Market to Market - January 17, 2014

Coming up on Market to Market - One week after a toxic chemical spilled into a West Virginia river, officials lift a ban on tap water. Critics of genetically modified foods urge President Obama to fulfill a campaign promise made in 2007. And America's first legal sales of recreational marijuana generate some serious cash for the state of Colorado. Those stories and market analysis with Alan Brugler, next. This is the Friday, January 17 edition of Market to Market, the Weekly Journal of Rural America. Hello. I'm Mike Pearson. The U.S. coal mining industry is predicted to enjoy a modest - and short lived -- rebound in 2014, after two consecutive years of decline. Coal-fired power plants, historically, have been the largest single source of power in America's energy portfolio, accounting for 37 percent of total electrical generation in 2012. But "King Coal" is expected to abdicate the throne by 2035, when natural gas is predicted to become the primary fuel. And U.S. coal production is predicted to fall by more than 25 million tons in 2015, when new rules for mercury emissions take effect. Critics blame pollutants from coal-fired power plants for everything from birth defects to climate change. But even before the fossil fuel is burned, coal - and processes related to its use - can cause problems. And no one knows that better these days than the people of West Virginia. Last Thursday, thousands of gallons of a chemical used to prepare coal for processing spilled into the primary source of drinking water for 300,000 in Charleston, West Virginia. The 7,500 gallons of 4-methyl-cyclohexane-methanol spilled into the Elk River, which is less than a mile upstream from the state's largest drinking water treatment facility. Residents were told not to drink, bathe in, or cook with the tainted water and late this week the ban was lifted. Tensions quickly escalated in the Mountain state's capital city of Charleston. Gary Southern: "Look guys it has been an extremely long day. I'm having a hard trouble talking at the moment. I would appreciated it if we could wrap this thing up - (reporter interjection: But we actually have a lot of questions and it has been a long day for a lot of people who don't have water.)" Freedom Industries just took over the operation in December, and the facility hadn't been inspected by state officials since 2001 when it was owned by a different company. Following the spill, Freedom was ordered to move its chemicals to a nearby facility called Nitro. The new site has already been cited for safety violations, including breeches in a backup containment wall. According to a report from the West Virginia Department of Environmental Protection, the Nitro plant had no documentation of inspections, nor proof of employee training in the past 10 years. State officials may force Freedom Industries to move the toxins to a third site if containment is not approved. During the 7,500-gallon spill at the Charles facility last Thursday, a cracked containment wall allowed chemical to ooze into the Elk River. Freedom Industries then moved the remaining 70,000 gallons of that chemical to Nitro. The company is still under order to move almost 1 million gallons of other chemicals from the Elk River location to another site. The spill forced businesses and residents to find other sources of water whether at make-shift distribution points or in stores which still had stock. Beverly Hager, Resident: "It was crazy. It was crazy. There were so many people, packed buggies full of water. The shelves were empty. Pop aisles, juice aisles. Everything was gone. Everything was gone." As the days passed, some residents went from no water to slowly being to use the taps again and were reminded about the process that easily taken for granted. Beverly Farrow: "We flushed all of our systems, all of the faucets, hot water first, cold water, dishwasher, washer dryer so we run all of that. And I took a shower today for the first time today, yeah (laughs)." The chemical spill in West Virginia serves as a reminder of the frailties of water supplies. And the safety of water everywhere has been called into question following the accident near Charleston. Bill Price, Sierra Club: "I think water is something people assume they can just go to their sink and get here in Charleston at least but that assumption isn't safe anymore." Also calling for a change in attitudes is one well-known environmentalist. Erin Brockovich, Environmental Activist: "It would've cost so much less to identify the leak, report the leak, fix the leak instead of ignore the leak. This is going to be hundreds of millions of dollars. It's just ludicrous that we continue to act this way, as a business, have these type of business practices in 2014." West Virginia is the largest coal producing state east of the Mississippi River and the nation's leader in underground coal mine production. 2012 marked the first year that developing countries produced more biotech crops than were grown in industrial nations. According to the International Service for the Acquisition of Agri-Biotech Applications, a record 17.3 million farmers grew biotech crops in 2012. Over 90 percent of the growers were small, resource-poor farmers in developing countries. And the group claims the adoption of biotech seeds has enhanced food security and reduced poverty in some of the world's most vulnerable regions. Nevertheless, genetically engineered or modified crops are vilified by critics who believe the biotech products pose risks to health and the environment. Those concerns were voiced again this week, when a handful of democratic lawmakers, and a coalition of advocacy groups reminded President Obama of a campaign promise he made way back in 2007. Members of Congress were joined by a litany of pro-food labeling groups reminding the president to honor a campaign promise made before he was elected the first time. Four House Democrats, along with more than 200 businesses and organizations, sent a letter to President Obama urging him to fulfill a 2007 pledge mandating the labeling of foods containing genetically engineered or GE ingredients. Among those signing the letter were ice cream maker Ben & Jerry's, organic pasta maker Annie's Inc., organic dairy producer Stonyfield Farm, and the Sierra Club. The letter also cites a New York Times poll conducted last year which revealed 93 percent of those responding want foods containing biotech products to be labeled. Currently, only Connecticut and Maine require food to be labeled if it contains any genetically engineered ingredients. However, both measures are predicated on other states adopting similar laws. And the National Conference of State Legislatures is expecting more than 20 states to have GE labeling proposals on their ballots during the coming election cycle. GE crops that are currently consumed for food, fiber or feed include corn, soybeans, cotton, canola, alfalfa and squash. According to the Center for Food Safety, a non-profit public interest and environmental advocacy organization, over 70 percent of processed foods on grocery store shelves in the U.S. contain GE ingredients. And the USDA estimates, 85 percent of the corn, 93 percent of the soybeans, and 82 percent of the cotton planted in 2013 was genetically modified. On the other side of the debate, the Grocery Manufacturers Association, or GMA, is pushing in the opposite direction. The GMA, which represents more than 300 food companies, revealed that last year PepsiCo, Nestle USA and Coca-Cola were part of its group that spent more than $7 million to stop a labeling initiative in Washington state last fall. In all, $17.2 million were raised by various associations to defeat the proposal. And, according to the news agency Reuters, the Grocery Manufacturers Association, is preparing to petition Congress to enact a law to crush state-by-state efforts that mandate labeling of foods containing genetically engineered ingredients. It's hard to imagine any crops more controversial than those containing GMOs, but the states of Washington and Colorado may have found one: Marijuana. Twenty states and the District of Columbia have legalized medical marijuana, but voters in Colorado and Washington State went a step further in 2012, becoming the first in the nation to legalize small amounts of weed for recreational use. Retail sales in Colorado began on New Year's Day, while sales in Washington are scheduled to begin later this year. Both states plan to regulate marijuana and tax it like alcohol. And proponents have "high" hopes for a lucrative new cash crop - and a significant new source of revenue - for their states. Though commercial sales of recreational marijuana were initiated less than a month ago, Colorado is on pace to enjoy significant revenue in 2014. In the first five days of the New Year, retail cannabis sales averaged about $1 million per day in the Rocky Mountain State. Long lines of eager customers over the age of 21 were common in the 19 municipalities and 7 counties where retailers can legally sell weed. While many residents have taken advantage of their newfound freedom, plenty of out-of-staters also were on-hand for the landmark event. Adam Hartle, Jacksonville, FL: "Well it's just history, you know. It's the first time in 75 years that cannabis is going to be legal in America, so it's a modern movement. You know, it's a major moment in modern American history and we wanted to be here for it." With economic implications worldwide, many outside the Centennial State are keeping a close eye on how the fledgling industry unfolds. Charlie Brown, Denver City Councilman: "Not only is the world watching but other states that are considering adopting similar rules are going to be watching too." So far, only Colorado and Washington State, where sales are set to begin this spring, have legalized recreational pot use. Proponents nationwide find themselves on the cusp of a variety of legal maneuvers at the state level that, while groundbreaking, still run afoul of constitutional law. Danny Conners, Madison, Wisconsin: "Quick as they made this law the federal government can still step in and take this ability away. So I just have this at one time in my lifetime, even if I could only buy a gram, to have that receipt that says I made a legal purchase in my lifetime...I'd rather have that than see the third coming of God." Drug abuse was declared "public enemy number one" during the Nixon Administration, and since then, U.S. efforts to eradicate the global illegal drug trade have ramped up considerably. Enforcement costs tens of billions of dollars per year, but critics claim the so-called 'War on Drugs' is more wasteful than beneficial. From 1970 to 2010, the federal government spent $1.5 trillion attempting to stop the narcotic trade. But, during that same 40-year period, the U.S. drug addiction rate has remained at a relative standstill. And despite reforms in Washington and Colorado, federal law prohibiting both medicinal and recreational weed remains unchanged. The Controlled Substances Act of 1970 classifies marijuana as a schedule one drug, in the same category as *** and LSD. Uncle Sam has long cautioned against the problems associated with chemical dependency, while remaining relatively silent on similar issues involving some other intoxicants like alcohol. Sean Azzariti: "I get to use recreational cannabis to help alleviate my PTSD and it's a stepping stone for other states to help other veterans as well." Regarded by some as a foot-in-the-door for outright legalization, nearly half of all states and the District of Columbia have medical marijuana laws on the books. But patients in Colorado, whose physicians prescribe weed for legitimate reasons, have seen prices skyrocket since prohibition was abolished in 2012. While supply and demand will ultimately determine fair market price, existing medical marijuana dispensaries find themselves on the fast track for commercial endeavors due to the legal infrastructure they already have in place. As Colorado's state coffers fill with tax revenue, a handful of other states are debating how to lift the veil on legal weed, while others prefer to lay the groundwork. Andrew Cuomo, Governor of New York: "Research suggests that medical marijuana can help manage the pain and treatment of cancer and other serious illnesses. 20 states have already started to use it. We'll establish a program that allows up to 20 hospitals to prescribe medical marijuana and we will monitor the effectiveness and the feasibility of a medical marijuana system." Advocacy groups like the National Organization for the Reform of Marijuana Laws, or NORML (normal) have long supported the development of legal commercial markets for cannabis. With those efforts beginning to bear fruit, the tide may be turning for growers to reap enormous benefits. A 2006 study by the former head of NORML entitled 'Marijuana Production in the United States' goes so far as to label weed as the country's biggest cash crop. Author John Gettman estimates that rural areas are losing out on over $100 billion in annual income from cultivating pot, dwarfing the combined market of heavyweights corn and wheat at over $30 billion. That theory, however, was criticized in a 2012 book - 'Marijuana Legalization: What Everyone Needs to Know'. Written by a team of researchers and public policy experts from Carnegie Mellon, Pepperdine, UCLA and the RAND Corporation, the book claims that cannabis more likely ranks among the top 15 cash crops, somewhere near potatoes and grapes. Regardless of the actual economics, there is no denying that preliminary results in Colorado show the potential for an emerging market which could prove to be lucrative. Tripp Keber, President Dixie's Elixirs & Edibles: "The genie is out of the bottle. I think it's going to be an exciting time over the next 24 to 48 months." Next, the Market to Market report. Creighton University's Rural Main Street Index declined more than 5 points this month to settle at 50.8. The reading just barely above growth neutral was blamed primarily on weaker farm prices. And that trend continued this week as grain prices declined again. For the week, March wheat lost 6 cents, while the nearby corn contract fell 9 cents. Soybeans broke through the $13.00 barrier as the March contract settled with a weekly gain of 38 cents. Nearby meal followed suit advancing by nearly $21 per ton. In the softs, cotton broke out of its slump as the March contract advanced by more than $4.00 per hundred weight. In the dairy market, February Class III milk gained more than $1.70, while the deferred contract moved $1.20 higher. It was a big week over in livestock as the February cattle contract settled with a weekly gain of $3.65. March feeders advanced by 27 cents. And the February lean hog contract improved by 35 cents. In the financials, the Euro improved 13 basis points against the dollar. Crude oil advanced by $1.65 per barrel. Comex Gold declined $5.00 per ounce. And the Goldman Sachs Commodity Index gained more than 6 points to settle at 616.60. 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: Always great to be here. Pearson: And we're glad to have you. As we take a look at the grains this week, and especially as we look at the wheat market, we saw a relatively stable week until today. Is that a good sign? Has wheat decided to maybe get close to bottoming? Brugler: Well, I think the downward momentum is slowing a little bit. You still have the large speculative fund short position. You still have a fairly limited interest in buying commercially in any big way. But yeah, the slower momentum, the slower pace of decline is a good sign. As a trader I wouldn't yet be jumping in with both fists to buy it but we are getting close to a multi-year uptrend line that goes back to 2006 on the wheat chart and I think that could be a support area for us. Pearson: Now, how far down do we have to go before we begin to hit that line and get some traction? Brugler: Earlier this week it was about 20 some cents yet. Pearson: Okay. So we are getting nearer. And once we hit that point, how quickly do you think we'll rebound? Or do you think we'll see some low prices here? Brugler: It depends if we have a trigger event or not. Realistically the problem with wheat is that Canada had a huge crop that they're trying to move. They have got problems moving it, about a 30,000 rail car backup right now for moving wheat out of Canada. But that is forcing wheat south into the U.S. where they can. You've got Australia just having completed their harvest and competing in the world market. You've got India trying to move some wheat. And so the U.S. has had to lower our prices fairly considerably to get some activity. We did this week. We sold some wheat to Egypt and that was an indication prices have gotten low enough to be competitive. But, again, you're going to have to see more of that. Normally export sales commitments do start to pick up again as we get towards the end of the winter and into the spring. So I think there's some potential there but I'm not going to do any bottom picking here. Pearson: Okay. Alright. Well, now let's take a look over at the corn market. We saw the pop after the report. Since then we have been on a slowdown trend. Would you say how far is this going to continue? Brugler: Well, I think what happened was you ran into some farmers that had a lot of grain, they were lugging a lot of grain, as soon as they got that 20 some cent rally they felt they had to reward the rally. And that was enough selling unfortunately to back us off of the highs. We also were up against a regression channel, a technical indicator that has held the market since last August. So you have that spectacular rally that basically went from the bottom of the channel to the top of the channel and anybody who was inclined to add more shorts to sell more that was their place to do it. And I think we're probably going to go down and retest the lows, it doesn't mean we'll get all the way there, but kind of say did we mean to rally off of that price level. Fundamentally I think it's fairly encouraging though. Pearson: For producers out there, you have mentioned there's a lot of American farmers out there very long still with a lot of corn in the bin. Are we through the high point of the rally? Are you best now to hold until we get a rebound? Or should we still reward the rally that we've got left? Brugler: I think you have to sell into rallies. I don't think you have to sell into weakness. The thing that people are overlooking, they're focusing on the big build up in world corn stocks. But as a percentage of use the situation is still tighter than it was in 2008, 2009. So prices should not go to the 2008, 2009 level. They need to be, should be higher than that based on the world fundamentals that we know. And that puts a little different light on it. It takes away some of the urgency in selling the corn. Now, if we break the multi-year uptrend line in the $4.20s, if we conclusively start trading below it, yeah, we'll probably go back to $4.00. Pearson: Alright. Now, quick thoughts, new crop corn sales? Are we in an area to start selling? Or continue to hold off? Brugler: Well, the best time to sell obviously was a while ago. We're carrying some short $5.00 futures, for example. But I think, again, you have to sell rallies. And the thing I point out there is it won't take much of a yield problem this year to really tighten up stocks again. We did some preliminary runs at 92 million acres, which is what some of the surveys are showing, and 154 bushel yield, which is only 6 bushels below trend, you'd be down to a billion bushel carryout again. And prices would be 35 to 50 cents higher than they are today. So it won't take much of a crop problem. And if you look, yes it's the middle of the winter, but if you look at the drought monitor there's some dryness in the western Corn Belt. Pearson: Certainly. So there could be weather scares -- Brugler: For new crop we don't want to get too far committed because it's really early. Pearson: Alright. Now, let's take a look at soybeans. We saw a big jump this week, almost 40 cents in soybean prices. What happened? Brugler: Combination of things. Export sales are still very good. USDA raised the projected exports on Friday. Basically all of the additional bushels they found in production immediately went to consumption, which tells us we're still at pipeline supply levels. The export sales on Thursday basically took us to 102% of that forecast. So we have already got more sales on the books than the USDA revised us to have for the year. The second thing that is happening, of course, is that we have had some heat and dryness in Argentina, 97, 98 degree highs during the day in some of the main growing areas, very little moisture. It looks like that's going to ease up a little bit next week. But there's potentially some yield losses down there, more for corn and possibly for beans as well. Pearson: Now, is this heat and dryness, is it enough to get the trade off that 90 million metric ton figure we've been hearing about South America's soybean crop? Brugler: Well, I'd think the 90 million tons is just Brazil. And I think that's still kind of in play because they have better weather than Argentina has had. The interesting thing to me was one of the Brazilian officials that suggested that 90 million could be 95 million. And I thought, okay, here's a major exporter country trying to talk down the market? Why would this be? I concluded the reason is that they don't want U.S. farmers to be planning on planting a lot of beans this spring. So it was kind of a veiled message to the U.S. farmer, hey, take it easy on this rotation switch here. Pearson: Keep that corn on corn going another year or so. Brugler: Something like that. Pearson: Alright. Now, let's take a jump over and take a look at the livestock market. That has been really hot this week. We saw the cash cattle trade touch $144, $144.50. Where is this cash, where is the cattle trade, fat cattle trade headed? Brugler: Well, it's kind of a perfect world, if you will, if you're bullish. And that is production is down, USDA was suggesting that the first quarter, January, February, March would be the smallest beef production since 2005. Cattle on feed report confirms that we're down about 5.5% on cattle. And while we had been picking tonnage up by feeding them to heavier weights, the packers are now so anxious to get these reduced number of cattle that they're buying them, what we call green, just barely ready to market and that tonnage is starting to come down. The average carcass weight is starting to come down. So bottom line is there's just not enough beef to go around. The wholesale prices shot up to all-time record highs for choice and select and we're also seeing a pickup in retail prices now. Pearson: Now, we did, you mentioned the wholesale price choice boxed beef was touching that 231 level and it has been said that once we get over 210 there begins to become a lot of consumer resistance. How soon should we expect to see that in the meat counters? Brugler: Well, I suspect that we're starting to see it already but we won't really have the data for a week or two, maybe three. Yeah, when you go to that level, at the retail level -- keep in mind that's a wholesale price -- it takes a week or two or three before that gets all the way through to the meat counter and everybody has adopted it. The retail knows there's a shortage, they know that this is a decent time to raise prices because gasoline prices are down, consumer's have got more spending money, maybe a little of it goes to food. So if you're going to put through a price increase because you're' running out of beef this is a good time to do it. Now, having said that, it's going to damage your total beef consumption as that is fully implemented. You'll get more switching to chicken, you'll get more switching to pork and we'll see an end to this big bubble that we've got. Pearson: Certainly. The prices going higher too ration demand. Now, as we look at the feeder market we saw a little bit farther up today. How many legs are left on this feeder market? Brugler: It's very contingent on what the live cattle do. If we know we have a 50 year low in calf supplies, we know that we're starting to pull a few heifers out to retain for mama cows so that shrinks the supply further, so that is why feeders are so strong compared to the fat cattle. But, again, it doesn't pencil break even to buy feeders at this price. You can't hedge them in a profit. You're buying and then betting that the price of live cattle goes even higher when it is already at record highs. So what I'm hearing is actually the cash feeder market is softer than the futures. The futures are going to new highs, the cash is not. So that tells me there's some people out in the country pushing a pencil and saying this isn't going to work for me. Pearson: Right, maybe keeping their hand down at the auctions a little bit longer. Brugler: That's it. Pearson: Now, you mentioned hedging. As we look at the fat cattle trade we've got cash at $144, futures hugging that $139, $140 mark. Should guys be hedging at this $140 or waiting to see if futures rise to meet cash? Brugler: Well, it's kind of the opposite of the wheat market, I don't want to bottom pick, I don't want to top pick. I think it does make sense to have some at the money puts in place because this thing could melt down quickly when it turns. Pearson: Alright. Now, as we take a look quickly at the hog market, are we going to see some spillover strength from cattle into hogs? Brugler: We saw some signs of that this week. We saw the wholesale pork prices start to pick up a little bit despite higher slaughter. We are starting to see the board trying to at least flatten out a little bit of an upturn on the board. So, yeah, I think we're going to borrow some strength from cattle here and bump those hogs up just a little. This is not seasonally a strong time for hogs though. Pearson: Alright, so we should see a little more strength as we get through the first quarter. Brugler: Correct. Pearson: Potential is there. Alright. Well, Alan, we really appreciate you being with us here this evening. Brugler: My pleasure. Pearson: Alright. That's going to wrap up this edition of Market to Market. But Alan 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 examine efforts to improve water quality in a leading farm state. 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.