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Even as exports put in good numbers, a higher dollar, private acreage reports, and weaker currency rates in other ports- of-call left the grain markets mixed. For the week, March wheat added a nickel and the nearby corn contract moved 9 cents higher. Hot weather in Argentina and a higher soybean acreage estimates made for a volatile week in the soy complex as the January soybean contract finished 2 cents lower. January meal lost $1.50 per ton. In the softs, March cotton gained back last week’s loss to the penny. Over in the dairy parlor, January Class III milk futures gained 3 cents. The livestock sector continued to move to higher ground as the February cattle contract put-on $6.47. January feeders added $3.80. And the February lean hog contract increased $3.15. In the currency markets, the U.S. Dollar Index climbed 141 basis points to levels last seen in 2003. Crude oil gained 51 cents per barrel. Gold fell for the 7th week, losing $40.40 per ounce, dropping nearly 13 percent of its value since Election Day. And the Goldman Sachs Commodity Index gained almost 7 points to finish the week at 393.40.

Pearson: Here now to lend us his insight on these and other trends is our senior market analyst, John Roach. John, welcome back. 

Roach: Thanks, Mike. Great to be here.

Pearson: Before we get started, you can listen to our market discussion anytime by downloading our Market Analysis podcast on our Web site, iptv.org/mtom.

Pearson: Let's talk about the move this week that really dropped a lot of jaws and that is the dollar climbing ever higher. Fed raised rates. The dollar is now up in territory we haven't seen for 13 years. John Roach, where do we go from here?

Roach: Probably stay strong. The dollar is higher because of the higher interest rates and the Fed told us that instead of having two increases next year, which they had indicated before, or thought they might, that we might expect three increases this next year. And then the U.S. optimism right now about the U.S. economy and the U.S. economy started percolating maybe just a little bit. So there's reason for people to bring money to the United States. We're also talking about repatriating some of the profits that some of the companies have overseas and if they can get that program put together in Congress here earlier in the year then that's more money coming back into this country. So a lot of buyers to the dollar because of all those factors.

Pearson: Well, and all those factors, especially the U.S. economy starting to percolate, these dollars potentially coming back on shore, raises some inflation pressure. And we've got a question here from Vance in Nebraska and this is from Twitter. We encourage all of you to send in your questions to us on social media. Vance is asking, what are the odds of inflationary pressure creating commodity rallies in 2017?

Roach: Well, I think it's certainly a possibility. Inflationary pressures don't seem to be right around the corner, but they certainly could, and so we may see that. But at the moment we're not getting much of an uptick, as you noticed gold down $40 some dollars. There's an inflation indicator. So there's some possibilities. Weather will be more important than the inflationary tendency though I think.

Pearson: Speaking of weather, here in the Midwest, the Great Plains, we're expecting bitterly cold temperatures over the weekend. The wheat market responded a little bit but we're still solidly within our range. What is it going to take to break this wheat market out one side or the other?

Roach: Well, we're going to have to see something change in the fundamentals. And certainly if we have crop problems in this country, it's also very cold in Russia as well and so if they've got some cold temperatures, we may have reason when we get the wheat coming out of dormancy that maybe we start to see some tightening of the supplies. But otherwise we really don't. The wheat supplies are adequate to burdensome and the dollar is strong, which makes it hard for us to compete in the international market. And so for a moment we're going to continue, we think we're going to continue to have some tough sledding on wheat. But pay attention as we come out of dormancy in February, early March.

Pearson: Okay. We would have to see fairly substantial winter kill though to really shake some of these doldrums with this burdensome stocks?

Roach: Not necessarily. We've just got to have to fear that. And at the moment we have the spec traders heavily short the wheat market, they have been for a long period of time, and just the idea of turning the trend up and getting the speculators to come in and cover those short positions, that in itself would give us a pretty substantial rally. So I don't think it's going to take a lot of problem but it's going to take some sort of a catalyst to get it started. We need a match to light the fuse.

Pearson: Okay. Old crop soybeans, John Roach, staying very strong in here, exports are staying very, very solid. If we've got old crop soybean in the bin, we're moving to soybeans, what should I be doing with hose?

Roach: I think for a moment you just have to wait a little bit. We actually had a buy signal this morning on soybeans and soybean meal. And so we think that the selloff we've had here, just the recent selloff is probably run about as far as it's going to go right now. The important thing to understand with soybeans is that we're the only store in town right now. The crops were short in Brazil because it was so dry and short in Argentina because it was too wet and they're sold out. So between now and perhaps the first of March we're the marketplace and the buyers have come to the U.S. buying in faster quantities than what we would expect them to. We run at about 5% ahead of the pace that they should be at, so the U.S. estimate is probably a little bit low on total exports and you also have speculative buying into that market. So there's several different ingredients here to give us another rally in the bean market. But on that rally you have to understand that you're probably in a short period of time you're going to have a lot of competition coming on from South America. And so we want to be ready to sell the next rally on soybeans. We sold the last rally that was about two and a half, three weeks ago and we also started to sell 2017 beans. We sold our first increment of '17 because the market is nearly a dollar over what the government forecast is and we're concerned about big bean acres this year and having problems in the fall with a big bean crop from the U.S., a big bean crop from South America and it will be a completely different environment than what we have today.

Pearson: And a lot of that fear, that big acreage fear, that big South American crop, I know there was a report out earlier this week, potential for 106 million metric tons to come out of Brazil, record smashingly large. How aggressive are you on those new crop bean sales, those November '17 sales?

Roach: We sold an increment and for most of our customers an increment will be 10% to 15% or thereabouts. We want to sell another increment here on the next rally. We think these $10.30 kind of prices, $10.40 kind of prices, those are good price levels to get started and if someone said, well I'd like to sell even more, I won't argue with you very much. But if you sell more now you have to be very cautious about what happens with weather. You've got to be prepared to come in and cover them or something of that nature.

Pearson: Utilize your revenue insurance policy or something.

Roach: Certainly have a high level of revenue coverage if you're selling heavily and be prepared to buy some call options or some futures should weather turn sour. Remember the key here when you have markets like this where you have monster levels of demand is you have no room for any weather problems. And so weather in South America is going to be very important here from now on out until probably the 1st of March and weather in the United States becomes important starting in March, early April.

Pearson: Alright. The corn market, we are a little stronger on the week, we're 9 cents higher. With the substantial climb in the U.S. dollar does that give you some hope that this corn market is going to continue to slug along through here?

Roach: We triggered a sell signal on Tuesday, Wednesday. I lost track of my days now, Mike, I'm not sure -- it lasted for two days so it must have been Wednesday, Thursday and was gone this morning. And so we sold the rally in the market but we don't really expect the corn market to break very far here. We think that the market is going to find pretty good support and we'll rally back up again. But we think it's a relatively narrow kind of a trading range that we're going to see unless we have some weather situation show up in South America. Remember we had a monster crop that we harvested. I was over in Illinois from Central Illinois up to Northern Illinois, there are millions and millions of bushels that are out there with a tarp over the top of them and most of those bushels need to go buy the 1st of April. And they can carry it longer but they've got to reduce some of their program if they do that. And so we think there will be lots of bushels available for the marketplace on every little uptick in the market.

Pearson: Okay. Let's take a look at these livestock markets. Substantial rally in live cattle. We climbed here $6 on the week, we're back up around $115. John Roach, is this a sign of new demand into the marketplace? Is the low solidly in, in live cattle?

Roach: Oh I think it is and I think it is a sign of stronger demand and it's also a sign of the weather that we have out there today. We really boost the market today, the dressed beef market was very strong this week. So the futures have now had enough of a move, we think it's time to be a hedger so we have sell signals on cattle and sell signals on hogs both. So we think from here on up you'll want to be moving some of that risk off and let somebody else take the risk.

Pearson: And are you hedging all the way out through the summer on these market prices?

Roach: Yes, I think you look all the way out into the summer months and look at where your profit levels are and be willing to take them home.

Pearson: Okay. Feeder cattle, another solid week, we did see that climb in live cattle. Are we always just going to be playing tagalong here in the feeder cattle market if corn stays in that tight range?

Roach: Yeah I think that the corn market is not going to be the key to the feeder cattle market. I think it's going to be pretty much a constant. The feeder cattle market will follow right along with the fats.

Pearson: Okay. Looking at this lean hog market, this was an incredible story this last year taking tremendous highs and then it collapsed. Now we've bounced back, we're into the mid-60s here on the nearby lean hog contract.

Roach: It's an amazing recovery.

Pearson: It's an amazing recovery. Do you market on this contract because we're $20 higher than we were a month ago or do you let it ride?

Roach: You market on this. You take a look at the numbers, we moved fewer numbers through the system than people were anticipating, we're current, the Chinese demand is double what it was a year ago so we really have a lot of positive things coming to the intersection here, plus you've got a very strong technical performance in Chicago. So we're up into price areas where you need to be a hedger and we're thankful to get the opportunities.

Pearson: And the same story just like on live cattle, you're hedging all the way out through summer. Some of those contracts are trading in the mid-70s right now. You want to sell them all?

Roach: We want to sell them all.

Pearson: Is it to the point where as a speculative trade you'd be selling it?

Roach: No, what you're doing as a speculative trade is you would be fading a really big surprising rally. That's never usually, that usually is the wrong thing to do. But if you've got inventory that you need to sell, you've got hogs you need to sell, it's fine because you're looking at profit levels and the opportunity there to remove risk from the operation.

Pearson: Perfect. Now let's talk about crude oil. We did see a little bit of a move this week. John, is crude oil going to break one way or the other any time soon?

Roach: Well, there's the possibility. With OPEC agreeing to reduce the production then the non-OPEC oil producers agreed to reduce their production and so the market surged on that. But the numbers out for most of the production areas in the United States we are well over the cost of production, from $30 to $40 a barrel will catch most of the production cost according to the numbers that we're looking at and we've gone from having about 400 rigs out in the field, we're now up to I think the number today was 820 or 830. So we're not back up to the big number which was 2,000 but we're certainly going to increase the production in the United States and we'll probably over a relatively short period of time we will make up, I maybe should stress that a little bit, we'll make up what it is that the other people are reducing, plus we don't trust them to continue to keep their numbers down. We think they'll sneak a few more barrels out than what they planned.

Pearson: Of course, if it pops the market they'll sell a little more.

Roach: Yes.

Pearson: John Roach, thanks for taking the time to join us this week.

Roach: Thank you, Mike, I really enjoyed it.

Pearson: That wraps up the broadcast portion of Market to Market. But John and I will keep the market conversation going including answering more of YOUR questions during Market Plus available on our website. While you’re there, check out this week’s M-to-M podcast as Mark Gold talks about how bridging the rural-urban divide could be as simple as turning to the church. And join us again next week for a look at how a holiday flower is being used as a teaching tool. So until then, thanks for watching. I’m Mike Pearson. Have a great week!

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