Market Plus: John Roach (June 9, 2017)

Jun 9, 2017  | 14 min  | Ep4242 | Podcast


Pearson: This is the Friday, June 9, 2017 version of the Market Plus segment. Joining us now is John Roach. John, welcome back.

Roach: Thanks, Mike. Great to be here.

Pearson: We are very glad to have you. We're glad because we’ve got a lot of great questions from our followers on Facebook and Twitter. We encourage all of you to find us on whatever social media site you like. We're happy to take any questions. To begin with, we've got a question here from our buddy Phil up in Ontario, Canada. He's on Twitter @AgriDome. Phil wants to know, does this crop year/price scenario right now strongly resemble last year when the corn price topped out June 18th? Can we expect that again?

Roach: Phil, that's a really good question. And yes, I think it very much resembles last year and really for the last couple of years. We have come into this time of year with plentiful supplies in the bin by and large and uncertainty in the field. And then that uncertainty, which when it didn't rain and it didn't rain and it didn't rain started to scare us to death, suddenly changed, the rains came and surprise, surprise, we raised the biggest crops we've ever raised, which nobody was thinking that in June. So we're in exactly the same position. Have we hurt the crop enough so that we're going to lose the yield? Maybe, but probably not, it's too soon to tell. That's what people tell me. And so as long as we can get enough kind of moisture to keep us along, there's plenty of moisture down underneath in most places. And so yes, we could change this around very quickly with rains or we could accelerate it pretty rapidly without rain. And I think that's the key to understand is just exactly how powerful the market could be if the weather doesn't cooperate because we have all of this energy that is underneath the market in the form of speculative shorts that came into this whole rally with record or near-record short positions and now those short positions are hurting and they're getting out of them. So the weather is stimulating technical buying, it's also stimulating some user buying and as a consequence we've got the market up this far and last year that's exactly what happened, it went on for another week or so and then it rained. And when the rains came the weather problem was over and we have to be aware that that could be exactly what happens again this year.

Pearson: These opportunities could be very short-lived given the shorts coming out of the market and the fact that we're, you're exactly right, just waiting on rain. I looked at the ten-day forecast for East Central Iowa and I think we're expected to be 100 degrees over the weekend with like a 50% chance of rain next Thursday. We haven't had rain in I believe we're coming up on 15 days. But the crop still looks good. One rain storm and hey, we're in good shape.

Roach: And they'll probably still look good in a week because they're at that stage in their development where they sink the roots down, it finds water and so forth. But the marketplace will not be patient with that. The marketplace will grab a hold of that on Monday morning. We're going home today on Friday afternoon, I can't imagine a more bullish forecast in weather. You just gave it to me. So that's where we're trading, so we already have some of that weather discounted, if not maybe quite a little bit of it, but next week we're going to play the game all over again. Nothing in the USDA reports today will take away our weather market. The weather market is still solidly here.

Pearson: And did anything on those USDA WASDE reports jump out as a shock to you? It looked to me like it was all fairly in line with analysts' expectations.

Roach: If there was a surprise it was that the wheat crop is a little bit better than they thought. That was really the only surprise we saw there. And we had some better crops, wheat crops around the world that were a little bit better. But otherwise not much of a surprise. Very small number differences compared to the guesses.

Pearson: Right, which leaves the weather market in full force. Next question is also from our buddy Phil up in Ontario, Canada. He says, can we expect a corn acreage surprise in the USDA report on June 30th? Or, in lieu of that, has the corn crop been compromised by tough spring conditions?

Roach: We certainly have had a lot of replants, we're already in some of the northern regions we're past the insurance date you have to have the crop planted and it's not and so people will decide not to plant. And so prevent plant will probably be bigger. People are talking maybe it could take a million, million and a half acres out of corn. I'm not sure, might be a little bit aggressive, but they're pretty smart people that are saying that. So I guess I'm of the opinion here that we've had the bad news on corn. Now we're going to play with the good news for a little while. Bear in mind, the weather is going to be in there and it's going to be a component of it. But the news is better than what the news was. And that is a different psychology than we had in the market up through the last several months.

Pearson: The news being better meaning, for lack of a better word, more bearish or bearish leaning for the corn crop. We've already digested tough spring, we've digested replants, now we're looking at we need demand and we need moisture to keep the crop growing.

Roach: Yeah, but I don't think I said that right. What I really was trying to say was that we've had such a negative attitude around the corn market for months and now suddenly in one week we have a more positive attitude. And are we only going to get a week of it? And what my suggestion is, is that, no, there's several things out here impacting this corn crop and the corn market and corn demand that are positive. Before the President of China came to visit President Trump in Mar-a-Lago in Florida we were scared to death of what kind of a problem we were going to have with China and how it was going to impact the trade. And as it turned out all for not, it looks like we're better friends than we were before.

Pearson: Somebody is still buying an awful lot of beans, John Roach, it's unknown, but somebody is out there buying.

Roach: Yeah, exactly right. So I just think we're in a more positive atmosphere now than what we've been in and don't forget to put that into your thought process a little bit.

Pearson: Gotcha. Next question is from Jacquie in Colorado. Jacquie is on Twitter @jkholland89. Jacquie wants to know, we talked about this on the program, this is a great question, Jacquie. Will the aging waterway system impact long-term commodity pricing and supply?

Roach: More interesting to me is it will impact users' and processors' decisions on where they locate plants and work around the government. The government is notoriously slow in making those improvements to waterways and so forth. But the industry is very adept at figuring out where the best place is to put the next plant. And so we have taken areas that used to have the worst corn bids in the state of Iowa and turned them into some of the best corn bids because there's three ethanol plants there. So the industry works around whatever problem that you give it and so the more interesting aspect of that conversation is between now and the time they get the rivers fixed how will the industry change to take advantage of that slowed transportation? And what we've seen so far is we need less of the river traffic than we used to need.

Pearson: That's true. Or we're utilizing the river in a different way where shipping fertilizer and beans out, not necessarily all the corn going down the Mississippi as an example.

Roach: Yes, exactly.

Pearson: Hmm, interesting. Final question from Ronald in Bremer County, Iowa. He's on Twitter @RKZelle. With no sell signals on corn or beans, and of course we do have a sell signal on corn as you mentioned on the program, and this is the prime time to sell and it's running out, what should a producer holding old crop, waiting for a signal, do?

Roach: Sell. I hate to sell when there's no sell signal and I've had sell signals, all of them at higher price levels that we've taken advantage of. But if a market doesn't quite get up to give you a sell signal but you have several other ingredients, the weather, the technical fund covering, the funds covering their short position, you have those ingredients just dribble out smaller sales. Cut the quantity, but don't leave yourself in a lurch where you're stuck with inventory coming into harvest and miss the whole selling season. So go ahead and make sales, just make them small, and when we get our next sell signal in beans you'll have one or maybe two and then that's it.

Pearson: Yeah. So incremental sales, minimize or at least reduce your risk a little bit.

Roach: Reduce the size of your inventory. The reason, I'm guessing this, but the reason he's asking this question is he's got a bigger inventory on hand than what he's really comfortable with. And a lot of people are in that position, particularly on corn. If you're in that position in corn, don't feel alone, you have a lot of people out there that are in the same position.

Pearson: Now, John, before we let you go we've heard a lot from the Federal Reserve, from President Trump and we're expected  to see interest rates increase. Is inflation a concern yet, or should inflation be a concern yet for producers?

Roach: I think it should be. I think it should be a concern really for everybody in the country. I think we've just deficit spent our way into a position where that's really I think our only way out of it. But it is being camouflaged now partially because that's what the treasury is trying to do is to not move interest rates very fast and not tighten the supply at all, but also because a lot of people look at energy as the leader for inflation. And energy supplies are increasing fast enough that our price is cheaper if not inflating at all and so people are ignoring the inflation potential of commodities because of what is going on in oil. That's a mistake. People are not going to be able to substitute oil for all the other commodities. And so you can have an inflationary period, you can have the commodities inflating, even though you have one or two of them that are actually going to new lows. So I think that you just have to look at what is going on around the world and the world is starting to come alive again after having the worst recession since the Great Depression and we're coming out of it. We're now several years coming out of it and the stock market is roaring and there's a lot of positive things that are going on around the world. And so I think people have to be ready for the next step of it, which is inflation.

Pearson: Alright. If people don't believe there's inflation, go try to price a pickup truck today versus what you could have bought in 2012. It's unbelievable how much stronger prices are, even in the used pickup market, which is where Pearsons do our shopping.

Roach: I was going to say, what is a 2000 model worth?

Pearson: I hope it's quite a bit because I've got several. Alright, now, before we let you go, John, we've got a question this week from a student up at Iowa State. We encourage all of you students of any age if you've got a question you want to ask our great analysts, get out your phone, film a little question and send it into us. This one is from Craig up at Iowa State University.

Mikayla: With the direct incline in our population, how do we expect to feed the growing population of 9 billion?

Pearson: My bad, my apologies, that was not Craig, that was Mikayla Dulch up at Iowa State. I'm very, very sorry, Mikayla. That's what I get for not looking very closely. But, how do we expect to feed the growing population?

Roach: Mikayla, we have to depend on farmers to raise bigger and bigger crops. We have to depend on the genetics to be developed that will allow greater yields per acre. And what’s interesting is that this was a serious discussion that was really thought to be a problem we were going to contend with before year 2000. I started in the business in 1973 and there were people writing books --

Pearson: Paul Barulich, wasn't he in the '70s, the population bomb?

Roach: Exactly, and we were going to run out of food, there was no way we could feed everybody, and yet agriculture for the most part around the world is a capital business, capitalistic business and so people are able to respond to the market forces. And when the market forces give us higher prices we get lots more of the commodity. And all you have to do is just go back and take a look at when we got the big prices, because of a crop problem, back in '12 and '13. We're still buried under those supplies. And so have faith in the system but don't let anybody take over the system because taking over the system would be that which would cause an inability to be able to feed people. And you can look around at countries in the world today and they have exactly that problem today and they can't figure out how they got themselves in that position and they can't figure out how to get out of it. But it's all a matter of they took the capitalism away from food production. That's failure.

Pearson: As long as the market can set the price you'll get people that produce to respond to the price signal.

Roach: That's exactly what happens.

Pearson: Well, John Roach, thank you so much for taking the time to speak with us this week. We always appreciate your insights.

Roach: Thank you very much, Mike.

Pearson: Join us again next week when Ted Seifried will sit across from me at the Market to Market table and we will focus on how one group of hog farmers is producing pork with a purpose. Until then, thanks for watching or listening. I'm Mike Pearson. Have a great week. 

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