Market Plus: Don Roose (November 2, 2018)

Nov 2, 2018  | 10 min  | Ep4411 | Podcast


Howell: This is the Friday, November 2, 2018 version of the Market Plus segment. Joining us now Don Roose. Don, welcome back.

Roose: Great to be back, thank you.

Howell: Don, there were a couple of things that we didn't get to touch on during the main program but I wanted to make sure we touched on now in Market Plus before we get to our great social media questions. The first one being the feeder cattle markets. Can we hold above $150 in the January contract?

Roose: Well, the feeder cattle you have to be very careful because there's a lot of moving parts. Number one, the corn market has good underlying support and if it continues to move up that is a little bit of an anchor. The other thing out here is the interest rates are going up gradually. So those two things are a bit of an anchor. And the fat cattle market we think is probably close to topping out in here short-term on the futures market, not necessarily the cash. So we think that there is some downside risk in feeders seasonally. So don't be surprised if we break $5 or $10 from here.

Howell: Okay. Don, the other thing we wanted to make sure we talked about was the baseline numbers report. Before we get into kind of the nitty gritty of that will you just explain for producers what that report is for those that have never heard of it before?

Roose: Yeah, the baseline report is a report that the government puts out from a budget standpoint so they know what to work with from a budget going forward. But it is one that a lot of times in November we don't look at. They're going to put out another one in February but everybody is so concerned about what the acres are going to be, what things look like next year that we did look at it this year.

Howell: Break it down for us then. What were the important components that came out of that report?

Roose: Yeah, I think if you look at it next year a lot of talk on acres. Corn acres they had up about 3 million, they had soybean acres down about 6.5 million. What does that all mean? From a yield standpoint they had yield at 50 bushels down from where we're at this year on soybeans, corn yield at 176 area. But the price they had for next year is $3.90 on corn, up a bit, and they had soybeans at $8.75.

Howell: Okay. Let's talk about acreage estimates here. You mentioned 2007-2008 crop year. Walk me through that and how that could be similar to what we see in 2019.

Roose: Yeah, the big acre debate is on right now and if you look at another year that we had where we had this huge uncertainty, big acre jump was from 2007 to the 2008 year. And in that year the corn acres unbelievably jumped 15 million acres, the soybean acres dropped just under 11 million, 10.8 million acres. What the real catalyst was on that is soybeans were just too cheap. We forget about this, it's only 10, 11 years ago. But soybeans in September on the board were $5.64, $5.65 area so that's a low price. At the same time we had the ethanol boom just beginning so corn was on the rise. So if you push the producer with numbers he will change is our theory. So watch it close but it's a big debate out here.

Howell: Don, my next question, you know what it's going to be. What are we going to see then for your acreage estimates for 2019? Are we going to see an 11 million acre shift?

Roose: I think it's work in progress but I think we're going to have to watch very close what happens with this, the trade negotiation with China. But I can tell you in soybeans today on the cash sub-$8 and corn stays closer to $4 if that's possible I think you'll see an acre switch that is much bigger than people think. So it's work in progress, the producer hasn't planned yet either so we're going to watch it very close.

Howell: And I'm sure a lot of producers at home are watching it very close. I think the other thing a lot of producers are watching closely is commercial storage and we talked about it a little bit in the main program but we've got a good question here from John in Nebraska. He would like to know, commercial storage was sold to stop storage. Is it time to buy back in on both corn and beans?

Roose: I guess if he's selling the crop because he didn't want to put it in storage and pay the fee if you look at it that way I think you should retain ownership is what we think.

Howell: For both corn and beans?

Roose: For both corn and soybeans. Now, you don't necessarily have to own the futures because you can go backwards. But you probably owe it to yourself when you're below the cost of production or at the cost of production to reown it with some option strategies, you can buy some $3.75 March corn calls to a $4.05. You have to build that model. You spend about 10 cents to make 30. I think those are the type of things you're looking for. The same thing on soybeans, spend 15 cents to make 60, go for the little windows right now, but try to retain a little bit of ownership and try to add some value to it.

Howell: Speaking of little windows, we saw a little window here in the soybean markets which leads to our next question. John from Twitter would like to know, does the soybean rally have legs or is it a blip? How can people ever afford to grow corn again?

Roose: And that goes to the acre switch. I think that's what he's saying too. But I think soybeans, I think what you did find out this week is the breaks are going to be more shallow. I think people are going to be very respective that any day that there's a negotiation signed with the Chinese on trade that the market is going to put on a quick run to the upside. It's probably going to be in the area of 40 to 60 cents depending on where you're coming from. I doubt if soybeans can get over the $9.80, $9.70 area just because we were lugging around an 800 million carryout. It's tough. But I think that will cause some excitement to the upside.

Howell: Do you think we'll see $9 soybeans here in the near future?

Roose: Well, if you look at it from the basis standpoint if the basis, I think that is what the producers are looking at is flat price, because on the board we got close this last week to $9.40, went to $9.36 and three-quarters. So if you put a normal basis on that in some areas you're back to $9 by the time you hit the spring. So that is what we're saying, you have to try and merchandise your way out of these low prices, use the basis to your advantage, use the carries to your advantage in corn, beans and wheat.

Howell: Okay. Let's talk about corn prices. We talked about soybeans, now let's take a question here about December corn of 2019 specifically. Phil in Dresden, Ontario said, with December 2019 corn at $4 and a huge swing back to corn acres possibly in 2019 are these future levels rife for the taking based on the last 5 year average?

Roose: That's a good question and I think so. We just talked about how the acres could switch and no doubt about it. The corn market the last few years has only been able to run on weather problems to $4.15 to the $4.50 area, $4.15 to $4.50. So we got up this week close to the $4.04 area. There's no doubt if you put a carry on that of 26 cents you're up at some pretty decent levels already. You're talking easily close to $4.40. So yeah, I think you have to, it just depends on what kind of risk management you use. But you certainly should be doing something, do some hedge to arrives, buy some insurance policies for weather. But if we have that acre switch you could be looking at the high end of the corn market before we get weather scares.

Howell: Speaking of acreage switch, we have Richard in Belle Eagle, he is confident that cotton acres are also going to increase here in 2019. And with that he said what are the fundamental and technical factors driving the cotton markets right now?

Roose: Well, I think he's right, I think the cotton acres probably do go up and the cotton acres probably go up because soybean acres down, maybe even some corn acres down. The issue that you have, much like we have in a lot of these other commodities, the price is just probably too low. But on the baseline projections the government didn't give you a lot of future optimism there either. It's just a matter of the best to the worst to plan I guess is what you're saying. And the Chinese were the big hope again. If we have trade negotiations that are positive, which we all hope, then I think we get back to a more normalized market, one that gives support not only to cotton but the grains and the meat markets also.

Howell: Yeah, absolutely. Don, we've got one final question for you here and this is not usually your area of expertise. We're going to be talking about the milk markets. We've got a question here from Kyle in Corvallis, Oregon. What is the outlook for milk prices in the next year?

Roose: Yeah, well, I can tell you I've been in a lot of different ag markets and I did grow up partly in a dairy operation too. But anyway, when you look at it in the '80s the milk was about these prices, hasn't changed a lot and the great equalizer is always supposed to have bigger production, like we have in a lot of commodities, and I think the milk market is kind of stuck in this range, a tight range. I think the way the producer can help himself is make sure he buys the inputs correctly, cover your meal down in these areas, cover your corn down in these areas and at least cover the, lock in the low end of the price because there's nothing worse than if the inputs also rally up out of here. If the production, we've got over production is the problem and slower exports. So do what you can to help yourself and I would buy the inputs.

Howell: So should producers, dairy producers, specifically be looking to lock in their feed needs right now? And how far into the future should they be locking in those feed needs?

Roose: I think I would and I think I would lock them in all the way into the early summer because that is the risk if we have some weather problems in the crop. Basis levels are wide so make sure you take advantage and they should be buying the cash, if you can't buy the cash buy the futures, if you don't want the margin call buy the options.

Howell: All right, Don Roose, thank you so much.

Roose: Thank you.

Howell: Join us again next week when we’ll explore how one non-profit agency is feeding millions with food from overlooked sources and Sue Martin will join me at the Market to Market table. Until then, thanks for watching, listening or reading. I’m Delaney Howell. Have a great week!

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