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Market Analysis: John Roach

posted on February 22, 2013

The combination of fund liquidation, a strengthening dollar and weaker crude prices pushed coarse grains lower this week while inclement weather in the Southern Hemisphere and increased foreign demand pushed oil seeds higher.  For the week, March wheat lost 14 cents as the nearby corn contract moved 10 cents lower.  Late season weather concerns in South America, tight domestic supplies and stronger Chinese demand pushed soybean prices higher as the March contract posted a weekly gain of 36 cents.  Nearby meal prices followed suit rising $17.40 per ton.  In the softs, cotton traded sideways this week as the May contract gained 7 cents per hundred weight.  In the dairy market, March Class III milk continued its downward trend as the nearby contract fell 15 cents and the deferred contract moved 34 cents lower.  Over in livestock, despite the smallest herd numbers in several decades, April cattle lost $2.23 as the market continued to reel from last week's fund liquidation.  Nearby feeders were off more than $2.00.  And the April lean hog contract posted a weekly lost of $2.60.  In the financials, the Euro lost 177 basis points against the dollar.  Crude oil lost $3.28 per barrel.  Comex Gold continued its fall losing nearly $37 per ounce.  And the Goldman Sachs Commodity Index fell almost 20 points to settle at 657.50.

Market Analysis: John Roach

Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach.  John, welcome back.

Roach: Thanks, Mike, nice to be here.

Pearson: Glad to have you here, John.  We've got a lot to talk about this week.  Let's look at the broader market picture.  We've seen the S&P 500 and the Dow on a tear as of recently getting up above 14 even though I think we did lose that on Friday.  What does that mean for the broader economy?  What is going on in the equities?

Roach: Well, I think the real estate story that we had on a few moments ago really tells you what is driving in the economy right now.  After several years of having really difficult times in the real estate business we now have real estate values going up.  With most consumers having their greatest net worth invested in the real estate this is a significant change to people's attitudes and their way of living their lifestyle.  So I think that's probably the big thing that is occurring right now is seeing some light at the end of that real estate tunnel.

Pearson: The thought is people are going to feel more confident, more willing to go out and spend and invest and just partake in the markets.

Roach: Well, their values are going up and so not only do you have the real estate values going up but now the stock market is going up and we see people willing to move back into the stock market over the past few months.  So we really have a couple of the major places where people have their net worth starting to show positive growth and that really is a positive longer term economic signal in my opinion.

Pearson: Now, does this shift into kind of an upward moving equity market mean anything?  Does it have any impact on the commodity markets?

Roach: Well, it does because it gives an investor an alternate place to put their money.  Rather than putting money into corn or soybeans if there is a market, the equity markets are moving up then that garners the money and that market is so much larger than a commodity market that a large amount of money out of the commodity market moving into the stock market is a small amount of money in the stock market. And so part of the concern that we have in the agriculture market is that we've seen a mass exodus of traders out of the corn market since the peaks were seen last fall.  And last fall the ownership of the speculative net long positions did not reach the levels that they did in 2010.  In the wheat market we actually have the spec traders net short the market.  The only place where we still have willing participation is in soybeans and we saw today when speculative liquidation hit the market, we saw the market come under substantial pressure.

Pearson: And it is those speculative traders, those funds when they come in, that is what allows the markets to hit the tops as we saw in 2008 and summer of 2012.

Roach: Well, we're talking literally in the case of corn of several hundred thousand contracts.  I mean, at the peak of a market in 2010 the net long spec position in futures and options on corn was 450,000 contracts times 5,000 bushels a contract so it is a big, big number of bushels and that number last June was all the way down to 100,000 contracts.  So the difference between those two numbers is a huge amount of buying and although we like to talk about the buying of a user and the buyer, buying of an export and so forth the buying of a speculator who holds that inventory for a little while anyway off the market, that is real buying power and we have lost that and we don't really have a good story to convince that speculative trader to come back into the market right now.  Now, we can develop it but we don't have it today.

Pearson: Let's talk the stories we've got going on.  What is happening in the wheat market?  What are your thoughts there?

Roach: Well, the story in the wheat market is changing.  We came into this year with increased wheat acreage, winter wheat acreage planted but we had the worst crop conditions in memory.  I mean, the lowest crop ratings that we've had but through particularly the last couple of months we've had some areas get relatively decent precipitation and now just this week we saw a great snowstorm moving across a lot of the wheat country.  So that story is changing as we speak.  For several months of the season we were overpriced and we just couldn't sell any wheat to anybody it didn't seem like and now suddenly we are competitively priced, we've seen China buy some wheat so the wheat story is actually starting to improve a little but the market yet really hasn't grabbed a hold of it.

Pearson: The story is improving on the crop condition side but over the long haul that is going to be generally bearish towards prices, going to continue to push us into that affordability area?

Roach: Yeah, when I mention the story is improving I mean the crop is improving and that is not positive to the marketplace.  The demand side is improving but, again, that part is not, people are looking at the supply side getting larger and the demand side not being robust enough to offset that.  Now it may well be here in the upcoming weeks that we've already adjusted to the supply improvement and the demand may start to rule the roost here a little bit, particularly if the precip we've been seeing, if it shuts off.

Pearson: So your advice to producers who are out there right now looking at their winter wheat crop, what would you suggest?

Roach: Well, for most of them there has really been very little that they could do because they didn’t know if they had a crop or not.  And now things are a little better, you're getting ready to come out of dormancy or starting to come out of dormancy in some areas and so I think producers need to take a serious look at the crop and if the crop is good enough that they can feel comfortable selling forward I think they use strength in the market to be making some new crop wheat sales and wrap up old crop wheat sales at the same time.

Pearson: All right.  Let's look at corn.  We've seen kind of the old crop and the new crop having a pretty substantial divergence.  They're still pretty inverted.  What are your thoughts on old crop corn?

Roach: I think old crop corn is in very tight supply.  We're going to struggle to get through this season with the supplies that are available unless we really ratchet down the feed demand and the export demand.  But it's hard to take the export demand down much more.  We've got some profitability back into the ethanol business so we started to increase some ethanol production.  And the feed demand has been better than was anticipated.  We just saw in the cattle on feed report that came out today bigger numbers out there coming off out of the feedlot here in the month of January.  So we think that the demand is gong to stay strong for cash corn.  We think a lot of that may have to take place in the basis.  We think it will be exciting kind of inversion levels.  Farmers should look back to 1990, or 1996 era to see what it is like with the very tight supplies of old crop and a new crop that looks like it could be very large.

Pearson: So as far as the old crop prices and the basis staying strong you expect that for Midwestern producers until we see what is coming out of South America?  How long is this going to last?

Roach: I think we'll stay strong on old crop values, the cash values will stay strong all the way in through just ahead of the new crop harvest.

Pearson: And speaking of new crop, what are your thoughts there?

Roach: Well, the new crop is really an uncertainty at the moment.  What we have is a lot of acres that are going to be planted and half of the corn acreage is going to have very dry subsoil conditions.  We could recharge some subsoil and we could get into a better position but at the moment we're going to need to have very timely rains all the way through the growing season for at least half of the Corn Belt, at least the part of the Corn Belt that is west of the Mississippi and even some to the east.  So it's a real dicey situation as far as yields are concerned but we know acres are going to be very large.

Pearson: So it's going to be weather driven.  Watch the forecast.

Roach: Very much, very much weather driven.  But for a moment we're really not threatening the crop.  The crop is still sitting in the warehouse in seed bags and so we still have a period here of another month to two months that we can talk about weather but it really doesn't have much impact on the crop.

Pearson: Well, really quickly let's look at beans.  We've seen some increased Chinese buying.  Where do you see soybeans headed?

Roach: Well, the bean market is also very tight in old crop supplies in this country.  But the South American crops are large.  The Brazilian crop continues to be inched higher.  There has been some concern about the Argentine crop but I was just in Argentina two weeks ago and their crop is doing better than maybe what the news media would have you believe.  They need rains, they need particularly on their double crop beans they need more rain but they're going to -- the biggest problem in Argentina is they don't want to sell the beans because of currency relationship.  It's going to be hard to get those beans to move.  There's a big difference between the official exchange rate and the real, what they call the blue market exchange rate.  And so Argentine farmers are going to hold onto the beans as tightly as they can until they can sell the beans and buy something they need because they're scared to death of inflation.  So the bean market we're going to be a little dicey because of transportation, we're going to be dicey because of the unwillingness of farmers to sell and we're going to be tight here in this country.  But once this country's crop is planted then we're all committed to weather.

Pearson: Well, really quickly, you mentioned the cattle on feed report a little bit early.  We saw placements were down six percent from last year and then yesterday we saw that slaughter is up roughly 5%ish over last year.  What does that dynamic tell you about the cattle market?

Roach: The cattle market right now is suffering.  The cattle that are coming out of the feedlots are, for the most part, losing somewhere around $100 a head, perhaps even more and the struggle is we're having trouble moving the beef, we're producing more beef than what the market can handle and trying to do it at higher price levels.  We've got some resistance from the Russians.  So we just, we're really struggling here to move the quantity of beef that we're producing.

Pearson: So do you see this taking the -- where do you see this taking the live cattle market in the near term?

Roach: Well, it has already taken the market down a long ways and perhaps we can move it down a little bit more but we're probably down toward a low water mark, there's a greater likelihood I think of prices recovering as we get into smaller slaughter numbers out forward.  So I would think at the moment we're near a bottom point in the fat cattle market.

Pearson: Now looking at feeders, looking at the price of corn, where do you see feeders headed in the near term?

Roach: The feeder market is really still too high.  I mean, you need to have cheaper corn prices or a little cheaper feeder price because at the moment the break evens, they're all in the red and so it's going to be hard to get people convinced to buy the feeders although they have been surprisingly willing to pay too high a price for them.  So my bet would be that the feeder price stays where it is or perhaps slips down just a little bit.

Pearson: Might see some downward pressure.  You mentioned briefly the pressure we're seeing from Russia and China on animals that have been fed ractopamine or the lean muscle promotant feed additive.  What impact is that going to have on the hog industry?

Roach: Well, the Chinese have requested that as of March 1 that there is a third party that is going to need to verify that the pork that they are purchasing is free of that feed additive and that is an uncertainty that has come into the market.  And at the same time we have got the uncertainty of the sequestration and what is going to happen as far as meat inspectors.  So there's a lot of uncertainty that is in front of the market at the moment and that uncertainty always puts pressure on prices and that is what we've been seeing.  And I think for a little bit until we clear up some of these issues we're going to struggle to move the pork market any higher.

Pearson: So how far down do you think this market might trend?  I know we've been sliding in pork now for a little while.  It just seems to get a little cheaper and cheaper each week.  Do you think there is a natural bottom based on fundamentals or at some point is it just going to take market willingness to pick it back up?

Roach: Well, I think, again, we've adjusted to some of these things we were talking about.  We still have a little more time to get things clarified but I think we probably will.  I don't think we're going to in effect see an embargo on pork to China.  And I think that we'll see some recovery once we finally get everything clearly understood about how that all is going to work as we go forward.  But for a moment we still probably have a little bit of pressure to see.  But I don't think it's drastic from here.

Pearson: All right.  Mainly policy issues.  Thank you so much John, appreciate you being with us today.  That wraps up this edition of Market to Market.  But if you'd like more information from John 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 examine the outlook for agricultural prices.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture analysis cattle commodity prices corn cotton drought economy hogs John Roach markets Mike Pearson soybeans wheat