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Market Plus: Don Roose

posted on April 18, 2014


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Pearson: This is the Friday, April 18, 2014 version of the Market Plus segment.  Joining us now is Don Roose.  Don, welcome back.

Roose: Thank you, Mike.

Pearson: We've got a number of questions here from a lot of our great viewers on Twitter and Facebook and those places. And to start it off, Lester in Newhall, Iowa is curious, should all of my old crop corn be sold? We talked about when to make some sales but give us a little bit more of a detailed view on when we should be making some sales here in the grains.

Roose: Well, you know, seasonally the market I would say yes.  I think the market has been an overachiever for what we know about the fundamentals on the marketplace.  Now, it is true that the ending stocks have continued to erode since January but this $5.00 to $5.20 mark on the futures is a selling opportunity.  You may not get another one, you may if we get a weather scare, particularly if the weather improves next week.  So I would say most definitely these are opportunities for catch up sales.

Pearson: Now, you mentioned that we've seen the grains have been overachievers on this recent rally.  Whenever we get that kind of overachievement in the markets we definitely attract some of that non-commercial money, that fund money.  Have we seen that this year in the grain market?

Roose: Yeah, we definitely have.  In 2012, we had the funds were about 312,000 contracts long on corn.  We're up over 330,000 contracts now.  So what we're sitting with is a huge fund long position in the corn market.  And on Friday we did start to crack a little bit and what you have to be afraid of is if the fundamentals start to change to more favorable in weather.  The funds have already front run on the corn market and the soybean market so you could see liquidation.

Pearson: And that would be probably pretty quick liquidation.  I mean, 300,000 contracts if they start to move that would be noticeable in the countryside.

Roose: Yeah, and unfortunately it's an all in, all out exodus and the market goes from overbought to an oversold pretty quickly and the price erosion is pretty fast and your gross dollars per acre disappear.  So I think that's the caution that you have, the other side of it, is you can bank on the weather that it turns unfavorable but I think it's a low bet.

Pearson: Alright.  Well, we've got a question, a wheat question from Tim in Crookston, Minnesota and coming back to this most recent rally.  He goes, of all the factors that are driving it, which is the most important? Weather? Putin? Or as you mentioned the fund money, that outside money?

Roose: Well, I think probably the dominant thing that is driving the market right now is actually the Ukraine situation because they're a huge exporter, they're the #5 wheat exporter in the world and it's an important region. So I think that is the dominant issue followed by the weather and after that the funds.  But unfortunately they all tie together.  If the Ukrainian situation cools down, the tensions, which it looks like who knows, maybe a little bit and then if the weather improves in the wheat area and then the funds exit.  So that is kind of how the program would go.

Pearson: So all of those could be rather short-term trends.  I mean, if the weather improves, if Putin scales back his involvement, if we get a sense of accomplishment or closure I guess in the Ukraine situation, it could all come off pretty quick.

Roose: Well, most definitely.  And then the time of the year you're at, seasonally we usually move into a low moving into that June/July time period.  So the seasonalities are right for the market to begin to slow down to the upside and move lower.

Pearson: Alright. On the livestock side, we've got a question from John Torpy in Urbandale, Iowa and it's a question I think a lot of consumers are going to be seeing this summer as they go in to get ready for a barbeque.  He asks, when will we see relief at the meat counter?

Roose: Well, I tell you, that is a good question.  And the meats have moved to the upside.  But really not disproportionate to what the grain market has done.  But I think as far as relief in sight, on the hog industry it looks like in the fall you start to see the prices cool.  And if you look in the futures market out in February we're at $86, just over $86 a hundred weight where the June hogs of this year are about $125.  So it tells you that there's a downward slant if the production picks up again.  The beef market is a little bit more precarious because it just plain takes too long to replenish that supply, two and a half, three years.  So I would say that the high priced beef is here to stay for a while.

Pearson: Alright.  Now, we've got a question from Ben and we've been talking a lot tonight about the Ukrainian situation over in that area and he is just asking, talk a little bit more about that.  How long will it affect the markets?  And what other impacts from the Ukrainian situation are we seeing in other markets here in America?

Roose: Well, I think the big thing that we have is the trade is uncertain on two things.  One, are we going to have timely plantings, proper plantings? And then, is the export pace going to continue? Both of those seem to be taking place so far so I think with good fortune we'll move along and production will move along as normal. Now, what has really happened from a world perspective, it has forced some of the buyers to over commit both ways.  In other words, they have booked here in the United States, booked there also and they'll cancel one or the other accordingly.  So that is probably the one concern that you might have from an overall interest.

Pearson: So we should, could start hearing cancellations here as we get into summer and that would have an effect.

Roose: That's right.  I mean, it depends on how it goes but if the tensions ease over there you could have cancellations here and vice versa.  It could help our exports if they have problems.

Pearson: Alright.  Now, we also, we saw gold fall this week about $25.  Despite the unrest, what is your take there?  Why are the metals reacting so differently this time?

Roose: Well, I think what it really tells you is the maturity of the metals markets because historically there has been a rush to security when you've seen instability around the world.  But this time, rather than that, we saw fund liquidation, we saw the market move significantly to the downside.  So that's not a good sign for the metal traders.

Pearson: Alright.  Now, we've got a final question here from our Twitter followers.  Phil in Ontario, Canada is curious about the U.S. dollar.  It has been down lately.  He is asking, do you expect a resurgence back over $83 that would have an effect on commodity futures prices?

Roose: Well, I think he is right from one standpoint, we think the dollar still continues to have some strength.  We continue to be the best of the worst.  And so we still have, we have moved a lot higher versus the Canadian dollar, the Australian dollar and it looks like there's some upside potential yet as we solve some of our debt problems.

Pearson: Okay. Alright.  Now, before we let you go and enjoy this Easter weekend that is upon us, we are doing a new segment and it's part of our new initiative called Market to Market in the Classroom.  We're trying to talk to our traders and our brokers and our analysts who come on the show about how they get their insight before taking the time to appear with us.  So, Don, we've got a couple of questions for you and these will appear on the website as part of the Market Plus segment and then eventually they will be part of our Market to Market in the Classroom website that will be found online.  So our first question, Don, is how do different commodities interact with and influence one another?

Roose: Well, that's a good question because we have, the number one thing is there's a relationship between corn and soybeans.  In other words, soybeans, if corn is 2.4 times the value of -- corn is 2.4 times the value of soybeans then we see the planting switch.  So I think it depends on some of the inner commodity relationships from that standpoint, the same way with the weather will affect the different planting depending what you have around the country.  So I think it's, a couple of those are the dominant factors.

Pearson: Alright. Now, as we're talking -- Market to Market in the Classroom is going to be aimed at high school students.  What is one thing you believe every new producer or trader needs to understand about the commodities markets?

Roose: Well, the number one thing probably is you're hugely leveraged.  You really aren't putting up 100% of the value to own 100% of the commodity.  You're putting up more like 5%.  So because you're so highly leveraged it causes a lot more risk and you have to be very well aware of what you're actually controlling for commodity when you buy one.

Pearson: Now, you mentioned leverage, which is a concept that you run into, as you mentioned, all the time in commodities trading.  What other concepts are there that a new producer might have to learn?  What should somebody go and study if they're interested in trading commodities?

Roose: Well, from a producer standpoint, you really have to be aware that the futures market is a price discovery.  But it also, you know, you come back to sell the cash product so you have to be very aware of the basis levels.  I would say that is the big thing.  From a trader's standpoint the industry has already changed, I've been in it for about 35 years and really what has happened is in the olden days we'd watch the commercial trade.  And anymore with the advent of the huge, big fund trading you really have to be very aware of where the funds are and when they start to move because they exit and enter in just such huge moves so you have to make sure you're not standing in front of the train.

Pearson: And just to clarify for some of our younger viewers, the commercial side would be the farmers, the elevators, the end users of the grain and then the non-commercial, the fund side, would be the managed money, the Wall Street money for lack of a better word.

Roose: Yeah, one of them is trying to protect their commodity and the other is trying to take advantage of a price movement in a marketplace.

Pearson: Alright. Well, Don, thanks so much for taking the time to be with us this weekend.  Have a Happy Easter.

Roose: Thank you, Mike, and you have a Happy Easter.

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


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