Market Analysis: Angie Setzer

Market Analysis: Angie Setzer

Oct 22, 2021  | Ep4710 | Podcast


Good export numbers were met with technical resistance in the trade. For the week, the nearby wheat contract rallied 22 cents while the December corn contract added 12 cents. The largest week of exports in a year helped stabilize the soy complex. The November soybean contract improved 3 cents. December meal gained $10.80 per ton. December cotton expanded 93 cents per hundredweight. Over in the dairy parlor, November Class III milk futures moved higher by 26 cents. A selloff in the livestock sector. December cattle dropped $2.65. November feeders shed $4.53. And the December lean hog contract weakened $4.95. In the currency markets, the U.S. Dollar index dropped 34 ticks. December crude oil increased $2.18 per barrel. COMEX Gold gained $27.80 per ounce. And the Goldman Sachs Commodity Index feel more than 2 points to finish at 589.65.

Yeager: Now here to provide insight is market analyst Angie Setzer. Hello, Angie.

Setzer: Hi.

Yeager: Good to see you.

Setzer: Yeah, good to see you.

Yeager: It's been a while since we've had you in-person, but we've kept in touch via this technology thing so it's crazy.

Setzer: Isn't it great? Yeah.

Yeager: So, people keep in contact with you all the time with questions. I have like 12 pages of gifs and questions that came via Twitter. We'll try to get to as many of them as we can. The first one involves wheat. What the heck is going on with wheat?

Setzer: Oh, it's my favorite commodity. Well, from a global standpoint or from a carryout standpoint we've seen wheat basically low prices cure low prices. So, if you remember it's only been about a year or so where we were sub-$5 wheat and in some places sub-$4 cash wheat and so you really saw this reduction in planting and production and that held true the world over. And then you throw in some issues with production and some of those other things and suddenly we're short wheat. And in addition to that you have some gains we've got with Russia, what Russia is doing and you have some domestic indications of continued demand and we fed a lot of wheat not recognizing that potentially we were really cutting into what we needed for the year ahead. It's just, I think wheat has just got a whole plethora of stories depending on which class, which type of wheat you're looking at and that's not something that is going to go away any time soon because we're not going to really replenish that pipeline, aside from what is going on in the Southern Hemisphere, until we get into May and June of next year.

Yeager: You mentioned global. Wheat explodes today on Russian export grain tax increase, there didn't seem to be much of a reason for the drop yesterday. But you had a new contract high in Minneapolis, tight world milling stocks and we still have tight stocks in general. So it's not just limited to one class.

Setzer: No, it's all of them.

Yeager: Is anything going to solve this issue?

Setzer: More production, but then you look out the window in some of these areas and we had for some reason all of a sudden China is going to give us wheat planting progress for the first time this year. That was interesting. But they are half of what their normal rate is. And then soft red wheat areas, my home state of Michigan, we can't buy a string of dry days. And so for a lot of the guys that were looking at a 10% to 15% increase potentially in acreage we might be scraping by to get to where we were a year ago. Maybe we do see a little bit of that increase in some of these spots. But the closer you get to November, Halloween tends to be our drop dead date, and we caught another rain yesterday and looking at another one on Sunday. And so some of these guys may put the planter away here before much longer. But from an overall standpoint, every class, and you have the Russian issue and then you saw 1,100 plus contracts of Kansas City wheat cancelled yesterday on the delivery side of things. And so that basically is pulling that out of the cash market to a certain extent and indicating some demand.

Yeager: Given all that, real quick, are you making any sales or are you holding for a little bit longer?

Setzer: We've been making sales. I mean, my job as a risk manager is to make sure that we acknowledge the fact that $7.50 wheat from a historical standpoint -- a lot of my customers come to me and they're like, I just want to be able to sell in what tends to be the top portion of the market -- and so you look at a 20, 30 year chart and we're still in the top portion. Now, where a year ago we may have been like, let's see 50% to 60% of your expected production at $7.50, we might be more like let's sell 30% and see what happens this winter. We look like we'll see decent production out of Argentina and Australia but that's not going to be enough to replenish the pipeline. The biggest question is going to be what Russia is going to end up exporting and what you're seeing from a production standpoint there.

Yeager: You mentioned acreage battle, you mentioned production, that is impacting corn as well because there is going to be this major battle of acres and it might not be for the wheat story impacting corn as it is inputs. We're already worried, let's not talk about deferred yet, let's talk about this nearby contract first. Why is that bouncing back? Is this some kind of technical wave pattern?

Setzer: Just looking at a chart of ethanol margins right now, they're the highest almost on record. If they're not on record they've got to be close. And so you're seeing this real strength of spilling over from the energy sector and obviously ethanol, soybean oil, all of these things are going to contribute to supplying what we need to meet our gasoline demand. In addition to that, the inflation story has not gone anywhere. So if you look at lumber, if you look at energies, if you look at metals, if you look at grains, a lot of this stuff has recovered and buyers have come back in to really kind of put their foot on that gas pedal to get the Fed, we've got to force some of these hands of these central banks to figure out what we're going to do with this monetary supply because otherwise inflation is going to be out of control. And so until that is solved, whatever it takes to make that happen, you're not going to see this market get too far out of where it has been simply because of the fact that we're going to have that support that comes from that inflationary side of things.

Yeager: So, is the inflation story bigger now in this December contract? And is March impacted by input rises? You're talking range bound. Help me understand this, Angie.

Setzer: I really feel one of the things we're forgetting about here is the market's job is not to guarantee a margin. and so everyone seems to think that if for some reason whether it's fair or not, this Dec corn price for '22 has to increase because it's going to cost me more to produce it. No one that is trading this market structure right now outside of folks that are like, well will we see a reduction in acres or not, no one is really asking the farmer, is this an okay price? Are you going to make enough money here because we're worried about that? That's nothing that has ever been done before. And so yeah, the market needs to incentivize planting but it doesn't necessarily have to do it by shooting to $5.50 or $6 in the Dec '22 contract. We can see soybeans Nov '22 back off eventually if that is what needs to take place in order to encourage some solid, some more corn production.

Yeager: All right, I'm going to ask Eric in Moville's question then right now that came via Twitter. He was asking, with all of the supply chain uncertainty, why shouldn't holders of nearly every commodity be tremendously bullish?

Setzer: I can't say you shouldn't be outside of the fact that from a supply and demand economic standpoint, fundamentally speaking at this point in time, we have far more comfortable stocks at least on paper. Now, a year ago the USDA was at far higher levels than where we finished this year. And so I can understand the idea that, well I'm just going to continue to hold. I'm old enough to remember the transition from oh my gosh inflation is going to be the death of us to 2009. There's a lot of economic indicators that I would be concerned about. We've seen cranes, the level of cranes in the world indicating construction projects and things of that nature, they're down 5% from Q1. You're starting to see to where you cannot suspend economics entirely. High prices eventually cure high prices. When that is, no one knows. So I understand the idea of being bullish commodities long-term and I'm not going to sit here and tell you I'm bearish at all. But I don't know necessarily if we need to see a move to new highs from where we've been unless we start to see an increase in demand.

Yeager: Are these the same factors in soybeans right now?

Setzer: I think so. Soybeans are a little bit scarier to me. You’re looking at, we've had some really strong Chinese demand, which has been great, but we saw some further indications this week that China is continuing to buy beans out of Brazil for November and December.

Yeager: Which was to be expected, right?

Setzer: To a certain extent because of the Gulf, but we are back up and running. But with the logistical hiccups that we're seeing now you're talking about beans that are loading out of the Gulf the end of October that are going to land the end of January. And so they're looking at it like, well the end of January sure, that's spring festival. You don't want to bring in a whole bunch of beans when we're all shut down and we're not crushing. So the million dollar question in soybeans is going to be that export demand. We know that crush demand is going to increase, we know that we have an exponential amount of crush projects that are on the table that will grow domestic demand in the next 5 to 10 years. But is that going to offset our loss in exports due to the fact that we are looking at a potential increase out of Brazil this year production wise of another 300 million bushel. And they're cheaper and they're able to produce it cheaper and their currency is helping them sell better and so China is going to use U.S. beans to get by until they have that large amount of Brazilian production. Granted, we could run into a dry period from a weather standpoint. But right now you look at the last two weeks and the next two weeks, we're off to one of the second fastest paces on record when it comes to planting and they look to be able to continue to see adequate rainfall.

Yeager: Is the soybean story with the hog story, when you mention China and the crush versus exports that they're taking in, what's the biggest factor? We've had two straight weeks here now of hogs moving dramatically lower.

Setzer: Yeah, and honestly on the hog side of things I think we were anticipating this massive increase long-term in Chinese imports. We were afraid that they had decimated their hog herd and they weren't going to get back online and we had encouraged increase in production. We were trading at some record high levels in hogs as well earlier this year. And so the thing with hogs that is a little bit different than cattle obviously is that your cycle in growth, when it comes to increasing your supply availability in the hog sector, is far greater than what you'll see in cattle. And so I think that we, again, high prices cure high prices, it's literally the only job of the market is to figure out what a fair value is for the buyer. And so if we aren't seeing this massive increase in demand as we were anticipating 6, 8, 10, 12 months ago we're going to have to chew through a lot of this demand. And so you're going to have to -- or a lot of this supply, excuse me -- you're going to have to get prices low enough to where you're encouraging an increase in demand.

Yeager: Cattle on feed came out today. What did you see?

Setzer: It looked bullish to me. Marketings came in far below expectations, placements were down, the on-feed number is relatively decent. I think margins there will continue to improve to a certain extent. And honestly when you're at the grocery store, yeah your prices have creeped up a little bit, but you're still able to access beef for a relatively decent price comparatively speaking versus chicken and pork. And so I think that demand stays strong. I think we've got to encourage the cattle producer to continue to fill that pipeline. And, like I said, it takes a heck of a lot longer to make that happen than it does with poultry or hogs.

Yeager: In the feeder market, so that was going to be my question, if you're someone with some space in a feedlot right now are you expanding?

Setzer: I think you see long-term support on the beef side of things. But I think when it comes down to it you have to look at the individualized margins. You have to know where you're at when it comes to sourcing feed right now, especially.

Yeager: Given the wheat story that we talked about.

Setzer: Exactly and if you're in an area where you're going to be competing with an ethanol plant when it comes to buying corn or maybe you're going to have to transport it a heck of a lot longer than you typically would, there's a whole lot of additional extenuating circumstances that have to come into play when it comes to making those decisions now than what you would have seen even six months ago.

Yeager: The feed story, I want to go back to that just quickly, because wheat has dropped down. We had a discussion point either last week or two weeks ago about the pastures and their damage because of dry conditions, hay issues. Is there any of those all in the factor of expansion in these feedlots?

Setzer: I think all of it has to be. If you're in an area with an isolated drought and if you're going to be paying exponentially higher than what you typically would to access your hay or access your corn or you can't access wheat or something of that nature I think you have to make smart decisions because it's not going to be just a short-term pinch, this isn't something that goes away. If you were in a drought stricken area it's not something that is going to go away in three months. It's going to take until we get into next year's production and it's not going to be first or second cutting that's going to fix it, it's going to have to be third or something of that nature. The same can be said as what we say in grains, the pipeline, if you have an empty pipeline it takes a lot longer to fill than what you ever anticipate and the same could be said on the feed side.

Yeager: Thank you, Angie.

Setzer: Thank you.

Yeager: That will do it for this installment of Market to Market. The conversation continues in Market Plus so join us, find that on our website of Information comes from all different sources and we have compiled many of the stories we're reading into a Flipboard magazine called Market to Market Reading Material. Click on the capital F on the homepage of Next week we explore how a dry weather bet paid off for some grain farmers. Thank you for watching. Have a great week.



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