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Market Analysis: Don Roose

posted on November 8, 2013

The Dow settled Friday at yet another record high. And as money poured into Wall Street this week it appeared to flow out of the grain markets.  For the week, December wheat lost 27 cents, while the nearby corn contract moved fractionally lower.  Soybeans recovered all of last week’s losses as the January contract settled with a weekly gain of 45 cents. Nearby meal prices followed suit with a rally of $27.40 per ton.  In the softs, cotton declined this week as the December contract shed 30 cents per hundredweight. In the dairy market, December Class III milk lost 36 cents while the January contract moved 12 cents lower.  Over in livestock, December cattle gained 33 cents. Nearby feeders recovered nearly a dollar of last week’s losses. And the December lean hog contract posted a weekly loss of 23 cents.  In the financials, the Euro lost 14 basis points against the dollar. Crude oil gave up a penny per barrel. COMEX Gold declined by $28.50 per ounce. And the Goldman Sachs Commodity Index lost nearly 3 points to settle at 608.55.

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: The conversation this week centered on Friday's release of the Agriculture Department's combined October/November supply and demand and crop production reports.  Break it down for us.  How did the report come out?  And how is that shaping the trade today and then into Monday?

Roose: Well, it was much anticipated because, like you say, we didn't have an October report.  The trade went in looking for a negative report, supplies to grow.  We've been getting yield reports that have been just terrific on corn and soybeans.  So it was well documented bearish report.  The big unknown was what was the demand going to be.  The report came out, the acres were lowered on corn and soybeans about what the trade thought.  The yield was probably not as big as the trade thought.  But the demand was really the great equalizer.  In fact, the demand on soybeans pretty much neutralized the increase in supply in the corn, the demand was bigger than we thought there also.  So the lower prices did their job, they built some demand.  And we did have a good, technical, positive close on Friday.

Pearson: Now, let's break it down by commodity.  As we look at the wheat market we didn't see a whole lot of movement today, still large global supplies.  How is that going to shape this market into the winter?

Roose: Yeah, and that's the problem with really the corn market too.  But the wheat market, first of all, we do have just huge global supplies.  So you're in a supply bear market.  We did get a relief rally, it gave us some support, we pushed up to some real resistance areas but now we're pushing back down trying to find some demand.  India has joined the mix in trying to sell some of their wheat supplies.  Who would have thought?  So that is really the tell of the tape for the wheat market.

Pearson: How low can the wheat market slide?

Roose: Well, and that is the other side of it.  I think when you look at it that's the case with a lot of these grains.  The upside may be limited but the downside there's still good demand and as long as the demand stays underneath and the market is supported -- the upfront wheat, soft red wheat under $6.50 has some buying interest but when you get up close to $7.00 it runs into a terrific resistance.  So you're really being caught, actually we've been in this kind of a trading range for quite some time.

Pearson: So for producers as we're looking, we're on the low end of the trading range, sit back and wait until we get some buying interest, maybe find a rally and sell into it?

Roose: Yeah, I think that is what you're left with.  When you have big carryouts, big crops you have t kind of pick your point of selling.  And when you're down at this kind of a level now, oversold, watch some of those indicators because you'll get these technical rallies, you'll get short covering and that will be your opportunity.  40 cents, 50 cents in wheat is probably enough to the upside unless weather changes.

Pearson: Take advantage of it and keep an eye on the forecast.

Roose: Exactly.

Pearson: Now, as we look over at corn, as you mentioned, the big shock the market hadn't really priced in was the export increase that USDA put into this report.  Was the market anticipating that we were done with exports, we were going to trade at '12 levels for a while?

Roose: Well, I think when you look at the corn market, you know, as we've gone down exports have grown and that has been a terrific thing.  So I think we were expecting that.  The surprise was the feed demand grew 200 million bushels.  And on Friday, Mike, we did have a key reversal on corn.  So that is a technical indicator that we've socked in an intermediate low.  The real problem is when you're lugging around close to a 1.9 billion carryout we could see that grow over 2 billion if the yield goes up in the January report.  The upside is also limited and as part of these carries if you rally the corn market 15, 16 cents you're at $4.70 on July corn.  So it's the carries in the market that attract selling.  So it's a market that I think went home on Friday with a positive note.  It's a matter of how much upside can we achieve in the marketplace before we run into selling?

Pearson: And you did mention, you did use a phrase, intermediate low, does imply there's a lot more bearish pressure out there than bullish pressure as we go forward.

Roose: Well, and that's why we want to be really careful because we think this is a market that, you know, we're in a supply bear market, there's no doubt and it could be a multi-year supply bear market if the weather turns out to be favorable in the U.S. and around the world.  So I think it's one of these that you can put in these lows, you can get these good technical rallies.  On December corn there's going to be a lot of resistance up around $4.40.  If we'd push through that really tough at $4.50 and it really boils down to who comes in and participates in the selling end of it.  It doesn't look like South America now.  But does the U.S. producer, when does he pull the trigger and start to move stuff?

Pearson: And where are we sitting with managed money, the non-commercials in the trade?  They've been short corn for quite a while.  Are they still short corn?

Roose: Well, and that's part of the reason we had a key reversal on Friday and a big turn in the market is because the funds are sitting with record short positions.  And this was probably the last of the big news, bearish supply news.  From here it's just going to be tweaking stuff a little bit.  So without weather problems it's going to be this market that just kind of chugs along in these big trading ranges.

Pearson: Alright.  Now, as we take a look over at soybeans we have seen exceptional demand for beans all year long.  Is that projected to continue?

Roose: Well, the soybean demand is really just terrifically strong led by the Chinese.  The exports were up 80 million on this report, the crush up 30 million.  What we really did is the new demand that we've created really equalized the negativness of the larger supply.  But there again, what you really have from a producer standpoint, Mike, is you've got this window, you've got a six month window and you're going to have South America really on top of us starting the middle of February.  They have a big crop.  When you're talking over a 5 billion bushel soybean crop, 5.2 or whatever you want to say, 5.3 billion, we raised a 3.2 billion crop this year, you can see there's a lot of competition ahead.  So we've got an inverted market and we've got basis that are strong so the producer's goal is to sell the soybeans before he carries them into a declining market and before South America harvest.

Pearson: So before he carries them into the declining market China's beans could come to market here presently or shortly if not already?

Roose: Yeah, I think the producer in South America is going to be trying to sell and put some pressure on the market at some point in time and that's just something that you have to be careful of.  All these markets, Mike, are really very similar to musical chairs, there's too much grain out here in the world and it is who is going to take the chair before somebody else and eventually we know, particularly in corn, that it's just, there won't be any chairs left as you run into the summer next year.

Pearson: Certainly.  And in beans we're pushing that $13.00 level in an inverted market.  It's a signal to sell?

Roose: That's right.  I mean, the soybeans they were down in this sub $12.50 on January beans, you get a lot of buying interest, you get up over $13.00, $13.00 to $13.20 a lot of resistance and you run into selling by people that are taking advantage of this, beats the market back down again and you start over.  So it is kind of this range type of thing but that can change with weather in South America.  We have definitely changed the weather focus to South America.

Pearson: Alright.  Now as we take a look over at livestock we have seen the fat cattle trade stay strong, we've been staying in that, the lower mid $130s now for a while, up again 33 cents this week.  Cash trade seemed a little lower.  Talk to us about where the fat cattle trade is headed at this price level.

Roose: Well, we had a supply/demand report on Friday and basically it's not about the supply side, it's the demand because the demand, our beef production next year is going to be down about 5.8% versus the previous year.  So the numbers are going to decline, the second quarter we're probably going to have supplies at a 20 year low.  It's a matter of with the economy the way we are just kind of fragile.  At what price will the consumer start to back away?  We're going to have poultry is going to increase about 2.6% this year, pork is going to increase about 2.6%, total overall meat supplies are going to be slightly larger than last year.  So you have to be pretty selective.  The cattle market, you know, $136 to $138 is pretty much a top end of the range I think in the futures and the cash.  The downside if you start to slip a little bit you go under $130 maybe to the $128 area.  So I think it's a market that is going to be all about the demand.

Pearson: How should a producer be playing in a market with price levels this high?

Roose: Well, any time you're at the top of a market where there's more downside than upside, I think we're talking about okay at $136 where are you going to go, maybe $138, maybe $140.  You definitely should take on some type of risk management protection at the top end of the range because there's more downside potential if anything happens, remember the Mad Cow years, so insurance is a good thing.

Pearson: Alright.  Now, as we take a look at the other side of that and look at the feeder cattle market, again, incredibly strong market, we seem to have stabilized, for lack of a better word, in that mid $160s.  Can that continue as we watch corn with the key reversal today?

Roose: Yeah, and a lot of these markets, the feeder cattle and the cattle and even the hogs, so dependent on the grain market because we have a grain risk premium in the market and if the market starts to go down maybe we take some of this risk premium out and we change some of these levels, that's a little bit of a danger.  But the cow calf operator, he's in the driver's seat.  We just don't have numbers.  We have to rebuild the herd.  We're starting to do that.  Numbers are going to stay tight, a couple years, three years.  So I would say $160 on the downside on feeder cattle you're probably going to see a lot of feedlot interest.  You get up around $170 you're probably going to run into some resistance.  But feedlots want to keep the capacity pretty full so that is a good thing to help the feeder cattle.

Pearson: That's true, especially as consumers are willing to pay in that $200 level for choice box beef and the overall demand picture, as you said, looks pretty strong.

Roose: Yeah, demand looks okay.

Pearson: Now, as we talk about the other protein, take a look at the hog market, how is the hog market trading the PED?  We saw a rise in values here the last couple of weeks, it seems to have sold off a little bit.  Where are we going from here?

Roose: Yeah, the hog market sold off $4.50, $5.00 and of course when we were up at the higher end of the range it was all worried about the PED virus.  And I tell you, if we don't have a big problem with the PED virus hogs are too high.  I would say $90 even for the summer months is very attainable and we're closer to $100 and part of that comes about, Mike, if you look at the government numbers they put out on Friday you're still talking about pork production for next year 2.6% over this last year, they're sticking with it.  In the quarterly pig report they said the same thing.  So we're going to see if the numbers actually verify it.  Now, this week we actually started to see the slaughter go up. For months we've had the slaughter under projections, 3%, 4% under what the government said on slaughter numbers.  We finally went over a year ago on slaughter.  Our weights are adding about 2.5% to the total mix.  So the weights are compensating, we have record weights on the hogs right now.  But hogs we put a key reversal in October 30th and that really stalled the market out.

Pearson: So we put a key reversal into the downside.  How far can we slip while the market sorts out PED?

Roose: Yeah, and I think the only way you're going to be able to tell is watch the slaughter.  But we do know that there could be backed up hogs, guys are putting on extra weight because it's profitable to do it with grain prices sliding.  So the hog market on the downside it feels like a December hogs, probably going to hold in that $85, $86 range.

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

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 question 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.  And be sure to join us next week when we'll examine a pair of controversial reports on the pros and cons of the Renewable Fuel Standard.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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