Health Care Reform Slowly Churns in Washington
According to the Commerce Department, gross national product – the value of all goods and services produced in the U.S. -- declined at an annualized rate of just one percent in the April-to-June quarter. The latest tally comes on the heels of a 6.4 percent drop in the first quarter of 2009, which was the largest decline in nearly three decades.
The GDP report was welcomed on Wall Street where the Dow Jones Industrials gained 17 points on the news.
In its latest snapshot of the economy, the Federal Reserve acknowledged weak economic activity in each of its 12 districts, but the Fed noted most districts indicated the pace of decline has moderated, or that activity has begun to stabilize.
Fed Chairman Ben Bernanke predicts the recession will end later this year. And many analysts think the economy will start to grow again in the third quarter.
But even if the recession ends later this year, job creation typically lags well behind initial economic expansion. And unemployment — which now stands at a 26-year high of 9.5 percent — is expected to surpass the 10 percent mark by the end of the year.
Against that backdrop of rising unemployment and a fragile economic recovery, the Obama Administration continues to press forward with health care reforms. This week though, it became obvious that Congress would not approve an overhaul of the system before lawmakers adjourn for their summer break.
Congressional leaders have spent much of the summer in closed-door meetings hammering out details of potential health care reform. A key group of Senate Finance Committee members have languished over the plan’s details for months. Some of the bipartisan group of Senators represent mostly rural states of Iowa, Wyoming, Montana, and North Dakota.
Sen. Kent Conrad, D-North Dakota: “If I had to describe the two or three things that I think are most challenging, one is the affordability question, for people who have insurance offered to them at their place of employment but its insurance they can't afford, that is a significant concern. Second would be Medicaid, and the expansion of Medicaid, and what the reaction of governors will be to additional state requirements.”
Democratic Senator Kent Conrad of North Dakota is currently pushing for a cooperative alternative to federal health care insurance. The co-op proposal is modeled after the same principles that guide member-owned credit unions. According to Conrad, regional cooperatives could quickly become the nation’s third largest insurer.
The Conrad Co-ops could also appeal to Republicans weary of further government involvement in the American health sector. Iowa Republican Senator Charles Grassley believes co-ops would be well-received in rural America.
Sen. Charles Grassley, R-Iowa: “If we can get bigger private sector insurance groups in the form of Co-ops then that is something I would be on board with. Rural Americans have a long history of making these types of programs work.”
But the co-op plan would still require billions in start-up costs paid by taxpayers and opponents argue the proposal would not cover all Americans.
The co-op option does not sit well with liberal members of the Democratic caucus. Many progressive lawmakers like Massachusetts Congressman Barney Frank pledge to vote against any bill that does not include a government-backed public insurance option.
Frank’s comments came in response to possible legislative breakthroughs in the U.S. House. A group of conservative Democrats, members of the so-called “Blue Dog Coalition”, fought for a less-expensive bill and higher insurance payments for rural hospitals.
Rep. Mike Ross, D-Arkansas: “We protected small businesses, and we ensured that the public option is on a level playing field, it's optional for people, won't be mandated on anybody, and that it's done in a way by demanding that the public option compete with private plans by negotiating rates with providers instead of mandating Medicare rates on providers, saving a lot of rural hospitals across this country.”
Despite perceived breakthroughs and an ill-fated Obama Administration deadline, neither Congressional chamber will have a final bill until after the August recess. And the Administration acknowledged this week that a final vote may not come until October.
Debate Over Higher Ethanol Blends Continues
The incentive offered qualified customers up to $4,500 to trade-in older, gas-guzzling cars for newer more fuel-efficient models. But after only four days, the government suspended the deal saying the program’s $950 million budget was already depleted. On Friday, the House authorized spending another $2 billion on the program.
The Renewable Fuels Association supported “Cash for Clunkers”, but voiced concern late this week that the program would be paid for by depleting the renewable energy loan guarantee program.
And the ethanol industry responded again this week to a coalition of groups criticizing higher blend rates of the alternative fuel in gasoline.
The move could supersede current EPA evaluations of increased ethanol blend rates and might be a boon to biofuel producers. Such a step has strong support in many, but not all agricultural sectors. Renewable fuels advocates had hoped for a quick EPA decision permitting modest increases in ethanol blends.
In a recent Agriculture Committee hearing, Senator Amy Klobuchar (kloe-buh-CHAR) said she thought EPA was taking too long and addressed two leading farm organizations.
Sen. Amy Klobuchar, D – Minnesota: “I see home-grown biofuels as a piece of the future here. I think the way to do it is with higher blend amounts to go up to say 15 percent. I wondered Mr. Johnson, Mr. Stallman, if you could comment on that."
Roger Johnson, National Farmers Union: “We would certainly support that.”
Bob Stallman, AFBF: “As would we.”
Roger Johnson, President of the National Farmers Union, and Bob Stallman, President of the American Farm Bureau Federation are among those supporting increasing the current ethanol blend rate to 15 percent.
Others at the hearing expressed frustration over EPA’s involvement in ethanol policy reforms and pending climate change legislation.
Sen. Richard Lugar, R – Indiana: “I believe I could get a majority of Senators to repeal what’s in the EPA act to eliminate EPA out of this picture. The audacious idea that we have to be pressed into this kind of legislation because somebody at EPA finds things is a ______. I’m outraged by the measurements of corn ethanol being done by EPA using extraneous events… It’s outrageous.”
Senate Agriculture Committee Chairman Tom Harkin, a Democrat from Iowa, recently said he may push to have the increase to E-15 approved in Climate Change legislation because of his perception that the EPA was biased against the ethanol industry.
Meanwhile, opposition is rapidly growing from an unusual coalition of 46 food, business, and environmental and sporting trade groups. They sent a letter to EPA last week opposing higher blend rates of ethanol. The groups voiced concern that increased ethanol blends would pose a risk to all gasoline-powered engines, to public health, to the environment and to consumers.
According to the National Cattlemen’s Beef Association, “Changes made to the ethanol blend percentage will impact all industries that rely on corn, not just the ethanol industry. Before considering raising the blend percentage, the government should first take a serious look at how it would affect corn and cattle markets, and whether corn production would be able to keep pace with a higher mandate.”
In the wake of dramatic growth in ethanol production, a group of food producers has focused on what it calls, “the negative impacts of ethanol’s competition.”
Meanwhile, the American Coalition for Ethanol, the nation’s largest ethanol advocacy association, has filed comments with EPA on behalf of nearly 1500 grassroots members nationwide and submitted a petition signed by 7000 individuals in support of E-15.
EPA has until December to make a decision on the higher ethanol blend.
Sue Martin Analyzes The Mid-Season Markets
Visit the Market Analysis page for an expanded discussion of commodity prices with Sue Martin. Click on this link to find the discussion.Market Analysis: Sue Martin
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Strong demand from China supported last week’s rally in a big way. For the week, the August contract gained more than $1.10 and the nearby meal contract was up nearly $40 per ton.
In the softs, cotton moved back into positive territory this week as the December contract posted a gain of 40 cents.
In the dairy market, Class III Milk futures recorded an impressive gain of $1.10, but prices remain well below the cost of production.
In livestock, August cattle were up nearly 20 cents. Nearby feeders were off 20 cents. And the August lean hog contract lost just over $3.00.
In other markets of interest, the Euro gained 38 basis points against the dollar. Crude oil gained $1.40 per barrel. Comex Gold was down 10 cents. And the Goldman Sachs Commodity Index gained more than 6 points to close at 456-even.
Martin: Thank you, Mark.
Pearson: Let's talk just a little bit about some of the things that are happening. I want to get to China and the soybean buy here in just a moment. But let's talk about some of the broader trends and one of those has been continued weakness in the U.S. dollar. What is your take on that, Sue? Do you think it's going to continue for a long period of time?
Martin: Well, I think the dollar is caught into a little bit of a temporary range and so I don't see it getting much over 80 and I don't see it going much under 78 so I think we're caught there. In the meantime, of course, whenever it seems to have its bad days, gold and the stock market tend to lift and, of course so do other commodities just on the thought of better opportunities for foreign countries to buy.
Pearson: What is your thinking on crude oil as we sit here tonight and survey the scene? It seems like we're a wash worldwide in oil contrasted to a year ago where we were paying $4 a gallon for gas.
Martin: Well, I'm friendly to crude oil. We got close to the 70 cent area again this week and I think that this coming week and on into, more into August I think crude oil has a chance to lift. I still look for it to make up to 75, maybe 77 cents. Crude oil has a beautiful saucer bottom on its charts, on the daily charts and it is big based and that should be pretty positive until you break out of that saucer to the down side. That would say that breaks are for buying and when you listen to the rhetoric that China's economy is supposedly getting better and other parts of Asia as well that would then lead us to believe that their demand for crude is not going to back off, it's probably going to get more stronger.
Pearson: So, are you predicting that? Are you seeing that more of a stronger global economic picture for the balance of 2009?
Martin: I think yes, it is. I don't think it's going to be a huge ball of fire yet. I think everybody is just tip-toeing but China has the ability to grow even on their own mass of people and the population continues to grow so I think yes. I think China will be the country that leads us out of here. One example was this past week when the Shanghai stock market fell five percent over night and was the biggest break it had had since November of last year, something like that and our markets went into a dump. That tells you how much we're watching China.
Pearson: We're going to see what else happens. Let's talk about some of the other markets that we follow on the show on a weekly basis and the wheat market is one of those. We're getting through the harvest for the United States, we're getting close to where it's wrapped up. Looking ahead, Sue, it looks like there's plenty of wheat around in the world. So do we have much market up side?
Martin: Well, I think that we're looking at the potential of the fact that wheat is like a weed, it just seems to grow very easily and it took a lot of stress this year in the U.S. and still even the spring wheat is showing better yields than what we expected. So, I think that we're going to end up with a better carry than what we originally thought. I think yes, you've got problems in the Ukraine and other parts of the world but then you've got India that while they've kind of been on a teeter totter with the monsoon rains it's still thought that their wheat crop is going to be pretty decent.
Martin: So, I think that with having said all of that the carry in the world is still going to probably be one of our largest in eight years. Sometimes you get big markets from big carries because we have plentiful supply. The one thing that could help wheat out is that the rice market looks to me like there's some issues there and here again another market building a huge saucer. Well, wheat and rice tend to intermix so if there's a problem with rice then maybe that gives us a little more demand towards wheat. For now, though, wheat is coming off the cusp of harvest and that should pull some hedge pressure away and that's good. But in the meantime I wouldn't be surprised yet if wheat just labors a little bit as we go through August. I will say that wheat has the biggest short position on the board right now of all the funds.
Pearson: Of course, that can sometimes trigger a pretty healthy move to the up side.
Martin: Exactly.
Pearson: So, your advice for a producer right now, hold off on wheat sales?
Martin: I wouldn't make any wheat sales now. If they haven’t made sales by now they've missed it so let's hope for something better down the road. I think that we have to look, you know, wheat is also suffering from long corn, short wheat spreads because of a different time of the crop year but that will change with time here too as they start to unwind those spreads. So, I'm going to tell the producer it seems like we're finding support against $5 on Chicago wheat and maybe around the $5.25, $5.40 area in the KC let's try to see if we can't weather this storm a little bit and see if there isn't something better down the road.
Pearson: You mentioned corn, let's talk about the corn market. Everywhere I've been -- I've been to every one of the major growing areas for corn -- the crop by and large looks very good. It looks late, Sue, and the agronomists I've talked to tell me many areas as much as a week or ten days behind. With that in mind we haven't had an early frost, a serious one since the mid-70s. Is that going to be an issue in 2009? Obviously it's a big crop but will that be an issue?
Martin: I'm glad you brought that up because that is one thing that has me concerned about this crop. Once you get the crop pollinated it's thought that 90% of your yield is there. But then if you get hit with a frost/freeze the crop doesn't dry down as easily but it's more of a quality issue that you experience than anything. So, the situation I experienced is this past week, World Weather which is one of our weather services we use, we use three, but they came out with a very good study, a comparison or parallels of this year to the year of 1965 and it was astounding. First off, we have very low sun spot activity this year, minimum and you did that year as well. You went that year from a La Nina into an El Nino, the same thing we're doing this year. That year you have several of your oscillation indexes finding negative territory. We're doing the same thing with the same indices this year. This year we have an Arctic oscillation that has turned into negative territory, it allows for the ability of cool weather to come down out of Canada into the U.S..
Martin: In 1965, North Dakota, Grand Forks, North Dakota had 32 degrees on August 28th. Other areas have freezes throughout South Dakota and North Dakota September 5th and then, of course, many areas in the central to northern part of the Midwest experienced freezes by the 24th, 25th of September. We have a lot of similarities this year. The crop is late, there's not going to be a problem with pollination, that's a given, so now we've got to watch how we move through August, if we can get a warm spell through mid-August that will be very beneficial to that crop to kind of speed it up a little bit but in the meantime the cool weather is not bad towards corn, it allows those kernels to fill out nicely, it just doesn't come on as fast. Conversely, soybeans react to daylight hours so they don't experience the delay, so to speak, in coming on but the problem they experience is quality issues with cool temps.
Pearson: So, with that in mind do you think that we'll see some kind of a frost premium entering the market? Maybe we've seen that already?
Martin: I don't think we've seen it yet. I do expect that to occur about the last week of August. I think when we start getting into that latter part of August I think we're going to start to see some premium added into this market. And seasonally we're at a time of the year where in the month of July beans and corn on a hard break in a year like this one especially you do tend to bounce around and get some short covering rallies anyway.
Pearson: So, for a producer right now you would not be in a big hurry to make corn sales?
Martin: I think what I would do is when I was on the show the last time I talked about a gap on the Dec. contract, actually it came after that period but I was looking for corn to break down and it did but then around the 1st of July, the 2nd of July, we came in after the 4th and we left a gap on the charts from $3.53 and a quarter to $3.56 on the electronic weekly charts which is very abnormal. That gap projects to $2.36 if it's not closed here. So, I would be watching. I would tell producers if you get a bounce in this market use it, if you haven't made cash sales this is an opportunity. The futures might get as high as $3.80.
Pearson: Let's talk about soybeans. You mentioned soybeans in a lot of the same boat with an early frost but reacting more to daylight hours. As we look at price right now in soybeans this is quite a move. We had a couple of amazing days. Everybody thought China was done buying, they were building reserves and we wouldn't see a lot of excitement and then they come back into the market and this old crop is extremely volatile.
Martin: Well, first off, the beans that SIMA Grain was putting into the market or auctioning off was poor quality beans and they're trying to get rid of them before harvest. In the meantime, the crushers, of course, prefer better quality beans so I don't really see them leaving us per say but their demand certainly hasn't been as robust. We have to remember the 1.8 million metric tons that they bought for 2009-2010 is just that for the whole year. They'll probably buy more than that and in the meantime, the 120,000 metric tons for old crop, yes, that will be in very short-term but the thing we have to remember is they bought it through basis, they did not lock up price, they locked up the basis and so having done that says if they were thinking prices were going to go higher the Chinese would lock up price and they didn't do that.
Pearson: What is your take now for a producer on making sales at this stage of the game?
Martin: Well, we recommend that they do take advantage of some of this rally. Again, it's very seasonal. If you look at what the market is doing this year versus the fifteen year seasonal beans are tending to bounce here as we go into about maybe at least the first week or so of August and sometimes all the way into September. We may have that kind of a year. In the meantime, if you take years in which crop condition ratings are like what they are this year and possibly even better and you go back all the way to 1986, well, there's been eight years. Five out of those eight years November beans put their lows in, in July. So, we have to remember there is a strong tendency in a year like this to do an early harvest low. The sixth year was in August and then the two remaining years were in October.
Martin: Now, I talked about the year of 1965. I went back and looked at that year, what November beans did, for where they put their harvest low in, that year they put it in, in October. So, anything can happen here. But what I'm telling producers is if you haven't sold and you're trying to ride this market, even if you're not going to sell and you're going to store these beans at least go in and buy some $9 puts or $8.80 puts. Remember, the low on this whole move so far is $8.80 now for July. If that market takes out $8.80 after this kind of an up move it's not going to be pretty.
Pearson: Well, on that note let's talk about what you see in the livestock business. Obviously very frustrating whether it's beef, pork or dairy, it's been a dark time and the recovery we thought we'd see in those this summer a lot of analysts were hoping for with the lower numbers hasn't happened with the sluggish economy. What is your take on fed cattle? What do you see happening between now and the end of the year?
Martin: Well, I think as we go in towards fall I think the cattle market is going to continue in this sideways meandering that it has done since last October. Part of the problem is that each month further out, especially like the October futures is so premium to the lead month or to the cash market, I think this week we ran almost $7 over. So, when a producer sees that, especially the feedlots, they're saying to themselves I'm going to try to feed these with cheap corn, I'm going to feed these cattle as heavy as I can, get them through and as close as I can into that September, October timeframe and I think that's what we're going to see.
Martin: I think the one thing that we have to remember is we don't have demand. The demand is lackluster because we are killing less cattle but the weight, steers are running 17 pounds over the five year average, heifers are 15 pounds over the five year average so we certainly have tonnage coming at us but less numbers. In the meantime, the cut out is down so it has to be a thing that’s dealing with demand and I think that goes back to the economy, restaurant business is down, that kind of thing.
Pearson: Hogs, what do you see ahead now for the pork business?
Martin: Well, in the long-term I think that we have potential in the hog market. Now, there is the market that's had trouble but I believe we're going through a liquidation at this time. Sows at this time of the year coming to market are up, the numbers are up aggressively and the weights are very heavy. That leads me to believe we're seeing a sow liquidation. In the meantime, we're seeing piggy sows come to market and, of course, in about I think another week we'll have the data out on boars. But I think you're seeing a liquidation and that is adding to numbers that are already too burdensome and we have too much meat in the coolers. So, demand is poor at this time but the whole thing says that down the road if I'm right that we're seeing liquidation we should have a good first half of next year. Also add to that the normal tendency is for the market to be soft. As you go in towards the fall I see that kind of a year, that should help the Febs drop the Dec.
Pearson: All right, Sue Martin, thank you so much. That will wrap up this edition of Market to Market. If you'd like more information from Sue on where these markets are headed be sure to visit the Market Plus page at our Web site where you'll find streaming video of our program and you can download audio podcasts of the Market Analysis and Market Plus segments absolutely free at our Web site. Of course, join us again next week when we'll preview the government's next crop production estimates. Until then, thanks for watching. I'm Mark Pearson. Have a great week.
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