Market Analysis: Angie Setzer and Chris Swift

Market Analysis: Angie Setzer and Chris Swift

Feb 12, 2021  | Ep4626 | Podcast

Podcast

A perceived bearish USDA report and cancelled orders sent the grains downward and almost like clockwork buying returned on the price breaks. March wheat dropped 5 cents while the nearby corn contract fell by a dime. Even with the Chinese on holiday, buyers saw value in a price drop of 60 cents in 50 hours. Nearby soybeans gained a nickel.  March soybean meal declined $3.30 per ton. May cotton expanded by $4.64 per hundredweight. Over in the dairy parlor, March Class III milk futures shed 17 cents. Green in the livestock sector, April cattle added $1.40. March feeders improved $2.57. And the April lean hog contract jumped $4.90. In the currency markets, the U.S. Dollar index dropped by 58 ticks. March crude oil increased $2.57 per barrel. COMEX Gold rose $8.50 per ounce. And the Goldman Sachs Commodity Index added 6 points to finish at 458.15.

Yeager: Now here to provide insight are two of our regular market analysts, Angie Setzer and Chris Swift. Hello, you two. How are you? Yes, Angie, I made you jump.

Setzer: You did. And then I realized I was muted, which is the pinnacle of Zoom errors.

Yeager: Yeah, I'm going to hold a sign that says, Angie, you're on mute. But some would say that is an improvement, but I am not one of those.

Setzer: I was going to say, Carl would wish he could do the same.

Yeager: It's like we're playing that TV game. So, Angie, did you feel like you had to mute maybe the USDA this week after that report? I said, perceived bearish. Did you perceive it as bearish overall?

Setzer: No. I mean, no. Compared to what analysts were expecting or what the average market guess was in corn I guess you could say it was easily perceived as bearish. But the reality is right now the -- it's February and the February report has never been one that the USDA has come out with and made major adjustments. Now, granted, the recent track record of the USDA surprising us with adjustments that they don't typically make had us kind of a little on the edge of our seats. But, based on export shipments right now I understand the idea based on sales pace what we're looking at from a likelihood of seeing an increase in exports. But based on the shipment pace right now, there's no real reason. I said after the report, let's check back in in April and see if we're making the shipment pace, which is likely as the bean export program backs off you'll see corn really ramp up. But the early first quarter and a half of corn exports, though strong shipment wise, they really need to be a bit stronger in order to really kind of solidify the idea that we need that 200 to 300 million bushel increase in export production.

Yeager: I'm going to throw everybody off. I want to start with a question. Glen in Ohio was asking us on Twitter -- it's a little bit of a follow-up to what I said, but it's a little more pointed. He says, farmers continue to be frustrated with the fluctuations and major corrections made to most USDA report. With all of today's data technologies and resources, why does most of the data from USDA continue to be predictably bearish and negative to the markets?

Setzer: I don't know -- I understand that is a feeling that farmers have is the market is supposed to back off or the market doesn't necessarily take this next leg higher. But I would say that starting with the June acreage adjustments the USDA really has kind of changed that track record of being overwhelmingly bearish. Now, are they making up for maybe some previously overly bearish reports that weren't necessarily correct? I think that is a real possibility. But we did throughout the 2019-2020 crop year have the conversation that we really wouldn't know what was produced until we got toward the tail end of the bins, hence the change in the June numbers and the change in the September numbers that kind of came into December. So I wouldn't say a 1.5 billion bushel corn carryout is something that I would call overwhelmingly bearish at this point. They didn't up it, they just didn't reduce it quite as aggressively as what some folks were thinking and I think the USDA has made it clear that they do anticipate China's imports to be large. They're just not certain that the U.S. grabs all of that increase for one and the other thing is high prices cure high prices. So part of what you saw change in the global fundamental standpoint is that the higher price of corn due to China coming in and purchasing a lot offset the needs for other countries when it comes to those imports.

Yeager: Angie, I want to get into the wheat market specifically. It is going to be cold, it is cold in a lot of areas. Is that going to have any impact on this market going forward?

Setzer: I saw the other day someone said maybe dig down underneath the snow and interrogate the wheat plant to see if it's feeling it or if it's potentially injured. And so I would say the wheat -- wheat has nine lives. We tend to always kill it at least two to three times. Now, granted, this is a historical cold event. I'm not going to ignore the fact that there is true concern that you could see some of these areas that will really struggle. But the fact is we'll know better in the spring on what we're looking at and then a good portion of the crop that is going to see the extremely cold temperatures is going to have a bit of a blanket on it to kind of cover it from that excessive cold that some folks are expecting.

Yeager: All right, so are you making a sale on either say March or July, on either one of these contracts right now?

Setzer: We have been selling right along. So I would be wrong to tell you not to, if a customer has a substantial amount of wheat unpriced then $6 plus wheat has been a good deal for the last several years. And I think as long as you don't get overzealous in selling well beyond what you plan on producing or deep into your production it doesn't hurt t be continuing to make decent sales at these levels if you have good looking wheat and plan on keeping it.

Yeager: All right, Angie, quickly here on corn before we bring Chris into this discussion. There was a cancellation of 132 metric tons of corn, right, that was the number?

Setzer: 132,000, yep.

Yeager: Was that the major pull on the market this week?

Setzer: It didn't help but I don't think i was -- I think the reality is right now we are starting to see the South American crop, Argentina, you've seen that stabilize, probably improve. Argentina's traditionally strong export time period comes March and April as the new crop is coming off and they're moving all of those old crop bushels out. Once they get their logistical sort of nightmare figured out down there you're seeing their corn offered anywhere from 20 to 50 cents lower than what U.S. corn is and so I think that is a part of it. I think we know that logistically speaking over the next three to four weeks because of what is taking place weather wise, the logistics are going to be a nightmare as a whole when it comes to getting grain from where it is to where it needs to be. And I think reality is at this point we've had a substantial rally, we're sitting at a 1.5 billion bushel carryout per the USDA, we really need to see what the cash market starts t tell us and what shipment pace looks like. Shipments will indicate whether or not we need to take another leg higher. If we see some continuation of Chinese sales potentially but they're on vacation. And so the reality is right now in the corn market we went higher on the idea that you were going to see this substantial increase and really kind of a reduction to pipeline minimum levels in the corn market. It didn't necessarily happen. and now we're going to start to focus on U.S. weather even though it gets earlier every year, it's like decorating for Christmas in July, we're going to start focusing on U.S. weather and we're going to start focusing on the USDA is going to come out next week with their Ag Outlook Forum. What does that look like? What are they anticipating from an acreage and production standpoint? And then obviously the South American crop at this point is stabilized. So until we see another reason to take another leg higher we'll probably sit around here, chop back and forth, and try to find a comfy range to sit in.

Yeager: Chris, off all the things Angie has just said, we've talked about weather, cancellations, an Outlook Forum, cold. What is the biggest pull in that livestock market on the cattle producer right now?

Swift: Right now the cold weather is always going to increase the feed need. We see that to be the first thing that is out there and we look at this weather as an event. As deep as it is pushed down into the southern portions of Texas it's going to impact a wide swath of the cattle feeding area. But what we're not real sure is what kind of moisture will come with that. So we know that cattle can stand quite a bit of temperature change, but when you get moisture added to it, it tends to make it a lot worse. So right now kind of knowing that the cold weather is here we've seen some optimism in the futures market today, now we kind of wait to see what begins to subside in the weather and see how much moisture actually fell while the cold weather was here.

Yeager: Yeah, Friday was a good day there in the cattle market. The weights are dropping. But just yesterday you said you were perplexed by this market. Has that gone away for you yet?

Swift: No, not really. We're just faced with such high input costs to the cattle feeder and we're not seeing any kind of real big gains in the cat cattle market and not in a timeframe that is big beef eating season either. So it kind of appears that we have leveraged ourselves up in the cattle feeding industry there with still over 100% cattle on feed right now. We think that maybe January was a big inventory month so it looks like maybe the placements could be right at 100% to 102% on the cattle on feed report for placements. So I think they moved a lot of cattle. This weather kind of came in a little bit fast, they got ready for it and now we're just going to see what the impact of it was.

Yeager: You mentioned something also this week about the fulcrum that is playing in in the feeder market. What are the factors that are pushing that balance act?

Swift: Well, the leverage right now all tends to be towards the packer and that fulcrum right now, the leverage in there with the feeder cattle themselves still hugging around between $135 and $136, the futures carrying $3 to $20 premiums out into it, seems like the leverage is still to the packer because he knows there's plenty of feeder cattle still yet to come into the cattle feeder, we know that we've got the inventory out there because the January inventory report only showed a 1% decline. So there's still ample, plenty inventory out there and until you're able to move some of these cattle out of the feed yards and reduce those numbers just a little bit then that begins to shove that leverage back toward the producer.

Yeager: Angie, the soybean market this week had its own up and down, hurt your neck, volatility, huge red, huge green, back to stable. Is that just the new norm?

Setzer: For now, yeah. We kind of go back and forth. We obviously know the U.S. is going to be running on fumes. We know that there's nothing that we can do to really kind of stop that until we figure out what we're actually looking at from, first of all an overall demand situation but also we started to recognize this week that you are seeing we're getting to import parity and so it's important to remember in 2013 and the last time we were really at this type of level of ending stocks we did find that we had imported a significant amount of beans from Brazil. This was something that was almost impossible in December with the idea that we were going to have a Brazilian production issue but at this point this week we saw several Brazilian crop estimates stay relatively large around that 133 million metric ton range. Even if they were to drop to 132 or even 130 you're still going to have a reasonable amount of beans. And so until we really start to get comfortable with what is taking place from a harvest standpoint in South America and what we're going to be looking at from an overall standpoint here in the U.S. when it comes to what is going to be left once we export everything that we need to export it's going to be a big fight. Obviously new crop is going to have to stay incredibly supported. So that really can't go too far because we're going to have to incentivize planting soybeans. But the reality is that old crop is really going to go back and forth and there is a pretty good likelihood at some point in time here we're going to see the same thing happen in corn where really basis and spreads start to do all of the work. And so futures may calm down if people stop really getting, there's a lot of excitement still about what is taking place in commodities, the inflation trade, what happens with outside investors and things of that nature. So there's going to be some money flow issues that you're going to see and we're really just going to be trading rumors until we get comfortable with what happens with the South American crop and that works its way into the global pipeline.

Yeager: Chris, you've got to worry about where some of that global pipeline comes when it is for feed in the hog market because China still is trying to repopulate this herd, concerns again this week surfaced about ASF. IS that helping the U.S. producer what is going on in China or something else?

Swift: Honesty I'm not real sure, Paul. I know that China, the exports we have not seen them increased any tremendous amount. I think if we look at China and what they're doing with their pork production the corn and soybean market is probably the bigger ordeal to look at because that is going to be a consistent pull as they continue to put that hog operation in a more controlled environment and they're going to need that cleaner feed source to be able to keep some of these diseases from happening.

Yeager: And you also have a concern of PED in the United States, a report out of Oklahoma this morning from the Department of Agriculture going through show animals. Disease is always at the forefront no matter what country it is with hog production. How much do we need to pay attention to what is going on with that disease?

Swift: Well, I think we always have to pay attention to all of the diseases because we don't ever want to see anything break out and get beyond our control. So as best I understand with a tremendous amount of the pork production underneath a controlled environment they could probably stop it pretty quick. All of this came about, like you said, just this morning. I read about it this morning on one of our announcements and there hasn't been a great deal of more information about it. So maybe it is a very confined area that it was in.

Yeager: Angie, before we go, the cotton market, you mentioned something about acres. That is kind of a topic we've been having a lot. Cotton seems to be pricing itself in a position to defend acres. Is that what is motivating this move?

Setzer: Oh yeah, definitely. I think it's just like with anything else where obviously we have a significant level of demand versus the supply that we have and then there's this concern that we are going to lose a substantial amount of acres in the new crop and so that price is going to have to kind of stay up and stay supported and try to keep the attention of growers, especially there is a level of concern obviously with what is taking place in Texas from a drought standpoint and so could that also hurt production in the year ahead. So there is going to be a substantial amount of support brought into this market structure simply to get the acres planted, for one, and for two, kind of ensure that we see a reasonably decent level of production as we move ahead.

Yeager: All right, Angie, I've been real nice. I'm going to stick you on two things right here right now at the end. Do we have corn $6, this is in the rest of 2021, do we ever see corn with a 6 in front of it before the end of the year?

Setzer: Do we have a drought?

Yeager: That's a good scenario, absolutely. With soybeans, is $14 in the rearview?

Setzer: I think the same thing. I think you'll see this market try to maintain a level of support but I think as we work ahead here now that the South American crop is relatively known and we see it work its way into the pipeline $14 is probably going to be a tough hill to climb for old crop in my opinion. But we have a whole growing season ahead of us. So if you can tell me what the growing season is going to do, I can tell you if we see $14 beans.

Yeager: Hold on, I've got this crystal ball that Chris gave me on his last time up here. Chris Swift, Angie Setzer, thank you so very much, appreciate your time. That will do it for this installment of Market to Market. We will talk more in Market Plus. I've got a lot of great questions right here so join us there. You can find that on our website of MarketToMarket.org. Learning has evolved in the last year, but our Classroom project remains a constant in the study of commodities, business and the history of agriculture. Visit MarketToMarket.org/classroom to dive into our modules. Next week, a firsthand account of the relationship between the United States and China from someone who has spent a number of years over there. Thank you so very much for watching. Have yourselves a great week.

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