Market Analysis: John Roach (April 12, 2019)

Market Analysis: John Roach (April 12, 2019)

Apr 12, 2019  | Ep4434 | Podcast


Midwestern weather, a potential trade deal and a WASDE report did little to move the commodity markets. For the week, May wheat lost 3 cents while the nearby corn contract dropped 2 cents. Lower than expected export sales, a large South American crop, and reduced Chinese buying pulled the May soybean contract 4 cents lower. May meal lost a dime per ton. May cotton declined 14 cents per hundredweight. Over in the dairy parlor, May Class III milk futures lost a penny. The livestock market ended mixed. June cattle added $1.10. May feeders put on 27 cents. And the June lean hog contract shed 48 cents after clawing back from a $3 midweek loss. In the currency markets, the U.S. Dollar index lost 41 ticks. May crude oil gained 61 cents per barrel. COMEX Gold dropped a $1.60 per ounce. And the Goldman Sachs Commodity Index added a little more than 4 points to finish at 452.05. Joining us now to offer insight on these and other trends is our Senior Market analyst, John Roach. John, welcome back.

Roach: Thanks, Delaney. Great to be here.

Howell: John, we had a pretty boring week in the grains markets this week as you look at the closes compared to last week. Corn, soybeans, wheat, what's going on? Are we just waiting for some Chinese trade news?

Roach: We're waiting for something. We're right at a crossroads. We have a battle going on with your biggest customer and we have a weather situation out there that is very unusual. And so we have both the demand that is uncertain and we have the supply that is uncertain and the supply situation of course becomes more critical as we move into the next week and the week after because it's planting season and the weather is not cooperating just yet.

Howell: I want to talk about planting from a wheat perspective. Obviously hard red winter wheat we've got some of that in the fields. Spring winter wheat planting is trying to happen at the moment. Are we going to see a shift in acreage here because of all the wet weather and awful weather we've seen across the Western Plains?

Roach: We sure may. There's no doubt that farmers are still making up their mind what they're going to do when they can finally get into the field in the wettest areas. The problem with spring wheat is there's so much competition coming out of Canada increasing their acreage as they move away from rape seed because of the Chinese situation. So the competition for spring wheat has pushed the price clear to, it's the weakest market we have right now.

Howell: The spring wheat market?

Roach: Correct.

Howell: Are we going to see weather add any support to the markets here longer-term as we watch to see acreage shift around?

Roach: I was at a meeting in Ogden, Iowa today, or yesterday I guess, with about 100 farmers and I asked how many of them were worried about the crops right now and how many were planning on maybe changing their acreage mix a little bit and most of them really did not raise their hand. They're really not overly concerned yet. Maybe next week that would be a completely different response. So we're right at the critical part of the weather. Our planting progress as of last Monday was right on target so we really weren't behind. But the progress this week and then the following week will become very important to the market. And it may very well give us a lift in the price. We have everybody leaning on the downside of the market. Commodity funds are holding record short positions in several markets, and near record in the others, and so they're all leaning on the side of markets going down at the same time that we might be ready to get a deal with China and we might have a problem with weather. And so the market is going to have to make adjustments if in fact we have those issues develop.

Howell: And one of the markets that is record short positions is the corn markets. John, we touched a new low this week in the July contract, $3.64. Are we going to hold here at this low or do we have the potential to head lower?

Roach: Well, we have the potential certainly to do anything. All we would have to do is talk about African swine fever in the United States and we're going to rewrite the whole demand picture. And so there are things on the horizon, and I don't mean that they're coming at us, but they are certainly being identified as something we have to watch, that could be devastating to us. And so certainly you could have that. But let's take that away for a second and just talk about what is probably likely to happen if we don't have something really abnormal. And what's likely to happen is the market should bottom in this timeframe and we should have some recovery as we start to worry about the size of the crop we're going to be able to raise and that should start at any time. We have a buy signal on corn right now that I think is four days old and it has three of the four boxes that we follow checked. And so that says it's really a fairly reliable kind of a buy signal, not that it will work always, but it's one of our more reliable indicators. And so we're telling livestock people use this weakness in the corn market to accumulate your corn needs out into the summer on into almost to the fall.

Howell: You mentioned you have three out of the four boxes checked. John, what is the last box you're kind of waiting to see if it gets checked in the corn markets?

Roach: It's what we look at with the commodity spec funds. When we get the spec funds all on the long side of the market it's a great sale. When they're all on the short side of the market frequently it can be a great purchase. And so that's where we have them right now, it's the money flow, we call it, is at completely the opposite side of where it should be in order to check the fourth box.

Howell: Okay. What is the story in the soybean market, John? We got some news that maybe we've got an enhancement mechanism put in place here with China, but we also had the WASDE report. Did those just kind of balance each other out for a fairly neutral week in the soybean markets?

Roach: Well, the WASDE report really gave us very little news as far as beans were concerned, there were very little changes made there. But the China news keeps coming in as positive and then negative and then positive and I had to define for some millennial people in my office what Chicken Little, the Chicken Little story and we're continually ready for the Chinese but then they didn't appear. And so that is the dilemma we're facing right now and we've heard it so long that we're a little bit, believe it a little like we believe Chicken Little.

Howell: Okay, I like that analogy. When you look at the WASDE report we keep hearing this one billion bushel carryout in the soybean markets, or we're nearing it. Is the market past the point of caring about that number, John?

Roach: That's a really good point. We've been dealing with that number for months now. I like to tell people that this market is battle tested. How many times have you seen a market where you lose your number one customer and then you have record surplus supplies and the market is dealing with that for a period of months and maybe even something worse coming along in some horrible hog disease. And so that is battle testing a market. And so we're down on the bottom side of all of this and it's certainly, we could get worse, we could have some of these bad things happen. But typically what happens is the market anticipates the bad things and we overreact the market and it's never quite maybe as bad as we thought it was going to be and then markets recover. That's the history of how futures markets trade. And so we've been trading the situation with the African swine fever in China now for how many months, it has been several months that we've been trading that, so it's not a new thing to the marketplace and in all likelihood a lot of it is dialed into the market unless there's something new on the horizon that comes in.

Howell: John, since we're talking about African swine fever I'm going to switch things up because sometimes our pork producing friends get the shy end of the stick here. Let's talk about the African swine fever situation. We saw a huge export sale this week to China, 77,000 metric tons, maybe a little bit more than that. How much does this really change the African swine fever picture in your eyes?

Roach: Well, I think that the picture is bleak and we don't know if we know for sure how bleak it is. We had reports earlier on the show about the loss of the herd. And so we don't know how tough it is. The reporting out of China is somewhat suspect. And so we're really uncertain. But when we saw the Chinese business come for our pork this week that is what really lit the market back on fire. And if you look at January through February we supplied about 5% of the pork China imported. Germany supplied 20%. Spain supplied 20%. The Dutch put another 8% in. So they're buying pork from around the world in sizeable quantity. And so I'm not sure that their population yet is walking away from pork as a diet item or they sure wouldn't have paid all those extra levees and premiums in order to get that pork delivered to them at these high prices.

Howell: When you look at maybe the spillover effect that the hogs are having then on the cattle, are we seeing some strength in feeders and live cattle because of pork prices being maybe at a higher level?

Roach: Yes I think we are. I think the right way to look at the situation as far as pork is concerned we have a protein shortage that has come on in the last six months and so that is going to impact protein prices worldwide for probably quite a few more months. I don't think that this is something that is solved in weeks, this is months that it's going to take to solve. So protein demand in general is going to be rising. And one of the things that is also interesting is that the Chinese are back in buying meal, sorry, back in buying beans in the export sales report even though with the tariffs and so forth and then their livestock, there's all the reasons in the world for them not to buy any and instead they are. Now, they're not buying as big as what they were last year, but they're still buying a little bigger than what people would anticipate if they have the problems that we think.

Howell: Okay, John, we've got a good question here I think really sums up maybe some questions a lot of producers have when we look at the cattle market in particular. We've got Ethan in Dows, Iowa. He said, with the mud in the north are cattle feeders sending them to the packer at a lighter weight? And if so, will that lead to lower placements in the next cattle on feed report and a rally in the fat cattle futures?

Roach: Well, he's certainly right about we're moving cattle at lighter weights. Our weights for the cattle going to packers are running lighter than where they have been. The only exception to that is the formula cattle where they're running a little higher. So what the packers is doing is they are trying to get, take as few of their own cattle into the slaughter mix and try to build as much weight as what they can. So the anticipation is that beef prices are going to be stronger out forward because of the tight supply situation that we’re in. But we have to be careful, that is going to cross with the placement numbers, which show bigger numbers that are coming in the latter part of the summer. And so we really have to be careful that there's a seam in here where the lighter weights are going to help us with the positive prices followed by more cattle coming that are probably going to put pressure back on our market.

Howell: So longer-term the outlook is more pressure on the markets.

Roach: Pressure on the market, in general from the cattle business. But I don't want to put too much pressure in because, again, this is a protein shortage that we have in the world right now.

Howell: Okay. John Roach, you summed it up quite nicely. Thank you so much for your time today.

Roach: Thank you, Delaney.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at While you’re there, check out the Classroom. Our virtual schoolroom gives you a chance to explore the science, technology and business of agriculture. Join us, again, next week when we explore the life of aerial applicators who dance in the sky while taking care of nature’s bounty. So until then, thanks for watching. I’m Delaney Howell. Have a great week!



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