The commodities biz is in the tank; here’s why that’s bad news for Nebraska, Iowa

Source: By Russell Hubbard, Omaha World-Herald staff writer • Posted: Sunday, March 13, 2016

Omaha, we have a problem: The commodities biz is in the tank.

High supply of and low demand for the stuff the world eats, depends on for fuel and uses for building supplies mean low prices paid to the producers of those commodities.

Those producers, in turn, cut back production because they aren’t getting paid what they had been accustomed to when supplies were low and prices high.

That has been outstanding for everyday folks, who are paying gasoline prices almost $1.50 a gallon lower than two years ago.

But viewed from a wider lens, a low-price commodity market has a profound effect on the economy of Nebraska — a main hub for agriculture, transportation, ethanol production and grain handling. Those are four major components of the commodities ecosphere. It affects Iowa, too.

And the lagging commodities economy has some mentioning the R-word — as in recession.

“Commodities are in a depression, manufacturing and industry are in a recession, and the consumer is on the sidelines,” said Matt Troy, a transportation industry analyst who follows railroads for Nomura Securities. “I don’t see good prospects for a recovery in 2016.”


» Omaha-based Union Pacific and Berkshire Hathaway-owned BNSF Railway, the two largest railroads in the nation, employ almost 15,000 people in Nebraska and haul a good deal of the nation’s rail freight. And a lot of that is pure commodity — oil, ethanol, grain, lumber.

Both companies, and their five brethren among the seven largest U.S. railroads, had freight shipments fall in 2015. And so far in 2016, overall volumes are down 6 percent for Union Pacific and 2 percent for BNSF.

» Ethanol inventories held in storage have skyrocketed, reducing selling prices. That has major implications for Nebraska, whose ethanol industry is the nation’s second-largest, trailing only Iowa’s. Ethanol producers are finding it harder and harder to earn a profit from grinding corn into the motor fuel.

“Ethanol is subject to an odd mix of bedfellows. Ag and oil. Midwest and Middle East,” said Brett Frevert, chief financial officer at the Southeast Iowa Renewable Energy ethanol plant in Council Bluffs. “Ethanol prices generally follow oil prices, with plenty of caveats, but also must follow corn prices to some extent.”

U.S. ethanol producers have had a tough time lately, said Bill Lapp, of Omaha-based commodities consulting and forecasting firm Advanced Economic Solutions. They’ve expanded capacity and become more dependent on exports to sell the extra gallons. But a strong U.S. dollar that makes American goods more expensive overseas has crimped that.

The stock price of Omaha-based ethanol producer Green Plains is down more than 40 percent over the past year.

“U.S. production continues to outpace demand for the time being,” Green Plains Chief Executive Todd Becker said in a statement earlier this month.

Because ethanol and oil prices are related, things are improving a little, Lapp said; crude prices — despite being down sharply over the past couple of years — have started to rise in recent months.

“It will be very positive for ethanol if that persists,” Lapp said.

Lapp, an economist with a graduate degree from Purdue University, said the whole oversupply started years ago as China became the world’s largest economy with a huge appetite for food, fuel, fiber and building materials. Producers ramped up production based upon growth in China’s economy that then was averaging about 10 percent a year; it has since slid to about 7 percent and is forecast to drop a little lower.

» Farmers are sitting on record stocks of grain held in storage, waiting for better prices. Corn is going for about half of the $7 a bushel it fetched just a few years ago. That has crimped anyone in the farm-to-table business — farmers, railroads and grain brokers — all of them big businesses in Nebraska and Iowa and in Omaha itself.

BNSF and Union Pacific alone furnish plenty of clues about the economy because of their status as gatekeepers, transporters of the stuff that makes up the physical world. Some of the news so far this year has not been good:

» Shipments of metals, down 15 percent at Union Pacific.

» Petroleum, down 28 percent at BNSF.

» Grain mill products, down 15 percent at U.P.

» Coal, down at least 30 percent at each railroad.

U.P.’s stock is down about 29 percent over the past year. Because it’s part of Berkshire Hathaway, BNSF doesn’t trade on its own. Neither railroad commented for this story.

Actions show the state of play in the industry and beyond: Union Pacific said last week that 4,100 union workers on trains and in yards and terminals are now on temporary layoff, up from 3,900 in January.

“Scaling back is a painful reality,” said Joe Schwieterman, a transportation industry professor at DePaul University. “The railroads can talk all they want about competing more with barges and trucks, but the fact is, there is just less traffic.”

And there is now twice as much coal stockpiled on the ground awaiting use by utilities as a year ago, meaning there is no hope for resurgent shipments of the fossil fuel to bail out the railroads.

(Although coal is under criticism and tighter regulation for environmental reasons, it still accounts for more than 30 percent of electricity generation and is a profitable cargo for the railroads. It is being squeezed out by cheaper natural gas, which also is in oversupply and which most utilities can burn instead.

What’s it all mean for consumers?

Jerry O’Flanagan, chief credit officer at First National Bank of Omaha, the state’s largest bank and one of the nation’s largest credit card issuers, said his information indicates consumer spending at retailers is rising after being flat for quite some time.

“But it does feel like we are treading water somewhat,” O’Flanagan said of the broader economy. “It doesn’t feel robust, but it doesn’t feel terrible, either. If there is another recession, God forbid, I don’t think it will be as bad as 2008.”

Many economists figure that lower gasoline prices — about a dollar a gallon less than a year ago, thanks to the oil oversupply — are putting an extra $2,000 to $4,000 a year in the average family’s wallet.

And overall consumer inflation has remained little changed for some time now, according to federal figures — good news for the families with a little more cash at the end of the month.

But as is often the case in complex systems such as economies, there is more than one side to the story.

Troy, the transportation industry analyst for Nomura Securities, argues that people have been using their extra money not for higher consumption but to repair their credit and bank balances after many years of using plastic for restaurant lunches and vacations to theme parks.

Rational behavior, for sure, but it does nothing to increase the consumer spending that accounts for two-thirds of gross domestic product, according to the St. Louis branch of the Federal Reserve.

Which recalls the concept of there being a lot of moving parts to an economy: What seems required now is to achieve an equilibrium that earns a profit for both commodity producers and commodity users while leaving consumers confident that they can spend some more of their surplus.

And that is a hard thing to come by, said Lapp, the Omaha commodities consultant.

“There is an economic model that suggests such a sweet spot, when commodity producers are making a profit but consumers aren’t burdened,” Lapp said. “But I think by and large we pass through those without even knowing it.”

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