Market Analysis : Brian Roach (Episode# 4235)

Market Analysis : Brian Roach (April 21, 2017)

Apr 20, 2017  | Ep4235 | Podcast


The weakness of wheat held back the grain trade this week as favorable weather lowered prices. For the week, May wheat plummeted 6 percent to finish a quarter lower and the nearby corn contract fell 14 cents. Any demand from exports was offset by an advantageous May forecast as the May soybean contract shed a nickel. May meal declined $7.90 per ton. In the softs, May cotton rose again, this time $3.37 per hundred weight. Over in the dairy parlor, May Class III milk futures increased 45 cents. The livestock sector was mixed. The June cattle contract improved $2 and May feeders rose 85 cents. However, the June lean hog contract dropped 6 percent or $4.17. In the currency markets, the U.S. Dollar index lost 58 basis points. Crude oil tumbled $3.98 per barrel. COMEX Gold gained $3.20 per ounce. And the Goldman Sachs Commodity Index plunged more than 18 basis points to finish the week at 383.15.  

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Brian Roach. Brian, welcome back.   

Roach: Thanks, Mike.

Pearson: Before we get started, you can listen to our market discussion anytime by downloading our Market Analysis and Market Plus podcasts on our Web site,

Pearson: Brian, we've got to talk about the wheat market. Holy cow! Where did we finish from a technical perspective in the nearby? Are we bouncing off those lows set fourth quarter of 2016?

Roach: If you look at the Kansas City wheat or Chicago wheat they're both putting in contract lows here on the nearby. And it really tells you we came into this year with pretty good supplies worldwide and in the U.S., record wheat yields last year and demand really hasn't been enough to strip those away. It tells you where prices were and what we saw this week was favorable weather, we're shoring up the drought concern in the southern plains and out there in Oklahoma and Kansas City where it had been dry and you're seeing that, the specs are taking that as a selling opportunity. It looks like to me we're going to trade down to these record short net positions that we've seen before, not quite there at a record but we're close to that, we're tamping around that. And so I think wheat prices will have to look for a catalyst and I don't know if wheat on its own generates a catalyst, maybe the European weather. But for the near-term I think we're going to have to wait for a catalyst. It may come in the corn market to get the specs to come in and cover some of these shorts and give us something worth talking about in terms of selling inventory.

Pearson: Now, given the fact that we have such a massive short position being taken by these large scale speculators, is this a time to step in and reown with a call option some wheat that has already been sold?

Roach: It's a good practice if you're accustomed to it. It's not for everybody but it might be a way to get some paper ownership back on for bushels that you might have sold. We had a pretty good two rallies earlier this year that were worth selling and so if you have been patient enough to get back on paper now would be certainly a good time to do it. The indicators that we use are telling us it's time to do that. We're down into the maximum net short area territory on almost all but the spring wheat and meal. And so you might look at that. The other thing to notice is that the volatilities on all the options is very low, actually very low. I just haven't seen them quite this low in a while. And so that tells you that those options are cheaper all things being equal.

Pearson: Well, now while we're talking about the options I want us to talk about the corn market. Old crop corn, is the trade still considering a massive crop coming out of Brazil? Is that still what is really overhanging the market?

Roach: Yeah, corn and soybeans both we're putting in what I call the southern hemisphere low, the harvest lows, just like we're used to in September, October, November in the U.S., the crops outperform and so now the market is fearing that they own the export markets for a little bit and so back on the corn, nearby corn is trading in this 30 cent range and we're down to the low side of it. Dec corn is trading to the low side of the 20 cent range. And so I think for the minute we're going to probably trade down here and give your processors and your livestock guys a chance to get some feed needs bought.

Pearson: Get some ownership on the table. Now, we've got a question here from one of our Twitter followers. We encourage all of you to submit your questions via Facebook and Twitter. This one is from Paul in Iowa. He's on Twitter @NeIowaFarmer. He's saying, and I know he's not the only one in this boat, need to move some corn for cash flow needs and want to buy it back on the board in July. Do you prefer calls? And if so, at what strike price? Or are you outright buying futures at this point?

Roach: It's a good question. Is now the time to do it? I'd say before the crop is planted, perhaps, although the trade pattern that we're seeing, I call it a pre-planting low and the specs are running this thing down cheap, if planting progress goes well, so let's say in a month, third week of May we look at planting progress and the market is not too concerned about it, that will be a better place to buy that call. Okay, so you have to look at it as though today looks like a good spot. If it becomes too expensive for some reason, although I think corn prices have little downside from here given the acreage perspective and big demand, I think now is a good spot to do it, you may leave a little dry powder to buy some more in May, just in case, but the call option versus futures really, the narrow trading range doesn't offer the option trader as much upside. So a lot of guys are going to the futures side because you're penny for penny but you've got to be able to handle the risk.

Pearson: Right, penny for penny both directions. Yes indeed. Now, let's talk about the soybean market. We've seen beans finally it looks like maybe start to establish a bottom. Is that what you're seeing when you look at this market the way it has been bouncing around both sides of that $9.50 mark on the nearby?

Roach: The Brazilian farmer has not been an aggressive seller and if you look at the charts you're talking about we're bouncing along and we're actually bumping up against the short-term 20 day moving average and if we get through that we may see a small uptrend in prices and that might give us a chance to sell something. But I like the trade action in beans. I am fearful though when you look at the acreage, a decent yield in the U.S. and maybe China thinking about planting more production of their own, growers need to be on the defense willing to sell the next couple of rallies here as we get into the growing season.

Pearson: And that's the question, we're looking at big acres, we're looking at even a trendline crop is still a big carryout this year. For producers who are looking at this $9.60 on the Nov contract that's pushing close to some guys' cost of production. How aggressive do you want to be managing that risk in here? Are we going to have a better opportunity?

Roach: We typically do. So if you look at the last four years we've seen $1.80 to $3 moves in beans from the low so whatever the low is and so even if we just got a piece of that, if you think about it that way, that would be $1 higher from the level we're at today and maybe we go down a little lower but I think to think in terms of just $1 that would be the small side of what we've seen in the last few years. And so keep in mind the U.S. still grows 33% to 34% of the world's bean supply. We have to grow a crop. It's still early too. We're just still here in the third week of April not planting any beans, never lost a bean crop in April, and so I think it's time to just be patient.

Pearson: Alright, just sit and watch. One of the markets that is not very good at encouraging patience over this past week is the cotton market. We're up almost a little over $5 in two weeks. Is this just export driven? Because we're not trying to buy acres any more are we?

Roach: I don't think so. I think what you're seeing is it's a tighter ending stocks situation than what we planned, what we saw six months ago. And yesterday's big move in the cotton market on big exports and you're seeing a little bit of weather premium creep into this so you have big acres but weather is worrisome here for the cotton market and so I think you're seeing a combination of both, what did we trade $80, just over $80 on the nearby. We took $1 off that today. New crop has made it through the 20 day moving average and I don't know if we get $80 out of new crop. The weather will dictate that but it looks like a selling opportunity coming really for both. Right here, right now in the nearby and certainly the new crop looks like it could be a $77, $78 market if things were to follow through next week.

Pearson: Alright. Well now let's jump into the livestock market. Live cattle has been on a freight train just screaming higher. When is that going to come to an end, Brian?

Roach: Well, when the market catches up and right now the market is very current. Lower placements last fall accelerated marketings here this first quarter of '17, at the same time you've got the carcass weights are falling, they fell $10 here in the last week, $26 lower than last year. And so you're seeing the nearby offers stay relatively strong. Today's cattle on feed report though probably will play okay neutral on the nearby and into June. It looks to me like it would probably be fairly negative on the August at 111%.

Pearson: 111% placements, we saw 100% cattle on feed. What was marketings? 104? 105?

Roach: 104.5.

Pearson: 104.5. Okay, so all in all fairly what the trade was anticipating in the nearby but that 111%, that's a lot of cattle going on feed.

Roach: Yeah, so guy have been selling this all the way up. It has continued to go higher than most cattlemen and analysts probably thought and so there's some stuff that has been sold on the way up here. And I think the question is, should I sell some more here front part of next week? And the answer is probably yes. If you go back a couple of months ago we're looking at a way different situation. So I think a cattle operation is willing to take some profit, bake in the input costs through harvest right now, same with all the livestock is strike out these prices on the feed side right now and look for opportunities to sell. But when you can sell with the kind of profits that we're looking at today it's probably wise to go ahead and play something here at these levels.

Pearson: Okay. Now as we take a look at the feeder cattle market, that of course has also screamed higher right along with fats. But I've noticed here this week in particular we started to see the feeder-fat cattle spread begin to widen. Is that something we encounter seasonally in here?

Roach: It is. Grilling season spikes the live side a little more. But I think the feeder situation is looking for direction. If you look at the futures it kind of went sideways here on into this report so we're really looking for direction. But I think both beef markets remain pretty strong here at least on into the next month.

Pearson: Now, the 111% placements, is that bullish for feeder cattle looking forward? Are we pulling calves forward? Can you read it that way?

Roach: Yeah, I think if you look at the weights, if you think about the weight scenario it tells you the market is very current, we're stripping the feeder market out. So if you're a feeder guy I think the upside remains pretty strong. I talked to a cattleman yesterday who two months ago, feeder guy, and he was wanting to hedge 120 and here we are $20 later talking about should we do something here? And I think with the input costs driving profits it's time to do something, it's time to take a sizeable increment off the table.

Pearson: Okay, now let's talk about lean hogs. They're a mirror image of the live cattle market. We just keep getting beaten down week after week now in the lean hogs, down $4 this week. What is the story?

Roach: Well, it's about supplies. The hogs and pigs report, it gave the USDA a chance to kind of square up the numbers but at the end  of that report if you look at their growth projections, that 1.5%, the numbers are still going to be there and carcass weights are continuing to come up. It's really the -- on demand in the hog market for now and if you look at the USDA's number, upwards, over 8% expected in exports, that really has to be a part of it. But I look at the carcass weight or the dollars, the cutout values, I'm sorry, have leveled off and that tells me that demand is pretty good and typically when you look at the cattle market we have a seasonal rise here of anywhere, we typically capture 12, 15, 17 dollars on into summer. So I think if the hogs producers have got the input side covered at low prices, you wait for that to, that's not a guarantee but if you look for that $10, $15 move in futures that's a good selling opportunity to bake in some profits.

Pearson: Alright. Well, Brian Roach, thank you so much for taking the time to join us.

Roach: Thanks, Mike.

Pearson: That wraps up the broadcast portion of Market to Market. But Brian and I will keep the conversation going including answering more of your questions during Market Plus available in podcast and video form on our website. While you’re there, check out the link to our Flipboard magazine “Market to Market Reading Material.” Each day, our producers update the collection of news they are reading and put that in one convenient location. And join us again next week when we explore how industries in Louisiana are helping shore up the Gulf Coast. So until then, thanks for watching. I’m Mike Pearson. Have a great week!


Trading in futures and options involves substantial risk. No warranty is given or implied by Iowa Public Television or the analysts who appear on Market to Market. Past performance is not necessarily indicative of future results.

Market to Market is a production of Iowa Public Television which is solely responsible for its content.

Grinnell Mutual Insurance