Iowa Public Television


Market Plus: John Roach

posted on August 30, 2013

Pearson: This is the Friday, August 30, 2013 version of the Market Plus segment.  Joining us now is John Roach.  John, welcome back.

Roach: Thank you, Mike.

Pearson: Real quick one of the segments we didn't get a chance to talk about during the show was cotton.  We saw a couple weeks up in cotton, down $9 last week and now trading sideways.  Where do you see us headed in the cotton market?

Roach: That was a huge up and down move in the cotton market and then the market destabilizing.  The worries about the demand side of that market that took prices back down after the big rally, people were trying to get their head around just what kind of a demand situation we're going to have out here this next year.  And I think we're going to see the market just kind of maintain this kind of price level here for a little bit, perhaps maybe a little bit more pressure.  But I think we just have to kind of let a little bit more time go by at about this kind of price level until people get comfortable with what it looks like forward.

Pearson: Okay.  Now, I'd like to get to some of the questions here from our Twitter and Facebook followers.  Danielle is asking a question that a lot of people are asking relating to the corn market.  She's hearing lots of doom and gloom over $4 corn or lower, but is this still a weather game?  And if there's a frost or the drought continues will the rest of the crop be good enough to make up for the loss?

Roach: Well, Danielle, I think that the doom and gloom that people are presenting is a little bit misguided.  I think sometimes what you hear about is the story that people would like to have you believe because they're talking their position.  And the market has had a huge decline from $8 plus corn down now to sub $5 corn and the people who have made a lot of money on that side of the trade are still the ones talking about it going on down, on down, on down and their argument, of course, is supplies are going to continue to grow forever.  But I think that there's another argument in corn and I think that you need to hear this argument.  And that is that the worldwide growth in corn, and by the way also wheat and beans, all three of them are within one tenth of a percent of each other.  For the last five years the demand has been growing at 2.5% per year compounded.  And that last five years, of course, is a period of time of difficult economic conditions around the world and record or near record price levels.  And as you look out forward you have to think that we continue to grow at that kind of a rate or perhaps even a faster rate than that and in order to supply that level of growth in the world we've had to push our production into non-typical areas, into areas that are more marginal production area with more marginal weather and more marginal political considerations.  And it's very difficult to keep pushing your production into new areas if you don't have the profit motive to get that job done.  An interesting look at that is the United States, as an example, total planted acreage jumped 11 million acres in one year, in the 2011 into 2012 because of profitability.  And if you take away the profitability we lose -- in the last two years back to back when profitability was pulled down we dropped 5.5 million acres and 5.5 million acres.  So we can lose the 11 million acres just as quickly as we gained it and that is in the United States where we don't move in and out of production very easily.  And if you go into the marginal areas of the world it is much easier to pull back out of production.  So I think the real challenge here, and I think as you look at this from a longer term perspective which is what you really should be thinking about if you're in agriculture, the longer term perspective is the challenge in the world is how are we going to produce enough corn, beans and wheat to supply this level of growth.  And what we really have to have is we have to have very good crops every place in the world or almost every place in the world and if we have any problem anywhere in the world the market will be very quick to react to it and here we are this year after a bumper crop in South America and what looked to be a bumper crop in North America all of a sudden two weeks of bad weather and the whole story is rewritten.  And so this ability to raise this production that the guys in Chicago want to tell you about, it's not that easy to do it on a consistent basis and grow it worldwide.  And so I think that this idea of sub $4 corn, it's not going to happen this year and everything has to be perfect for it to happen next year.

Pearson: And now that raises some other interesting considerations as we look long-term.  As you mentioned, we're growing corn in more marginal areas at the expense, often times, of other crops.  In America, of course, we've seen wheat acres transferred to corn in the Dakotas, for example, and around the world.  As we look long-term, as this demand for corn continues, is this going to help put increased bullish pressure on wheat and some of the other grains whose acreage could be reduced?  Do you think it will be that much of an impact as we push into marginal areas?

Roach: It actually is this year.  If you look at worldwide wheat numbers, again, the ending stocks on wheat, if you put them on a graph, when you compare them to usage they're smaller at the end of this year than they were last year and they're actually some of the smallest in several years.  So wheat supplies one year from now are going to be very tight.  So this -- we're on a delicate balance here with these levels of worldwide consumption that we have, this is a very delicate balance.  And people who are telling you other than that, they're not looking at the numbers and understanding what it takes to feed this hungry world.

Pearson: Now, that being said, as we look at the big picture, I'd like before we let you go to bring it down to the narrow term again for producers out there.  Austin in South Dakota is asking, what is the path of least resistance on the December corn contract?  How is Chicago feeling about corn?

Roach: Negative. The traders in Chicago will sell it every opportunity they get.  And if, as long as the market wants to trend down they'll dog pile on it.  The flip side of that is if the market doesn't want to break and it starts to trend higher they have to get out of the way and that is what we saw last Monday with that sharply higher market and so if we come in on Tuesday morning and this market doesn't want to break and we start, this market starts moving higher and we take out the highs of last week we have a lot of shorts, speculative shorts that have got to get out of the way of it.  We also have record export sales on the books for this time of year on new crop corn and somebody has sold that corn and the farmer hasn't sold it.  And then we also have the user who doesn’t have anything bought.  So, as I look at this poker game, again, the people who are holding the cards here I think are the farmer and farmers right now, as I talk to them, they don't like these prices and they don't have to do anything right now.  They are not harvesting anything and they wont' be for a while.  Now, there's a few in the fringe areas and thank goodness they are because that corn is needed right now today.  But as far as the main part of the Grain Belt, the grain that we need to supply the biggest part of demand, you can see how much of that is available because you can see how aggressive the cash bids are to try to get all those last little bushels that are available.

Pearson: And those bids are going to stay strong through harvest?

Roach: I think they're going to weaken, they're weakening because, again, we're giving incentive for people to harvest early, we’re giving incentive to move grain from Mississippi up to Illinois.  We're moving grain in funny directions in order to try to fill the holes.  But, so those big premium bids we had on Monday, they slid back by Friday, but they can come back again very quickly but they're for very limited supplies.

Pearson: Alright.  Thank you so much, John, for being with us.  Appreciate your thoughts on the future bullish attitude that I think we are facing in agriculture looking down the road.

Roach: Thank you very much, Mike.

Pearson: Appreciate having you with us.  And thanks to all of you for sending in your questions via Facebook and Twitter.  Just wanted to make a mention we are almost up to 970 followers on Facebook, I know we'd love to get that to 1000, so tell your friends.  And in the meantime, keep submitting questions and we'll keep getting expert answers for you.  Thanks so much for watching.  Have a safe holiday weekend.  Take care.

Tags: acreage agriculture analysis basis commodity prices corn economy John Roach markets midwest new crop grain soybeans USDA weather wheat