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Market Analysis: Apr 15, 2011: Don Roose and Mark Pearson Discuss the Markets

posted on April 15, 2011

Even with premiums being paid for some commodities the market trended lower.

For the week, May wheat lost 53 cents, while the nearby corn contract moved 52 cents lower.

As the end of the winter harvest in the Southern Hemisphere is completed, a large amount of Brazilian soybeans have come on to the market pushing the May down by 60 cents for the week. Nearby meal prices also trended lower, with a loss of $12.00 per ton.

In the softs, cotton dropped below $200 per bale this week as the May contract fell nearly $7.50.

In the dairy market, April Class III Milk prices gained 3 cents while the deferred contract was up by nearly a dime.

Over in livestock, cattle prices continued last week's downward trend as the June fed cattle contract lost $1.62. Nearby feeders were off nearly $2.20. And the June lean hog contract went against the trend and gained 32 cents.

In the financial markets, the Euro was relatively steady with a nominal gain of 2 basis points against the dollar. Crude oil gained $3.13 per barrel. Comex Gold advanced $11.90 per ounce. And the Goldman Sachs Commodity Index lost a little more than 25 points to close at 733-even.


Market Analysis: Apr 15, 2011: Don Roose and Mark Pearson Discuss the Markets

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.

Pearson: Every week we quote that Goldman Sachs Commodity Index. I wonder how much that Goldman Sachs Commodity Index was influenced by Goldman Sachs' announcement that we should take money out of commodities.

Roose: Well, most definitely. I think the big elephant in the room has been the big funds, and Goldman Sachs, of course, is very large, and so starting on Monday we did see that take place. we had key reversal in crude oil, and we had a lot of fund selling throughout the week, starting with Goldman.

Pearson: That's right. And what's your thoughts on that, Don? what should producers -- what should we in the Farm Belt think about that?

Roose: Well, I think when you look at it, it's probably just smart trading. They were aggressive buyers when we were at lower levels. Now we're at higher levels. You have to say from a commodity standpoint we're pretty mature and the upside looks more limited than the downside. And so I think it's a simple case that take your money off the table is what they were saying and we'll look at prices down the road and adjust our portfolio, so that's really what I think they were doing.

Pearson: Is it going to have a long-term impact, do you think, in commodities? I mean in the fund business, like I say, it's been a huge driver.

Roose: Yeah, it has been a big driver but also the funds really don't dictate a market other than price swings. I think they're going to help push it quicker to a level that it should go anyway. They don't change the fundamentals or make the fundamentals. So I think, really, if you look at the big fundamental picture, all they're doing is adjusting their commitments accordingly to what the fundamentals are telling them to do.

Pearson: A week ago I was down visiting some friends in Lubbock, Texas, and it's biscuit dry down there. Don, let's talk about this wheat market and where you see wheat prices going.

Roose: Well, you know, the wheat market, if you back up a little bit, our big problem started with the Russian drought last summer. And of course, around the world things are changing a bit. Even this week it looks like Russia is going to enter the export picture again on wheat starting in June. Australia had a big crop. Now we're up to bat here in North America. I think when you look at it this week, we were down heavily on wheat because we are anticipating some moisture. And we're going to find out we're in a weather market, Mark, really.

Pearson: All right. And the weather really hasn't improved much. Worldwide is production decent on wheat?

Roose: Yeah, that's what I think we're saying. Our world ending stocks are very ample. We've got countries like India that now are looking to export more wheat and rice. Australia had us a fairly decent crop, and it looks like Europe we're going to have a decent crop. So I think things are improving. Of course, that can always change.

Pearson: What are you telling U.S. producers at this point on new-crop wheat?

Roose: Well, we're marched into a crop, number one. The wheat -- soft red wheat this week went under the price of corn for the first time since 1996, so we're trying to encourage some wheat feeding. It tells us that we have ample wheat out here. You know, probably from this point forward, unless we have some real weather problems, which we could, rallies were meant to be sold, so it's probably two steps up, one down.

Pearson: All right. Let's talk about the corn market too. Demand has been strong across all segments, really, of the corn market. In talk overseas, maybe some China buying and so forth. Where do you think we're going now with corn prices? We're not off to a great start on corn planting. I've talked to Roger Elmore from Iowa State, Dr. Fred Below, the 300-bushel corn guy over at the University of Illinois. I've visited with Brett Wilson from Pioneer, a well-known agronomist. None of them want to see producers get in the ground when the soil is this cold and this wet. Some snow in the Dakotas. I would have thought the market would have maybe jumped up.

Roose: Well, you know, actually the market did a little bit. December corn -- new crop corn was higher, where up-front corn was significantly lower. So the corn market is trying to gingerly move up. but, you know, we look at the history, and really we don't get concerned. if we have 40 percent of the corn in the ground May 1, then we think we still have a chance of trend line yields. If we don't, then we reduce it. So I think it's just a little early yet, but the market is inching up to the starting gate on weather.

Pearson: All right. New crop corn sales, are you in a hurry to make those?

Roose: Well, I think you have to say -- you know, as we were talking, you know, things are changing around the world. we're moving to more ample supplies. We're buffering some of these tight stocks situations. so I think you have to say that corn market -- realistically new crop corn, you're within 5 to 10 percent of the upper end of the range. We've never had prices at this level historically ever. We're substantially over where we were in 2008 for a high, so these are attractive levels to make some sales. And use some of your -- creative type of sales are possible also if you're concerned.

Pearson: An option strategy, is that what you're thinking?

Roose: Yeah, I think can if you can, you know, implement a window strategy where you protect the down side starting at 640 and still give yourself a chance to go to $8, some type of a window, you can do that fairly reasonable. It just makes good sense, particularly when you're well over the insurance rates.

Pearson: Absolutely. So at this stage of the game, you're not that worried. We'll get the crop in the ground. Hopefully we'll see more of a trend line yield.

Roose: I think it's still to early to get really concerned about it yet. Of course, next week, you know, we'll see what the weather pattern looks like, and it will be more of an issue. I think we're off to a start that's not really that great, but it can improve.

Pearson: It's a La Nina too, they tell me, so that's always volatile.

Roose: Well, you know, and this is the way we're looking at it. We think that we're in a transition phase not only on the world supplies but also on the weather. And we think that as we hit the first of July, we're going to move into a more normal pattern from a La Nina to an El Niño. And so we think we increase our odds for better growing conditions.

Pearson: All right. Let's talk about soybeans. Talk about South America, Don. we should be close to wrapping up harvest down there, but it's been delayed with all the wet weather.

Roose: Well, it has to a certain degree. But if you look at the soybean market, really, we were waiting to see what happened with the South America crop. We put the wheat top in, you know, at the right time. we put the high in soybeans back in February. That was just as we were starting the early harvest. Now the production in South America is large and ample. Our ending stocks have grown, and so consequently our old crop has lost over a dollar to the new crop and we're -- you know, we're well off the highs.

Pearson: Where are you on new-crop sales? What do you want to be doing there on soybeans?

Roose: Well, I think the soybeans is the same type of thing. I mean it's probably a market that as we move through the crop year, we're going to continue to take risk premium out if everything goes perfect. So that's a choice for the producer. But we think that at these levels, there's probably more downside than upside eventually. And, you know, we're going to have plenty of weather scares. It's going to be a volatile year -- there's no doubt about it -- with all the movement that we have going on and things. But these are attractive prices. You've never seen prices like this in history either, so you have to take advantage of them through some type of a contract if you don't -- you know, creative contract if you don't have a hard contract.

Pearson: Don, as we go forward and as we look at soybeans, are you a third sold on new crop? 20 percent? Where are you?

Roose: Yeah -- no, we're sitting close to a third sold on new-crop soybeans, and we want to continue to reward the market on rallies and get more aggressive as -- you know, we try keep up with the sales according to how things are going around the world in your production. So, you know, that's where we're at, and we feel comfortable there. But, you know, looking for opportunities to make more sales.

Pearson:, When I was down in Texas, everybody was talking about this old-crop cotton supply and how tight it is. And it was very reminiscent back in '95 during the drought when corn prices went to $5. The reason they did was nobody had any. Cotton was just under $200 a bale because nobody has any. What's your outlook on new crop cotton, Don, and should we be taking some of that money off the table?

Roose: Well, you know, I think all these commodities are running the same. Funds are taking money off the table in raw commodities, and I think that should tell you something. But, you know, you're having export cancellations on cotton versus, you know, big purchases. You're having India that is more manageable to their situation. China, unfortunately, they're the ones that are leading us around on the demand side, and they're really starting to slow their consumption on cotton also. So, you know, it's a market that you have to be very careful of that it could continue to slip to the downside, as it's been doing.

Pearson: All right. So add to sales on new-crop cotton.

Roose: Absolutely. Yeah, I think definitely. You see rallies were meant to be sold from here forward unless something really changes.

Pearson: With the high input costs the last couple of years, it's been hard to talk about the livestock sector with any thoughts of profitability. We've seen prices jump up. I talked to a turkey grower today. They've been through the same thing there. What do you see ahead on this cattle market? We had a pullback on the cash market and a pull back on futures to a lesser extent. What's your tight cattle market? It's the same story? Just kind of the air coming out of this whole commodities thing?

Roose: Yeah, I think the air is coming out of it. The thing with the cattle market is seasonally this is about the time you put in your top, and we did about it at the right time. We put a spiked top in the cash cattle trade at 123, 124 quickly and broke. And usually from a spring high to a summer low, we drop 13 percent. So if you put 13 percent off of June cattle, you're down around 106, you know. So maybe 106, 110 is kind of zone that you ultimately probably continue to ratchet lower, as beef also was off this week, Mark.

Pearson: That's true. consumers hanging in there? You feel good about the economy?

Roose: Well, I think it's still questionable. I think it's work in progress. The high energy values certainly are a big issue. And, you know, our demand we think is starting to soften up. The bright spot is our export pace continues to be very strong. Japan last week took almost 50 percent of our beef on our sales. But it's really the domestic market, when we sell about 91 percent of our beef sales are domestically.

Pearson: Yeah, we talk about the export market. Bottom line, the beef picture is less than 10 percent, so we need to get it sold here first. So we need some warm, hot days to get the grilling season going. Is this calf market going to stay strong, then? I mean obviously it takes us a while to rebuild this --

Roose: Yeah and that is the one thing. The overall supply/demand balance table on cattle is very tight. So, you know, the bull market we think is still in place, because the real thing we have to do in the cattle market is make sure and not encourage liquidation. So we think the second half of the year the market stays strong. It's just a matter of what is really a fair market value if everything else kind of leaks a little bit lower. So it's not that we don't have a solid fundamental picture from here forward -- I mean the last half of the year -- it's just as what price.

Pearson: Let's talk about the hog market, Don. again, foreign markets, big on that one too.

Roose: Yeah, the hog market, you know, the export market is bigger on the -- than on the beef. And our export pace has been very strong. Of course, South Korea with their foot and mouth disease, was really -- you know, our exports the last month were up 170 percent versus a year ago to South Korea. So, a real strong market there. A little bit opposite of the cattle. The seasonalities are still strong on hogs until about the middle of May. And so the market when it pulls back, it continues to have some buying interest come into it. On our trading systems, we're still positive on hogs, although we had a big setback on Friday. So, the seasonal top may still be up ahead of us.

Pearson: Both cattle and hogs, are there hedging opportunities out there for producers? Can we make these operations all turn black ink?

Roose: Well, on the hogs you certainly can. I mean, farrow to finish still has some profitability. And the issue we have with the hog market is not that it's not a strong market; it's just that we built some big premiums in the market in those summer months, where you can get up to 102, 103, the cash has a long ways to go to catch up. So just from a basis standpoint, those are good hedging opportunities.

Pearson: I want to come back to something else you mentioned. Crude oil. Obviously most of the recessions that we've had in recent times the last thirty years have been driven by higher energy costs. As you look at crude oil as we go forward, some of the headline risk may be getting behind us for the time being. Could crude oil roll back some more?

Roose: Well, we think it can. But the a real problem, you know, because we're so dependent on world supplies. So, we think that's going to be the real issue. Does the world slow down on their demand enough to pull crude oil down, or does the developing countries get aggressive with purchases again. So, we think that is the issue ahead of us. But short term we're going to join the fund activity. We're going to believe that the market can continue to sink lower until we see the demand from overseas again.

Pearson: Got about ten seconds, Don. your thoughts on the gold market?

Roose: Well, the gold market is a market that is pretty bloated. It's bloated with interest rates that are exceedingly low. So it's a pretty crowded field. So you have to be very careful. Interest rates starting to go higher. Be careful on the metals.

Pearson: Don Roose, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Don on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson: And be sure to join us again next week when we'll examine prospects for "green" energy at a Midwest plant that's making renewable fuel from algae. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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