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Market Analysis: Mar 19, 2010: John Roach, market analyst

posted on March 19, 2010


Private analysts released their estimates for the 2010 planting season. Informa Economics is expecting farmers to plant 78 million soybean acres while Allendale puts the number just over 79 million. For coarse grains, the two groups were separated by nearly 2 million acres. Informa believes there will be 88.4 million acres of corn planted while Allendale's surveys indicate 90.2 million acres. The information pushed soybeans higher while coarse grains traded in a sideways fashion.

For the week, May wheat lost a little more than a penny and the nearby corn contract lost a dime.

Reduced soybean yields and fair weather in Brazil helped move nearby soybean contracts slightly higher. For the week, the April contract gained more than 35 cents, and the nearby meal contract rose by $18.90 per ton.

In the softs, cotton lost all of last week's gains and moved more than 88 cents lower.

In the dairy market, April Class III Milk futures declined nearly 29 cents and the deferred contract was down more than 30 cents.

Over in livestock, April cattle gained $2.87. March feeders were up $1.80. And the April lean hog contract gained 70 cents.

In other markets of interest, the Euro lost 221 basis points against the dollar. Crude oil lost $1.46 per barrel. Comex Gold gained $5.90 per ounce. And the Goldman Sachs Commodity Index lost almost three points to close at 522 even.

Market Analysis: Mar 19, 2010: John Roach, market analyst Borg: Here now to lend us his insight is our senior market analyst, John Roach. John, welcome back.

Roach, Thanks, Dean.

Borg: Cattle and hogs this week, am I right on this, new highs?

Roach: We made new highs in the futures on both cattle and hog futures as the market looks in general optimistic out into the future. Traders are looking at supplies being under control. At the same time we're starting to get some improved demand and making an outlook that is a positive outlook longer term. The movement has been good, the weather improving and so attitudes have turned more positive in the futures markets.

Borg: Before we talk any more about the meat animals let's go over into the grains and wheat because I was talking about the weather just a moment ago. We've already seen some effect of the weather on wheat plantings, haven't we?

Roach: Yes, last year the harvest was so slow in the winter wheat area that we didn't get some of the wheat planted that was anticipated to be planted and the smallest acreage actually since the early 1900s. So, one of the real questions coming up is what will we do with those empty acres?

Borg: Well, that's just what -- I'm going to ask that in just a moment. But what are the implications and how is the market responding immediately to this thinking ahead?

Roach: Well, the market this week is trying to figure out what are we going to plant on those extra acres that didn't get planted to wheat? We saw the reports from Allendale and from Informa. Just informally I've been out conducting meetings over the period of the last 45 days and I asked that question to every meeting and interestingly enough if I asked producers what will you plant if you had an extra 160 acres, about a third say corn, about a third say beans and a third have no idea. So, farmers I think at this early stage in the planting season really are trying to make up their mind. I don't think their minds are made up yet.

Borg: Well, what will help them make up their minds? What are they waiting for?

Roach: I think maybe number one will be weather. I think that from a profitability standpoint farmers tell me in most areas that corn might be a little more profitable than soybeans at current prices. But we are worried about getting everything planted in a timely fashion because it's so darn wet out there. We've got a lot of field work in the same areas that they didn't get the harvest done and they didn't get the wheat planted they also did not get all the fall field work done.

Borg: And that has some implications, though, for those who didn't plan to plant any wheat but they're going to be planting corn and soybeans. They're going to wonder where are those wheat acres going.

Roach: Well, that's exactly what the market is trying to figure out. So, we're seeing different estimates out. On the 31st the government will give us their first idea, their first survey, it will be the March 31st planting intentions report and that sometimes can be very surprising to the market as it was last year and the year before. But typically that's not really such a shocking report and it's also subject to change because on March 31st we're certainly not at any deadlines at that point, farmers can still plant something different from what they intend on March 31st.

Borg: We're looking ahead to corn planting but last year's crop has its own issues, doesn't it, in test weight?

Roach: Sure does. The producers are telling me across the entire Corn Belt, with the exception of perhaps the far east, that the test weight on corn is well below normal. We're hearing a lot of instances of 52 to 54 pound test weight when normal would be 56 and above.

Borg: Why is that important?

Roach: Well, what it does is it changes the quality of the corn. When you're measuring corn in a volume, as an example, if you're a producer and you're used to going out to the bin and you know that corn up to this ring, if you fill the bin to this ring that normally is 10,000 bushels when you measure that by volume it turns out that it's not 10,000 bushels when it's filled to that ring, that it's actually lighter in test weight and when you measure it over the scale you find out you have fewer bushels there than what you really thought.

Borg: So, what about the corn market now? What are the implications of what we've just been talking about on test weights and not as many bushels as we thought we had, implications for the corn market?

Roach: Well, there's really still some issue, some question in people's minds. Do we really have fewer bushels? Has the government really overestimated what our total supply of corn is? We're going to really hopefully learn more on the March 31st stocks in all positions report when the government gives us a reading of how many bushels are left out there in the bin now that we're six months into the usage season. So, hopefully we'll get an answer and there potentially is a surprising answer in that we had to use more bushels to get the amount of ethanol produced and the amount of meat produced because if you use lighter test weight and you're doing it, when you're doing the volume measurement it takes more bushels in order to get the same amount of alcohol or same amount of meat.

Borg: With all of those uncertainties and a report coming on March 31st, you said, what are you advising now for growers with the corn that they have on hand, still own?

Roach: We think that it's going to be very important to be an aggressive marketer of corn and soybeans this year, corn, soybeans and wheat for that matter. We think that we're headed into increasing surplus times. We already have seen that in the case of wheat, our wheat surpluses are the largest that they have been in some years, we're moving in that direction on soybeans. The anticipation for this fall, world soybean supplies, not so much in the United States but world soybean supplies will be the largest they have been in several years because we'll still have a lot of Brazilian, Argentine soybeans still ready, still available to the market at the end of August and we believe that although the corn supplies are estimated to be smaller this fall, this will be the last fall of those smaller levels. We anticipate bigger surpluses one year from now and so we think that the number one advice we have for producers is be aggressive marketers this year. We're no longer marketing in a tight supply situation. We're marketing in an increasing surplus situation and so we have to be sure to get the job done.

Borg: What are you seeing in South America? They are harvesting soybeans right now.

Roach: Yes, they're already well into the harvest in Brazil and beginning the harvest in Argentina and the crops in general are very good. In fact, record levels are being forecast in Brazil and expected to be in Argentina on very large acreage.

Borg: Not good news for U.S. producers.

Roach: It's not good news but it's not new news. We've known since November that South America was planning on raising a good crop and every report we've seen since November had indicated in fact they are raising good yields. So, we've known this now for some weeks and some months and now once we're actually into the harvest and we're seeing them busy harvesting soybeans it's old news.

Borg: Is a lot of that going on in the world market?

Roach: It's moving into the world market as fast as they can get it there. They will become the favored supplier of soybeans to the world as they normally are at this time and so -- the key producers should understand from this or take away from this is that they will still have beans next harvest. When we're harvesting our beans they will still have beans that they are supplying in the market. So, it's important to get sales made this spring on soybeans because there's going to be a lot of competition next fall.

Borg: That is the South American soybean marketing will be lagging into our harvest season here, is that what you're saying?

Roach: Absolutely. They haven't constructed lots of new roads, bought new trucks or built new railroads so as a consequence when you have big crops in the field you can only move it to town at a certain pace and that pace will have them continuing to load ships in November and December and January.

Borg: And just to reiterate, are you saying -- when you say aggressive corn and soybean marketers, are you saying get it sold?

Roach: Not today. We're not rushing to sell today. We think the market will inch somewhat higher here over the next 30 days. We think that we still have yet to play this weather worry out here. It's still a little bit early but we think that card is going to get played, we think there will be nervousness about getting the crop planted, we think that will give us a selling opportunity but the key here is that producers take advantage of that early in the selling season, the selling season we believe is March through June.

Borg: Let's hit cotton just briefly before we go to cattle and hogs.

Roach: The cotton market we've reduced acres in this country considerably. They are having some problems down in the southern part of the country, it's really a late spring so we think that market can do better as we move in here through the next 90 days.

Borg: Now, cattle and hogs you already said hit new highs. Beef demand is good, is that why?

Roach: I think it's firm. I don't know that I want to get carried away and say it's --

Borg: What's the reason for the new high then?

Roach: Well, the new high is that we've had some supply problems. The weather situation in the feedlot areas has been really dire, they've just had difficulty with lots of mud, lots of moisture where it tends to typically be dry, they've just had a wet year. And so the cattle are finishing slower and plus we've reduced numbers. As we saw in the cattle on feed report today we're down a couple percent here on what our numbers are and at the same time our economy is starting to improve and the weather in people country is warming up which creates some extra demand.

Borg: Extra demand, steaks on the grill.

Roach: Steaks on the grill, exactly.

Borg: For hogs?

Roach: The hog market moved up as well in the futures although the cash market didn't. The cash market really lagged here this week. We had a softer week. We think that's about the bottom of the cash market in the hogs and we think the market ratchets higher. Both cattle and hogs have a strong seasonal upward tendency this time of year and we think we're moving towards some higher price levels. So we think this peak in the futures that we made this week may be a short-term peak but we think we'll see higher levels as we move down the road.

Borg: What are you seeing on feeder cattle?

Roach: Feeder cattle prices have been hot. In fact, as we've had a lot of the profitability that was just coming into the fat cattle market turn around and be put right over -- they spent those profits over into the feeder cattle market so it's been very strong. Feeder cattle supplies are relatively tight. Our herd has just not increased, in fact, it's been reduced really for over a period of years and we've borrowed ahead and borrowed ahead and so when the demand picks up on feeder cattle, which it has, prices move up quickly.

Borg: On the beef market, is that -- you told me why, lower market weights and reduced numbers -- but how long is that going to last?

Roach: We think it can last for quite a while. Remember the livestock business has really gone through a wringer here over the period of the last couple of years and so we just have a reluctance to expand breeding herds. We have a hog and pigs report coming out at the end of the month, we think it's going to show a smaller breeding herd, maybe down two to three percent from what it was a year ago so we really think that the longer term implications in the next year to two years we're going to have stronger meat markets not only because of the improved domestic demand but also improved export demand.

Borg: And that holds for hogs then too?

Roach: It holds for hogs as well. In fact, there's a lot of talk right now that maybe we'll get that Russian business back that has not imported our pork for some time here and that that's coming back.

Borg: So, we look for increased demand even in exports for pork?

Roach: Absolutely.

Borg: Good.

Roach: We think that the outlook here for the livestock business is positive and the primary reason is because it was so negative for such a long period of time. Expansion will be very slow.

Borg: John, thanks so much, thanks for your insight. Well, that wraps up this edition of Market to Market. If you'd like more information from John on where these markets just might be headed you can visit our Market Plus page at our Web site. You'll find streaming video there of our program too and you can also download audio podcasts of Market Analysis and Market Plus segments. It's free of charge, you'll get it at our Web site. Before we go we'd like to remind you that we're nearing the end of fundraising here now on PBS. If you value programs like Market to Market and the comments you've just heard from people like John Roach then please consider phoning in a pledge and investing in a service providing you with accurate information and timely market analysis like you've just heard from John. And be sure to join us again next week when we'll be taking a look at the impact of the 2010 planting estimates that we've been talking about here. Until then, thanks for watching. I'm Dean Borg. Have a great week.

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