Market Plus: Don Roose

Oct 21, 2016  | 11 min  | Ep4209 | Podcast


Pearson: This is the Friday, October 21, 2016 version of the Market Plus segment. Joining us now is Don Roose. Don, welcome back.

Roose: Thank you, Mike.

Pearson: We've got several questions from our followers on social media, both Facebook and Twitter. But first I wanted to pick your brain on this cotton market, Don Roose. Big week to the upside last week. Sizeable week to the downside this week, $1.50 lower. What are we doing?

Roose: Well, cotton is very much like a lot of these other commodity markets, the grain particularly. When you move to the upside you just run into consumer resistance, you run into a lot of resistance. So when you get up around the 75 area of resistance you get down to the 60 area as a support zone and I think when you back up and you look at it it's really the Chinese that continue to control the market. They have the big ending stocks and they have the big demand underneath of them. So I think some of the other countries like Vietnam and such are supportive underneath the market. But I think it's one of those that I think they're going to be cautious on chasing rallies with the big supplies.

Pearson: You get a bump up towards 70 here in this current market make some sales and reown down around 67, 65?

Roose: I think until you get some weather problems, something changes or some economic thing that changes I think you're in that type of range, 70, 75 top end of the range for right now.

Pearson: Okay. You talked about China controlling so much of the world cotton stocks, for years, three years at least, we've been talking about China's massive corn stockpiles and they announced earlier this year China was going to begin to export corn. Big announcement. I think we talked about it on this program. And I haven’t heard anything. Is anybody buying Chinese corn?

Roose: Well, I tell you, when you look at it the Chinese, they did, they made another announcement this week and to put it in perspective they have about 50% of the world surpluses from an ending stocks standpoint. They are artificially high as far as corn to the rest of the world. Their producers are being paid too much. They want to send an economic incentive. Actually what they've done is they have a five year program where they want to increase soybean acres, increase the soybean production and cut the corn production and they’re making some real moves. Look what they did on the DDGs as far as basically putting restrictions, the big tariffs on the five companies. So no doubt they’re trying to get their corn market back in line with the rest of the world and incentivize their producers.

Pearson: And if we're looking at a year, this next  year with potentially 5 million more acres of beans and beans do make a lot of sense from a cash flow perspective and a $10 perspective, how much should we be worried about five years from now when China has increased their soybean production? Will they do you think?

Roose: Well, my experience since I've been in this business, I remember when I first started, the EU we were going to be selling all kinds of grain to EU, now they're an exporter. Then it was Russia was going to be our big savior from an export standpoint. And now they're exporting. Now it's China. So I tell you, I wouldn't underestimate the Chinese to secure their own food supply and produce. All they do is have to move from a non-GMO to a GMO and you've got excess supplies just like that. So I think those are some things you have to watch. I think they want to be self-sufficient on their food supply and I think that's their goal. And thy have issues just like we do. Their hog growth is huge now after big cutbacks, they're down 20% on the year over there too on hogs.

Pearson: Alright. Let's get to some of our Facebook questions, actually Twitter. This is from Philip Shaw, our friend up north in Ontario, Canada, @Agridome on Twitter. Phil wants to know, what are the chief reasons corn prices have rallied since August? And then he wants to know as a follow-up, do we go sideways or down from here?

Roose: Well, that's a good question and the market is pretty smart. We put our lows in the end of August, that was right at the time when we thought we had 175 bushel yield, there was talk of even bigger 176, 177, who knows. Since then if you really look at it, step back, it's gotten smaller from a yield standpoint, still too much there's no doubt about that. The other thing the producer when he looked at it he was not going to sell corn sub-$3, he wasn't going to sell it at this cheap price and so he didn't, he's squirreling away everything he can, he's still not selling it. He's trying to figure out how to merchandise at higher levels down the road either through the carries or something. So where do we go from here? We're in a trading range, if we don't get some weather, we're in a trading range $3.30 to $3.63 like we talked on the show, head and shoulders top up there, tough resistance, puts corn near $4 on '17. Without weather problems in South America, which we could, there's a weak La Nina, like we said, you're going to run into maybe your first harvest, probably really the second harvest in the winter when the producer here in the U.S. has to sell, at the same time South America is starting to harvest their first corn crop and their soybean crop. Remember, they start harvesting their soybean crop the middle of January.

Pearson: Right. And so we've got, we're coming through, we're into a New Year, we've got tax implications, farmers are making some sales here. With that being the case, should producers looking to store a lot but knowing they're going to need cash in January be making those January cash sales today, go ahead and contract those out if possible?

Roose: Yeah, I think you should be doing something. There's no doubt when you're off the mat by a long ways, like we said this last week you got up to over $3.80 on July corn, not a great price but it's better than what we had. And you can do some options. You can buy some $3.80 puts and sell some $4.40 calls for not much money and still give yourself a chance to go to $4.40 but you're protected at $3.80 with a carry. And remember, September corn was $3.02, Dec corn put a low in about $3.15 so July doesn't look so bad at $3.80 and at least it helps pay some bills.

Pearson: Are you also marketing your 2017 corn crop? Are you selling some of these Dec '17 at roughly $4, $3.85, $3.90?

Roose: Well, if you don't think you're going to have a dry drought crop issues, when you get close to $4 most definitely you should and on top of that if we don’t get problems going forward when you sell 2018 corn at $4.15 to $4.20 that doesn't look so attractive. Those sales you can also buy some insurance with some call calls to the upside but you have some management and you're able to keep the cash flow going. So those are not bad levels. I know we're just coming off of a multiyear of good crops. So any time we can stumble here and 80% of a market is always weather.

Pearson: Alright. Next question from Tomm in Urbandale. We talked about this a little bit on the show but I'd like to get into a little more detail. Tomm is asking, would you be looking to forward sell the '17 bean contracts that are over $10? Look into, I suppose you've got to go into March of '18 to get over $10?

Roose: Well, yeah, because you have November '17 beans close out at $9.85 and so you put a carry on that market. But if you look at it, if you think we're going to get a big crop you can sell the November '17 and you'll build a carry in. Look where we're at this year, you're going to build in a 30 cent carry, so you're at $10.15 already if you really look at it from Tomm's standpoint. So those are attractive levels. And, like I say, you can sell those anywhere in this zone and then you can do some insurance with some call calls but you've got to plan going forward and I think that's more important because we don't know if we're going to have multiyear bear markets or we're going to continue with the good weather. It would be odd to not run into some weather problems here pretty quick that are serious. But you have to market today so you can survive tomorrow.

Pearson: Marketing today, are you selling November '18 beans?

Roose: We're a little more hesitant on '18 beans just because they can be so dicey and can change so fast and it's a little bit thinner out there. Corn we're a little more aggressive on the '18. And don't get me wrong, we're not selling 100% of the crop, but I think you can go out there and sell 10% to 20% in 2018 and get something going or do some window contracts. You can do like $4.20 puts against $5.20 calls, that's a pretty good range.

Pearson: Yeah it is. Put $1 in there, it's not bad. Final question, Chris Swenson from Northwest Minnesota, Chris is asking, are we still in a 10 year cattle cycle? Does that model still apply today? And if so, where are we? And you talked about it, you think there's still some downside. Does that 10 year cycle still exist in the cattle market?

Roose: Well, I'm a cycle trader on cattle but I think it's more of a 7 year cycle. I think it's 3.5 up, 3.5 down and if you look at it that's why we put the top in here about a year and a half ago, two years ago. So we've got a ways to go here yet. So I don't think it's as far out as you think. I think you're talking another year and a half and the market starts to look pretty solid, probably down to some levels that we can live with from profitability in the cow-calf operation and also from feeding cattle and hopefully the grain cooperates.

Pearson: Now, we've seen tremendous bloodletting in the cattle feeding sector. Are those guys just going to have to manage pretty tight margins for a couple of years before they can look to make some of that equity back?

Roose: Well, I think so. The good news in the cattle business is yeah it has been painful coming down here, we slashed all these commodities about 50% or more, so cattle are just playing catch-up with everything else. But we're actually getting down to some risk management where you can buy some feeders, make them work, lock in your corn, do a crush and the risk is much less now than it has been. You don't have probably some of these huge downsides like we had at one time and you’ve got a chance to make some money, hit some singles at a time rather than home runs.

Pearson: You bet. You're not hanging a $1,600 price tag on a calf on a rainy day, which is a pretty good sized risk.

Roose: Exactly.

Pearson: Final question for you. I lied earlier. We like to ask our analysts questions, help define the terms we discuss on this program. I wanted to get your definition, what does it mean when a fund is short covering?

Roose: Okay. When a fund is short covering, and right now what we have is the corn and the wheat are both short, in other words they're negative positions. And short covering means that they have a position sold, it's a negative position, and they want to get out of it, so they're buying it back, so that automatically pushes the market higher, buying back a position they previously sold and we call it short covering.

Pearson: So when a fund, when the funds are massively short as we have seen in the wheat market and in the cattle markets, you could expect a bounce just from them buying those positions out on any piece of bullish news.

Roose: Exactly. It's kind of the theory that, and people track that, how short the funds are. How short have they been before? How big of a negative position they have. And it's kind of one of those we have run out of sellers. So that's about the story.

Pearson: Alright. Well, Don Roose, thank you so much for your insight and your wisdom. We appreciate it. Thanks for joining us.

Roose: Thank you, Mike.

Pearson: Thanks to all of you for sending in your questions via Facebook and Twitter. Please continue to do so and tune into the MtoM podcast. Thanks for watching and have a great week. 

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