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Market Analysis: John Roach

posted on May 31, 2013

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: We did have a nice upward move this week pretty much across the board in grains. As we take a look at wheat what was the main factor in wheat this week?

Roach: We have seen a real pick up in the export demand for wheat. Export sales this week were bigger than what people anticipated and we have seen several weeks actually of good wheat volumes. We have started into harvest and so some of the people, the users, that have been waiting to buy some wheat finally have been willing to step in and accumulate some wheat. But as the harvest is progressing we are actually seeing basis levels start to give way.

Pearson: And that is just a function of more supply being on the market. Probably expect basis to continue to weaken as harvest progresses?

Roach: We would think so. We would think that as long as the crops continue to run a little better than people anticipated which is what we are hearing that we would anticipate that the basis levels might stay a little softer in here. Users have waited for the new crop. I think we are seeing the same thing across in corn and soybeans. Everybody is waiting until the supplies are more available and as they became more available in wheat we have seen that export demand pick up.

Pearson: No of course the news this week about the genetically modified wheat that was found in Oregon is that going to have in your opinion a long term impact over the summer on wheat demand internationally or is it just a bump in the road that producers should expect to just sort of overcome here rather quickly?

Roach: Well, we would hope that it is a bump in the road. But unfortunately what it is going to require is it is going to require more testing of white wheat coming out of the northwest and until the confidence is there that our supplies are relatively clean it will slow down that kind of wheat business. Surprisingly it didn’t' really have much impact as far as the futures markets were concerned.

Pearson: Ok. All right. Just demand is still there regardless of what people maybe finding?

Roach: Well, it is going to slow it down. I mean Japan backed away actually and we will see some other countries that will be testing a lot more thoroughly. That concern is still there. But we think it is a limited situation.

Pearson: Ok. Now as we take a look at corn we did see another rise this week in old crop corn prices. Can you talk to us a little bit about what is driving that? Is it just limited supplies? Is that where we are seeing this rise come in?

Roach: Old crop corn supplies are extremely tight. When we look at the Stocks in All Positions Report that was given to us as of March 1st our supplies are so tight that we have to cut usage substantially as we move through the summer months. So the need here to keep a high price to slow down the consumption to keep strong basis, we think that is going to really be prevalent all the way through. We notice particularly when we bring a contract into expiration that the - when the futures become equivalent to cash at that point we think there is going to be another spike in this July corn market.

Pearson: So your advice to producers sitting still on old crop corn wait for expiration to get a little closer do you think?

Roach: Well, we think at this time of the year when you are looking at the month of May and you have a weather problem going on and you have very tight supplies and you have a big crop coming out of South America, their second crop corn is going to be - is being increased on a weekly basis almost, we think that it makes sense to make sales when the market stages a rally and comes up with a little bit of a cyclical top and in fact as we had one of those this week. So, we advised our readers to make some sales on corn this week. We also think we will have two or maybe three more of those during the summer period. We think it is going to be a very volatile market particularly in old crop corn as we go all the way through this summer. The one thing we know for sure is we have delayed the harvest date or the beginning of harvest on corn because of the weather conditions we have and so we think that the supplies are going to be very, very tight prior to coming into harvest. So, we think a volatile market with several peaks but we think the one we had this week was one worth selling a piece of the inventory in the bin.

Pearson: Certainly. Especially when looking at the favorable basis that a lot of producers are seeing --

Roach: Absolutely. The one thing that we know is that the basis values can cave away rather rapidly as we saw happen in soybeans this week.

Pearson: Now before we talk soybeans can you give us your thoughts on new crop beans? What should producers be doing? What would be your advice to them as they look at this wet weather 86 percent of the corn planted here coming into June 1st? How should they best be approach marketing of their new crop corn?

Roach: Well, new crop corn, we think needs to be sold on these peaks as well. So, we think that producers need to take a look at their own situation from a standpoint of what they have planted and what they feel comfortable selling and we thought this week was an opportunity to sell an increment, again anticipating we would average that together with sales we made earlier and sales that we plan on making yet later on during the summer months. We think we have got another - we have a selling opportunity now. We think we will have maybe two more or two or maybe three more and we just kind of like to average on each one of those peaks. We are not sure which one is going to be the highest one. It will be the one where the weather is most worrisome and heaven only knows it is very worrisome right now. This week's market peak we think was worth making some sales on.

Pearson: Presented some good opportunities.

Roach: It did.

Pearson: Now as we look at soybeans, again we are still dealing with that tight crop situation in the old crop beans, advice to producers and as you mentioned basis levels can be rather precarious. Talk to us a little bit about what we saw in these last two weeks in old crop beans.

Roach: We saw the old crop bean market finally attract the speculative demand. The prices roared higher. Basis levels had been very strong and the combination of a higher futures market and the strong basis values brought the price up to levels where farmers were willing to sell. We had a sell signal that we issued and we think that it made some sense to make some sales of old crop beans. Again with the idea of making some further sales on further rallies or on the next rally, and we expect a couple more and maybe as many as three more before the summer is out.

Pearson: And now with that in mind as we look at what has happened these last two weeks has the opportunity to sell into the existing rally pasted us by or should producers this weekend sitting on beans plan to hold until we get to that next rally do you think?

Roach: I think if you didn't make any sale here during this last half of May, if you have passed on all the string, I think that - I would suggest you want to take another look at that because sales at the end of May or first part of June historically are very, very good on soybeans. So we are making a sale when we know supplies are tight, we know the weather is worrisome, we have had a round of speculative demand and you may want to not fix the basis on anything you were to sell say Monday, but as far as the futures price is concerned we think these are some good prices to take advantage of again planning to average with a couple more sales this summer.

Pearson: All right and same advice for new crop just continue to plan your sales when we hit these rallies.

Roach: Exactly. The market will cycle back and forth. There is going to be a lot of volatility and on the upper side of the cycle go ahead and pull some - make some sales. If you think that maybe you are getting too far sold when we get a set back in the market there will opportunities to maybe buy call options to cover your needs. Other people will look at new crop put options on the strength when they want price protection but they are afraid to commit bushels. So, you can utilize the tools in Chicago to aid the cash marketing that you are doing.

Pearson: All right. Depending on what is going to work best for your situation.

Roach: Exactly.

Pearson: Now as we take a look at livestock, as we mentioned a little bit earlier, we did have the big news of particularly for hogs about the Smithfield buyout by the Chinese firm. Against that backdrop what impact is that going to have, in your opinion, long term over the hog industry in America and cash hog prices in particular? Is that going to affect us very much?

Roach: I would think it will help. I would think it would give - make it an easier situation to export pork into the Chinese market. Now you have the two ends of the company one located here and one located there. So, it will certainly make it easier to move into the Chinese market with U.S. pork. I think the real advantage however is the branding opportunity. Pork is the number one meat in China. Their pork consumption is way, way larger than what our pork consumption is and - but they have had problems with food quality and adulterated food and so forth and so - purchasing a brand, an American brand, that is very well respected in this country will be very well respected in China and that is probably the biggest opportunity in this transaction is that now you have a branded product that you can sell in China and maybe even some Chinese pork under that brand. But that branding opportunity is probably the biggest advantage and I think that helps the U.S. pork market as well as helping the Chinese pork market.

Pearson: Gives us a sort of trusted gateway into that market.

Roach: Absolutely. We are familiar with other branded products from McDonalds to Kentucky Fried Chicken to Coca Cola to you name the brand as it moves around the world that brand carries a value and I think that is probably the largest component of this transaction.

Pearson: All right. Let's take a quick look at the cattle markets. We have been telling this story it has been a low futures price, it is relatively strong cash prices for live cattle, give us your thoughts on what to expect here on the next week or so for cattle producers.

Roach: More sideways I think. The market is just really sluggish, kind of lethargic kind of a market, steady to just a little easier this week in live. The futures market is pretty well sideways. Feeder cattle under pressure because the loss of equity in the feeding operation and a little strong corn prices. But we think it is kind of the same. We see this continuing. We may get a bump up here if we have a good Father's Day clearance and we may get a little bit of help from that but we really think that the cattle market is suffering from a sluggish U.S. economy and a high priced product that is struggling in that environment.

Pearson: Certainly. It is working hard to catch consumers with the record high beef prices we have been seeing.

Roach: It has been - it is hurt. It is just hurt. That combined with the economic situation in this country that has hurt us.

Pearson: Continuing to be bearish. Well thank you so much John. We appreciate you being with us today.

Roach: Thank you Mike.

Pearson: Well that wraps ups up this edition of Market to Market but if you would like more information from John on where these markets just maybe headed visit the Market Plus page at our website.


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