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Market Analysis: Jun 18, 2010: John Roach

posted on June 18, 2010

Favorable export numbers this week and wet conditions in Canada fueled a rally in wheat prices.

For the week, July wheat gained 21 cents and the nearby corn contract was up more than 10 cents.

Soybeans followed the coarse grains higher with the July contract gaining nearly 15 cents, while the nearby meal contract declined 30 cents per ton.

In the softs, cotton traded in a sideways fashion with the December contract gaining a penny.

In the dairy market, July Class III Milk futures gained 18 cents, but the deferred contract lost 17 cents.

In livestock, June cattle lost 20 cents. Nearby feeders were up a dime. And the July lean hog contract lost 78 cents.

In the financial markets, the Euro gained 287 basis points against the dollar. Crude oil advanced nearly $3 per barrel. Comex Gold traded in record territory again this week and settled Friday with a weekly gain of $28 per ounce. And the Goldman Sachs Commodity Index gained nearly 20 points to close at 511.25.

Market Analysis: Jun 18, 2010: John Roach Pearson: Here now to lend us his insight is our senior market analyst, John Roach. John, good to have you with us.

Roach: Thanks, Mark. Nice to be back.

Pearson: All right, let's talk a little bit about what's happening in the world first and foremost. Obviously we've talked a lot on this program about the situation in the Gulf of Mexico and BP which seems to be acting as a little bit of a drag on a lot of markets. But the European markets, the euro strengthened a little bit this week. What is your take on what's happening over there? They are critical buyers of our products.

Roach: Well, the European market has worried us really for a period of several months, since back before year end and now this week we're less worried. That worry maybe has about run its course from my way of thinking about it. We've seen the credit ratings downgraded, we've worried about the various countries in southern Europe that have been having economic problems, difficulties and so forth and you can only do that about so long and then the market will have adjusted for it and so unless there's some kind of shocking new revelation I think the market has adjusted for that and I think the strength in the dollar this week showed -- the weakness in the dollar this week showed that we were less worried about Europe. My hope is that we stay a little less worried because that's what is important to see economic growth around the world is we have to take away some of the worry.

Roach: On the positive side, the brick countries, China, India, Russia and Brazil, they are all doing well particularly China doing well. Who would have thought a year ago or a little over a year ago in the midst of the economic crisis that China would be growing at 11% now? The growth in Brazil is excellent. India is growing. So, what we're seeing is we're seeing the economic powerhouses that were leading the world economy or those powerhouses were leading the economy back in 2007, 2008. If we take away the anchor that Europe has provided the economy will start to improve.

Pearson: All right. So, pretty good global outlook then as far as you're concerned. You mentioned China demand. Obviously weather is going to play a part in their crop. Demand, I know that's been something that we'll talk about in our segment when we talk about corn, but generally speaking good overseas demand, can those countries kind of power a continued recovery for the global marketplace?

Roach: They were what led the strength in the economy back in 2006, 2007. They were the powerhouses and they went through this economic debacle that we have all faced and really have come back out the other side of it in fairly good shape. So, if we can just, again, quit worrying about the economic problems in Europe and now the problem is that we may well have to face economic problems in the United States because as we see every night on the national news the disaster in the Gulf, unemployment numbers still problematic, we still have some problems, we have states that are in severe economic problems here in this country. So, what we may well do is we may well replace the economic worries in Europe with economic worries in the United States.

Pearson: All right, well let's talk about what is worrying producers right now. Let's talk about the wheat market first. A little bit better week. As you pointed out in previous visit with us there's plenty of wheat in the world but a little bit of an up move this week.

Roach: Well, this week we worried a lot about the wheat crop in Canada. The crop, a good chunk of it is still left to be planted. The Canadian Wheat Board cut their production estimates and suddenly instead of building surpluses in the world, which is what the government told us on last week's report, now the likelihood is surpluses will actually be becoming smaller in the year out ahead. But we have to be careful to understand that the total crop in Canada is about 26.5 million tons and if they were to lose even half of that crop world surpluses are still plenty adequate. So, we can't get too excited about the distance that wheat could go. The fact is we generated a sell signal for our clients yesterday and we'll continue to sell the strength in wheat getting as many bushels sold as we want to get, as the customer wants to get sold prior to harvest.

Pearson: John, let's talk about the corn market. So, you've got a sell on wheat. What about the corn market? What do you see happening there? Some disturbing news from the EPA, from the Department of Transportation about the acceptance of E-15 happening this summer. We were assured by Secretary Vilsack a couple of weeks ago on this program that he felt that was a done deal. Now there seems to be some roadblocks. So, we may not see that demand emerge like a lot of people had thought we would see. How concerned are you about the corn market and production in 2010?

Roach: Well, we think production is off to a very good start. The state-by-state ratings are as good as they have been since 1994 so we have a very good start to the crop. We have too much moisture in some areas but most areas have moisture that will support a very good yield. We need to be a little concerned, of course, about the La Nina potential and drier weather out in the future. But right now two weeks of dry weather would be a blessing for a lot of people. So, we think we have a big crop on the way but at the same token we have very big demand as well. We think that we'll have an opportunity this next week. We don't have a sell signal on corn today but we think we'll have one early next week and we'll want to sell the rally next week and expect lower prices into the fall. We think we're having particularly good opportunities to sell 2011 crop. We traded today as high as $4.15. We traded in the $4.20s on 2012 corn. We think those are very good sales opportunities and we think farmers need to be selling next week.

Pearson: All right. Let's talk about soybeans and what you see happening in the bean market.

Roach: We have a sell signal on beans, started on Thursday. We think that the strength in the bean market is being caused by the weaker dollar, by concerns about canola planting up in Canada, the South American farmers are a little tighter holders than they normally are. They still hold a bigger percentage of their crop than they normally do at this time of the year. There is plentiful supplies on soybeans but they are in relatively tight hands. U.S. farmers, when the price gets boosted they'll sell but until it does they don't. So, we're a seller of soybeans here now again thinking that we're nearing the summertime peak and looking for lower prices into the fall.

Pearson: All right. So, again, sell signal it looks like on soybeans, maybe one next week for corn, you've got one on for wheat right now.

Roach: We're selling wheat, we're selling corn, we were on Thursday and Friday, selling wheat and soybeans. We'll likely be selling corn as well next week.

Pearson: Let's talk about livestock. What do you see happening in fed cattle?

Roach: The cattle market is having a tough go. We had a cattle on feed report showed placements up 23% from a year ago. They were small a year ago so that's a little bit of a bigger percentage but it's still substantially above the five year average. The marketings were down I think three or maybe four percent this last month. That is a disappointment. On feed numbers slightly above a year ago. But the trouble is demand. The dressed beef market just tanked over the period of the last few weeks and demand continues to be puny even though we're marketing fewer numbers of cattle. So, we need some economy recovery in order to help the beef business.

Pearson: What do you see, what are your price parameters for 2010 on beef?

Roach: Well, we think in general that the market should do better as we see economic recovery. But the slowness of this economy to stage a recovery, the continued bad news on the nightly news, that's just really putting a drag on the beef business. It's not the supply issue, it's a poor demand period of time.

Pearson: Let's talk about hogs, John. What do you see ahead there?

Roach: Well, the hog business we have smaller numbers, demand has been better for pork, export demand has been better for pork, the market has staged a little bit of a rally. We think if we can get a rally in the market another three to four dollars we'll be hedgers but at the moment we're not, we're just kind of patiently waiting. As we move into kind of the hotter days of the summer it should slow the numbers and tonnage down just a little bit and we think it will push, the market will push higher and we'd like to hedge the market on strength here over the next 30 days.

Pearson: All right. So, the hog market longer term do you feel better about that as we've gotten our house in order on the supply side and maybe the world market you were talking about earlier might help us?

Roach: Feel a lot better. We actually, pork prices here for 2010 have been very strong historically speaking. We think that it will take a lot of ongoing profits to get anybody to expand in the pork business. It was such a blood bath for so long and we lost so much equity out there in the hog business. We think people will be very reluctant to expand and so we think we're into a long running period of profits in the pork business.

Pearson: John Roach, thank you so much, our senior market analyst joining us this week. That will wrap up this edition of Market to Market. If you'd like more information from John on where these markets just may be headed visit the Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts, streaming video, everything and it's all free at the Market to Market Web site. And, of course, join us again next week when we'll examine prospects for El Nino yielding to La Nina with climatologist Elwin Taylor. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news wheat