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Market Plus: John Roach

posted on January 24, 2014


Pearson: This is the Friday, January 24, 2014 version of the Market Plus segment.  Joining us now is John Roach.  John, welcome back.

Roach: Thanks, Mike.

Pearson: Well, we're glad to have you back.  We've had a lot of questions.  As we touched on during the show, the Renewable Fuel Standard is a hot topic and there's a lot of concern about what is going to happen to corn demand should the EPA continue with the rule change as proposed or repeal it and go back to their initial programs.  Laura in Iowa is concerned, living in a rural community what impact does the RFS have on corn prices?  Where is ethanol going in this next year in your opinion?

Roach: Well, I think the initial impact gave confidence to investors to put up ethanol factories so that we could develop that source of energy, renewable energy.  And now the concern is that they're going to pull the requirement back to a smaller amount.  The old requirement was based on growth in gasoline usage that hasn't occurred.  The gasoline usage has been smaller than anticipated and so the current Renewable Fuels Standard is calling for more ethanol to be produced than what the industry really can use at a 10% blend.  So there in is the rub.  And so people say, if they repeal that is that going to kill the ethanol industry?  And the first answer to that is, no.  This week we traded ethanol at 83 cents a gallon less than unleaded gasoline that is used in the, we call it RBOB, it's a gasoline that is used to make what comes out at the pump.  And so the 90% of the gallon of gasoline that you buy at the pump and the 10%, the 10% is 83 cents a gallon cheaper than the 90%.  So if you think about it as a business person if you can sell a product for $3.00 a gallon and your input, one component is 83 cents cheaper than the other one, there's a real financial incentive to continue to put that 10% blend in there.  In fact, I wouldn't be surprised that we would find some people out there might have, oops, goofed up and actually made it 11% or 12% because of the financial difference.  Of course I know nobody does anything like that but there is a financial incentive to use it rather than not use it.  And so the first thing to do is to take off the table all of some of those big worries that it's going to disappear because that's really not likely the case.  From a standpoint of growing the industry it's going to be very difficult to grow the industry if we're restricted to a 10% blend because we're just using about so much gasoline and that requires, if it's 10% ethanol that's about your limit.  Now, that gasoline usage has been slowed because of the economic slowdown, it has been slowed because of more efficient cars.  So as we look out forward if we can get the economy cranked up a little bit that will help.  But, once again, the cars, and we're selling a lot of new cars, are more efficient than the cars they're replacing for the most part.  So the real answer here is we need to push toward a higher blend or we need to push toward blender pumps so that the consumer can make the decision.  We also need to encourage the retailers to have a fair markup on E85 as compared to the gasoline.  In my neighborhood, the gas station right across the street from my office, sells E85 at a 15 cent per gallon discount compared to gasoline.  But E85 costs 83 cents a gallon or traded this week 83 cents a gallon cheaper.  So they're obviously working with a much larger markup on that E85, which is discouraging its usage. And so those would be the areas that I think we really need to focus in on.

Pearson: Alright.  Now, keeping the topic on corn, Brianne in Iowa is asking, have we missed the boat on selling new crop corn?  Looking at the sell signals you've seen so far, what percentage would you recommend producers having had sold by this time of the year?

Roach: Well, first of all, the boat hasn't come in.  You had to make sales on new crop corn months and months and months ago and have that kind of a marketing plan.  And although some people have a marketing plan to sell grain a year or two or more in advance, for the most part most people really don't.  Most people are uncomfortable selling corn even a year in advance.  Most people prefer six or eight months in advance.  So although the price is definitely cheaper we really haven't had opportunities at price levels that made very much sense so far.  Now, we think that the supplies will be tight enough this year in the world.  If you take a look at usage we normally increase corn usage in the world 2% to 4% per year.  And if you take the usage that is forecast for this year and you increase it 2% you're increasing it by 20 some million tons.  And so that is a big increase in the crop and as a consequence we're going to have to find where we can produce those extra bushels.  We're not going to have bigger acreage, corn acreage in South America, we're not going to have bigger corn acreage in North America so that means we're going to have to get the yields in these two areas, we're going to have to get acres and yields around the rest of the world.  That is the challenge.  We've got dry conditions here in this country.  So I think there will be some weather scares and there will be opportunities to sell new crop corn.  But what we're suggesting to people is find an oscillator program you're comfortable with.  We're really comfortable with an oscillator program that we use and our goal is to make a sale, try to make sales at the peak of that price oscillation each time we get it this year.  And we think we'll have four more times or four oscillations between now and mid-summer.  So we're looking for those market peaks to be making sales.  But I can assure the listeners out here you're not going to like the price that you're being offered and that's going to be the really difficult decision.  Do I go ahead and lock in what is maybe a break even or maybe a little less than break even?  Or do I wait a little longer and hopefully get something more because maybe there's some weather problem a little bit later?  Or do I hold on and say, I'm going to wait and sell next spring, in the spring of '15 because, again, we're going to have to get another 2% to 4% bigger production and we're going to have another issue with trying to raise a crop.  So these are going to be the management decisions producers are going to need to be making.  But each one of these cycles up.  When we get sell signals in the marketplace you're going to have to make that decision and then go on forward and then see what happens.

Pearson: Alright.  Now, you mentioned corn producers might not like the price they're offered when it comes time to make some sales.  Ben has a different question for folks who may like the price a little bit more on the cattle side.  What do you recommend about looking at the price we've got right now in cattle and taking this opportunity to hedge summer, June, July, August cattle?  What are your thoughts there?

Roach: We don't think the market is going to collapse.  We think the market is going to stay a good market.  We saw the cattle on feed report where numbers are down, the price of breeding stock is very high.  It's very hard to justify expanding the herd.  So it's going to be difficult to get additional numbers out in the months ahead.  So in general we're optimistic about the cattle market.  That being said, these kind of price levels that are being offered and some of the profits that are being offered, again, like the corn producers asked, I don't want to miss the boat on this. So take a look at your profit potential, take a look at the market.  We are getting sell signals.  This is time to be doing it if you're going to, to be making sales or buying puts.  And if you're not that's okay too because we think we'll have strong spring markets.

Pearson: Alright.  Now, you mentioned we are seeing sell signals in most of the livestock, all the livestock markets.  How long have those been going on?  We've seen this rally substantial --

Roach: They've been on all week and in the case of cattle it started last week.

Pearson: Wow, alright.  So there is a lot of movement there.  Now, as we take a look, you get to talk to producers all around the world.  Looking at Brazil, Tim in Crookston, Minnesota is curious, what is your take on the Brazil bean crop and Argentina?  Has the heat really damaged it?  Or is the rain this week going to save it do you think?

Roach: The Brazil crop is excellent.  Nobody is complaining about problems except maybe southern Brazil a little bit.  The main production area they have started harvesting already and the yields are all uniformly pretty good, or excellent, I should say excellent if not record.  Argentina, we were in Argentina with a group of farmers last January and it was a very dry January, had been dry during December and if you remember there was a surge in the market because of how dry it was in Argentina.  And then the Argentines produced an excellent bean crop.  Their soils there are very good soils.  Their farms have, they have been farming them for years.  We were surprised at how mature that industry is and the quality of soils and the kind of soybeans they raise.  So my suggestion would be there's probably less worry here about Argentine crop than maybe some might suggest.  But that being said -- and we've had some improvement in the weather.  So, I'm not ready to count the Argentine crop out at all.  I do think it has maybe shrunken just a little bit but it's still going to be a big crop.

Pearson: Alright.  One final question on corn, before we let you go.  As we get into this time of year we have got producers who have already purchased seed, we've got some that are waiting to make their acre decision.  How many corn acres are you expecting in 2014?  Are we going to see a decline as more folks switch to beans?  What's your take?

Roach: I think so.  In fact, if you look at the total planted acres in the United States or the principle crops, over the period of the last ten years we have seen two swings of 10 million acres.  We'll add a total of 10 million acres and then take those 10 million acres back out of production and put them back in production and take them back out and then put them back in again.  So we've seen that swing of those 10 million acres and it follow the profits.  If the profits are there we get the extra acres.  If the profits are not we lose them. And so it would seem to me that we should expect all planted acres that we ought to lose about 5 million acres in the United States.  That has been the pattern.  That's what I would expect.  And it could be even more than that.  Nobody else is really thinking that there's going to be that kind of loss.  We've already seen the wheat acres be reduced some.  I think corn acres will be reduced.  And bean acres will stay the same, maybe come up just a little.  So the biggest crop reductions will come in corn as I see it.

Pearson: Alright. Well, thank you so much for being with us, John Roach, really appreciate your insight.

Roach: Thank you, Mike.

Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter.  Please continue to do so and we'll continue to get expert analysis right to you.  Thanks for watching and have a great week.


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