Market Plus: John Roach

Feb 14, 2020  | 12 min  | Ep4526 | Podcast


Yeager: This is the Friday, February 14, 2020 version of the Market Plus segment. Joining us now, John Roach. John, good to have you back.

Roach: Thanks, Paul, nice to be here.

Yeager: We always bring you back in winter just to remind you about things. You were meeting in, you came into Illinois for some business, went to Iowa for some business, you were meeting with producers, I saw the pictures from your Twitter account. I'm always curious, what are people asking you this year?

Roach: Everybody is trying to figure out what to do with inventories that are in the bin and what to do with this livestock market that seems to be weaker than anybody anticipated and what is going to happen with the plantings this spring.

Yeager: And did you have a magic answer for any of those?

Roach: Well, of course, you have to have a magic answer --

Yeager: Otherwise I don't invite you back.

Roach: Exactly, exactly, you have to have -- what I always try to do is to find something that makes sense, look through everything you're looking at and look to see what makes sense. And the two things that I try to deliver or maybe three points that I try to deliver to people is one, you have your heating oil price down and your diesel, your diesel fuel is down. If you're going to use diesel fuel this year go get some bought. Buy this scare that is going on and the reality that is happening in China, it's causing weak prices, it's time to accumulate some fuel needs. The second thing is it also beat the feeder cattle market. We had buy signals in the feeder cattle market and so we're pushing on people because we were up in Northwest Iowa in feeder cattle country or cattle feeding country and so those that need to look to buy some replacement cattle we would encourage them to do it. And on the other side look at the ending stocks on corn and beans and wheat and they are considerably smaller than they were a year ago at this time. The forecast for the fall we're going to have a lot smaller supplies of all three of the crops before we harvest than we did last year. So from a fundamental standpoint we really have a tighter surplus situation or smaller surplus situation. So we should have a relatively normal kind of growing season unless something really unusual distorts it. And right now it is being distorted. But I'm of the opinion, the market is saying this is not going to last. I don't know anything about it clearly but so at the moment I'm going to assume it's not going to last long and so I'm going to assume a relatively normal kind of a marketing spring for grain and I think we'll have opportunities and we'll have sell signals but we have to take advantage of them.

Yeager: Because traders are not going to buy into this delayed planting because last year we pushed it into June and later June and almost July in some spots and we got the crop in. So they're not going to be fooled by a delayed -- the thing that could probably weather wise have an impact is a drought.

Roach: Well, it certainly could. Droughts have a weather impact almost every year and sometimes it's major, we haven't had a major one for a while, but we've had some minor issues in various areas. So we normally have some worries and when the worry comes along, the markets rally, the trend changes, you get enough of a push upward, we normally get sell signals. And so we think you just be, you just have to be patient here through this period of dismal news. And look at the month, it's the month of February. We used to always say that the month of February was no good because people were selling grain to make March 1st payments. Now this year is a little different, we have some government money coming at us, thank goodness for that. As you saw earlier on the show a third of farmer profits are coming from government payments. So that is helping farmers be able to hold inventory here during this tough period of time but you've got to be ready to sell when the rallies come.

Yeager: I need to go back to one of the points you said about feeders. I wanted to follow up on something. Are you recommending right now to make any sales in that market given what you just laid out about tighter supplies of grain coming out?

Roach: We want to be on the buy side of the feeder cattle market at these cheaper prices.

Yeager: Okay. Let's get into the questions that come via Twitter and Facebook and we always appreciate each and every one of you that hit us up on Facebook and Instagram, MarkettoMarketShow or Twitter @MarkettoMarket. The first one is from Mark and this one, John, is a question about basis. He's asking, is a basis contract a good idea for corn or soybeans?

Roach: To answer your question, Mark, yes it is if you're in an area that has a very strong basis level. I was in Northwest Iowa, again, and talking to farmers who had basis on corn, zero basis and even here not long ago 10 over basis. Now, most of those farmers had never seen a bid that strong in Northwest Iowa. So to me it makes very good sense to go ahead and sell the basis when the futures market is cheap but you have to be ready to price the futures market on the next rally. In other words, pricing the basis so you can protect 10, 15, maybe 20 cents, but leaving the futures where you could lose $1. It's not a risk, it's not risk removal. You're taking away a piece of the risk but it's a small piece and you're still leaving the bigger risk and that is the one you've got to be careful with. I've seen people in the past, they fix the basis, but then they never get satisfied with the futures and they end up selling the futures at an even cheaper price. So do this as a short-term trade. You sell the cash or normally it is called hedge to arrive, you sell the basis and then wait here and on the next rally up you go sell the futures and secure the price.

Yeager: Give your advisor a call if you need help walking through that one or just hit rewind and watch what John said over and over again. Another question, this one is off our Facebook page, it came from MJ. And this one is on bets are on corn to get more acres and soybeans less, kind of what we talked about already. Just running his profit numbers. But the question that we have here is, what about the rest of the country? Are there certain pockets? You were in Northwest Iowa, John, if you go 100, 200 miles north it's a whole different story in what's across the prairie of South Dakota, North Dakota, Minnesota. There's a lot of corn still in the field.

Roach: There's a lot of corn still in the field and the corn that was harvested was not of the best quality and the corn that is still out there yet to be harvested is turning into junk very quickly. And so the concern is what are we going to do with that corn and how are we going to get enough good quality corn to blend with the poor quality corn to try to make it have some value? And so those areas that are still fighting corn in the field are going to be struggling to get that corn out and get the field work done and the new crop planted. Now, absent that delay, let's say that the weather turns off perfect and they're able to go out and get the harvest and so forth, most of the other areas are going to plant more corn and probably even those northern areas will plant more corn if they can get the job done, if the spring will allow them to do it.

Yeager: All that weather. And this week there was a report about flooding potential again in that Missouri Valley region and along the Missouri River itself. So it sounds like another story but if we get through that maybe it will just be all right and we can get those normal conditions. Let's go to Paul in Sioux Valley, Minnesota. He's asking, can we expect a rally in corn before the South American crop becomes available? The magic question is, if so, how much?

Roach: We normally do and I would think we could go back up to the upper side of the range of where we've been trading and that's about 20 cents a bushel. That's not a very big rally. It's going to take some sort of nervousness of something else. We're going to have to be reassured the Chinese are actually going to do business. And I think, by the way, let me talk about this Chinese business for a second. You have to take one of two approaches. One approach is they made this phase one deal and signed a deal with the intention of violating it from the very beginning and they're never going to do the business. You could take that approach if you'd like. I think it's a mistake. I take the approach that they're going to do the business but they're not going to do it and pay higher prices, we have to be competitive with other sellers. But I think they're going to try to do that business. I think they want to normalize trading relations with the United States. I think this whole trade war has cost them dearly and I think we have to take one approach or the other, I'm going to take the approach that the business is coming, I'm going to take the approach that we'll have springtime rallies. I'm willing to wait for them.

Yeager: So you're taking the optimistic approach to it.

Roach: I don’t' think it's the optimistic approach -- I think what it is, it's just simply acknowledging where the papers are at. They're signed. And so the problem is oh they haven't bought anything yet. Okay, well patience for a minute here. The paper is signed. Give it a little opportunity here. Don't rush out and sell in fear. I've never had a lot of market success when I was running in fear.

Yeager: Do you anticipate, markets will be closed Monday, Tuesday when people wake up, look at headlines and no buying, no buying, no buying, is that the panic that could set in if we don't see buying come? Are we to that point though where we need to see buying today?

Roach: No, I don't think we're to that point. I don't think we're to that point. I think that we are seeing buying. I think the demand in the countryside and the basis levels tell you that demand is very strong. You can't have strong basis and tell me there's no demand. They don't go in the same sentence.

Yeager: Good point. All right, last thing is the outlook forum from the USDA end of next week. What is going to be a bigger story when we're talking here next week? Is it going to be the weather issue? Is it continued rain in the South? Still cold? The economic outlook? Or China coronavirus? You get to pick one of those four. What is the biggest story we're talking about next week at this time?

Roach: Huh, the biggest story next week at this time.

Yeager: Given those four factors that we have playing into the market next week.

Roach: It's still going to be the coronavirus I think. I think that is still the news that we'll all be talking about. I'm not sure that it's what is really driving the market but that is going to be the news that we'll be talking about. I think that the outlook forum is going to tell us that we're going to have lots of grain for the foreseeable future and that's normal. One of the things, don't get so concerned about that at the forum because think about it for a minute, they're making all their assumptions based on normal weather. And if you think about normal weather and you think about the trendline increases in yield, we all are familiar with those trendline increases in yield but we used to have a carryover of a couple billion and we still have a carryover of a couple billion so obviously the demand has consumed all of those increases. But let me make a suggestion to you. There were a couple of droughts in that long-term trend and that pulled the supply down. Had there been normal weather through the entire period of time the surpluses would have built even bigger and so if you project normal weather for the next nine years you're going to have to project even bigger surpluses because there's no draw down with normal weather.

Yeager: Thanks for the normal conversation. Thank you, John Roach.

Roach: Thank you, Paul.

Yeager: And before I let John go, I've just got to say thank you to those that have done shout outs to us on their accounts. Hinch680 in East Central Iowa, huge thanks on their Instagram page for telling them to follow our page, we thank you for that. And if you do a big shout out maybe we'll give you a mention here in Market Plus. And next week when we're back on the TV show we will look at one business that is helping landowners put some of their ground back into prairie and Shawn Hackett will join us at the Market to Market table. Until then, thanks for watching, listening or reading. I'm Paul Yeager. Have a great week.

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