Market to Market (February 22, 2019)

Coming up on Market to
Market — Negotiations with China continue, but
the trade war isn’t the only battle. And market analysis
with Dan Hueber, next. Pioneer Hybrid
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Friday, February 22 edition of Market to
Market, the Weekly Journal of Rural America. Hello, I’m Delaney Howell. The effects of a trade war
with China weigh on rural America. The Creighton University
Rural Mainstreet Index, a survey of bank CEO’s, fell
just over 3 points but remained above
growth neutral. Banker confidence remains
below the midline as tariffs, trade tensions
and low agricultural prices pressed
the index lower. Worldwide stock markets
have been reacting positively to trade
negotiations as the Dow Jones Industrial Average
and China’s Hang Seng moved higher. It is against this
backdrop we are joined by Tom Vilsack, President
and CEO of the U.S. Dairy Export Council and
Kirk Leeds, CEO of the Iowa Soybean Association. Gentlemen, welcome
to both of you. Vilsack: It’s
good to be here. Leeds: It’s
great to be here. Howell: We have literally
breaking news as we are recording this section
right now of the show. The announcement, or
potential rumored announcement of $1.2
trillion in buys coming from China on U.S. all products, not just
agricultural products. And I think the word you
used, and I’ll start with you Secretary Vilsack,
was skepticism. Vilsack: Well, I think
until we know the details, until we know of what
period of time, until we know is this in the
context of other agreements that the
parties have reached, I think at this point in
time I think there is an effort to try to get
something on the table so that March 1 comes
without the necessity of escalating this trade
tension with additional tariffs. I think they have been
working extremely hard in a number of areas but I
think there’s still a lot of work to do, especially
in terms of the structural reforms that the
administration is seeking from China. So this may be an effort
to try to buy some time. Hopefully that does
include agricultural sales. Kirk and the farmers, the
soybean farmers hope it includes some soybean
purchases and obviously I’d like to see some
dairy being sold as well. Howell: Kirk, any
comments to add to that? Leeds: Well, again, I
think it’s just a very large number of course. And without any details we
would all be speculating. It was hard enough really
to imagine the Chinese buying $30 billion
additional commodities, agricultural products, let
alone trying to get your mind around $1.2 trillion. That’s a significant
increase over what they’re currently buying. So, again, without details
it would be very dangerous I think to speculate. But there is a lot of work
that needs to get done, absolutely true. Vilsack: This
conversation, this trade discussion with China
started on the belief that there was an imbalance
between the trade relationships between the
two countries and I think the Chinese have
interpreted that to mean that if we just
buy more U.S. products that will take
care of everything. But the reality is there
are a lot of structural issues at play here in
terms of how China treats U.S. business interest in
China, unfairly, in a discriminatory way and the
administration I think is calling the Chinese out on
this and it’s going to be incredibly difficult for
the Chinese to acknowledge that they have to change
their way of doing business. And that’s why these
negotiations may drag out by March 1st and may
include sort of an incremental set of steps
towards ultimately, hopefully a resolution. Howell: Let’s talk a
little bit about that, the incremental steps or the
March 1st deadline is quickly approaching. Even if we have some sort
of “deal” in place the next question is what
happens after that as far as enforcement
or next steps? It doesn’t sound like it’s
going to be a fast process from what you’re saying. Vilsack: Well, I think
that there has been some conversation in the media
about six MOU’s, six separate agreements, one
on agriculture, technology transfer, services and
things of that nature. But I think where the
stumbling block is on those MOU’s is exactly how
will these be enforced? The Chinese can agree
to just about anything. But the question is will
they actually follow through? And is there some way of
making sure that if they don’t follow through that
there is a mechanism for re-establishing the
tariffs or some kind of penalty. I think that is where
these negotiations are. And then there is the
whole set of issues, the very significant
structural changes in terms of currency, in
terms of the conditions under which American
businesses can do business in China, that have to be
discussed, which are even more difficult
to negotiate. So I would imagine that
this will be a stepped process. I think they’re serious. Ambassador Lighthizer and
the Treasury Secretary, are engaged in these
conversations, which indicates that it’s
a very high level. Howell: It almost sounds
then as if we’re saying it’s more of the
perception of these trade talks that is more
important right now to the commodities and to the
producers rather than the reality of what
actually happens. Vilsack: Well, it gives
people a sense of hope that actually there will
be a resolution that will restore a relationship
that has been very beneficial to American
agriculture no question. And I think the
administration is also suggesting at least as far
as I can see that we also need to look at other
markets, additional markets to supplement the
Chinese market so that we’re not overly dependent
on a single market. Leeds: Yeah, I think
there has been a lot of skepticism from the
beginning about what really are the true goals
of this administration as it relates to trade, not
only in China, but around the world. And specifically to China
you have this trade imbalance the Secretary
mentioned which has been at front of those
discussions. But the real issues, the
issues that have been going on for much longer,
are the issues of intellectual property and
tech transfer and the subsidies that the
government provides in China. Those are the issues
that are difficult. Those issues will not be
resolved by March 1st. And the question becomes
is whether this $1.2 trillion or whatever the
offer might be, whether that is enough to handle
the politics both here in the United States
and in China. In the Far East in China
they talk about saving face. Is this agreement going to
give the Chinese and the Americans something
to claim as victory? Certainly publicly a lot
of people think if you just simply buy more
products that solves the problem. But again, that was not
the fundamental issue we went into this. And some of us have been
skeptical that at the end of the day this was really
more a window dressing than it was truly to go
after these core issues, which have been issues
that went back to the Obama administration, the
Clinton administration certainly as well. So that’s the real
question I think about all these negotiations. Howell: And with the
negotiations do we have a real winner? Is someone winning
at this point? A war, right, you have
a winner and a loser theoretically. Are we have that with
this kind of a trade war? Vilsack: I think at this
point in time it may very well be that both
countries have lost. Seriously the economies in
both the United States and China have suffered
as a result. Certainly I can speak
specifically to the dairy industry, we have seen
significant drop off in terms of trade
opportunities in China and whether or not we will be
able to ever regain the markets that we had
advantages in is yet to be seen. So I think there is a
pressure, political pressure is growing in
both countries to get something done. The March 1 deadline
I think is critically important because that
is the deadline that President Trump has set
to determine additional tariffs and I would say
that if additional tariffs were assessed that there
would be a very depressed feeling if that
were to occur. Leeds: Yeah, I would add
I think the damage has already been done. From a soybean perspective
we have already caused long-term damage to the
relationship between China and the United States as
it relates to soybeans. We might get some
agreement the Chinese government commits
to buying additional soybeans. But remember, we were
exporting more than 30 million metric tons to
China before all this started. We’ll be lucky to sell
them 10 million metric tons now unless, again,
there is some government edict that comes forward. So when you lose that kind
of market you have that short-term gain, I’ve said
from the beginning this is not really a 2018 story,
this has always been a 2019 story because that
is where the damage from these tariffs and
counter-tariffs are going to impact soybean farmers. Even the USDA yesterday
said this is going to take us 8to 10 years to work
through these troubling times. The damage has
already been done. Vilsack: Here’s the
fundamental problem with this, I think everybody
would agree that China needs to be called
out on its practices. But the reality is the
United States went in alone. And the question is, when
was the last time the U.S. went to war
without an ally? And why didn’t we
basically formulate a coalition of nations
that are similarly being treated unfairly by China
and go in block as a global community to China
and say you’ve got to change your way
of doing business? By going it alone we put a
fairly significant target on the backs of American
farmers and ranchers and the Chinese understood
that, they understood the politics of it and they
took full advantage of it. So Kirk is right, it’s
tremendously prejudicial to the soybean growers
because once that market is lost it is really,
really difficult to get it back. Howell: Are we past the
point then of creating allies in other
global players? Vilsack: I wouldn’t
be surprised if this administration gets some
kind of interim deal that allows them to save
face and allows them to proclaim a bit of a
victory and then for the more structural changes,
the long-term changes that really this is all about,
I would think they might take a step back and
try to formulate that coalition, try to bring
the Europeans into it, bring the Japanese, the
Koreans, and others into this so that there is a
much more significant impact on the Chinese
economy than just what we can provide. Leeds: That’s going to
be critically important. But again, I want to be
optimistic that will happen. But again, we still don’t
have a signed deal with Mexico and Canada. We’re going to have
European issues that are likely coming up
because of automobiles. Again, it’s hard to start
getting a coalition after the fact. But these fundamental
issues that we talked about are important to
Japan, Korea, all of our European partners as well,
so you’d like to think that could happen and
certainly I think it’s going to have to happen. I don’t believe we have
the ability on our own to force China to make these
structural changes. I just don’t
think it’s doable. Howell: I want to come
back to talking about the EU, USMCA and other trade
agreements here in just a moment. But Kirk, I want to delve
in just a little bit farther to a point you
made earlier about soybeans being impacted in
the 2018-2019 marketing year, this current
marketing year that we are in, as oppose to the
previous marketing year. Why do you think we saw
MFP payments or that market facilitation
program happen in the previous marketing year
as opposed to this one? And Secretary Perdue said
just this week again, we’re not going
to see one. Leeds: Well, I think first
of all, we all know it’s political and there was
certainly some gains that were made politically
because of those payments. But I also think the
Secretary and the President I believe
recognize that this was indeed doing real damage
to farmers, particularly soybean farmers. I’ve heard the Secretary,
I’ve been at places where he has given a speech and
said they are one time and they’re done, we’re going
to make those payments last year because the
damage was done last year. And the farmers will
respond to the market, that they have always
responded to market signals, to change
crop rotations. But the challenge that we
have here in Iowa is we do corn and soybeans really
well and right now the market is not sending a
particularly strong signal that it wants a
whole lot more corn. In fact, if we saw a
significant shift here what would we do
with all of the corn? And so we have
depressed prices. I would suggest that the
market has still kind of factored in a belief that
we’re going to have a resolution with
China on soybeans. You could easily see this
market fall quite a bit if this indeed blows up. So I think the market
transition payments are still necessary. I don’t think we’re going
to see them politically at least unless we have a
complete failure in these negotiations. Howell: Gentlemen,
thank you both so much. Thank you, Tom Vilsack
and Kirk Leeds for your insight. To catch the full
interview with Tom Vilsack and Kirk Leeds you can
head to our YouTube page or
to catch this and more, including trade with
Japan, the European Union and what’s going on
in South America. Next, the Market
to Market report. A week of trade rumors and
a confirmed high level meeting pushed much of the
commodity markets higher. For the week, May wheat
lost 15 cents and the nearby corn contract
rose 2 cents. The May soybean contract
finished 2 cents higher after battling back
from a weekend low. The move was fed by buzz
over letters of agreement with China and a Friday
meeting between President Trump and Chinese
Vice Premier Lew Hee. May meal dropped
$1.10 per ton. May cotton grew $1.15
per hundredweight. Over in the dairy parlor,
March Class III milk futures gained 39 cents. The livestock
market was mixed. April cattle put on $1.70. March feeders
added 30 cents. And the April lean hog
contract shed $4.08. In the currency
markets, the U.S. Dollar index fell 5 ticks. March crude oil gained
$1.28 per barrel. COMEX Gold added
$10.70 per ounce. And the Goldman Sachs
Commodity Index gained more than 4 points
to finish at 429.80. Joining us now to offer
insight on these and other trends is one of our
regular market analysts, Dan Hueber. Dan, welcome back. Hueber: Thanks very
much, great to be here. Howell: Dan, we spent the
first half of the show talking about a lot of the
announcements in trade that came out
here on Friday. And I’ve got to ask, from
a market perspective, this announcement or this
rumored announcement that we got here on Friday,
this $1.2 trillion in potential buys of U.S. products by China, does
that matter to the commodity markets? Hueber: Oh, I think
it certainly matters. In fact, it’s the
overwhelming story that really even before we
heard how many dollars may be involved in this just
the idea that they could have a breakthrough on
the negotiations, that we could finally be putting
this trade war behind us, certainly elevated prices
off of what were pretty depressed levels. We started this week there
was not much good to talk about, we drove all
three commodities, corn, soybeans and wheat, down
to levels we had not seen in months and not that
this is necessarily a major trend changer but
boy it lifts that cloud that has really been
hanging over the market for ten months now. Howell: One higher level
question for you before we transition here
into wheat. Monday’s open, we saw this
announcement here right before the close on
Friday, Monday where do the markets
head from here? Are they going to react to
this $1.2 trillion rumor? Hueber: Well, I certainly
think it’s going to continue to
stabilize the market. By the time we get through
the weekend everybody is going to have a little
more time to assess it so unless they come up with
some more specifics, which is probably a little bit
doubtful because we really haven’t even come to an
agreement per se yet, but it should help stabilize
things a little bit. It gave us a great boost
just on overnight on the thoughts that we’re coming
closer to an arrangement. It didn’t really hold
great gains per se for the close. But regardless we’re back
into the trading range that really we’ve been
in for months here now. So to go above and beyond
here we’re going to need something a little
more substantial. But regardless, like I
say, it takes away some of the overhanging clouds
that have been punishing us for months. Howell: Definitely,
definitely. Let’s talk about the wheat
markets because they had quite the week, traded
down quite a few cents every day here, closed
finally at the end of the week up a couple of cents. But what’s going on there? Hueber: Unfortunately the
wheat market is one that just can’t seem to catch a
break when it comes to the export business. Just when we were starting
to get a little more optimistic that Russia had
priced itself out of wheat in the market, we were
going to get competitive, France basically stepped
up, or I should say stepped down I guess, they
really took their wheat prices down to the point
where they were really the most competitive in the
world and even in the Asian markets here you’ve
got Australia with a tough crop, looks like they’ve
got another tough crop coming, they were not
really capturing that business into the Far
East, they’re going to Argentina at this point
and picking up their wheat. So we have just, every
time we think we’re right there as far as getting
competitive again somebody else steps in and takes
that business and even the Egyptian tender this week
we were not competitive, the U.S. stepped away from them and
they went to other markets out there. Howell: Dan, how much
lower are we going to have to see wheat prices head
before we are competitive again on the market? Hueber: I guess I would
tend to say with the breakdown we did witness
this week we probably took ourselves to low enough
levels, not that we couldn’t flirt around
these levels for another week or so, but I think
the time we get to March we’ll start to refocus
a little bit on growing conditions, what’s going
to be ahead, acreage, those type of things take
their minds off of where we haven’t been
competitive. So I think we have 90%,
95% of the worst of it out of the way. So things should look a
little better as you move into spring. Howell: Okay. What is the story here
when we look at the corn markets? We had the USDA data dump
here at the end of the week. Let’s talk about ending
stocks in particular. We were down from what
they pegged us at earlier this year. But they only increased
exports I think 25 million bushels. Where are we losing I
guess those bushels from? Hueber: Well, again, back
with the exports were bumped up 25 million over
this year but of course I think they came back and
if you go back to the February supply and demand
report surprisingly they dropped domestic usage
and I think everybody was scratching their heads a
little bit where is that really coming from, hog
numbers are certainly not down, cattle numbers were
maybe slowing the growth in the cattle inventory
but we’re still at 1% higher even on the on feed
numbers here today, or 2% higher I think on the
on feed numbers today. So I think everybody was a
little bit questioning why did they drop the
domestic usage? If they were going to make
a cut maybe it should have been in ethanol and they
took it more out of domestic feed. So I think that has been
compensated again as they look out in the next year. And realistically yes, at
1.65 billion projection for ending stocks a year
from now is still very ample but it is a
reduction from where we are this year. So the old adage is if
you’re taking ending stocks now you should take
prices steady to higher. So it’s not really a,
granted we have a lot of weather, we don’t really
know what the acreage is going to be yet, but
the outlook on corn is certainly not a negative
one at this point in time. Howell: Is it enough of I
guess a non-negative sign in the corn markets to
continue to break us up higher? We hit those lower lows
this week, $3.70 mark and held there. Do we continue
going higher? Hueber: I think the upside
is still pretty limited. I think there’s going to
have to be a combination of two factors
moving forward. Once we get beyond say the
end of March when we get the acreage numbers out
there, one is we’re going to need to have a weather
issue, and I think probably beyond that I
think even with a weather issue unless we see the
dollar turn lower, and I think the probability is
decent that it will, but until we see that dollar
turn lower we really are not going to get the
commodity markets or at least the ag commodity
markets excited. Howell: Let’s talk about
the acreage outlook here for 2019. We’ve got a question here. Dustin in Granger, Iowa
said, assuming USDA’s outlook on planting
intentions are correct and assuming trendline yields
in corn and beans, what does our carryout look
like for the end of the next marketing year? Hueber: Sure. And here again in corn
that is where they actually came back
with a reduction. So they took us about
5% lower than we are projected this year. So again, even with the
larger acreage I think they pegged a 176
trendline yield, trade was thinking it could have
been a little bit higher than that, but starting
with that base in there that really keeps a floor
under the corn market. Now, is it enough when you
look at new crop corn, seems like every time we
get around $4 a bushel it tends to run out of steam,
yes I think that’s still the case. It’s not enough to really
accelerate us into significantly higher
prices, particularly considering the
increase in acreage. But on the same token, if
we’re coming up with lower ending stocks that’s
certainly not a negative situation. Howell: What’s the story
then for the soybean ending stocks? Hueber: Soybean ending
stocks interestingly enough with the slightly
reduced yield as compared to what many were thinking
I think a lot of people thought we were going
to come up closer to 51 bushels, they were down
around 49.5 with the reduced acres, it’s a
two-edged sword, yes it’s a lower ending stocks
but I think we were — Howell: 845 million
though, is that enough to make a difference? Hueber: Well,
psychologically it helps. It’s not enough to sustain
a rally by any stretch of the imagination and any
way you slice it 845 million bushel beans
is a lot of beans. So something else is going
to have to come into the picture to make
that change. And even with China coming
back in and purchasing, boy, we’re behind the
eight ball for 2019, we maybe can look out to 2020
for some improvements for that. Howell: So is that really
what we have to wait for, something big like that to
get us out of this higher, or get us through the
higher end of the trading range? Hueber: Well, yes, and
granted we’re far enough along in the South
American harvest at this point, there’s a question
mark is it going to be 112 million metric tons, 115? Any way you look at it
it’s either going to be the biggest or the second
largest soybean crop still out of Brazil. So even that is not going
to be a major mover. The question then becomes
what happens a year from now in South America
because the new President in that country has
certainly been a strong proponent of
increasing acreage. They have definitely said
the door is open for investment and China and
other nations have been down there and this time
not so much investing in the production but
they’re investing in infrastructure, new rail,
new port facilities, they’re going to be a
force to be reckoned with for many years to come. Howell: Yes,
that they are. Dan, we’re going to save
cotton for Market Plus. Folks, you can get Market
Plus online on podcasts and what not. Dan, let’s talk about
the live cattle markets. We pulled back here,
posted a new high in the April live cattle markets,
pulled back on Thursday. Why? Hueber: Well, one I think
just dollars and cents. When you start looking at
the competitive nature of pork versus beef at this
point in time we’re really stretching that rubber
band out a little bit too far. If you’re really going to
go to the retail counter, granted there’s going to
be a certain amount of beef people are going to
want to consume, but pork is going to be extremely
competitive against it and I think we just stretch
that out too far. Yesterday particularly we
saw that snap back pretty dramatically. The cattle on feed reports
today we tend to be neutral, maybe even a
little bit positive, because the placements
were weak and that is the one thing that has
continued to support the cattle market is we’re
just not putting the numbers into the feedlots,
the weights have been light on marketings
— Howell: Because of weather? Hueber: Certainly weather
related and probably that is the major factor is the
weather, it’s not because the guys have
had incentive. But after having a little
bit of a struggle earlier in the year I think people
are quick to cash in on the profits when they can. So we’re not overfeeding
and of course that is one of the issues we’re having
over in the hogs right now is just far too much pork
in the market at this point. Howell: A quick question
for you, when you look at the cattle markets as a
whole we have been putting in higher highs,
especially in the live cattle side of things,
and higher lows. Does that attract spec
money into the live cattle market? Hueber: Well, of course
that’s the traditional definition of an uptrend. As long as you
consistently put higher highs and higher lows in
you’re in an up market. Yes, money tends to flow
where they think it’s going to show
the best return. That said, they also there
comes a point in time where they look at
relative value as compared to competing products, in
this case we’re going to look at the pork and say
do I get more bang for my buck investing in the hog
sector or do I look at it in the cattle sector? And I think at this point
in time you’re starting to shift that over to hogs. Howell: Let’s
talk about hogs. They had a crazy week as
well, limit up a couple of days and then down
yesterday I believe it was, African swine fever
or something else causing that? Hueber: Well, I think
we’ve had a number of situations where the
hog market has been disappointed time
and time again. One, I think everybody was
maybe a little too geared up that this African swine
fever is really going to create a big
export demand. That really hasn’t
materialized. And probably
understandably so. It’s probably the last
half of ’19 if China really steps up and needs
to start bringing pork into their country. So we were premature
in thinking that. Two, if you go back to the
reports, the last hog and pig report, we were
looking at 1%, 2% hogs increases but here we’re
seeing 4%, 5% increase in slaughter numbers,
partially weight, but partially head, so it
would appear that those numbers were understated
so you’ve disappointed the trade in several different
ways which I think has just exacerbated the
problems to the downside. Hopefully we have a
lot of that behind us. Certainly the African
swine fever situation is not going away in China
and could be spreading to some other countries
at this point. So that’s something —
Howell: All right, thank you, Dan. We’ll continue that
discussion in Market Plus. That wraps up the
broadcast portion of Market to Market but
we will keep this conversation going where
we’ll answer more of your questions. You can find it
on our website at Check out our
YouTube channel. This week you can watch
the extended interview. Thank you for watching,
have a great week, I’m Delaney Howell. (music) (music) Market to
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