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Market Analysis: Aug 14, 2009: John Roach, Senior Market Analyst

posted on August 14, 2009

Prices rallied somewhat towards week's end but not enough to erase previous losses.

For the week, September wheat lost nearly 8 cents, while the nearby corn contract was down 3 cents.

The report had bearish implications for soybean prices. For the week, the August contract lost 85 cents but the nearby meal contract gained $5.50 per ton.

In the softs, cotton trended lower this week as the December contract posted a loss of $1.30.

In the dairy market, Class III Milk futures traded sideways again and ended up with a weekly gain of 5 cents.

In livestock, August cattle were up 80 cents. Nearby feeders were off 65 cents. And after losing more than $7.00 last week, the August lean hog contract eked out a gain of 32 cents.

In other markets of interest, the Euro lost 2 basis points against the dollar. Crude oil was down nearly $3.50 per barrel. Comex Gold lost $8.60 per ounce. And the Goldman Sachs Commodity Index lost more than 16 points to close at 450.15.


Market Analysis: Aug 14, 2009: John Roach, Senior Market Analyst

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

Roach: Thanks, Mark.

Pearson: Well, just continuing volatility, a big wait for the government's crop production report and what that was going to foretell and now we have to wait again for September for another report to come out. So, we'll start tracking that. Your reaction to the August report generally, John, as you look at what the USDA had to offer us?

Roach: Probably the biggest surprise to producers was when they re-looked at the acreage, they re-surveyed the corn acreage, they didn't lose any. They left the planted acreage the same as it was although they did reduce the harvested acreage by a couple hundred thousand acres. That surprised producers because producers particularly in the eastern part of the belt felt that some corn did not get planted that was intended and so they had counted on that report showing smaller acreage and had hoped it might give a little bit of a pop to the market but that isn't what happened.

Pearson: No. Let's talk just globally about what is happening. We heard tales of China selling soybeans. We see a gold market that is starting to soften up a little bit, energy prices that have been under some pressure. Are we starting to see these things starting to come together for this global economic recovery? Are we starting to see that now?

Roach: Well, what we've seen happen in the commodity business, you see it more over in some of the metals, the industrial metals, copper and other industrial metals, are all up sharply from where they were as China and others have inventoried, primarily China, and stockpiled in anticipation of an economic recovery. The question now is will we get that economic recovery in the United States because we're the marketplace for a lot of the finished goods that come from those raw products that China has been buying and importing and the jury is still out. As you saw earlier in the show our economic indicators this week really weren't all that shiny, they're pretty dull really, not very much in the economic news that is very positive at this point.

Pearson: So, with that in mind and with what is happening in the markets and the volatility we've had in the commodity markets, we had all that fund buying, we have all those new investors coming in a year, year and a half ago, are they starting to reappear? There's been a lot of talk about the impact the index funds are having on commodities. What are your thoughts on that?

Roach: They have never left. Index funds actually have grown really over time, maybe not in each individual market, but in general those index funds have been adding positions. And one of the concerns that we maybe have not talked about that is going to be facing us is what will the CFTC do with those index funds? Currently an index fund is considered a hedger in the marketplace because they are offsetting the risk that they have in their investment portfolio, they are selling people the right to own ownership of basic commodities and so they have to offset that risk so they come to the futures market and purchase the same number of contracts or tons of whatever they are selling to investors. And that has allowed them to have a hedging designation which allows them to own as many contracts as what they need to own. The problem with that is there are speculative limits in merely all of our markets. Those speculative limits are designed so that one individual or perhaps a group of individuals working together can not corner a market and distort prices beyond where they really should be. However, with the index funds not being subject to those speculative limits it theoretically allows a large pool of people to literally own a substantial piece of the market and to very much distort prices. The government is investigating whether that occurred in the energy markets last year and they are looking for a solution to make sure that that doesn't occur. Where that is important to agriculture is that about 40% of the ownership in the hog market, about 38% of the ownership in the cattle market, 40% of the ownership in the cotton market, 25% to 28% of the ownership in the beans and in the corn and about 40% in wheat is owned by index funds. So, if the government comes in and decides that we're going to force them to reduce the size of their positions that will be selling coming into the marketplace. So, one of the issues that is going on as we see China and other people building inventories, we have the index funds building inventories and we have the government about ready to address that whole issue.

Pearson: So, index funds could be very price sensitive to us if they force those funds to reduce their positions and make sales. Let's talk about the wheat market and what you see happening there on the USDA's report. Based on what we saw there appears to be plenty of wheat out there and plenty of wheat worldwide?

Roach: Plenty of wheat, exports on wheat are really sluggish right now, we're way behind the pace that we were over the past couple of years at this time of the year. However, the wheat marked acted like it bottomed a little bit today. It was the only market that was able to independently move back higher. So, we have big speculative short interests, about 35,000 contracts by the professional speculators, the funds that are short, that's a huge position. Again, they are waiting to see what the CFTC does about this index fund situation and that has pressed the market clear down into the hole. We think demand will start to rebound and we think the wheat market will have some better days ahead and so we're thinking we're just at the end of the harvest bottom, if you will.

Pearson: Let's talk about the corn market. Obviously the USDA is convinced this is a huge corn crop out there. Weather wise not a whole lot really can be done except an early frost I suppose at this point because of the maturity level of the crop. What is your take? What are you telling producers right now?

Roach: Well, the market stabbed up here a couple of weeks ago and we sold into the market. We didn't get as many days to make sales as we hoped to have but we think rallies need to be sold. We think that the crop is a large crop and we think that the demand estimates that are out there are actually a little too big. The government is currently estimating about 230 million bushels more corn or corn equivalent if you look at the byproducts of ethanol will be fed to livestock this upcoming year and we think the livestock numbers are going to be down, not up. We think the feed demand will be down, not up. It could be we could have maybe a little more usage into ethanol and depending on the economy that will really tell the tale as far as exports are concerned. But our concern is that the market has not yet put in its harvest lows, that we will have a harvest low and so any bounces we get in the price we'd like to make sales.

Pearson: Longer term corn based on this report and supply and demand going into '09 and '10 if we hit these numbers we're boosting carryout quite a bit.

Roach: We're going to boost carryout quite a bit, that's exactly right. The biggest numbers will not be seen this year, they will be seen in 2010 in all likelihood. So, we think that the market made a peak, by market I mean corn, wheat and beans, all made a peak last summer. We came back and tried to get to exceed those peaks this summer, we were unable to do so even though we had a substantial weather problem in South America and we had weather delaying planting in the U.S.. We think that we're on the back side of this big mountain, last year was the peak, we think the valley doesn't come until the fall of 2010. So, from a longer term standpoint we think that the markets on strength need to be sold, we need to have good selling programs set up for the next spring to be able to take advantage of weather problems but in general prices are going to ratchet their way lower as the livestock producers reduce the amount of feed that they are feeding and as corn producers increase their supplies.

Pearson: The same story for soybeans, obviously a big number in there and big acreage and a big crop on tap in the face of, like you say, a global economy that is by no means well.

Roach: Well, the soybeans have a little different positive factor going for them. The South Americans lost about a billion bushels. If you look at the September forecast of 2008 to the most recent forecast they are down about a billion bushels from what they planned on soybeans. So, that means our supplies are very tight right now because they are basically out and we don't have our crop ready yet and the supplies are likely to be somewhat tight until we feel comfortable about the South American crop coming up. But the South American crop is expected to be very large, a new record this year and so if weather cooperates and they are able to get the kind of normal yields that they have seen in past years then we'll be into soybean surpluses here six months to a year from now.

Pearson: Okay, so plan accordingly, use the rallies as best you can. What are you thinking for a harvest low? Are we going to have a conventional harvest low this year for soybeans?

Roach: That's what I'm expecting. I think we will see a harvest low as we're busy out running the combines and price wise -- the thing I suggest to my customers is to not have preconceived price in mind, just expect to see the low ebb come at harvest time.

Pearson: Let's switch over to livestock. You talked about reduced feeding, you talked about liquidation in poultry, dairy, pork and beef, it's all been occurring, hopefully near-term we're working our way through this mess that we've got ourselves into and particularly on the dairy front it's been such a disaster and on the hog front, a lot of tales of tribulation out there for the handful of independent producers that are still out there and for that matter the large integrators. Let's talk about the fed cattle market first. What do you see ahead for the balance of 2009 going into 2010 for fed cattle?

Roach: The cattle business is on a little better footing than the other two and so we expect the cattle market to show some improvement as we move through this year and on into 2010. We don't see drastic improvement but exports in the month of July were better, up from a year earlier. We see futures prices showing some premium, it's causing us a little problem right now because people are holding for heavier weights. But in general we see a cattle market that has a little brighter light out there. If you look at the cattle crush which is a way of comparing feeder cattle, corn and fat cattle prices out forward the cattle crush is in 80% to 90% of the best levels it's been in the last nine years. So, there's better opportunity out there than what there has been 90% of the time in the last nine years. So, we think that it makes some sense to be looking at cattle, be willing to hedge those cattle on strength, to make sure you hold your risk under control because we're still going to have to slug this economy out. I think people need to remember that we still have to find the impacts of the H1N1 flu. What is going to happen when people hear of deaths this winter? Remember, supposedly 30,000 people die of flu every year. The difference this year is we're going to know about every one of them. It will be in the newspaper and we'll be testing this and if we start to see unusual deaths, of young people and so forth, we could really wrinkle the restaurant trade and what is going on in the malls and so forth. So, I think there's reason to keep hedges in place if you're a cattle producer.

Pearson: What about a pork producer?

Roach: A pork producer has no opportunities right now. That same hog crush where you take the price of corn meal and fat hogs it's in the bottom 5% of what profit opportunities have been out there in the last nine years. So, there really is very little opportunity there. Unfortunately, hogs are all coming into town at heavier weight. We had a great summer, cool summer and so the pork tonnage is actually higher and we're not seeing the sow slaughter. Sow prices have gone up in the last month in the period of heavy pork production so it's difficult to imagine that we're really liquidating very many sows if the packers are actually bidding higher to get them. So, we think that the sow slaughter is yet to occur. We think the hog business is going to be in tough sledding here for a little bit.

Pearson: John Roach, as usual we appreciate your insights into what is happening with the commodity markets. That's going to 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 where you'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. Be sure to join us again next week when we'll learn how a renewable energy entrepreneur is enticing Midwestern homeowners to give wind turbines a whirl. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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