Market Analysis with Don Roose

Market Analysis: Don Roose

Dec 14, 2018  | Ep4417 | Podcast

Podcast

The news that China is buying soybeans from the U.S. for the first time in months failed to inspire the commodity markets.  According to Reuters, the White House has delayed additional market facilitation payments because it anticipates new sales to China. For the week, March wheat was flat and the nearby corn contract fought a see-saw battle to finish nearly even. Orders from China’s two major state-owned companies have yet to put a fire under the soybean market as the January contract fell 16 cents. The January meal contract dropped $3.90 per ton. March cotton fell 63 cents per hundredweight. Over in the dairy parlor, January Class III milk futures gained a quarter. The livestock market remains mixed. February cattle added 87 cents. January feeders put on $3.20. And February lean hogs tumbled $3.38. In the currency markets, the U.S. Dollar index improved 89 ticks. January crude oil lost $1.41 per barrel. COMEX Gold slid $11.20 per ounce. And the Goldman Sachs Commodity Index took shrank more than 9 points to finish at 406 even. Joining us now to offer insight on these and other trends is one of our regular market analysts, Don Roose. Welcome back, Don.

Roose: Great to be back. Thank you, Paul.

Yeager: All right, Don, we know there was a government report this week, we know there was some news just a tiny little bit with soybeans and China. We'll get to that in a minute. There is some ink though out there that says wheat is the leader in this market. Why would anybody be saying that right now?

Roose: Well, when you look at the wheat market first of all it's down at a level that is very competitive here in the U.S. and if you look at the problems we had around the world Europe had a dry drought, Australia had a dry drought, Argentina the wheat crop 60% harvested but this poor quality too much rain. Paris wheat made an eight week high this week. And now Russia is offering wheat about 10 cents higher than their last offer. So our export pace did go down on the government report the last report. But it feels like this market is just waiting for Russia to quit selling wheat in the world market. That's the big problem.

Yeager: Is that anticipated to happen any time soon?

Roose: Well, they're going to have a meeting next week with the government with the exporters and they have a monthly meeting but they're trying to decide, and I think that's going to be a question mark next week, do they think they're exporting wheat too aggressively, that they're going to slow or restrict the exports? And that has been on the radar but we'll see if something happens. But there's definitely a bid underneath the wheat market and that is helping the corn market also.

Yeager: Am I selling off what I have left in the bin?

Roose: Well, look at the wheat. March wheat has been in a trading range from $5.10 to about $5.50, just hasn't been able to get out of that area. And so when you look at it, it's a market that don't sell breaks, don't buy rallies and so when you get closer to that $5.40, $5.50 area in March if you have to have some catch up sales that's probably the opportunity, Paul.

Yeager: Am I going to dribble anything out new crop then? Or am I going to keep that same philosophy that you just laid out?

Roose: Yeah, the new crop wheat is very much like the old crop wheat, we're caught kind of in this range, $5.20, $5.60 on the upside. So when you get close to that $5.50, $5.60 I think you have to look at that as an opportunity and certainly if we would get a break out to the upside, which it feels like we're trying to do, when you get closer to that $5.80 to $6 those are catch up sales.

Yeager: Old school thought tells you that corn follows wheat. Resisted though a little bit this week and kind of did its own thing. Why?

Roose: Well, the corn market if you really look at it, it's one that has pretty good fundamentals. And I think when you look forward to, I think the bullish story under the corn market, under the soybean market is the January report because it was a late harvest, the yields at the end of the harvest were really not that great and so I think when you look forward to the January report, not that far away, that yields could go down a couple of bushels on corn and it wouldn't be surprising to me if soybeans went down a bushel. So not a game changer on beans, but on corn that could get your balance table down closer to that 1.65 billion bushels, so then the fight is on for next year's crop and the weather.

Yeager: Are you buying into this story that China is interested in U.S. corn? Do you think that's happening right now?

Roose: Well, I think it's a good question. But I think it would be highly unlikely that they're in for big amounts. I think it would be more token amounts. I know there has been reports that they're going to be in for 10 to 12 million metric tons. That's 400 million bushels. We only export 2.4 billion a year. I would say that it's more of a logistical situation where they're shipping corn from us off the Pacific Northwest to meet some of their southern regions because it's more expensive to bring it from the north down. I would say that's the better bet. But underneath the market there is buying interest around the world, Paul. That's a good sign.

Yeager: And we still have corn in the field, you talk about it with the old crop that we might adjust some of that end number down there, it's still sitting out there waiting. But is it enough, do you think it's only on dropping that yield number of what is left in the field? Or was maybe this crop a little more hurt with weather than we realized during 2018?

Roose: Well, the yields particularly when you get into the northern Corn Belt, you get into northern Iowa into southern Minnesota, there's a number of areas that just had crops that were substantially under a year ago. It's hard to make up yield losses like that. So I think the yield probably is going to go down. The real trick of the market though, Paul, is when March corn gets up around $3.90 it's just tough resistance, you get July corn up around $4, $4.05 tough resistance and you even have new crop corn when it gets between $4.05 and $4.10 that kind of stalls us. But when when you pull back to the downside you get down around $3.90 on new crop corn, you get down around $3.77, $3.70 on March corn there's good buying, there's a $3.78 gap on March corn. So I think what I'm really saying is we're caught in this big, broad trading range. We're at the top now and producer selling picks up, beats us to the downside, end user picks up and world buying picks up.

Yeager: All right, so if China is maybe not buying corn, they say they're buying soybeans, the proof is in the pudding, whatever phrase you want to use, until they take shipment and delivery this might just be news and it's not enough to move the market. Do you read, are we reading too much into this and looking for hope where hope is not?

Roose: Well, if you look at this last week you had a classic situation, the futures market, it was a buy the rumor, sell the fact. We had an announcement on smaller than the trade thought, 1.1 million metric tons of soybeans, and the trade sold into it because they were looking for a bigger number and it was a fact. But when you have a 955 million carryout if you stop and think about it we're past our peak export time, our advantage. South America is going to start harvesting soybeans the end of December into early January. It's going to be hard to change that balance table a great deal even if you increase exports on the balance table 150 million you're still at 800 million carryout. It's just hard to put lipstick on that pig, Paul. It's a big number and we've got actually pretty good prices. We rallied a dollar off the bottom on soybeans.

Yeager: Well, that's good and you shouldn't, you've been looking at Twitter again because you saw that Adam in Wisconsin was writing and asking, why would China buy beans from the U.S. contra-seasonally when South America looks to have a massive crop? That's his question he sent to us.

Roose: Well, we've got a lot of competition. Why would they? I think because they have been buying very aggressively from South America already so I think it's more of a token situation and I think he's right, I think it's going to be all down to the price. And you take the tariffs off, if we can compete I think we'll get the sale and if we can't we won't. And that is going to be the real issue.

Yeager: Real quick, we hit a four month high. We had the ninth biggest one day sale of beans in a while. Look new crop deferred, what do you see long-term?

Roose: Okay, when you look at the new crop acres could be down 3 to 4 million but that's not going to be enough. But look at the price that you have for an advantage. This last week we got January '20 beans, January '20 beans up close to $9.75, not a bad price. If you put a carry on the market, a normal carry of 52 cents, 50 cents, you're talking about July '20 soybeans up around $10.30. that's a number you can live with.

Yeager: That's a serious number.

Roose: Well, last year in a bull market when we had a drought and weather problems we could only get to $10.60 on July beans. So there's opportunities but I think you have to kind of market, merchandise your way out of these markets this way.

Yeager: Give your advisor a call or pick up an advisor and try to work through this a little bit.

Roose: Yeah, there's some opportunities. And the same thing, Paul, in corn. New crop corn is $4.05, you put a carry on that you're out to about $4.31, $4.32 on July '20 corn. So try to use those to your advantage.

Yeager: Well, you've been feeding some of that corn to those big animals. The cattle market, large December kills, very strong demand in the live cattle market. What's moving that besides those two things?

Roose: Well, the surprising thing is two things. One, the consumer, the domestic demand is just unbelievably strong. Talk about the consumer confidence at an 8 year high, I think that is part of what's going on. The packer has just been amazing. This week we finally had the packer margins move down to $100 a head profit but you remember just a few months ago he was making $250 to $300 a head. So the cattle market when you look at it looks like there's demand under it but we're pretty mature, we have dialed in an awful lot of bull news into the cattle market. We did have a key reversal on April cattle this week which often signals intermediate high. There's nothing real bearish on the cattle but like a lot of these commodities you get close to the top end of the range and if you break too far the demand picks up. So we still have good demand underneath the market.

Yeager: So do you think the leverage now, you said it was at the packer, do you think the feeder has the leverage right now, the feeder cattle market?

Roose: No, I think the packer is still in control. I think the numbers are there. Stop and look at the production, next year we're going to have, you know what we had for prices this year, next year we're going to have overall production up another 3.1%. There's just big numbers coming at us. You have to be really careful on the demand side if the economy starts to slip a little bit that's the risk. So when you're up at the top end of these ranges according to what the government says risk management makes a little bit of sense.

Yeager: All right, well you're trying to figure out if that pencils out. And so is the hog farmer right now. Another drop this week. Is this all because oh we've contained the fever? Or what is moving this market?

Roose: Well, you're right, it has been all about we've got monster supplies in the U.S., there's no doubt. We're going to have 5.3% more pork this year than last year in production. The government is saying our exports are going to be up 8%. So we'll see, it's all about the demand. And it's really the battle, huge supplies versus China hopefully they're going to be a big buyer. They have bought three weeks in a row, Paul, so that's a good sign.

Yeager: I was just going to say, Don, there has really been no news about China and hogs and that's something we'll get into. I don't know if I'll ask you if the Chinese like bacon but we'll find out in the Plus. We'll also talk cotton and other things. Don Roose, thank you so very much.

Roose: Thank you, Paul.

Yeager: That will wrap up our broadcast portion of the television program Market to Market. Guess what, we're going to keep this conversation going on Market Plus. We'll answer all of your questions that you have submitted to us and you can find it on our website, in case you haven't noticed that's new, MarketToMarket.org. That's easy, MarketToMarket.org. Our Facebook page has been full of additional material as part of our Justice in Agriculture series. Like us today to be in the know. Join us again next week when we'll explore why one farmer spent a year in prison. So until then, thanks for watching. I'm Paul Yeager. Have a great week.

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