Market Plus: Don Roose

Mar 12, 2021  | 12 min  | Ep4630 | Podcast


Yeager: This is the Friday, March 12, 2021 version of the Market Plus segment. Joining us now, Don Roose. Don, when you come out here and you're asked questions and what are we going to talk about, it is pretty boiler plate. But the last 12 months have been anything but standard, I mean, history will judge us in a couple of years about how we've done. But one thing has developed that you were telling me about is the structure of spreads. What exactly do you mean by that? And why should someone at home be paying attention to it?

Roose: Well, the structure of the spreads tells you because somebody has to carry corn or pay a big premium more than they would like and when people are really excited they'll buy the up front month because they're afraid they may not have it down the road. So what we've seen in the structure of the spreads, for example in corn, old crop corn at one time was trading close to a dollar over new crop corn. That has relaxed all the way to 40 cents. So in other words they have gotten closer, old and new crop. Same thing in soybeans, we were up like $2.33 about a month and a half ago difference July over November, old over new, now it's down closer to $1.50. And even more than that when you look at new crop soybeans at one time November was trading 66 cents higher than July 22. So are you going to carry beans for 8 months and lost 66 cents? I don't think so. So what you see is people selling that front end month saying I can't afford to do that. Now, corn is not as bearish as you think, or as bullish as you think --

Yeager: You mean right now?

Roose: Right now because we're losing gas because of these spreads. You can refire it again but new crop corn carry right now there's about a 13 cent carry from December of '21 to July of '22. Now, that's not enough but it's telling you that there's enough that somebody wants to get paid something to carry it where in beans like we just talked about there was a 66 cent inversion November higher than July '22 and that shrunk down this week to 15 cents difference. So not as excited to worry about the shortness of the crop. So that is a warning sign for the bulls, Paul.

Yeager: That's a warning sign for the bulls. So that is the market telling us something.

Roose: It's telling you that it's a market that has dialed in an awful lot of bullishness, a lot of problems, that some place -- if you grow something you want to get paid to carry it if you're going to carry it, a farmer in his storage or in the elevator and the market will signal that listen, you can't afford to carry it, sell it all in the front month and it relaxes everything and that is kind of sort of what is going on right now.

Yeager: Trying to entice some --

Roose: Trying to tell you that we've got a bigger supply coming at us and somebody is going to get paid to carry it.

Yeager: And you just hope it's you and not somebody else. You want to be in the upside, not the downside.

Roose: Exactly, so you have to watch the spreads for a little bit of an indication because the commercials are heavily involved in the spreads and they're trying to make this whole thing work from a very tight supply and demand balance table.

Yeager: Now, I guess, is any of this going to change because of what's going to happen Monday with the CME and that there's going to be expanded contracts, there's going to be more contracts available? Is any of that going to impact the way this plays out after Monday?

Roose: Well, what you're alluding to, Paul, is the bulls believe when we hit Monday that you're going to have just massive buying and by what we mean on that right now the position limit that you can have is somewhere around 33,000, it goes to 58,500. It's unbelievable. When I started this business it was like 1,200 in the '70s, then it's 3,000, then it's 6,000, then 12,000, then 24,000, then 33,000. So this thing has just blown up. So that means a fund can come in and buy that amount. It's a position limit.

Yeager: Put on your historian hat again. You just talked about those spreads from the '70s, '80s, '90s. Does this look like it's a good thing come Monday?

Roose: Well, it's a good thing if the market is going up from a producer standpoint because you have funds pushing the price higher. But remember, it's a double edged sword, be careful what you ask for because when the market, just a year ago in July we were on our knees, my gosh we're never going to go up, funds were pressing it to the downside. So I guess what I'm saying is it's good as long as we're pushing up and you want the price to go up. But when they reverse it they also have the power to sell more than they ever have in history.

Yeager: All right. I want to get to a couple of questions that came in via Facebook and Twitter and we always appreciate all of those each and every week. The first one is going ot be from Doug in North Central Iowa. I'd like to say hello to north Iowa. Always good to see there. What can we expect for fuel prices later this year? Do we lock in prices now, Don? Or will we have an opportunity later for harvest fuel needs?

Roose: Well, we're in an inflationary environment. We talked about it earlier. Crude oil goes to $40 negative, whoever thought, and then it stumbled around $25, $30 for a long time. Now you're on your path to get to in the upper 60s, probably to the upside you see some pretty respectable people talking about $75 as a target to the upside. So probably limited to the upside, probably wishing you would have locked stuff in earlier. But these have been markets that if you chase big rallies there hasn't been a lot of opportunity and if you chase big breaks there hasn't been a lot of opportunity. So I would say be careful when you're toward the upper end of the range. But we are in an inflationary environment.

Yeager: Know what your price of production is, know what your breakeven, know what your price structure is at home and act accordingly.

Roose: Yeah, I think that is what you have to do. Any by the way, all of these targets, that is what is keeping people from selling like you could sell '22 corn at $4.40, you could sell '23 at $4.40, '24 at $4.20, so those are opportunities. Those look like good prices, right? But it's the fear of the input costs, it's the fear of the inflation that keeps you from looking at that.

Yeager: Well, maybe we talked about the grains but let's talk about the cattle because kind of the same thing has been happening there with months. Tim in Nebraska asked us via Twitter, why are the June live cattle futures higher than the April? And when was the last time that this happened?

Roose: Well, that goes back to the whole COVID situation. What has happened is the first quarter supplies up 7% over a year ago just the way the placements were. Then remember month over month we had big placements over a year ago. Then we got into uh-oh we placed all the cattle. So now we're into where we're going to get into a counter seasonal because of those lower placements and so consequently June looks like the summer months are going to be positive versus negative and thus June higher than the April.

Yeager: You answered the majority of this question already but there's one part of it that I didn't quite flush out from Aaron. Is there simply a ton of positions being rolled? Or is there some other underlying important reason about the March/May grains trading in opposite directions? And then he went back to cattle. So I want to focus on the first part. Are there positions being rolled here?

Roose: What you're asking, Paul, is why is March trading -- it went off the board today, by the way, but anyway why is it trading 15 cents over the May? There's no deliveries, the farmer is tight, he's not willing to sell at these price levels and so consequently you're bidding up the front month and they really want it now. We talked about the structure of the market, that's still positive. But you also have May corn trading 10 cents over July. So the beat goes on. It's all about when you can you shake loose grain for the producer and when does the demand slow down? End users on breaks continue to buy the market whether it's an ethanol company or feed people. So that is the real strength.

Yeager: When can you shake loose the acreage debate? Cotton this week kind of holding high and then falling just a tiny little bit. But does that signal that maybe some of the acreage decisions have been made in cotton country?

Roose: Well, you probably already have made those decisions. And I think what you're really looking at is I don't think it's just cotton, Paul. I think you're looking at bringing a lot of different pasture, what not, marginal ground back into production. That is what you have to look at because these are pretty good prices across the board and guys think they're going to stick. So we'll see.

Yeager: And also how else are going to get to those massive acreage numbers that you alluded to if the marginal ground doesn't come out of --

Roose: It will, that's right, because there's only so many acres and you push it around, marginal acres you're going to have pasture tore up. Remember we had some dry conditions, we had liquidation of cows. The January slaughter on cows was large. And so you will bring pasture, you'll bring in some of the marginal areas so that is what is going to happen.

Yeager: I want to go back to hogs just for a moment and close on that. This African swine fever, we're going to have the World Pork Expo, announced this week, back in Iowa the first time in three years, we missed it for two. The first was because of African swine fever. That's not necessarily my question about the expo, but it indicates that that's still a story in China, it's a matter of how big of an impact -- how much of an impact -- getting accurate information out of China is a challenge? So what information do you look for? What signs do you look for that maybe something is worse or maybe not as bad as we think?

Roose: Well, I think actions speak louder than numbers and I think what you have to look at is they do have a backup of meal, they've got soybeans trying to unload, they've got meal under pressure. We had a day this week, Wednesday where meal was down $18, soybeans down 70 cents over there. Yeah, you're getting conflicting information. They just had their February CPI consumer price level and they said that demand was, prices were up two-tenths of a percent only and they said it was because domestic pork prices were under pressure because the herd was 14% over a year ago. The two days later they say the sow herd is down 1% versus a year ago. And then a lot of the privates think we're down 5% over a year ago. But our prices here are really responding to disease problems that we have, the COVID issue that we had and really strong consumer demand with the stimulus, the spending, the government is telling us to spend and I think we are.

Yeager: Thank you for spending your time with us.

Roose: Thank you, Paul.

Yeager: I know that time is a valuable commodity so glad to have you here.

Roose: Thank you, Paul.

Yeager: Thanks, Don. That will do it for this program that we call Market Plus and also a reminder that this is the last weekend of the national PBS fundraising cycle. Many of the stations that carry this program may shift when we are on so if you're online thank you for finding us but the message is still clear. If you value the work done on this program please consider supporting the work that we do with a financial contribution to your local PBS station. Thank you for your continued support. Next week we will check out a retraining program that focuses on both hard and soft skills and John Roach will break down these markets. Thank you so very much for watching and have a great week.

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