Market Analysis: Angie Setzer, Chris Swift

Market Analysis:  Angie Setzer, Chris Swift
Market to Market | Podcast
Jan 21, 2022 |

Angie Setzer and Chris Swift discuss the commodity markets.


Yeager: A movement of troops to the border between Russia and Ukraine had the attention of the grain traders in the United States. For the week, the nearby wheat contract added 37 cents while March corn improved 20 cents. South America's changing weather patterns and predictions of crop damage created volatility in the soy complex. The March soybean contract improved 45 cents. March meal shed $12.90 per ton. March cotton expanded by 98 cents per hundred weight. Over in the dairy parlor, February Class III milk futures declined a $1.58. A mixed week in the livestock sector. February cattle lost a nickel, March feeders cut $3.08, and the February lean hog contract strengthened by $5.30. In the currency markets, the US dollar index increased 44 ticks. March crude oil gained a $1.66 per barrel. Comex gold added $15.30 per ounce. And the Goldman Sachs Commodity Index improved almost 17 points to finish at 609.40. Let's welcome in now two of our regular market analysts. One would be Angie Setzer. The other is Chris Swift. Hello to the both of you. Chris, I'm gonna start with you and Angie, I'm gonna ask you the same question. ‘What's the biggest, I'll say, hang up weight on commodities in general right now, as we sit here in, uh, mid to late January?’

Swift: It seems like the transportation and distribution channels have been messed up in just about every single aspect of, of moving product across the United States and from our rail, from our shipyards to our rail heads, and then to our trucks to get it to the actual place of business. The down times are incredible. The restrictions that are placed upon a lot of the are really causing most of this. So we're really not seeing much in shortages of the actual product, just the inability to get it from where it needs to from where it is to where it needs to be.

Yeager: All right, Angie, same question to you. He says, transportation. Your answer is,

Setzer: I agree with Chris, although I'll use family feud style rules and not

Yeager: Have to pick a different answer,

Setzer: Right? I have to. Yeah. Uh, I would say this how China manages their zero COVID policy as we move ahead, obviously we've seen Omicron, uh, you know, across the globe has really kind of created this huge surge in cases. And then we've seen things kind of mellow out and move on, you know, how that works in China. What we see happen after the, the Olympics is something I'm really going to be watching. You know, as we've already seen, it they had one positive case of Omicron an office building in Beijing last week and they locked down the office building. No one got to go home. So it'll be interesting to see just how they proceed and what that does to overall demand. Plus supply the ability to unload, um, ships at port. All of these things. So I, I, I think it probably just kind of exacerbates the, the transportation issue. Uh, but it's definitely something I'm, I'm watching.

Yeager: Angie, is there one specific commodity that concerns you, uh, say soybeans with China if, uh, uh, a big breakout happens there?

Setzer: Well, yeah, I would think soybeans could, uh, could cause an issue. I mean, there's been a lot of conversation that the, the reduction in restaurant eating has already taken place. We saw that happen in December with a large percentage down. And what we've seen, you know, it, it early on in COVID was the reduction in restaurant eating. And some of that really kind of made the Chinese population transition away from maybe more in the way of meat to, to that of a, a diet of, of maybe more poultry, noodles, things of that nature, which is part of the reason we've seen their wheat demand increase so much. Um, but obviously, you know, soybeans are the obvious answer and then corn, you know, simply because I feel like we have this large amount of risk premium, just kind of lurking in the market with the idea that China's gonna swoop in and start buying up all of this extra for corn. Um, so I'm definitely watching both corn and soybeans when it comes to that. And I think wheat demand continues to increase because they've discovered how delicious bread and noodles are. And there's no going back from that.

Yeager: All right. You're, you're, you're teasing wheat. I wanna go back to soybeans and finish that discussion about, uh, the other big story. And that's the varying weather reports in South America. There's reports that enough rain fell, not enough rain fell. The crop is damaged. The crop is great. Where do you see things right now in south America when it comes to soybeans?

Setzer: All of the above? I, I mean, I think that's one of the important things we have to to think about is, is the Brazilian or the south American growing region is up and down. You know what I mean? So we have a very widespread, um, sort of maturity sort of phase in, in growth that takes place. You know, you obviously you have Mato Groso and points to the north that started planting in September while Rio Grande del Sul, Argentina, you know, they just planted or are just wrapping up on planting. And, and so you have, um, some instances where we could see some of these rains really kind of save, or at least cap that damage that we've been seeing. Other areas, obviously it's, it's too little too late. They planted early this year because we thought the monsoonal moisture was going to kick in. And so you've seen that big reduction. And so the million dollar question becomes how much does the north offset of the south, because the north did have nearly ideal, um, growing conditions. And, and so here we sit, um, you know, most of the folks in the know that are down there that are working with folks down that way are still in that upper $1.37, $1.39. Now granted that's a heck of a lot lower than where we were at the $1.45 to $1.50, you know, sort of, uh, potential level that we were sitting at. So it is something that, that is definitely, we're gonna continue to watch it. What I find most intriguing right now is the Brazilian farmer, you know, taking after the, the us farmer to a certain extent in the sense that they sold too much last year, they were almost 60 percent sold by this point in the growing season last year only to watch the market surge up another dollar, $2. This year, they're below average on sales, and that's kind of causing some issues with the cash market. Now they've definitely shut off sales as the, the market started trade higher and these drought talk, the drought talk has come into play. And so that's influenced basis, It's brought some business back to the US. It's helped kind of support this thing, but we're only about 2% harvested. So we'll see here in another four or five weeks, we'll get a better feel for what's taking place. But so far you have zero and you have hero when it comes to, to yield reports out of, out of South America, out of Brazil, especially. So we'll see which one wins when we get to the end.

Yeager: Let's look at the board ‘zero and hero’ were both up on there. Very good, Chris, uh, from a livestock producer's perspective when they look at the corn market, what's their initial reaction right now?

Swift: Um, a little bit of a shell shock. Simply because nobody has had an opportunity so far to reload at a new production cycle at any lower prices. We ended up this year, uh, in December with some of the higher prices for corn, and now we're ending some cycles. We're, we're finishing off our wintertime cycle and fixin’ to go into a more spring type cycle, and we'll still need some of those products. And, and we're just finding that there's been no break whatsoever for our producers to, to replenish those, uh, inputs that we need.

Yeager: And so if you are someone who needs the corn, do you have to ‘bite the bullet’ and make a purchase right now?

Swift: Well, you know what we're looking at right now, if you can wait, it's always cheaper in the back end right now, we had a full inverted market today where the March contract traded the highest price. And, uh, again, it, you would like to be able to go out and buy some of the cheaper grain in the future, but we know that these cycles are ending. Nobody has been able to buy grain at a cheaper price. So they're just having to come back and reload those feed bins again, with the highest price going there is

Yeager: Angie. When you hear inversion and you look at the December corn contract on the screen, now $5.65 and a quarter. We're over $6 in the March. It's January for heaven sakes. Does where's this go? Higher?

Setzer: Oh, well it could. I mean, I think at this point, yeah, the path of least resistance, or at least the risk is, is to the high side. We're in a full blown bull market here, right? We have been now for what a year, 14 months, 15 months. You know, and, and when we were trading at the low side, I, I can remember always telling my customers, okay, you have to realize that unknowns tend to always be bearish in this current market structure, right? Like market psychology always wins. Well, now we're in a bull market. And so unknowns are, are bullish. Does China step in? Does Russia attack Ukraine and reduce the amount of, of global corn stocks? Does the drought continue in Argentina and reduce production? You know, we're, we're not really of the mindset yet that it's like, okay, well, these are reasons that we're going to see supply increase or demand slow down. It's it's still the, the opposite. Um, you know, and, and so you, you look at it and you think, does it continue higher? And, and right now I would say the sign point to yes, but if you look the outside markets and you look at some of these other stories, if we don't see things line up, you know, I, I read earlier today, someone using their, their private estimate of 1.2 billion bushels, you know, of, of corn ending stocks versus the USDA at 1.54. You know, okay. If that is the truth, then we should be, uh, $6.50, $7.00 And heavily inverted. If it is truly 1.5 or 1.6, or 1.7. If we don't see China take in everything that they have purchased from a corn export standpoint, and we potentially see feed demand, maybe back off a skosh even though cattle on feed, not to steal Chris's numbers, doesn't show that's gonna happen. I mean, there's a lot of ways that we could back off, but until we know more about what's going to happen with Russia, Ukraine, the, the Brazilian crop and, and Chinese demand, we're going to stay supported at the very least, if not try to move higher. The open interest indicates money is flowing into commodities as well, and still be no better than to, to get in their way.

Yeager: Okay. So let's, let's go to wheat now. Uh, you mentioned Ukraine and Russia. I mean, this is, um, geopolitical in many re reasons, China, same thing, but this wheat market, uh, it's also cold in the plains. And so what is the, what are those, the two biggest factors in the market right now, Angie in Wheat.

Setzer: I would say. Yeah, I think the biggest factors in the market right now is that a continued increase in Chinese demand. The fact that we did see such a reduction in production last summer in the Northern hemisphere, both in Russia and in, in the US and Canada. Um, and so we still kind of have that long tail, the short crop of, of 2021, that's, that's gonna hang over our heads. And then the Russian, Ukraine thing is huge. You can't have two of the top world exporters you know kind of running into a situation where there's a conflict and not have some sort of risk premium put into place. You know, traders remembered 2014. The last time we saw an actual full on, uh, conflict between both countries, wheat rallied 20 percent. Now a lot of things are different now than what they were then, but it's something that you, you maintain in the back of your mind. And until we feel better about what's taking place, whether Putin's just working to, to challenge the west and, and see how far he can go, or if he truly is intending on, you know, not only, uh, having the incursion actually going through with a full on invasion until we know more about that, you know, you really have to keep that risk premium in place, because what happens if you lose, you know, that large supply of, of, uh, world wheat, when we're already. I mean, we're already worried about food scarcity, and now we're talking about the potential of limiting exports out of two of the top exporters. Like I said, it's going to keep the market supported. And then obviously weather comes into play probably here in another couple, three months.

Yeager: All Right. So Chris, if I'm with my livestock right now and hearing what Angie just talked about with the grains, and I know what you watch with the grains, which is one of the three that we just mentioned, that I need the closest attention to or at least the story that I need to see to, to figure out how to make decisions that benefit me

Swift: Well today, right now, probably wheat, more than anything we, we've heard over the last couple of weeks, that more cattle are being pulled off of wheat pasture, simply because of the deterioration in the crop. And we find out today that we've got a 6 percent increase in our placement, and we have to believe that a lot of that increase is due to that factor. We've been running it fairly normal placements. We have believed all year long that we've whittled down the cattle market considerably. We've been placing more heifers, we've been slaughtering more cows. And then yet we come up with a 6 percent increase of placements. And that is pretty much primarily due to that week pasture and it going backwards, having to pull those cattle off early, more than likely that'll run all the way in through January. But then what that really does is we get into the March/April timeframe when those really good nine weights will be coming off of that week, they won't be here.

Yeager: Well in reading you the last couple of weeks, all of this year, you, you felt a little more bullish about cattle, but something changed here. Uh, you've kind of talked about it a little bit, live cattle. You concerned, are we in a bear market yet?

Swift: No, because we just set contract highs within this month. So it's, it's not that we're in a bear market nor do I think that we have a bear market environment, but we've got an outcrop in this wall of worry that kind of popped up over the last couple of weeks. And, uh, between the transportation distribution issues, we've got another snowstorm coming into the Northeast. The restaurant issue is really horrific. So with backing up the, the cattle market and backing up some of this inability to move those cattle, I think what we're going to see is maybe just a little bit of some of the premium that's been in the future's market, kind of bleed out some.

Yeager: The Secretary in the piece earlier tonight, uh, talked about that, uh, shift in consumer, again. Couple of theories, uh, maybe this virus is peaked in Europe, maybe is peaked now in the United States. Uh, is there any optimism there, Chris that, uh, maybe things get better for the restaurant industry or is this just back to what it was in early 2020 in the, in the virus that everything went to the grocery store?

Swift: Uh, I have to believe that the, uh, to tenacity of the US, uh, businessman is gonna, they're gonna want to, uh, reopen every restaurant that they possibly can. Uh, they have been backwards for several months now. Uh, we know they need a lot of help in, in both ways, reducing the food prices, helping to get those distribution channels open, where the fresh vegetables and fruits can come into restaurants. And so if we look at it going forward, we've, we've had a cyclical change in the production. We're, we're killing more cows, we're placing more heifers. So what we're really doing is liquidating at a very small amount and we're waiting for this spring and, and this spring will be the turn as to whether we continue to liquidate or whether we actually go into some type of mild expansion. And we all tend to know what happens when we go into mild expansion, we pull all those cows and heifers back onto the farm again, and we make an instantaneous shortage of cattle to the beef market.

Yeager: If it isn't one, then it's another, let's quickly get in logs here. Before, before we get to another question into Angie, uh, that, that someone sent in from Colorado. Chris, I wanna ask you hogs. A good week for them. What is driving that rally?

Swift: It, it seems to be that there are fewer market ready hogs is about the only thing that I have heard of so far. And that market has been very, very volatile. We, we dropped $5, $6 in two days, and then in rally $10. So a lot of that volatility in could have been some of that, but the index has not moved that much. It, it may be slated to move more. We've got several, uh, hogs and pigs reports that show lower breedings and lower hogs kept on farms. So we know that we're whittling it down a little bit, but not by that much.

Yeager: All right. All right, Angie, I have a question that came in via Twitter. Imagine that something came in via Twitter for you. Uh, Matt and Holyoke, Colorado wants to know when considering marketing the 22 crop should a farmer be thinking seasonality? For a couple of years in a row. I've had a cash price at, or after harvest, better than I could have gotten the spring before. Are the old ways out with this new world? And you can use any commodity you want to answer Matt's question?

Setzer: Yeah, I mean, I said it the other day in conversation. I've been doing this now for 17 years, and this is the fourth new price paradigm. And so I'm sure Chris can, can agree that, you know, we tend to run into these situations where, you know, nothing's going to be the same again, and suddenly we're back to, you know, here's your new boss, same as the old boss. I mean, honestly, I think at these levels with the amount of risk that you're laying out to spend on putting a crop in, if you've already invested in fertilizer, you've already invested in seed. You've already invested in chemicals, whatever, you know, you, if you're long a crop, you, you definitely wanna be making sure you're at least covering the cost or the cash that you're trying to outlay to a certain extent. I'm not saying you have to liquidate everything by any means. And I'm not saying that you may not see, uh, prices higher after harvest. You know, it's part of the reason that you build grain bins. And if you out ways to kind of, uh, maximize your, your revenue in, in that regard. Um, but yeah, I, I would say at this point in time, well, it is something, you know, to pay attention, to be aware of and, and kind of try to figure out how you can use to your advantage. It's not necessarily something I would say needs to, you know, you don't wanna throw the baby out with the bath water. There's certain marketing things and, and tools that have worked throughout all, even if you may have missed the high last year. And so you wanna make sure that you don't get so overzealous or so, you know, stuck in a mindset of, of, uh, punishing yourself for last year's mistakes that you don't do anything this year.

Yeager: Angie Setzer thank you so very much, Chris swift, thank you as well for your time. We'll keep this conversation going, because this will, for the installment of the TV show, we call Market to Market. We're gonna keep going in Market Plus. Answer a lot of your questions. Join us there. Find that on our website of market to and several schools started new semesters this week. And you can too, in our Market to Market Classroom, we have modules on innovation, entrepreneurship and the 1980s farm crisis just available at Next week, we look at the push for voluntary electronic identification in cattle. Thank you so much for watching. Have a great week.