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Market Analysis: Don Roose

posted on November 30, 2012

Market Analysis: Don Roose

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Don Roose. Don, welcome back.

Roose: Thank you, Mike. Happy holidays.

Pearson: Happy holidays to you as well. We've got some folks out there that maybe aren't so happy with the way things are going in Washington. We've talked about it a lot. Can you lend your insight on where this fiscal cliff situation might be headed?

Roose: Well, you know, it is a big deal. It's something that, you know, all traders have an eye on and we're watching very close. I think when you look at it, what really happened this week, there was optimism when you think there's agreements, and then there's a risk off trade when things look like they're kind of breaking down. So that is an issue. The other side of it is you have to be optimistic that's something positive happens and then it's probably risk-on green light trade.

Pearson: And the risk-off trade that you're seeing, is that affecting all markets pretty much across the board?

Roose: Yeah, I think the end of the week it did. We saw the meats come under pressure. We saw the grain market come under pressure. Gold, silver, a lot of selling at the end of the week, so I think it was pretty much across the board.

Pearson: All right. Well, let's talk grains a little bit. Let's talk the wheat market. How have things been going there? I know we've had kind of back and forth, different concerns in the wheat market. How do things stand now?

Roose: I think in a lot of these markets, Mike, you have to ask yourself long term and short term, because long term what we're really very focused on in a lot of these grain markets are the dry drought conditions. When you have 60 percent of the Grain Belt in a drought condition, you know, you have wheat that you're alluding to, 64 percent of South Dakota is in a poor to very poor state. What wheat has really done is holding at the top end of the range. And we did have one negative thing on Friday. We had a poor technical close, and probably what that means is to start the week next week, we come under some pressure. We're a little overbought also so I would look for a little bit of pressure to start the week.

Pearson: You see this continuing on through the month of December/January.

Roose: We haven't made any headway. Actually if you look on Kansas City March wheat, we've been -- since July, we've been in a trading range. We've really been in a trading range for two months on the other grains. So I think it's one of these that you have to be very technically oriented. When you break some technical weak signals and you hit the downside and get oversold, you find some support. If the news stays equal, it's the dry weather and the world value that finds support, and we come back again. So that's really been the process has been taking place on wheat.

Pearson: So advice to producers out there. What numbers are you looking at as far as sell?

Roose: Well, I think when you look at new-crop wheat, when you look at Kansas City Wheat, when it gets close to this 944 area, that's a double top area. But I think it's an area that if you had moisture, you would use that as a good opportunity. If we get moisture it's not going to be there. So I think what you have to do is use some of the trading tools and put some windows on these markets, where you can lock in a profit here and give yourself some upside room. But, you know, it's all weather dependent from here forward.

Pearson: You bet. And we're going to see that -- let's talk soybeans a little bit also being affected by the weather. We saw the weather market take effect last week. Is that carrying forward this week, or what's driving the soybean rally?

Roose: Well, the soybeans, really what happened was they got deeply oversold. So really it's just a technical bounce. We've had about a 60-cent rally. Then we're looking to see if we have any new news. If we don't have any new news, you know, we start to sink a little bit again, like we did on Friday. But the soybean market, interesting it topped out around September 4, Labor Day, close to $18. We had a $4-a-bushel break. So we were oversold and what happened since that time frame as the U.S. yield grew, when the trade didn't think they could, we thought we had razor tight supplies. Now we have a bit of a cushion in the U.S., but it's all going to be up to South America when you look at the soybean complex because last year, remember, December 15 we started a weather problem in South America. So from December 15 to February 15, that's going to be the big issue. Watch the weather in South America.

Pearson: All right. So advice to producers out there maybe with old-crop beans they haven't sold? Thoughts?

Roose: It's a merchandising challenge because there's a premium structure to the market. By that I mean there's an advantage to selling up front versus the deferred. So there's better ways to own soybeans, particularly with the basis structure that's fairly decent and the inversion that we have in the market. So I would say market them if you want to reown it. Go to work and use some kind of risk management going the other way.

Pearson: All right. Protect your upside and minimize that down side as you go forward.

Roose: Well, I think that's right. On new crop there's some things we can do too because that's put in a big window at $13. You can do a strategy where you protect at 13, give yourself a chance to go to 15, you know, for not a whole lot of money. I think going forward, those are probably things to look at because it's all about weather, and we could go either way sharply.

Pearson: All right. Let's talk corn. We saw a little bit of a rise again this week, 7 cents week over week. Where do you see the corn market headed?

Roose: Well, corn, again, it's much like these other markets if you're talking short term or long term. You know short term, of course, you know, at the bottom end of the range on March corn, we were down around 715. We were oversold. We had some support. And what happened? End-users came in and bought corn down at that area. Exports picked up a bit and also end users. And as the market moved to the top of the range around this 767.5 area, exports just died, and the end users put their hands in their pockets. The market stalled out. You know, we've had a pullback now. And where we're really at, you know, the wheat market closed very poor on Friday, the end of the week, in technically soft position. And corn is right there too. 748 and 750 needs to hold early in the week. If it doesn't, we're probably going to start a little bit of a move to the downside until you get oversold. But I guess what we're really saying, Mike, is we really haven't gone anywhere. It's been two months in a 50-cent trading range, and part of the reason we're doing that is because the information really hasn't changed. That's what we're looking for.

Pearson: As we bounce back and forth in this trading range, that 50 cents, what is that doing for the end user? How is that impacting our future demand as we look to next year?

Roose: Well, what the end user is really doing is he is really more hand to mouth, really not out real far with this coverage. At least that's what we think. So he is a selective buyer. When you move to the top of the ranges, he also stalls out on his buying. But one night you get at the bottom of the range, he gets pretty aggressive. But the end user, actually what he's looking forward to is hopefully we have some better crops this next year, we improve with the moisture, and going forward you can buy your inputs at a lot lower level.

Pearson: Do you have any advice for producers as far as marketing '13 crop at all?

Roose: Yeah, that's a good question. Where we're at right with the corn is an important situation. You're at a level where obviously when you have 60 percent of the Corn Belt in a dry drought status, if we don't get moisture, you know, the market has a chance to move up. And we know it can go to at least 850 now, because we did last year. At the other side of it, we have a chance to drop under $5 a bushel I think pretty easily, if we end up with some trendline yields or more, if we're going to get this 97 million acres. So what I would say, a window contract, you can buy 640 December corn puts. Sell the 740 calls and sell puts below them a dollar. Give yourself a $2 range up or down, and spend about 10, 15 cents.

Pearson: As we're talking end users, let's look at livestock a little bit. Where do you see the feeder cattle market headed?

Roose: I think when you look at the feeder cattle, what you really have is a corn market trade because the feeder cattle put in a top, you know, low 160s in the spring, May/June. That was the same time the corn market was at the lower end. Well, corn went up and feeders dropped about $20. So what you have is feeder cattle supply that is limited. Feedlots are going to buy feeders on breaks here. They're value buyers but if the corn market goes back up or goes down, the feeder cattle moves back up again.

Pearson: All right. As we look over into live cattle, what we've seen close to record high, retail beef prices. Do you see that continuing? Where do you see the live cattle trade headed?

Roose: Well, you hit the nail on the head. With this fiscal cliff that we talked about, back to that again, it is an issue. When the choice beef gets into this 195-197 area, just hard to move beef, you know. So consequently, the consumer switches over to cheaper products, pork, which is one of the reasons that pork is gaining on beef, and to poultry. So the packers are losing about $70 a head. So we get these pullbacks in the market. On Friday we traded cattle sharply lower, down $3 a hundredweight. The packer is losing money, not willing to pay feed lots that are forced to push cattle out the door. More of that's going to continue, although long term the cattle market is very positive, we have a tough time getting over 136 on cattle.

Pearson: When you say long term, the cattle market is very positive. How long term are you thinking we're going to have to wait for the economy to turn around? What's going to --what's going to push us over that?

Roose: Well, there's two sides to the story, and one is the supply. We think the supply is going to be positive. You probably have two years of positive supply before you can rebuild a herd. It just takes that time. On the other side, there's the demand side. And the consumer, what are we going to do, because we're trading cash cattle, we'll say 125, 128, and we can't move beef at this level. So the futures market has structural premium of up to the mid-130s built into next year. What's going to happen? So I think you have to when you look at it from --we're positive cattle, no doubt about it, but it's up to the demand.

Pearson: All right. Let's talk hogs a little bit. We did see a nice little rally in hogs this week. Was that due to the consumer switching their demand from beef to hogs? What's driving that this week?

Roose: Well, I think it is. We're talking about the packers losing about $70 a head on cattle. You're still making money on hogs, you know, about five, six bucks a head. So what we think is really happening is the packer is killing hogs now at a profitable level, putting them in cold storage. The domestic demand is a little bit better because of the high-priced beef, so that combination has allowed the upfront hogs to move higher. Actually December hogs moved to the highest level that they've been since early March. On the back months, if you look at it, we haven't gone anywhere for two months just like the corn market. From April on the hog market has just been stuck in the same range as corn.

Pearson: And you see that continuing for a little while.

Roose: Well, I think it's the corn trade is what it is. The feeder cattle are grain trade. The hogs are a grain trade. So I think you have to keep a close eye on that. But it's all up to the weather in the grain. I think we stay in this trading range, and we stay in this trading range in the hogs in the back months. But when the weather pattern starts to change one way or the other, that's going to be our move.

Pearson: Great. Thank you so much, Don. Appreciate having you here. That wraps up this edition of “Market to Market.” But if you’d like more information from Don on where these markets just may be headed, visit the Market Plus page at our website. You'll find expanded market analysis, audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account all free at the “Market to Market” website. Be sure to join us next week when we’ll learn how tougher immigration policy is creating a shortage of farm workers. Until then thanks for watching. I'm Mike Pearson. Have a great week.


Tags: agriculture cattle commodity prices corn Don Roose drought economy feeders hogs markets Mike Pearson wheat