Market Analysis with Don Roose

Market Analysis: Don Roose

Oct 21, 2016  | Ep4209 | Podcast


Two bearish factors kept the grain trade in check this week as the dollar hit its highest mark in more than seven months and harvest pressure kept resistance on the top side even with some bullish export news. For the week, December wheat declined 7 cents and the nearby corn contract moved 2 cents lower. A surging real coupled with strong export demand pushed beans to four week highs as the November contract finished the week 21 cents higher. December meal went along for the ride adding $5.90 per ton. In the softs, December cotton gave back part of last week's gain moving $1.50 per hundredweight lower. Over in the dairy parlor, November Class III milk futures reversed trends to rise 48 cents. In the livestock sector, prices added some weight as the December cattle contract increased $4.43. November feeders rose $4.05. And the December lean hog contract declined 38 cents, now at eight week of losses. In the currency markets, the U.S. Dollar Index climbed 69 basis points. Crude oil again finished north of $50, the second week in a row, up a dime a barrel. Gold added $12.20 per ounce. And the Goldman Sachs Commodity Index declined 10 points to finish the week at 375.95.

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.

Pearson: We saw a lot of strength in the dollar this week, also saw wheat pull back a little bit. Is that just that correlation, strong dollar, weaker wheat prices? Or is there something else going on?

Roose: Well, I think exactly. Number one, overall there's a glut of wheat not only in the U.S. but around the world. So we have to make sure that we're very competitive, particularly on the export market. And when the dollar moves higher, like you said, seven month highs, it's a bit of a headwind. But really what the wheat did is we were very competitive on Dec wheat down around the $4 mark on Chicago, then we move up closer to $4.30 and instantly we become uncompetitive and so consequently we start to roll back to the downside. So really it just confirms that we just maintain that trading range market until we can run into some kind of an event that moves us out of it, probably more than likely weather. But when you look at it next year we're the only major country that is going to have a wheat production decrease as far as acres. Europe is going up. FSU is going up. Australia is going up. Canada is going up. So the rest are increasing their production and we're going to try and cut back a bit.

Pearson: Now there has been some concerns as we look out globally to some of the rainfall events and that protein is going to be lacking in some of these outside markets. Is the U.S. high protein wheat going to find substantial export business as we roll through this year?

Roose: Well, and that's a good question because that's exactly right, that's one of the things that we have for an advantage in the world market and that is as we move through the year we're going to see that the high quality wheat is going to become more valuable, it's going to get a little more scarce. So we are going to have an advantage on that end of it until we see some of this new crop production from other countries come on stream. So we think that's going to be a supportive factor for the wheat and that probably keeps us from really moving too much under the $4 mark on Chicago.

Pearson: Okay, so watch that $4 to $4.30 on the Chicago contract, $4.25 I suppose. Any chance basis is going to improve in any of these wheat growing areas in the near term?

Roose: Well, that's the real problem, the wheat basis, you get in the hard red winter wheat areas where you're a dollar plus under, still harvest is way past and it's just a real issue. And it just tells you the competitiveness that we have not only in the wheat market but the overall grain supplies in the world. So the basis levels will improve. We've got carries in the market. We'll distribute over time as we do so you just have to make sure and use that carry in the basis to your advantage when you're merchandising and marketing.

Pearson: Alright. Well, now we want to talk about this corn market. And we've got a question here from one of our followers on Twitter. This question is from Drew Rempp, he's on Twitter @drew_rempp. And he's asking a question that I know a lot of folks were thinking this week. Can corn rally past $3.60 or is that resistance solid?

Roose: Resistance is pretty solid. Really when you look at it from a chart formation we had a head and shoulders target of $3.63 on December corn up around the $3.73 on March corn so that's tough resistance and part of the problem is the carries in the market. The strength really in the market is coming from short covering and lack of producer selling. But when you stop and think about it, how hard it was and the amount of time we spent over $4 this last year, not that long, in December '17 corn got ever so close to $4 again this year so you're already at some carry, some risk management opportunities. July corn goes up to over $3.80. So I think it's just the fact that what is fair market value? And to put it in perspective, since 2005 we haven't spent much time over, 70% of the time we've been under $4.50 on December corn. So we don't stay over that very long.

Pearson: Alright. So now as folks are getting into their corn, and we're seeing a lot of variability, but by and large strong yields, folks maybe haven't marketed as much as they thought they had as these bushels started coming in. For producers facing storage concerns, cash flow needs, are you selling corn now and reowning at any point later in the year? And if so, when?

Roose: Well, you have a couple of problems. One, you're going to sell with a poor basis. So if you want to reown with futures you probably have to neutralize the basis a little bit. It's a bit confusing but you buy the futures and sell a call above it saying that you're going to gain time value there. Otherwise from a long-term perspective if you're concerned about weather, you don't want to pay the storage, I would say that you're best to go way out into the September and put on a bull call spread, buy a call, sell a call, give yourself an 80 cent window and wait to see what unfolds with the weather down the road. It's really, to break out of this trading range and out of this bear psychology you're going to have to run into some weather problems some place around the world, South America first, then us.

Pearson: And with that September contract you'd be looking at maybe a $4 call to buy, sell the $4.80?

Roose: Well, that's a good point. Probably the $3.80 call and probably sell a $4.60 so you're giving yourself some kind of an 80 cent window there. Part of the problem with it, it's not easy, if you really want to own the upside market you have to own the cash to get the basis in the carry. You go out to September you're going to give up the carry right away so you don't have everything you want but you have something, at least you're in place in case something big happens.

Pearson: Okay. Looking down at this soybean meal market, beans on a tear, 21 cents. What is the topside of this current bean rally?

Roose: Well, the bean market has been, it did the classic thing, it bottomed the first week of October, does it over and over, year after year, then we rally into the third week of October into the first week of November. And your real question was what's the topside. I tell you it's very tough to have the November beans go over $10 unless you're going to have some weather problems in South America. And, by the way, that is the next tissue on the block. I think our harvest now basically we're saying is a large crop, it's basically not the focal point anymore, it's a matter of what the producer does with it here. But the next bull story possibly is do we get some weather problems in South America? So rallies up close to $10 are very hard to sustain. On the other side of it breaks when you get down into this $9.20 to $9.40. You have the Chinese buying almost on a daily basis, that continues to support us. And they're doing that because they want coverage until they see what happens in South America.

Pearson: And in South America we're still anticipating bean acreage growth, just not as much as we've seen in the past, is that correct?

Roose: Yeah, that's what we're looking for. In fact, if you look at South America, of course they raised between Argentina, Brazil, the whole works down there they raise about 1.5 times the beans that we do here. But Brazil, for example, had about a 96 million or 95.5 million metric ton crop. We think they'll be about 102 next year. But the real issue is do they get a weather problem? And then the other issue that we think is going to happen, next year we think bean acres are going to be up about 5 million. So that's a huge number --

Pearson: In this country.

Roose: In this country. So that's a huge number and that means the carryouts, you put the numbers on them, that's a lot of beans, carryout easy goes over 500 million, 600 million if we get the same types of yields we had this year. So it's a lot of supplies out here but we do have some weather events that could develop in South America.

Pearson: Now, as we're looking ahead to South America and potentially almost 90 million acres of beans in this country, are you aggressively marketing your November '17 crop?

Roose: Exactly. I think that's what you're looking at. When you have November beans at $9.85 we go home at the end of the week here in that zone, you're getting close to $10, you look at it without weather problems and the big crop in South America, big crop here, that's going to look like an attractive price. It even looks like an attractive price today. But remember, we do have a La Nina year, it's a weak La Nina so far, Mike. And what that means is you can have issues in Central West Brazil all the way down into Northern Argentina. So it's going to be a dicey situation. I think again you'll have some weather scares, you'll have some problems. You're supposed to have a warmer and drier condition in that area over actually about 50% of the area so it could be a big deal but it's a weak La Nina, maybe a dud, you still have to market the crop as if you've got something coming at you.

Pearson: Alright. Well now let's jump into this livestock market. A positive week in live cattle. We're up back over $100. Are we climbing or are we establishing a range?

Roose: Well, where we're really at in the cattle market if you step back, and we've thought this for a long time, you're in a multiyear bear market. We think that it's two steps down, one up. We think that you're going to try and put a low in next fall about this time, closer to $83 to $90. And by the way, August cattle went under $90 this week and then bounced back over it again. So those numbers aren't so unrealistic, particularly when you look at the hog prices that we have here. So had a positive cattle on feed report on Friday, probably going to start the week out a little bit higher. But we've had three days of fund buying, the technicals look a little bit positive, but the cash market has to perform and the beef is moving slow at the retail level so far.

Pearson: Given that we're two steps back, one step forward, at this level are you looking to put some risk management in place? Or do you think, as you mentioned, Monday we could see a little more strength and then get aggressive managing risk?

Roose: Well, I think if you're buying feeders right now I think actually some of these feeder cattle work pretty well from a risk management standpoint. So we're all in favor of getting some risk management on in a supply, multiyear supply bear market. So yeah, we think that risk management, we think you could go a little higher. Tough resistance if you're just a trader on December cattle $105 or $108 and that's going to be tough to get through that area. But we could have some weather issues again on cattle. You start looking around Thanksgiving and you can get into some storms, some mud, but it's   La Nina year so that means the South feedlots are supposed to be warm and dry. So we'll see.

Pearson: Now you mentioned feeders, starting to get towards break even for a lot of the cattle feeders out there. Is there still downside pressure to come in this feeder cattle market?

Roose: I think there probably is a bit. But when you get the cash down around this level they start to work from a feedlot standpoint, from a risk management standpoint, you're probably getting to a bit of a floor. And $100 certainly is big support any time you look at it on the feeder cattle.

Pearson: Okay. You mentioned lean hogs being a headwind for the beef market. These hogs just keep getting cheaper. We're eight weeks now in declines. Where is the bottom?

Roose: Well, you're in one of these years, just like we've had other years, the 2002 when you went to that $29.40, 1998 when you went to $20.

Pearson: That makes people cringe when you mention 1998.

Roose: Right. Not that we're going to those areas but we're fighting into those low type of areas. You take, the board goes down to $41 in December, that's $31 live basically, $32. So the hog market is in a bear market. There’s too much supply. We have total meat supply is 3% over a year ago. Hogs are 3.8% this next year. Cattle 3.6%. Poultry 2.1%. So I guess my point is you're going to have a lot of meat coming at you. In the fourth quarter you have 5.5% more hogs coming at you than you had a year ago. So it's just a lot of tonnage and you're going to have to figure out how to sell it. Exports are picking up a bit but even only about 5% over a year ago.

Pearson: So they're not going to bail us out of this hole completely, we're going to have to start chewing on a lot of pork chops.

Roose: Yeah, that's what we're going to have to do. We're literally going to have to chew our way through it, like you said.

Pearson: Chew our way through it. Well, Don, thank you so much.

Roose: Thank you, Mike.

Pearson: That wraps up the broadcast portion of Market to Market. But Don and I will keep the market conversation going including answering more of your questions during Market Plus which is available on our website. And this week on the M-t-o-M podcast we'll take a bite of a new apple that could be a game changer on two fronts. You'll find it wherever you get podcasts by searching M-t-o-M. And join us again next week when we'll examine how a producer co-op is helping tobacco farmers transition to new crops. So until then, thanks for watching. I'm Mike Pearson. Have a great week.


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