Market Plus: Don Roose

Sep 8, 2017  | 14 min  | Ep4303 | Podcast


Pearson: This is the Friday, September 8, 2017 version of the Market Plus segment. Joining us now is Don Roose. Don, welcome back.

Roose: Thank you, Mike.

Pearson: We are glad to have you. And apparently Twitter is glad to see you as well because we have a ton of questions for you, Don. So we're just going to kick it off. We're beginning here with Jeremy in Lanark, Illinois. He's on Twitter @Jflikkema. Jeremy wants to know, if corn averages 165 to 167, what price outlook do you have? And what can farmers do to increase their on-farm price?

Roose: Well, that's a good question. I think first of all that doesn't move the carryout down much under 1.8, 1.9, 2 billion bushels. So I don't think it's enough to change the carryout. I think what it means is you've probably socked in a low. What can you do about that kind of a carryout and that kind of a yield? I think you should look at it as merchandising your way out of this thing. You've got a carry from Dec to July of 26 cents so I would use that as my advantage saying, listen, I don't like December corn at $3.57 but it's better than having July that is $3.84, $3.85 go to $3.57. So the way we see it is if we get a rally any time back up close to that $3.95 to $4 on July that's a risk management opportunity.

Pearson: And when farmers are looking at doing that, do you have a preference whether it's an HTA if they can get that from their elevator? Do you want to just sell futures outright? Is it worth using an option for July corn given the time value? What are your thoughts? How would you best capture that carry?

Roose: Well, I think that's up to the producer and kind of risk management that he wants. But if they're charging a lot for an HTA you're better off if you can handle the margin calls yourself if they're there, do it over the futures market. If you want to kind of gamble a little bit there's a good strategy buy even today, $3.90 July corn puts, sell the $3.40 puts and a $4.60 call. That gives you a window of opportunity is what I would say up to $4.60 on July corn but you’re still covered at $3.90 down to $3.40 and it protects the price and it protects the carry in the market, two key things that you need to be doing.

Pearson: And now the risk involved with that if the farmer has these bushels stored on the farm, what is the risk? If corn goes to $5 he's just going to sell --

Roose: He still has the cash product that he's going to be selling for $4.60. He's capped at $4.60 so he doesn't get the run to $5. Well, if South America doesn't have a problem the odds of that get to be smaller or unless we don't have a problem in the spring. So that's part of the problem, we have moved into a cycle where our demand is stale and we keep having crops that are just big enough and every six months we have another crop, another potential from somebody. We just went through that cycle now for the last two years.

Pearson: And that kind of leads us I think right into our next question. If USDA on Tuesday confirms the lows are in, if we see yield drop on corn and beans, what is the upside potential in the corn and the bean markets?

Roose: Well, I think one, the producer in the U.S. is probably going to tuck the grain away from the market. I don't think producers are interested in selling at this level and this isn't an opportunity, this is no time to be doing, getting real negative on the market. So what you're really looking at is probably the upside under normal circumstances I'd say July corn is $4 plus is probably about it, so not huge. And that's the thing, December corn at $3.40 is too cheap, July corn as you get close to $4 is too high. But you do have a chance South America they're just going to be planting the first crop of corn, 30% of their production is the first crop. They could have some weather issues so you might have some nervousness on that.

Pearson: Although it seems as though, and you watch the market far more closely than I do, when we saw that weather issue hit Brazil in the harvest of 2016, their spring of 2016, our spring of 2016, it took quite a while for the market to respond. Is that just the difference in most of the traders are concentrated in North America? Is that what kind of drives that delay?

Roose: I think the problem is, Mike, remember what buffered us is we had this huge crop and that huge crop buffered us. Now the problem is we've got a smaller crop but South America, right, so it's one thing and then another. And that's what I say, the new marketing era, I've been at this since the '70s, is we have a huge change where every six months somebody has a weather problem potential but it also is a buffer for problems. So that's the issue and that is the new marketing era I think that's going on.

Pearson: Alright. Our next question getting out of the corn and soybean discussion for a second. EZ$ in the Red River Valley of North Dakota, this guy is on Twitter @bankerfarmer1. He wants to know, is hard red spring wheat going to make another run close to July's high? And, well we talked about this on the show, will hard red winter wheat acres be down? So is it going to make another run? We're coming off of harvest. The crop was subpar, we know that. Where does that take us from here?

Roose: Well, it's another good lesson in trading because short crops have a long tail. We had the big run up over $8, we rationed the supply, other buyers found some other alternatives, other places. And so now what we have moved down to is we have to buy that demand back again. And I think the wheat market looks like Kansas City, Chicago has probably bottomed and I think Minneapolis is probably bottomed and we should be buying that demand back again. So no, I think you're down at the bottom end. Can we run to the top end of the range? I think it's a world environment so that's the real issue.

Pearson: Okay. And given the fact that we're close to the bottom when you look out to next year we do anticipate hard red winter wheat acres to be down or at least certainly not growing very much. Do you see much of a jump anticipated next spring for hard red spring acres as producers think about that $8 sign they saw earlier this year?

Roose: Well, I think we probably do see the acres probably try and go back up again. North Dakota if you look at soybean acres are the fourth largest now in the United States so who would have thought just a few years ago. But I do think you have those acres try and come back and build a little bit because you're certainly looking for alternatives.

Pearson: Okay. Let's bring it back to corn and beans. This is another question from our same friend @bankerfarmer1 on Twitter. Similar but slightly different question. He wants to know, for guys out of on-farm storage should they be locking in basis and leaving the futures open or just selling right off the combine as we get through harvest?

Roose: Well, this is the poorest time of the year to be moving stuff from a cash standpoint regardless. The best opportunities if you have storage try and store it and use the carry to your advantage out in July like we've been talking about. If you don't have storage I think you go the other way. I think you say I'm going to give up the carry in the market, I'm going to go all the way out to July, I'm going to buy a call and sell a call. For example, July corn go out and buy like a $3.80 call, we closed about $3.80, $3.84 on Friday, buy a $3.80 call and sell a $4.40, $4.50 call, give yourself a window of opportunity. You're giving up the carry but maybe you have a weather scare going into the third week of June sometime between now and then from here, from South America or from us.  So I think you're looking at it more from a gamble standpoint.

Pearson: And at that point you would be buying or paying for commercial storage. If you're out of on-farm storage pay the commercial storage, do the call spread and see what happens?

Roose: No. I think I would dump the cash corn. Or what I would try and do is go for the minimum and say the basis is going to improve, pay my minimum three month storage, maybe go for a basis improvement a little bit, dump it and buy a call. I'm not so sure I wouldn't do the call-call first, go for a little bit of a basis jump and then dump the corn.

Pearson: Alright. Alex in Iowa, he's on Twitter @AlexTreBeck07. He wants to know, is this the beginning of a bean rally? Or are we about to find the top for a while? And is it dependent on next week's report?

Roose: Well, partly dependent on next week's report, there's no doubt about that because think about it, if you move the needle two bushels an acre on soybeans that's 180 million bushels, you go from 470 million down to 300 million and just like that it's game on, you're tighter, South America needs to get a crop. So that's the situation. Now, thinking on the negative side you've got a carry in the market, much like we have in corn and wheat, so you can lock in on the board $10 soybeans, you can do a window contract, like we said, a window of opportunity, $10 puts against $11.60 calls against $9 puts, spend 20, 25 cents, you've got yourself downside protection of a buck and $1.60 to the upside.

Pearson: Alright. And for folks looking to free up some cash, as we head into harvest when they're making those decisions about storage this looks like another year where beans could be the crop to sell off the combine. Would you think so?

Roose: Yeah, I think that's it from a profitability standpoint. I definitely with the basis where it is on corn I would take a shot at trying to hold as much corn as I could from a basis and from a carry because the carry in the July beans is only, what is it, 4 cents a month. It costs you 3 cents a month on interest. Well, so you only get a bushel on your storage where the corn you do the same math you get about 3 cents a month.

Pearson: Just makes sense a little bit more.

Roose: A little more sense.

Pearson: Now, we have been talking quite a bit about weather with Hurricane Harvey, Hurricane Irma and then Hurricane Kataya in Mexico, we've got three going on right now. John in West Des Moines, Iowa is wondering what impact, if any, will the hurricanes have on grain shipments and basis? And how much has Mexico booked of corn and beans this year versus years past?

Roose: Well, first of all, we move a lot of grain out of the Houston area, out of that Gulf area. So it has impacted us no doubt about it. But I think we're getting back to it quickly, these guys are very quick. So that is the good news. So it has been an effect there's no doubt. When you look at Mexico it is a little bit of an issue because what you have with Mexico is they're starting to search around with these NAFTA talks and they've already got an alliance going on with Argentina. They ship out most of their corn, export it. They've been talking to Brazil. So we're not the only game in town. I think if you look at it this way between Argentina and Brazil they export more corn than we do. So they're a competitor.

Pearson: Right. They're a competitor and you hate to give the market that worry about Mexico sourcing corn from any place else because that's just going to hurt our prices.

Roose: Well, particularly when they're in our back door.

Pearson: Yeah, we've got the lines that go there through the railroad and the highway. Now, that being said, corn would have to be priced I would imagine fairly cheap versus ours to justify shipping it from Argentina up around Brazil, up the Central American coast, into Mexico, wouldn't it? Or would they buy it out of spite?

Roose: No, I think it's a dollar and cents game. But look at it, corn in Brazil at the export point is $2.55 tonight. So look at our exports, we're substantially higher than that so they can ship it is the real issue. They're very competitive. Argentina is actually about 20, by the time you do the numbers they're about 20 cents a bushel cheaper, Brazil is about on parity with us.

Pearson: Okay. Something to keep an eye on as these talks continue. Finally, before we let you go, Don Roose, we have another question from an Iowa State student. And folks, we have received the first video question of the week from one of our viewers and we encourage all of you to do just what Isaac Christensen from Iowa State has done today. If you want to get your video question featured shoot us a DM on Twitter or a message on Facebook or send us an email at and we'll work out the details. So, Don, this question is from Isaac Christensen at Iowa State University.

Isaac: Hi, my name is Isaac Christensen and I'm currently in San Francisco on a student trip through Iowa State University. With the Bay Area being a global hub for technology I was wondering what you thought on the changing role of technology in agriculture.

Pearson: So technology. Don?

Roose: Well, I tell you, he's got a good question and it's all about technology, it really is. Look at the GPS systems that we have not only on the planters but on the sprayers, on the drones from keeping track of stuff, from the accounting software that we have towards he just sent you a message on Twitter, Facebook. Technology is -- the producers can keep up with the markets faster and more efficient than they have ever been able to so I think technology is here to stay.

Pearson: When you think about that, and you've been in this business since the '70s, the ability to keep up on the markets to the second, kind of a double edged sword. It's nice to have that information constantly available, but do you ever get the sense that maybe growers are too tuned into market prices rather than just figuring out their bottom line and setting a target and waiting for it to hit?

Roose: Well, I think you can, you can get information paralysis, which is really what happens to the producers. If you look at it they probably, most producers probably sell what, four to six times a year. So they're watching the market closer than they ever have and sometimes we think we're smarter than we are because you have all this information at your side. So I would still challenge producers to do a good job of marketing, look at your profitability, look at some of these strategies that we've talked about. Merchandise yourself out of some situations, don't speculate yourself out of the situation. But yeah, I think there's opportunities but make sure you don't get information overload.

Pearson: Perfect. Don Roose, thank you so much for taking the time to join us this week.

Roose: Thank you, Mike.

Pearson: Join us again next week when Angie Setzer, Naomi Blohm, Ted Seifried and Darin Newsom will sit at the Market to Market table to discuss the commodity markets as the harvest season ramps up. Until then, thanks for watching or listening. I'm Mike Pearson. Have a great week. 

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