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Market Analysis: Sue Martin and John Roach

posted on December 6, 2013

Stocks on Wall Street soared on the upbeat jobs report Friday.  The Dow rose nearly 200 points in its best session in two months.  Commodity markets, on the other hand, were more subdued.  For the week, March wheat lost 12 cents while the March corn contract moved 8 cents higher. Soybeans also rallied as the January contract settled with a weekly gain of 5 cents.  Nearby meal prices broke ranks with the raw commodity in a decline of $2.25 per ton.  In the softs, cotton traded higher again this week as the March contract advanced by nearly $2.00 per hundred weight.  In the dairy market, December Class III milk gained 61 cents while the January contract moved 82 cents higher.  Over in livestock, February cattle lost $1.25, nearby feeders declined by 85 cents and the February lean hog contract posted a weekly loss of $1.47.  In the financials, the Euro gained 12 basis points against the dollar, crude oil surged more than $5.00 per barrel, Comex Gold lost $9.00 per ounce and the Goldman Sachs Commodity Index advanced by 11 points to settle at 632.35.

Market Analysis: Sue Martin and John Roach

Pearson: Here now to lend us their insight on these and other trends are two of our longtime market analysts, Sue Martin and John Roach.  Welcome back.

Roach: Thanks, Mike.

Martin: Thank you.

Pearson: We've got big news on the broader economic market this week as we take a look at the jobs report and what is happening in the American economy.  As we watch the Dow rise and unemployment fall, is this good news long-term for commodities?  Sue, what do you think?

Martin: Well, I think the concern is when we get positive news towards our economy I think it is good news for commodities in general over a longer, broader picture.  But the concern is that the Federal Reserve will move on with their plan to start cutting back on their stimulus program on the quantitative easing and that is a concern because it has always been thought that that was very commodity friendly.  So the first thought will be that when they start into that program, when they announce it, that that will probably give the commodity markets in general a pull back or a break because money will stay with that sentiment into the stock market.  However, that said, anybody that is trading the stock market, there's always been kind of a little bit of a tie, positive stock market helps positive cattle market.

Pearson: Alright.  John, what do you think?

Roach: I think Sue is exactly right.  I think that on one hand you have concern that the Federal Reserve slows down its bond buying program and interest rates start to rise.  But on the other hand, economic news is turning positive and it has been really for some months.  The one that has been really slow to come along has been the employment numbers.  And so finally we're seeing the employment numbers coming along and I think it's great news and I think we really should look at this and say, this is great news.  We have been exporting grain and exporting meats into a world that has been struggling to grow and to get anything going and it is really starting to get something going now and you have to look at that as positive although the market traders will be nervous if interest rates start to rise, if money starts to tighten, certainly.  But the overall prospects for solid cash type demand is definitely improved with these kind of economic numbers.

Pearson: A rising tide lifting all boats.

Roach: It certainly does.

Martin: Exactly.

Pearson: Now as we talk about the global market, we saw wheat continue its decline this week basically on a large Canadian crop and large global supplies.  John, where is this market going to go in the short-term?

Roach: Wheat market just has no friends.  I mean, it just keeps going down and going down and going down and we just don't have anybody who wants to come in on the positive side of it.  The speculative traders are at a record short position or very near record short position and so you have everybody leaning one way.  And that tends to take care of itself.  You tend to have something come along that changes people's attitudes and you see the market reverse and those speculators have to get out of those short positions.  But as of the end of the week that hasn't happened yet.

Pearson: There's nothing on the horizon.

Martin: Well, and I think too, our winter wheat crop went into dormancy under the best conditions it has had in several years.  So that too kind of gives a little bit of an expectation that we're going to have a decent production this year, and granted we've got a long ways to go, but that expectation is there.  And in a marketplace that is looking at global supplies that keep increasing that would be kind of an indication that we need to kind of keep our eyes open.  The market is kind of lethargic and if you have a weak corn market it certainly isn't going to help on the wheat market.  One thing about wheat it was getting a little high priced as opposed to the corn price so demand there left wheat going over to corn for feeding.

Pearson: Okay.  So now we're looking at the March wheat around $6.51.  Are there any ranges that we should keep an eye on, producers should keep watch over as it continues to slide?

Martin: Well, I think that on the top side, of course, psychological is the $7.00 level.  On the bottom, this is Chicago wheat, and on the bottom side it's the $6.30 mark, $6.32 something like that.  On KC it's $7.40, $7.35, $7.40, get up towards the $7.50 mark and there's going to be static there.  On the down side would be about $6.80 to maybe $6.75.

Pearson: Okay.  Alright.

Roach: We look for a rally in wheat.  We think wheat is overdue for a rally and we think we're on the verge of -- we started a bit of a rally and then we got smacked down by Canada's crop estimate so we're on the side that says look for a rally.  Wheat frequently will come up and make higher prices and post some decent prices in the Jan/Feb timeframe.  So, seasonally we're into a period when we should see some stronger prices.

Pearson: Alright.  We just need that catalyst.

Martin: And your record shorts will add to that.

Roach: Yes, absolutely.

Pearson: Alright.  Now as we take a look at the corn market, we've been seeing corn hang steady between that $4.25 to $4.40 mark.  Is that going to last long-term?  Sue, where do you think this corn market is headed?

Martin: Well, I have been one to say all along that December corn futures would never get below $4.08, that that was going to be like the brick wall of China, still believe that, and so far that has come to fruition and we have one more week to go.  Now, the March contract I believe is going to have a little bit of an issue up around the $4.45 mark, maybe $4.50 and it too will probably water down after the December expires.  You'll see the March kind of water itself down.  The expectation is as we go towards the January report, I believe it seems to me 7 out of the last 10 government reports, the November to the January final crop production increased in corn in the last 7 out of 10 years.  And so with seeing the Canadian wheat crop increased and the canola sharply in supply it is leaving that expectation that we're going to see an increase not only this next week's report but in the final.  And so I think that that keeps a hangover on us for just a little bit along with if we see something out of the Fed it will just kind of keep us in a range I guess for now, you'll see a 3 in front of corn I think in the March contract.  But, again, there's another market that has leaned heavily short.  And so as you go into year end you're going to see these shorts kind of leveling, these funds level their positions, take some of the money off the table.

Pearson: Alright.  John, your thoughts on corn?

Roach: I think that the corn market has played the supply game now for the last several months, at least from maybe September.  When we first started seeing corn harvest and we saw the yields were surprisingly good and in some of the areas, the states that are not really big producers of corn having phenomenal yields, nobody had storage capacity to handle that size of crop and it has taken this long to get that crop all put away and get it into secure positions and I'm thinking that's probably just now happening.  I'm not sure that it happened, it would happen maybe in early November but I think we're still there and we've just kind of gotten through that.  Basis levels are still stronger than they normally are, not substantially like they were, they were a lot stronger, but they're still stronger.  And I think that the cash market will lead the futures market up.  I don't think we can get enough corn to move out of first ownership with cheaper price levels than we have today.  I mean, the people who were holding onto the corn now have, they're not ready to sell the corn market up ten or fifteen cents from here.  People are waiting for something better.  We still have a lot of weather to go through.  We want to talk about how big the crop was but let's face it, the demand is also phenomenal. The Gulf export capacity from my understanding is sold out through the month of January.  So if you're going to ship the capacity that is required out there and then fill that demand you're going to have to have corn moving.  So we have to go to a price level cash corn that will allow that adequate movement.  I don't think we know where that is yet.  But I do think that we're not far from a rally.  We moved close to a sell signal here this week and next week I think we'll probably get into a sell signal.  We're not going to be very aggressive at selling it though.  We're going to be a little more patient.  South American corn production isn't going to tank compared to last year.  They can't make any money, they're not going to plant the amount of corn, they're not going to raise the size of corn so instead of dealing with the supply burdensome one of these days we're going to start talking about how small the corn crop is going to be in South America because they can't make any money and how small it will be again next year if price levels stay where they are.  So the demand on corn I think is what people need to start focusing on and I think that causes the market some bounce, nothing crazy, just move to a price level where we can see grain moving out of first hands.

Pearson: We've got to see those cash trades pulling it out of the farmer's hands and then the market will go higher.

Martin: So I think what we're looking at probably is more of a basis move.  You know, for the past year it seems like more than a futures move, it has been a basis move.  Cattle have done the same thing.  And I think that's what we're going to see in the corn is that whenever they need something they'll feed them a little carrot, dangle a carrot just to pull enough out and then the basis will fall back.  Rail is running about a month behind so we're not getting stuff moved and then with this bitterly cold arctic weather the rivers are going to freeze up and you aren't going to get those barges moving down like you'd like to and so that is going to really put a demand to get those ships -- we have to remember the demand has been phenomenal both for corn and soybeans and there's ships waiting to be loaded, it wants to go out the door as fast as it can.  But, again, we're looking at a situation where I think John is right, the demand is going to help pull it.  But, again, it's a long broad situation.  The cold winter, more feeding of cattle, but on the same -- ethanol usage is very good.  Another thing, corn is extremely cheap to Chinese corn values.  And in the past on historical charts whenever the spread on the two prices is extremely wide it isn't so much the Chinese price coming down because of government subsidies, it's the U.S. values of corn coming up that narrows that spread.  That spread is almost record wide.

Pearson: Alright.  So reasons there to watch for a bounce in corn.  Now as we take a look over at soybeans, John, you travel quite a bit and we've been hearing in the soybean market record Chinese demand, record exports.  What are you seeing in your travels?  How does that demand look?  Do you expect it to continue?

Roach: The demand really for all the crops, interestingly enough doing the math getting ready to do some seminars Monday and Tuesday so putting some graphs together and so forth, the growth in demand for corn, wheat and beans on the average for the last five years has been a 2.5% increase every year and that is through some of the worst economic times that we've had and through the record or near record price levels and we're increasing worldwide demand by 2.5% every year.  So as we start looking forward we can see it in soybeans how big the demand has been.  There's no reason to expect the demand to really slow.  We would think that the demand will probably be larger than what the government has currently forecast.  We think in next week's report soybean demand will be raised, U.S. soybean demand will be raised, and we think by the time we get those bushels adjusted we think bottom line is we probably don't have very big of an increase in our carryover compared to what it was this last fall.

Martin: I agree.

Roach: And the South American crop looks very good right now, looks like a 90 million ton crop or something like that.  But they've got to raise it.  I was in Argentina last year in January when they were scared to death they were burning up the crop.  We had a nice big rally here. They didn't burn up the crop.  They ended up with a record crop.  So as it turned out, but just the worry about not getting rain for a three week period of time took our market sharply higher.  And so the demand is there.  The question is can we raise the supplies to take care of the demand?  Last year the United States was able to do it, South America was able to do it.  This upcoming year we're just now starting, let's see how that goes.  But demand is solid.

Pearson: Alright.  Sue?

Martin: Well, I tend to agree, demand is very solid.  And I think that when we look at the bean market the one concern I have is here again is a market that is record long.  And so we're going to see -- I think that is holding this market at bay a little bit and causing us to step back.  What I think is, is with the demand shift up front and the huge front end loading that we've had by Chinese buying, I think that we have to realize that at some point yes, this is going to slow and ____ is saying that their sugar warehouse will be back on deck in time, by the end of January.  So by the end of May they maybe should be back shipping to be able to continue to ship out the door.  They've got this new road that they're about to be finished by the end of May as well through the Amazon to cut time for trucks to get to ports.  I think that Brazil is going to get their arms around the infrastructure.  But for this year Chinese know that they weren't able to get ships loaded very fast and I think that we would be really foolish to think that they're going to take and steal our thunder away from us.  But we also have to realize if there's a crop being sold it's beans.  Those are going into the commercial's hands.  It's the corn that is sitting in the farmer's hands and the biggest percentage of the crop is unsold, which is a big concern.  On top of it, not only is it that way here, it's that way in Brazil as well and there's even some 2012-13 corn unsold in Brazil.

Pearson: That will be an ongoing story. We're getting short on time.  John, give me your top 30 seconds on the cattle market.  Where do you think we're headed.

Roach: The cattle market is kind of struggling in here right now.  The exports have been very good, the last couple of months particularly, we had good export numbers.  But we're just having a struggling kind of market.  My hope is here that we're getting, with positive economic news and employment news, that maybe we can crank a little demand back up.  But struggling kind of a market, steady struggling.

Pearson: It's going to take that growing U.S. economy to really drive demand.  Sue, same story on the feeder side or is there more hope there?

Martin: Well, I think the feeder market has had some pretty good demand.  We all know that.  Feedlots wanted to buy as many cattle as they could get.  You had moisture into the wheat pastures so that was off to a good start so they had a place to put them out on grass.  I think that when I look at the cattle market my concern is that once we roll the year over how is the housewife going to keep paying for increased medical costs or insurance costs?  Somewhere, everything is going up in costs, somewhere something has got to give.  They're going to start cutting back on their grocery bill, maybe it's smaller portions, however they want to do it.  That is a concern.  But in the long-term this winter is going to be a big bullish factor I believe for the cattle market.

Pearson: Alright.  John, now is that going to have an impact on the pork market as we take a look forward?

Roach: The pork market I think is going to focus, I'm going out a little bit further forward, but on the virus problem we had last spring into the summer and we haven't really gotten into that run of hogs yet but that is what is around the corner.  So from a difficult market to a better market as we move along into 2014.

Pearson: Alright.  Thank you both for your time here tonight.  We appreciate it.

Roach: Thanks, Mike.

Pearson: That wraps up this edition of Market to Market.  But Sue, John 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.  And be sure to join us next week when we'll examine the effects of root rot on America's Christmas trees.  Until then, thanks for watching.  I'm Mike Pearson.  Happy Holidays.

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