Iowa Public Television


Market Analysis: Don Roose

posted on July 3, 2014

Livestock prices hit all-time highs to round out the trading week shortened by Independence Day. Grain prices, however, were on a downward slide experiencing a large drop after Tuesday's government reports. For the week, September wheat lost 14 cents, while the nearby corn contract moved nearly 33 cents lower. Tuesday's USDA report revealed larger than expected soybean stocks pressuring the August contract 78 cents lower. Nearby meal prices followed suit with a downward move of $29.55 per ton. In the softs, cotton continued its second week of losses as the December contract gave up $2.79 per hundred weight. In the dairy market, August Class III milk lost 70 cents, while the deferred contract gave up 93 cents. The big story continues to be in the livestock sector where prices hit new records as the August cattle contract gained $3.88. August feeders advanced $3.30. And the August lean hog contract improved by $1.78. In the financials, the Euro gained 4 basis points against the dollar. Crude oil declined $1.81 per barrel. Comex Gold fell by 60 cents per ounce. And the Goldman Sachs Commodity Index lost more than 12 points to settle at 651.45.

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: It was a big week in the grain markets this week. It was a tough week for a lot of producers to watch these prices slide. Let's jump into the wheat market where we didn't see as big a jump as some of the others. What happened this week to really spark us lower?

Roose: Well, I think the big thing overall is this report was a game changer and really what we did, the highlight was the fact that we brought back some of those phantom acres that didn't show up in the March report, they showed up in this report, 5.7 million more acres, 3.3 million soybean acres, 700,000 wheat acres and from there we also had stocks that were bigger on soybeans, bigger on corn and it all added up to just a game changing negative report.

Pearson: And as we look at the wheat market in particular this week, 14 cent slide on the nearby on top of slides for the past several weeks. Are we just going to continue trying to find a bottom?

Roose: Well, what we did on the wheat market is we reached some kind of a support this week. We ended the week trying to go a little bit higher. But funds have been piling into the short side of the wheat market, sitting with a big short, 40-45,000 contracts. We're down to about 50% harvested on the wheat in the United States. We're not competitive. That's one problem. So, these technical bounces, I would say 10 to 15 cent bounces are probably going to see some selling just because the rest of the world continues to sink lower on prices. So, it's still a struggle from a big supply world wheat.

Pearson: Now, how far out of the money are we versus world wheat?

Roose: Well, you know, it changes. Right at the present time this last week we had some sales to Egypt, Russia and Romania, actually made those sales. We were about 10 cents out of the market. So, it's not like we're a long ways out of the market but it's a very competitive marketplace and the same thing is starting to happen in corn and in soybeans.

Pearson: Well, and let's talk corn market. We did see the acreage number come out. It was lower than last year, as expected, but still predicting trendline yields. A lot of corn this fall.

Roose: Yeah, you know, our acres are adequate and they were down just slightly, almost unchanged from the last report. But, still a big number, particularly it was a report that ending stocks are probably going to go up in the July 11th report on Friday. So, what has happened is our stocks have quit getting smaller, they're starting to build a little bit on old crop. And on new crop we're going to take these acres, we're going to put them to a balance table and that is probably going to be around the 1.8, 1.9 billion. So, it's still a supply bearish market. And crop conditions are the other thing that we're focusing on very heavily. And with the conditions we have right now it's still possible to have a yield of plus 170, a remarkable yield when we're 165.3. So, that is possibly in the cards but it's all about weather, Mike, from here forward.

Pearson: You bet. Now, as you're speaking of weather, we've got a question that came in on Facebook for our Market Plus segment that is on our website and it's a question a lot of producers have been asking, particularly in the Corn Belt that were faced with these high winds, heavy rains. Jamie in Wagner, South Dakota is asking, his thought is that for every acre lost from flooding, 100 acres get a perfect rain? Is that sort of the way the market is treating these weather events that have rolled through the Corn Belt?

Roose: Yeah, some of these old adages really hold true, Mike, and that's the one is rain makes grain and it really is true because you have some areas that it's devastating, we've also had some high winds, we've had a lot of excess rain in areas. But the other good areas are really making up for it around the country. So, it's just too many areas that are too good versus too small of areas that are struggling. So, it's unfortunate for the people that are struggling but it usually doesn't hold a lot of water.

Pearson: Alright, now it's a game changing report, new crop corn. Should producers be making sales?

Roose: Well, we're going to come back after the 4th of July and 85% of the time how we start out on that Monday after the report is the direction that we go. So, watch it pretty close, you know, into the end of July that's usually we slide if we start out lower on Monday, which it looks like it now. We think that there's possibly another 50 cents weather premium in the corn. You know, when you're sitting around $4.15 on December corn, you can still push down into the $3.65, $3.70 so catch up sales with decent weather we think makes some sense.

Pearson: Alright. Now, let's take a look at soybeans, really the big story from all of Tuesday's report, both new crop and old crop were hit pretty hard with surprises. Talk to us about the old crop soybean number. What changed?

Roose: Well, really what happened is we did have a report that the acres were bigger, like we talked about much bigger. Then what the government did is made some adjustments on the old crop stocks. And really what it boils down to is our last year's soybean crop was understated by about 60 million bushels, about seven-tenths of a bushel. So, rather than having a 44.0 yield you have a  44.7. So, what it means is we're going to have bigger stocks than we thought, we're going to start harvest down in the Delta the first two weeks of August. So, the market took a lot of risk premium out of market, there's probably more to come. We broke through a head and shoulders formation that has been there on soybeans since April 1st, downside targets on November beans are $11.20, the next stoppage is $11 and then the next after that is $10.88. So, you need some weather to find some, give us support back on this market again. We're oversold right now, Mike, so you know you have to be a little careful.

Pearson: Alright. Now, as you look at the new crop soybean market, you mentioned the trendsetting here on the Monday after the 4th. Same story in soybeans? Keep an eye on Monday's grain trade?

Roose: Yeah, exactly. And really what it boils down to is the July 4th kind of marks a mid-year development timeframe and if we have the green light the market takes more risk premium out of the market. And it'll be more in the corn but also the soybeans because August is really the time that soybeans are so critical where we know probably by the middle of July we're going to have about 50% of the corn pollinated. So, after that timeframe pretty hard to hurt the yield by more than 10%. But the soybeans still holding a lot of risk premium we think so that is probably the market that is the most vulnerable if the crop development continues okay.

Pearson: Okay. And you talk about being the most vulnerable. USDA earlier this year released their '14-'15 marketing year average of $9.65 or so for soybeans and a lot of producers kind of scoffed at that number. It has been a while since we've seen beans below $10. After looking at the acreage and this year's carryout, is that pretty realistic do you think?

Roose: No, I think those are downside objective. Now, a lot of it is going to boil down to what happens with the producer. Does the producer sell aggressively? Does he store? Does he look at the insurance program? So, it's going to be -- if the weather is favorable it's going to come down to the producer. Then we're going to look and see if South America's crop development -- but things, we've had four years of struggle in the United States with crop development and off and on around the world. If those acres around the world come into production along with big yields we are going to come under some pressure. And when you look at prices all the way out to 2015 we're still $11.37, 2016 you're over $11 and even 2017 soybeans are just under $11. So, there's still some hedgeable opportunities all the way out there.

Pearson: Alright. Well, now let's take a look over at the livestock markets. This has been just a roller coaster ride for producers and probably a roller coaster ride for folks trying to buy meat for their 4th of July barbeques. As we look at fat cattle prices, the live cattle hit another record this week, $155 on the board. Is this, to use a term that in vogue, sustainable?

Roose: Well, one thing, the fireworks came early in the cattle market, there's no doubt about it. I mean, we had a lot of activity and we traded up $4 a hundred weight higher on Wednesday, you know, really shocked the trade. $158 in the Corn Belt, $158 to $160, is it sustainable? You know, the big surprise is the fact that the consumer purchasing has been really aggressive so it has been all about the consumer buying. He is willing to buy beef, buy pork at these record levels and it probably comes back to the economy, maybe some of it comes back to pent up demand from the winter, but for whatever reason that really was the difference in the high price beef and pork that we have right now.

Pearson: So, as we take a look at the next week, do we anticipate with the $158 trade, for this to keep rising?

Roose: Well, I think when you look at these prices right now from a risk management standpoint there certainly is more downside than upside if anything goes wrong. You know, it's kind of the perfect storm really. The consumer, you know, we looked at the unemployment figures are low, the economy low interest rates, it's finally all coming to fruition and he's spending money. But those good times you have to be very careful because the stakes are very high from a risk management standpoint. You've got a lot of break-evens on cattle that are in the low $150s to the low $160s. Those are big, huge numbers and a lot of risk. So, upside I would say is limited. It felt like to me that we had a blow off type of a market on Friday, this week on cash cattle and we topped $158 to $160.

Pearson: Okay. Now, you mentioned the very high break-evens for a lot of producers. And, of course, these feeder cattle prices are feeding right into that. Record highs again, $217 August feeder cattle. Same question, is there still optimism for this market?

Roose: Well, when you look at the feeder cattle, I mean, it is -- we have some big profits coming out of the fat cattle market and what's happening is I think the feedlots are willing to pay higher prices for the feeder cattle partly because of the grazing conditions have really improved and so trying to grow these feeders longer than normal. But is it sustainable? I think when you look out to May of 2015 feeder cattle are trading under $212. So, probably the same type of thing, you know, it's all fine until it ends. But these markets when they go vertically you have to be very careful because that's not a solid market. A solid market is one that builds over time or breaks over time and this is a market very much like corn was when it went to $8, shoots up and you have to be careful. It gets overbought and anything can happen.

Pearson: Advice to producers risk management wise? What is the best way to play this for calves perhaps coming to market this fall or maybe into next spring?

Roose: Well, there's no doubt that you should have a strong risk management program. If they don't -- if the break-evens are too high for you, make sure you buy some insurance with puts on the downside. You can sell some calls into the mid $160s to cheapen that up. But some kind of a formula that makes sure that if something happens strange, like the BSE that we had in 2003, we went down seven days in a row limit, those are the type of things that you have to guard against when the times are so frothy like they are right now.

Pearson: Alright. Well, let's take a look over at the hog market. Speaking of frothy times, we're back up into record territory at $130 on the hog side. Again, is this mostly PED related? Are we still worried about the loss of hogs?

Roose: Well, we definitely are talking about the PED virus trying to figure out what the real slaughter is going to be. I think the slaughter is going to be down in July, August and September, then maybe start to build if we don't get hit with a PED virus again, a PED virus. But, again, just like the cattle, it's really the consumer. 75% of our pork is sold domestically and the consumer at these high prices continues to be a purchaser. So, you know, sometimes those things can end pretty fast when you're reliable on the consumer. I think for all the meats watch the movement after the 4th of July, see if the buying pattern slows down or not. But, you know, we do have discounts in those back months, Mike. You know, when you look at December 2015 hogs are trading $25 under 2014.

Pearson: Things to keep an eye on. Thanks for being with us this weekend, Don.

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 next week when we'll learn how federal officials, scientists and hog farmers are fighting back against a virus finding its way into the barn. 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