Analyst John Roach discusses the volatile commodity markets with host Mark Pearson.
Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.
Pearson: Well, it's pretty crazy. The wheat harvest is wrapped up in most the key growing areas. We are right on the verge of the corn harvest and the Corn Belt. I was in Decatur, Illinois, this week. I was over in Lincoln, Nebraska, this week. I was up in Redwing, Minnesota. Saw some really good corn. Saw some real poor corn. Saw some soybeans that look pretty good, but the concern about what that crop looks like. Over in wheat country a huge concern. One of our listeners -- viewers actually sent us a note with a question. He asked a question about the wheat market, and that's with the drought in the winter wheat states: what are we going to do for acres? There's some big concern about the big drought in Texas and Oklahoma and South Central Kansas and others. So a lot of fundamental issues as we wind down production of the corn and soybean crops for 2011 and what's going to happen with wheat. Let's talk wheat first. Plenty of supply around the world. Last time you were on the show, the U.S. crop came in okay. But looking forward to 2012, John, there's a lot of concern.
Roach: There's a lot of concern. We have a real drought situation going on across a lot of the United Sates, and we are not far away from the time we'd like to start putting some wheat in the ground, so there's some real concerns. There's a little bit of hope, maybe, that the tropical storm coming up on the Gulf might give some relief to some of the folks, depending on how that system comes across. There's been some rains in the western part of the Grain Belt, but the dry area down through winter wheat country is still dry and needs rain. It's going to make a big difference to plantings if we don't see that rain come. That's part of the reason we've had the rally in the wheat market. Traders got very heavily short the market, particularly in Chicago Wheat as we came into their harvest season. Once we began the harvest and the market started to recover a little bit and now we're well up off of -- well up off of what those lows were. And part of that is the concern about the new crop driven in recent weeks by the specs coming out of those short positions and going long.
Pearson: All right. Is this the time to be selling wheat?
Roach: We've been in a sell signal on wheat. We just lost the sell signal in Chicago Wheat. We still have it in the Kansas City and Minneapolis. We're not really aggressive wheat sellers this time of year. This is the time of year where you sell what you need to in order to take care of storage issues and take care of financial needs and so forth. But we think that the wheat market in general will be stronger as we move from here on into the New Year.
Pearson: All right. So bullish on wheat. Let's talk about the corn market, john, and what you see happening there. I've witnessed some of this corn deterioration, particularly in Central Illinois, Central Indiana, eastern parts of Iowa. There's definitely some concern about the size of this crop.
Roach: There's real concern about the size of the crop. We saw F.C. Stone's estimate out this week, which was smaller than people anticipated. But the market is already traded these smaller numbers to a degree. When the stone report came out on Thursday afternoon, Thursday night, or overnight Friday morning, trade was higher but not lots higher. And then today the market caught and ran up. But we're still not back to the highs that we established here a week or so ago. So the market has anticipated this smaller crop and has adjusted to it. Now we have to wait and see what the USDA says. We'll have Informa's numbers out next week. Markets are up at high price levels. Although we're longer term friendly on wheat, we are at a toppy spot there. So we think wheat and corn and soybeans are kind of at a toppy spot with longer term, very positive fundamentals.
Pearson: The corn market at this stage with the rally we've had, do you want to sell this one? Do you want to sell some crop here, John?
Roach: We've sold into this rally for people who needed to kind of get some last-minute sales done before they went into harvest but, again this is the time of year when you have these kind of surprising crops, these surprising losses during the month of august. You have to stop and wait a little bit and see what's really out there in the field. We really don't know what's there in the field. It's going to be highly variable. We've seen initial in-field reports and, again, some good yields but really a lot of disappointing yields. So we're not aggressive sellers here until a producer actually gets in the field and sees what they have. Once they do, then at that point, they've got to decide, okay, do I want to go ahead and make sales at these price levels or do I want to put it in a bin and gamble for higher prices next summer. Our suggestion would be don't gamble on bigger quantities than normal. Gamble on smaller quantities because we're up at what we think are price rationing kind of levels.
Pearson: Could we see a spike, though, if this thing gets worse in corn prices? Could we see $10? In Lincoln, Nebraska, I was asked that, in Decatur and Redwing. Everywhere I've been, they say could we see $10 corn this year.
Roach: Well, we don't know. We simply don't know how far people are willing to pay up in order to maintain the business operation that they have that's consuming the corn. That's really going to be the key. If we go back and look at 2008 when we thought we had the perfect storm of title old crop supplies, problem with the new crop, very high priced energy, et cetera, that $8 area was really tough. This summer we moved up against $8. And when we thought we were tighter than what we turned out to be, again, very tough area. Now we're back up and have pushed up against the $8 area again. That's really a tough, tough area. We are in a new environment that we moved into in 2006 and '07, and so we're really learning. We don't know how high high is anymore in these markets. So far $8 in a front month of corn has been a very high price level.
Pearson: Big resistance point.
Roach: Well, we think we're actually hurting demand. We're actually slowing the demand down. The export slowed down at the latter part of the season here on corn, and we think we're at price levels that are somewhat rationing. We also have to remember that there's a big crop overseas. If we totaled the wheat and the coarse grain production around the world, it's not a lot smaller than what it was back in the may forecast. It's slightly smaller. We're looking at very large demand estimates, and so with economic conditions that we have, we could have some problems on the demand side, and we haven't yet really dealt with that.
Pearson: That will be one to be seen. Let's talk about the soybean market too. Big crop in South America. Beans have to be defensive, though, with this corn market, don't they?
Roach: Well, the bean market actually is the one that really depends -- or the bean crop, the bean plant really depends on August/early September weather, and the August weather was just really tough. The bean plant in most instances still looked pretty good in the field but really needs to have some rain. On the pro farmer tour, they remarked about how they saw less disease problem in soybeans than they'd seen for a long time. The bean plant is still there ready to perform late in the season, but we've got to get rain on it.
Pearson: Got to fill some pods. What's your thoughts on selling beans at this point with these kinds of rallies?
Roach: Again, we're into a sell signal on soybeans, so we are selling bushels that producers would like to kind of get sold here before harvest. People that have been a little bit slow in selling, it's sure worked out very well for them this year. But we think some sales in here probably are in order. But for most people they've already sold all they really want to sell, and they're going to need to see what their harvest really is before they're going to be able to make any further sales decisions. They need to know what bushels they have out there in the field.
Pearson: Cotton, real quick, John. We didn't get to touch on it last week. As you look at the cotton market and what's happened down there in terms of demand falling off on that one after those huge prices.
Roach: That's really the key to the cotton market. Demand has fallen off and prices fell sharply. They bounced back a little bit this week, but the longer term prospects on the demand side look a little concerned. In addition, the Chinese crop looks like it might be a little bit bigger than what people had anticipated. So we may have difficulty getting much of a rally up in the cotton market until we get through the harvest and see exactly where supplies are.
Pearson: One of the questions we've had from our social media network here on "Market to Market" is regarding taking advantage of strong prices into next year, into 2012 and even 2013. What are your thoughts on it for corn, soybeans, wheat, cotton?
Roach: Well, the grain market, when it goes up and makes highs in the front months, the back months follow along. As a consequence, we've got into price levels that we think are attractive for making some sales for the new crop. So we think it makes sense to make some measured sales as time goes along at these price levels. Just make sure that about as soon as you can get inputs tied in so you know where your costs really are. Making sales further on out ahead in years of very high prices has made sense for a long time.
Pearson: All right. Let's talk livestock. Fed cattle Market, we keep getting these disappointing reports about what the U.S. economy is doing or not doing. There was concern about the double dip. Now that was assuaged a little bit. As we go forward from here on out, if we get, say, a 1-percent GDP growth or maybe a little bit better, what that could mean to the restaurant trade, reducing unemployment, all those things. This cow herd is so small. You mentioned the drought issues down in Texas and Kansas and Oklahoma. We're seeing a lot of cows getting relocated. Seeing a lot of young calves come on feed. What's your take on the cattle industry? What can we see?
Roach: Well, initially here we think that we still have some fairly large numbers that we're going to have to go through over just the next weeks ahead, so we think the market may have a little bounce here after the labor day weekend, but we think it's, in general, kind of a soft market here, you know, for the next 30 days or so. Then we have some smaller numbers to deal with, and we should see some rebound. But the market, unless we can get the middle meats, the main meat cuts to move higher on the dressed side, that's where the problem is. The dressed beef market is pulling down the live market. So the demand side is worrisome. In the restaurant index where they measure the outlook of -- the restaurant owners' measure their outlook, they had negative numbers this week. The trend line is moving down. They're worried about the longer term prospects for the business -- or the next year's prospect for the business.
Pearson: That's always a good barometer to see what people are thinking and how confident consumers are, because when you're feeling good, you're eating out, and when you're not, you're not. Let's talk about the calf market, though. Obviously we've had some cow liquidation. We've had a lot of cow movement. But it's still a relatively small herd. If things do perk up, this calf market, do you think we'll stay strong there?
Roach: The runs were lighter this week. The attitude is maybe we've moved through the numbers that moved off of pasture because of the dry conditions. Maybe we'll get a little bit of improvement here in weather. So maybe we're stabilizing there. But we're still well above last year's price levels, so we shouldn't look at this market and talk too much gloom and doom because the numbers, as you say, are tight. And with a little bit of consumer confidence, a little bit of moisture in the pastures and we can bring this market back higher.
Pearson: Hog market?
Roach: Hog market probably bounces a little bit the first part of the week, but then we come back under pressure we think into the fall of the year. We think the market still has some struggling to do as we move out into the fall months.
Pearson: John, let's talk about the broader things. We mentioned in the open of the market segment that gold is at a record price. Oil has come down. The dollar has certainly strengthened with what's happening in euro -- in a more macro sense, where do you see commodities. Is the panic metal? Are people still going to be putting money into gold? What's your outlook on that from a commodity viewpoint? What do you think we're going to see ahead?
Roach: Gold quit being a commodity a while ago. Gold is a store of value. People look --
Pearson: Shadow currency.
Roach: It's a currency. It really is a currency. Where do I put my money? If I can get ten-year t bills for 2 percent, I can put my money in stocks, which I'm scared to death of. I can go buy agricultural commodities, which are up near record highs. You really have very few places. I can put it into real estate. You have very few places for people to put money. And people who have been putting money in gold have been rewarded handsomely. They have no desire to take that money out of gold and put it anyplace else.
Pearson: John Roach, thank you so much. That wraps up this edition of Market to Market. But if you’d like more information from John 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, streaming video of our program and links to our Twitter feed and Facebook page-- all FREE -- at the Market to Market Web site
Pearson: And be sure to join us next week when we'll examine how some rural Americans cope with living in a food desert. Until then, thanks for watching. I'm Mark Pearson. Have a good week...
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