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Market Analysis: John Roach

posted on August 30, 2013


At the beginning of the week, action on LaSalle Street could best be described as a weather market but prices fell back just before the start of the holiday weekend. Despite the heat, traders are well aware the point is rapidly approaching where high temperatures will have little effect on the harvest. For the week, December wheat gained 8 cents, while the nearby corn contract moved 12 cents higher. Soybeans traded in the weather market saw the new crop contract rising nearly 30 cents. Nearby meal prices increased $4.20 per ton. In the softs, cotton traded in a sideways fashion as the December contract fell 60 cents per hundredweight. In the dairy market, September Class III milk rose 51 cents while the October contract gained 42 cents. Over in livestock, October cattle gained 10 cents. Nearby feeders also gained a dime. And the October lean hog contract posted a weekly gain of $2.52. In the financials, the Euro lost 176 basis points against the dollar. Crude oil gained $1.23 per barrel. Comex Gold advanced 30 cents per ounce. And the Goldman Sachs Commodity Index gained 7 points to settle at 655.50.

Market Analysis: John Roach

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

Roach: Thanks, Mike, nice to be here.

Pearson: Well, we're glad to have you.  A big story this week, internationally of course, has been Syria, the chemical attack and what the U.S.'s response is going to be.  Is that going to be a major factor on the markets as we roll into this next week, two weeks from now do you think?

Roach: It certainly could be.  It depends on what the response is and then what the response is to the response.  The energy market rallied sharply and then slid back a little bit toward the end of the week when nothing had actually happened so far.  But it's an uncertainty in an area of volatility, or a volatile area of the world and whenever you have that you tend to put upward pressure on the energies and the precious metals.

Pearson: And so headlines are going to continue to drive those two markets especially as we work through this situation.

Roach: Absolutely.  You also put a little fear over into the equity markets and you make everybody just a little but uncertain as to whether to take positions or exit positions.

Pearson: Alright.  Well it'll be something I think nationally we'll have to keep an eye on for sure.  As we take a look at the grain market we did see wheat rise this week.  There is still a big global crop.  Where do you think -- how does the future look for the wheat market?

Roach: We do have a big global crop of wheat and we've got a good crop or produced a good crop in the United States.  But we're working through that.  We've seen big production in the Black Sea region, the former Soviet Union area and they have been rapidly selling that crop out.  That has held pressure on the market.  As they move through that crop we would anticipate that that would, will move -- as they get moved through that crop we look for prices to start to firm.  In reality the supplies will be tightened this year.  It's the only crop that actually ending stocks will be tighter this year as a percentage of usage compared to prior years. So it's actually an improving fundamental situation.  We just can't see it yet because of all the competition coming out of the Black Sea region.  They're just discounting the prices right now and that is going to continue until they finally get moved through that production.

Pearson: Probably going to move through that production towards the start of the New Year.

Roach: It's going to take all the way through this calendar, that's exactly right.

Pearson: Alright.  Now, as we take a look and look at corn, we saw corn spike on Monday as we started to digest this big dome of hot air over the Midwest and then it traded sideways to a little down throughout the week.  Where do you see corn going in the future?  And how does this year's potentially large ending stocks, how is that going to affect us more longer term in the corn market?

Roach: The people in Chicago were bearish on corn and they have been for some time.  If you recall a year ago we were trading $8 corn and so from $8 corn all the way down into the $4's it has been a big bear market, the speculative trade has made a lot of money on the short side and they continue to favor the short side of that market on all rallies.  They're getting ammunition from the government reports that showed a monster crop growing, it was reduced on the last USDA report but then Pro Farmer Tour went out and found big yields again.  We're getting reports from the fields, early harvest in some of the areas where they've had good moisture, big yields coming again so there's plenty of ammunition for the spec guys in Chicago to continue to want to press on the market.  And yet old crop supplies are extremely tight.  The users have very little inventory on hand and almost no inventory bought for the new crop.  Farmers, in addition, have no inventory for the new crop sold.  Very few farmers have sold the numbers of bushels that they would normally have sold by this time of year.  Prices just never got up high enough to interest them.  So what the market has to do is it has to get through this timeframe prior to the main part of the harvest and figure out what do we have in the field.  And after a week of extremely warm temperatures, actually several weeks of very little rainfall in many areas, farmers really don't know what they have in the field.  They have become very less certain than what they were two or three weeks ago.  The prices are still very low relative to where their needs are for profitability.  And so producers are kind of stuck in a spot where they don't know what to do, they don’t like it so they're not selling.  Users are stuck in a spot where they need to buy grain for the new year but they think the crop looks big and so they're trying to be patient and there's nothing really being offered to them in quantity.  Overseas buyers have been a little more aggressive. We have record corn sales on the books.  And so here we are in kind of a -- in the middle of a poker game trying to figure out, okay, what is the next card going to be?  Are we going to find out that the crop has actually been reduced more than the people in Chicago were thinking?  And I'm in that camp.  I think the crop is a little smaller than is currently being traded in Chicago.  I think the users will blink first.  I think that the corn market is too cheap.  I think cash corn values for delivery into the main part of harvest will rise, not decline, as we move into that harvest period.  I think that as we get into that period of time it may well be the basis and carrying charges that have to do a lot of the work and I anticipate that we'll see firmer prices and better price opportunities than what we have today.

Pearson: So we'll see the futures market continue to hold with the specs being short and the end users trying to figure out what to do but the cash market could be carrying the weight as we roll through harvest like it did throughout the summer.

Roach: It actually did alls summer long and if we go back it actually has done it for many months quite frankly.  Basis levels have been very strong for many months as it took strong bids to move grain out of farmer's hands.  I think that's going to continue.  And just a couple of months ago people thought just the opposite.  They thought there was going to be so much corn that it would really pressure basis at harvest.  I think that has changed.  I think the flat price that is being offered right now, there will not be enough volume of corn in trade at that price to satisfy the user.  The user finally can make some money whether you're an ethanol producer or whether you're a livestock producer.  However you're using corn you finally have an opportunity to make some margins and you'd like to get some corn booked so that you can take advantage of those margins and I think that the user will do what they need to do to get some of that corn bought.  They're not going to go crazy, we're not going to have really high prices but we're going to have the prices necessary to get grain to move out of farmer's hands.

Pearson: Now, before we let you go on corn, for an end user's perspective as a hedge, seeing the futures staying low until we get through harvest would this be a good time to put some sales on the board, or make some purchases on the board rather, in the anticipation that the market is going to catch on to a smaller crop and we'll see the futures rise into December do you think?

Roach: If I were a user I would be trying to accumulate inventory on every little dip in the market.  I would look at these price levels and say, you know, the low is probably in this market and we're not very far off of that low, I'd be taking advantage of every little dip.

Pearson: Alright.  Now, let's take a look at soybeans.  Again, we've seen record exports of old crop beans.  As we work into the new crop we're in a heat wave in August, the opposite of what we saw last year.  What are your thoughts on the soybean market?

Roach: Well, people tell me the soybean crop is probably in more jeopardy in this hot weather and dry conditions than even the corn crop.  We're now in that pod filling stage and we really need the moisture badly.  I spent the last couple of weeks here in the Midwest and over at the Farm Progress Show here the middle part of this week and I talked to farmer after farmer who's just very concerned about their bean crop, they really don't know how bad the impact is going to be but the worries are great and my presumption is if we don't see surprising rains, because quite frankly they're not called for, so unless we see surprising rains we're going to see continual, some further reductions in the size of this crop.  We already are looking at relatively tight supplies for this next year.  And so I think U.S. supplies are going to be tight enough to maintain relatively high price levels on beans.  Now, the South American crop is also growing at the same time.  South American currency values are cheap.  The producers there are not able to make any money on corn.  At these values they're going to plant a lot of beans. The estimates are 6% more beans than Brazil, maybe even as much as 8% more beans than Brazil.  So there's going to be a lot of competition in the southern hemisphere.  They're going to need to raise a big crop.  We're going to need it.  So we'll have chances for weather scares.  So the bean market overall has turned into a rather positive situation because of these weather conditions.

Pearson: So quick advice to producers, if they haven't made sales up to this point probably better holding off until we work through harvest and see the supplies start to tighten?

Roach: Well, if you're a producer who has been catching some of the rains and you can see the crop out there and you feel comfortable with the crop and you like these prices, it's okay, there's nothing wrong with making some sales here.  But you make sales with the idea that prices are not going to fall out of bed.  They could fall out of bed in the midst of a rain but the prices in general through the year are going to be relatively firm.

Pearson: Should stay strong.

Roach: Should stay strong.

Pearson: Now, as we take a look at the meats, we're talking end users needing to acquire corn, let's talk fat cattle.  We have seen some relative strength both on the board and in cash prices up a couple dollars for the last two weeks.  Is that going to continue?

Roach: We think we're about fully priced in the cattle market.  I mean, this is kind of the tough time of year here for the beef market.  The kids are back in school and it's expensive to put the kids back in school and so moms look for some way to ease the budget a little bit and that tends to slow down the demand for beef a little bit.

Pearson: Alright.  Now, as we take a look at the feeder market, as we saw a pretty good selloff on Monday as corn prices skyrocketed.  Since then they've kind of traded sideways, climbed up a little bit.  Is that going to continue?  Is there still more room to climb in feeders with corn around the $5 level for December?

Roach: I think there still is.  The pasture conditions are good.  There has been some change here in the central part of the Midwest but if you go to the fringe areas where a lot of the pastures are located, the pasture conditions are good.  We're seeing some expansion in the herd a little bit.  We saw in this last cattle on feed report the placement numbers were down.  We think that's some heifers going back out into the pasture.  So we think feeder values will tend to be firm as we move out here through this fall period.

Pearson: Alright.  Move out to the fall through about December do you think we'll see continued strength?

Roach: I would think so unless for some reason or another the corn market were to get really excited.  I'm not really thinking that the corn market gets overly excited in here.  We just think firmer prices.

Pearson: Alright.  Now, as you mentioned, we are seeing moms look for perhaps a more affordable supply of protein.  As we look at the pork market then is that going to afford some continued strength as we look to the next month or so?

Roach: Well, we still have that seasonal downtrend in the pork business.  Normal seasonal decline, we're about halfway through it, is about $12 and we're down about $8 so we're still in that decline period.  And we're about halfway through it.  So we're expecting some further pressure here over time but we think in general the market is okay.

Pearson: Alright.  Well thank you so much, John, appreciate you being with us.  That wraps up this edition of Market to Market.  But John and I will continue our discussion and answer some of your questions in our Market Plus segment on our website.  You'll find audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account exclusively at the Market to Market website.  Be sure to join us again next week when we'll take a look at how one noted meteorologist is using the historical record to help predict future weather trends.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture analysis cattle commodity prices corn cotton dollar economy feeders gold John Roach live cattle markets Mike Pearson soybeans wheat