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Market Analysis: Jan 29, 2010: John Roach

posted on January 29, 2010

Grain prices continued the freefall they began two weeks ago, when the Agriculture Department's annual crop summary awakened hibernating bears. For the week, March wheat lost nearly 25 cents while the nearby corn contract declined more than a dime.

There were more sellers than buyers in the soybean pits this week as well, where the March contract lost 36 cents, and the nearby meal contract was down nearly $12.50 per ton.

In the softs, cotton trended lower again this week with the March contract posting a loss of $1.75.

In the dairy market, February Class III Milk futures declined 8 cents, and the deferred contract was down 81 cents.

Over in livestock, February cattle lost $1.30. Nearby feeders were down $1. And the February lean hog contract lost nearly $4.

In other markets of interest, the Euro lost 240 basis points against the dollar. Crude oil fell nearly $5 per barrel. Comex Gold declined nearly $30 per ounce. And the Goldman Sachs Commodity Index lost more than 25 points to close at 486.40.

Market Analysis: Jan 29, 2010: John Roach

Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, good to have you with us.

Roach: Thanks, Mark.

Pearson: A lot of things happening out there in this global economy. Obviously foreign exchange is a big one. It wasn't that long ago where everyone was talking about the weakness of the dollar and the strength of the euro, and now it's flip-flopped, John.

Roach: Well, people are starting to look at the indebtedness that governments have put on around the world, and what they're starting to realize is that you compare the debt of a particular country to their GDP, suddenly the United States is not in as much debt as a lot of these other countries. And a lot of European countries, Iceland leads the whole bunch, and as people take a look at that situation, suddenly the dollar is not as weak in their minds. It's maybe a little more secure than what we thought maybe a few months ago. The big difference is that we already faced a lot of this criticism, a lot of this discussion. As I say, talking about the U.S. dollar has already faced that. Whereas other countries, it's like we're now just really learning how bad their debt situation is.

Pearson: And as we've seen that dollar strengthen, we've seen commodities under pressure. One of those that we don't track as regularly, maybe we should more, is certainly gold futures and what's happening in the gold market. Is that starting to chill some now too?

Roach: it's chilling some but not as much as what one might think. Gold has become its own currency, we think. It's – it is a store of money, as we've always known, but it's also freely traded. And so it has not suffered by the kind of percentage as some of these markets have.

Pearson: Let's talk about some of the markets that we deal with and, of course, all the grain commodities. Let's start first with wheat. You know, wheat really fewer acres in that USDA report. I guess plenty of wheat around the world; is that still the story?

Roach: Plenty of wheat around the world, that's exactly right. Now, we do have a little bit of positive news in that the former Soviet Union countries who had been aggressive sellers, they're getting down to the lower side of the bushels they have available for sale. We did reduce the planted acreage for the winter wheat. Surprisingly small acreage planted this year. And we are looking out forward and we see numbers able to improve next year. But for the moment, we're dealing with a market that's struggling. Export sales were good this week, best week we've had I think all season. So we are getting some better news, but we still are dealing with very big inventories that will still be in the bin when we harvest our first bushel in the spring of 2010.

Pearson: All right. Sales strategies for wheat, John?

Roach: We're on the bottom side of everything. All of these markets – grain markets have all fallen down, and we're just not much interested in making any sales. We think that everybody is looking at the worst news now, and it was just a few weeks ago that we were looking at better news. Although the numbers have changed, they really haven't changed enough to justify the kind of decline that we've seen. So we think that in the case of wheat, we've seen the worst numbers. Now we have to raise a crop. And we think that that will be troublesome and we'll have better opportunities to make sales.

Pearson: All right. You mentioned same – all the grains. Same thing on corn. Obviously the USDA turned out a little bit bigger report than what was expected. And the year, really it's not all that different from a year ago. What do you think? We're just -- with the negative news, the crop report, and the strengthening dollar, this just is all combining in these commodities?

Roach: Yeah, they're all coming together at the intersection at the same time. And remember, we were on a bit of a bubble in the equity market as well, where we'd seen stocks move drastically from 2009 from March to the end of the year. So really everything out there is sagging. All different investment vehicles are sagging, and nearly all are sagging here in this environment.

Pearson: All right. So no sales on corn. You're going to wait for better opportunities to –

Roach: We're going to wait for better opportunities. And the news on corn is that the ethanol business is about as profitable as it's been all year long. We have seen better numbers. Most everybody thinks that the ethanol consumption of corn will be bigger than the current estimate. Our exports, which were very slow, we're finally about the only store in town for corn exports for a little bit. We've seen that market pick up, and now we think we can actually meet the export expectation, maybe even exceed them a little bit. We also think that this light test weight that farmers told us that they found when they combined their corn, it didn't show up on the USA stocks report really. USDA didn't really see the light test weight. But when they get their March stocks – position report, we may find that that corn, there's not as many bushels in the bin as we anticipated, which would imply increased feed rates, although it would actually be the test weight issue will show up probably in March.

Pearson: That's right, as a result of more consumption. I was up in Ipswich, South Dakota, last week, John. I was going up Interstate 29 to Sioux Falls. I saw corn still on both sides of the road. They tell me it's still worth something in North Dakota, so we still have that issue too.

Roach: We still have that issue but some of that corn is getting reduced out there. It's not been managed appropriately. We've all seen pictures probably circulating on the Internet of piles of corn and the damage and so forth that's occurring. And what it really says is that we need more infrastructure built. We're going to be raising big crop, and so as farmers are thinking about what they should be doing this winter, they should be getting their storage needs taken care of.

Pearson: Good point. Soybeans, no sales there either?

Roach: Bean market, the same kind of situation. Now, the difference there is that demand has really been surprising on beans. We outstripped all the projections as far as the crush is concerned. The December crush was a new record crush level. Our exports are way ahead of where we should be and we know that it's been front loaded and quite a bit front loaded to China, but we're also seeing China taking more than we anticipated. So we have to kind of come to some kind of a conclusion: will the Chinese continue to feel the amounts of protein and produce the amount of milk, meat, and eggs that they're doing? We think that they will. We think that the Chinese fear of having food shortages in their country, I think they got a little worried about that when we got tight on supplies here in 2008, so we think that demand is still good.

Pearson: All right, so good demand going forward for soybeans. South American crop is still pretty strong, John.

Roach: Well, we hear estimates of all the way up to 65 million tons, but there are some that think that that's too big of an estimate. We're starting to see some little small ones, but still a very big crop in South America. And really we should be thankful that we have a good crop there because we need to keep the demand fueled, otherwise we'll lose it. So it's actually a positive thing long term.

Pearson: Let's go over to livestock. Fed cattle market, of course we'd had some weather issues out there. We've had a good demand for feeder cattle with all that wet corn that you alluded to, so that's another factor out there. But fed cattle 2010, what do you see?

Roach: We think that market will do better over time. We're struggling right now in the meat market with demand, but we think demand will be better. We think the exports will pick up. The current USDA forecasts are for higher prices as we move out forward. We think that's exactly what producers should be expecting. Actually if you look at the livestock crush, the cattle crush, we actually are in somewhere in the 60 to 80 percent of the best profit margins we've had if you look at the board values, feeder cattle, corn producing fat cattle. So watch for opportunities to buy replacement cattle. We think the business is good going forward.

Pearson: All right. John, your take on the hog market as we go forward in 2010?

Roach: We think the same thing for hogs. We think that the hog market has seen the worst, but this past week was tough. We lost big money in the cutout values. We lost some big money in the live markets. We just got the market profitable for producers and took it right back away from them. So we continue to see producers struggling and trying to figure out how they're going to hold things together as they go forward. That keeps expansion from occurring. That's kind of positive news but at the moment we need to get the demand picked back up, and we're struggling getting that done.

Pearson: Cattle, hogs, poultry, dairy. Is it a good time to be buying feed?

Roach: It's a good time to be buying feed. We've been talking that way here for the last couple weeks, a little longer maybe. Accumulate on the downward market. We think now is the time to get that job done.

Pearson: All right. Of course, do whatever you can on the board.

Roach: We also think you should be buying fertilizer too. We think fertilizers prices are down in kind of a low ebb in here.

Pearson: All right. So maybe a good time to take advantage of the input purchases out there. John Roach, our senior market analyst, it's always good to have you with us, sir. Thanks so much for joining us.

Roach: Thank you very much.

Pearson: Well, stay with us. If you'd like to get more information from John on where these markets may be headed, be sure to visit the Market Plus page at our Web site, where you'll find streaming video of our program. And, of course, you can also download audio podcasts of our market analysis segment and the bonus, Market Plus, absolutely free at our Web site. Join us again next week when we'll take a ride on the Fresh Express, a unique train route connecting farmers and consumers from coast to coast. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices markets news