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Market Analysis: Don Roose

posted on March 2, 2012

Market Analysis: Don Roose

Pearson: Don, good to have you with us.

Roose: Thank you.

Pearson: Another eventful week in commodities. Another week kind of hinging on with happening with the weather. In this case it was us weather.
And also some Informa numbers out this week on the South American crop and maybe a little bit smaller than what we didn't anticipate. So a lot of issues out there, a lot of unknowns as we approach 2012. We do know what our 2011 production is, for the most part. We've got a USDA Supply and Demand Report coming up that's going to update the global situation here in the U.S. But as we sit here tonight, Don, and we look at where this market has been, we look at all of these factors that impact us -- Iran, Syria, Israel, crude oil, the euro, what's happening in Greece; on it goes and on it goes -- people are trying to make decisions. We passed through March 1 and we sold a little bit of corn. I still have this sense there's a little bit of corn in the bin out there. That's going to be a factor.
Let's start with the grains and start with the wheat market first. There was a big move this week for wheat.

Roose: Yeah, you know, when you look at the wheat market, it's moved up to some tough resistance again, Mark.  You know, the problem with the wheat overall is the stocks-to-use ratio is large, probably in that area of 40, 45 percent stocks-to-use ratio, so there is no shortage of wheat. Really what wheat is doing is just following the corn and the soybean market higher for the short-term.

Pearson: Trying to maintain some acres or something here.

Roose: Yeah, I think it's -- you know, it's really just trying to keep competitive from an overall world balance table. We are feeding a large amount of wheat around the world, but there is not anything that signals that we're really moving into anything, but still a supply bear market so far.

Pearson: And the situation in Europe, we'll know about what the impact was down the road. Was it significant in terms of the wheat crop?

Roose: Well, you know, I think it was. You know, there's no doubt that we lost some percentage of the wheat crop in Europe, not only in Europe but also in Ukraine and Russia. So, you know, the Black Sea -- you know, the cold weather that we had really has been a big influence because it has slowed down the shipments of wheat out of that area.

Pearson: Are we making any sales here, Don, on wheat?

Roose: Well, we think when you look at the wheat market on Chicago, new crop, as you move close to the $7 Mark, which we are starting to get ever so close to, you know, those are opportunities to catch up on some sales. And the same thing with hard red winter wheat, July up as you approach 750. Those are good long-term targets. You're probably going to have to have some North America weather problems to push past that area.

Pearson: Whether is a big issue with corn too? Like we say, corn is king.
It's driving everything else, for the most part. The beans seem to have some life in them right now. So let's talk about corn. The Informa numbers on the South American corn crop a little bit smaller, but not that much. The Argentine deal was kind of anticipated. Anything else that's going to impact these old-crop prices?

Roose: Well, I think when you look at the old price on corn; really what's happened is the producer is just sitting very tight. He's really not aggressive seller at all. I think the other thing that really is going to influence it when we move into -- probably the big issue that I think we have to be very concerned with is the March 30 stocks-in-all-positions report because, you know, we have had a very mild winter and we think that, you know, the chance for a negative stocks-in-all-positions March 30 is probably something that you have to be careful of.
So for right now, we're riding the coattails of tight farmer selling in the South America crop that is smaller, and that's been pushing us up to the upside.
Also, we've had a terrific amount of fund buying. A new month this last week of new buying. 

Pearson: What's driving that, Don? Why are the funds all of a sudden showing back up in corn?

Roose: Well, you know, I think when you look at the funds; really what they look for is a market that has some potential fundamentally. And I think when you look at the stock-to-use ratio that you have on old crop, you know, 800 million carryout could be larger than that. You know, that's largely close to pipeline minimum, so you see fund buying on that. And the same thing on the soybean market.
On the new crop, we've had some fund buying there. So interest rates this low, Mark, you certainly have commodity funds looking for alternative investments.

Pearson: All right. I talked to a lot of producers all over the country in the last couple of months. Everybody wants to hold tight because they think it's going to be a tight transition again from old crop to new crop come July and August. Do you agree with that? Are we going to see that again? We've had that happen now the two previous years.

Roose: Well, you know, you have to be careful because you're exactly right. We've had two years with back-to-back problems during the summer. That's really, you know, what has propelled the market higher. But, you know, to have three years of crop problems is really quite unusual. You know, I think what we're looking forward to is probably a more normal growing season. You know, and I think you have to be careful that yields don't jump up to, you know, a bigger yield than what we have had experienced in the past and, therefore, you know, our stocks may not be as tight as some of these southern states start to put corn in the pipeline earlier.

Pearson: We were checking -- talking about 95 million acres of corn being planted a month ago. Now that's kind of been dialed back to around 94 million, maybe an increase in bean acres. But that acreage number is going to be pretty significant at the end of March too.

Roose: Yeah, you know, that's going to be a big number. And, you know, probably -- You know, right behind that, of course, is going to be the weather and, you know, do we actually plant those acres. But, you know, we're all, you know, on pins and needles on the acres, but the acres are certainly there. And we think we're going to get acres on both corn and probably soybeans.

Pearson: Okay, so 94 million plus on the corn and 75 million plus on the beans?

Roose: Yeah, we think so. We think that's a high probability if the weather is right.

Pearson: All right. Since we've always had -- We've never had three bad years a row -- and all the old-timers like you and I are repeating this. If that's indeed the case, should we be selling new-crop on right now?

Roose: Well, new-crop corn has a lot of resistance right at 570. You know, the weather scare will probably push you up close to $6, which is going to be a tough area to push through. But when you look at stocks-to-use ratios that have a chance to double next year and if you have a yield that jumps up one standard deviation and goes into, like, 172, 173, ending stocks could go over 2 billion bushels.
With that, you know, you push back down lower, closer to five. So, you know, these look like attractive areas unless things change.

Pearson: All right. Let's talk about the soybeans and talk about this new machine that the soybean market seems to have of late. And again, you mentioned open interest was jumping up on both corn and soybeans. Certainly there is Chinese demand that looks like it's going to be strong again this year.

Roose: Yeah. Really what's driving the market is, like you alluded to, the Chinese demand is underneath the market. But, you know, their buying pace is down 21 percent from last year, so it's lower than you think. But the real driver, much like has been the driver around the world the last two years has been a smaller crop in South American and the uncertainty whether we're going to have the acres.
So, you know, that's really the driving force. The spreads on new crop soybeans, you've got November inverted over July 13. So it's telling you we're really pushing the buttons pretty hard to get the acres out here.

Pearson: All right, anything that's going to work. You think it's going to be 75 million plus here in the U.S.

Roose: Yeah. We think it will be between 75 and 77 million actually because we're going to have 9 to 10 million acres coming out of prevent plant and a million out of CRP.

Pearson: And there's a logical place a lot of times, especially for those acres coming out of CRP, but the first here's the soybeans. You've got some good points there, Don. So are we making any sales? Are we jumping on the new-crop thing? 

Roose: Well, new crop is trying to get close to $13, and it's really close. So, you know, if you look at it, we think that 13-1350 is a real opportunity to sell. We're 45 cents, at that level, over the insurance rate, which was set at 1255. So we think that that does present some selling opportunities, and probably sooner rather than later. Oil and soybean meal turned down technically on our indicators, so we think that's maybe the start of things starting to get a little bit shaky.

Pearson: Cash basis on soybeans -- We had a strong cash demand on corn. Is it as strong on beans?

Roose: No. You know, we've got a bigger carry on old-crop soybeans, and we also -- The basis levels on soybeans are more relaxed, you know, than corn, you know, partly because we have 275 million carryout on soybeans, which is actually pretty large. The soybean really has been artificially supported by the problems that we have in South America.

Pearson: All right. Let's talk livestock for a minute. A buck thirty down in Texas, 205 in the beef up in the Midwest. These are some pretty good times being in the cattle business.

Roose: Yeah, it has been. And, you know, making up for some lost time from before, but when you look at the cattle, you know, the supply -- the supply/demand balance table on the cattle market is positive. There's no doubt about it. Really, you know, the driving factor is going to be will the consumer pay up for beef. Beef is getting close to $200; 2001 was all-time high in beef in 2003 of October. So now we're going to have to move the beef as we move up.
We think next week that the beef starts to turn a little bit toppy, and that probably is going to start to spell out some problems.

Pearson: All right. Maybe a little bit of a pullback, but decent prices for the balance of the year?

Roose: We should have decent prices. There's no doubt that the fundamentals are there to push April cattle up close to that 135 mark. But, you know, it's going to be a market that, if demand slips at all, you're going to have sharp setbacks, and then we'll see if we can drive back up. But you've got big numbers out in these deferred cattle next year, 136 on cattle. You know, those are lofty levels by historical standards.

Pearson: Absolutely. The calf market is going to remain strong as well because they're not there.

Roose: Yeah, I mean the numbers just aren't there on cattle; you're exactly right.
So the cow/calf person, he's in the driver's seat, and that's the job of the market is to retain heifers. So that's the final phase of the bull market is that retention, and supplies get even tighter.

Pearson: There you go. Let's talk about the hog market. We did a better job producing pigs in 2011 than I think a lot of people thought. There seems to be some bigger numbers out there. Prices have been strong, but everything seems so export sensitive anymore in the pork business.

Roose: Well, the pork business is export scientific and, you know, the exports have been on fire. We're exporting this next year probably 23, 24 percent of our pork versus 11 percent on the beef. So, you know, the hog market -- you know, they plus on the hog market is the beef supply next year is probably going to be down 4 percent. Poultry -- or our broilers are going to be down 3 percent. Pork is going to be up 2-3 percent, and it's going to pick up the slack and it's going to have to follow the cattle higher. We've got some lofty numbers already built in, and we'll see if it can hold or not.

Pearson: It's very volatile; your thoughts on the oil market as we close out here tonight.

Roose: Well, we know that if the oil market surpasses 110 -- between 110 and -20 -- 120, it really starts to slow the economy down. So, you know, I think an election year, there's going to be a lot of talk to try and push the oil price down.
We know that we've got a lot of premium built in because of the Iranian situation.
We know we have excess gas supplies right now and, you know, we think it's a market that is lofty up at 110 and technically is probably due for a setback.

Pearson: A big setback in gold this week. What are your thoughts on that?

Roose: Well, we did. We had a big outside day down on gold and silver.
I think what it really says is how volatile these markets really are, all the markets.
And they're going to stay that way, and so risk management is probably key.
But, you know, the gold market, it just really struggles when it has to perform over $118.

Pearson: I've got five seconds. Your thoughts on the dollar?

Roose: The dollar we think is the best of the worst, and we think that the dollar is going to continue to try and move higher.

Pearson: All right. As usual, Don Roose, some great insights. We appreciate you joining us. That will wrap up this edition of "Market to Market." But you'll find expanded market analysis and streaming video of our program, as well as links to our Twitter Feed and our Facebook page, and it's all free at our website.

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