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Market Analysis: Don Roose

posted on April 18, 2014

Commodity markets were closed during the final session this week in honor of Good Friday. Nevertheless, wheat prices rallied significantly.  For the abbreviated trading week, May wheat gained 25 cents, while the nearby corn contract moved nearly 4 cents lower. Tight supplies and strong demand supported soybeans again this week as the May contract gained 51 cents.  Nearby meal followed suit with an upward move of $15.40 per ton. In the softs, cotton recovered about a third of last week's loss and the May contract gained $1.15 per hundred weight.  In the dairy market, May Class III milk gained 81 cents, while the deferred contract improved by 47 cents per hundred. Livestock prices took a breather from their record run this week as the June cattle contract lost $1.40, nearby feeders were off more than $2.00, but the big story again this week was in the pork sector where the June lean hog contract gained $3.60.  In the financials, the Euro lost 7 basis points against the dollar, crude oil rose 56 cents per barrel, Comex Gold lost $25 per ounce and the Goldman Sachs Commodity Index advanced by nearly 10 points to settle at 661.50.

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: This week we have seen a continuing rally in the wheat markets.  Talk to us a little bit about what's going on there.  Are we strictly looking at crop condition? Is that what's driving this?

Roose: Well, I think you have to look back to the crop report that we had in April and we actually had a negative reaction, a negative crop report. And I think when you look into the May report we're probably going to have a negative world ending production estimate, probably from 180 million metric tons to 200.  But I think a lot of the push to the upside this week was really Ukrainian tension.  So I think that's what it was and a rush to a little bit of short covering.

Pearson: Okay. Now, as we keep that in mind, as we look at a potentially significantly lower May number, where are we at on wheat today?  Is this a selling opportunity as we see this rally or does this represent a buying opportunity for folks with the idea that we could see reduced supplies?

Roose: No, I think when you look at it, Mike, I think what we really have it we're probably at the top end of the range.  We pushed up to some levels -- I think you have to remember we're not that far away from harvest and we've got a lot of bullish news already dialed into the markets.  So we think when you look at the July wheat just up around the $7.10, $7.20 indicates that we're probably at a mature level and we expect that the market probably doesn't fall under $6.50 on July wheat until after we ease the tensions in the Ukraine.

Pearson: Okay.  And it doesn't look like that's going to be happening any time soon with the increasing developments this week on the Ukrainian situation.

Roose: Yeah, you know, you just don't know so I think it's a moving target.  But I think we also have to remember out of that Black Sea region, that whole area is the third largest grain exporter in the world, so it is a significant area.

Pearson: And has planting started over there, it's been proceeding as expected in the Ukraine?

Roose: Yeah, you know, that's the good news is the export pace has not been affected and it looks like the planting progress is going to be unaffected, the seeding rates.

Pearson: Okay.  Alright.  Well, now let's take a look at the corn market.  Despite the rally in corn, did not do anything -- excuse me -- despite the rally in wheat, did not do anything to pull the corn market up, basically unchanged this week.  Where are we at on corn?

Roose: Yeah, Mike, and I tell you, that's the real issue is the corn market since the first of April has just been treading water. We haven't done anything.  We've just gone sideways while the soybean market has moved higher on the tight supplies, the wheat market has moved higher on the Ukrainian situation and I think what it tells us the maturity of the market.  We think that on, to end the week, the market closed technically poor, that's a bad sign.  If the weather, if we get the all clear signal on the weather next week, which it looks like the weather is improving, we probably will have socked in an intermediate high, selling opportunities have been up around this $5.10, $5.15 on Dec wheat and the same thing on July wheat, or July corn, sorry.

Pearson: On July corn.  So as we look to the future, if we get clear weather, if we see the planters get started here in this next week we'll probably see a bit of a selloff.  Then if folks haven't made many sales so far do you sell into any weather rallies as we roll through the spring? Or do you want until a little farther in the season?

Roose: Well, I think when you look at it this was probably our first weather rally that we've had, you know, a little bit of a concern right now.  But I think you really have to gauge yourself because probably two months ago we didn't think we'd be at these levels and so it has been a pleasant surprise.  But we also have the development of El Nino and it looks like that could be kicking in pretty aggressively, which means the end of June the weather turns more favorable to growing conditions.  So, unfortunately, how many weather scares are you going to get? You know, we may not get as many as we think if we do move into an El Nino.  So these are hedging opportunities, these are attractive prices for what we know the fundamentals, even in the April report it wasn't a bullish report, it was just less bearish.

Pearson: Alright.  Now, you mentioned technical close at the end of the trading week on Thursday.  Should planters get to rolling, looking at the technical signs, where could this market slide down to?  Should we be looking on the Dec side of giving up 10, 12 cents?

Roose: Yeah, you know, I think probably the downside objective is probably the same thing, stair-steps.  You take risk premium out of the market as the cards come out a little bit negative any probably the first stoppage levels down around the $4.80 level on December corn. Then we'll see how things go from there.  And I think that is a market that probably, if we start to roll over, it's two steps down, one up.

Pearson: Okay. Alright.  Well, now let's take a look at soybeans. Probably a very different situation on the old crop side as we look at a 50 cent rally this week.  Have we topped out?

Roose: Well, the soybean market is the one that really what we're trying to do is ration supplies.  We've moved into contract highs on the old crop meal and soybeans.  We're trying to ration supplies.  We're trying to import soybeans, we're trying to keep that signal strong to import soybeans, try and cancel sales to China, roll stuff forward.  We think that happened. This week it's quite possible that we have up to 20 million bushels of soybeans diverted from Brazil to the United States by China, some to the Pacific Northwest, some to the East Coast so that's going to be good news if that in fact does take place.  We have also, so far, we have brought in about ten million bushels from Canada, that is probably going to continue.  So the real goal of this market is to try and plug this tight situation that we have.  Overall the world is really going to be a wash in soybeans come the fall so it's the rest of the world is trying to plug the U.S. tight situation now and you have to bet that that happens.

Pearson: Now, on the South American standpoint, harvest is still progressing.  We're pretty well in the gut shot of harvest now down there I believe.  Are they able to complete their exports sort of as needed or are they facing port backups like we've seen in the past?

Roose: Yeah, they're having some logistics problems but they have worked on that greatly from last year. But their harvest that is right there, over 80% harvest in Brazil soybeans, 20% in Argentina and the producers there recognize an opportunity when they see it.  They're selling very aggressively and that is causing a wide basis down there.  And what that really is doing, it's making the imports attractive.  Soybeans in Paraguay are about $1.30, $1.40 cheaper than the U.S. FOB Gulf beans so it's attractive so it's doing its job but the producers there are aggressive sellers.

Pearson: Alright.  Now, you mentioned something that could be troubling to producers in America looking to plant record soybean acres.  You said the world might be a wash in soybeans by this fall.  As we look at new crop, $12.00 cash is realizable in a lot of places in the country. Should folks be making some aggressive sales?

Roose: Well, we think so.  We think it's an opportunity and it's one that may not come along again and it might, you know. The grain markets are so dependent on weather, Mike, and we think it's going to be a fine growing season with the El Nino but we think that probably there's $2.00, $2.50 risk premium built into the market right at the present time on new crop soybeans.  The old crop soybeans have pushed the new crop up.  We've got about a $2.60 premium July over the November so that is probably about as far as it can go.  But we think that is very possible to believe the government's estimate that they came out in the ag forum of $9.60 for cash soybeans.  So we think it's possible to go under $10.00 but it's on hold for right now but it's starting to crack.

Pearson: Alright.  And $12.00 is a lot better than we thought we were looking at, at the end of last growing season on soybeans.

Roose: Well, they're profitable levels and the same thing for corn is profitable levels.

Pearson: Alright.  Well, now let's take a look at the livestock market.  We did see the June cattle contract pull back a little bit this week.  We saw cash soften in a lot of places around the country.  Where is this cattle market headed?  Have we hit the peak for this year do you think?

Roose:  Yeah, we think we have.  We think that we've traded cash as high as $155, $153 in volumes in the south and usually we drop about 11% from the peak down to the summer lows.  If you figure that out, that is about $137 on cash in the summer.  Well, the June cattle are discounted by that by about $2.00, the August cattle about $4.00.  So the cattle market we're anticipating that the cash market continues to move lower but we have already got it discounted in the market at the present time.  So the down side is probably limited.  The upside through the summer is probably limited also.  But we think product next week starts to move higher, packer is losing about $100 a head so it's going to be a struggle.

Pearson: They're going to need to see the values push up to continue to pay what they have been paying.

Roose: That's exactly right.  It's in their benefit to try and push the product higher and we think they'll start to try and do that next week.

Pearson: Alright.  Now, if we look at this downtrend in the fat cattle side, compare that with the relative stable and in fact increasing run until this week on the feeder cattle side, where does that tell us this market is headed on the feeders?

Roose: Well, the feeder cattle supplies are just tight and they're going to stay tight.  So, you know, probably significant downside pressure probably just doesn't happen.  And I think we have to remember the technicals did turn soft this week on the feeder cattle but the overall seasonalities on feeder cattle are actually positive from now until October so it is usually a market that finds some strength once we hit some support zones.

Pearson: Now, you mentioned we did have a technical close, a poor technical close again on the feeder cattle side.  Where does that put us?  What are we looking at as we start the week post-Easter?

Roose: Well, you know, I think probably the downside is probably limited to another $2.00 to $3.00, down around the $176 area I think is probably a good support zone and probably find some buying interest down there.  Just fundamentally look at what the prices are at the sale barns.

Pearson: And so that could tell us upside potential as we roll into next week if we get decent buyer potential.  Technically upside up above $180 again on feeder cattle?

Roose: Yeah, I think so and I think it's going to partly depend on what corn does and if we see corn sitting there with just a huge fund long, if they start to liquidate that's going to be supportive to the feeder market.

Pearson: Alright.  Now, let's jump over to the hog market.  Saw a bit of a gain this week, $3.60 back to the positive.  What is happening in the hog market?

Roose: Yeah, the hog market is just a wild swinging market and it's because nobody has a real good handle on it.  The government is telling us that the supplies are going to be down about 3.3% for all of next year, the summer slaughter is going to be down somewhere 4% to 5%, trade thinks it's going to be down more like 8% to 13%.  So far the slaughter the last few weeks has been down about 7% but our weights are trying to compensate so it is really only total production only down 4%.  So I think it's a market that we went from funds piled in, futures had a record premium to the cash then we swung the other way as they liquidated a record discount to the futures and I think this is a market that probably overall, when we sort it out, is one that rallies are going to meant to be sold.

Pearson: Alright.  We'll continue the hog discussion in the Market Plus segment on our website.  But Don, thanks so much for taking the time to be with us this weekend.

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, Facebook page and the rest of our social media outlets exclusively at the Market to Market website.  And be sure to join us again next week when we'll learn how farmers are growing food year round in the heart of the windy city.  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