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Market Analysis: John Roach

posted on August 10, 2012

Market Analysis: John Roach

Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back.

Roach: Thanks, Mike. It's really nice to be here with you.

Pearson: Well, we're glad to have you. It's been a busy day. The USDA report came out this morning. Let's talk about how that affected wheat today. Do we see much impact from that on wheat?

Roach: The wheat numbers were the surprising numbers on the report that they were larger than what we saw last month in the United States. And when we looked at wheat numbers around the world, they didn't shrink as much as what some people had thought they might, so that was the reason the wheat market came under pressure. The market has been really trending along right on some important moving averages, the twenty-day moving average for the Hard Red Winter Wheat and for the Chicago Wheat. And then today we tipped down. So we brought in quite a bit of technical selling as well as the fundamental selling, which pushed the wheat market lower for the day.

Pearson: So for producers out in the field, what does that tell you? What should they be looking at going forward?

Roach: This is the time of year, the month of August, when we tend to move the wheat market up and get a second selling opportunity. This is kind of the first rally after harvest in most years. So when we go back and look at a lot of history, August is a decent month to be selling in. Then after this month, then you have to go all the way out into February. So we think --our hope is that the market doesn't fall very far and that we have an opportunity on a rally here to get whatever sales need to be made during this timeframe. We actually think our sales in the winter months may well be better, but at this timeframe, we'd like to get around the sales made here on some strength over the period over the next three weeks.

Pearson: All right. Good idea for producers out there. Let's talk corn a little bit. What are we seeing there? What's going on?

Roach: The USDA told us several different things about corn today. First that the yields are going to be down sharply compared to last year and compared to what people expect. As was said earlier in the show, the yield level is down to 126 or thereabouts, as I recall. In addition to that, we had the acreage pulled down, the harvested acreage, so total supplies are going to be well underneath what we need and we're going to force the demand down because we just don't have the supplies available.

Pearson: And where do you see that demand being forced out of? Who's going to have to sacrifice their corn usage this year, in your opinion?

Roach: Well, the USDA took corn usage out of ethanol production, out of food production, and out of feed production, and out of exports. So they really went through all the different categories and pulled each of them down somewhat. But the problem is that we really have not yet started to reduce the demand as much as they're currently forecasting. So the question is, are prices high enough to accomplish what the USDA forecasts today, and you look at the market, it tried to rally today. It couldn't really get very far, so maybe we are at a high enough price level. That's the real question that the market has to determine. What's it going to take to reduce the different categories of demand so that we have enough to go around and we don't run out?

Pearson: With that in mind, what are you telling producers?

Roach: Well, we think that the market is just going to have to work on this over the period of the next 90-180 days. It's not something --livestock people --as we saw in the early report; livestock people don't make these decisions quickly. They make them slowly, deliberately, and with a lot of pain. These are very difficult decisions to reduce their livestock herd. So you have a similar difficult situation if you are in the manufacturing business and you're using corn to make ethanol or some other food products. Then you have the same kind of decisions being made overseas. So people are thinking about it. They're coming to that point where they have to make a decision, and so we'll be hearing more and more about that as time goes along, but at the moment we really haven't started to cut the demand nearly to the level that we need to cut it. So that really suggests prices have to stay high. They may already be high enough, but they're going to have to stay high. We can't give a signal to the user that there will be enough supply. We can't encourage them with lower prices. So prices need to stay strong. So what we're saying to farmers is that if you like these prices, and you've got some grain that you'd like to sell, don't let anybody talk you out of it. These are good prices. Let's go ahead and make the sales that you want. But if you've made sales and you're comfortable right now or maybe scared you don't know how many bushels you're going to have in the field, we think it's okay to be patient and to wait here. We think we'll have other opportunities as we go down the road.

Pearson: Patience is a virtue. And the report today was bullish on beans. What's your take on that?

Roach: Well, the bean situation is really beginning to get quite dire. The South Americans had a major crop cut, and now North America is having a major reduction. When you put those two together, that is a substantial thing around the world and China has not yet quit buying. China was back in the market again this week, but today with more sales announced; we're going to use all the U.S. soybeans up. We've already used all the South American beans up. Now we're going to use all the North American beans up, and then we're going to have to depend upon that South American crop. Everybody thinks the crop is going to be very large. The South Americans will try to raise a monster crop this year. If Mother Nature lets them, everything will maybe be all right, but it's going to be dicey. So the bean market is also on a very solid fundamental situation here. We think we'll have opportunities to make better sales at better price levels.

Pearson: So again, patience.

Roach: Patience. Wait for the market to come up. Wait for the oscillators to signal it's time to make some sales.

Pearson: Let's move into livestock a little bit. What are you seeing in fat cattle? Where is the market going there? How is the demand level?

Roach: We think that demand is going to spur up here. We've got a little cooler weather in Southern Iowa today. Didn't it feel good out there. It's a little cooler weather. And this is the normal time of year when we see the demand ramp up as we move into Labor Day weekend, so we think the market is going to be a solid market here and that we can maybe advance the cash market maybe $4-$5 per hundredweight during this period of time. So we're kind of optimistic on the market here over the shorter run, but on an advance, moving in toward the Labor Day weekend, we're hoping we can get the futures market up. We traded right up at the top of resistance. If we could clear 127 in the Octobers, we could maybe scurry on up into the low 130s. So we're hoping for that opportunity to be able to get some hedges on because we think the fourth quarter will be back under some pressure.

Pearson: Let's talk hogs a little bit and move into that market. We had a down week last week. A little bit lower this week. What's the forecast looking for hog producers?

Roach: The hog market, we look at something called the livestock crush, which is the price of corn and the price of meal and the price of hogs. It's at the lowest that our data has been in the last nine years. The profitability in the hog business is really tough. We've seen the sow slaughter pick up a little bit last week. It was the biggest week of the year. We think it's going to pick up some more. We think that it's indicating maybe a little bit of liquidation, but the USDA and their forecast today said that the third quarter would average $5 or better than the second quarter. But the fourth quarter, we're going to lose $6 compared to where we get to in the third quarter. So we're concerned about the hog market longer term.

Pearson: Thanks so much, john. Appreciate your being here. That wraps up this edition of "Market to Market." but if you’d like more information from John on where these volatile markets 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, as well as links to our Twitter Feed and Facebook account all free at the “Market to Market” website. Join us again next week when we’ll examine the long-term impact of smaller crops, tighter supplies and higher prices. Until then, thanks for watching. I'm Mike Pearson. Have a great week. 


Tags: agriculture cattle commodity prices corn economy feeders hogs John Roach markets Mike Pearson news soybeans wheat