Market Plus with John Roach
John Roach discusses the commodity markets in a special web-only feature.
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Yeager: Welcome into the Friday, June 24th, 2022 Market Plus joining us again, John Roach, John, um, we usually call you the senior market analyst, which just, you know, it's only because you've been here a couple years. That's all, it's, it's a respect thing, but there's a, you're the perfect person to answer our first question that I want to get to from the social question, by the way, appreciate all everybody who's submitted, whether it's Facebook, Twitter, or Instagram love hearing from you. We're gonna try to get to a, a few of them, some great questions. This first one I wanna start with is Paul in Danvers, Minnesota and, and Paul brings up, he says, John, when you look at the ag economy with inflation and interest rates on the rise, are we in about say 1978 or 1979?
Roach: I think we're earlier than that. Um, I got into the business in January of 1973 and, uh, we came up from the, uh, Russian grain robbery. We called it in '72 where the Russians took, took a substantial, uh, surplus of the world's wheat. Um, the, uh, uh, we then ran into an oil, uh, embargo, the Arab Oil Embargo, and we had, uh, a rampant inflationary period of time. Corn was a dollar and a half, uh, or thereabouts had come up from a dollar and the old timer said, 'Well, it can't go any higher.' It didn't stop 'till it got to $4. So, uh, we're not at, uh, at, um, at the multiple stage, but, but we are somewhat because we were at $3 in '20 and now we got up a lot of cash markets at $8. So it's, it is multiple. Uh, but, uh, uh, we have similar, uh, uh, inflation going on. Uh, and we're on the front side of that mountain. People keep comparing backwards and they talk about in the late 70s. And, and when we, you know, when we were maybe starting to starting to come back down, we're, we're still on the front side of the mountain, uh, in my opinion, well,
Yeager: A lot of the, the things that we talk about is the highest since 1982, the highest since 1981, the highest since, because that's, that is when we were coming down off the mountain is what you're saying. So what should someone do if we're staring the upside of the mountain?
Roach: Well, the thing that if we go back and, and look at the, at what happened, uh, during those years, the, the biggest mistake people made was leverage of people who bought anything, uh, and had to mortgage it. Uh, it became painful because interest rates didn't stop at the kind of rates we're seeing now, interest rates went right on up, and there's a lot of farmers out there that I'm sure remember, uh, paying interest rates in the teens, uh, and, uh, and the, and the very best thing to have done was to not have borrowed money or to have it locked in at rates that were more reasonable than that. Um, but from a standpoint of, of the, uh, agriculture economy, the agriculture economy is strong. I, we, aren't seeing a lot of farms sell with much leverage. Most of the farms are selling.
Roach: People are putting Sable down payments if not paying cash for them. And so a cash paid for a farm. Uh, there's not much risk in that. Uh, no, it may, the price may go down at some point, but so far, and I ask, we, we, we stopped at 25 farm families in the last two weeks and, and talked to them about, uh, uh, retirement accounts of all things. And, uh, and what, what we, uh, asked each of them was what's happening with farmland in your area. And we had one farmer who said, I think it's down just a little bit, everybody else, that was, it was steady or better. And they expected the next sale would probably be pretty strong.
Yeager: However, can they rise at the rates that they've been going at? Will they be up, but maybe not by 4%, maybe 1%.
Roach: Well, the rates have been more like 25%. No, we can't continue to go up at those kind of rates, but we can, we can certainly inch our way higher. And, and we, we, we met with one farm family where they own the land on three sides of a farm that's coming up for sale. And I'll tell you that farm could get to be really expensive. So you have those kind of situations.
Yeager: Do you think agriculture's a good thing to be in right now?
Roach: I think it's the best place to be. I mean, I think it's of all the different industries out there. Agriculture is absolutely the best place to be, but you have to be careful with leverage.
Yeager: Okay. You know what you also have to be careful is recession George in Clay Center, Kansas asks you John, if the us goes into a recession, what does that do to all of ag, uh, commodities?
Roach: Well, you can, uh, expect the first of all, all the commodities to adjust to their own fundamentals. And so part of what's going on here is not just inflation. It's also fundamental tightness. If you look at the ending stocks, uh, uh, and compare to, uh, prior years ending stocks as a percentage of usage, we have, we're relatively tight stocks in everything. Uh, the, uh, uh, the crop we have growing in the field must be a good crop. It must be a better than an average crop, or we're going to tighten those fundamentals even further. And then we have to have a good crop in south America. And so, uh, we really have, uh, those fundamentals that need to be completed before we can, we can take away the, the, the, the tightness and the price that's caused by that tightness.
Yeager: But how close are we to flipping that on its head and going to major surpluses? And we're staring at, nobody wants the grain.
Roach: We're not even close.
Yeager: You don't think we're close.
Roach: No. We, uh, now we may find out at the end of the month that something's different, but, but looking at last month's USDA WASDE report, uh, and comparing our supplies to the prior, uh, several years, uh, we're down at a very tight level beans, just inched up off of the tight supply that they, that they had last year, but corn's actually forecast a year from now. The fall of '23 will be a tighter supply if the government yield forecast, which is the same as last year and the acreage that we received already, if that's both of those are correct. And the demand is correct. We will have a tighter supply the fall of '23 than we have in the fall of '22. So no, we're not, we're not seeing breathing room, uh, in any we're seeing breathing room. I may, I don't wanna exaggerate it, but right. But we, we act, we absolutely have to have good crops. And maybe we'll, maybe we do. I mean, right at the moment, I think we have good crops in the field in general, but the, but we need to have the right kind of weather from now through harvest in order to bring that home.
Yeager: All right. Well, you just kind of answered Shannon in Iowa's question, but I'm gonna ask it anyway, because it is very important. I think people understand about the whole, what's it doing in my backyard? Shannon's asking you, he says most forecast call for limited rainfall, the next six weeks that doesn't fare well for the big "I" states in pollination. He, him in Northwest Iowa, he says, we're extremely dry. How widespread does the condition need to be to impact the market?
Roach: It's widespread enough this year? I mean, right now it's widespread enough because it runs from Northwest Iowa to, to, uh, Southern Illinois, uh, over on Indiana as well. So it's really wide widespread enough right now. And now the Northern part of the, of the growing belt expected to get some rains. And so it may well be that we'll narrow, that, that, uh, worry area. We had some rains come through Iowa in, um, in the last two weeks. And I was at a farm where they actually had too much rain. They had ponding and I mean, they, they, they don't want anymore rain for a little bit. So, uh, so you do have some of that, but for the most part, uh, the, the widespread crop belt is dry.
Yeager: All right, let's go back to one of those ponded areas, Northwest Minnesota, Tim in Crookston, Minnesota wants to know the funds are exiting wheat, but with a below average yield in the winter wheat crop and a late planted spring, winter, or wheat crop exposed to heat and continued problems with exports in the Black Sea wheat exporters is the exit overdone?
Roach: I think it is. And I didn't really expect this kind of a decline in wheat this week. Um, but it's harvest. And, uh, nobody wanted to stand in front of the market. We, we were selling off everything. And so, uh, the op the piano player was taken away as well. And, uh, so, um, uh, but, uh, um, in the situation in Ukraine, I mean, it has not improved, uh, and, uh, they blew up another, uh, facility this week,
Yeager: If not two.
Roach: So the, the, uh, as I see it, the, the wheat situation is tight. It's just harvest. And when you have harvest that these high price levels, uh, it's not surprising that you have pressure.
Yeager: All right. Uh, I want to get to Phil in Dresden, Ontario's question here. Uh, he's talking about the swoon in grain prices. He says, it looks like demand is finally cracked, or has it, did prices go down because non-commercial specs were getting spooked by big USDA numbers next week, or with Russian missiles hitting grain terminals?
Roach: Uh, I'm not sure that, uh, the, the Russian missiles would, would be a reason for prices to go down. Uh, it, it might have chased some people away, but to me, that's a reason that, uh, that, that makes me believe that some of that grain that we hope to be available may not be available. Um, but, uh, uh, demand certainly is tepid at high prices. Nobody wants a big inventory of old crop grain at very strong basis levels. So everybody's buying, uh, just the bushels that they can use right now and take the margin out of it. Nobody's stretching their neck out into next week and next month, uh, we're a little worried about the weather and that would maybe cause some people to stretch, but, but we didn't see that this week.
Yeager: All right. You two questions and you kind of open it up right there. I think you kind of answered it, Shane in Alberta, Canada, which by the way, those of you in Canada, thank you so much for picking up the program here. Shane wants to know John, are you buying the dip?
Roach: Yes, we have buy signals in corn, beans and wheat. So we think that if a person wants to own, particularly if you've made heavy sales, we, we advocated some pretty aggressive sales at the higher price levels for, for someone who's done that or someone who wants to be aggressive on the next rally. This is where you buy call options to give yourself some courage and to give yourself some protection in case we've got, uh, a problem in, in, at the high prices, we always have some kind of problem. It always makes it hard to sell. And so if you buy, buy the call options, now that gives you some coverage.
Yeager: Gives you an opportunity on the end. Last, question's gonna be Shane in, uh, Bloomfield, Nebraska. He says the Illinois, Iowa, good to excellent rating is going down in the market. Not very responsive. Are the grains more linked to technical and money flow now than fundamentals? I kind of asked you some of this question on the, the main program, but Shane also does a good job consulting it or condensing it here.
Roach: That was a real good question, uh, at the, um, the market moves toward the fundamentals, but it's the technicals that cause it to move. Uh, the people who are, uh, placing large bets, uh, the trend is the friend, your friend. And so they try to follow that trend, uh, as best they can. And so, uh, when the market, uh, uh, is moving lower, they're in selling, even though the fundamentals might be very tight and when the market's moving higher, uh, they're in buying, uh, regardless of the fundamentals, the fundamentals will have a little bearing and winter trade, but the, but the main bearing is the direction of the market. They're trying their best to stay within the direction of the market and have their equity go up every day. And, uh, so when a market turns south, like it did this week, the equity and long positions was going the wrong way. And so they'd get out and move, uh, and not waiting for the fundamentals to be changed next week with the government report.
Yeager: So instead of shifting plates, places in the boat, they're getting out of the boat.
Roach: No, they're shifting places.
Yeager: They're just shifting places. They're still in the boat.
Roach: You're, they're still in the boat are still in. I think they're, I think they're still in the
Yeager: Boat. Okay. And guess what, we're gonna ship you off back to home now. Good to see you again, John. Thanks, Paul. Thank you so much. That's John Roach. Next week. We're gonna talk about the impact of pending legislation on cattle feed lots and Elaine Cub will join us to analyze the markets. Thank you for watching. Have a great week.