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Market Analysis: Don Roose

posted on February 7, 2014

Wheat prices rallied this week as the trade pondered drought on the southern plains and deteriorating winter crop conditions.  For the week, March wheat gained 22 cents while the nearby corn contract moved 10 cents higher.  Big week over in the soybean pits as scorching temperatures in southernBraziland strong demand powered a weekly gain of 49 cents.  Nearby meal followed suit and settled $20 higher per ton.  In the softs, cotton also rallied this week as the March contract improved by $1.60 per hundred.  In the dairy market, February Class III milk pulled back slightly from last week's record highs but still hovered near $23 per hundred weight.  Over in livestock, the April live cattle contract lost 2 cents.  Nearby feeders declined by $1.60.  And the April lean hog contract gained 2 cents.  In the financials, the Euro gained 14 basis points against the dollar.  Crude oil advanced by $2.40 per barrel.  Comex Gold improved by $23 per ounce.  And the Goldman Sachs Commodity Index gained nearly 10 points to settle at 630.55.

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: We did have a big move up in the wheat markets this week.  Talk to us a little bit about what happened there.  And have we put the low in?

Roose: Well, the wheat market was one that was poised for some kind of a bounce.  We went down to, very much like a lot of these grains we went down to big support zones down around the $5.50, $5.60 onChicagowheat, funds heavily short.  Really the news was stale.  And so what we did is we started to move higher.  A lot of it comes back to the harsh weather that we've had so far and I think that started to make some of the funds nervous.  We moved through some technical areas and we had a sharp technical bounce. 

Pearson: Alright.  Now, is the market really getting concerned with winter kill?  Is that starting to play into the thoughts?

Roose: Well, we're really not going to know until we come out of dormancy how serious it was.  But on the backdrop, remember we did of the planted acres were down about a million from what we had anticipated earlier, so I think really where we're at is we're still in a supply bear market.  TheUnited Statesstocks are tight, very similar to the soybeans,U.S.stocks are tight but not the world's stocks.  So I think all we did is we just really moved up to some levels of resistance.  We're probably going to need a new catalyst to move higher.

Pearson: Do you think this would be a good time to make some sales?  Or do you hold off and wait to see if we get a catalyst?

Roose: Well, I think when you look at it right where we're at right now technically the charts are still positive.  We're overbought.  We could have another 25, maybe even 35 cents to the upside.  So I think here you're a scaling seller.  But remember on Monday we're going to have the monthly crop report is probably going to be a little bit positive, exports probably up and then we're going to have the ag forum the 21st of February.  So that's the next two big news items that we have ahead of us.

Pearson: And there's nothing in either of those two news items that the trade is very nervous about?  As far as we know there isn't any terrible news that could come from either of those?

Roose: No.  I don't think so.  But I think when you look at it we've got a lot of world competition. Indiais trying to sell wheat in the world market.  Who would have thought?  We have some political unrest with the biggest wheat buyer in the world,Egypt.  So there's some question marks on the demand side and on the supply side.  So I think it's a market that in order to move into a more positive situation it is probably going to have to be weather dominated.

Pearson: Alright.  Keep an eye on the skies.

Roose: Right.

Pearson: Now, let's take a look over at the corn market.  Also saw a little bit of a rally this week, 10 cents up in the nearby.  Where is corn headed?

Roose: The corn market has been up 7 days in a row and is very similar to the wheat.  We reached down at some low end of the charts.  We were oversold.  Funds were short about 160,000 contracts.  And so we spent a lot of time short covering.  And really what happened is the stocks in all positions report told us that our feed usage was more than we thought so rather than having a 2 billion bushel carryover at one time we thought, we're now close to 1.6 billion.  So very much similar to the wheat market.  All we did is move up to some tough resistance, March corn $4.45, $4.50, new crop corn $4.60, $4.65 and so those are areas that we're going to need a catalyst much like wheat to power through those and then we're going to have those same two reports coming up here that are going to give us a little bit of direction but we're still in a supply bearish market.  But, again, it's weather, it's the tough transportation.  We haven't been able to move stuff efficiently this winter.  And so we've got a little bit of an artificially tight situation and overall very adequate supplies.

Pearson: Alright.  Now, as we watch the old crop corn market I believe we're at about 91% of the USDA's export forecast for the marketing year.  Is that going to provide support over the summer as we  hopefully continue to export?

Roose: Yeah, and that is a good point because our export pace has grown.  And like you said we're at 91% of our total export pace.  Soybeans were 106%.  So it's all about the exports have supported us on this rally and to the upside we've got competition when we move higher.  We're not the cheapest corn in the world anymore.  We were at one time.Ukraineis tough competition.  We've gotArgentinaandBrazil, their crops are going to be coming at us here soon.  So I would say that there's still an abundance of world corn that is available.

Pearson: Alright.  But still, probably better selling opportunities down the line.

Roose: Well, I think it depends on what you're really looking at because I think it's more of we've had a nice rally, we've got a push to some very tough resistance areas.  In order to push past this $4.60, $4.65 on December corn you're probably going to have to have some kind of a weather type of catalyst.  The charts do look positive.  We had a key reversal on corn January 10th and since then we have been moving to the upside back up to this resistance.

Pearson: Okay.  Well, now let's take a look over at the beans.  Talk about a surprising move this week.  50 cents to the upside.  What is driving that?  Is it primarily South American weather?

Roose: Well, the real driver is the fact that our export pace is strong.  Like we alluded to, we sold 106% of our total export commitment.  Previous years we have seenChinacancel some of their purchases or roll them forward.  So far they haven't done that.  So the trade is starting to get concerned that we've got our stocks to use ratio is historically low.  We have to seeChinastart to make a move on some of the beans that they purchased, cancel them otherwise we're going to be in a precarious type situation.  I think they probably do start to cancel.  Those rumors are abundant all the time.  South America soybeans inParaguayport to port are about $1.00 cheaper than we are.  So there's a good incentive to switch at some point in time.

Pearson: Okay.  And so far they're able to get them out of the ports inSouth Americawith the little harvest they've had done so far?

Roose: That may be the reason thatChinahasn't canceled so far because I think they want to see -- last year remember it was a real bottleneck.  And so I think that is probably what we're waiting for.  The port congestion looks much less than it was last year.  It looks like it's going to be a very efficient movement this year so we think that is probably, China does probably start to cancel maybe even next week or forward move some of their beans.

Pearson: And then that would create big selloff in the old crop bean market?  Are we just riding on weather, excuse me, on exports?

Roose: I think it's just really an export committed market because we have an abundance of world supplies.  What we really have is excess canola stocks inCanada, we have excess rape seed wheat in Europe, we have big supplies out ofSouth America.  So it's really only theU.S.that has a precariously tight situation.  And we're probably going to rely on some imports this next year also.

Pearson: Alright.  Well, now let's take a look over at the livestock market.  Fat cattle have been hot now for two weeks.  This week seemed to settle down a little bit.  We saw the cash trade pull back, a lot of scattered reports kind of all in the mid $140s.  Where do you see this trade headed? Was two weeks ago just a one off when we were seeing $150 trade?

Roose: Well, what really happened in the cattle market is we just plain spooked the consumer.  Since the first of the year we spiked up, in one month we moved box beef, the beef at the consumer level up 20%.  It was just too much too fast.  So I think what happened is the packer was making about $100 a head as the beef spiked up there, he paid like you say $150 for cash cattle in Nebraska, $147 in the southern plains and since that timeframe we have seen the box beef retreat.  It has retreated now, it's going down about as fast as it went up.  It's going back down to the level, the high level that we were last year.  So I think it's still very much a positive market, it's a bull market but I think it's one that we went up too fast, we lost some of our demand, now we're starting to rebuild it and so watch for the box beef to stabilize somewhere between probably $207, $211 and then we should have resumption of the upside again.

Pearson: Alright.  Still historically high prices very much so on the choice box beef side.

Roose: Yeah, the box beef is still historically tight and on Friday we did have a positive technical move on cattle.  So I think it's one that how much do we move to the upside to lose demand?  When you're talking about beef down 6% for the year we're still going to be positive all the way through the next year.

Pearson: Alright.  Now, let's take a look at feeder cattle.  We did see a little bit of a selloff this year primarily driven by the corn rally.

Roose: Yeah, the feeder cattle we still have a positive situation and that's going to continue for the next couple of years.  In the last cattle inventory report we have 700,000 less feeders outside of the feedlots than we had a year ago.  So the demand is going to stay.  I think it's really a question mark if the corn moves higher feeders probably move lower and vice versa.  But overall the feeder cattle probably caught in this $160 to $175 trading range, a big wide range.  It's going to probably be tighter between around this $170 both sides.  But overall feeder cattle are positive and they're probably going to stay positive.

Pearson: Alright.  Now, let's take a look over at the hog market.  Nearby not much of a change here in April hogs, hovering around that $94 mark.  Is there any strength left in that contract?

Roose: Well, the big thing that you have with the hog market is the upfront month, the cash mark is very much different than the back months.  The April hogs probably have a $10 hundred weight PED premium, virus premium in it, the summer months about $8.  Seasonally slaughter should start to go down but the weights have accounted for the last several months about an extra 2% to 3% of the overall slaughter.  So the weights are going to have to come down and we're going to have to see the slaughter come down, we're going to have to see the PED virus really start to show up.  That is the big debate that you have out here in the industry.

Pearson: Now, does that mean as we look at the June, this mid-summer contract at that $105 level, time to make some sales do you think?

Roose: Well, $107.47 is the old all-time high.  And so I think when you look at these levels most definitely risk management makes some good sense, particularly when we talk about it's all about what do you think the disease factor really is?  Remember the government in the last report, we'll see what they say in the report on Monday, but they had the high for the summer hogs around $89 to $90 so there's a big difference.

Pearson: Big difference.  Alright.  Well, thank you so much, Don, appreciate you being with us tonight.

Roose: Thank you, Mike.

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 online.  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 further examine the impact of persistent drought inCalifornia.  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