And since we're looking
at that premium into December
the market is anticipating
continued economic improvement,
you assume, to help get us to
that premium?
Brugler: Well, we've got tighter
supply, just looking at the way
the numbers finish off.
But we're assuming some
improvement in consumer demand
or at least being able to pay
the prices that we're asking.
Wholesale beef prices have
backed off from the peak.
Choice had been up to $210, now
we're down 20 some dollars off
of that and that's making it a
little easier to sell the stuff.
Pearson: Alright.
Now taking a look at feeders, we
did see some strength this week
in the feeder cattle market.
How much of that is attributable
to having a 4 in front of that
December corn contract.
Brugler: Well, I think that's a
lot of it.
The equation is if live cattle
go up, feeders can go up.
If corn goes down, feeders can
go up.
And in this case corn -- cattle
kind of held their own this week
but the corn got cheaper.
So you saw that bid into the
price of the feeders.
To the degree that pasture
conditions are improving that
also tends to make you think
maybe they'll keep a few more
feeders out on grass rather than
market them.
So that's part of the equation
too, although a relatively minor
part.
Pearson: And speaking of that,
what does the supply side look
like as we get into fall?
How are doing on the supply of
feeder calves throughout the
rest of the year?
Brugler: Well, we know the macro
number, which is we're at a 50
year low in cattle numbers and
we know the calf crop was down.
Unfortunately we don't have as
good of data with some of the
USDA budget cuts as far as the
cattle inventory.
But at this point we're still,
we have fewer animals probably
to come into the feedlot and
where that will really become
important is if the feeder
cow-calf guy decides he wants to
hold back some heifers,
typically when you bought on the
cattle cycle then you have a
shortage of feeders because more
heifers go back to be mama cows.
Pearson: They keep them retained
and that is going to cause a
shortage looking at the feeder
side.
Brugler: Right.
Pearson: Now, let's take a look
at lean hogs.
Again, we've had a story of
strength recently in the lean
hog market.
What is driving it?
And how long can we expect it to
continue?
Brugler: Well, basically we've
had a real strong move in the
pork carcass cutout value, what
the packer receives for the
major pieces of the hog.
And that bottomed back in March.
It is a fairly normal pattern to
rise into summer because hog
marketings decline during this
time of the year.
It has been given a real boost
by bacon demand.
I saw the other day there's over
3,000 different menu items that
have bacon in them now and even
some things you drink.
Pearson: That's right, that's
right.
Brugler: And that has translated
fairly strong pork belly demand
which is one of the major
components off of that hog
carcass.
That could be the seed of
destruction though also because
that, the peak of bacon demand
typically is BLT season here in
the summertime, your bacon,
lettuce and tomato sandwiches.
If it starts to fall off then we
need to see demand for hams or
loins or some other component
pick up.
Pearson: Okay.
So it's kind of all hanging on
bacon, more or less, at this
point.
Brugler: Yeah.
We're somewhere close to a top
in the hogs, between now and
August for sure, just from a
seasonal standpoint.
Pearson: Alright.
Well thank you so much, Alan.
Appreciate you being with us
tonight.
Brugler: My pleasure.
Pearson: That wraps up this
edition of Market to Market.
But if you'd like more
information from Alan on where
these markets just may be headed
visit the Market Plus page at
our website.
You'll find expanded market
analysis, audio podcasts and
streaming video of our program
as well as links to our Twitter
feed and Facebook account all
free at the Market to Market
website.
Be sure to join us again next
week when we'll examine the
impact of the government's
latest estimates on supply and
demand.
Until then, thanks for watching.
I'm Mike Pearson.
Have a great week.
Market to Market is a production
of Iowa Public Television which
is solely responsible for its
content.
Funding for Market to Market is
provided by DuPont Pioneer,
working with growers to match
the right product to the right
acre.
Science with service, delivering
success.