Market Analysis: John Roach

Market Analysis: John Roach (June 9, 2017)

Jun 9, 2017  | Ep4242 | Podcast

Podcast

The expectation of lower year-over-year ending stocks and an early arrival of the dog days of summer made for higher commodity markets even before Friday’s midday release of the June WASDE report. For the week, July wheat gained 16 cents and the nearby corn contract, rose 15 cents. Sales to unknown destinations fueled the fire as the July soybean contract gained 20 cents. July meal added $4 per ton. In the softs, July cotton continued to shrink falling $1.00 per hundred weight. Over in the dairy parlor, June Class III milk futures lost 24 cents. The livestock sector was mixed, the August cattle contract fell $2.20 and nearby feeders dropped $4.55. The July lean hog contract continued its 8-week streak moving 72 cents higher. In the currency markets, the U.S. Dollar index gained 57 points. Crude oil fell $1.83 per barrel. COMEX Gold drained $8.80 per ounce. And the Goldman Sachs Commodity Index retreated more than 7 basis points to finish the week at 368.50. 

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: We're glad to have you. But before we get started, in case you want to go over things again, you can listen to our Market Analysis and Market Plus podcasts anytime online at iptv.org/mtom.

Pearson: John, I want to open it up to you with a fairly broad question. We've seen the U.S. dollar bouncing here around this 96, 97 basis point mark here no the dollar index, and yet we've seen foreign currencies really all over the board. We talked about Brazil and the Brazilian real last week. What other currencies should people have an eye on in the world of agriculture today?

Roach: Well, I think one of our major trading partners is Mexico and another one is Canada and we need to look at currency relationships with both of those countries as well as currency relationships with China and with some other people and how we compare versus Brazil to China and so forth. What's very interesting is to see the movement that these currencies have made prior to the election, then directly following the election and for several weeks following that, and now more recently as things in Washington appear to be a little less certain, the currencies have relaxed quite a little bit, or the dollar has relaxed quite a bit. As an example with the Mexico peso, prior to the election the peso was trading  in the neighborhood of 18 or 19 pesos to the dollar and then right after the election the peso went off on a terror and ran all the way up to 22 pesos to the dollar and now we're back down to 18 today.

Pearson: So what does that tell you from a grain demand or meat demand perspective for a U.S. producer? Why do we care?

Roach: Well, if you take a move from 22 to 18, that's a 4 point move, if my math is right, and a 4 point move on a 22 basis is about a 20% move. So it would be as if you're a buyer of something and the seller called you up and said, look, because of currencies I'm discounting the price by 20% from what it was in November, are you interested? And certainly a 20% move for almost any commodity is a significant number and it also takes away some of the fears that we've had that maybe we were going to lose all that business, the renegotiation of NAFTA, we really had a lot of things hitting the intersection of the road at the same time all worrying us about this new administration, and yet the markets have not worried nearly as much as what a lot of people were.

Pearson: Alright. Well, now we're still a little worried as we take a look at Chicago wheat. It doesn't seem to have much climbing power, up 16 cents on the week, biggest move to the upside in quite a little while. Can it run any higher?

Roach: Well, it certainly can.

Pearson: Will it run any higher, John Roach? I guess that's the question.

Roach: Well, always with the weather kind of markets you just have to say it depends on whether it rains or it doesn't rain and it depends on whether the forecast changes or doesn't change. And I've been around this business long enough to tell you that a forecast for no rain on a Friday night has turned into being over 3 inches by next Wednesday. So you have to be really careful in these kind of markets because we probably have been very little actual damage to the crop out there. In the case of spring wheat that's a little different. The spring wheat crop we've lost bushels and the market has adjusted to that and it may need to adjust more We'll have to see how that kind of shakes out. They've got some difficulties up in Canada as well. So the high protein wheat market is going to be an entity of itself compared to the ordinary. So you have to think in those kind of terms. But in general, we've just been in a sideways kind of a market here. And so we've had a run up based on weather issues and we can turn around and lose that just as quickly as we gained it. We had wheat sell signals for spring wheat and for Kansas City wheat and so we executed, we talked to our people about if you're needing to sell some wheat use this rally to be selling some wheat. We don't have a bullish long-term fundamental picture for wheat. The government re-issued the numbers again today and we're plentiful in supply. And so you have to act within accordance of this is a weather scare, could turn into a weather problem, but you have to sell into it and then be careful with your position and be prepared you may have to defend your, may want to defend your position using a call option to re-establish a level of insurance in case prices rise.

Pearson: Gotcha. Now, you talked about moving sideways, we saw corn trading sideways for almost 3 months. It was not very exciting to watch week on week. This week, especially, well both old and new crop we shot up out of that range. And we've got a question here from one of our followers. This is from Nathan in Inwood, Iowa. He's on Twitter @nieuwendorp_n. We encourage all of you to send in your questions via Twitter and Facebook. He says, it seems like corn is primed for a weather rally. John, what resistance levels should we be looking at to get some new crop sold? Are there price points that you want to be pretty aggressive making sales?

Roach: We called our customers with a corn sell signal this week, yesterday I believe it was. I've been traveling so I'm losing track of my days a little bit. But yeah, so we initiated a corn, it was our first sell signal for the year. And so we think it's at a price level that we need to reward the market. We have rallied on the weather. And that's the thing that people have to be careful about. It's not a matter of will we rally next week on the weather, we may or may not, but we rallied this week on weather. In addition to that, we have stimulated the technical guys to cover short positions. And so we've had really two things working for us this week. We may have two working for us next week or only one. And so we have to be cautious about that. And my suggestion to people is it's time to be looking at the old crop corn that's in the bin. You've held it for a long time. You've been rewarded with better prices. Don't miss it.

Pearson: Okay. And make some new crop sales as well then?

Roach: I think you make new crop sales where you don't have storage. Rushing out and selling corn with a 3 in front of it in a cash bid is just not something I can get very enthusiastic about unless, again, I don’t have much choice, in which case, okay I'll go ahead and make the sale on strength, when the market pulls back and I get a buy signal I'll replace the paper in Chicago.

Pearson: Alright. Soybeans, John Roach, we've got another little move to the upside here, we've got a big crop coming out of Brazil. Is there still opportunity to get some sales in here on the new crop side of soybeans?

Roach: I think there still is. I don't want to hold out a tremendous amount of optimism. I don't have that. But let me play this back to you a different way. We just harvested the biggest crop in South America they've ever harvested bar none, after us harvesting the biggest crop of beans we've ever harvested bar none last fall. And so here we are with all those supplies and we just made the harvest lows in Brazil and now we've started to rise a little bit. We're just up a little off of the lows. I'm a willing seller on beans but I'm not an aggressive seller here and I think we still have some opportunity. We don't have them planted yet and so we don’t know for sure what our acreage and what our situation is going to be and so if I'm going to play the drought game I want to play a little of that with the soybean market too.

Pearson: Gotcha. You don't currently have a sell signal in soybeans?

Roach: Not currently, no. In fact, as we came out of a buy signal just last week --

Pearson: We bounced off of those lows.

Roach: So we bounced off of the lows and the market is positioned in a way that we could still get some further recovery. U.S. farmers don't have very many beans to sell. And so the pressure is going to come from South American farmers. And if you're a South American farmer why would you want to rush out and sell beans, turn into the paper currency, which is deteriorating about as fast as anything out there? So it makes sense to hang onto the product as long as you can until you can get the alignment, the currency and everything aligned correctly.

Pearson: You bet. Well, now John, let's take a look at the livestock market. We had live cattle trade at $135, $136on the cash market this week and yet we saw the futures market continue to pull back on this front month June live cattle contract. At what point do you think we're going to see that thing start to move up and try to converge? Or is cash going to have to come down?

Roach: I think the cash market may have the problem. I think we may be fully priced in this market, including fully priced into a weather situation. And so it would seem to me that we're at some pretty decent kind of prices and if you look at the report out today from the USDA, 4th quarter cattle, we're going to be swimming in fourth quarter cattle. And so the thing that we've had that has been very favorable here is this whole discussion with China and overseas demand, exports in the month of March were excellent, I think 25% over, the best they've been since back in the '70s, really very strong kind of demand. And so we have pushed that in through the market and the market has rallied. Now we need to pay attention to the 4th quarter, make sure we keep our rears covered going into that 4th quarter.

Pearson: So at these price levels are you willing to sell on the board for 4th quarter if I'm buying some feeders today?

Roach: Yes. Yes. I think you have to look at the board and be willing to be a scale-up seller from here.

Pearson: Now, on the feeder cattle side, for those folks that are seeing these decent returns coming back for cattle leaving the lot today, we're pouring that right into the feeder cattle market as we often do, is that a good idea given the swimming in cattle in the 4th quarter?

Roach: It's okay as long as we can market our way through. The thing here that is so, that has a potential to be so important is Chinese demand. We talked about the Chinese, we thought we were going to have trade problems with the Chinese and we went from that to seemed like they came to Mar-a-Lago down in my neighborhood, didn't invite me, and came away with a much better relationship it seems. And so if we can get that business going there's lots of possibilities out there. But at the moment I've got to look at what I have in front of me and I've got a lot of numbers to deal with in the 4th quarter, I'd like to get hedges on.

Pearson: Okay. Now, I want to take us into the hog market. We've got a question here. This was of course World Pork Expo week in Des Moines so we've got hogs on our mind. And we've got a question from Doyle in Alma, Arkansas. He wants to know, what's the future of lean hog prices going to look like if they continue to go up? How is that going to change the industry?

Roach: That's a good question. The industry has surprised everybody with its ability to expand throughout thick and thin almost. And so our numbers are bigger. The thing to kind of keep in mind when you're talking long-term like that, I saw a report that was a very well written report by Bill Gary that talked about the Chinese slaughter levels compared to the United States' slaughter levels and the 5% of their imports in China comprise 30% of the world's exports. So they are so big relative to the rest of us that the economic situation in China and the relationship there, that can really change the longer-term outlook on the hog industry.

Pearson: On the short-term, as we've pressed up north of $80 per hundred, we're closed in on $82, is there the strength left given the fundamentals we've got today to move us even higher?

Roach: Well, certainly perhaps, but we're there. If you were standing back putting together a plan some weeks or months ago you would have been at this point in here I'm going to start hedging them up. And I think that's what you should be doing. I think you should be looking out into the balance of this year and trying to find some prices that you can be satisfied and put some protection underneath of it.

Pearson: Do you want to sell out any further than say December of this year? Are you looking at 2018 sales at all?

Roach: No. I wouldn't go any further than that.

Pearson: Okay. Not quite time for it yet.

Roach: May be, but I'll be comfortable for a little while.

Pearson: Okay. Well, John Roach, thank you so much for taking the time to join us this week.

Roach: Thanks, Mike. It's been great.

Pearson: That wraps up the broadcast portion of Market to Market. However, John 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 follow the links to our Twitter feed. Tweet us your questions via @MarketToMarket and we’ll get you the answers either during our Market Analysis or Plus segments. And join us again next week when we see how one group of hog farmers is producing pork with a purpose. So until then, thanks for watching. I’m Mike Pearson. Have a great week!

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