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Market Analysis: Don Roose

posted on January 11, 2013

Grain markets rallied in the wake of Friday's report pushing corn to a three month high.  For the week, March wheat gained 8 cents, while the nearby corn contract moved 29 cents higher.  Favorable export numbers helped counter a bearish report for soybeans as the March contract posted a weekly gain of 6 cents.  Nearby meal gained $5.30 per ton.  In the softs, cotton continue its trend higher as the March contract gained 57 cents per hundred weight.  In the dairy market, February Class III milk lost 70 cents, while the deferred contract moved 66 cents lower.  Over in livestock, February cattle lost $2.35.  Nearby feeders were off nearly $5.  And the February lean hog contract declined by more than $2.00.  In the financials, the Euro lost 266 basis points against the dollar.  Crude oil gained 47 cents per barrel.  Comex Gold advanced by nearly $12 per ounce.  And the Goldman Sachs Commodity Index gained 4 points to settle at 650.90.

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.

Roose: It was a busy day today with the USDA report coming out.  Could you talk to us about how the changes in that report affected the market with its release at 11 today rather than the usual 7:30 time?

Roose: Yeah, most definitely.  It was a change and the trade was anticipating a possible sharp move in corn or soybeans so there was a lot of positioning before the report.  But I think because the report was moved from 7:30 in the morning to 11 we had a lot of evening up prior to that.  And I think also if you look at the European trade basically you're into the night already so they were really off guard.  And the Asian trade was already into the weekend.  So I think it was more muted than it would have been under normal circumstances.

Pearson: Does that, having the Asian trade in the weekend and the Europeans overnight, does that affect volume at all when we're looking at how things were trading throughout the day?

Roose: Well, I think it did.  The market was still plenty volatile though, Mike.  I mean, just before the report came out we were down 12 cents on corn, then the report was issued and it was positive for old crop corn and we shot up 20, 25 cents in short order.  So the volatility was still there but we did not have the feared limit upper, limit down move.

Pearson: All right.  Well, let's kind of break it down a little bit.  Let's talk wheat.  How did the report affect the wheat markets today?

Roose: Well, the wheat market went into the report really oversold.  If the report was going to be neutral positive we were ready and poised to move higher and that is exactly what we had is we had a report that was neutral to a little bit positive in two factors.  One, the ending stocks on wheat were lowered down to 716 million bushels.  That was number one.  But then also when you look at the planted acres they were moved down also.  So those acres are going to move some place but overall that was positive and then the weather pattern of course is still positive out here, Mike.

Pearson: And so what does that tell you for wheat as we roll through here in to the New Year?

Roose: Well, I think we're down to value.  That's what we were really looking for is are we going to buy some demand down at these levels?  And I think this week that's what we started to do.  So we -- with the export pace hopefully picks up at this area, a little more feed use around the world and the nearby wheat on a short covering bounce could have a chance to go back to $8 on soft red wheat, could go back up to that $8.75 on hard red winter wheat in new crop.

Pearson: All right.  And let's talk new crop a little bit.  We've still got a devastating drought out in the western Corn Belt, South Dakota, Nebraska, North Dakota.  What effect is that having on wheat as we look towards the new crop futures?

Roose: Well, I think the big thing is when you have a drought really from North Dakota all the way down into Texas I think what we're afraid of is what is going to happen?  Are we going to get some moisture?  And I think more importantly it looks like we're going to have abandonment rates that could be higher than normal also.  So there's a good support underneath the market but I think it's all going to be up to the weather as we always talk about.

Pearson: So just keep an eye on the weather and see how things play out.

Roose: Well, I think as we go into the spring weather is going to be the key.  I think if you look at the soft red wheat in the eastern Corn Belt we're starting to get some moisture in that area so things are improving there.  Around the world also we have a chance to bounce back on supply.  So this next year I think what we're hopeful of is that is going to be the year that we bounce back on supplies not only on wheat but on some of the other grains also.

Pearson: All right.  Now let's talk corn.  That was the big mover today.  A lot of volume in the market.  A lot of volatility.  Corn ended the day 10 cents up.  What are your thoughts?  What did the report tell us on corn?

Roose: Well, this report was all about the corn market and I think what the trade really found out is that our stocks are really razor tight.  Our ending stocks are a pipeline minimum, 602 million bushels.  The trade when you look at it we really weren't rationing the supplies like we thought we needed to from a feed usage standpoint.  It didn't make sense.  Trade went into the report thinking that we were going to cut the feed usage on corn by 9% even though we have the same or more grain consuming animals than we had a year ago.  So the report it was really a positive for the corn and setbacks are going to probably find some buying interest.  But the real issue on the corn and also on the soybeans as we go forward, the planted acres on wheat that we saw less acres anticipated, those are probably going to float into corn and soybeans now so we're going to have more acres to deal with next spring and that is going to be an issue so we'll watch that real close.

Pearson: Now, again, as we talk about new crop and we're looking at more acres being planted I know that the numbers floating around out there are right around 100 million acres from Informa was my last update.  What are your thoughts on that?  Do you think that's pretty accurate?  Do you think we're going to see record corn acres next year?

Roose: Well, after we saw the planted, the wheat acres intentions down you have to say that the corn acres now probably if you thought they were going to be 97 to 98 million before you have to solidify that and I think if you put a trendline -- so you could be 97 to even 100 million, Mike -- and if you put a trendline yield on corn, let's just say even slightly off 160 bushels an acre, you can come up with a carry out of 2.2 to 2.3 billion bushels.  Historically that is not positive corn and I think you have to remember the December '13 corn contract really started this rally at about $4.20, $4.25.

Pearson: And today closed about --

Roose: About $5.77 in this area.  So there's plenty of down side potential.  But again if we get the acres, if we get the moisture we have a chance for a big crop. But if we don't all bets are going to be off.  One thing that has happened, the eastern Corn Belt and the delta are replenishing their subsoil and topsoil moisture.

Pearson: You bet, just in the last couple of days they have had decent rains in that area.

Roose: They have and what you have to be afraid of is that we don't get into a regional or a western corn drought and then you don't get the yield in the west and then the prices aren’t there either.  But there's going to be a lot of volatility ahead yet, there's no doubt about it.

Pearson: So, as guys are looking out there what is your advice to producers either with old crop and then looking towards new crop '13 corn, what's your thoughts?

Roose: Well, if you look at the old crop first, the report gave you another positive because the market is probably going to -- setbacks on March corn back into the $7.50 area are going to be well supported because we have to make sure that we ration the supply.  So I think that's one thing.  New crop corn you get up into, I said $7.50, I meant more into the $6.50 to $6.70 range, $7.50 is going to be resistance on old crop corn.  But new crop the $6 range is going to be an area that's going to be a target now just because like we talked about the larger acres and the eastern Corn Belt starting to replenish their supplies a little bit.

Pearson: All right.  So plan accordingly out there.

Roose: Yeah, I think there's going to be opportunities but I think you have to be well aware of what can happen also.

Pearson: All right.  Well, let's talk soybeans.  The soybean exports have been really supporting the market through the whole fall.  Is that continuing even with the report?  How did the USDA break down soybean numbers today?

Roose: Yeah, the soybean really what we've had is a real problem because our production has just continued to grow each month and again in this report, like we say, big crops get bigger and no surprise we took the yield up 3 bushels an acre, probably a little bit surprising we took the harvested acres up 400,000.  Probably what we found is some of those acres that normally wouldn't harvest because of the high price, we went to work and harvest anyway.  But the bottom line is the exports were kept the same on this report.  South America is starting to steal some of our thunder there.  But our crush was up 44 million bushels so that offset things from a production standpoint.  But we still have a tight situation on soybeans, 135 million carry over.  But the real problem you have with soybeans, Mike, is that we've got a huge South American crop coming at us and the potential for possible 79 to 80 million acres of soybeans this next year.

Pearson: So what does that tell you for producers out there?  What should they be doing right now?

Roose: Well, it's a little different on corn, we talked about the supplies are tight on the old crop and we've got a buffer there and setbacks are probably going to find some buying interest up to a certain point.  But on soybeans we have a big crop coming from Brazil, I mean harvest has started, their yields are pretty big so you have a big crop from South America.  In Argentina we have export pace starting to back off a little bit so you don't really have as much buffer.  The big bull that we had at one time in soybeans is starting to die a little bit.  But I think these resistance areas up at $14 on March beans are going to be pretty tough without some weather problems in the U.S. and then new crop soybeans rallying back over that $13 mark is going to be a good resistance area again there also.

Pearson: All right.  Good time to get in there and plan for next year.  Now let's go back to corn real quick and let's talk about how things are shaping up in South America for corn.  We're talking record crop in soybeans.  How are things looking down there corn wise?

Roose: Well, it's the same thing on the corn crop.  They have a big crop coming at us.  In fact, the government actually upped their corn crop on this report also.  They have been getting some very timely rains.  Same thing in Argentina, they started out with very wet conditions and slow plantings.  Their acres are down some but even despite that they're going to have a large crop because the yield looks pretty large.  And then if you switch over to some of these other countries same thing, South Africa they are pollinating corn right now, it looks like everything is very timely there from a rain standpoint.  So high prices, Mike, you run into a lot of production out there because everybody wants to plan for the high prices, not just in the U.S. but around the world, and that's what we're really finding out as we're trying to transition going forward from high prices to we'll see what prices.

Pearson: All right.  Let's talk cotton a little bit.  Cotton has had a pretty good run the last couple of weeks, up 57 cents on the week today or through today.  Where do you see cotton going forward?

Roose: Well, the cotton market is really one that you have to talk about it's a Chinese market because the bottom line is China is artificially supporting cotton, it's really not competing with polyester because of that and if cotton was just on its own fundamentals it would probably be down in the 60 cent range, 60, 65 versus 75.  But it looks like China is going to continue the supportive program and so I would say that cotton right now is, 75 cents is probably fair market value.  You rally to 80 it probably runs into a lot of resistance and you're at 70 pretty good support.  So they're probably going to lose acres in cotton in the U.S. this year because it's just more productive to plant other crops.

Pearson: You bet, those high prices, that is an inducement.

Roose: It is.

Pearson: Let's talk livestock.  Now, we saw a big setback in cattle this week.  Talk to me about fat cattle.  Where do you see them going?

Roose: Well, the cattle market this week I think we ended up the week trading cattle $2 lower, $126 and the real issue with the cattle market is not that the long-term fundamentals aren't positive, it's really the short-term fundamentals are sloppy.  I mean, the beef market right around this $195 just really stalls out the demand, $193, $195.  And so we have to move the beef market higher to move the cash market higher.  We can't do that and so consequently the packers is losing about $60 a head and he backs off and we have the weights on our cattle continue to be a concern.  Last year it just added more tonnage, our weights were up 18 pounds over the year before.  And most recently we're sitting about 25 pounds higher than a year ago.  So that is just a lot more tonnage and it really negates some of the positive production numbers that we could have. 

Pearson: But you think the long-term fundamentals are supportive on cattle?

Roose: Yeah, the long-term fundamentals no doubt are supportive, even in this report that we had this afternoon or Friday afternoon.  The production is expected to be down 3.2% next year.  So if you back the weights off certainly we'll have that.  So what we're really going to have is numbers that start to tighten up as we hit the end of February.  And from there we should have kind of a collide with shrinking supplies, demand starts to grow there and usually, Mike, if you look at it from the winter/fall lows to the spring highs we usually move up about 14%.  That would put you right around that $139, $140 mark in the spring.  We think that happens probably in the April timeframe is the timeframe that it should happen.

Pearson: When we should be looking out for that.

Roose: That's when we should.

Pearson: Let's talk feeders.  Where do you see -- how do you see them stacking up here in the next month or so?

Roose: Again, I hate to come back to the grain market but I tell you all of this livestock market is about the grain market, even the cattle market.  But the feeders, same thing, and the feeder cattle supply no doubt is going to be short but it's up to the corn market.  If the corn market would happen to move up sharply on some dry weather concerns because we're still very tight supplies the feeder market will come under pressure.  But I think as we move forward and if we can alleviate the tight situation on old crop corn, get to our in between months, September and into new crop the feeder cattle market probably is going to find some strength again.  So the feeder cattle market struggled down around $141, $145 on high priced grain it probably could go back up to $160, $165.

Pearson: Well, let's talk hogs and I know we're facing the same concerns there with high priced inputs.  Where do you see the hog market going?

Roose: Well, the hog market is an interesting market actually because the chart formations are very suspect.  In fact, they're on a ledge and they could fall off across, all the way across the whole board and I would say April on out.  The hogs, the latest production estimates from the USDA we're looking for just slightly more hogs than a year ago.  I think when you combine red meats and poultry combined all of next year we're going to be down about 1.2%.  But the hog market, short-term the seasonals are a little bit positive.  We're oversold.  The market cut out should try to move higher.  But, again, if the corn market moves lower I think you have to be fearful that the hog market could be too high.  If you take the October hogs there's a big ledge it could push the Octobers all the way back down to $75 to $77 from their current level of in the mid 80s.

Pearson: Thank you, Don.  We'll keep an eye on those corn prices.  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 board a massive dredge working to keep freight moving on the drought stricken Mississippi River.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture commodity prices Don Roose drought economy markets Mike Pearson