Market Analysis with John Roach

Market Analysis: John Roach (June 8, 2018)

Jun 8, 2018  | Ep4342 | Podcast


Weather, geopolitics, trade skirmishes and profit-taking took the wind out of the commodity markets. For the week, July wheat fell 3 cents, while the nearby corn contract plunged 14 cents. Trade tariff retaliation, coupled with concerns over North Korea and G-7 meetings, put pressure on the soy complex as the July soybean contract plunged 52 cents. July meal fell $16.40 per ton. In the softs, December cotton added $2.58 per hundred weight continuing a 4-week run where prices have risen 12 percent. Over in the dairy parlor, July Class III milk futures lost 19 cents. The livestock sector finished the week higher as the August cattle contract added $2.15. August feeders put on 95 cents. And the July lean hog contract moved up $1.93. In the currency markets, the U.S. Dollar index dropped 64 ticks. Crude oil slowed its slide losing 7 cents per barrel. COMEX Gold poured on $3.40 per ounce. And the Goldman Sachs Commodity Index fell just over a point to settle at 476.10. Joining us now to offer insight on these and other trends is our senior market analysts, John Roach. John, welcome back.

Roach: Thanks, Delaney, nice to be here.

Howell: It's good to have you, John. And as we transition here into talking commodities, it seems like they are being overshadowed by the trade that is going on. We've had a pretty bearish week this week. But let's start with some positive news for producers. We were talking a little bit before the show. Can you share what you see as this positive light coming for agriculture and for the economy as a whole?

Roach: I think that you have to realize that the economic growth that is occurring is really quite unusual. The now fed article that is published by the Atlanta Fed projects, not projects but estimates GDP growth forward using some of the same practices they do to do their reports and they're looking at something in the neighborhood of a 4.6% GDP growth rate in this second quarter. So I think the first thing we have to look at is to see that we really have strong economic growth in this country and that that's likely to spill over into other countries. And so I think we need to look out forward a little bit and realize that our economy is really accelerating here and we need to recognize that prices really aren't going down very much based on the kind of negative things that we had coming at it this week from tariffs.

Howell: Well it's refreshing to hear some positive news this week coming from you. Let's talk about wheat specifically. Out of all the commodities this week wheat has seemed to hold on and had strength through the end of the week here. Why?

Roach: The wheat market was never a favorite of the commodity spec funds, they were always short or have been short. That has changed over the period of the last month or so when they have come out of their shorts, they are now long in futures. And so we have a speculative buying group out there now, as long as this wheat market can hold up above the 20 day moving average we're likely to put some more money on top of the wheat market.

Howell: How much more money?

Roach: Well, we're headed right into harvest so it depends on what kind of weather we have at harvest and what we find. This next week we're going to learn a lot more about the winter wheat crop than we know today. We're into the harvest and we'll be far enough in, in some different areas, that we'll have some better ideas. But I think we take the wheat market back up to where the highs were if these weather conditions don't improve in this country, and it's a little late to do that, and we have weather problems over in the former Soviet Union and in areas of Western Europe too.

Howell: With that being said, just briefly here before we transition to corn, is the bigger story right now the U.S. weather market or the Russian/Baltic Sea/European weather market?

Roach: A combination. We have to have the northern hemisphere raise big crops. We've started out the year with Brazilians and Argentina, the South Americans raising about 20 million tons less soybeans than last year and about 25 million tons less corn. So in the northern hemisphere we've either got to make up for those bushels that are lost or we have to take them out of our carryover and that is what will end up happening. We're going to have to pull our carryover down, tighten our surpluses and so it means we have to have good crops in the northern hemisphere because if we don't we could eat all the way through our surpluses. So the market is going to be paying attention to the development of crops really in all of the northern hemisphere and right now we have parts of the western United States and parts of Europe that have got problems.

Howell: Okay. Let's take a social media question here off the top because as I mentioned earlier we saw corn plunge quite a bit this week and we had a great question come in about the December corn contract from social media. Jeff in Lincoln, Nebraska said, has the high in December corn futures been put in already?

Roach: I think there is a shot that it could be. We may have had the worst of our weather concerns and we may have had the worst of our concerns about tariffs and stuff like that. We may be at the worst of that right now. And next week we could come in and get good rains, make the crop come along well, in which case we'll put more pressure underneath of it. Or we could straighten out things with the tariffs. There's a lot of different possibilities and a lot is going to come to a head here this next week. And so I'd say there is a shot that we already put the highs in but we're going to have to have good growing crops through the whole season. And to be able to get that you have to have almost perfect weather. So I think there is, it's possible we've put the highs in, but I would not bet that we put the highs in. I think people are actually getting too bearish in here. We have buy signals on corn, soybeans and meal and spring wheat and so we've been counseling our customers to slowly, not quickly, but slowly make feed purchases and accumulate inventory, buy calls maybe for some of the grain that you've sold, those kind of things because we think that we're really dealing with the worst of the information right now.

Howell: Okay. Let's move on to beans here because they had a big story as well this week. We closed under $10, I think it was under the 200 day moving average. Why did we see that happen in the bean markets this week?

Roach: The biggest thing that happened was the real weakened initially and then turned around and actually closed up sharply today. So the currency move has really made a difference in bean pricing around the world. And when the real weakened that allowed Brazilian farmers to go ahead and make sales at a favorable exchange rate and that allowed them to be able to make sales.

Howell: And is that part of the reason we saw such low export numbers this week for soybean sales?

Roach: It's usual that we would see small sales for soybeans this time of year. This is the time of year when all the business goes to South America and we get very little. And so it doesn't make any sense for when they're trying to push politically to shoot themselves in the foot by helping the bean market. So no, my bet is that the Chinese are doing everything that they can do to make the bean market look as bad as they can.

Howell: Will we continue, or will we see the USDA, or soybeans hit USDA's expected target here then towards the end of the marketing year?

Roach: I think we'll see the bean market come back. I think prices, again, are down into an area that it's just too cheap here. Farmers don't have very many beans to sell. We're just liquidating the spec trader. The spec funds built large positions and took the market up to the highs, we saw some peaks here in the last couple of weeks, and now we've been liquidating those long positions out. This week the liquidation, we liquidated about 130,000 contracts of crop markets. And so those are lots of bushels being sold by speculative traders who we can be mad at them except they're the ones that gave us the high prices we had two weeks ago. And so you can't be too mad at them. And now they're giving us cheap prices for livestock feeders.

Howell: Let's go on here quickly into cotton because they've been a positive story in the markets over the last couple of weeks. How high can we get here in the July cotton contract?

Roach: This 93, 94 cents per pound area is going to be a tough spot. We were up there once, backed off and now we're back up pressing in that area again. We think we're kind of moving into a tough spot there. We're getting a sell signal in the cotton market. We had one here a week and a half, two weeks ago and now we're generating another one.

Howell: So producers should potentially be looking to make some sales.

Roach: It's time to be pricing some cotton, yes.

Howell: Okay. Let's transition here into the livestock markets. We've seen a $300 plus packer margin and I just generally, is this helping or hurting the cattle markets?

Roach: Well, it's helping the cattle market. It allows the packer to be able to bid and to pay some of those dollars back out to the grower, to the producer.

Howell: But are we seeing that money trickle back out to the producer?

Roach: A little, a little. We'd have a lot tougher market right now if the packer was not making good profits. But we think the market has got some room to move up a little bit more here. We're not far away from a sell signal in cattle so we're looking to be putting some sales here in the next dollar to two dollars higher. But we're not really pessimistic in this market here. We think, again, we've got a lot of pessimism circulating.

Howell: We definitely do. So what are you looking for, for cash prices over the next week?

Roach: I would think we could, we had a pretty strong cash market this week, it took a long time to get it developed, finally at the end of the week. I would think we could maybe do another dollar or two dollars higher this next week. We're very current and, as you say, the packer has got plenty of money.

Howell: They definitely do. Have the August live cattle put in their lows yet? I think we hit below $100 here back in May.

Roach: Probably have, yes. We think that that bottom that we made in the cash market is probably the bottom.

Howell: Is weather affecting the live cattle markets at all? Or is it mostly in the feeder cattle where that's being the main story?

Roach: In the feeder cattle, you've got a lot of the areas that are awfully dry where they have feeder cattle, and so but feeder cattle prices are still very strong. It's hard to buy the feeders and make them work. So we're not having pressure put on the feeder cattle because they're having to move them off of pasture. We're able to, as I say, they're being held pretty tightly.

Howell: When you look at the feeder cattle charts it looks like they've kind of just been moving in this sideways pattern, a pretty tight trading range. Do you anticipate that to continue over the summer months? Or do you think we will get another seasonal rally?

Roach: Well, I think we could get a seasonal rally but it will really depend upon corn. If the corn market continues to decline yes, feeder cattle will be the beneficiary. But if the corn market doesn't get the kind of weather it needs here in this next week and it starts to stage a recovery, feeder cattle prices will weaken.

Howell: Is there any reason for us to see over$150 here in the near term contract months?

Roach: I don't see it. It's always possible. But we're going to have to have something more positive come along than we have right now.

Howell: Okay. We of course have to end on hogs. We had the World Pork Expo this week in Des Moines, Iowa and a lot of pork producers were here and got a few words from them that we have to make sure and talk about hogs in this week's program. So of course we had big news with Mexico this week announcing a tariff. What is that going to do for our hog markets? We haven't really seen them react price wise this week.

Roach: Well, I think that's the thing that is important. Markets will usually tell you if you'll pay attention. And so if you get a lot of bad news, which the hog market has had a lot of bad news, but the market doesn't go down or maybe it goes down a little bit, it doesn't stay down, it tells you that the biggest money, the smartest money is betting on prices to recover some and that's the way we closed the hog market today. We closed the hog market today strong, the cash hog market is very strong. It makes a person believe that either they're going to find a solution to the tariffs or that maybe they don't think that there will be such loss of business. I'm not sure exactly. But the market is telling us don't be too bearish in the hog market right now based on just the way we traded this week.

Howell: So if we haven't made sales yet should we be looking to make --

Roach: Patience, patience, just have some patience here. Don't sell in the midst of bad news. It's a whole lot better to wait and sell when there's a little bit of good news around. And what the market is telling you today is there's going to be some good news around or else the market is just clear wrong. And I've learned over the years that when the market is telling you something better off to pay attention. And so right now unless you're already planning on getting stuff sold, be patient here for a little bit.

Howell: All right. John Roach, thank you so much for your insight today.

Roach: Thanks, Delaney. Nice to see you.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep the conversation going on Market Plus where we'll answer more of your questions. You can find it on our website at The M-t-o-M Podcast just passed episode 100. Join Paul Yeager each week for a behind the scenes look at the program with our producers and analysts as well as a few movers and shakers in agriculture. Subscribe today to be in the loop. Join us again next week when we explore how cash-strapped firefighters are preparing to face another season of tinder-dry conditions. So until then, thanks for watching. I’m Delaney Howell. Have a great week!


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