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Market Plus: John Roach

posted on February 22, 2013


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Pearson: This is the Friday, February 22nd, 2013 version of the Market Plus segment.  Joining us now is John Roach.  John, welcome back.

Roach: Thank you.

Pearson: It's good to have you back.  On the show you mentioned briefly the disappearance, so to speak, of speculative traders in the commodity markets.  Would you be able to expand on that a little bit?  Give us your thoughts.  How does that affect pricing?

Roach: Well, each Friday the CFTC gives us a commitment of traders report and what that report tells us is what are the net positions, they tell us both the long and the short positions of several groups of people.  We pay close attention to the net position of the managed speculative funds and the other large traders.  And what we have been seeing is that those large traders have been abandoning the long side of the corn market really since this past summer.  There's been a time where they surged back in a couple different times but they keep liquidating out those net long positions and we think that we're losing those people because they're going to other marketplaces and we think the stock market is a pretty obvious spot where people are putting money right now, the stock market moving higher, the corn market struggling and not being able to move higher.

Pearson: And with all of the uncertainty that is going on with the sequestration and the debt ceiling and all of the policy issues we've got facing us, could some of this money just be sitting?

Roach: That's another thing.  I mean, they could be taking the money out and putting it in their sock, I mean, because of the uncertainty.  But the thing we do know is they are taking their money out.  And when the speculative people take their money out of the market, take their money out of the long side of the market farmers need to understand that you're not going to have as solid and upward moving kind of a market as long as that continues.  Now certainly we can start to develop a story.  Once we get the crop going in the ground in this country then we could develop a story of problems and so forth and we could bring speculative buying back into the market.  But the South American crop has been a little worrisome as of late but by and large it is a very large crop, both corn and soybeans.  So we don't have a story there and we don't have a big demand story in corn or wheat.  We do have a big demand story on soybeans but we need to have more positive kind of fundamental outlook in order to bring the spec traders in or I think most farmers will be disappointed with how far up prices can go even with a little weather scare.

Pearson: Our rallies really are capped in a sense until the spec traders come back in and give us that jolt up to the high end of the price ranges.

Roach: I think more than a jolt, a sustained increasing ownership.  That’s what we really need.  They can come in with a jolt and we get the shot up, we saw that in beans a month ago, we saw a surge up but the market stopped at about $15.00, fell all the way back down.  Again, we surged back up again this time, cleared $15.00 but couldn't hold it, fell back down again.  So we're just not keeping the speculative demand growing and growing and growing each week the way we saw back in 2010 and the way we saw in the early part of 2012 or the middle part of 2012.

Pearson: Right, when that story of the drought really took off.

Roach: And it kept, the story continued and continued and continued and the speculative demand continued at the same pace.

Pearson: All right.  Well, let's look at some of our questions from Twitter.  Doug here has asked a question you touched on just briefly on the show and that is, with this sequester looming, next Friday I believe is the date it will take place, how will the government layoff of meat inspectors and shortening plants, plant slaughtering kills affect hog and cattle prices?  Is that something we can quantify?  Has the market taken it into effect?

Roach: Well, it's a great question.  I wish I knew what the answer was.  Will the sequestration actually take place?  And if it does where will the cuts be?  I mean, when I listened to the litany of cuts that the administration has described there are a lot more cuts than the $85 billion I think we're talking about.  So hopefully that would not be where we would see reductions at, hopefully, but you saw from the earlier story that that is in fact where it may happen.  So that is never positive news to a market when you worry about how are we going to move the supply.

Pearson: And with, in particular, as we've seen with these policy deadlines that come into effect and then Congress takes action the day of or in some cases the day after, this might not have an effect on the market or a serious effect on the market until it either happens or doesn't next Friday.  We might have to wait and see?

Roach: Typically what happens is the market runs away.  If you recall when we were facing the fiscal cliff markets bottomed right at the time when we found out how they were going to solve the problem, we bottomed when we found it out.  And so that may be what happens this time.  We may bottom if we find out that they have resolved the issue and we're not going to have to slow the plants down.

Pearson: So that's something to keep your fingers crossed for I suppose.

Roach: You just have to appeal to Congress to be a little more adult.

Pearson: You bet and good luck.  Phil in Ontario was asking, what is the future of the U.S. dollar?  We've seen recent strengthening.  Is that going to continue?  What is the fundamentals around the dollar and how does that shape the markets?

Roach: Another great question.  The Federal Reserve January minutes were released this week and if you sort of read between the lines it looked like maybe the government is signaling, I saw Dennis Gartman said, we've had a punch bowl at the party and maybe they're going to move the punch bowl a little ways away from you.  And we know eventually they're going to take the punch bowl away.  So the quantitative easing that we've been seeing may be ready to slow down or may end sooner.  And when that happens that is going to take away a lot of the free money out there and the thought of that strengthened the dollar this week drastically and the strengthening of the dollar of course means that anybody who is an exporter from the United States now has some greater cost to export because the overseas buyer has to pay more of their currency in order to obtain the U.S. dollar in order to buy your goods.  So it hurts the export side of the business and the dollar index cleared the 200 day moving average this week and we closed over the 200 day moving average.  So that is a worrisome kind of a thing for anybody in the export business and of course those of us in the agriculture business or certainly in the export business.

Pearson: Certainly.  And so as a technical trend closing above that 200 day moving average, does that show you indications that maybe we’re going to hang out above that level until we get more guidance from the Fed?

Roach: It tells you the dollar's trend is higher.  In any market when you're above the average for the last 200 days you're trending higher.  And so it is occurring.  You know, will we learn more about the Fed and their policies and will we decide oh wait a minute they're not going to pull the punch bowl away or not?  I mean, we'll just have to wait to see what happens.  But right now the traders are betting that that move has started and you saw that with the move of the dollar index today, or this week.

Pearson: One final question.  We do have a question from Ted in Omaha.  He is asking about ethanol and he says, is the USDA estimate that ethanol use next year will increase 175 million bushels accurate given the expected production?  I mean, what out there could affect ethanol production?

Roach: Well, it's all about margins.  One of the things about the ethanol business, people talk about demand destruction, we don't really have demand destruction ethanol, we just close the plant and you can fire the plant back up within just a matter of days as soon as the margins start to work and you can go to producing over the plate capacity of that processor, of that mill, just as soon as the margins make sense.  And we know the margins are going to be difficult until we get into the new crop.  But if you look, energy prices tend to remain relatively constant and if you look at new crop corn prices versus old crop corn prices clearly there's more profit to be made in the new crop than there is in the old crop because of the difference in the two values.  So my guess is we will have a greater production of ethanol next year.  I think the USDA may actually be conservative.

Pearson: All right.  One final thing, as we're talking ethanol, crude oil.  We've seen a slide in the past couple of days on crude oil.  What is going to happen there?  What is the story in crude oil?  Is it going to keep sliding lower?

Roach: Well, there's talk around that maybe somebody is feeling forced to liquidate long positions but, again, as the dollar moves higher the other side of that teeter-totter is that anything that is priced in dollars that you're trying to export whether it be corn, soybeans, crude oil or gold for that matter, all those things go down in value when they are priced in dollars and the dollar strengthens.  So that is the back side of that Federal Reserve may be changing the QE3.

Pearson: All right.  Thank you so much, John, appreciate you being here with us and sharing your insights.  And thank you for continuing to send us your questions via Twitter or Facebook.  Please keep it up and we'll continue to get very bright people to get them answered for you.  Have a great week.


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