Market Plus: John Roach (April 12, 2019)

Apr 12, 2019  | 11 min  | Ep4434 | Podcast


Howell: This is the Friday, April 12, 2019 version of the Market Plus segment. Joining us once again is John Roach. John, welcome back.

Roach: Thanks, Delaney, nice to be here.

Howell: John, we had a little bit of discussion about the Chinese market and how that has been having some impacts on U.S. commodities. I want to talk about it from a feed markets perspective because we hear often times from analysts and folks in the industry that African swine fever is having such a negative impact on the feed industry, especially when you look at soybean and soybean meal. But that's maybe not the case that you're taking or the stance you're taking on that is it?

Roach: Well, I'm taking the stance that it has had a huge impact, there's no doubt about it. But the idea that we look out forward and continue to extrapolate that situation for months off into the future it doesn't make any sense to me. People will want to eat, people will eat and people who raise chickens will raise more and people who raise ducks or aquaculture will raise more and the feed demand for all of those other protein sources will become bigger as we lose the feed demand from pork, or at least that's my opinion, that they're not going to shorten, reduce the protein supplies by that amount that will reduce their feed consumption and demand by as much as what some of the numbers are that I'm seeing.

Howell: What are you expecting them to see in reductions instead?

Roach: Well, I think we've seen them. I think we have probably seen the worst of the situations. And so I expect that the Chinese demand as we move forward let's say for the next six months, will ramp up from where it has been. I'm not sure that it's going to be explosive or anything like that, although if we make a deal it could be. But I do think that we have to think in terms of we have played the African swine fever very, very hard into the marketplace, it's not something we just discovered last week, it has been around for a long time. And in the futures business, by the time the people, we say the shoe clerks, are talking about it, it's probably already in the market. And so we think that may be the situation. Now, we're all operating on lack of knowledge here because we don't have the kind of trust in their reporting we get out of China and so we're all uncertain about that. But in general when we talk about markets you don't normally get to trade a market for years, you get to trade a market for a few months and the market will have adjusted enough in that period of time.

Howell: So have we, if that's the case John, have we already traded the African swine fever to its fullest extent or do we have a couple more months of that story?

Roach: We could sure have a couple more months. But the idea that we're thinking about oh this is a five year deal or something like that, I don't buy into that. I heard people saying that yesterday, isn't this going to take five years, I don't think so. I think the markets are much more efficient than that. And so I think that we're a long ways through the process already.

Howell: Okay, unless maybe we saw reductions of more than 30% of the Chinese hog herd?

Roach: Well, it certainly could be and that certainly is a possibility. But usually the smart money knows it well before the shoe clerks do. And so by the time it gets down to my level I figure the market has already dialed most of this in.

Howell: Okay. Let's talk about the market dialing in on a trade deal. We've got LJ here in Minnesota saying, even if a deal with China gets done, can we expect much upside potential to the grains being that African swine fever is rapidly reducing that Asian hog herd? So I think we've maybe answered that portion of the question. But the rest of it there, can we expect that much upside potential?

Roach: The thing that's interesting is the market has been beating us down for so long that we no longer think we can have better prices. Stop thinking that way. We still have to raise big crops, we are still increasing the consumption that we have every year in coarse grains around the world and oil seeds around the world. We grow soybean demand at 4% per year and corn at close to 3%. So the idea that we can't rally this market don't think that way, we certainly can. And when would we normally do that? Normally during the growing season, which guess what, that's right around the corner, and we're late. And so we've got to think in terms of the market still has some opportunity in here. Now, when we get the rallies we've got to be ready to sell them, we can't stand around and not get our job done. But the idea that we're never going to have a better price down the road, we've got to be careful with that. We've also got to be careful that we're not maybe making some sales on new crop for the bushels that we can't store. I'm most concerned about new crop beans that you can't store on the farm. If you look at the ending stocks that we're going to have this fall before the combines go in the field it's a huge number and it's going to be a large number again next year. So we're dealing with really big numbers here. So when the market gives you the opportunity to make sales, when you get sell signals, you've got to take advantage of them and get new crop stuff sold as well as old.

Howell: John, you're saying that folks shouldn't be looking to make sales just because they don't have on-farm storage?

Roach: I think that you should make bean sales because you don't have enough space to store them. That's right. If you can harvest the beans, put them in the bin and store them, that's what I'd do. I'd carry them around until next winter to see what we have. I don't think we'll probably have as bad of news as we had this year, but heaven only knows. But if you don't have storage, if you're going to have to sell at harvest time, you need to understand the bins are full at harvest time and it's going to be a really poor bid. And so as I said last time I was on, people will hold those beans until they have a birthday, not because they want to, but because they couldn't get their sale made.

Howell: Okay. You also mentioned there that seasonally we usually start to see a little bit more price action around planting time or the growing season. Are we still going to see those normal patterns continue even with all of the other fundamental factors like the Chinese trade deal?

Roach: Sure because weather trumps trade deals.

Howell: Always.

Roach: Well, not always, no, not always. But weather is the important factor here. We have to raise good crops and the market is acting as if that's no problem anymore and I don't agree with that.

Howell: Okay, so here's an interesting question that is on social media here, a Twitter question. Darren in Elkhart, Kansas @Buck_Farms on Twitter said, how long before the market realizes that no field work is done in the Corn Belt? I'm not sure no field work is accurate. But a lot of fall field work didn't get done.

Roach: Exactly and that’s the whole point, the market will start to -- @Buck_Farms, I like that -- I think the market starts to react to that the latter part of next week.

Howell: Okay, that early.

Roach: Yes.

Howell: And once it starts reacting, John, what is going to happen next? Are we going to see finally moving out of some of these ranges or just a little bit of volatility?

Roach: Well, here's the possibility. We have the speculative traders, the spec funds short a record quantity of corn and almost a record quantity of soybeans and so if the market starts to go up they have shorts that they have to buy and that stimulates the market to move even a little higher. In addition to that you have the commercials and we saw on the commitment of traders report today the commercials have some of the smallest hedges on for this time of year that they've had in a long time. They have less than 1,000 contracts of soybeans the net position hedged. So either they have no inventory or else they're comfortable holding it without any hedges on which is not typical and it's the same situation in corn. They have very small hedged positions on corn, short positions which would be against long inventory. Commercials have almost no inventory and the spec trader is loaded up on the short side with record short positions. To me that is the perfect ingredient for a nice, sharp rally. I just have to get the catalyst. I just need a little more bad weather, I need a China deal, I need something to light the fuse because the fireworks are all sitting there and everybody is on the same side of the boat here. So if the fireworks come, a little bit of fireworks come, you could light off a pretty nice explosion and if you're a farmer you need to use that opportunity to be getting sold on old crop and part of your new crop.

Howell: I think that answers this question pretty well but I want to just run it past you because we've got Tom in Cleghorn, Iowa here on Twitter, @notilltom. He said, with the boats in grains and soybeans so overloaded with shorts when will they need to buy their way out? And shouldn't this cause some uplift?

Roach: That's exactly what I'm saying. But here's the thing, Tom, they won't get out of those positions until the market begins to trend higher. And the ingredient that we look at or the line we look at is the 20 day moving average. If we can get the price of the nearby beans up above the 20 day moving average it will start to trigger some speculative buying short covering to get out of short positions, same situation in corn. Get up over the 20 day moving average you'll start to get some buying. Now, on the further rallies you're probably going to run into farmer selling unless they're worried about their crop because they can't plant. So that is the, if you're holding onto inventory and you're wishing for something, wish for two more weeks of rain, which would light the fire and have the farmers worried enough that they won't sell very quickly.

Howell: They'll just trickle it out through the markets.

Roach: Well, they'll be cautious. And so that is what is stopping all these rallies is farmer selling. What's causing the rally is spec buying when the specs come in to make a purchase. So it's really those two components of the market that are kind of working toward some sort of a resolution here of this low volume trade.

Howell: Okay. John Roach, thank you so much.

Roach: Thanks, Delaney.

Howell: Join us, again, next week for a look at aerial applicators who dance in the sky while taking care of nature’s bounty and Naomi Blohm will join me at the Market to Market table. Until then, thanks for watching, listening or reading. I’m Delaney Howell. Have a great week!

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