Market Plus: John Roach

Jun 4, 2021  | 14 min  | Ep4642 | Podcast


Yeager: This is the Friday, June 4, 2021 version of the Market Plus segment. Joining us now, John Roach, senior market analyst. And John, in the south, if you look at the drought monitor this week which comes out every Thursday, we pay attention a lot to that during the growing season here in North America, we see to the north it's dry, but to the south it is hard to find any dry conditions. And that is specific in cotton country. Is too much moisture causing a problem and pushing cotton higher?

Roach: I think we're seeing too much moisture in some spots and that may be helping the cotton market. But we just have a bullish situation going right now in crop markets in general. And remember that much of it is coming from demand from China and China is also a buyer of cotton too. So all the markets seem to be operating somewhat in a uniform positive nature because of the uncertainty of weather and because of the size of the demand.

Yeager: Okay, I'm going to take the inverse now of the too much and let's go too less water. Jenny in Des Moines is asking us, how does the prospect of a failed wheat harvest affect how Midwest corn farmers should think about marketing their 2021 crop?

Roach: I'm not sure that you want to look at spring wheat and think how that impacts corn. The problem with spring wheat is that it's a relatively small crop and the real competition comes from winter wheat, which is a cheaper priced feedstuff. And this year, particularly with all the moisture that they have down through winter wheat country, that crop is actually looking pretty optimistic and we anticipate there will be some of that wheat that is fed to livestock because of the price comparison and because of the availability. And so we think we could cause corn a little problem. We wouldn't look at wheat from the standpoint of shortage there positive corn, we'd flip it around. More wheat than what we probably need negative to corn, at least at this juncture.

Yeager: Okay. So then let's ask about the soybean side of this same discussion. This is Husker Fast in Lincoln, Nebraska who is asking this question. Are we out of soybeans if the Dakotas dry up? Now you get to play speculator. Are $20 soybeans coming if that's the case?

Roach: $20 soybeans are pretty high prices. Remember it's a wholesale product. You have to be able to turn it into meal and oil and then somebody has to buy that meal and feed it and somebody has to buy the oil and from what it looks like we're going to put that into some sort of a renewable fuel. And so it's possible that we could have an energy market strong enough to do that and we could have livestock prices strong enough to do that but I wouldn’t be betting that way. What I would be betting right now is you're liable to get a sell signal on beans next week and that would be a good opportunity to be getting sales made on soybeans. That's what our plan is. We think putting any beans at this price level into a bin this fall doesn't make any sense. It just takes too much to make that profitable and there's just a lot of risk involved in doing that. And so we'd be careful here for a little bit to not get distracted off of our game. If you're going to let weather in spring wheat country and the Dakotas take you off your game of getting sales made in Iowa and Illinois and other areas where you have good crops that would be a mistake in my opinion.

Yeager: All right, you've already kind of teased a little bit of this question. But Merrill in Johnston, Iowa is asking kind of some of what you just answered. What should a producer be doing with new crop? How would you utilize option values in this crazy marketing year?

Roach: Okay, that's a great question. Now, what I'd be doing is I'd be trying to take risk off the table. Take risk off the table depending on where you are, basis is the first issue. Basis in a lot of areas is much better than normal so a cash contract at the elevator represents probably the best sale opportunity, particularly in the case of corn. A new crop sale right out of the field or for the delivery period that is best for you as long as you don't go too far down the road because there's no carry in the market. So that is the first crop to deal with. The crop you can't store, that all needs to get sold. The crop that you would like to store, you have storage for it or you're afraid to sell it or you're really optimistic, you see something out there the rest of us are missing and you say look, I don't want to sell this percentage of my crop. Excellent, consider at least buying puts to put a floor underneath that crop so that that way you can count on what you've sold plus the floors you've put to get yourself in a financial position that makes sense on your farm. The flip side of that on options is say, well look, these cash prices are good enough, I don't care about insuring them from declining because my bet is they probably will. So what I'd rather do is I'd rather sell the crop and then I'll go buy a call option just in case this weather thing turns out to be a real problem. So there's two ways of using the options. One is to insure while maintaining the inventory. The other is to sell the inventory and then go buy some price insurance in case prices go up. For most farmers if you get the crop sold and it represents the profit level on the farm that you have projected you then could take some of that and go buy some call options and put your ownership in Chicago and change your risk structure. And that makes good sense for most all farmers to walk through a discussion with somebody who is knowledgeable on their operation and their storage and their ability to handle grain and their profitability and so forth and come up with a very specific plan and that is what we really have been doing all week and will be continuing to do is we'll be formulating plans for farmers who are trying to figure out how do I get my way out of here without leaving a lot on the table and that is what we've been spending a lot of time doing and the options help us do that.

Yeager: All right, I'm going to keep on the marketing theme here for a minute. I'm going to go to Tim in Crookston, Minnesota who had a question. You just said something that made me think that this is maybe where we should go next. It seems that the past couple of weeks of trading is basically managed money trading technical signals more than fundamentals. How will we know when the market returns to trading fundamental data over technical signals?

Roach: Another good question. It swaps back and forth. Let me give you an example in corn here for just a second. I don't have my numbers in front of me here. But it seems to me that the spec funds own 400,000 contracts of corn when the market was peaking back here a month or so ago. Then the prices started to decline and once they started to decline and moved into downtrends for fundamental reasons, the fundamental reason was we got the crops planted here and we got some precip in South America and we stabilized that crop a little bit. And so we started down for fundamental reasons and then once those trends changed then we got the spec funds and they came in and they sold 130,000 contracts and if you want to multiply 130,000 contracts times 5,000 bushels a contract you'll find out that that's bigger than the Chinese ever are. So the spec funds took it away from the fundamental traders. Okay, now this week we flipped back around and the spec funds bought 20,000 contracts of corn prior to, during the week ending Tuesday and that, again, 20,000 contracts multiply it out, that's a lot of grain. And so we pushed prices back up above the green line, we think the green line 20 day moving average. You probably don't know it as a green line but it's a 20 day moving average, we market green, so you always know when you get the green light. When you go up through the green light you turn that spec fund back into a buyer. So the fundamentals move prices back and forth but once the price starts to move it triggers technical indicators and that activates the big boys. And we have to remember that when prices turn down the big boys are owning big inventories right now and if they start to sell them you won't see it on the weather forecast, you won't see it in the Chinese news, it's only going to happen in the pits or in the computer, in the computer matching and those spec funds will go from being long a near record quantity to probably being short a near record quantity before it's all done and you want to be the seller when the spec funds are the big owners. You can't wait until they're the big net shorts because at that point the market will have already moved a long distance.

Yeager: Okay, Phil thank you for your question. I want to move to a little global picture. Phil was asking about June sales and the next weather option. But this one is a little more, you mentioned China, it's something we're always watching. And Minda is asking us via Twitter, wondering what the smart folks in ag make of China's info war. I know that we should watch what they do and not what they say, but do you have any other wisdom to offer about reading the Chinese tea leaves? You just got done talking about computers, large positions, large market movers. China is that same way. That are the China tea leaves telling you, John Roach?

Roach: They're confusing. The situation right now between the United States and China is getting dicey and so it's hard to know what really the tea leaves bring. But what do we know today? What we know today is China grew its hog population large enough that now the prices are going down. And so although we thought it might take a long time for them to get their hog herd back large enough to, it didn't, and so now we've gone through a period here of heavy demand for feed grain to feed livestock. Not only did you have the other poultry or the other proteins, you also had the hog industry growing and their demand grew because of that. But now farmers are losing money. So look for maybe some contraction in China because they're not making any money and so that could slow their demand. Let me make this suggestion. We were talking before about the spec funds and the Chinese and I compared in corn that the spec funds in the last couple of weeks have been bigger, maybe I should say the last six weeks, we been bigger than the Chinese. So I think if you would like to learn more about the people who are bigger than the Chinese that might move you further ahead in your marketing than trying to figure out what the Chinese are going to do. The big spec funds are reliable with what they do. They go into the marketplace to make money. They follow the old adage, the trend is your friend. And if you want to watch what they do over time it will help your marketing. We have four boxes that we pay attention to. The fourth and most important box, our key market indicator, is the money flow which is a position of the spec funds. China does not have a box in our key market indicators.

Yeager: I'll tell you what --

Roach: My comparison is between the two, China doesn't have a box. So it's hard to try to understand what people are going to do in China. It's easy to understand what the funds are going to do. They're going to stay with the trend.

Yeager: And we like that you've stayed with us over the years as our senior market analyst. John Roach, thank you so much. Next week we are going to look at some of the monumental impacts on western stakeholders and Sue Martin will join us to break down the markets. Thank you so very much for watching, listening or reading this Market Plus. Have a great week.

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