Market Analysis with Don Roose and Ted Seifried
Don Roose and Ted Seifried discuss the commodity markets.
Huge foreign crops, poor exports and improving planting weather led to a selloff. For the week, the nearby wheat contract lost 39 cents, while the July corn contract shed 30 cents. More liquidation in the soy complex as oil and exports were lower. The July soybean contract fell 30 cents, while the July meal contract subtracted $11.20 per ton. July cotton added 65 cents per hundredweight. Over in the dairy parlor, June Class three milk futures added 11 cents. The livestock market was up as June cattle put on 95 cents. May feeders added 85 cents. And the June lean hog contract jumped $5.62 or 6.5 percent. In the currency markets, the US dollar index fell 13 ticks. June crude oil lost $1.06 per barrel. COMEX gold gained $8.30 per ounce. And the Goldman Sachs Commodity Index fell almost 14 points to settle at 562.60.
Yeager: Joining us now, our regular market analysts, Mr. Don Roose and Mr. Ted Seifried. Gentlemen, good to see you. Don. Ted.
Seifried: Good to see you too, Paul.
Yeager: Be with you in a moment. Don, this wheat market. We have all these questions. We just heard about Oklahoma, how dry it is. Kansas is dry. The U.S. domestic story doesn't seem to be a dominant factor in the market. Or does it?
Roose: Well, I think if you look at it, it has been for a long time it has been all about Russia, record crop selling wheat. And we always say for every action there is an overreaction. We had $13 wheat and everybody wanted it. It's Russia, EU, Australia. So, I think the bottom line is we just have too much wheat in the world. Good news to end the week, soft red winter wheat at the Gulf is about 30 cents cheaper than the rest of the world, EU and Russia. So, it looks like maybe the market is finding some support down here, Paul.
Yeager: Some support. But how much?
Roose: Well, I think when you take 92 cents off of wheat in nine days, Chicago 120 and Kansas City about the same and Minneapolis I think probably is a market that is sold out. No doubt it's a market that is trying to find its footing. But looking for a catalyst. But you can easily find that in short order in these markets. A technical market with the funds big short, probably about 25,000 off of their record. So, we saw what happened in the hog market, same thing can happen in the wheat market.
Yeager: All right, so Don is talking about contracts that are short. Supplies might be short domestically. What do you see as a big factor right now in wheat?
Seifried: So, first of all, supply being short domestically, the USDA raised their carryover the last WASDE report. So, that is sort of a dark cloud over wheat as well as the rest of the world has a lot of wheat and the dollar is fairly strong. Like you said, wheat is cheap at the Gulf right now. But if that dollar strengthens that can put a wrench into that too. Yes, wheat is the hogs of the grains. If there is something to spark the funds to cover their shorts there can be some upside potential. But I think it would be fairly short-lived. When we got up to $13 that was based on a short covering rally because of an event that happened that wasn't foreseen. And anybody who was short in the market had to get out. It wasn't because prices needed to go to $13, at least not in my opinion, it was because it was a short squeeze. That sort of same thing could happen but it would be a spike and then probably back down to reality. I would say reality is that wheat should be trading a little bit higher than it is right now. But I don't think $10, $11 wheat, I just don't see the justification for that.
Yeager: Do you like this range right now?
Roose: Well, I think it's a market that when you're down at these levels, these price levels, you're the cheapest in the world, it's kind of like the best of the worst is where we're really at. It's an El Nino year so probably Australia has a drought. So, there's other things that can happen. We've got the Black Sea issue. You don't know what's going to happen over there at the present time. You've got a lot of the EU countries not wanting grain, particularly wheat, into their country, the farmers protesting. So, Paul, it's one of those markets that once you get all the negative news in, it's like who's left, and I think that’s kind of where you're at in some of these grain markets, particularly wheat.
Yeager: Okay, so in corn though, Ted, I was just looking at something and I wanted to make sure before I said this, we had China cancellations this week, every contract has a five in front of it, and I was looking, I don't have the May. But we have dropped not as bad as soybeans or wheat, but corn has not exactly been a bright spot. Are there any good days ahead with corn?
Seifried: The May still has a 6 in front of it. The July contract when it got down to its low of the day on Friday -- now it reversed off of that -- but when it was down at the low of its day it was down more than 75 cents in eight trading sessions. That is an epic slide in corn. Some of us are going to say that we've been waiting for this to happen and that maybe it should have happened earlier, we've been concerned about exports for a long period of time. The catalyst or the trigger was these Chinese cancellations. There was two rounds of them, almost 600,000 metric tons total. So that takes away some of that buying spree that they had. But now the question is, how much more does China cancel because on the books that we have sold to China yet not shipped yet still about 3.8 million metric tons and there's another 2 million metric tons sold but not shipped yet to unknown destinations. That's not all of China but China does probably represent at least a third of that. So, there's still more bushels at risk. And we are already in a situation where we are not on pace to hit the USDA's target, 400,000 metric tons of weekly export sales is not going to do that. So yeah, we need to find these sales. But unfortunately, we might be in a position where we find cancellations rather than sales and now you have a growing balance sheet. Everybody wants to be bullish corn, but if you look at the USDA's WASDE reports it's been five reports since we've seen that carryover go down. It's been going higher. That's not a situation where you expect to see a big rally in a market unless you have a major weather issue, which at this present moment we don't have.
Yeager: Don, I've heard you tell me several times the Chinese taught us how to trade. Are they just doing one of their, are the Chinese being the Chinese right now? They're going to have another cancellation, see this market go a little lower and come back in? Are they the white knight that will save us?
Roose: Well, it's an all-in, all out. Remember, they bought corn like 10 out of 11 days they rallied us. Then the President of Brazil goes over to China, sure enough after that weekend they canceled two times. But when you back up and look at the -- yeah, I think you look at that. But I think you look at our domestic situation, our exports are a factor, but they're a smaller factor. Our domestic demand is much bigger from the feed standpoint, ethanol, and I think it's about a domestic market the May/July corn spread sitting here close to 50 cents inverted. What does that really tell you is that we've got a rationing supply that has to occur. Down in the southwest you talk to the feedlots in Kansas and western Nebraska, they'll tell you they don't think there's too much corn. And really what the corn market did if you step away from it, last year July 22nd we went down to $5.74 and a quarter, interesting went to $5.72 Friday, a 75-cent break. But then in six days we rallied to $6.44 and a half. So, these are markets that are going to be very volatile, spike low on Friday, good close and we'll see if we can build on that. A lot of technical selling, Paul.
Yeager: What do you see then in the next I'll give you a three-week window? You say a spike lower. That to me says a little higher coming.
Roose: Well, I think we saw people doing this towards the end of the week. This is a place from a producer's standpoint you buy courage calls because it's a sold-out market, it's one that doesn't take a lot to get a relief rally and it happens very quick. And I think what's going to happen this summer is you're going to see a lot of volatility because you're going to have a lot of short bought people that want in the market. Don't lose fact that there was no deliveries on corn, soybeans, big deliveries on wheat, you buy big deliveries and that's what happened.
Seifried: And by the way, July corn $6.10 calls were going for about 11 cents there early in the day on Friday. I think they settled up a little over 12.
Roose: And $6 and 12 -- $6.00 calls were 12.
Seifried: Okay, so right in that neighborhood, and that's 56 days of potential upside at the time of year where you would expect to see that. Now, the strange thing about corn is that we had this big drop in the middle of last month and then we came back based on the quarterly grain stocks number that was supposedly bullish, although it didn't translate into a tighter balance sheet, and now we're doing it again. The worry that I have is that all of us expect for corn to rally into the beginning part of the growing season as we normally do because of weather premium, but we've already had the break, the recovery and now this break again. So, this may be, we might not get that. I hope we do. The only thing that is really giving a problem with this big slide that we just had is the time of the year, the calendar. This isn't the right time to be doing this necessarily. But we're also at these higher prices. Normally when we rally into a weather premium we're doing it from $4, $3.80. We're already at some very elevated prices that we've been at for years and demand destruction happens and you get Brazil with the second season corn crop looking very good. With the Chinese cancellations you have to wonder what they're doing because if this grain corridor deal is going to fall apart, if Russia pulls out of that, that means that a lot of corn going from Ukraine to China disappears. So, does China know something? Are they going to push Russia to continue to be part of the grain corridor? Or is China saying that they have enough booked between now and that second season corn crop, which is looking very good, and a lot of the Brazilians are raising their estimates on that second season corn crop even though it was planted late and into a risk area of hot and dry, that hot and dry hasn't occurred, that crop looks good. So, why is China cancelling and will they cancel more? That's the big question the market has.
Yeager: You want to counter that?
Roose: No. The only thing, I think all that stuff is good, but I think a producer is trying to figure out what is the real value of corn and I think if you look at it in August of 2020 we had a low in corn of $3.07, then in May of '22 we had a high of $8.27, so from a producer standpoint you're sitting here just over $5., $5.25 on Dec corn. What am I going to do with it? Where do I go from here with insurance at $5.91? You're 60 cents under insurance on corn, producers aren't going to sell, 90 on soybeans.
Yeager: In beans, a dollar in nine days, similar not as big of a percentage move lower. But do you see similar setup in soybeans?
Roose: Well, the big thing that happened in the soybeans is it was kind of telegraphed. We brought soybean oil from Brazil into the southeast, then you bring two cargos of soybeans from Brazil into the U.S. Their basis was like $1.90 under, cheaper than we were, now they're $1.50. They just had too much grain coming at us too quick. Their farmers too are treating their grain like a currency. So, I think they're probably not interested in selling at this price level either, Paul.
Yeager: What are you doing right now, Ted, with beans? Are you holding?
Seifried: Well, it's hard to sell beans after a dollar -- but the hope is that we do have this sort of bounce, the seasonal tendency to go higher right now. That would be great because I think we would love to see another opportunity to sell a little bit higher. But I really do feel like unless there is a major weather problem for this growing season that we could be talking beans that are $2 lower than where they are. And I'm not just talking about old crop, I'm talking about new crop too. $10.50 beans, I don't see that as a wild scenario for November beans by the time we get to harvest. So, again, the hope is that we get some sort of weather premium built back into the market. So, we get another shot at making more sales. Brazil, like Don said, they're not wild about selling beans at this big of a discount to us. But also, they have all these beans and not a ton of storage and they've got the second season corn crop coming. So, they have to move, some of it has got to move. They do a lot of bags but a big portion of that has to move. And the Chinese demand down there has not been great. So, if they're going to continue to be $1.40 to $2.40 under us to China how are we going to get another 4 million metric tons of soybeans sold between now and the end of the marketing year to get to the USDA's target?
Roose: But remember, Argentina lost half of their corn crop, half of their soybean crop, that's just an amazing number, 700 million bushels of soybeans probably lost by Brazil, or Argentina.
Seifried: Why aren't they buying from Brazil then at the $2 cheaper? I mean, I know they are.
Roose: I think they've bought so far 4 million metric tons.
Seifried: And the projection is 7 million, I think it could be closer to 10. But that's not raising Brazilian premiums.
Roose: Not yet.
Seifried: So, Brazil has the beans to sell. Yes, not yet.
Yeager: All right, I need to get to hogs. That's the big mover of the week. Is this the reversal, is this the beginning of more rallies in hogs?
Roose: Well, I think if you look at the hog market there it is, it's kind of similar to where the grains are. They're just ahead of them. Who's left to sell? The funds were record short. The producer didn't want to sell at a loss. Seasonally we get some strength in the market. The cash market hasn't started to move yet. First quarter supplies were just larger than the fourth quarter, that's unusual. First quarter larger than the last year. Retail prices last week I think really did it. The retail pork clearance was good. Beef slowed down. So, I think the consumer woke up is what happened.
Yeager: So, in live cattle we did hit, we were near a contract high a lot of the week, then we were higher boxed beef on Wednesday. Are the high at times of beef over?
Seifried: The cattle on feed report that we saw a week ago has kind of put a little bit of a wet blanket on the whole supply side story of this shrinking herd and smaller production going into at least the third quarter of this year. Placements were much bigger than expected. So, I'm not saying it completely changes the narrative because domestic demand is really very good and I think that will continue to be that way as we get into growing season. But the top end of the rally, the expectations that we were having that maybe a whole other leg higher happening in the cattle, I'm starting to kind of walk back on that a little bit. I don't see any reason for cattle to go down any time soon, packer margins are good, cash is still strong, but I don't know if we have this much, much bigger extended rally.
Yeager: I need to go to something you said on feeders earlier talking about covering some feed needs. Is the feeder excited this week after this drop in grains?
Roose: The grain market there's no doubt that the feeder market you should be covering your feed needs because you don't know what can happen. But when you look at the cash cattle market we topped out at $185. Typically, we top out in cattle in early to mid-May, so it happened. The futures have a big discount already dialed in. So, I think the feeling is that the cattle market is going to drop down into $166 cash, still a nice level, then come back in the fourth quarter, historically to make new highs, so let's see if we do that. That would be an interesting one. Supplies are going to stay tight.
Yeager: Ted, you get five seconds on feeders.
Seifried: On feeders, I'm going to hogs. I hope Don's right. We've tried to pick a low in hogs many, many times and I hope they're also a canary in the coal mine for the grains. I hope that chart is correct, but we'll see.
Yeager: All right, thank you, Ted. That's Ted Seifried. That's Don Roose. Thank you very much, gentlemen, appreciate the insight. We are going to pause for just a moment here on this analysis, continue our discussion about these markets in our Market Plus segment. You can find both analysis and Plus on our website of MarketToMarket.org. These resources they are free. We make it easy to never miss any of our offerings when field work season hits. We have three podcasts to keep you informed of the markets and the stories around agriculture with our MtoM podcast. Follow today to stay up to date. Next week, we look at an immigrant farm boy who ended up being the longest serving cabinet member. Thank you so very much for watching and have a great week.
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