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Market Plus: Market Analyst John Roach

posted on August 10, 2012


Pearson: This is the Friday, August 10, 2012 version of the Market Plus segment. Joining us now is John Roach. John, thanks for being with us. We didn't get a chance to talk at all about ethanol and the ethanol mandate going forward. I know there has been a lot of pressure from various livestock groups to get that removed or changed. What are your thoughts on that? What effect would that have on corn prices going forward?

Roach: Well, you know USDA today said that ethanol will absorb 4.5 billion bushels of corn in this upcoming year. That is down 500 million from what they earlier forecasted and about 500 million from where we are this year. The pressure is really coming on and will continue to come on the administration to have the EPA change the mandate. We saw this week that pressure came from the United Nations in addition to the users and some of the livestock people in this country. So, that pressure is just really going to continue. I think it is going to be hard to resist it. I don't want to say that they are going to change it because I sure don't know. But I think it is going to be very hard to resist that amount of pressure particularly in an election year. Particularly when energy prices are really - have moderated a little bit and energy supply seems to be adequate enough that we can get by without the ethanol. At least that is the argument that people are going to be making. But we don't have many alternative food supplies. So, I think that is going to be a hot issue that continues to get a lot of pressure from politically powerful people.

Pearson: And if that happens, if they make some sort of change or remove it or do something, is that going to have much of an effect on the price of corn? What are your thoughts there?

Roach: Well, I mean let's just say as an example that they did something that pulled the demand down by 25 percent. I mean that kind of a number puts a billion bushels, a little over a billion bushels, back into the - into the supply. And so yes, that is certainly enough to alter the supply/demand balance and the speculative demand in the market would run away from that kind of an announcement. So, we might get an out of line kind of a break in the market if we had that kind of an announcement. But just talk about more discussions and so forth will chase people away from ownership in corn.

Pearson: Ok. And another thing we didn't talk about very much was the report that came out this morning. Corn prices rose early in the day and then steadily kind of retreated a little bit. What was driving that? Was it just profit taking is what we saw today? Why didn't the report have more of an impact on corn futures?

Roach: Well, I think everybody who wanted to be long in the corn market had plenty of opportunity to get long here ahead of the report and we saw a big run up in the market in the past couple of days. So, everybody who wanted to buy did and the report came out and people didn't really want to commit more money to a larger long position and so when some profit -- came in, we just didn't have the buyer on the other side. Users are your primary buyers on weakness but users are standing on the sidelines right now. Prices are so high. They don't work in anybody's budget. And so they are just standing on the sideline hoping and praying that prices will get cheaper and meanwhile they are just buying minimal amounts on weakness.

Pearson: All right. We got a couple questions here. Tim in Minnesota is asking should we price some of our 2013 crop now. He is worried it might rain next year.

Roach: Well, let's hope it does rain. Let's really - it was interesting in the segment ahead here again, the optimism of people. So, let's just get this year past and we will start over again next year. It is that great thing about the farm perseverance and the willingness to go out and do it again. And so here we are in the midst of one of the hottest summers and we're talking about well, next year will be better and so what do we do? I think that the producers need to sell very small pieces of next year's crop here with the high prices we are getting in this year's drought. I wouldn't sell a lot. I wouldn't sell it all at once. I would want to wait for - we use an oscillator, we call it a sell signal, when the market comes up and gives us a sell signal, I would sell a few bushels. The thing that producers don't want to do is they don't want to drastically alter the percentage of the crop that they normally sell ahead of harvest. So, if normally a producer, they pick a number, they sell 25 percent of their harvest. They sell it in advance of harvest say the spring ahead of harvest and then they should plan on doing the same thing again next year and maintain that same percentage. So anything that gets sold now will be peeled off of the percentage you would normally sell in maybe March, April, May, June of next year, and to maintain those percentages so that the averages of the market work in your favor.

Pearson: All right. Let's talk a little bit about soybeans. Tim also was wondering how high do beans have to go so the world doesn't run out of beans.

Roach: Well, it is a little bit like musical chairs. You know it doesn't - it maybe doesn't feel like there is much of a shortage when there is a 100 people in a circle in 99 chairs. But when you get down to - there is only ten people in the circle and only nine chairs, suddenly now it looks a lot tighter. And today we are in the period when there is a lot of beans that will be harvested here in the next 60 to 90 days and the time when we are going to be very, very tight will be out into January and February and at that point we could have very high prices because we will have to choke off whatever residual demand that didn't get supplied during the next few months. So, look for very high prices on beans as the South Americans are dry or out of beans and the United States is nearly out of beans. That is when the market will get most exciting and that is probably not until the end of the year.

Pearson: Do you have any idea what kind of prices, those very high prices, might look like?

Roach: You know people were talking 20 dollar beans. Several different people have said for hedgers and for grain merchandisers, make sure you have got enough money to be able to margin up 20 dollar beans. So, I don't know if that is the right number and of course those are always for very small quantities at those very highest of prices, you know, but we're going to have a very, very tight supply situation prior to the Brazilian harvest.

Pearson: All right. Come January - January/February. We didn't get a chance to talk cotton on the show. Anything there you would like to talk about?

Roach: Well, the surprising thing is the government found more cotton and demand was pulled down too. -- is we have bigger surpluses and it took the prices down. The Chinese economic situation had some sour economic news from there again this week and U.S. production was pretty good. So, the cotton market has to slug out the situation when there is adequate supplies to go around and demand is kind of puny and that is going to last for a little while.

Pearson: All right. So, you don't see prices going up any time soon?

Roach: Not unless something changes in the economic picture or some surprise as far as production. We still don't know how good the Indian crop is because there were monsoon situation there where they have had a poorer than normal monsoon. We haven't harvested yet the Chinese cotton. So, I mean there is room for movement here on these numbers but demand is relatively puny.

Pearson: Ok. For producers out there would it be worth them waiting until we get more information on the monsoon or the Chinese harvest?

Roach: I think so. I mean, I think right now we're at kind of a low kind of an area here for where we will be. I would be a very sluggish seller here at today's price levels.

Pearson: All right. Well, let's also talk about feeder cattle. We didn't get a chance to talk about that on the show either. What are your thoughts there facing these high feed prices? Where do you see feeder cattle going?

Roach: Well, feeder cattle prices are going to stay under pressure. The futures, the August futures today, I mean they are right down at the bottom of where they have been. They have been kind of banging on the bottom and producers are making decisions right now. Again I refer to the earlier segment on the show, the producers are making very difficult decisions and trying to figure out how many animals they can keep and the rest of them they got to sell. And that is going to push more cattle into the auction barn, hold the price levels down, as long as corn prices are high feeder cattle are going to bear the brunt of that break even issue, and we don't see that changing here for a little bit. So, dry pastures, difficult situations all around.

Pearson: All right. So, it is going to be a tough couple of months. Six months?

Roach: I think it is going to be a tough six months for the feeder cattle.

Pearson: All right.

Roach: Now one thing interesting I should, let me interrupt, sorry for interrupting Mike, the cattle crush which I mentioned the hog crush earlier in the show, the cattle crush is actually fairly good. It is at about half of where it normally is over the last nine years. We are kind of in the middle of profitability. So, sometimes when the corn prices are so high and they pressure feeder cattle prices down sometimes cattle people will tell me you get your absolute best profitability for feeding those cattle. So producers should watch carefully here what the margins are that are available as people are forced to sell cattle they really don't want to sell.

Pearson: All right. We didn't get a chance to expand very much on hogs. We were just kind of -- into the show this week. Do you have any other thoughts there? Where do you see prices going? We didn't really touch on that very much.

Roach: Well, the biggest problem we have had in the hog market is that the loins and ribs have really gotten cheap. I mean they are running close to 25 percent less than they were last year. And the whole hog cut out is down, I think about 16 percent. So, the - apparently people are not firing up the BBQ grills and we are not using those primal cuts. Well, now we have got cooler weather and so we think that we can see some recovery here in pork prices. The thing that is saving us really is that almost 25 percent of our pork we have produced this year has gone into the export market. And so we need to continue to have strong export business and we need to be able to get through some liquidation. But again, the USDA is forecasting hog prices in the fourth quarter to be a dollar cheaper than they were in the third quarter --- second quarter after a bump up in the third quarter.

Pearson: All right.

Roach: So, there is not lots of optimism on the horizon.

Pearson: All right. Well, any final thoughts for us before we go John?

Roach: Well, I just want to echo what the producers said in the earlier segment and that is, you know let's get through this year. One good news that was out this week was we got a report out of the USDA, is that land prices are up sharply. That, I believe, Iowa farm ground was up 22 percent. I think the USDA said at $7000 per acre average for the state of Iowa. So, these are bad times because of the weather but we have all been through worse times.

Pearson: You bet. All right, thank you so much for being here John. I really appreciate your thoughts this week. Thanks for watching.

 


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