Market to Market (March 25, 2016)

Coming up on Market to
Market — Obama tries to break through a 55-year
barrier in the name of trade. And the dairy industry
adapts to life under a new subsidy program. Those stories and market
analysis with Don Roose, next. Funding for Market to
Market is provided by Grinnell Mutual. You think differently
about a customer when you stand in the middle
of his dreams. We work to make sure
you get covered right. Grinnell Mutual —
a policy of working together. Information on finding
an agent near you is available at This is the Friday, March
25 edition of Market to Market – the Weekly
Journal of Rural America. Hello, I’m Mike Pearson. U.S. home buyers realized
the American dream by purchasing a new
home last month. The transactions injected
much needed cash into the recovering U.S. economy. According to the Commerce
Department, new-home sales rose 2 percent last month
– slightly behind a year ago. However, data from the
National Association of Realtors shows existing
home sales fell 7.1 percent in February. And the Commerce
Department reported orders for durable goods declined
2.8 percent last month. When big ticket items like
airplanes are removed — the economic indicator
fell 1 percent. — As part of
helping the U.S. economy recover, several
groups, from Main Street to Washington D.C.,
are working to find new markets for
American products. This week, President Obama
took up the cause and became the first president
in 90-years to travel the short 90 miles to Cuba
to open a door closed for more than five decades. Angry ex-pats who escaped
the 1959 revolution took exception to the trip. They were joined by other
critics who cited the country’s poor
human rights record. The president’s Cuban trip
included a meeting with Fidel Castro’s brother
Raul, a baseball game, and dancing the tango
at a state dinner — reinforcing the old adage
that it takes two to tango on trade. Peter Tubbs reports. President Obama became the
first US President since Calvin Coolidge to
visit Cuba this week. The visit was an extension
of Obama’s program to normalize relations
between the US and the Communist nation,
reversing over 50 years of government policy. Obama and Cuban President
Raul Castro had decades of Cold War issues to
discuss, among them Cuba’s emerging privately owned
economy, human rights and the American military
presence at Guantanamo Bay. The President called the
economic embargo of Cuba a relic of the past. President Barak Obama
“And I will keep saying it every chance I get. One of the best ways to
help the Cuban people succeed and improve their
lives would be for the US Congress to lift the
embargo once and for all.” The embargo has also
been costly to the United States, reducing trade of
finished goods by over a billion dollars per
year according to some estimates. However, agricultural
products have had a special exemption from
the embargo since 2002. The U.S. has been shipping over
500 million dollars of everything from grains
to seafood to boxed beef annually, making the
United States Cuba’s largest supplier
of food products. Even with a population of
only 11 million, Cuba must import 70-80
percent of its food. The President acknowledged
that Cuba has made progress in modernizing
its economy: “To its credit, the Cuban
government has adopted some reforms. Cuba is welcoming more
foreign investment. Cubans can now buy and
sell property, and today many Cubans own their
own homes and apartments. It’s easier for Cubans
to travel, to buy a cellphone, for farmers to
start cooperatives, and for a family to start
their own business.” But critics of Obama’s
efforts site a lack of change in Cuba as a reason
to continue the embargo. Rep. Ileana Ros-Lehtinen, R
Florida “President Obama says that human rights
are important to him, but empty words with no
actions to back them up sends the message to the
Castro regime to continue with his repression, and
Castro continues to do so.” Agriculture Secretary
Tom Vilsack joined the President on the tour to
sign agreements to share research data as well as
coordinating the opening of Cuban markets to
American companies. Several agricultural and
commodity trade groups support the move,
including The American Soybean Association. ” Today’s announcement is a
big step forward in terms of expanding the Cuban
marketplace for U.S. soy… Today’s announcement is a
big step forward in terms of expanding the Cuban
marketplace for U.S. soy.” No matter the final
outcome of any trade negotiations, Congress
will have the last word on whether or not the embargo
on the tiny island nation will be lifted
anytime soon. For Market to Market,
I’m Peter Tubbs. Among those searching
for new markets are U.S. dairy farmers. According to the National
Milk Producers Federation, the U.S. herd yields 30 billion
pounds of milk over and above what U.S. consumers can
drink annually. The ever increasing
amount of product has the potential to
depress prices. Under previous Farm Bills,
dairy producers were nearly guaranteed
automatic subsidy payments in lean times. That was until 2014
when the new Farm Bill introduced policies to
wean producers off of government payments. Colleen Bradford
Krantz explains. In 2009, dairies like
Iowa-based Yarrabee Farms were losing as much
as $500 per cow. Subsidies paid through the
government’s former dairy program, Milk Income Loss
Contract, or MILC, helped many farms
survive the year. Most years, 100 percent
of eligible dairy farms received a payment
of some kind. As of 2015, however, a
new program, the Margin Protection Program,
was in place. And new data shows how
dramatic the shift has been. Just over 1 percent, or
261 of the nearly 25,000 U.S. dairy farms enrolled in
MPP in 2015, received anything back from
the government’s insurance-style program. Dane Lang, Yarrabee Farms
– Iowa: “The days of the government giving us money
to milk cows is over.” Fifty-four percent of the
nation’s nearly 44,000 licensed dairy farmsdid
enroll in MPP for 2016, the program’s second year. However, farmers are
required to continue in the program through at
least 2018 once they’ve enrolled. And the percentage of
dairy farms choosing to pay premiums for the
Margin Protection Program’s higher levels
of financial coverage has dropped significantly,
from 56 percent in 2015 to 22 percent in 2016. Dane Lang, Yarrabee Farms
– Iowa: “I think people thought that for the first
time in 40 years, the government hasn’t sent me
a check in the fall, so maybe we shouldn’t
participate in the program.” Most instead paid only a
$100 administrative fee for minimal so-called
“catastrophic” protection. MPP provides financial
assistance to farmersonlywhen the difference
between the price of milk and price of feed falls
below a certain dollar amount. Enrolled dairy farmers are
automatically covered at a minimum $4 margin,
which is considered a catastrophic loss level. Producers can choose to
pay higher premiums to protect a greater
percentage of their income. In 2015, milk prices slid
downward, but feed prices also declined, cancelling
out any advantage the program might have
provided for the majority of producers. Jim Mulhern, president,
National Milk Producers Federation: “Our
experience in the first year of it was such that
people who bought coverage – paid a little bit for
buy-up coverage – found that they didn’t hit
those levels of margin. And so what we saw this
year, for 2016, was a similar level of
involvement, participation in the program, but more
people were at the basic catastrophic
coverage level.” According to USDA,
dairy producers paid the government nearly $73
million in MPP fees and premiums last year, while
only $685,000 was paid out. Jim Mulhern, president,
National Milk Producers Federation: “That’s a
glass half full, glass half empty story. You don’t want it to drop
to that level where you are going to collect
payments because that means you lost money on a
lot of the milk you have produced.” Some industry leaders
point out that the program should not be judged
in a one-year period. Others, including Dane
Lang, suspect many milk producers are finding
other strategies for weathering potential price
shifts after receiving little or nothing from
the program last year. Lang, a fourth-generation
dairy producer, said he enrolled at a premium
margin level of $6.50 in 2015. This year, Yarrabee Farms
chose to instead use forward contracting
through its dairy cooperative to
manage risk. Dane Lang, Yarrabee Farms
– Brooklyn, Iowa: “This year, we participated in
the government program so that our production
records are in the program and can stay
in the program. But we were able to
purchase what we think is a much better margin and
much better value to us through the market.” Lang says some dairy farms
produce too little milk to enter into most private
sector contracts. Dane Lang, Yarrabee Farms
– Brooklyn, Iowa: “You can’t go in and say, ‘I
want to sell 100 pounds of milk on contract. Nobody does that. You have to be able to
sell – at least with our cooperative – contracts
are made in 200,000 pound increments.” For those smaller dairies,
MPP may provide the only option for help during
the most difficult years. Lang also believes
programs like MPP force farmers to balance their
books with less help from the government, and might
help shorten tough times in the dairy industry. Dane Lang, Yarrabee Farms:
“I think people have to make quicker decision now
and they have to make more realistic decisions
because that government handout isn’t
there anymore. In 2009, if the government
program had been such as it is now, maybe it would
have been six months’ crash of milk prices
rather than a 12-month disaster.” If MPP had been in place
between 2009 and 2014, government officials
calculated it would have paid out more than it took
in during three of the six years. In order to determine
payments to producers, the program incorporates
national numbers for feed and milk prices. As a result, dairy farms
in Midwestern or other states that produce large
amounts of corn, soybeans and alfalfa have a
financial advantage over states like California
where feed is more likely to be shipped in from
greater distances. Jim Mulhern, president,
National Milk Producers Federation: “I will agree
that having a national index, which is what you
have to have in a program like this, does have
different impacts in different parts
of the country.” Mulhern says the
government’s feed prices offered a reliable
starting point, but farmers need that cost
estimate only to run their own calculations on what
level of government-run coverage, if any,
is most logical. Although fewer dairy farms
dot the countryside than in past decades, those
still operating continue to hit record levels
of production. In 2015, all U.S. dairies produced 209
billion pounds of milk, up 1.3 percent from
the year before. Mulhern says that with
large supplies, the next battle plan should focus
on increasing exports to prevent prices
from sliding. Dairy industry exports
have grown from less than $1 billion in 2000 to a
record $7.2 billion in 2014, before dropping
again in 2015 to $5.3 billion. As the Margin Protection
Program matures, dairy farmers will continue to
watch, waiting to see if any advantage emerges or
if more farmers shy away from the
insurance-style program. For Market to Market, I’m
Colleen Bradford Krantz. Next, the Market
to Market report. The commodity markets
closed early this week due to Good Friday and
Easter celebrations. Even with fewer trading
sessions, South American political unrest and
foreign import reductions, the grain markets
finished relatively flat. For the holiday-shortened
week, the May wheat contract was unchanged,
while the nearby corn contract moved only
3 cents higher. A brief rally for soybeans
burned itself out, but it didn’t prevent the May
contract from finishing 13 cents higher. May meal stayed with the
trend rising $8.50 per ton. In the softs, the May
cotton contract rose 56 cents per hundredweight. Over in the dairy parlor,
April Class III milk futures lost 16 cents. In the livestock sector,
the April cattle contract fell $3.97. April feeders
were off $6.37. And the April lean hog
contract declined $1.82. In the currency
markets, the U.S. Dollar Index rose
105 points this week. The May crude oil contract
rose a scant 2 cents per barrel. COMEX Gold dropped
$32.70 per ounce. And the Goldman Sachs
Commodity Index lost just over 7 points to
settle at 327.95. 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. We had a relatively
uneventful week in the wheat markets, finished
the week unchanged. Where do you think that
sets us up as we look into this next week? Roose: Well, exactly. The wheat market started
out the week with a little bit of fireworks. We did have some freeze
damage in the hard red winter wheat area. The trade is still trying
to assess what the damage was. Realistically it’s
probably somewhere in that 10 to 30 million bushels,
so really not enough to make the difference. But the market was
anchored back to near unchanged again throughout
the week just because the big world supplies that
we have push us back down, when we’re under 8% of the
total world market share it’s just not enough to
make a big move to the upside unless the rest
of the world follows us. So that’s right
where we’re at. Pearson: Now as you look
ahead to next week’s USDA Stocks and Planting
estimates, any chance there we could get some
numbers that would move this wheat market? Roose: Well, it’s possible
but I think when you look at it estimates are
somewhere down 3 million on the wheat acres
just because of the profitability
versus a year ago. But when you look over to
the stocks number that we have as of March 1st,
actually the numbers were probably about 200
million over a year ago. Then when you look at the
world numbers on ending stocks we’re about 1.2
billion bushels more than we were two years ago. So just a lot of wheat
in the world market. And that’s an issue for
the corn market also because now there’s feed
wheat that is out here, particularly in Europe,
competing with the corn. Pearson: Now, you
mentioned this corn market, as we look out
here there’s still a lot of growers sitting with
old crop corn in the bin. We’ve had a little bit
of a rally here, old crop corn. How do you handle that? Roose: Well, I think where
you’re really sitting with the corn market there’s
just too much corn also, but you have two moving
parts that could push you to the upside. If the dollar would happen
to come under pressure, it did a few days back and it
did give us a boost to the market. Then if we get into some
weather issues that could be another issue. And, by the way, we do
have the Delta and the southeast getting to be a
concern, too wet, probably aren’t going to get all
the acres planted there. The forecast here over the
weekend looks like we’re going to be wet
and cool again. So that is starting to be
a little bit of an issue along with our weather
here in the U.S. is starting to look real
favorable, not so much as it was once. But your real question is
what do you do with sales? I think with the funds
sitting with a big short position probably 10 cent
rallies, 5 to 15 cent maybe, are catch-up sales
opportunity in the corn. Pearson: Okay. Now, you touched on
weather, as you mentioned in the Delta, in Texas,
massive amounts of rain have fallen over
the past month. We’ve got a question her
from Adam in Woden, Iowa on Twitter. We encourage all of you to
send us questions on our social media. Adam is wondering, with
carryout levels where they are, you mentioned this
massive global supply of corn, what is a realistic
weather premium for new crop corn? Roose: Well, let’s look at
what happened last year. We had some massive
wet weather problems. We had carryouts that were
lower than what we have this year. You rallied corn to $4.54
and it stalled, $4.54 and a half and then
it stalled. So what kind of weather
premium should we put in the market? I always tell people this
time of year we’re sitting at $3.87 on Dec
corn roughly. We usually have this time
of year about 60, 70 cents risk premium
in the market. So right now you’re
trading probably around the $3.20 futures
market on corn. What kind of premium could
we put in the market? Going to be hard for corn
to get over $4 without some real serious
problems as we go forward. But you do have a catalyst
and that is the funds sitting with a big short
position just ahead of the start of the
growing season. Pearson: So with that
record short fund position and the idea that there’s
really probably not a whole lot of premium that
we can pour into this thing, how aggressive are
you on new crop sales if and when we should
get a weather rally? Roose: Well, I think you
have to be real aggressive because our downside
target this next fall, if we get the acres that we
think, and we’ll find out on the report March 31st
— Pearson: And what are you thinking acreage wise? Roose: We’re thinking that
the acres are probably going to be up 2.5
million on the corn. Last year 88 million, we
think it will be 90.5. We think that gives us a
chance for the carryout with our demand that we
go up to 2.3, 2.4 billion versus 1.8 billion now. So we think that you
do have to be pretty aggressive on
new crop sales. If you’re concerned as we
get between $3.90 and $4 on new crop corn buy some
insurance before the start of the growing season by
buying some call or call spreads. Pearson: Alright. As a way to go ahead and
fell comfortable making those sales at the cash
price and be covered for the upside. Roose: And I think that’s
what it does, Mike, it gives you a comfort zone
because we’re all the same, you don’t want to
sell too early, ahead of a growing season in case
you get some real weather problems and none of us
know what could happen. The weather has certainly
been strange so far. NOAA is saying we’re not
going to have any real change in the El Nino
pattern to a La Nina. So you have to anticipate
we’re going to have favorable growing
conditions so make some sales on the rallies
between $3.90 and $4 is what we’re saying. Pearson: Okay. Well let’s talk soybeans. Let’s talk old crop
soybeans first. That was a market I
thought was dead and buried and yet here
we are over $9. How aggressive are you at
making old crop bean sales right in at these levels? Roose: Well, exactly,
Mike, and you’re right. That is what keeps the
producer from being too aggressive on sales when
you get these surprise moves. We’ve had a sharply higher
move right in the gut shot of harvest in South
America, but Brazil probably right now is over
65% harvested, they’ve probably sold 70%
of their beans. Argentina’s harvest is
aggressive, yields look big there, it looks like
the crop is underestimated from what the
government is saying. But when you look at May
soybeans we’re overbought now, funds are sitting
with a big long position, record long
position in soy oil. So we think between $9.10
and $9.20 are catch-up sales opportunities on old
crop and we think as you get up into the $9.20,
$9.30 on new crop beans those are catch-up
sales opportunities. Ahead of the acres and
stocks report, which is going to be our first
chance to solidify where we’re at for next year. Pearson: What are your
estimates as we look ahead to acreage and stocks? Roose: Well, we think
that the soybean acres are going to be up a million. We think what that does
for ending stocks is we think that gives us a
chance for our carryout to be up lose to 600 million
next year if we get a big yield on the crop. And also this year we’re
probably overstated so probably carryout is close
to 500 million so a lot of beans around here, a
lot of world supplies. Pearson: Now, we’ve had
a lot of unrest in Brazil and the political
situation with corruption charges and a potential
resignation or impeachment of their president. Is that going to lend us
any strength here in the near term in soybeans? Roose: Well I think that’s
actually partly what has given us some strength
because what has happened is the real has come
back down a little bit. Remember when the real
is very high versus the dollar it gives them
the export advantage, so pulling back gives
them less of an export advantage. And actually if you look
at it you go home at the end of the week
and the U.S. soybeans are right now
about 7 to 8 cents cheaper at the Gulf than
Brazil soybeans. So that is an interesting
fact and I think that is one of the reasons our
bean market pushed up. The Chinese buying program
although is coming to an end here in the U.S. Pearson: Oh, okay. So that coming to an
end here how soon? Roose: Well, we think
right now, our export sales are ebbing to a very
slow pace right at the time when Brazil is
picking up the pace but the real certainly has
given us one last shot on demand. Pearson: Okay. Well let’s talk
livestock markets. We saw the live cattle
futures down almost $4 on the week. Where was cash trade this
week, Don, do you know? Roose: The cash trade this
week was lower, basically at $136, $2 to $3
lower on the week. But I think the trade
thought we actually could be trading at $140 and
really what happened to the cattle market, Mike,
is we had some just very good weather early, it was
an early growing season. I think we put our
seasonal top in the cattle two to three weeks
earlier than normal. Then we got into the
weather that has turned not so favorable
for grilling. Our demand has kind
of suffered again. Our boxed beef came
under pressure. So this week we were down
for five days straight and then we bounced at the
end of the week a bit. But pressure I think in
an early seasonal top. Pearson: Looking at the
deferred months of this live cattle contract there
is substantial discounts built into this
futures spread. Where do you — how should
producers be managing that discount looking out? Are you pricing
aggressively out through the end of summer? Roose: Yeah and I think
what you’re talking about is the discounts probably
upfront, but if you look into August of ’17 it’s on
the board, no real trade, but it’s under $110 so
it just tells us that the cattle market is in a
multiyear bear market. But I think where we’re
at is probably a seasonal, typical seasonal market. We probably put our
seasonal top in here around the $140
on cash cattle. You probably put a
seasonal low in somewhere in June, middle of June. And it’s probably going to
be somewhere around that $120 on cash if I had
to take a guess at it. Then we’d probably try and
rally back a little bit. But these placement
figures are going to be a real issue, up 10% in
February, we think March are up 15%. So rallies or catch-up
sales opportunities with a lot of meat coming at us,
overall beef production probably up 2% to 3% along
with the other pork and poultry competition. Pearson: Okay. Now feeder cattle have
seen a big break here over the last two weeks. It was accelerated by that
cattle on feed report last Friday. Are we coming to the end
of this break or is there still more downside here
in the nearby feeders? Roose: Well, you look at
the placement figures that we’ve had, they’ve been
big and they’ve been big just because we have a
lot of feeders outside the feedlot, a lot of feeders
coming off of the wheat pasture right now, and I
think where we’re at in the feeder cattle is
we think it’s one that probably is the best of
the worst in the cattle, it probably has
some support. But I would say another $3
to $5 down we probably see some buying interest but
the upside rallies just as the cash cattle in the
futures we think are probably more risk
management opportunities than anything else,
because remember November feeders took a shot
down under $140. Pearson: Under $140. Now, as a multiyear bear
here, we’re into this cycle, what is the
downside risk in your mind today over the next three
years in feeder cattle? Roose: I think that if
you look at it we probably have close to the $115
to $120, maybe $125. I think that’s a downside
target, same thing in the cash cattle, probably
a downside target realistically probably
around $100 to $105. And we could
go under that. If this competition picks
up cash cattle, you don’t want to hear it, but
probably could trade between $95 and $100. Pearson: Now you talk
about competition, we’ve heard a lot of stories in
the last week to ten days about expanded processing
capacity in the hog market coming online in the next
year to year and a half. Lean hogs down almost
$2 on the week. Where do you see this lean
hog market going in the near-term? Roose: Well, in the
near-term I think you have to look at the supplies
we had ahead of us and we don’t see a shortage
of supplies. We think we probably have
more of a seasonal type of market there also. The futures market
probably got ahead of ourselves, pushed the June
hogs up around $84, but we think probably the real
risk on the market is into the fourth quarter. We think supplies will be
up 4%, somewhere in that area, 3.5% to 4%. So we think that,
we believe what the government said in their
outlook meeting that they think we could be trading
for the next year around $57 for an average
price in the dress. So we don’t have any
prices on the board that are down to that level,
so it just tells you risk management probably makes
sense if you want to kind of believe a little bit
what the government is focused on, and I
think that’s the case. Pearson: With that being
the case, how far out are you making sales for
your hog producers? Roose: Well, I think you
go out as far as you can. Aggressively you can go
out with options as far as February. You can go out in the
futures even farther than that. But if you look at June
and July of ’17 they’re sitting around $76 and
that’s not a bad price from a breakeven
standpoint if the inputs stay at these levels. Pearson: Right. Looks a little
better than $57. Roose: Most definitely. Pearson: Alright. Don, thanks so much for
joining us this week. Roose: Thank you, Mike. Pearson: That wraps up
the broadcast portion of Market to Market. But Don and I will keep
the market discussion going and answer more
of your questions during Market Plus, which is
available on our website. While you’re there, check
out the Market to Market Classroom. It’s a place where
students of all ages can find stories on the
business, technology and science of agriculture. And join us again next
week when we’ll dive into the details of the 2016
Prospective Plantings report with a special
roundtable edition of the program. So until then,
thanks for watching. I’m Mike Pearson. Have a great week. ♪♪ Funding for Market
to Market is provided by Grinnell Mutual. You think differently
about a customer when you stand in the middle
of his dreams. We work to make sure
you get covered right. Grinnell Mutual —
a policy of working together. Information on finding
an agent near you is available at

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