Market Analysis: Angie Setzer and Chris Swift

Market Analysis: Angie Setzer and Chris Swift

Sep 25, 2020  | Ep4606 | Podcast


The bulls ran out of feed with many markets giving back last week’s gains. For the week, December wheat fell 31 cents while the nearby corn contract declined 13 cents. It only took a week for the soy complex to erase most of the nearly 50 cent rally as the Chinese buying spree stopped and combines rolled. The November soybean contract fell 41 cents. December soybean meal weakened $3.50 per ton. December cotton expanded 29 cents per hundredweight. Over in the dairy parlor, October Class III milk futures decreased 73 cents.     The livestock sector was mixed. December cattle shed 45 cents. November feeders dropped $2.38. And the December lean hog contract gained 90 cents. In the currency markets, the U.S. Dollar index expanded 174 ticks. November crude oil fell $1.09 per barrel. COMEX Gold plunged $90 per ounce. And the Goldman Sachs Commodity Index declined nearly 11 points to finish at 346.80. Joining us now to give us some insight is one of our regular market analysts, Angie Setzer and a new face to the program, Chris Swift.

Yeager: Hello to the two of you.

Swift: Good afternoon.

Yeager: Chris, we'll get to you in a little bit. You can sit and listen to Angie. Angie, we've got to start with this wheat market. Last week we didn't think it was going to be a story compared to corn and soybeans and then this week there's some positive news for the price to go up but the market sure didn't reflect it, almost 5.5% down. There's dryness in Europe, Black Sea region. But that's not enough to offset what? What is pulling this market lower?

Setzer: Well, I think it's important to realize we were back up to the highest levels we'd seen since July there for a while. Dec was up into well above $5.50, you're looking at new crop July '21 has been trading well into the $5.80 range plus, looking at Chicago especially, that's the market I tend to trade and focus on here. So I think we really were due for a correction. Obviously when you're looking at Kansas City wheat though you cannot ignore the Southern Plains dryness, how dry it is, how dry it's likely to be because of La Nina and so I think that you could see some transition between the two market structures here where Chicago wheat is going to be going into the ground and has been going into the ground into really nice soil conditions, really good planting conditions, and really high incentive to increase those acres whereas Kansas City wheat is almost exactly the opposite. So it would not surprise me to see Chicago wheat start to sink a bit more and maybe Kansas City wheat get a little bit. The biggest problem Kansas City wheat has is just getting those outside investors to come in and start purchasing. But we are paying attention to what is going on. Australia does look like they'll have a bigger crop. Argentina is going to have a smaller one. But does that matter with what is taking place geopolitically there in their country? Ukraine's exports are down, their production is lower, Russian wheat is getting more expensive when you look at some of these offers they're putting out into the world. So still a lot of moving parts in wheat, still a lot of wheat globally though, still a decent amount of carryout here domestically on all sides. And so wheat is really going to have this ebb and flow of is there a potentially bullish story, especially with looking at what is going on in the Southern Plains combined with it's wheat and everyone likes to just sell wheat and move on. So we're going to really see some continued volatility there well into the January acreage report and then beyond into next year's production.

Yeager: All right, so the big question is, are you buying or are you selling this contract? Let's stick with Chicago since that's what you're --

Setzer: Chicago wheat right now I think is still overpriced by about 25 or 30 cents on our side here in the short-term and so when I'm working with customers we're still active sellers on something if they haven't had anything sold yet in recent history.

Yeager: Let's move to corn. Combines are rolling pretty quickly around the Corn Belt. There is some forecast for rain in Northern Minnesota towards Wisconsin over the weekend and then Missouri through Ohio it will slow it down there just a little bit. Yields, everybody is, those first yields very much holding their breath to see what's out there. What's out there?

Setzer: You name it you'll find it. There's some better than expected that you're seeing in certain areas, people that are happy with what they're getting. I do think we can all agree that the crop size that we thought was out there in August and even potentially in the September report that the USDA put out is probably a little bit too high. Most of what I'm hearing in these certain areas, Illinois especially where we thought we were going to have, a lot of folks that I talked to there initially were thinking they were going to have a record crop are now thinking they have a good crop. It's probably above APH but not as much as what they had thought originally. Same for Indiana, Ohio. Iowa has been an extremely mixed bag. Obviously you're seeing a lot of much lower than anticipated yield numbers because of how dry they've been. But then you have the dark horse which is Kentucky, Tennessee. Kentucky, I don't know where they're going to put all the corn that they're trying to produce and harvest right now. And so it's really going to be I think varied and so a variable crop isn't a record crop. So I think we'll continue to see some potentially lower production numbers out of some of the bigger producing states, maybe some higher numbers, there's some places in Kansas that have been, I have one guy that I talk to there who is part of a peer group that said it’s the best crop he's ever had, it's a record crop, super excited. And so I think you'll see some areas that haven't had really good crops that have some really good crops and then the areas that we really kind of rely on as being the consistently larger producer across the Corn Belt we'll probably see some smaller numbers come in than what they had anticipated even.

Yeager: So $3.63 is one of those technical support levels. We're getting darn close to that. Do you anticipate us heading below $3.63 when we open up on Monday?

Setzer: We could potentially see some harvest pressure. It's definitely going to be an important thing. I think we'll dip below it, it's just a matter of whether or not we hold that at 60 or come back. Even if we do though I think long-term there's enough support in this market structure that a dip below $3.60 I don't think is something that lasts forever. I'm not saying we have to go back to $3.75 or $3.80 but I do think we'll kind of find a happy place between $3.40, $3.45, $3.60, $3.65 and just kind of stay there on the front month for a while until we feel more comfortable with what is taking place from a demand standpoint, what is taking place overall from a production standpoint, and what we're going to see come out of South America.

Yeager: This is a question for beans a little bit as it is corn. You've got a lot of people that have come in and gone long on some positions here. What happens when they start moving from that side of the boat? What is going to force them to move? What does a producer need to watch for an indicator of, they're starting to go back from one side of the boat to the other, I better sell?

Setzer: I think we're seeing some of it. I think we have kind of tested some of those weaker longs here this week. The hardest part with the CFTC report that we get, so we get the numbers on Friday of what traders are trading in what direction or what is being allocated and the hardest part is it's as of Tuesday. So you have three full days of trade that you don't know really what has been happening. Funds have been estimated to remain long but I do think we've seen some slippage there. I really don't think we see anyone aggressively exit the position until we feel comfortable with what is taking place in Brazil. Same thing for Chinese imports. I don't think you'll see Chinese imports necessarily slow or even really not get shipped until we know for sure what is going to happen with Brazil. And for the next couple of weeks they're going to remain relatively dry.

Yeager: Chris Swift, what is the cattle producer listening to this thinking right now? What is your question for Angie here? What is the biggest, feed is a big need for this market right now. We keep expanding. Let's talk cattle on feed, the report that came out here just a couple of hours before we taped. What did you see in that report?

Swift: It showed a little bit of elevated inventory coming out. We showed 104% on feed, a 9% increased in placements and a 3% decline in our marketing. So we're going to have  elevated inventory on feed for the next several months and of course we'll need that corn to feed them. And we've always had a pretty good corn crop for the last three or four years to do that. And it seems like $4 seems to be the high end of it and somewhere between $3.50, $3.30 the low end and here we are at $3.60 so we're right about in the middle. We didn't see the cattle market respond too awful much to rise in feed costs so I'm not real sure that those margins or the percent gains that we've seen in corn are enough to impact the feeder market just yet.

Yeager: So the feeder market, I've been reading you for the last couple of weeks and I can just see you scratching your head trying to figure out because you anticipated there was going to be some of this expansion in the feeder market. Who is expanding and why?

Swift: It looks like the north, we have a lot of farmer feeders in the northern areas there that will have under 1,000 head lots or feed yards that they'll feed those cattle out into. A lot of them are custom feeders or they will actually be going to a high end scale restaurant or something for that beef. But we noted that in the north they're paying in the low $150s, upper $148 for a lot of these seven and eight weights and when you move down into the south in Texas and Oklahoma they're trading in the $136 to $138 range and the difference between the two has kept that feeder cattle index between about $138 and $142 for close to four or five weeks now.

Yeager: When you look at these, you also wrote something that caught my attention this week, there's a story floating out there about some of these cattle in the lots, there's a question about maybe there's a couple of corners being cut in getting these feeders moved. What do you mean by that?

Swift: Well, I think what a lot of it is more so in the calf market. So what we're seeing is some maybe elevated numbers of calves coming in either unweaned or unvaccinated and that kind of tells a little bit of a story. Do we believe that the market is in a need for higher end cattle that already had these vaccinations? If not then we're probably going to see those input costs be passed along to someone else, I'll take the lower amount so I don't have to spend the labor and the input costs of having to increase my vaccination or wait for the timeframe where I've got them weened and I'm going to allow somebody else to do that. Of course you get a little bit lower price for those calves out there but some people have more of a nursery type area and are willing to take on those more sickly calves, some of them are not and they want nothing but already weened, ready to go on a hot ration and ready to go.

Yeager: So feeders on Monday, are you buying or selling this market?

Swift: Actually we've been very protective of this market. We think we've got a lot of cattle that have to move, the disruptions that we saw in March and April are just now starting to get worked out. The cattle on feed report being a little unfriendly. And with the calf market the cattle feeder now seemingly have loaded up a lot of cattle on feed that will be finished at a timeframe that is not necessarily conducive to big beef demand. So I think coming in Monday we'll probably see a little bit lower trade. The feeder market moving down into the $135, $130 area would not be out of the ordinary at all. Even the northern cattle could retain their $4 or $5 premium to the south and still move that market down into the upper 130s.

Yeager: What is it telling you when a large grocery store like Kroger is having a sale on beef? What is that telling you?

Swift: We discussed that on -- Kroger is doing their New York Strips for $5.99. We noticed that Publix is doing it for $7.99 and it's a catch-all. So we either look at it from the standpoint of we're having to lower the price of beef in order to move it, but we do believe that that will move some beef too.

Yeager: So what about that cattle market? Where is that thing headed, up or down?

Swift: The cattle market is interesting because we have been able to increase our slaughter rates. We have been able to get the consumer from the significant shifts that we've seen over the last six months, they have now settled into habits and those habits have been formed over the last four or five months and probably aren't going to change again unless there's something dramatic to change with their discretionary spending habits. So the fat market we know will have plenty of inventory to work from. Our concern now is going to be the consumer and whether or not they are going to have to be asked to shift once again in their discretionary spending habits. We either increase the mask, we decrease the mask, we settle some of the social issues, we increase some of the social issues and all of those have impacts for the consumer as to whether they want to go out and enjoy a dining experience or whether they want to keep that beef at home and enjoy it there.

Yeager: Chris, you led me right back to Angie because, Angie, you downplay your abilities when it comes to talking livestock. I believe you've said a time or two we celebrate life's big moments with a steak, right? Angie has always said that, I've heard her say that and we seem to have a little bit of a freeze-up there, hopefully we get her back. There we go, now I hear you. We celebrate big moments with beef don't we?


Yeager: Still frozen. Chris -- we're going to go back to you. Let's go into the hog market now.

Yeager: We'll come back to you in a minute, Angie. Chris, let's talk hogs. This is something that you still have some, there was a hog report this week, there were two reports, cold storage and another pigs and hogs report. What did you see out of those?

Swift: In the hogs and pigs report for the first time in probably nine quarters we had a dead even number for all hogs and pigs. We had 100%. We had been increasing that hog number for several quarters in a row, the breeding has declined a little bit from to 98.5. So the actions that we saw from the COVID response probably changed a little bit of the pork producer's minds to just slow some of that expansion. The previous issues with ASF that we felt we would be exporting a tremendous amount of pork to China, some of that has come through now in the later stages but it didn't come through in the earlier stages so I believe pork producers were continuing to ramp up product in hopes for that export that didn't really pan out as much as what they though. So we had excessive pork here in the United States that we had to deal with domestically. Now that we've seen more and more pork exports to China that is relieving some of the pork issue as well as we know that producers are going to cut back just ever so slightly on that pork production. So with that cutback in the pork production and China buying maybe hog prices when they start going down they go down to a little bit higher level but when they go up they go up to a little bit higher level.

Yeager: Angie, are you with me now?

Setzer: Am I there? You were talking about steak, I had to go grab one.

Yeager: Let's go back to soybeans here for a moment. That's a big feed, that's a big concern, that's a thought that the Chinese are buying our United States soybeans to help feed their herd as they ramp back up. Is that what ran us back up? So what's running us back down?

Setzer: I think we just got a little hot under the collar for a minute without any real extensive reason to kind of continue on beyond where we were. We had rallied $2 in four weeks’ time and so a lot of times you have to get some sort of correction. I've always likened it to building a house of cards, you can't build it straight up, you have to kind of have it fall down a little bit, maybe widen out that foundation. And so I am not overly concerned with this correction. I just think we could see some continuation of it with harvest pressure coming into play. But I think we really have a decent amount of support underneath us because not only are we seeing this export market return, we're seeing crush margins improve because of what is taking place in Argentina with their soybean meal export capabilities and what is happening elsewhere around the country when it comes to the feed demand for all of this livestock that we have.

Yeager: There's always conspiracy theories out there and one of them involves what China is up to. I had one person write me this week, it says, China is doing a pretty good job of buying smaller amounts and making the market insensitive doing what they would call a grain robbery just a little piece at a time and that leads us to our question that Matt in Amherst is asking. Why did China wait until now to do all these purchases instead of spreading them out throughout the year so they wouldn't move the market as much with so many consecutive days of buying?

Setzer: Well, it's interesting, I had a friend point out that we didn't have that ceremonial purchase. Remember how we used to have those, remember that back in the day when they'd come to Iowa and we'd sell 4, 5, 6, 10 million metric ton so that's a little bit of a different sort of feel. It is piece by piece and I don't think it's making us insensitive. I think the market has rallied as much as it has because of this continuation in buying. It may become a negative if they stop doing every day because we had this record stretch of purchases being made. So maybe that does become a negative because you get so used to that bull being fed daily. And so I don't know why China waited until now. I think there's some political motivation. I think there is hedging of bets, i.e. maybe President Trump gets re-elected and continues to really put the pressure on them to get this phase 1 trade deal kind of solidified. I feel like it has become a bargaining chip for them. We had the action that they did last week with Taiwan, there's some aggression there that we have seen, we did see them kind of agree to back off with India on that border. So that's a little bit of a relief. But we are looking at what's going to take place with TikTok, what's going to take place with Hawaii and we have all these things going on and I think to a certain extent China's purchases are a way for them to say hey, we're doing what you asked us to do so you need to kind of leave us alone and let us do our thing. So it will be interesting to see how it does play out. But right now based on what we're seeing from a freight standpoint, from a cash pipeline standpoint, they're planning on taking those deliveries and at this point they have pretty well bridged themselves that gap between Brazilian supply availability and when that next crop is harvested.

Yeager: All right. So you unpacked a couple of things. We do have a political question that we will answer in Market Plus. And we'll just leave it at that, Angie. Real quick, you've got about 15 seconds. Are we, is this high rally over for the next two months in soybeans?

Setzer: I think for the next two weeks yes but I do think we see some recovery eventually. The floor has been lifted.

Yeager: That's Angie Setzer and Chris Swift. Well talk to both of them. Thank you so very much for all of your flexibility. That will do it for this installment of Market to Market. We will talk more in Market Plus so be sure to join us there. You can find it on our website of As the harvest spring hits full stride take us along for the run as our Market Analysis, Market Plus and MTOM podcasts are all available each and every week. Find them on our site or your preferred podcast provider. Next week we'll bring together four of our analysts for a roundtable where we'll break down the quarterly grain stocks and look at the trends in the commodity markets. Until then, thank you so very much for watching and have a great week.



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