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Market Analysis: John Roach

posted on August 31, 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 nice to be here. 

Pearson: Well, we're glad to have you.  It's been an interesting week.  What in the outside markets do you think is having an effect on commodity prices this week? Is there anything? 

Roach: Well, we all kind of already held our breath a little bit, with the meeting to see what Mr. Bernanke was going to do, and they said that they're going to try to keep credit readily available and hold interest rates down until the job comes back.  And so that was a little bit of a positive kind of news, kind of an inflationary type news.  But then, of course, the weather concerns this week, with the hurricane, had a big impact on prices. 

Pearson: All right.  Moving into wheat specifically.  We heard more news about Russia.  They're cutting back their wheat crop estimates.  What kind of affect is that going to have in the near term and in the longer term on wheat prices here in America? 

Roach: When you look at the world seller of wheat, the swing player, if you will, are the countries of the former Soviet Union, Russia, of course, being one of the larger.  With their production increased a year ago, they took a lot of business away from the United States' exporters.  Now this year with their production back down sharply, there's been a lot of talk that maybe they wouldn't have enough grain to be able to have the export program we earlier thought they were going to have, but this week, even though they cut their production estimate, they're still signaling that they're going to maintain their exports and draw down their own domestic stocks.  But the former Soviet Union countries are the real swing players when it comes not only to wheat but also to coarse grain exports in the world.  As long as they're continuing to pull their stocks down and export the numbers that they're talking about, then the fundamentals are pretty much in place, but if they start to actual reduce their exports or eliminate their exports, as they did back in 2010 when they had the crop problem, then that would be very positive to our export market. 

Pearson: Now, what sort of timeline are we looking at to learn exactly how those country's export markets are going to be looking? Is that something we'll know in the next couple of weeks? 

Roach: I think we're probably two months away from really having our hands --I think we get into October -- maybe not quite.  Maybe six weeks or so and then we'll see whether their policy changes or not.  What happened in 2010 was they embargoed or they restricted their exports and they ended up almost a year later, prior to the harvest of the 2011 crop, with too big of surpluses in the bin and a big crop coming on at the same time.  So they really hurt their domestic industry by not letting them ship when prices are high and instead forcing them or opening up those exports when prices were cheap. 

Pearson: What do you think that's going to do for prices? What should wheat producers be doing right now? 

Roach: The thought that we were going to see some restrictions to their exports allowed markets to move higher.  However, when we didn't see any restrictions, prices eased back again.  We think that we're in that period of time where we're just having to kind of grind through some time.  The wheat market has been down on a little more of a lower ebb here.  It's been following the corn market.  When the corn market stalled, the wheat market started to drag.  We think it's going to drag for a little bit, quite frankly.  There is concern in Australia that the wheat crop is being cut a little bit.  South America, of course, we'll learn more about that crop as that time goes along.  But at the moment we think wheat producers need to be in a holding pattern.  We've had the rally up post harvest.  Now we --the market has to absorb this and we think we'll have some better prices later. 

Pearson: So wait and watch is the moral of the story. 

Roach: Wait and watch.  Look for some price recovery.  Remember, the high in wheat usually comes around February. 

Pearson: Well, let's talk to corn a little bit.  Where do you see that going? What's driving that market right now? 

Roach: Well, the corn market is trying to get its arms around the size of the U.S. crop.  We're into harvest and we have a small percentage of the crop harvested, but it's so variable.  I was at the farm progress show this week and we had people stop by our booth who had harvested from zero crop, crop was -- the adjusters were out and there was nothing in the field, maybe a couple bushes an acre, all the way up to people who had harvested corn at 175 bushels an acre.  We saw some reports of even bigger yields than that in some areas, and we had everything all over the map.  It didn't seem to make any difference where you were.  The variability was quite high from field to field and from farm to farm.  So we really need to get our arms around the size of the crop and, quite frankly, we just don't think that's going to happen until we get a ways into this harvest.  We just combined enough acres so that we can finally figure out where we are.  We may even have trouble doing until a little bit later.  But we think the September report, since the crop is more mature than normal, could be a little more accurate than normal, except for this variability. 

Pearson: So that September 12 report, that's going to be, in your mind, kind of a big market -- 

Roach: It's going to be important.  The August report gave us smaller numbers than people anticipated. The government adjusted faster than what people anticipated. Now we'll see when the September report comes out if they'll have much more of a reduction to deliver to us. We just don't know. We're all trying to figure out what kind of crop is out there. I think it's going to take more harvest to know. 

Pearson: So for producers that are confident they're going to have a decent crop and they've got bushels to sell, should they be looking to sell or should they be waiting until these numbers firm up a little bit to see where the market goes? 

Roach: Well, I think that the market has already reached a relatively high price level and particularly on, let's say for a producer who would be combining this weekend, the first of next week, basis values for spot delivered grain -- for corn, in some areas are still very strong. And those high spots bids are going to give way to lower prices as basis caves away. We've seen basis ease off 35-40 cents in some areas. We think that the producer will be a willing seller at these kind of price levels, particularly for quality corn, fears of aflatoxin, fears of storing something close to $8 bushel corn and taking a risk on that. So we think that the next job of the market, unless we're shocked on production estimates, the next job on the market is to discourage farmer selling because the market cannot absorb huge percentages of this crop at this kind of price level. So pressure into harvest. And from that pressure, we should have a very strong rally once the crop gets put away. We think users are going to be hand-to-mouth buyers in the early part of the harvest, and not really come to the trough until they realize, holy cow, it's not going to get a lot cheaper. At that point we think the user will be stepping in at the same time farmers are wrapping up harvest and closing the bin door. We think once the bin door is closed, prices are going to have to come up in order to encourage the movement. 

Pearson: Let's talk a little bit about soybeans. Are you seeing the same sort of action in the market on that end as well? 

Roach: The soybean market actually is right up on the top. This week we saw all new lifetime historic highs. We're into a sell signal, according to the programs that we use. This is the ninth day of the sell signal. Just a few days ago, we printed the absolute historical high. So we think sales of soybeans, if you have a little comfort about what your crop size is, if you're looking to make some sales, we think it makes some sense to go ahead and be making some sales in here. But the same thing applies; once we get into harvest, we expect the market to come under some pressure, followed by a very strong rebound once the bin doors are closed. 

Pearson: So it's either sell now, wait, and then see what happens after harvest is completed? 

Roach: Either sell now or resign that you're going to wait until everything is put away, and then you're going to be prepared to make sales later. This is assuming that the crop size is not drastically different than the kind of numbers the trade is using. 

Pearson: Sure. With that in mind, hitting record highs, should farmers that are planting for next year, should they be looking at selling some percentage of 2013 crop already? 

Roach: Well, we think that -- if you remember the old song the people used to talk about, the beans in the teens song, if you remember that, you've got beans in the teens.  We had some $13 cash bids out for new-crop delivery of 2013. . . 13 for '13. We think it makes sense to make light sales just because of the price level.  We're not making any sales out of fear. We don't see a market that's going to collapse in here.  We see reasons for prices to stay very strong until we're certain about the South American production, so we're not trying to be fearful here.  We just think that if we're making some light sales during the sell signal out for the new crop starting at $13 a bushel, we think that that makes some good business sense. 

Pearson: Grab those prices while they're available. 

Roach: Exactly. 

Pearson: Let's talk livestock a little bit.  What are you seeing in the feeder cattle market? What are producers doing, especially in relation to these high costs? 

Roach: Well, as soon as the corn market eased back the feeder cattle market popped up. We have stronger price levels this week.  We have people that are chopping corn and preparing to feed cattle.  So we think that market is probably going to stay on somewhat of a firm footing here, as long as we don't move the corn market back higher.  In fact, if we see the corn market come under some harvest time pressure, which is what we anticipate, we think that will put some strength into the feeder cattle. 

Pearson: And you think that strength will last through the duration of harvest, and then we'll have to wait and see when the bin doors close. 

Roach: Once again, it's really the back end of the corn play. In other words, if the corn market softens, the feeder cattle are strong, and as soon as the corn market recovers, the feeder cattle prices come back under pressure. 

Pearson: And how about in live cattle? Are we seeing a similar kind of dynamic play out there? 

Roach: Live-cattle market higher this week.  We're bumping up against some tops, technical tops in the futures.  But we think longer term as we look out forward, we think the cattle business is going to have to pay producers in order to stay in that business. 

Pearson: And how long-term are you looking? What kind of time window are you looking at here for prices to continue to rally? 

Roach: Well, we think as you look at this upcoming year, you have a combination of a very, very small cattle herd, pasture conditions that are perhaps going to force some more cows into the slaughter arena, and then increasing feed availability next year with perhaps an economy in the United States or perhaps around the world that is maybe starting to show some improvement.  So we think the demand side of the market could improve.  At the same time, the supply side is tight.  So we think cattle prices next year --I'm talking mid 2013 and beyond.  We think it could be quite high priced. 

Pearson: Are you seeing that same thing in hogs? 

Roach: Well, we're not quite.  We're slugging it out in the hog business.  It's kind of a bloody situation.  The hogs were backed up because of heat and we're getting bigger runs now and it's putting pressure on the market.  And we really haven't seen much liquidation at all, and the hog business is a horrible losing proposition right now.  We had people stop by the booth this week talking about losing $40 a head on bringing in feeder pigs that they're committed to take.  And so we're just concerned that weren't going to have a liquidation phase to run through here.  We're really dependent upon the export business for pork.  It's been a big chunk of our business this past year.  So I'd like to offer some words of optimism, but I don't have very many, quite frankly. 

Pearson: And you see this trend continuing on the way through the winter and spring? 

Roach: I think continuing on into the spring, perhaps.  You can always look out forward.  You look at the forward and they offer higher price levels out ahead.  I don't want to suggest that that won't happen, but we're going to have to slug it out first.  So the first step is probably more pressure before recovery. 

Pearson: All right.  Well, thank you so much, John.  I appreciate it.  That wraps up this edition of “Market to Market.” But if you’d like more information from John on where these high flying markets just may be headed, visit the market plus page at our website.  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.  Be sure to join us next week when we’ll examine the outlook for agricultural trade.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.


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