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Market Analysis: Sep 24, 2010: Don Roose, market analyst

posted on September 24, 2010


With lower export sales numbers and early reports of disappointing yields, corn prices had a wild ride this week. And prospects for better weather next season pressured wheat prices lower.

For the week, December wheat lost nearly 20 cents. After losing 30 cents since Monday, corn prices rallied, with the nearby contract gaining nearly a dime over last week.

With concern over weather conditions in South America and increasing demand there appears to be no stopping soybean prices. The November contract moved more than 55 cents higher, while the nearby meal contract gained $8.80 per ton.

In the softs, cotton flirted with the $100 mark as the December contract posted a gain of nearly $2.

In the dairy market, October Class III Milk futures advanced 30 cents, while the deferred contract moved 12 cents higher.

In livestock, the October fed cattle contract lost $3.38. Nearby feeders were off $3.18. And the October lean hog contract gained $1.32.

In the financial markets, the Euro gained 428 basis points against the dollar. Crude oil gained $1.57 per barrel. Comex Gold gained $18.80 per ounce. And the Goldman Sachs Commodity Index was up more than 7 points to close at 534.70.

Market Analysis: Sep 24, 2010: Don Roose, market analyst Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Don Roose. Don, welcome back.

Roose: Thank you.

Pearson: Good to have you with us. Let's talk about this. We've got wild commodity markets, wild grain markets. Let's start with wheat, pressure on wheat this week, obviously we've had some very sharp improvement in wheat prices this summer, obviously the situation in the former Soviet Union driving a lot of that which would lead us to bigger acreage worldwide for 2011. What should a wheat grower be doing these days?

Roose: Well, I think if you look at it you summed it up pretty well. After we had that spike in the early summer, you know, the last two months we haven't really gone anywhere. We rally up to some resistance levels and we'd lose demand, we'd pull back down under $7.00 and we find demand again so we're just chopping around. So, I think when you look at it from a producer's standpoint it should be a warning signal that we're buying the acres not only in the U.S. but around the world and so when you look at July wheat out around that $7.50 mark that is an attractive price and you can lock in some very good values as wheat turns.

Pearson: Absolutely. And with the idea that world wheat prospects could improve this year and certainly acreage could expand sharply including in many points the Midwest we could see more wheat in 2011 barring a weather problem.

Roose: Well, exactly. We've seen this before. It's kind of a repeat of 2008. We had big spikes and then we found the acres and we went lower and the Canadian crop looks like it's bigger, it looks like we're going to have 3.9, 4 million more acres of winter wheat, or wheat next year. So, just like we're talking about we are buying the acres around the world and bigger acres if we get a decent weather we could have some big carryouts and the last world supply and demand report, remember, the world ending stocks went up three million metric tons when the trade thought we were going to go lower.

Pearson: All right. So, that's a pretty hardcore number too, the world estimate so we kind of know where we are, it's just a matter of maybe transplanting where that demand comes from or where that production comes from?

Roose: Yeah, you know, what we're really trying to do is we had a shortfall obviously in the FSU and we're trying to switch those exports to other countries the U.S. being one big one that has to pick up the slack we're trying to do that but at the same time we're very competitive in the world market but we're struggling to get the job done.

Pearson: All right. Well, it will sort itself out eventually but some good opportunities for producers. You'd take advantage of that $7.50 July contract.

Roose: Oh, most definitely. I think when you look at it in the big perspective of things you're sitting at the upper five to ten percent of these grain markets and those are opportunities not to let it get away eventually.

Pearson: All right. Let's talk about the corn market where we've had this big rally. A lot of the acreage numbers -- this is anecdotal, shouldn't base your decisions on this but some of these early numbers on the corn that we've been seeing have been not disastrous but disappointing. What is your take? What do you think the government is going to do? We've got another report coming out in October. So far, all the news has been fairly negative. The Informa number certainly backs that up.

Roose: Yeah, it does and I think historically we've got a short crop and what it means is small crops get smaller, big crops get bigger and this is a smaller crop and so we anticipate that the crop is going to ratchet lower not only in the October report but probably the November report then we'll have the final report to look at in January. But that is the path that we're on and we've seen some very low numbers down in the 158 1/2 by, like you're saying, Informa. A lot of these numbers are dialed into the market and that is the thing you have to be careful of, you know, how much news is dialed in.

Pearson: Don, we used to say, short crop long tail. Is that still true today?

Roose: Oh, most definitely. I think that is what we have, a short crop, a long tail and then remember, don't get whipped by the tail. That is the final thing. So, you put the top in right when you should be putting the normal harvest low in and then you drift lower the rest of the year and the reason we think that probably could happen again this year because you push up to levels where you do figure out how to ration demand, you do figure out how to buy world acres and consequently the market just kind of drifts and we did that in wheat and we'll see if we do it in corn.

Pearson: All right. Let's talk about hard numbers here. Do you want to make sales here on corn?

Roose: Well, I think the big thing when you look not only this year but next year there's some very good things you can do but we know that the job of the market right now is to try and figure out how to ration the lower crop, the smaller crop that we have. So, we think March corn between $5.50 and $6.00 is a big rationing number so you're not that far away from it. That doesn't mean that you can't go a little higher than that or fall in that range. So, again, you're at the upper five to ten percent of the historical ranges and that makes sense not to be on further sharp spikes.

Pearson: Do you want to sell 2011 corn at this point?

Roose: Well, we're always telling people to be careful to sell a crop only if you can lock in the inputs at the same time. So, if you can lock in the inputs these are some good opportunities. Now, if you can't lock in the inputs you can use some risk management using options that are very good.

Pearson: All right. That's a good point. We are seeing an increase in a lot of the inputs. We had oil up this week and we've seen fertilizer certainly on the rise, seed costs have been rising partly because the technology that is being added to every bag but if you can lock in inputs you would do it today, you'd make some sales.

Roose: Oh, definitely because you're profitable and the number one thing we have to remember in all of these markets how quickly they change. Funds are record long and if things change in the big picture of things the market can skid lower so certainly protect yourself and lock in profitability when you have it and it's here and that's when you start to look at it.

Pearson: A lot of us still remember 2008, Don, and those funds just kept coming in.

Roose: They kept coming in but eventually they all came out and remember, by the time it was all over after $8.00 corn we were down at $3.00 corn in December.

Pearson: That's well said. Let's talk about -- we've talked about wheat and corn, now the soybean market. Obviously this is a huge demand market too but we're at $11.00 soybeans. I'm 53, Don, I haven't seen $11.00 beans that many times. Be tempted to sell a few.

Roose: Well, I think the big thing is because it looks like we're going to have a sizeable crop in the United States and what the market really is doing is focusing on the strong demand that we have, particularly out of China, they just haven't given up, probably bought a million tons of beans this week again but we're afraid of a La Nina year in South America and Brazil particularly that we could have a dry weather pattern at some point in time so we're pushing more risk premium into the market. But the bottom line is these are areas between this area and $12.00 that are good opportunities to make some sales.

Pearson: All right. Again, are you in a hurry to sell next year's crop at all if you can lock in the inputs?

Roose: I think if you can lock in the inputs when you're zeroing in on $11.00 those are pretty hard numbers to achieve over time and so I think you have to say yes. When you look at it we really have agflation, the rest of the world is kind of stagnant so that is the thing that you are concerned about if you don't.

Pearson: Agflation is interesting, we've seen that before in my lifetime. The movie didn't end well. We don't seem to have the financial pressure that we had back in the late 70s, early 80s when there was so much borrowed money, so much borrowed money on real estate but there is a concern about what happens with ethanol, for instance, as corn. Has that dialed into this market with these prices on corn? Obviously soy based biodiesel has gone away and it can't seem to come back.

Roose: And that is what you have to be careful of because we know that probably the -- livestock probably doesn't ration as much as it needs to down the road but you can still have a lot of rationing from the ethanol sector, you could lose two to four hundred million bushels pretty easy from inefficient plants if the market keeps spiking up. So, there's some real concern that you can have up there. Of course, it's the dynamics and you have to work on it every day.

Pearson: Absolutely. All right, as we look ahead and I want to come back to soybeans and soybean demand -- the situation in South America, that weather issue down there, how concerned do you think the market is about this? Is this going to be another leg up for beans?

Roose: Well, I think it was a focal point this week but I think we're probably dependent on the weather but the forecast as we go home tonight what it really looks like is over the next ten days we're improving, they are going to get off to a fairly decent start. Argentina is about 13% planted on their corn so, so far no problems and we'll just have to monitor that week by week.

Pearson: Cotton almost to a buck a pound. Where is that going? That's going to be part of this acreage mix is it?

Roose: Yeah, it most definitely is and that is where we're at is we're battling for the acres and I think what we're doing in the cotton perspective we're buying acres not only in the U.S. but around the world so you have to be very concerned that the cotton at these areas long-term is probably going to be hard to sustain itself.

Pearson: You mentioned agflation and we've certainly seen it. What about goldflation? Where is that going, Don?

Roose: Well, you know, I think the problem is interest rates are just plain to low and so you've got too much interest coming into some of these products and who knows where it goes but I know one thing, that if any of these moving parts change interest rates start to go up which eventually that is the case. It's just a matter of when down the road. Then gold doesn't look so attractive. So, remember, all the stuff that turns a commodity bullish eventually the same news turns it bearish.

Pearson: Well said. All right, let's talk about the livestock market. A lot of hits this week on the board as far as fed cattle are concerned. Obviously the feeder market got hit with a jump in this corn rally but talk about the fed cattle market, Don. How concerned are you about the fed cattle market? It's been a good one. We've had a nice recovery and these cattle feeders, these hog producers, these dairymen, these poultrymen, these egg producers they're getting clubbed here with a surprise in this corn market. Is there some relief for the cattle guy do you think?

Roose: Well, you know, we think the overall fundamental supply demand balance table on cattle is positive, it's just that now you've got to manage your input costs extremely well. Remember each 50 cents that corn goes up that equates to $4.00 a hundred weight break even. So, there are some dynamics that you have to keep track of. But, yeah, we think the cattle market is silent and it's just a matter of what level does the consumer run into some real resistance and 104 to 105 on deferred cattle look pretty pricey.

Pearson: And it does look pretty pricey but, again, if you're looking at $5 corn and meal that has jumped up and the inputs that are rising that's about what it's going to take. Do you see any expansion in the cow herd, Don?

Roose: No, in fact, that is the real bull story underneath the overall cattle market. Our calf herd is now about 420,000 head smaller than it was a year ago. We're at the smallest numbers since 1950. The numbers just really aren't there. That's not the problem, it's just a matter of the demand and with the pork at these lofty levels the pork beef supply demand balance table beef looks very attractive.

Pearson: So, we're going to pause our story there. Ranchers not expanding so, again, a bullish story longer term on the feeder front. You mentioned hogs. Where are we going there -- we did shrink the herd, we've had good demand and this international demand seems to be strong.

Roose: Yeah, the hog demand is strong. Part of that is the dollar continues to push lower. The real key on the hogs is the higher priced grain probably did slow down some potential expansion down the road. We've got some big premiums in those back months too, Mark, and if you look at it from the farrowing intentions we're gradually ramping up, we're probably going to have slaughter over a year ago by the time we hit next spring and summer and remember we had June hogs a year ago went off the board around 78, you know, right now they're sitting around 84.

Pearson: Yeah, it's been a good change. We're maybe putting some equity back into some of these livestock operations, particularly the hog guy. Speaking of equity, Don, where do you think we're headed in the general economic front? You watch this, it's going to have an impact on our commodity prices. The National Bureau of Economic Research -- this is a group that a lot of people joke about because they tend to be the last ones to say that the top is in a market and the last one to say there's a bottom in, they are say, as we mentioned earlier in the show, the recession ended last June. Are you seeing signs of that? Are we seeing this consumer maybe start to pick up a little bit, maybe a little better attitude?

Roose: Well, I think on the beef sector there's no doubt that we've had better demand than you might have thought and the same thing on the pork sector so I think probably the best thing we can say is we are starting to unthaw a bit. I think people are still pretty cautious in taking on a whole lot of risk at the present time until they see more positiveness. But maybe unthawing right now.

Pearson: All right. Well, that's certainly a step in the right direction, Don, and hopefully it's going to lead to more beef than pork demand as well as demand for all of our agricultural products. But that is all the time we have. I want to thank Don very much. That will wrap up this edition of Market to Market. If you'd like more information from Don on where these markets just may be headed visit the Market Plus page, it's at our Web site. You'll find expanded market analysis, audio podcasts and, of course, streaming video of our program and the price is right, it's all free at the Market to Market Web site. Of course, join us again next week when we'll examine innovative efforts to associate a farmer with your food. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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