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Market Analysis: Don Roose

posted on March 1, 2013

Grain prices were mixed this week due largely to bearish export figures and a stronger dollar.  For the week, May wheat lost about 2 cents, while the nearby corn contract moved 24 cents higher.  Strong foreign demand supported soybean prices this week as the May contract moved fractionally lower. Nearby meal prices bucked the bearish trend with a gain of nearly $3 per ton. In the softs, cotton also traded higher this week as the May contract gained more than $2.25 per hundredweight.  In the dairy market, March Class III milk declined by 43 cents while the deferred contract moved 20 cents lower.  Over in livestock, April cattle gained $1.73, nearby feeders advanced by 38 cents, and the April lean hog contract posted a weekly loss of 53 cents.  In the financials, the Euro lost another 160 basis points against the dollar.  Crude oil declined by nearly $2.50 per barrel.  Comex Gold traded in a 50-dollar range en route to a weekly loss of just 50 cents. And the Goldman Sachs Commodity Index fell nearly 15 points to settle at 642.55.

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.

Pearson: It was a big day in currency.  We saw the dollar have a major spike upwards today.  What is going on?

Roose: Well, you know, the dollar has continued to move higher from those very low levels and basically the world looks at the United States as trying to get their budget in order.  So if you look around the world at the currencies the United States looks like the best of the worst if you can view it that way.

Pearson: So it is the sequester coming into effect basically that gave us this big bump.

Roose: I think it really is.  It says that we're trying to, while we have a lot of bickering back and forth, we're also trying to be more responsible and that is what the market is voting on.

Pearson: Now, with that in mind as we think about exports, ag and commodity exports, at what level of the dollar should we begin to get concerned that foreign buying power is going to be reduced?

Roose: Well, and that's a good question because that's really the thing that gave us a lot of support on our export pace over the last three years, four years is the dollar being pretty weak.  So that is an issue as we move higher and actually has competition from around the world with these high prices starts to grow, you know, it's the large supply and the rise in the dollar which will ultimately be a real headache for us.

Pearson: It will be a deciding factor for a lot of buyers.

Roose: Yeah, it really is because, you know, when you look around the world there's a lot of competition.  That is what has happened with the high priced grain is we found out that we do have a lot of competition and everybody is trying to produce for the high values.

Pearson: That's right, the best cure for high prices is high prices.

Roose: That's what we always say in the commodity business.

Pearson: That's right.  Well let's talk about wheat.  We did see some moisture fall on the western Wheat Belt this week.  What effect did that have on the market?

Roose: Well, when you look at the wheat market we've been in a dry drought pattern and what has really happened is the weather pattern has turned more active.  We've had increased moisture, we've had two major storms go through some of the wheat area, Kansas, Texas, Oklahoma so we're starting to replenish some of that moisture just in time so it really took on a defensive type of posture for the market overall.

Pearson: Now the big buyers for feed wheat in the past winter, I mean really, South Korea has been one of the big buyers recently.  Are they going to continue do you think?

Roose: Yeah, I think what we have is some unconventional buyers starting to bubble to the top and the wheat market, I think a lot of the countries, just like here in the United States, are trying to plug some of that feed demand with some alternative, you know, soft red winter wheat being fed not here, not only in the United States but around the world so you're seeing these buyers step to the forefront.

Pearson: All right.  Now for producers looking at this summer's crop what should they be thinking about with prices where they are?  What kind of price levels?

Roose: Yeah, you know, the prices have been under some pressure here and I think, you know, the world is changing, Mike, inch by inch and I think the world, you know, is shrinking from an overall standpoint of the demand, the United States.  But I think when you look at it we've got big supplies around the world potentially, we've got Russia, India now with what coming at the market, we've got the weather starting to improve, the drought is, while it is still very much alive, it is starting to shrink and that is one thing that has been an overhead press on the market.

Pearson: All right.  Well let's talk about corn.  We did see a big bump in old crop corn prices this week, roughly 24 cents week over week.  What's happening there?

Roose: Yeah, the story really on the bull side this week was really on the corn market and the corn market last week was just way oversold.  It had come under a lot of pressure with the improved weather conditions in Argentina, the shrinking drought in the parts of the United States and what happened as we got close to first notice day on March positions it really brought up the fact that we're razor tight on old crop supplies.  You know, for example, May corn pushed 20 cents over the July, even when we were up around $8.40 on corn that spread was only 15 cents. So what we're trying to do is the basis levels, 40 to 60 cents inverted over the May across the Corn Belt.  The spread is tight.  And finally the pressure was there and the price moved up on the futures market.

Pearson: So for folks with corn in the bin would this be a good rally to take advantage of and maybe get rid of some of their held supply?

Roose: Yeah, Mike, that's a good question because when the basis is this tight, when the spreads are this inverted there's cheaper ways, better ways to own corn, you know, not the cash.  The end user is really scrambling to get himself covered during this March, April, May timeframe, that's when the natural sell of the farmer is going to be out of the market.  You're going to have to rely on the hedged inventory from the country which is depleted.  So I think that's what it is, it is a mad scramble here during this window.  But at the same time you don't want to cover too far out in advance if you're an end user because you have huge potential supplies coming on board in new crop.

Pearson: That's right.  Let's look at soybeans.  We've got some competing pressure on soybeans with the crop coming out of South America but we're still seeing pretty decent exports.  Can you explain to us a little bit what is happening in soybeans?

Roose: Yeah and really what has happened is the soybean market is racing from $14 to $15 up and down the ladder and when you get up around $15 the Chinese just back away from the market.  At the lower levels they pick up supplies.  But in between time we've got a huge competition from South America and they have really halted, you know, our export pace or expected to slow down our export pace.  We've already sold 95% of our supplies for the year in just the first six months.  But they're having trouble with their loading so that is the real issue as their loading difficulties develop then China, some of the other countries push that buying power to the U.S. and we can't afford that to happen but it is. 

Pearson: And that's where it is coming from.

Roose: That's where it is.

Pearson: Now for folks out there looking to plant soybeans in this crop year what is your advice?  I mean, looking at that big crop coming out of South America would this be a time to consider selling some of next year's crop?

Roose: Yeah, Mike, I think when you look at it we had the Ag Outlook Forum and we had some real interesting things, the government came out and said that soybeans for this next year is going to average $10.50.  You know, we're $12.60 on the board.  So if you look at the potential, if we raise a large crop, and it's a big if, it's almost a repeat of last year, we had the exact same thing, you know, if we raise a big crop the price is going to go down.  If we don't and it is razor tight we move to the up side.  So you have to say at these levels there's potential of $2 to the down side.  So most definitely I think a person should be doing some risk management here.

Pearson: Definitely take a look at these prices, capture them while you can.

Roose: Most definitely.

Pearson: Let's look at livestock.  We had a lot of discussion with the sequester issue coming in that meat inspectors were going to be laid off yet week over week we didn't see, we certainly didn't see any down side change, we saw a little bit of an up side move in cattle.  Did the market not take the sequester seriously?  It's just kind of a non-issue?

Roose: I think that is probably well put.  I think with the marketplace you're pretty astute and I think what the traders in general said is it's a low bet that we're going to see inspectors pulled off the line particularly when your Secretary of Agriculture says at best we're going to have a rolling furlough and so that was kind of a green light to don't worry about it.  So you're right, I mean, this week really what happened is we've had two snowstorms that have really supported the market, taken weights off the cattle down south, not so much up north and cattle traded $3 to $5 higher this week.

Pearson: Now looking out a little bit longer term we're still dealing with a very small cow herd, even though it is heavier.  What are your thoughts longer term on the live cattle?

Roose: Well, the one plus that we had this last week is we're starting to see some change in the weather patterns down in the south.  So I think we've had a lot of cow calf operators that have been on hold thinking maybe they're going to liquidate some cows.  That is probably on the back burner now which is a good thing.  So that makes the cattle industry even tighter, the cattle supplies down the road.  But I think what happened is the cattle market just got ahead of itself.  Last December we had $138 April cattle.  We pushed all the way down to $127.  And I think we've kind of had a reality check.  February cattle bet off the board at $128 and I think what it really says is April cattle are worth more than that just from better demand and lower supply.  So cattle probably have put in a seasonal low and time to move up.

Pearson: All right.  And let's talk feeders real quick.  We've got that concern of a major corn crop coming, keeping feed costs low for feeder cattle.  Where do you see feeders headed?

Roose: The feeder cattle are very much the same.  I think they are, like a lot of the meat markets, we're very dependent on what happens to the corn market and that is going to be dependent on what happens to the weather market.  But if the grain market moves lower I think the feeder cattle pool is very tight, that's going to support the feeder cattle.  There's not a real problem with the overall cattle supply demand balance table, it's really an issue about are we losing market share and that's a good question, Mike.  Are we or aren't we?  You know, this last two weeks it sure felt like we could be.

Pearson: And speaking of losing market share let's talk about one of the competitors, pork.  We've seen pork prices tumble a little bit in this last week.  Where do you see pork prices headed in the next month or next week?

Roose: Well, pork has had a real issue, you know, they were very, very similar to the cattle, you know, back last fall we were at $93 on April hogs, we moved all the way down to $81, $12 break.  The hog market is deeply oversold now and it is due for a seasonal low very much like the cattle.  Now seasonally hogs put in, usually seasonally start to move higher the middle of March and we expect that is what is going to happen.  So, you know, they are primed to move higher if we get the proper catalyst.  That is probably an increase in domestic demand.

Pearson: Okay.  So keep an eye on what people are buying at the grocery store and that will determine a bump in pork prices.

Roose: I think most definitely and we're also getting closer to grilling season.  That's not that far away.  That is always a big supportive lift, not only to the hogs, but also the cattle, so we anticipate that is going to give us a boost.

Pearson: Well thank you so much, Don, appreciate you being 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.  Now, before we go, we'd like to remind you that many public television stations across the country are about to begin their annual fundraising activities.  So if you value the information and market analysis you receive each and every week on Market to Market, please consider contacting your local PBS station and making a pledge.  We appreciate your support.  And until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

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