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Market Analysis: Don Roose

posted on November 10, 2011

Market Analysis: Don Roose

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.

Roose: Hello, Mark.

Pearson: Let's do a little bit of a postmortem here on the USDA Report. Give us your take. Obviously we'll wait for the final report in January to get the final look and we'll see if there are any revisions. But the numbers that came out on wheat, corn, and beans, and the U.S. and world demand numbers, what's it telling us right now about demand for agricultural products and supply?

Roose: Well, you know, I think when you look at the report, Mark, really it was a bullish report on corn and it was neutral on wheat and it was neutral on soybeans. The market is just getting an underachiever. It fails to really respond to positive news. We had the news that it could have pushed to the upside but, again, the dominant factor on that day was the outside markets and the turmoil that we have in Europe, and that turned out to be the dominant factor. That really is the anchor on the market right now.

Pearson: It continues to be, what's going on in Europe, the Greek debt problem, the Italian contagion and so forth.

Roose: Yeah, that's right. And what that really has done is slowed down it's slowed the demand down. Our export pace on soybeans is terrifically slow. Corn is right behind it. The wheat market, you know, we're swamped with world wheat, so our export pace there is also slow. So we're left with what's the domestic demand look like, and that can that hold us together.

Pearson: You had the you mentioned the wheat number. Plentiful wheat supplies out there. Let's talk about making wheat sales, Don. What is your take right now? Obviously we've got the Baltic. We've got plenty of places with wheat.

Roose: Yeah, and I think if you look at it, the wheat, Chicago wheat, soft red wheat, it will tell you how negative it really is. We're back to where we were really basically back to July of 2010 on the front month. So we are struggling and wheat is running a discount to the corn, 20, 25 cents, almost unheard of. So as far as the sales, we think when you have 50 to 75 cent rally, you have to use those as pricing opportunities unless there is something else going on in the world environment that is not going on right now.

Pearson: Certainly, like I say, the situation in Europe continues to confound and depress largely what should be somewhat buoyant markets. When you talk about the wheat market, when we talk about wheat demand, when you talk about shifting uses for wheat, we are feeding a lot more.

Roose: Yeah, we are feeding a lot more wheat, and that really goes to the heart of the problem with the corn too. You know, it's a big substitute so you are slowing down your exports. That's slowing down your feed demand on corn. Really, the corn is the one that is the big bull fundamental story yet. If we get big acres again next year, you know, that can change pretty quickly. It would be unusual to have back to back to back dry drought problems.

Pearson: There's still a lot of concern in the plains about the U.S. crop but, again, plenty of crop worldwide.

Roose: Yeah, I think when you look at it, we do have two concerns from a weather standpoint, the southern plains and the U.S. and the Ukraine. But other than that, you know the world supplies continue to grow and it just shows what capitalism does. When you have the price that is attractive, we see the acres expand and the yield bounces back too.

Pearson: Good prices and property rights, a pretty good combination for capitalist growth. Let's talk about corn. You mentioned the USDA Report. Where are we going in the corn market? There's been a lot of talk about some concern about demand and destruction because of these higher prices. The problems in Europe certainly are resulting in a much stronger dollar. That's sure having an impact too.

Roose: Well, you know, when you look at the corn, really, what you have is the domestic demand is well and alive. Ethanol profitability is at a three year high. The feeding margins on livestock is, you know, still very profitable. So that is not the real problem. What we have is a market that when it breaks lower, end users come in and supports it. If you look at the basis level, you know, they're terrifically tight in a lot of areas for this time of year. The carries are being sucked out of the market. They are doing their job. The end user is covering and the job of the market from the producer's standpoint is to recognize that and take advantage of it.

Pearson: A friend of mine has a quarter million bushels of corn storage and he's not using it this year. Is that a wise move?

Roose: Well, you know, the market is going to tell you what to do. If the basis is right, the carry is not in the market. If you think the market can still go higher, you are better off to change your ownership, sell the cash like your friend did. And if you think it's still going up, you know, you can step in and buy some options to change your risk out there.

Pearson: Based on what USDA is saying and based on supply and demand numbers we have out there, what kind of bracket where do you think corn prices could be?

Roose: Well, the government is telling you that 670 is the average cash corn price for the year.

Pearson: So it could be 20 higher from that, 20 lower?

Roose: Yeah, I think what you're really looking at is a $6 to $7 trading range. The last time we went under seven, we saw Chinese demand, and we haven't been able to pop over $7 or even close to it here lately. It's almost unbelievable in the spring. If somebody would have said that the yield was going to be under 147, that we would be at this level, so that's the real difference.

Pearson: All right. Good point. We did have a lesser crop. In terms of sales, like I say, if we can make it work right now with this cash value maybe come back and own something on the board if you want to continue to have ownership.

Roose: I think that's the proper basis with the basis and the spreads where they're at.

Pearson: What's your take on the soybean market now? We have some different fundamentals there.

Roose: Well, we do. I mean all eyes are on South America. You know, that's the beginning anchor to the market. If South America doesn't have a problem, the market is just going to struggle. Our export pace we were cut 50 million in the last report. Probably could be cut another 25 million. So I think, you know, it's just competition and it's key right now.

Pearson: All right. Talk about South America. Everything I'm hearing is it's pretty much ideal growing conditions down there currently.

Roose: It is. We have ideal growing conditions. What the trade is really waiting for is we're in a La Nina year, which means that at some point in time in the winter, if we continue in a La Nina, we should see some dry weather develop in Argentina. You're down to a weather scare as your bull story. Otherwise the Chinese demand has really tapered off. World demand has tapered off. And, you know, the market has just struggling with too much supply. It's possible with the right acres that you take your ending stocks back up to close to 300 million next year.

Pearson: Which does change the picture just a little bit. Again, based on what USDA is saying, what kind of bracket where do you think we're going to be on our soybean prices? What's our range going to be?

Roose: The nearby soybeans are probably going to be on the downside. Around $11 is probably the low end for right now. And probably $13 is the top end. You know, if you get some nervous news from weather, it goes to the upside. If our demand stays soft, you try and push closer to $11.

Pearson: Harvest basis right now, firm, weak? What's your take?

Roose: Well, it's not a basis that we see in the corn. You know, the corn basis is, of course, hot. The soybeans, the market, the basis levels are just, you know, okay. But I think it's very much the same in the corn and the basis levels are right, you have to make sure that you reward the market with some sales.

Pearson: Let's talk about cotton. $700. Again, I make that comment and I have to kick myself because I remember a lot of your sub $50. What's ahead for the cotton market.

Roose: Well, and that's what you have to be afraid of in a lot of these markets you know, we blew to the upside when cotton went up to 140. And we've just been stuck here at a hundred. This competition has really picked up with the synthetics. The world demand has slowed down and production has picked up. Stocks to use ratios have really exploded on cotton in just short order. You know, I think it's a market that's just going to wander around very much like the grain market, 90 on the downside and 110 on the upside. We are stuck until we see some bigger new fundamentals develop.

Pearson: Something else changes like people go back to cotton. People start buying more jeans or something. Let's talk about the livestock business and what's happening over there. We always are amazed by the cattle market and what's happened with fed cattle. The U.S. economy, we talked about the 9 percent unemployment, the lack of job creation, and yet beef demand to be okay.

Roose: The beef demand has been very strong. It's been an incredibly strong. When you look at it, next year the government says that we are in a very tight situation long term on the cattle that we're going to cut our 3.5 pounds per pack capita consumption. So we'll see if that happens. At the same time, the overall production is going to go down a half percent.

Pearson: It's going to be interesting to see from a price standpoint and, like you say, what happens with the dollar. Where do you as you look at fed cattle going forward, where do you see some hedging opportunities at this point? Roose: Well, the cattle market I think, short term, we are probably peeking out. We've had some higher prices this week. We think that supplies are going to grow. But I think when you look long term, I think it's going to be very difficult for cattle to sustain particularly over $130. with the world environment and the economic slowdown. We've got some attractive areas out there right now, as we're nearing some of those areas in the spring months, so I think that is the upper end of the range.

Pearson: Okay. As far as the calf market is concerned, with this small cow herd, it's going to be pretty bright.

Roose: Yeah, I tell you, again, the cow/calf producer is the long term winner, at least for the next couple of years. So we are optimistic from that standpoint. We think that probably stays pretty firm.

Pearson: Let's talk hogs here. Obviously exports have been critical. Seasonally we're in a time of year where we see a little bit of pressure on hogs.

Roose: You know, people were waiting. It didn't develop as quick as people had believed, but the cash market has really been under assault for the past two weeks. Almost daily we've been dropping. At the same time, you know, the large supplies, the bigger weights are coming at us, so it's a seasonal type of thing, but that doesn't mean the long term prospects are really negative.

Pearson: Give me your take on commodities in general. We watched the gold market. We watched the concern in Europe. We watched crude oil, which strengthen this week too. What's ahead on the energy front, Don?

Roose: Well, you know, that's the one that's breaking out to the upside again. It probably runs into a barrier around $100, you know, just from an economic standard. But, you know, you were asking in general on the commodities. I'll tell you what we've seen is a real change in the world environment. With the debt load that we have out here, it's more of a risk off type of trade, a little more cautious trade from the years of the months of the commodities.

Pearson: The fund money, do you think we're going to see it coming back into these agricultural it's going to take some kind of a catalyst to bring that money back in?

Roose: Well, I think it's going to be metered is what I really think. I mean it was pretty aggressive. You know, when you have interest rates as low, mark, everybody is looking for different alternatives investments. And certainly commodities, you know, have to be a part of the portfolio but, you know, how aggressively we're going to see that funds in the market, I think it probably tapers off a bit and more of a risk off trade with the European problem and debts around the world. We've got the same situation really.

Pearson: With that in mind and with what's happening over in Europe, the gold market is still going to be a bullish one?

Roose: Well, you know, I've always viewed gold is really not a big as far as a huge solid investment. It's more of a place to park your money. It doesn't really give you a return. But I think in the present environment that setbacks are going to be well supported on gold.

Pearson: The market has been fascinating. Obviously the issue with the banks in Europe and what the response is going to be to the problems facing Portugal, Italy, Ireland, Greece, and Spain, are all factors and weakening that euro and strengthening the U.S. dollar. Of course, Japan is also dealing with the strong yen. They've been trying to fix that. This currency thing could come into play on the agricultural front in the next twelve months.

Roose: Well, and I tell you, we saw that really the day of the report. To emphasize that point, it's really on that day the Dow was sharply higher and I think that really was one of the reasons that caused a lot of weakness in the metals market, in the green market. So the dollar, we've been living off a weak dollar for exports. And really the United States dollar looks pretty attractive when you look at the other problems in the currencies around the world. So I think long term, you have to say that the united states is probably the best of the worst and we look pretty attractive and the dollar is going to find support, you know, particularly as the euro unravels.

Pearson: We are also, of course, watching to see just what this demand picture is going to be and what growth it's going to be, and it still looks like strong demand from China.

Roose: Yeah, I think so although, you know, China is starting to change a little bit. They want to be self sufficient, I think, particularly on pork. That could change into the next year. Soybeans, you know, their demand there has definitely waned some. And the corn demand has slowed down a bit too.

Pearson: Good point. Appreciate it very much. Don Roose joining us this week. That's going to wrap 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 website. You'll find expanded market analysis, audio podcasts, streaming video of our program, and links to our twitter feed and Facebook page, and it's all free at the “Market to Market” website. And of course, be sure to join us again next week when we'll travel to Williston, North Dakota, to examine the economic impact of a good old fashioned oil boom. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture cattle commodity prices corn economy feeders hogs markets news soybeans wheat