Market Analysis: John Roach

Market Analysis: John Roach

Feb 14, 2020  | Ep4526 | Podcast

Podcast

The coronavirus, weather and traders waiting on Chinese buying had a mixed effect on the market. For the week, March wheat plummeted 16 cents and the nearby corn contract lost 6 cents. Despite worries over the above mentioned factors and predictions of large South American crops the March Soybean contract gained 12 cents. March meal added $1.80 per ton. May cotton rose 27 cents per hundredweight. Over in the dairy parlor, March Class III milk futures lost 37 cents. The livestock sector was mixed. April cattle put on 53 cents, March feeders added $3.53 and the April lean hog contract shed $1.95. In the currency markets, the U.S. Dollar index rose 43 ticks. March crude gained $1.70 per barrel. COMEX Gold added $10.60 per ounce.  And the Goldman Sachs Commodity Index grew almost nine points to finish at 396.80. Joining us now to offer insight on these and other trends is our senior market analyst John Roach. Hello, John.

Roach: Thank you, Paul. How are you?

Yeager: Welcome to the Midwest. No polar vortex this year like last year when we bring you up in January. We just liked a good day of single digit weather just to remind you of your geography now.

Roach: It was crisp out yesterday morning.

Yeager: We'll get to what you talked about in some of your meetings. I want to discuss that in Market Plus. But I want to start tonight with wheat. This is a market that we watched a lot of 2020 heading up, but now here in the last little bit we've seen it going down. What is happening?

Roach: The wheat market had a lot of support from the spec funds that carry prices higher until it quit. And even though they have mostly held onto their net long positions until just this last week where they started to liquidate a little bit. We pushed the wheat market up and checked one of the boxes that we pay attention to is when the spec funds get over a normal net long position. When they get over 75% of their normal peak net long position it's like getting everybody on the same side of the boat and it gets dangerous and it gets wobbly up in there and that is what, we started to wobble and we broke down the green line and the 20 day moving average that we look at and turned it into a downtrend and ran right into spec fund selling as a consequence.

Yeager: Have enough people jumped off of one side of the boat? Are they going to continue?

Roach: The spec funds continue to hold a larger than normal net long position. They continue to trigger that box. However, they could hold them. They don't have to sell out. They're certainly welcome, they certainly may, their programs may have them holding these positions but typically if the market moves into a downtrend and that downtrend persists for a little bit they become even more aggressive sellers and I think we saw some of that this week and unless something stops this downtrend we can see more of it next week.

Yeager: If I'm sitting with some grain to sell, is it time to sell?

Roach: Well, I think if you're holding too much wheat, we're just talking about Chicago wheat, soft red winter wheat and to a degree the other wheats as well, if you're holding onto too much, if you're holding onto more than what you really normally would have then I think that you have to get yourself a more comfortable position, get some puts underneath it or something. We're already well off of the highs and I'm not a real anxious seller here but I'm worried about further liquidation and I'm worried about further pressure.

Yeager: All right. We get questions via Facebook and Twitter and Instagram each and every week and this week we got one from our friend Phil in Ontario, Canada. And he was asking, USDA report said corn exports down, however the U.S. corn being exported via rail to Quebec because the corn is so much cheaper there. But his question is, with more 2020 U.S. corn acres expected, how low could corn prices go in 2020?

Roach: Well, the market could certainly come down to last year's level if everything runs just excellent through the year and our demand continues puny. But I think we've been looking at the worst of the arguments here from a demand standpoint. I think demand will be more brisk as we move through the rest of the winter months into the spring. Brazil really doesn't have any corn to sell until their crop becomes ready and they're just now planting it. This week we saw the Chinese actually step in and buy some corn but they bought Ukrainian corn instead of U.S. corn so they're back at least buying a little bit. But so what I'm really suggesting to people is we have a normal kind of a year here, we're coming into the growing season, we've got to raise good crops and there's no guarantees that we're going to raise a big crop in this country or in Brazil. We have both of those crops really at risk right now and so our suggestion is be patient here in selling corn. We don't like selling a lot in February anyway. We think we'll get sell signals. Normally you get better prices in March and April and May. We have smaller carryouts forecast this fall than last fall so it's a lot of fear and a lot of possible if everything is big on the production side.

Yeager: Okay. There's the if and the fear and the possible side of understanding China's buying and what that is going to mean to the U.S. producer of corn. Traditionally not a big buyer of U.S. corn but we think they're going to buy. We hear in an agreement they're going to buy. Today is day one of implementation of phase one. What is the shoe going to drop when it comes to China and their buying and helping crystalize our grain picture when it comes to corn?

Roach: Well, we have a little curveball that has been thrown at us called the coronavirus and so we can't look at normal and look at past and try to project out in the future because we haven't seen anything quite like this before and it's not winding down quite the way it looked like it might be, in some of the numbers that have come out in recent days it is getting more scary perhaps. But it's not having a huge impact on the market, it's a small impact actually that we're seeing from the coronavirus. So the market, the big overall market is saying don't worry so much about that. Now, that may change because none of us really know, but at the moment equities are telling you that it's going to be a temporary situation as well as our grain markets. And so I think that as we look out forward, assuming that is the case, we expect Chinese business to be picking up because they have already sold a lot of their inventories, their stockpiled inventories if you will, or their surpluses and now they're down to where they're needing to buy some inventory in order to cover against one of their shortfalls.

Yeager: You mentioned coronavirus, they did a re-calculating of how severe it is. 1,380 dead in China. But just for perspective, we've had 14,000 deaths from the influenza in the United States this year. So this is still not a major problem. Is that what the market is telling us when they're saying this corona -- not saying discount it, but not give it as much traction as maybe it gets talked about or written about?

Roach: I think that's exactly right. Normally the market is able to figure out how good or how bad something is. Maybe this is a different time and maybe the market is giving us some bad signals. I don't know. But when I look at the marketplace, you just read the results of the commodity indexes were up this week, equities were up this week, so the marketplace is telling you the world is okay. Now, we may learn something different later, but at the moment the world is okay. And if you're marketing grain, market grain with the idea the world is okay.

Yeager: All right, everything is going to be all right. You're talking us off the ledge.

Roach: It's okay. It's okay.

Yeager: Today USDA put out some numbers that were old numbers that appear to be new numbers. The thing that stuck out for me, and I know you're going to tell me there was other things I should have been paying attention to, projections on USDA corn acres, 94.5 million, for beans though 84 million acres and a trendline of 50.5. From an acre standpoint let's talk about that first when it reflects to soybeans. Any surprise that that's not a change from November yet?

Roach: People's attitude as I've talked to several groups of farmers, three groups of farmers this week in Northwestern Iowa and I asked for a show of hands, how many people think the corn acres will increase versus beans on their farm? And we saw almost across all the meetings more hands coming up with increased corn acres and none on increased bean acres, or just maybe a hand or two. So at the moment the way relationships are farmers are going to plant more corn.

Yeager: All right, but there's also another factor, we talk about China with corn. China is involved in the soybean discussion but there is also a third party and that is Brazil and it has something to do with currency.

Roach: It has a lot to do with currency. And one of the things that I would suggest for those of you who are looking at prices in the bean, the market's decline and so forth, look at what currencies have done. Since January 1 the Brazilian real has dropped 8% and if you look at a $9.60 bean on January 1 that's a little over 75 cents a bushel of decline due to currency realignment. During that same period of time the farmers in Brazil afraid of what kind of deal we might strike with China and how much business they may lose have been much more aggressive selling, really for a period of several months they have more aggressive selling than what they normally are for fear they were going to lose the business. And so there's more going on here with the currency and that is having more impact than your beans than the coronavirus.

Yeager: All right, I have to move on, we'll discuss a little more currency in Market Plus. The cattle market, we talked about tariffs, there is a tariff that came off today on the cattle market. Is that impacting the price moving forward here as we see it did kind of tick up this week?

Roach: We saw the cattle market get slammed first before the tick up and the slam was a heavy liquidation of speculative longs and the disappointment that there was no business after phase one was signed. This week that turned. We had solid buy signals on fat cattle and on feeder cattle and we had a nice recovery here today, the market turned the corner. We think the market could move a little bit higher in there. We've got some front end numbers to deal with, we're a little worried, but at the end of the week and part of it was because of cold weather we saw the bids come back a couple of dollars after being down a couple of dollars at the middle of the week. So the market maybe is starting to feel a little better about the demand side.

Yeager: I left my price sheet in the control room, I can't even look up the number to help you out, however, speaking of moving up a couple of dollars up and down, the hog market has just been very hard to maintain. What is going on there?

Roach: It has just been down, down, down. There hasn't been that much back and forth, it has just mainly been down. We were all ready for the Chinese business and we have increased the breeding herd, we have held market hogs back and so when you look at the charts you can see we've just got big numbers of hogs now and coming at us and the Chinese aren't buying in the kind of volume we thought they were going to buy. And so we're pushing bigger supplies through a system than what the demand really, what we thought it was going to be. It's a smaller demand than we thought.

Yeager: And China is pulling from their own reserves again to feed their people as opposed to bringing some of our, at some point they're going to have to fill those reserves back up right?

Roach: Well you would expect that and you'd also expect them to start to import more because that is a substantial reduction in protein production in China and they need to import protein to cover it.

Yeager: The stories of we just didn't see a bounce back when it came for, after the Lunar New Year we thought we'd see some buying, but we still haven't seen that.

Roach: The headlines all shifted from what they were to coronavirus and that headline risk in the market, that's a black swan event in a market, if you will. Who expected something like that? And what is amazing about it is it came at absolutely the worst time when they put so many of their people together.

Yeager: It is a tough thing and unfortunately at hard times I have to interrupt and say, thank you, John.

Roach: Thank you very much, Paul.

Yeager: We'll talk to you in Market Plus in a moment. That will wrap up the broadcast portion of Market to Market. But we will keep this discussion going on Market Plus where we’ll answer more of your questions. You can find it on our website at Market-to-Market.org. Using Twitter allows you to stay in the loop with just a few characters. We share news, pictures and behind-the-scenes information on our feed of @Market to Market. Join us next week when we’ll look at how one business is helping landowners put some of their ground back into prairie. So until then, thanks for watching and have a great week!

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