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Market Plus: Don Roose

posted on March 1, 2013

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Pearson: This is the Friday, March 1, 2013 version of the Market Plus segment.  Joining us now is Don Roose.  Don, welcome back.

Roose: Thank you, Mike.

Pearson: One of the things we didn't have a chance to talk about on the show was crude oil prices and energy.  We saw a $2 drop, you know, basically over the week in crude oil.  What is driving that?

Roose: Well, one of the things we have to remember, Mike, is crude oil is traded in U.S. dollars around the world.  So as the U.S. dollar moves higher it's a natural for crude oil to move lower.  And also I think we hit some technical resistance that put some pressure on the market along with funds liquidating out of some of the commodity sectors.

Pearson: How long do you think this slide in crude is going to happen?  As long as the dollar keeps climbing?

Roose: When you look out in a distance, long future, we're beginning to be more energy independent all the time.  So I think the real question mark is if we produce more energy what is the real value as we have substitutes come in?  So  $100, you know, we really have a tough time up around $100 and we find pretty good support around $80.  So I think we move back and forth in that range until we really figure out the new supplies coming on line.

Pearson: And speaking of energy, we had the ethanol production report come out in this last week.  Were there any big surprises on there?  Are ethanol plants starting to come back on line?

Roose: They are starting to come back on line.  You know, profitability has come back to levels that it hasn't been since July.  So you're seeing some of the shuttered plants coming back on line and part of that is due to the fact that we had a 60 cent slide in corn and these people were able to cover some of their needs again for, you know, a few months out.  And so the crush works again.  So it is that on again off again situation just trying to bridge everything.

Pearson: Now, as more ethanol plants come on line or as production increases are we going to see cattle producers in particular switching, perhaps they have been feeding wheat, switching back to DDGs and other co-products?  Is that going to have an impact on the wheat market do you think?

Roose: I think, you know, the DDG probably is too small.  The DDGs, you know, they're a pretty stable market and we're really on pace to hit that level that the USDA says, 4.5 billion bushels of corn usage.  Soft red wheat probably is going to move out of the market as corn values, as corn starts to come into the marketplace and that is going to be in July.

Pearson: All right.  We have a question here from Kevin in Des Moines and he is asking, we've seen a lot of acreage estimate numbers thrown around, USDA has thrown out 96 million, Informa back in November, December said 99 million, what are your thoughts on acreage?  Do you think the USDA is going to be pretty accurate with that 96 million acres in corn?

Roose: They could be accurate around that 96.5 and I tell you, it all depends on your prevent plant.  We had a very low prevent plant this last year but my guess is we're going to plant fence row to fence row and I think the USDA is using a low prevent plant number.  I think that it's probably not going to be that low.  We're probably going to end up between 98 and 99 million acres on corn.  So a lofty number.  And if you put a yield on that you could come up with some incredible ending stocks.

Pearson: Certainly, even if we're looking 10-12% below trendline we're still going to see a lot of corn.

Roose: Exactly.  You know, we're talking, if you would be four bushels off of trendline even with a 97 million acres you still have 1.8 billion bushel carryout.  So, I mean, you look at those numbers it is actually going to be one of the largest increases in stocks in history from the tightness to a surplus.

Pearson: And this was the exact same conversation you were having last year with my father around this time of the year was concern of a giant crop.  So we could still see things change as the year goes on I suppose.

Roose: You're exactly right, Mike.  It was exactly the same talk and it was all boiled down to weather.  And that's why from a commodities perspective I always tell people about 80% of the market ultimately turns out to be weather and here we are again.

Pearson: That's right.  That's right.  Weather is going to continue to play a factor which is Michelle in Nebraska's question.  She is very grateful for the snow that they received.  It was the first moisture for the wheat crop.  It wasn't near the snow they were hoping for and it isn't nearly the moisture they need.  Looking longer term do you have a weather outlook that you trust longer term?  I mean, what is the general market sense on where these things are headed for that western Corn Belt and the wheat growing areas?

Roose: What I always look at from a market perspective, Mike, is when your -- is the drought getting bigger or smaller?  And that usually gives you a pretty good direction what happens to the marketplace.  And I think you can say right now that the drought is getting smaller.  In fact, one of our big issues, I know we're worried about weather problems in Nebraska and some other states, but the drought is shrinking.  In fact, it's too wet in the delta where three percent of our corn is produced and I think you probably will have some regional problems but I think we're moving back to a more normal situation.

Pearson: And you mentioned the delta.  One of the things we didn't talk about were cotton prices during the show.  We did see a nice little rise, two and a quarter in cotton this week.  What is going on there?  Is that the wetness that has got people concerned in that market?

Roose: It is some of the acre situation that is going to be down but I tell you the real driver on cotton just continues to be China.  In China, remember, they were stockpiling cotton and it ultimately, they're pretty smart traders, and they really are the ones that pushed the market up to this level just from a world standpoint because they're stockpiling so aggressively.  So cotton realistically is worth 70 cents but, you know, it could run up to 90.

Pearson: Okay.  And it is all going to depend on China.  Are they going to keep buying but at some point they'll stop and potentially could unleash a massive stockpile on the world market?

Roose: Exactly.  That is right.  So it is all dependent on them -- I wouldn't say it's similar to soybeans but part of the reason our soybeans are so strong is because of China and China buys 65% of the global soybean demand comes from China.

Pearson: Wow.  Big numbers.

Roose: Big numbers.

Pearson: We start talking about that.  We had a question here and we didn't get a chance to talk about it very long on the show.  Amanda in Iowa is asking about pork prices.  And we touched a little bit on demand at the supermarket.  What guidelines or what bits of information do you look at to get a gauge on where pork might be headed?

Roose: Well, one of the big gauges is I have always had confidence that the government has all the numbers and you better keep a pretty close eye on them.  And I tell you what, the government projections they're talking about in the fourth quarter $73 to $79 a hundred weight.  They're talking about in the second and third quarter they're talking highs only up in the $92, $93.  So I look at the government.  Then I look to see if some of the things they're using is correct and one of them is they have a very hard time with the demand factor and so I think if the market share grows on pork, pork will move up but we are going to -- one thing that happened with the pork industry, Mike, is with the high priced grain we didn't see the liquidation of the sows.

Pearson: Right.  I mean, total, total pork head numbers out there were almost unchanged from a year ago.

Roose: Yeah, exactly.  And our breeding herd up a half a percent.  So the pork industry looked at it and said we're going to live through these high numbers to lower numbers and this is a time that we're not going to liquidate out for the future.

Pearson: And we just need more demand and people willing to pay the higher prices.

Roose: Yeah, and then really what you have is, we found this out, you know, China, Russia, backing away from our pork markets on exports.  China was our third largest pork consumer last year and they are basically out of the market.

Pearson: And that is going to continue, I know there are talks ongoing to get the third party mediators involved.  What are your thoughts on the ractopamine situation in China and Russia?

Roose: Well, they're ultimately probably the gauge and I think probably what happens realistically, not that you want to, but ractopamine probably is forced to be removed in a lot of the rations.  And, you know, that is a big one that adds, it adds a lot, you use it basically in finishing for the last 15 days to add a lot of tonnage.  So it is one that probably takes some weight off the market, you know, on the livestock numbers but it might help the exports in the future.

Pearson: Okay, because they are big enough to demand that sort of change in the industry.

Roose: They're big enough to demand it along with some of the other trading partners, they might influence them also.

Pearson: All right.  Don, thank you for being here.  Do you have any final thoughts before we go, anything you'd like to talk about for this next week?  Anything jumping out at you?

Roose: Well, yeah, I think the thing that really jumps out at you is how do you bridge and what does the producer do when you're looking at record tight supplies for old crop and now you have big supplies on new crop?  I would say that if I had some advice that the producer should really say that we probably jump back to normal growing conditions and we've probably seen some of our best prices over the last year and we're probably going to move lower if we get the weather.

Pearson: So keep that in mind as you're putting together your marketing plan for this year.

Roose: Most definitely.  We've got the insurance rates set now so at least you have some insurance under your belt.

Pearson: That's right.  Thank you so much, Don, appreciate you being with us this week.  Have a great week.  And thank you for sending in your questions via Facebook and Twitter, we do appreciate it.  Keep sending them in and we will keep getting experts to answer them for you.  Have a great week.

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