Market Analysis: Arlan Suderman

Market Analysis: Arlan Suderman

Jan 24, 2020  | Ep4523 | Podcast


The commodity markets faced weather in South America and traders waiting to see if Chinese buyers would make good on their Phase One promises. For the holiday shortened week, March wheat gained 3 cents and the nearby corn contract lost 2 cents. Higher U.S. soybean prices and the fact that Chinese demand has yet to materialize pushed the March soybean contract 28 cents lower. March meal lost $2.30 per ton. Cotton continued its decline falling $1.90 per hundredweight. Over in the dairy parlor, February Class III milk futures climbed 49 cents. The livestock sector ended on a down note, as February cattle shed $1.50, March feeders cut $5.32 and the February lean hog contract dropped 45 cents. In the currency markets, the U.S. Dollar index was up 28 ticks. March crude oil fell $4.40 per barrel. COMEX Gold added $12.40 per ounce. And the Goldman Sachs Commodity Index plummeted more than 21 points to finish at 405.45. Joining us now to offer insight on these and other trends is Arlan Suderman. Arlan, welcome to the table.

Suderman: It's good to be here.

Howell: Arlan, I know you look at the markets a little bit differently than some of the other analysts we have on the program so I'm going to let you just share how you look at cash markets maybe as opposed to futures.

Suderman: Yeah, in 2015 I was hired to develop our market intelligence department and under Dodd Frank the regulators tried to put a China wall we call it, a separation between research and the brokers, so that research couldn't guide the brokers and the clients the way they wanted them to do it. We took a little different route, another alternative, and that is allow me, myself and my team to be on the trading floor with the brokers so we have more grassroots oriented work, fundamental work that we do. The tradeoff of that is we can't forecast derivatives. But we work quite a bit in the cash and the basis markets and it allows us to do fundamental market intelligence that is more beneficial then to our customers.

Howell: All right, so we'll take a focus today very heavily on the cash markets starting off here with the wheat markets. We've seen futures especially continue to soar and we're finally seeing cash start to catch up here. Will we see those tighten as we continue on?

Suderman: Well, we are seeing a lot of strength in the wheat market and a lot of it has really been driven by the algotraders, the computer traders that are right now trading momentum into the upside. It paused and hesitated now over this past week. And fundamentally they're looking at the fact that the Black Sea region has been very dry, very little snow cover there, but they have been mild, no real threat. We've got a lot of dryness in the Southwestern Plains, obviously the Australian drought is well known. But frankly this is a case where momentum started on the upside and they're looking for fundamental reasons to justify it and there's some hope that we're going to get some business with China. One of the things throughout the Phase One trade agreement was that it holds China's feet to the fire with their TRQ requirements from WTO. And that could require them to buy another 5 to 6 million metric tons of wheat that would be new business on the global market.

Howell: So it really sounds like we're going to have some sort of, have to have some sort of fundamental catalyst to move cash higher here.

Suderman: Exactly right. And a lot of times the charts will show a move before we know what the fundamental reason is but those are some of the things that we're watching that could provide the fundamental justification.

Howell: All right, Arlan, you mentioned this week in your newsletter referring to corn I think specifically that farmers are remaining as reserved sellers. A two-part question for you. Is it time to make some cash sales? And what's it going to take if we don't see farmers making those cash sales?

Suderman: Well, we've seen strong basis this year obviously and it has been pretty much above average across the Midwest largely because farmers have been small sellers, they've had several market facilitation payment programs to help pay the storage bill while they wait to see if China creates the demand. That really hasn't happened yet. We did sell over the last couple of days, a little over 11 million bushels to unknown destinations, it may be China, some of our sources indicated that China had approved some purchases. We don't know if that's actually happened yet or not. We have seen an increase in farmer selling after the new tax year started and so that has come up a little bit. But still the movement of corn has still been less than what the processors need and so they've had to continue to have pushes into bids. It pays to ask for pushes and a lot of times you'll be able to get it, particularly if you have quantities to sell.

Howell: Share with me, I know you follow basis a lot over the Midwest, share with me some of those numbers that we're seeing. I know we're definitely above where we usually are at this time of year.

Suderman: Well, a good example, in Northwest Iowa, Northeast South Dakota, even into Eastern Nebraska we typically have a sharply negative type basis well below the futures contract and over the past week we've seen plus 5, plus 10 cents on that basis, giving some opportunities, flattening out a little bit, still a few pushes out there. The concern would be if we do get a rally in the board and we do see a sharp increase in farmer selling that we could see that basis break.

Howell: And basis obviously is a very good indicator of what the commercials are wanting or needing. We've got a good question here that got emailed into us today from Merrill in Illinois wanting to know, what are your thoughts concerning current tight basis and the carry for corn? And what are your views on soybean basis and carry as well?

Suderman: We've seen the carry change a lot over the last week as we saw the spreads start to narrow in the corn market while widening in the soybean market over the past week. And some of that is through increased demand. We're anticipating that export demand is going to improve. Right now South America is starting to run out of exportable supplies. We still have decent ethanol demand here in the United States despite the margins. Livestock feeding is strong. The other factor is with this crop is a little lower test weight, a little lower protein than most crops and so that requires a larger volume to feed in order to get the desired ethanol production, livestock production so it requires more than a quarter billion bushels per week to really go through the system, 250 plus million bushels to go through the system. Farmers aren't selling at that pace. That is what is holding us up now. If we get that rally on the board and the farmers do start selling we could see that basis fall apart. There's a lot of low quality corn that needs to be moved before spring and so the clock may be running out.

Howell: And what about when you look at the soybean basis?

Suderman: Soybean basis been holding up there as well but with soybeans if a farmer needs cash he's more likely to sell soybeans than corn, it generates more cash. And so we've seen a little bit more weakness start to develop there and a little less undermining strength.

Howell: Is cash at these current levels in the soybean complex undervalued?

Suderman: Well, the cash market, the basis overall has been stronger than normal, obviously farmers would say yeah it's undervalued, we want more. Fortunately they got the market facilitation payments. President Trump recently said no more payments after this last run of payments, that the Phase One trade deal is going to solve it. Now farmers want to see that happen. And I'm afraid they're going to have to wait a while because African swine fever has killed a third of the world's hogs. You can't have that big of a drop in demand without hurting it and most of our customers in China say they have booked the next several month's needs out of Brazil so we're going to have to wait a while. We are seeing some good processor demand though. The largest soy meal export sales in almost 30 years reported by USDA on this Friday morning and that was largely because we have Vincentin, the big crusher in Argentina, is facing financial problems and we're getting some of that business so oil sales were strong as well.

Howell: And you mentioned African swine fever there. I know also a new disease that has kind of hit the line this week is the coronavirus. Is that impacting the soybean market in particular?

Suderman: Yeah, I get a lot of questions on social media about why would coronavirus impact our prices. The markets are dominated by the funds and price is still a function of supply and demand but is modified by the flow of money so it changes how the markets operate. And with coronavirus it brings back a lot of fears of the SARS virus in 2002 and 2003 where people quit traveling, commerce slowed down as a result and therefore it was a drag on the global economy and so the funds, they don't know a lot of specifics about the commodities, some do but a lot of them don't and so they'll say oh, slower global economy, less demand for commodities. So when coronavirus hits the headlines, sell commodities.

Howell: Okay. Arlan, let's move on here to the protein markets. We had the cattle on feed report here on Friday. Was there anything to report there?

Suderman: Pretty neutral report overall. We saw marketings in December up about 5% as expected, on feed numbers were up a little over 2%, placements a little over 3%, no real surprises. One of the interesting things that we've watched in this and confirmed in this is we've seen higher cow slaughter here in recent months than what we would anticipate and a little higher mix of heifers and heifer calves in the feedlots and that suggests that we're shrinking this, we're looking forward to the cattle inventory report coming out shortly to see if we're shrinking this at a time when the world protein market is tightening up.

Howell: Arlan, we've got a question here, another social media question coming to us from Bradley in Upland, Nebraska. He said, looking at the chart activity in live and feeder cattle is this market signaling a top in current prices?

Suderman: Well, this is a time where seasonally we struggle a little bit. It's head of barbeque season and the packers start slowing down the speed of the chains in order to improve their margins, which we have seen them do, and that tends to pressure the cash a little bit and the board will follow. Then as we get closer to barbeque season we see more demand for the products. We have seen their margins improve but the cash market overall has held pretty well so I'm frankly pretty encouraged. There is some downside risk near-term but we're already seeing the effect of African swine fever on this beef industry as we're getting fewer imports in from countries that are going to China instead of coming to the United States. That is helping tighten up our market and I think we'll see more of that in 2020.

Howell: You mentioned risk near-term. How near are we talking?

Suderman: Over the next couple of months. Last year we stayed cool into the spring, how about if we change that and we warm up here as we get to the first of March and everybody get in the mood to light up their barbecues.

Howell: Definitely. Definitely. It's also barbeque season is a big thing that impacts the lean hog market. We had the Iowa Pork Congress this week. I had lots of pork producers saying make sure you spend some time talking about the lean hog markets. Arlan, tell me about the discrepancy going on right now between the cash and futures. Which is going to give?

Suderman: Well the futures market obviously has an export premium built into it. The expectations for the last 15 months has been big exports to China. China increased their exports about 75% in 2019 over the previous year but that doesn't even come close to filling the deficiency of protein that they have. Will they start increasing more from the United States? Our industry has ramped up and has the production available. We're among the cheapest supplies in the world. We need to get those tariffs waived now. Phase One should allow that to happen but with China you can have everything ready but they still may or may not do it, we need to see them actually come in and buy.

Howell: Yeah, and we had another question here on social media. I'm throwing a curve ball at our producers today. I'll paraphrase for it. Wanting to know looking at we've got a big domestic supply going on, we've got incredible export demand, so which will win at that tug of war in the lean hog market?

Suderman: Well, if in fact China does come in and I talked to someone who is in the industry and works a lot with the export market here in the United States, and I said it's my sense that if China wants the pork that they will bid it away from the U.S. consumer. And he smiled at me and he said, that's exactly what they will do and they will push the U.S. consumer toward more beef and poultry. And so it's now, it's a measure of the will, how much willpower does China have to go ahead and buy that pork from us in order to lower prices, which right now are several times the normal price. They have 20% food inflation in China and I think they're going to want to pull that down.

Howell: How will we see that impacting our domestic prices then for consumers at the grocery store?

Suderman: Well, so far retailers have been trying to absorb the higher prices that they have to pay at the wholesale level. But if that becomes more sustained they're going to be passing that along. And as the consumer sees higher prices for pork, don't take away our bacon, but for other pork cuts, then they'll start looking at the beef and the poultry and we've seen this in China, we're seeing it in Europe right now, which is aggressively exporting to China and I think we'll see it in the United States.

Howell: All right. Arlan Suderman, thank you so much.

Suderman: Thank you.

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 Subscribe to our YouTube channel to find our stories and some extended interviews by searching “Market to Market.” Join us next week when we’ll look at how a group of beekeepers are using groundbreaking methods to fight colony collapse disorder. So until then, thanks for watching and have a great week!

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