Market Analysis: Arlan Suderman

Market Analysis: Arlan Suderman

Aug 7, 2020  | Ep4551 | Podcast

Podcast

Expanding drought conditions wilted in the face of private estimates in the Corn Belt. For the week, September wheat tumbled 36 cents while the nearby corn contract lost 8 cents. Soybeans drifted downward to join in low prices by wheat and corn as the crop size estimates surged. The September soybean contract fell 24 cents. September soybean meal lost $9.20 per ton. December cotton gained 2 cents per hundredweight. Over in the dairy parlor, September Class III milk futures plummeted $2.47 or 13 percent. A mixed week in the livestock sector. October cattle shed 70 cents. September feeders climbed 33 cents. And the October lean hog contract increased $1.68. In the currency markets, the U.S. Dollar index added 7 ticks. September crude improved $1.61 per barrel. COMEX Gold jumped $60.90 per ounce. And the Goldman Sachs Commodity Index expanded 5.25 to finish at 343.95. Joining us now to give us some insight is one of our regular market analysts, Arlan Suderman. Hello, Arlan.

Suderman: Good to be here, Paul.

Yeager: Good to see you there. Let's start in your back yard, the wheat contract. Just when you thought it couldn't get any worse already the Kansas City hard red contract low set in and then Russia and Canada said, oh yeah by the way our crops are better. Are there more bears in this market?

Suderman: That's what they're trying to find out and the momentum traders are certainly driving it. And you're right, Canada is looking like a good crop right now, Russia has got a better crop than first thought. And Russia, the Black Sea really sets the price. And so with a bigger crop than expected in the Black Sea that means that they're expecting to see lower prices pushing our market down.

Yeager: Well, we've seen Chicago give back 80 cents in the rally since June and July, it's a heck of a give back. We had a nice bump there. Is there any chance that this thing can turn around?

Suderman: There certainly is a chance. And it's going to be tied to the corn market too. If we can put a bottom in the corn market, and I presume we'll probably be talking a little bit about that today, that would certainly help. But right now the market is focused on the supply side of the balance sheet across these commodities. At some point it will be comfortable with what that supply side is and it will start focusing on demand.

Yeager: You mentioned corn. There was this company that came out this week with one of those private estimates that pushed us way above trendline yields in the corn market. It is your employer, Arlan, so what is it that the company is seeing in your estimates? And is there more corn out there than even what is estimated?

Suderman: Yeah, I've seen some higher estimates even than what we printed. But what we do is a survey of our customers across the country and especially the Midwest, if you were to pick a yield today that you think would be the final yield, we're not predicting USDA and the next crop report, but we're predicting final yield as of the 1st of the month, what would you think it would be? And then we compile that all into state and national yields and it came to 182.4 bushel yield for corn and 54.2 for soybeans. That 182.4 sounds really high but it's only 2.2% above trend yield. So that's really not that much above trend and I think it's just a perspective thing. But in reality I've heard higher yields, we have had some dry pockets in some locations, we've got some uneven stands in Illinois and those are the factors that I think are -- and obviously the dryness in Iowa, we can't leave that out -- those are the factors keeping us I think this year from a 187 or a 188 is those unevenness factors. Right now it does look like a good crop and above trend.

Yeager: Well, the stats from the drought monitor yesterday said 18% of total corn producing areas are experiencing drought. That is west of us here in Johnston, Iowa. They have gone from the darker brown to the red and that area keeps expanding. How much larger does that circle need to get, Arlan, before the market kind of starts paying attention?

Suderman: Well, it's all going to come down to supply and demand and so what they're watching is the various yield models and what they say is believed to be the size of the crop. And obviously Iowa weighs heavier and Illinois weighs heavier than some lower producing states. So they're watching that. Last week we saw the crop ratings drop about 3 points in the good to excellent category. If they drop again 3 points this week that will lower production expectations and that will start to narrow the surplus. But right now with an anticipated surplus stocks of around 2.8 to 3 billion bushels the trade is really not too concerned about it until we get a much lower production estimate.

Yeager: We have a question from Brian in New Providence, Iowa that I want to get to. I think it's also one of those factors you talked about, demand. Brian is asking, Chinese corn reserve auctions have garnered quite a bit of attention by selling out and at higher prices each consecutive auction. Is their domestic demand extremely strong or supplies tight? What picture does this paint for continued demand from Chinese on U.S. corn?

Suderman: Well, the answer to that is yes, their demand is strong, even with African swine fever reducing feed consumption it is strong. Their supply is limited. Their production, production tends to go up year after year, we have trend yields that go up, etcetera, but in China it has really flattened out. Demand has continued to go higher as production has flattened out. And so right now they're consuming about 25 to 30 million metric tons per year more than what they are producing. They have been leaning on their reserve, they quit putting corn in their temporary reserve back in 2015, that was the last year. They have been auctioning off supplies to fill the deficit. And based on our contacts on the ground we believe they will have about a three week supply left in their temporary reserve. They still have a permanent reserve and that is a big state secret what size that is but we're not really too concerned about that because right now the sentiment of the Communist Party of China is to build that reserve, not let it go down. So their cash supplies are getting tight and that does raise the prospect of the possibility of significantly more imports.

Yeager: Okay, we're going to talk a little bit more, there's another follow up to that that I want to get to in Market Plus but we'll wait. That's what we call a tease. Arlan, in soybeans the Chinese are still buying that product from us as well. However, whatever support was in this market has really started to erode in the last five, ten days. Is there further erosion going to happen? And how much lower?

Suderman: It certainly could because we know about the robust buying they did in July and have continued in August. On Friday we got the announcement of 16.5 million bushels, the largest purchase since June 11th. They're continuing to really pile on the purchases. But the supply is getting bigger at a faster pace. The average trade guess is that USDA is going to increase its stocks estimate knowing about that demand over 5 billion bushels. That is a quite adequate supply and I think it will be even larger because our production estimate is larger and we believe we're looking at at least a 10 million metric ton increase in Brazilian production this next year if weather doesn't interfere. So the western hemisphere is producing too much. So, again, the market is focused on supply, the price will erode lower until it feels like it has priced in whatever the size that supply is and yes, that can be below $8 and then it will start focusing on demand and I think demand will be robust this fall.

Yeager: And that was kind of the fear this spring but we kind of held off on this large crop sentiment. Right now you mentioned about Brazil, are they truly out of soybeans in Brazil?

Suderman: Well, they're not out of soybeans but their domestic market needs most of what they have left so their basis is really strong right now trying to price what is left of their supplies out of the export market so they have enough to make it to their harvest for their domestic needs.

Yeager: In the livestock market, there were signals flashing Wednesday into Thursday that maybe live cattle had seen the top and it appeared that those technical signals were right. Question is, how much further does this thing fall in live cattle? 

Suderman: Yeah, the question is do we go back and retest the lows and create a sideways trading range? I think that will be the real test to where we're coming out of recovery. Certainly you mentioned the idea of a pop in the market. We're watching the product market closely. We found some good demand when choice cuts hit $200 which started to bounce off that. We saw the big surge in exports but now those exports have kind of slowed once again. That is a real concern going forward. Restaurants being closed because of coronavirus and all the restrictions, California you can't eat on a restaurant premise, that's 13% of the nation's restaurants right there. Without that restaurant and food service and with a number of schools not being in session, going remote again this fall, that is really hurting demand and beef does not have the export demand that pork does.

Yeager: And there has been a low interest in that. What is the reason for that on the cattle market?

Suderman: Well, the world is well supplied right now and so we're really backed up on the supplies from when processing plants were closed in the spring. We have cut the excess weights about in half from where we were back in May so we are making progress. But it's going to take much of the rest of the year really to get current in the cattle market.

Yeager: And the low interest is still falling in the feeder market as well, right? Is it the same scenario that you're talking about in live cattle?

Suderman: Yeah, we've seen a little better interest in feeder cattle, although I think that may start to wane now with the fats looking like they may top out. But it has really been helping with the cheap corn prices helping to offset that somewhat and so we have seen better than expected interest in some of the calf sales.

Yeager: All right, that's a pretty good chart right there headed up higher. Is there more room to go up or are we kind of at that top?

Suderman: Yeah, on the feeder cattle it's really, again, going to be a factor of the fat price and how much do we correct lower and how low do corn prices go? Keep in mind that the cattle feeder tends to be the eternal optimist so if he sees cheap corn he's always going to believe those fats are going to go higher.

Yeager: Oh so that's who is the most optimistic. It's always the cattle feeder, isn't it? All right, in hogs again, it's a low interest story. But we were looking at a contract low play somewhere in the $47 range but then that thing kind of reversed late week. What's happening there?

Suderman: Well, we got a big jump in the product price on Thursday I believe it was up $3.76 per hundred weight for the composite pork index and that really helps the formula prices as well, the board responds to that, that ties directly to what we're going to settle the August contract against. We've got some support. I'm feeling like maybe we've hit a bottom. The board was nearing that bottom where we had previously set so we did see some fund money come in. But I think even though we have robust export demand accounting for about a third of our pork production we've still got a big supply problem there. We've still been producing about 11% to 12% more pork year on year and the demand has not been matching that so we can't get away from ourselves and price it too higher because we're starting to back up pork at the ports in China with all --

Yeager: All right, Arlan, I appreciate your time. Good to see you. We'll talk to you in Market Plus in just a moment. As we said, that will do it for this installment of the TV show Market to Market. We will talk more in that program I just called Market Plus so you can join us there. Find it on our website at MarketToMarket.org. Now, if you want to get a rewind of this week’s market analysis or track what our analysts have been saying for the past few weeks, you can do that in podcast form, all of them are available on our website. Next week, we’ll look at how the Federal Reserve tracks happenings in the Grain Belt. Until then, thanks for watching and have a great week.

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