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Market Analysis: Don Roose

posted on September 20, 2013

This month's FSA acreage report created a short-term upward move in the markets.  However, the potential for a record corn crop pushed the grain market lower.  For the week, December wheat lost a nickel while the nearby corn contract moved 8 cents lower.  A combination of widely varying harvest reports and the removal of the frost premium pushed the nearby soybean contract 66 cents lower.  Nearby meal prices followed suit with a loss of $29.35 per ton.  In the softs, December cotton added to last week's rally and gained 6 cents per hundred weight.  In the dairy market, October Class III milk lost a nickel while the November contract moved 4 cents lower.  Over in livestock, October cattle rallied 70 cents.  Nearby feeders rose nearly $1.00.  And the October lean hog contract posted a weekly loss of 65 cents.  In the financials, the Euro gained 240 basis points against the dollar.  Crude oil rose 67 cents per barrel.  And Comex Gold gained $23.75 per ounce.  The Goldman Sachs Commodity Index lost nearly 12 points to settle at 639.90.

Market Analysis: Don Roose

Pearson: Here now to lend us some of his insight on these and other trends is one of our regular market analysts, Don Roose.  Don, welcome back.

Roose: Thank you, Mike.

Pearson: The big market in the broader economic news this week of course was the Federal Reserve minutes and the announcement that they're not going to start their taper in September as a lot of the people in the market had anticipated. What effect is that having, if any, on the commodity markets?

Roose: Well, it had a big effect because gold and silver on that day shot up dramatically.  Crude oil was up sharply and we really had just a risk on buying and it helped support not only the grains but also the meat market.  So I think what you really had is the trade in general was looking for a more risk-on type of trade and so a lot of buying came into the market by the funds.

Pearson: Now, as we look longer term since the Fed didn't do it in September, we now don't know when they'll do it, it's probably a few months out most likely.  Is this going to encourage more money to move into equities?  Does this maybe create a little bit of risk in commodities going forward with managed money?

Roose: Well, I think no doubt.  I mean, the interest rates are basically in a zero environment that people are looking around for alternative investments and that always brings back buying into the commodity market.  And so I think until we actually see the fed starting to taper back, interest rates start to move up a little bit, I think you're going to have people looking for a risk-on trade, better potential and it's in the commodity markets also.

Pearson: Alright.  Now, the other news we had this week was the FSA acreage report that came out on Monday or Tuesday.  Now, that did create some discussion in the markets.  But the FSA number doesn't move the markets as much as some people had anticipated.  Could you explain the difference between FSA numbers and the USDA numbers?

Roose: Yeah.  The FSA you have people that are outside the program so the FSA number doesn't match up with what that NAS comes up with, there is a percentage correlation.  And I think if you look at the historical correlations, what it means on the October report, you're probably going to have the corn acres down 1.5, maybe 2.5 million acres.  You're probably going to have the soybean acres down 400,000 to 600,000 acres.  And wheat probably 300,000 to 500,000 acres.  That is going to make a difference on the balance table on soybeans.  On corn the increase in yield probably compensates for that so it really didn't make a big dent in the corn balance table.  But what you really had is after those numbers came out and the market continued to push lower so I think the market is just overbought, Mike.

Pearson: Alright.  Well, let's talk more specifically about the grains.  We did see wheat drop a little bit this week.  Is that going to continue?  What are your thoughts?

Roose: The one thing you have in the wheat market it has turned out to be the best of the worst right now.  You have the world environment is tightened up on wheat to a certain degree.  There's a lot of world wheat around.  Canada has a big wheat crop.  Hard red winter wheat is going to be a little bit on the tighter side but wheat now has pushed $2.00 over the corn and that is probably a limiting factor.  So when you look at the wheat market it probably has upside in that $6.70, $6.80 range on Chicago wheat and probably can anchor down to $6.00 if the corn market continues to push lower.

Pearson: Alright.  And now winter wheat seeding has begun.  How is that progressing so far with the drought and with the lack of rains are now turning into rains?

Roose: Well, the fortunate thing is we now have some seedings that have really started to pick up a favorable condition from a weather standpoint.  Guys haven't seen that for a number of years so it's a big plus for those guys and they're enthused.  That probably also is going to help cap the hard red winter wheat rallies and, of course, the spring wheat harvest is just wrapping up right now and a big wheat harvest as we move into Canada.

Pearson: Alright.  Now, as we take a look over at the corn market we did see that continued slide downward.  What is the current trajectory for Dec. corn?  Are we going to continue sliding?

Roose: Well, the corn market on Friday goes home oversold so I think it's one of these markets that is two steps down, one up and I think it's a market that wants to technically move down into the support zone, probably $4.40 to $4.50 going into the October report where we have a lot of uncertainty with yield and acres.  The corn market probably we're going to have a big balance table.  It's going to be a 1.82 billion carryout next year, could grow to 2.5 billion carryout under the right situation.  But it's more about the producer we think with the huge carries we have in the market between Dec-July about 28 cents, that the producer is going to try and tuck the corn away and the job of the market is going to be to try and pull it away from him and maybe the producer does not achieve the carries that he'd like to in the marketplace.

Pearson: Okay.  Now, so for producers out there, I know a lot of American corn farmers in particular are still very long, we haven't seen a lot of farmer's selling, for people concerned about this October report, what is the best way to handle the risk moving into that situation?

Roose: Well, you have risk both ways.  I mean, with the insurance, the market now under the insurance you can be fearful that you could lose some of your insurance premium, you could buy call options for the upside.  We think the upside is very limited, probably $4.70, $4.80 but you never know if we get problems in South America, which is probably on the horizon next.  So we think to protect yourself try and take advantage of these carries, buy some window contracts, out in July take advantage of that carry, buy some at the money puts, sell some calls over the market, maybe even put some puts below the market.  So a window, give yourself 50 cents down, 50 cents up and protect that carry I would say and try and see if you can get a basis improvement.

Pearson: Alright.  Now let's take a look at soybeans.  That has been the most bullish fundamentals we've seen of most of the markets.  Do you expect that to continue?  I mean, it's just a tight situation out there in beans?

Roose: Yeah, it's a tight situation but it's a tight situation in the United States, that's the problem.  And that's why we actually probably in the United States have the fundamentals are just as tight as they were a year ago.  The problem is South America has a huge crop, Canada has a huge canola crop coming at us so the market is inverted, we have November beans trading about 45, 50 cents over July but not that crazy inversion that we had last year where November was $2.50 over July.  So it just tells you what we're really doing is marking time, the U.S. producer has a six month window to sell his soybean crop before we hit south America's harvest that is going to start in February.  Without weather problems they're going to have a huge crop.  So for the producer, you know, the job of his market is to market soybeans with the inversion, with a tight basis and not carry your soybeans into a declining market.

Pearson: Now, is there any sort of price ranges you could, farmers should really consider selling at in your opinion as we look at the beans going into later this fall?

Roose: Yeah.  November beans, if you look at the November beans lead month they're very range bound.  We think, of course, we were down over 60 cents this week, we think $13.00 on November is good support.  Then there's gap support at $12.72 and then $12.40.  But the upside target is $13.72 and we think it's going to be very hard for the market to take out the double top of $14.10.  So we think it's kind of range bound but, I tell you, Mike, that is really the wild card on soybeans is we're going to have lower acres in October, a lower yield and if any problems develop in South America then the soybeans are explosive.  So we're counting on South America a lot.

Pearson: And now you talk to a lot of producers.  What are you hearing, windshield reports, hearsay?  What are you anticipating yield to look like for the American soybean crop?

Roose: Well, that's a good question because you're exactly right.  We've got all of these numbers from the government but it's really going to be, the tell of the tape is going to be the combines.  And so far the corn, the yields are coming in better than people thought across the belt so far.  That can change.  But on soybeans it's really variable and I think you have to anticipate the soybean yield is probably going to sink a little bit.  It needs to stay above 40 bushels an acre if the acres are going to drop 400,000 to 500,000 acres.  So it's going to be -- the October report is going to be a big report.

Pearson: So watch for that number.  If we see yield under 40 and the reduction in acres that's going to be a sign for probably a larger move in beans.

Roose: I think if both of those would take place you could probably take out the highs again along with the fact if South America is having problems.  Now, so far South America is a bit dry in Argentina and Brazil but the weather forecast as we go into the weekend looks like it's trying to improve.

Pearson: Okay.  Now, let's take a look over at the meat markets.  As we look at the fat cattle numbers we did see some strength, as you mentioned, that carryover buying from the Fed report.  Where do you see fat cattle headed?

Roose: Well, the cattle market, you know, we've been talking about tighter numbers I think it seems like for years but it has really been the last 18 months we've talked about tighter numbers coming at us.  And remember, a year ago in December, April cattle were $138 and we were anticipating higher numbers.  But your real question is where are cattle going and we think in the fourth quarter it's probably going to be hard to go past $128 to $130 cash.  Our production is going to drop 4.6% slaughter numbers in the fourth quarter and that number is going to continue to stay tight all of next year.  Probably the April cattle we think that $134 is going to be a tough number to go past.  It's just with these competing meats is a real issue, particularly poultry is on the increase.  So it's not so much about the supply is going to tighten as we go into the rest of the quarter and into next year, it's going to be more about the demand and the competition.

Pearson: Okay.  Now, cattle on feed report did come out today after market close, down 7% from last year.  Is that what the market was anticipating?

Roose: Yeah, I don't see anything out of that cattle on feed report that is a big surprise.  Cash cattle traded a bit higher this week so we think we've socked in a low on cash cattle.  The futures market tries to move higher but it has already got a premium dialed in.  But I think what the cattle on feed report really said is that their numbers are going to tighten as we move forward and they're going to continue to tighten.

Pearson: Alright.  Now as we look at the feeder cattle market we have seen that be a very hot market both cash and on the Mercantile Exchange.  Where is that headed?  How much upside is left in feeders?

Roose: Well, the real question mark is can the fat cattle push up high enough in the deferred months and the corn market go low enough to push the feeder cattle up to new levels?  I tell you, when you get feeder cattle up around $160 on the board, I tell you, that's a number that is pretty lofty.  You're going to have to have the right things happen.  You're going to have to have the deferred cattle go higher, corn values stay low and continue to push lower.  So I think, you know, $160, $165 is a tough, tough mark on cattle.  The downside is probably limited also just because the feeder cattle pool is pretty tight.

Pearson: And this is going to be another market that is affected by that October report should yields come in lower than maybe the market is anticipating or acres get cut even further.  Potential downside risk there in feeder cattle come October?

Roose: Yeah.  I think the feeder cattle are very dependent on what happens to the feed value.  And, of course, then the fat cattle are dependent on that also.  So it's that moving matrix that you're going to have to watch very close.

Pearson: Alright.  Now as we take a look over at the pork market, it's been another strongly supported market it had seemed over the summer.  Is that going to continue?

Roose: Yeah, the pork market has really been supported by, you know, the fact where are all the hogs at?  I mean, we've had, since the first week of August our slaughter has been down almost 4%, hard to imagine.  So where are all the hogs?  That's the question mark.  We even had the pork production on a weekly basis one week drop 10% under a year ago.  So it's the numbers.  We think that, you know, PERV probably is that effect but, I tell you, the big elephant in the room is the PED virus.  What is the loss?  When does it come at us?  We're probably going to find out in the September hog and pig report.  But we do think, when you look at the hogs, we think that seasonally the market, the numbers pick up, the weights are going to pick up with the cooler temperatures and the better corn, fresh corn, so we think there's downside potential in the hogs.

Pearson: Alright.  Thank you so much, Don, appreciate you being with us.

Roose: Thank you.

Pearson: That wraps up this edition of Market to Market.  But Don and I will continue our discussion and answer some of your questions in our Market Plus segment on our website.  You'll also 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 examine the legacy of author, feedlot designer and agricultural advocate Temple Grandin.  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 Don Roose economy feeders gold live cattle markets Mike Pearson soybeans wheat