Market Analysis: Don Roose

Market Analysis: Don Roose

Oct 9, 2020  | Ep4608 | Podcast


Another USDA report kept the market turning higher as drier weather and global demand ate through stocks of grain. For the week, December wheat gained 21 cents while the nearby corn contract improved 16 cents. Dry weather in South America led to talk of a delayed crop. The November soybean contract leaped higher by 45 cents. December soybean meal strengthened $11.80 per ton. December cotton expanded $1.82 per hundredweight. In the dairy parlor, November Class III milk futures increased 44 cents. A mixed week in the livestock sector. December cattle improved $1.50. November feeders dropped $4.35. And the December lean hog contract rocketed up $4.63. In the currency markets, the U.S. Dollar index fell 85 ticks. November crude oil bumped $3.64 per barrel higher. COMEX Gold added $25.70 per ounce. And the Goldman Sachs Commodity Index jumped nearly 20 points to finish at 359.65.

Yeager:  Joining us now to give us some insight is regular market analyst, Don Roose. Hello, Don.

Roose: Hello, Paul, glad to be back. Thank you.

Yeager: We had a couple of reports, two in the last two weeks, nothing special, they haven't done anything to the markets. Is it the report that is moving the market? Or is there such underlying factors the reports just happen to come through? You can do an overlay of all of these if you want.

Roose: Well, I think when you look at it when you look back what is really happening is the carryout that we have in the supplies that we have in the U.S. continue to get smaller report by report. The September report the yield was less than the August report. The September stocks in all positions report was a surprise report. It's a dangerous report. They adjusted last year's stocks by 205 million bushels, soybeans they adjusted downward 52 million. So you carry that over to today and the report it was another bit of a surprise, they adjusted the acres, not the harvested acres but both of them, the harvested and planted, a million acres on corn, 700,000 acres on soybeans, basically a lot of those acres out of the Dakotas that you're going to find out, North and South Dakota were prevent plant acres that we probably should have found out about before. So from a producer vantage point you would say well, I've been selling grain maybe not the way I wanted to because of the reports. Anyway, when you look back at it you would like to think maybe it's COVID, something else, but the USDA adjustments have been historically a bit surprising.

Yeager: A lot of green on the charts during the week leading up to maybe a positioning of the reports. But you look at the wheat contract specifically up $1.31 off the lows, we touched over $6. It's still dry in Russia, in the Ukraine and the Southern Plains. So again I ask almost the exact same question, is it a report or is it the weather that has had more impact on wheat?

Roose: Well, I think it's a combination but I think what has happened to the wheat market, to put it in perspective, we have pushed up to 5 years highs. So that is kind of historical. We took nearby Chicago over $6. But all of these markets, Paul, it's not just one thing that happens, it builds on itself. The dryness, we had big stocks last year, we still have big stocks this year but what we're afraid of is going forward, much like the corn and soybeans, our stocks are getting less in the future, we're under 900 million on the carryout on old crop. Next year you're probably going under 800 million in the U.S. But what is the driver? Russia is the largest wheat exporter in the world. They are in a drought pattern into Ukraine and also the U.S. Southern Plains is dry. So it's one of those that we continue to add risk premium to the market. Now, on Friday we didn't have that great of a close. The world stocks were bigger. We're down a few cents and charts look a little bit toppy. So you had to be a bit careful. Is all the bull news in? The funds are long over 70,000 contracts of wheat, that's about the upper end of the range. So it's a mature market right now short-term.

Yeager: Short-term, all right. Corn market, again, another rally, 74 and a half cents off the $3.20 contract low, 8 month high going into today and then we still went higher. Is that market topped?

Roose: Well, look at from an overall carryover standpoint I think that is the key. Our carryout is down to 2.1, just under 2.2 billion bushels. I think when you look at the report I think the feeling is that the exports are probably too low yet. If you look at it the government has China buying 7 million metric tons of corn. Well, they've already bought 12 million metric tons. So wat is the issue? So that's 200 million. So I think that is part of the reason the corn market pushed up. The other thing is the producers are busy selling soybeans with the big inversion at the highest price in 3 years and still holding onto corn with a carry in the market. But the carry did shrink down to 13 cents between Dec and July. So your question on price, usually around a 2 billion bushel corn crop gives you a nearby price $3.90 to $4, well we're right in that range. So things can still change, they do, it's a fluid market. But with what we know today a 2 billion bushel carryover you're also kind of a bit on the mature side with one eye on South America, one eye on Russia and China is buying underneath the market.

Yeager: Be careful, you might turn into an economist with all those eyes, like hands. Long-term corn, if you look down to the deferred months, March again 13 cents up, a 3% gain. The question a lot of people are floating around there, is 4 going to be the first number for a lot of these contracts moving forward? And for how long? What are you hearing?

Roose: Well, you're right, what has happened is once you hit 4 on one number you kind of pull it up and we're kind of pulling up from the back. July corn is up close to $4.10, $4.08 and a half, and then you have the May under $4, March is just under $4 and that is what his happening and the Dec on the up front. So the corn market still has a carry but just opposite of the soybeans. So you know that historically what happens is as we run up you run into South America and it stuffs us back year after year between that $4.10, $4.20, $4.30. So watch South America. Their production on corn next year is going to be up about 110 million bushels. Soybeans in Brazil is estimated to be up about 325 million. So the world is expanding, acres are up, they sell in dollars, they buy in their currency, so they've got a big advantage, big profits going on right now. So fence row planting they probably need a dry drought to keep the market going to the upside.

Yeager: Which is what they have seen a little bit when you flip over to the soybean contract and you start looking at factors there. Is China buying? Is this La Nina in South America? You read this week delayed planting as a possibility pushing now until late February before that South American crop is available. So all of a sudden the U.S. has a little more time in the spotlight. You’ve got yourself some factors. $10.65 is what we finished today on the November contract. At a time we were up to 45 month highs, Don. I guess I asked $4 for corn. Is $11 possible for soybeans?

 Roose: Well, you've got the good numbers because when you have a carryout where we're at now between 250 and 300 million the range that usually are in is $10 to $11. So we got up close to the $11, short of that. So you're in that range. We can, these markets aren't an exact science regardless of what you sometimes want to believe. It's a work in progress and with what we know today the carryout at 290, $10 to $11 is a tough market. We do have a dry pattern in Brazil. We're not so concerned about that. They're close to the Amazon monsoon rains coming. But in a La Nina year Argentina is supposed to go dry, that is our concern. And the U.S. Southern Plains are supposed to be dry. Well they are. So keep your eye on the sky over there.

Yeager: We had a question that came to us via Twitter. We know you love Twitter all the time. I know you're on it all the time. Not really. Timothy in Houston, Minnesota, the beautiful part of Southeast Minnesota there, he's asking, with the low carryover does it now look like we should store beans or still sell them up front? We hear all these stories of people selling off the combine right now.

Roose: And there's a good reason, Paul, so the answer is from a structural standpoint does it make sense to carry soybeans from November to July, 8 months, and lose 20 cents? Earlier in the day we got up to 34, 35 cents. So does that make sense to you economically? Not really. So your answer is if you want to still have ownership of beans there's better ways to do it and also we're at 3 plus year highs. So selling off the combine has been popular and it looks like it makes sense.

Yeager: Real quick on cotton, that is an area you saw on the news piece earlier. They're getting ready to harvest and having to deal with yet another storm. We're right at that point of a break out. Higher or lower? What are you hearing?

Roose: Well, it continues to kind of push up. The government is not saying to get overly wild, December cotton is up around 68, the government said the cash is 62. The concern is that the bulls are open now and we've a hurricane coming through so it's an issue. But it's probably up to China if they're going to step, in and continue to buy. They're a big player, as we know, in all these markets right now and so I would watch them but respect the charts are also up at the top end.

Yeager: All right, in the cattle market we've seen a little bit of narrowing on basis and then widening and then narrowing back. Up this week, but a little less dramatic than what we've seen in other markets. Is this thing, it's hanging around higher. Can it stay there?

Roose: Well, the cattle market is much like a lot of these markets, we've been spending most of the time since early summer recovering from the COVID. We've been marching two steps up, one down, all these markets have been doing the same type of thing trying to get that premium back in. That's what we're doing in the cattle market. Cattle feedlots are finally making money, breakeven somewhere $102 to $104 depending on what you have. So that is a good thing. We've got a premium structure in the market and it looks like that tough resistance on April is that $117 to $120 so we're at the bottom of that range. So feeders are coming to market. Feedlot weights are big. We've got feeders coming off the drought pasture and need to have the feedlots continue to move cattle.

Yeager: Well, and the feedlots it's hard to pencil out $4 corn if you have a feedlot right now. So what are their options?

Roose: Well, and that's the reason the feeder cattle have been coming under pressure, along with the calf run is really starting to pick up and putting some pressure on it. So you're right, it's all up to the breakevens and something has to happen. As the corn goes up either the feeders have to go down or the fat, back months of fat cattle have to go up. So been trying to put a little bit of premium in those back months. Is it going to be rewarded? That's the question mark. The government says all next year you're supposed to have an average of $114 for cash cattle.

Yeager: Well, and we're also hoping for a 2021 where it's a little better in the hog market too. China continues to expand their herd, they need some of our meal or DDGs or whatever to feed that. Is that our biggest competition for the U.S. pork industry looking ahead to 2021 is China or is there something else?

Roose: Well, I think we have to be a little bit careful. Remember, it has grown a beard on the African swine fever that they had, it's going on 2.5 years, something like that. So they're expanding and not only in China but in other countries also, Argentina, Australia even. So you have to be a little careful. With all these markets, Paul, I want to back up a little bit, I think we got really pasted on all the commodities with COVID and so when you're up at levels that profitable you have to keep in the back of your mind risk management makes some sense if for nothing else just because we haven't solved the COVID yet. And when do we solve it? And do we get into a second wave as we're still in the first wave? Europe is just starting to get into the second wave. So, risk management first is to manage the risk.

Yeager: So does that tell you to hold? Does that tell you to sell? Or is that I have to play both sides?

Roose: I think you have to play both sides. We've got premiums like you're talking about the hogs, you're close to 82 in the summer months, so those are profitable levels. You can do some risk management with some tools, build some up and down in the market, do some specific types of things for specific operations. But certainly you're at risk management levels on a lot of these commodities across the board.

Yeager: Always a lot to think about and we will ask you more questions, we have a good feed question when it comes to the livestock market, in Market Plus. Don Roose, good to see you. Thank you so very much for your insight tonight.

Roose: Thank you, Paul.

Yeager: That will do it for this installment of Market to Market. As I said, we will talk more in Market Plus so you can join us there. Find that on our website at Facebook is one of the places we post photos and links to our stories giving you a place to talk about rural America. It's not all about arguing. Give us a follow at MarketToMarketShow on Facebook. Next week we'll learn more about this year's World Food Prize winner. Until then, thanks for watching and have a great week.




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