Market Plus: Roundtable Discussion

Sep 15, 2017  | 15 min  | Ep4304 | Podcast


Pearson: This is the Friday, September 15, 2017 version of the Market Plus segment. Joining us now is an all-star panel of analysts, Naomi Blohm, Angie Setzer, Darin Newsom and Ted Seifried. Folks, welcome back.

Thanks for having us, Mike.

Pearson: We talked quite a bit in that first show but now we get the chance to expand a little bit more and we get to pick up the topics that we dropped such as cotton, which really had a big week, down $5.52 a hundred on the nearby. Naomi, you are nodding and your eyes are big. What are your thoughts on this cotton market?

Blohm: Well, when hurricanes take different paths things change. So of course that rally up was right up to old resistance levels on charts and then we didn't have any triumphant news to take it higher so back down we go to where we were before so it doesn't really surprise me too much. The USDA gave us humongous bale numbers on that report, they gave us double the ending stocks from a year ago, so the market is believing that we have supply and the Chinese production is up and the production in Brazil is higher. So now that we've had our triumphant rally and catastrophic fall I think we are going to now just sit and do nothing for a while.

Pearson: Alright. And now, Naomi, you said something interesting and this might be a full table discussion. USDA released its report. The market believes that we have these numbers. Darin Newsom, does the market believe? You're looking at the spreads. Does the relationship that cotton has gone through watching that post report fall apart as it did, does that lend credence to the fact that the market does believe these numbers?

Newsom: Absolutely not. Still an inverted market, still bullish. We've got to buy the rumor, sell the facts sort of thing. And for all of the USDA fans out there let's not forget that immediately following the release or attached to the release in this report they put an addendum saying all of these numbers are wrong so we're going to resurvey and do them again in October. So, did the market believe the October cotton number? No.

Seifried: It traded it.

Pearson: Right, it traded that number.

Newsom: It did on a buy the rumor, sell the fact. It pushed it up so far, the inverse had taken it so far, it ran out of gas, created this vacuum, there was no one left to buy, it fell back down. I don't think the market has changed its structure one bit.

Pearson: You still see a bullish setup in the cotton market.

Newsom: Oh yeah, absolutely. And this crazy number that they've got for ending stocks, which will be changed in October once they resurvey, yeah it's not going to stand.

Setzer: Yeah, I think the most interesting thing in cotton right now is for one we don't know what supply we have, we don't know what kind of production we're looking at, we don't know what kind of damage we have. What we do know is export sales are 60% of current USDA estimates about six weeks into the marketing year here. And last year that was a continuation of it was every week we saw these huge cotton exports. And so it goes back again to the cash market and we'll see what that kind of develops into. But I think what it comes down to it in the market structure no matter what with those USDA reports you have, I don't have a good way, for lack of a better term I would say your non-educated buyers and sellers, and I don't mean non-educated in the traditional sense, I mean they use headlines to dictate what their trade is, they're not in the trenches taking a look at what actually is out there, what kind of export sales we have, things like that. They hear bearish USDA numbers, lack of confirmation of expectations and they sell on that side, same with wheat, corn, beans, whatever it may be.

Newsom: In that respect, USDA reports have, they serve one purpose and one purpose only and that is to create trade for the CME. And you can look at any market that you just said, cotton, wheat, corn, soybeans, whatever you want to look at, and there is no volume until report day and then you get a spike and then it goes right -- there was nothing today in the corn market. Some were wondering if we were going to have negative trade volume today in the corn market. So that is USDA's only purpose with reports right now is to create trade for the CME. The only problem is it happens over the course of maybe an hour, two hours, that's it and then it goes quiet again. But that's what I think was going on in cotton.

Blohm: The stock market is still really high and so everyone is all in a tither with that. And so there is no excitement in commodities and so you're going to finally see, I think that the stock market is going to fall apart in 2018. I look at the luxury items and the luxury stock markets and I think about my own little town and the luxury boats and engines and things that are there and that is not looking fantastic and it reminds me so much of 2007. So I think you're going to see the stock market set back lower, not like crash and burn so don't get all paranoid. But you're going to see money finally coming back into commodities in 2018 because these stories are finally developing. Crude oil is finally starting to have a story, our grain markets are having a story. So once that money comes back in, ta-da, you'll have some excitement.

Pearson: And a little bit of anecdotal evidence on the other side, one of the key measures of economic wellbeing is RV sales and I live right on I-80 and I see more fifth wheels and camper trailers rolling from Indiana to the West than I can shake a stick at. It is unbelievable the way those sales appear to be moving from my vantage point in rural Iowa.

Setzer: Carl and I are getting into the Griswold cousin, Uncle Eddie RV style, we can't wait. We're looking forward to it.

Seifried: Are you taking the bunnies with you?

Setzer: Yeah the bunnies too.

Seifried: The bunnies travel.

Setzer: So our bunny breeding market elevator person is I guess saying the top is in, she is buying an RV.

Seifried: Show on the road.

Pearson: Yeah, Ted, what are your thoughts? When you look at the broad economy, let's look everything as Naomi brought up, stock market just has been on fire for the better part of nine years, are we due for a 10%, 20% correction? And is that going to spark commodities?

Seifried: Listen, we've talked about that for the last couple of years, Brexit and Trump, there's been so many things that could have triggered a big selloff in stocks. I don't know. I've stopped trying to pick a top in the stock market because I've been bearish for three years.

Setzer: I've been bearish, I had a guy ask me this week, he said, when do you think the top is in on the Dow? And I said, honey you don't want to ask me, I've been bearish since 15,000. So, honestly, I thought we were inflating with fake money a long time ago. And we obviously have not been.

Pearson: We're still here.

Setzer: Yeah.

Newsom: To go into commodities, to bring money back into commodities you're going to have to find some sort of supply and demand issue and I'm not talking about USDA nonsense, I'm talking about a real supply and demand issue. And right now if you think about it, cotton comes to mind, maybe soybeans, Minneapolis wheat. Did it run its course? Does it have another, it's wheat, does it have another life left in it? I don't know.

Seifried: We're grasping at fringes I think is what your point is.

Newsom: Exactly. It's going to have to, you're going to have to find a market or a market sector that has a real supply and demand issue and right now they're few and far between. And you consider it looks to me like the dollar has about run its course as far as going down. I've been a bear in that for I don't know how long and it hasn't really done as much as I had hoped. And if that starts to turn around that could be what puts a top in the Dow, but that's not also a great recipe for bringing money back into commodities.

Pearson: It's a recipe for cash on the sidelines is what it sounds like. Now, I do want to get to some of our questions from some of our great viewers. We encourage all of you to send in questions as you have them and we will get experts to, well we're going to chat about them anyway. So our first question is from Josh in Minnesota. Josh is on Twitter @KramerJosh. He wants to know, Angie this one is coming to you first, if you have basis contracts for harvest delivery for corn, what would be some realistic targets for Dec futures to get it priced?

Setzer: We've been looking for $3.70 to $3.75. I've got some old crop basis targets that we were able to lock in, or basis contracts that we were able to lock in first half of September and that has been our goal. I don't have much harvest basis locked in at this point unless it is against a hedge. But $3.70, $3.75 has been my top end and you may see above that but with a basis contract and the big carry that's in the market I wouldn't necessarily roll too much. And the other thing that you can look at, we talked about cheap calls during the show on soybeans, you can look at a March basically in the money $3.70 or $3.80 for about a dime, so it will be less than what your cost of a roll is and then when you roll a basis contract you definitely risk, especially into a carry market, you take that 15 cents and then you watch the next month come down to the front and that's more painful than anything.

Blohm: And I agree with you, and you, that the $3.75 target. The other thing I'm thinking is that harvest is going to be a long, drug out process this year and so we all I think have agreement that it's going to be variable yields and it's going to be hit or miss depending on which part of the state people live in, but where we are in Wisconsin we need three more, four more weeks yet before we can even start. They haven't even started silage where I'm from. And so with the long harvest it's going to just take a lot of time to finally know what's out there for sure and probably until January USDA.

Newsom: February, March.

Pearson: So $3.70 to $3.75. Ted, do you have a different --

Seifried: I think maybe, I'm going to add 10 cents onto that. It's not that big of a deal. But I think you've got to watch soybeans because if soybeans really make a push you can talk $3.85, $3.95 December, well it depends on when this happens and can we get there in time for the December contract question. But yeah, if soybeans really get going, that's the only thing that does that. Otherwise, yeah, $3.75 to $3.85 I think is a very realistic target.

Pearson: Alright. Darin, do you have any different thoughts in mind?

Newsom: Nope, sounds good.

Pearson: Next question, Former Farm Boy in Central Iowa on Twitter @ruralmidiowa wants to know, huge U.S. corn supply, we need to get exports to reduce that. Is that even possible in today's world? We seem to get headlines every other day, NAFTA is currently being renegotiated, we're going to pull out on the Korea-U.S. free trade agreement, North Korea is shooting missiles. Can we increase exports in today's environment? Nobody speak all at once. Darin?

Newsom: We've already been told we're not going to.

(indistinct chatter)

Newsom: Come on, those are absolute aren't they?

Setzer: It has been a slower start compared to a year ago. But of course a year ago --

Newsom: Brazil is back in the game. Brazil is back in the game and they're going to take some of their business back and they might take some of our business to go along with it. There's all this chatter of the possibility of new business coming online. We're going to have to develop something. We've got to find a way to maintain the level of exports we have right now, if not increase them and the question asked about the current environment, the current environment is not necessarily conducive to thinking that --

Seifried: The low dollar is.

Newsom: The low dollar is. The political environment. Right. But even the dollar is not quite as low as it needs to be. In corn it's not as big a deal but you start talking about wheat and soybeans, the kind of lower dollar than where we're at right now wouldn't hurt anything. But we've got to find ways to maintain, to keep the trade partners we have right now with corn.

Pearson: Now, one of the stories that was pretty big earlier this week and we've talked about it a lot, Angie has mentioned it, I know Darin has mentioned it, Ted, Naomi, we've all talked about it. China, huge corn supplies they're sitting on. We don't know quite how much and quite what condition it is in.

Setzer: Or where it even is.

Pearson: Right. But we do believe they have piles of corn. They announced, Naomi, earlier this week that they are going to introduce a new policy of basically a national ethanol blend rate. Is that something that, by 2020 they're going to get this kicked off so it's probably not going to happen this year, does that get you fired up for the possibility of future exports? Or can China meet all that demand domestically?

Blohm: I don't think they're going to buy any additional amount from us because they have their friendly partner with Syngenta so now they have the means to produce rapidly a lot more corn.

Pearson: Increase their own yields is what you're thinking.

Blohm: And so what they have done is said, well we're not going to get caught with our, well behind the scenes talk that we had before, pants down by the ankles, they're not going to go through that anymore. So they're saying, we're going to grow our own corn and now we have the means to if there's any excess we can use it for ethanol. And so yes of course they want to clean their air but ethanol isn't the solution for cleaning their air. So the amount of corn that they're going to try to do, so it's like by 2020 is this spiel, it amounts to based on the research that I saw just in the past two days, 1.8 billion bushels of corn to be used for this ethanol incentive based on what they're using right now. So we grow and use 5 billion bushels of corn towards ethanol and so the number is 1.8 billion bushels. So it's definitely an increase but it's because they're going to grow better corn yields.

Pearson: So they're anticipating our yields are going to increase, we've got to do something here to make it work.

Seifried: They've got a lot of old stocks that they need to move that is in not great condition but they do use a lot of wheat for ethanol so that's a little bit of a shift in sort of the paradigm of how they're approaching ethanol. So yeah, I don't know, in years to come if they have short crops maybe that does open the door for our exports. They deal fairly exclusively with the Black Sea area, Ukraine, but if demand, their demand goes above and beyond that maybe we are on the table. Either way when you take more out of that world balance sheet that should be a positive thing for corn.

Newsom: Except for we have a new policy as well, that we aren't going to do business with anyone who does business with North Korea. So we have a new policy now as well.

Seifried: And that is not an edge in stopping doing business with China.

Pearson: It has been discussed. It has been floated I believe on Twitter.

Newsom: And if it shows up on Twitter that makes it policy.

Setzer: We'll see if the House retweets it --

Pearson: Alright, Twitter followers, you know what they're talking about. For those of you that aren't on Twitter, count your lucky stars. Thanks to everybody today for participating, Darin, Ted, Angie, Naomi, thank you all so much for your insight. We always appreciate when we get these minds together to share their thoughts. Join us again next week, ladies and gentlemen, as we look at how new pork processing facilities could impact Midwest producers. Until then, thanks for watching or listening. I'm Mike Pearson. Have a great week. 

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