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Market Analysis: Don Roose

posted on June 7, 2013

Grain prices were mixed this week as wheat prices trended lower while old crop corn futures eeked out a modest gain.  For the week, July wheat lost nearly 10 cents, while the nearby corn contract moved about a nickel higher.  Old crop soybeans also rallied as the July contract gained 19 cents. Nearby meal prices followed suit with an upward move of $5.25 per ton.  In the softs, cotton broke out of its slump as the December contract posted a weekly gain of $3.12 per hundredweight.  In the dairy market, June Class III milk advanced by nearly 30 cents while July contract gained 27 cents.  Over in livestock, the August cattle contract lost $1.17. August feeders were off nearly 60 cents. But the July lean hog contract gained $2.70.  In the financials, the Euro gained 252 basis points against the dollar. Crude oil advanced by more than $4 per barrel. Comex Gold declined by 10 per ounce. And the Goldman Sachs Commodity Index moved nearly 20 points higher to settle at 632.80.

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.

Pearson: We mentioned there in the lead up we saw the dollar come under pressure this week.  Can you talk to us a little bit about what is driving that?  What did we see in the currency market that caused that to happen this week?

Roose: Well, one thing, the dollar had a lot of strength for a long time and I think a lot of it goes back to the interest rates.  It seems like, you know, when we think the interest rates are going to start to move higher the dollar comes under some pressure and vice versa when it happens the other way.  So I think it's that but still the dollar, although it's at a low level, still the best of the worst currency.

Pearson: Okay.  Alright.  Now let's take a look at wheat.  We've seen the U.S. wheat market, U.S. wheat producers under a lot of pressure with frosts and floods and all these negative things.  Talk to me a little bit about new crop wheat production.  What do you expect there?  Where are prices going to head?

Roose: Well, the big problem that you have with the wheat market is not in the U.S. market.  U.S. market, you know, our supplies are going to be down, our production is going to be down but it's more about the world production.  We've got Canada, we've got Australia, Argentina, the EU, the Black Sea area all are going to have increased production so that's the issue that we have and consequently, for example, hard red winter wheat, you know, a few months back was $9.50 a bushel, now it's $7.50.  It's harvest time, we've had a lot of problems but we're still under some pressure.

Pearson: Advice to producers out there looking at this situation?

Roose: Well, unfortunately, I mean, when you look at the wheat market from a global standpoint while we've got tighter supplies here we've got excess in the world.  And so our advice actually is to go to work and take advantage of some of the carries in the market and at these areas I would look at selling March '14 wheat in Chicago and Kansas City and see if we can come under pressure and maybe move down somewhere in the 50 cent a bushel area from here.

Pearson: Okay, start planning ahead for next year and be proactive.

Roose: Yeah, and I think it's really we're coming into harvest, you know, regardless of the size we're still going to have a harvest here and around the world we're going to have a harvest.  So I think it's more that time of year than anything else.

Pearson: Alright, well let's take a look at corn.  We've seen continued inverse relationship there, old crop versus new crop.  We saw new crop up a little bit this week, excuse me, old crop.  Talk to us a little bit about the old crop corn situation and then your predictions on new crop.

Roose: Yeah, that's right.  I mean, the old crop has been tight here for a long time and supplies are still razor tight.  The basis levels are historically tight and we're trying to just walk along, get to the new crop where we thought we were going to have adequate supplies.  Well now we're not so certain.  But we do know that the end of July we're going to have a bigger wheat harvest and that is going to help to buffer some of it.  We do know we're going to have some imports of corn from Brazil into the United States so that has given us a buffer.   But, you know, the market as we know it is all about the weather this time of year and the weather we thought a month ago it was going to be conducive to a large crop and now we've got probably about 6 million acres of corn at risk.  We were -- and they're in some key areas, Mike.  They're in Iowa, northern Iowa, northeast Iowa, Minnesota, Wisconsin, Illinois, that area about 5.5 million acres and then North Dakota about a half million acres.  So it's going to be all about weather.  But what the market is trying to say is the good areas are making up for the bad areas and we're gong to find out, we're going to look at the crop ratings from here going forward and see if that is true.  Remember a year ago we had the same type of thing.  We took December corn all the way down to $4.99 and it was the middle of June, June 17th the market took off to the up side.

Pearson: That's right.  So it's all going to be weather dependent.  Advise to producers looking at their fields as they stand now?  What is the best way to handle this upcoming year, new crop corn?

Roose: Well, unfortunately what producers are doing right now in a lot of areas, you know, it's late on corn and just starting to plant for the insurance period.  From a marketing standpoint I think this is another good year to look at some of these alternative strategies.  You know, rather than having tight sales you can do some of these window contracts that give you a lot of the flexibility.  It's also a good time to look at some of these short dated new crop options which, you know, have just come into the marketplace here recently.  So there's some things you can do to protect yourself but, you know, it's going to be a key -- I think the one thing we have going forward so far here, Mike, and that is really what the market is about, the crop so far is not getting bigger, it's getting smaller.  So look for signs of the crop stabilizing and start to go the other way.

Pearson: Alright.  Well now let's take a look at soybeans.  As we talk about all these acres at risk are we going to see increased soybean plantings for new crop?

Roose: I think that's what the trade thought for a long time.  I think as you went home on Friday new crop soybeans were actually up 16 cents on the week where new crop corn was down 8 cents.  So while we're pretty mature on the plantings in corn we're not so sure on the soybeans.  We still have about 20 million acres of soybeans to plant.  And so I think that's going to be the big issue, you know, do they get planted in a timely fashion?  And then remember it's all about August weather on soybeans and you could have a carryover of 300, 350 million but if the yield dips, remember, each bushel is about 78 million bushels on your total production so you lose four bushels you're back to 260 million bushels pretty fast on loss so it's all going to be about August weather.

Pearson: So this would be another good example to perhaps take advantage of those short dated contracts or something that is going to give you a little bit more flexibility this year?

Roose: Oh, I think most definitely.  And if you look at it just from a fundamental standpoint but the soybean market is overvalued at $13 a bushel there's no doubt about it.  But when you look at the carries in the market the structure in the market is much better on soybeans.  There's only a 3 cent carry from November to July '14.  That is eight months.  Where you look in corn there's seven months and we have a 24 cent carry.  So the market is much more comfortable with the supply on corn than it is on soybeans.

Pearson: Alright, well now let's take a look at livestock.  As you look at the live cattle market the way it stands what are your thoughts?  It's been a rough year.  Any brightness on the horizon for cattle feeders?

Roose: The cattle market I think it just got way ahead of itself.  You know, last December you could have sold April cattle at $138.  You know, then obviously the trade was thinking it was going a lot higher.  Now people are beat down where you actually have discounts in the market.  We're on a typical seasonal break where we usually drop 11% from the spring high to the summer low.  So we should take the cash market down to about we'll say $116 to $119.  We traded on Friday at $122.  I think when you look forward we probably have a chance for a counter seasonal because we're going to have our lowest -- actually we're going to have a decrease in beef production going into the third quarter.  That's the first time that has happened in 17 years.  So there are some big positives here and then the production next year is obviously, you know, positive.  And cattle across the board are undervalued out in those deferred months but we have to look and wait our turn for the market to stabilize.

Pearson: Alright, and in feeders, cost of feed has been the overriding concern for so many people.  Any bright spots there on the feeder market?

Roose: Well, you're right.  The feeder cattle market this week again was about the corn market and the corn market goes up on Friday, the feeder cattle market goes down a dollar.  But the feeder cattle supplies are pretty tight, they're going to be tight going forward.  But the whole beef situation boils down to what is the consumer going to bear and do we lose market share going forward?  And all of that is going to be something that we're going to sort out in the marketplace going forward.  I think what we're going to find is that beef is still going to be very much in big demand.

Pearson: Okay.  Now as we look at our export sales, particularly of protein, how does the future look there?  We know we've got issues with Russia and China importing our meat, our meat.  Any chance that's going to change in the near term?

Roose: I think when you look at it I think, you know, with the dollar down at these levels I think there's optimism that the export pace is going to pick up and moving forward I know our industry is working very hard to keep the exports strong.  Our pork exports are about 25%, 24% of our production, the beef is about 9%.  So, you know, on the pork it's a big item, it's a key item and we've got confidence that going forward that our exports will expand.  You know, we have had a lot of news of Chinese exports and exports going forward this last two weeks and so we think that there's underlying strength in the export market.

Pearson: Alright, looking at the hog market we did see a big run up this week in prices, about a $2.70 move.  What can we attribute that to?

Roose: When you look at the hog market they're an overachiever, the cattle are an underachiever but the hog market really we have a marketing hole.  We just don't have the numbers right now, the packers chasing the cash market higher and he's been the driving force.  The cut out has been moving up at the same time.  But what that has really done is it has pushed some of these back months, I would say October, maybe even August, but probably October forward you're probably over economic values, you know, realistically our pork supplies in the fourth quarter are going to increase the most that they have since 2007.  So we're going to have a to of pork coming at us at the fourth quarter going forward and realistically cash hog values probably $70 to $74 in the fourth quarter is not out of line.  And going forward for the year, you know, you could have values, you know, $70 to $85.

Pearson: Alright, well thank you so much, Don.  Before we let you go there was a brief breaking story about anthrax in Minnesota.  Quick take, any effect on Monday market opening, Sunday market opening?

Roose: You know, I don't think so.  I think it was an isolated case.  It was one cow so I think that we're going to walk right through that.

Pearson: Alright, thank you so much, Don, really appreciate your insight.  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 again next week when we'll examine the market impact of the Agriculture Department's latest estimates on global supply and demand.  So until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

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