Market Analysis: John Roach

Market Analysis: John Roach

Jun 4, 2021  | Ep4642 | Podcast

Podcast

Technical trades around rainy, hot and dry weather impacted the commodity markets this week. For the holiday shortened trade week, July wheat gained 24 cents while the nearby corn contract jumped 26 cents higher. The bulls appear to be leading the bears in the soy complex as soy oil serves as the biggest influence in the pits.  The July contract added 53 cents. July meal improved 70 cents per ton. December cotton rose by $2.56 per hundredweight. Over in the dairy parlor, July Class III milk weakened by 13 cents. A mixed week in the livestock sector. August cattle shed 52 cents. August feeders dropped $1.42. And the July lean hog contract increased $1.25. In the currency markets, the U.S. Dollar index added 11 ticks. July crude oil expanded $3.17 per barrel. COMEX Gold decreased $10 per ounce. And the Goldman Sachs Commodity Index gained more than 5 points to finish at 526.50.     

Yeager: Now here to provide insight is senior market analyst John Roach. Hey, John.

Roach: Hi, Paul. How are you?

Yeager: I'm all right. I want to start with wheat. And you were excited about wheat this week from Roach Ag Marketing. These contracts though are very different because it's not across the board that each one of these is doing well. The southern crop, yes, has gotten rain. The northern crop not so much. So what is happening as a whole in this complex?

Roach: Well, the wheats are differentiating themselves and the spring wheat is in the area that is having difficulty getting moisture and as a consequence we've had a very poorly rated crop there and on the other side in winter wheat country we've actually had more than normal rainfall through a lot of the winter wheat country. So we have winter wheat that is kind of dragging a little bit and a little worried about protein values out forward and we have spring wheat that pushed up to new highs today.

Yeager: Well, there is, as I kind of alluded to a little bit in the opening question, we have another question that came in, this one via Twitter from a viewer in Canada. Ken in Canada wants to know, with no real measurable rain in the forecast is the drought in the Dakotas and the Canadian prairies factored into the prices already?

Roach: The answer to that question it certainly is. I didn't mention the Canadian dry conditions. They are suffering as well. But that is something that the market is watching on a daily basis and probably driving the market more than anything else right now. What is the forecast and how will that impact the crop? And we come into this weekend with the hottest forecast we've had in some time and not much rain and it's going to impact all the markets but spring wheat is the crop that has been hurt the worst so far if you look at the ratings that were given to us on Monday.

Yeager: So what do we do here if we're in this market, we're knee deep in it? What are we doing?

Roach: Well, there's only one way to bring home high prices. You actually have to sell them. We have a sell signal right now in spring wheat and we've had it for two days and our recommendation is that you be making some sales of both old crop if you have old crop left and an increment of new crop. Think about another sell signal coming later on in the summer. This may be the peak or it may not be the peak. It will depend upon what the weather is and what the crops are really doing at that time and how the demand has been impacted. But we're selling into the strength in the spring wheat at the end of this week.

Yeager: It was upper 90s in North Dakota at Noon on Friday, 96, 97 Bismarck, Minot, in that area. A week ago it was ridiculously cold, so much so in the Dakotas, Minnesota, parts of Iowa we had frost on the corn. A lot of the pictures have come in, it looks like corn has improved. Did corn dodge the bullet in a weather scare? And is that what moved the market early in the week?

Roach: According to the crop ratings we saw on Monday, yes, corn appeared to have dodged a bullet although normally those reports are a little delayed because you can't tell how much damage was done by frost in one day or two days, it takes longer than that. But most people that we have talked to think that the crop was in a small enough state that although it was injured a little, probably did not reduce yield substantially.

Yeager: All right, so with the near contract and the deferred in December, we're almost getting to the point these two are very close to alignment. But they were very different in how they responded, one up 4%, the other up 8%. Why is December continuing to rally like it is?

Roach: We've already put a lot of premium into the old crop corn, July corn was much stronger and still is stronger through all of the higher price levels and even when the price is declined, the July corn stayed above the December. Well now we're getting to the point where July corn is about a done deal and we're now focusing out on the new crop, elevators are focusing out on the new crop as well with their bid structures. And so we've had strength come into the December relative to the July and again, it's mostly weather and we're getting through the end of the old crop.

Yeager: All right, so I'll ask the same question that I did in wheat. What do we do here? To sell is one option. Does that hold for corn?

Roach: Get ready to sell, we're not quite at sell signals yet, although we're close. We think we'll be there Monday, Tuesday. It just depends on how much follow through that we can get and what kind of weather forecast we have on Sunday when we start to trade the Sunday night markets. We think you sell into the strength here. The weather is usually traded into the market. We trade at least a week out if not two weeks. Now, there are some people saying there's going to be this ridge is going to lock in here solid, there's some cold ocean temperatures off the West Coast and that is going to move the jet stream around a little bit and so there's others that completely disagree with that. Nobody expects much rain and so we're dealing with dry. It's just a question of how dry and how long and whether it has a big impact on the yields. At the moment it hasn't had but it sure can.

Yeager: And it's almost the same story in soybeans too.

Roach: It's exactly the same story with one exception and that is the buying continues to be relatively strong in corn. We've got export sales out today, we sold some more old crop corn and we thought we'd see cancellations actually. But the bean business has really gotten slow. That has all moved down to South America and we just haven't seen much bean business. And so the bean market does not have that demand component that is working in favor of the corn market right now.

Yeager: I need to get into this JBS story and its impact on live cattle. Does this have a long tail impact in livestock, like say the fire at the Tyson facility in Kansas a couple of years ago? Or is this just a one, two week thing?

Roach: We don't know the answer to that exactly but we think it's just a one or two, a couple day thing. The slaughter numbers this week as I recall were down about 14% on cattle and 19% on hogs. They'll make maybe some of that up over the weekend but we think they'll be operating full steam here the first part of the week. But what we are seeing is a concern about the ability of somebody to come in and take out, our oil business or the pipeline business take out our ability to produce beef and pork. Those are scary kind of things. And the scariest part for me as a business person is my government tells me that I’ve got to defend against that. When I know that I'm fighting against the biggest people in the world how is a small business or even a bigger business such as JBS, how are we supposed to compete or fight against the most powerful nations in the world attacking us? I think that we need the federal government to step up and to help industry be able to fight off that kind of attack.

Yeager: The labor story that we talked about earlier in this broadcast, there are employers that are incentivizing workers to come back, bonuses, increasing wages. Is that what is going to maybe have to happen to maybe level up some of this field of the packer margin?

Roach: Possibly. The main thing that has happened here is that the demand for beef has been very strong and the packer has not been able to get enough animals and so they have been able to really widen their margins. And so we need to have everybody back to work in order to move the numbers through the system.

Yeager: All right, through the feeders quickly, John. Are you expanding any herds right now if you're a feedlot operator?

Roach: We're actually telling people be careful in here. These corn prices are high. Feed prices are high. Feed prices are likely to stay high for a little while here. So you really have to understand your numbers and understand how you can make this all work at these higher feed costs.

Yeager: That doesn't seem to be impacting the hog market though.

Roach: Well, the hog market is off on a race. The market closed at new highs here today and we have a sell signal, we're on the 7th day of a sell signal on hogs, so we're selling into the late summer and the fall hogs, we don't want to go past that. We think these are good price levels. We think people need to be a little bit careful, notice that the Chinese futures, pork futures today were down 4.4%, the Chinese are struggling with overweight hogs that have been held because they had losses in them, now farmers are starting to go ahead and move those hogs into the system, it is breaking their market quite aggressively and so remember, they have a lot more hogs than what we do. And so what happens there we can't ignore it. So when we're looking at very high price levels here and we're seeing theirs decline, we need to follow our sell signals and get our margins protected.

Yeager: John is teasing ahead to the global discussion we'll have. We'll talk about China in Market Plus. John Roach, thank you so much.

Roach: Thank you very much, Paul, appreciate being on.

Yeager: That will do it for this installment of Market to Market. We will talk more in Market Plus so you can join us there. Find that on our website of MarketToMarket.org. And we've been in the Twitter camp sharing links to our stories for a long time asking you questions and retweeting items of interest. Give us a follow @MarketToMarket. Next week we look at some of the monumental impacts on western stakeholders. Thanks for watching.

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