Market Analysis with John Roach

It was a down week in the grains complex as moisture spread across the Grain Belt and the Black Sea's shipping agreement was extended for another two months. For the week, the nearby wheat contract sold off 30 cents, while the July corn contract lost 32 cents. Soybeans faded on new estimates of a record global crop. The July soybean contract lost 83 cents, while the July meal contract fell $23.80 per ton. July cotton improved $6.19 per hundredweight. That's a 7% increase. Over in the dairy parlor, June Class III milk futures dropped 41 cents. The livestock market finished mixed. June cattle improved $1.33. August feeders put on $6.12. And the June lean hog contract dropped by $1.07. In the currency markets, the U.S. dollar index was up 54 ticks. June crude oil rebounded $1.49 per barrel. COMEX Gold cut $41.70 per ounce. And the Goldman Sachs Commodity Index gained a little more than 3 points to settle at 544 even.

Kohlsdorf: Joining us now is regular market analyst John Roach. Thanks for being here, John. Good to see you.

Roach: Thanks, Brooke, nice to see you.

Kohlsdorf: Okay, so really the big headline this week was that corn and soybeans collapsed. I don't know if I'm overstating it by saying that it collapsed, the market collapsed. Wheat went down a bit, but not as much. With wheat, we'll start there, what was behind that decline?

Roach: Well, first of all, we have to go back a little bit further and look at what caused the big price rally and that came as a consequence of an attack on the Kremlin or whatever exactly happened and the worry that they were going to close the grain corridor for any of the Ukrainian wheat. And instead we had the grain corridor opened, or extended, the corridor being extended and so it was a complete turnaround from what caused the rally and so the extension caused a greater than normal decline than what would normally happen because the market was out of position. It had rallied on the wrong news, so to speak.

Kohlsdorf: Okay. Also, one of the other big wheat stories, there was that tour in Kansas of the wheat crops there and kind of confirming what we already knew that that crop was one of the worst that we've seen in quite a while. So, where will we go from here with that news?

Roach: Well, certainly the crop tour reporting the lowest yield in Kansas since 2000 would be a positive factor to the market. But as we saw in the trade today it didn't really make much difference. There is enough wheat in the world, although the supplies are still relatively tight, as long as we keep the wheat from the Black Sea region coming into the world trade there is enough that we can avoid having a big price increase. And the soft wheat is a very good crop and that market closed today clear down on its lows. So, we've had a sell signal in wheat and sold into the strength of this market and now we expect the market to stage a decline as we see commodity funds start to crawl onto the short side of the market, or crawl off of the long side.

Kohlsdorf: So, let's move onto corn now. So, we saw the lowest prices that we've seen in about a year and a half. I think it was October '21 lows. So, are we headed even lower?

Roach: Well, it's possible that we could be setting the season's low in the month of May but that would be very unusual. Typically season lows come closer to fall when we have bushels moving off of the field and a certain percentage of them getting sold as they're harvested. But, we could also have a weather problem come along at any time and change the whole outlook as far as production is concerned here in the United States. And we still have a corn crop to raise in Brazil where they've got a very dry forecast forward during a period of time when about a third of their crop is in silk and 40%, 50% is in the fill stage, the dough stage. So, there's still a lot of weather situation ahead. But assuming the weather is favorable then we would think prices have further to decline. The commodity funds had very large long positions and they liquidated their long positions and have moved over to the short side and we expect them to continue to sell as long as the price continues to be under pressure. They're very good at building a big position in the trend of the market and we clearly have downward trends in the market. So, we think that what a producer needs to be looking at is making sales on any kind of price bounces we get. As long as prices are under the 20-day moving average we think that we have a downward trend that will continue to bring that speculative selling in. So, we're concerned about where the market is right now. The weather forecast looks pretty good here in this country. But again, we have to pay attention to that Brazilian weather forecast too.

Kohlsdorf: So, China canceled a big order this week and there's discussion about an economic downturn in that country. Will we see more cancellations from China?

Roach: We're worried about that. We're worried that China would prefer to do business with Brazil and not with the United States. We continue to be in a verbal sparring match with China and their way of expressing their displeasure is to quit buying our products whenever they can do that. And that is what we've seen happen, as they have been able to buy inventories out of South America they have been canceling purchases that they made in North America. We think that the USDA estimate for demand both in corn and soybeans is overstated and we're worried that those numbers will weaken as time goes along. So, we're very much concerned about our number one buyer in the grain market.

Kohlsdorf: Okay. Soybeans also took a big dip this week and the lowest levels since December of '21. Where do prices go from here in the short-term?

Roach: Well, we think the market closed today very poorly and we think the market stays under pressure here for a little bit. This week should have been rally week and it started out on Monday that way but it quickly faded and we tried to rally several days this week but every time it faded and slid back lower. So, we think there's more pressure. But what farmers need to think about is we had really very big markets, high prices, record high prices in some of our crops and that is over and now we're on the other side and usually after you have very high prices you pay a very big penalty with low prices as demand is constrained and people change their livestock situation. So, we're concerned about the market and we think that with good weather we probably don't see lows until fall.

Kohlsdorf: Well, let's turn to social media for our next question. This is from Doug in Michigan. He's asking, how will the purchase of grain from South Africa by China affect U.S. grain markets moving forward?

Roach: Well, the South African tend not to sell to China. This is a new round of business for them. And so, it's just, again, more competition for the U.S. inventory that we're trying to sell. And we think that it's an effort on the part of China to diversify their locations that they're purchasing from and we don't think it's a short-term thing. We think this is a longer-term proposition.

Kohlsdorf: Cotton, we can talk quickly about that. It was the only commodity that actually saw some gains this week, right?

Roach: It did, it did. The plantings are expected to be well off this year compared to last and they are off to a very slow start. We've got some weather issues in some various areas. But we're getting a sell signal where the market closed today. So, if you're a cotton producer and you're looking for a place to make some sales we think now is the time to be making some sales both on old crop and new crop.

Kohlsdorf: Okay. Well, let's talk about the meats. So, we had some things happen this week, cattle prices for June have softened a bit. The cattle on feed report was out on Friday and it was showing that the herd was only 97% of last year's size. So, what's pressing cattle?

Roach: Well, the cattle market has really been in a strong upward move really through most of the spring and we closed today right up at the top of the market. The cattle on feed report was not much of a surprise. The concern that we have in cattle is that the marketings this last month were down 10% from a year ago. That was expected. There was no surprise. But when you're running marketings that much below a year ago we're holding back cattle we think and cattle are not losing, the beef is not at a lighter weight and so we think maybe producers are holding back some finished cattle and putting a little extra gain on them. At this kind of price level it makes sense to them. So, we're telling feedlot people to be careful in here. This is a time when you want to be trailing with some puts or some other marketing and be careful because we're up here at a top and although we don't think it's over and we think the cattle market is on pretty good footing, there is some reason here for caution flags to be flying and we have to be careful we don't get ourselves in some trouble. The other part of this trouble comes in the pork market where we had the price down making new lows today as the futures are trying to get down to where the cash market is. We've been optimistic in the pigs, or the marketplace has been, and we've had hog prices in the futures at higher levels than the cash but the cash has just not responded. This is the time of year when it should respond. We think it probably will. But you won't convince anybody in the futures market of that today because, as I said, hogs of course closed right down on their bottom. And so, we need to see the cash market come up to where the futures are because at the moment it's futures coming down to where the cash is.

Kohlsdorf: All right. So, you covered hogs there. Let's talk about feeders. They traded lower week to week. With corn prices going lower, where are we going to see that market headed?

Roach: Well, the feeder market with the lower corn prices this week and the cash trade was actually a stronger market, as people see a lower cost of gain and they're putting that lower cost into the price of the feeders. And, again, we think that that market is also up here in an area that is a little bit frothy, if you will, and so we're saying that people should be cautious, be careful and you're buying replacement cattle you need to be finding some sort of risk management program to get some sort of a floor underneath because it's these kind of prices that can really hurt you if this market turns down.

Kohlsdorf: Should we be locking in our feed prices?

Roach: I think yes, yes. We have buy signals on corn, not that we think the market is going to take off and run higher, but we don't know about weather and with the uncertainty and relative tight supplies of old crop corn we are in the process of accumulating feed or advising farmers to accumulate feed.

Kohlsdorf: One of the bigger stories beyond just agriculture was the debt limit. They haven't come to an agreement on that. Where is the dollar headed? Are there concerns about that?

Roach: Well, and the news that I heard here in the middle of the day on Friday was that the debt, raising the debt has gotten pushed off a little bit, that republicans are holding strong and saying, we're really not ready to change the proposal that we have in front of the administration and if that is the case then we worry everybody. And the gold market took off and gained some of its losses back today. We think that the dollar could weaken under this kind of situation unless the politicians get their heads together and figure out the situation quickly.

Kohlsdorf: Quickly, okay, yeah. We'll see if that happens. John, really great to talk with you. Thanks so much for joining us and offering us all of your insight.

Roach: Thanks, Brooke, appreciate it.

Kohlsdorf: Well, we are going to pause this analysis and continue, actually we'll be discussing a little more in our Market Plus segment. That is where we get to some of the questions that we haven't been able to get to during this segment. And you can find both Analysis and Plus on our website of MarketToMarket.org. These resources are free. We do love hearing from you on story ideas, comments and general conversation. So, drop us an email via markettomarket@iowapbs.org. Next week, we look at the partnership shoring up and shortening up the grain chain. Thanks so much for watching us. Have a great week.

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