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Market Analysis: Don Roose, market analyst

posted on June 10, 2011

Wheat futures contracts traded a bit higher Friday, but not enough to erase losses in earlier sessions, while tighter supplies, strong demand and Mother Nature pushed corn prices to record highs.

For the week, July wheat lost 15 cents, while the nearby corn contract moved 33 cents higher.

The effects of a bearish supply and demand report were evident in the soybean pits, where the July contract fell back below $14 with a weekly loss of 27 cents. But nearby meal prices bucked the trend by moving nearly $5 higher.

In the softs, cotton gave back all of last week's gains and then some with a weekly loss of $11.60 per hundredweight.

In the dairy market, July Class III Milk futures were down 30 cents, and the deferred contract moved more than 50 cents lower.

Over in livestock, the August cattle contract lost 70 cents. Nearby feeders were off 63 cents. But the July lean hog contract rallied $5.37.

In the currency markets, the Euro lost 270 basis points against the dollar. Crude oil settled Friday with a weekly loss of 93 cents per barrel. Comex Gold declined more than $13 per ounce. And the Goldman Sachs Commodity Index gained exactly 1 point to close at 703-even.


Market Analysis: Don Roose, market analyst

Pearson:Here now to lend us his insight on these and other trends is one of our regular market analysts, Don Roose. Don, welcome back.

Pearson:A lot of stuff to talk about. A lot happening. Government reports are out. I mean there's a huge possibility of bullishness that's in the corn pit. You've got oil, which is somewhat unsettling after the OPEC meeting. And you've got foreign exchange. You've got all these problems in Europe, and yet the euro is stronger against the dollar. Kind of hard to put all this stuff together and make a lot of science of it, but that's why you're here. But let's start first -- let's start first with our regular markets. Wheat prices first. Obviously the USDA's report not overly friendly to wheat.

Roose: No, you know, really that's what the -- from a world perspective, first of all, you know, we upped the ending stocks on wheat three million metric tons, so we have more stocks in storage than we thought. So consequently, you know, that really was part of the story is we've got bigger world supplies on wheat and soybeans, but it's the corn market that continues to get the big, positive story.

Pearson: All right. And that was certainly the case this week. Let's come back to wheat. We've had the former Soviet Union, Russia say they're going to resume exports. Pretty decent production worldwide. We've heard about so many problems with weather this year, but wheat production looks decent?

Roose: Yeah, you know, and I think when you look at -- you know, if you back up -- you know, a year ago is when the problems really started. That's when Russia had their hundred-year drought. Then Australia had some problems. It was catastrophic around the world. But what we're doing now is we're starting to reverse that. Russia is coming back into the market a major exporter again. Their weather has been trying at times, but it looks like we have a pattern change over there. Europe, they've been dry and it looks like we've got a pattern change there. In china, also the same thing, weather improving. So around the world, the weather seems to be improving for the wheat.

Pearson: All right. Well, obviously we watch -- when it comes to wheat production, we watch what happens in Russia, what happens in Europe. I mentioned the financials. The euro I said was weaker against -- the weakened euro was weaker against the dollar, not stronger against the dollar this week. It was down about 270 basis points against the dollar. I apologize I read that the wrong way, but that's the correct number. So that may be a strengthening dollar, don? Maybe it can impact these export markets.

Roose: Well, I think when you look at it, the dollar, it's the best of the worst is what you really say because Europe has their problems, which are well documented. The United States looked pretty attractive. So consequently, as the dollar moves higher, the export pace probably is going to be a little bit tougher. That's really what we need to happen, you know, in this overall environment that we're in. We've had this aggressive export pace, and it's probably time to slow it down at a time when we need to. We think that's probably the direction that we're taking.

Pearson: All right. With this report in mind and with what we know in terms of wheat production at this point in the world, what do you tell the producer?

Roose: Well, you know, we're probably range bound, number one. You know, the corn market continues to lead us around. The job of the wheat market right now in the U.S. and around the world is to put more wheat into rations that normally would go to corn, not only here in the U.S. but around the world. We're starting to see that particularly in the U.S. -- you know, I think when you look at it, we think that's going to continue to happen, so from a price standpoint, we think that nearby wheat is going to be capped when you get up around the 8, 840 level.

Pearson: Let's talk about the corn market. That is driving everything. Corn is king. We all know that in the grain markets, and corn production is king in the U.S. and the U.S. is the king for the world. So these numbers come out: big problems in the Eastern Corn Belt; big problems over in Ohio -- we've got a lot of viewers over in that part of the world; big problem in the Dakotas, the corn that didn't get planted -- crops that didn't get planted. Very slow up in Minnesota. I talked to a couple of buddies of mine up in Central Minnesota, Southern Minnesota this week who -- they're very concerned about the progress of their crop up there. So by no means do we have ideal conditions for a huge crop in 2011, Don.

Roose: No. You know, and I think the marketplace votes overall from a real price discovery standpoint. It's a market that no doubt is bullish. We're going to have now two years of tight supplies that we're going to have to deal with. New crop is -- this year's -- next year's crop is going to be even tighter than this past year's. But from an overall standpoint on Thursday after the report, you weren't able to put corn up the limit. So I think what it tells you is that we're mature. If we would have had that same situation two, three months ago, the market would have had a two-day winning streak aggressively to the upside. So, you know, I think what we're saying is we know more about the balance table from the supply side. Now it's time to look at the demand side.

Pearson: Well, let's talk about that. I got an e-mail from a friend of mine, and he buys a lot of corn for a major international processor. He had people booking $8 corn in South Central Iowa for August. That's a pretty fat number. It's pretty hard, I would think, to run an ethanol plant profitably, to feed cattle profitably, feed broilers and eggs and everything else in dairy with $8 corn, Don.

Roose: Well, you know, these are dangerous markets because you don't have to look any further back than 2008. When you start locking into supplies at high levels and you have tight coverage, you know, things can really go wrong, as we know it did in 2008 for people who did that. You know, you can get a repeat performance, a mini repeat performance this year if things start to reverse. You know, you may be looking at the most bullish news of the whole year right now as things change, so I think you have to be very careful when you're looking at that. You certainly have to cover yourself and probably have to use some different strategies that allow you some flexibility.

Pearson: Where are we going to see the rationing occur? It's not in the ethanol plants. Rbob is still pretty high. It still looks pretty attractive for ethanol plants.

Roose: At the end of the week, the ethanol margins did start to turn negative. You know, I think it's probably -- the big elephant in the room, unfortunately, is the ethanol industry when they're using over five billion bushels of corn. So I think what you're -- you know, we're coming to a real crossroads. Are we going to look at the livestock sector continue to liquidate? Are we going to see a slow down in the ethanol consumption? From a demand standpoint -- you know, it's quite possible that these acres are bigger than what the USDA is saying. 66 percent of the time since 20 -- since 1999, we actually had acres go up in the July report from June, so the acres could go up. The yield could also be, you know, two, three, four bushels an acre better, so the Western Corn Belt could make up for the Eastern Corn Belt.

Pearson: All right. Speaking of the Western Corn Belt, let's talk about the Missouri River. There seems to be a lot of confusion about just how much inundation -- flooding could occur on some of that good bottom ground over there where corn might go under and not see the light of day for an extended period of time. Is that dialed into the market? Is the market watching that? How important is it, Don?

Roose: Well, my experience over the years, Mark, is you dial into the price, you know, the most bullish news at the top of the market. You know, if you can't continue to move higher on that news that's already dialed in -- you know, this week the market was strong but, you know, you're just up over 30 cents. That's just not an unbelievable number. And probably we're going to overdo the acres from a price standpoint and a guest standpoint -- probably overdo the acres that we're going to lose and the yield that we're going to lose.

Pearson: All right. What do you tell a corn farmer right now who maybe has some old crop left but hasn't priced a lot of new crop?

Roose: Well, you know, the old-crop bushels probably are down to your gambling bushels realistically. New crop -- you know, definitely we're in a tight situation on corn. You know, we're going to have to figure out -- and it's going to be price discovery how to alleviate that going forward. But we do know that historically these are lofty levels, and it's a foolish not to take advantage of these prices because we know that in livestock that changed very quickly just in a few months and that's what will happen with the grain market once the dynamics change. So what do you do. There's some definite things you can do with risk management from buying, like, puts -- $7 puts. Sell $8, $9 calls, some kind of risk management from that standpoint. It gives you the flexibility, all the down side protection, and still gives you some upside benefit.

Pearson: Interestingly different scenario for soybeans. China has been buying soybeans. Now it looks like some of the Chinese buying may be slowing down. Maybe they filled their reserves?

Roose: Well, you know, and that was their goal. I mean I think if you really look at it, sometimes we make it too difficult. Their goal was to stockpile. They've been doing that for an extensive amount of time. Well, now they've slowed down and they've slowed down at a time frame when the world supplies on soybeans are starting to grow again. So consequently, they probably reached their goal, and the market, you know, on the soybeans is also a bit mature but still has a very bullish undertone to it if the wrong things happen.

Pearson: All right. So based on that and based on the numbers that are still roughly positive from a production standpoint, -- in other words, USDA predicted a little bit bigger carryout. Is this the time to be unloading soybeans?

Roose: Well, I think, again, on soybeans, much like corn, you probably should be down to your gambling bushels this time of year is your mid-June. I think you can use -- if you're concerned, you can use some of the same type of strategies that we talked about on corn to give yourself some coverage through some flexible option strategies. Coverage to the down side still allows to you participate on the upside but, you know, you're -- you've got yourself covered from a breakeven standpoint. It's just good business at this time -- particularly this time of year where we're sitting with the world economy.

Pearson: All right. So make prudent business decisions. Take advantage of strong markets is always great advice. Can't go too far wrong there. Let's talk about cotton for just a minute. There's been a market that has done just what you talked about. Huge bullish move. Now slowing backing off, in fact, back off sharply in some areas. What's your take on cotton going forward?

Roose: Well, you're exactly right. We put the most bullish news in the cotton market back in March. We hit 200, you know, and since then it's been two steps down, one up. And, you know, the cotton market is, you know, a classic example. It's going to have to compete with the rest of the commodities out here in the world. So we think that probably the cotton, when you get down on new crop down to this 125, 130 is probably pretty good support. When you see the cotton rally up close to the 150, you run into a lot of resistance. We think that's probably the range that we're caught in.

Pearson: Let's talk livestock and where you see the fed cattle market going. I know you've tied this cattle market closely to what happens to this U.S. economy. There's talk about whether or not we're going to see a double dip. Unemployment is still high. What's your take on fed cattle?

Roose: Well, it's two stories, really. The summer/early fall, there's no doubt that we have too big of supplies. The demand continues to be soft. We're $20 off the high on the boxed beef. And so I think what we're really saying is the consumer votes on these products. And on the meat, he voted that when June cattle were up around 123 were just too high. He's still saying right now, when the cattle market gets up around 106 for the summer, it's at lofty enough numbers with the supply that we have. So bottom line on August cattle, we think we're caught in the range of 100 to 106. The wrong thing happens, you could go down into the 95 zone. That's probably going to be probably the result of poor demand.

Pearson: If demand stays fairly decent, the last two quarters of the year are fairly upbeat, maybe we'd see some higher numbers in your range. Well, from a supply -- from a supply standpoint, what's really going to happen, we've been looking for this for a while. As we pull out of the fall and we move into the late fall, early winter, our supplies really start to contract. There's a bullish story on the cattle. It's just a matter of at what price. The upside, you have to give the end of the fourth quarter a chance to get back up to that 120. You know, it depends on the demand. You could go a little by higher. From the supply standpoint, the numbers are there to move up. It's just a matter of how high when the consumer starts to say, listen, we've run into a high enough level.

Pearson: It sounds look an option strategy to me, Don. Is that what you're looking at?

Roose: Well, I tell you, we're just really big. With the big movements that these prices that we have, make sure you have some coverage that you can stay in business and actually make some money at. We're looking at various strategies on the cattle that would allow that to happen.

Pearson: Talk about feeder cattle, this calf market and where that's going. Seems like decent pasture conditions in most of the Corn Belt, even out in the West. Not so much in the Southern Plains where they've had the drought, but a lot of calves out there.

Roose: Yeah, there are. We've pushed an awful lot of calves into the feed lots here quicker than we'd normally like to. So that's one issue. You have to be bullish on the cow/calf industry for the -- if we're going to stay in the same meat demand. The feeder cattle -- we think that August feeder cattle are kind of caught in a range, you know, 119, 118 on the down side, 127 on the upside. That's going to be dependent a lot on what the corn market does. That's going to be dependent on what happens to some of the back months of fat cattle.

Pearson: Let's talk about the hog market. A big week on the board this week. There's a lot of concern -- there's certainly a lot of demand -- overseas demand certainly for U.S. pork. A lot of disease issues overseas. The situation with Korea. This is pretty bullish -- are we at the start of the bullish move in hogs?

Roose: Well, we think that -- you know, we had our big bullish optimum time period probably past us. You know, we had June hogs up at 104. So, you know, these are really retracements is what we think. But the hog market, as the cattle market, is very dependent on what happens to the grain market. I mean it really is. We think that if the grain market settles down here settles down here and starts to chop around here and maybe even work lower seasonally as it does, then you have to look at the hog market. You know, these summer months, you get close to 95, 96 probably at the top end of the range, wrong things happens on demand, you go back down to 85. So, you know, it's a market that has a lot of flexibility yet.

Pearson: I want to come back to a couple things. First of all, I want to talk about precious metals. The gold market, it kind of flattened out this week. And for a volatile week, not a whole lot moved on gold. What's your take? I keep hearing it being called a shadow currency.

Roose: Well, you know, I guess when you look at the gold from -- it's really people putting money because they don't know where else to put it. The interest rates are so low. You know, it's a popular mechanism. The gold market and silver market probably have seen their better days. You could make some new highs, but I think you have to say you're at the upper end of the range. These currencies eventually will settle down and we'll get some of the budgets under control like we're going to have to in the united states. Then the precious metals don't look quite as attractive.

Pearson: Let's also talk about crude oil and, obviously, the dollar figures into that. A little strength in the dollar this week verses the euro. After this -- we had this big highly discussed OPEC meeting where, I guess, Saudi Arabia is talking about increasing production but can they really do that. What's ahead on crude oil? How worried are you about that aspect of our economy?

Roose: Well, you know, energy is just -- we don't really have a huge alternative energy, so what we're really looking at is crude oil for right now. As it moves up, the economy starts to slow down. We see that definitely -- when you get up around 110, 115 the crude oil, it seems like the economies around the world slow down. So, you know, I think that's what have you to be careful of. You have to remember that crude oil has traded in U.S. dollars around the world. So if the U.S. dollar starts to move higher, crude oil could actually stall out and go lower. And the supplies are probably adequate enough that that's probably what happens. So, you know, keep an eye on the dollar, and that will help, you know, point you in the direction of where the crude is going.

Pearson:Don Roose, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Don on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson:And be sure to join us again next week when we'll examine the market impact of a slowing global economy... Until then, thanks for watching. I'm Mark Pearson. Have a great week.


Tags: agriculture commodity prices corn economy markets news weather