Market Analysis: Don Roose

Market Analysis: Don Roose

Jul 5, 2019  | Ep4446 | Podcast

Podcast

Even with uncertainty over acres and the hope of progress in the ongoing trade war with China, the grain markets were mixed. For the week, September wheat dropped 12 cents while the nearby corn contract bumped 14 cents higher. USDA’s concern their numbers don’t reflect what’s really out there countered optimism over progress in Chinese trade talks. The August soybean contract plummeted 29 cents. August meal lost $9.50 per ton. December cotton gained 74 cents per hundredweight. Over in the dairy parlor, August Class III milk futures added 33 cents. Livestock was in the green. August cattle put on $2.65. August feeders expanded $1.98. And the August lean hog contract rose $1.05. In the currency markets, the U.S. Dollar index flew 118 ticks higher. August crude oil shed 22 cents per barrel. COMEX Gold dropped $11.10. And the Goldman Sachs Commodity Index lost half a point to finish at 423 even. Joining us now to offer insight on these and other trends is one of our regular market analysts Don Roose. Don, welcome back.

Roose: Great to be back, thank you.

Howell: Happy late 4th of July to you. I know you've got some patriotic colors on there today. We can talk about that a little more in Market Plus. But Don, we had a holiday-shortened week this week. Tell me what happened here in the aftermath of last Friday's report which shocked the trade.

Roose: Well, last week's report was a shocker last Friday and really put the market down, 25 cents down the limit on corn at one time. The trade instantly didn't believe the numbers. But I'm here to tell you that you have to really trade the numbers whether you believe them or not. Then we came back a carryover into this week on some selling but then as we hit the end of the week, the holiday we had some evening up, and we ended the week higher. So I think when you look at it, it's a market that wants to believe that the numbers aren't right, but at the same time the crop conditions are probably improving on corn and soybeans. So you're in kind of a trading range market.

Howell: Okay, let's talk about the crop conditions when you look at the winter wheat. We've seen only 30% of that crop harvested. Usually this time it's nearly 50% on average. Will this add a little bit of premium into the market?

Roose: Well, the crop ratings actually went up last week, which seasonally you just don't do that. As you mature you usually go the other way. I think what that really says is the yields are probably bigger than you think and that is really the report that we're getting is massive yields, even on grazed wheat we've had some big yields. So I think when you look at it probably this next week we're probably going to be close to 40%, 45% harvested and a lot of wheat coming at us. Hard red winter wheat just amazing, it's running a discount 65, 70 cents to soft red wheat with the issues with the wet weather in the soft wheat but a big premium difference.

Howell: Okay, big premium difference. Don, let's talk now about the corn markets. July 3rd we saw a pretty good recovery from that report. You mentioned last Friday. Why did we see that happen on Wednesday?

Roose: Well, I think when you really look at it we had a 53 cent break on corn in just very short order and overall the fundamentals on the corn market, the trade is very mixed, not sure really what we have. The ranges run from a 1.1 billion carryout, a billion carryout all the way up to 2 billion, probably in the Thursday report that is coming up July 11th it's probably going to be a bit bearish because the WASDA is going to use the NASS numbers. Remember, there's a real confusion. WASDE took corn acres in the June report down 3 million, then NASS came out with the June plantings and they took it down just 1.1 million acres. But overall I think what you have, Delaney, really is a wide swinging market. You get down to $4.20, you start to see end user buying going to $4.20 and a half this week and scale down buying just because of the uncertainties that we have from the end user. But then fundamentals are actually a bit negative on corn if you believe the numbers, which I think you have to trade. You get up around $4.50 and higher it's really a tough slide again to the upside. So I'd call it a rangebound market $4.10, $4.20 on the downside, $4.45, $4.55 on the upside and I think we're going to be pushing back and forth and that watching the crop ratings as we go forward for better direction. We're going to resurvey these acres again for the August 11th report so you're going to keep the trade increasingly nervous. And then if you look at the lateness of the corn crop, just incredibly late, I don't think we've ever had one this last, so you're going to have to beat the frost scare as we get close to the fall.

Howell: Absolutely. Don, the other thing I wanted to ask you about here was cash has remained relatively strong. I've seen on Twitter this week guys have said basis has been really strong, really it looked like across the Corn Belt. Why is cash remaining so strong with these acre numbers that we've seen and they're not maybe listening to those numbers as you mentioned they should.

Roose: Well, I think what you really have in the U.S. is you have a domestic issue. There's no shortage of grain, no shortage of corn in the world market. It's really domestic only. And so what that means is you're going to have regional shortages of corn, particularly over in the eastern Corn Belt. We have 70 cent overs already at some of these ethanol plants and what happens with the market typically you push up, we're going to have dislocated corn that you're going to have to try and pull from all different regions. It's really going to be an eastern Corn Belt versus the western Corn Belt dislocation but you're also going to have dislocations in the western Corn Belt, you get into some of these synergies in South Dakota, in that region, you're going to run into the same issue. So from a producer standpoint that means there's going to be opportunities to watch the basis, get some good pushes as you go through the year, but you have to have some risk management on to take advantage of those because it may not be, it may be in the cash market and the basis versus the board. We talk the futures market a lot but it all comes back down to the cash market and the basis.

Howell: Okay. Don, I've got one final question here as we talk about corn acres. We heard Undersecretary Bill Northey report this week that he's expecting as many as 10 million prevent plant acres. So I've got a two-fold question for you. One, what do you think the acreage breakdown will be for that approximate 10 million prevent plant acres? And do you think that number is on the money? Too high? Too low?

Roose: Well, when you look at what he said, if you stop and look at it in the last report the overall planted acres from last year were actually down 10.4 million acres. So we've lost a lot of acres. Where did they go? 4.6 million came out of soybeans, 1.1 million came out of corn and realistically you're probably, history shows that you don't drop these acres, those big numbers going into the final, more like 2 to 3 million on corn I would say in extra, maybe another 2 million on soybeans, so there's another 4 or 5 million, so there you go, those are the acres Delaney. So that's why I think he was talking 10 million prevent plant acres, not that far off when you add everything up.

Howell: And is that what you're expecting to see? Or do you think we'll see something a little higher than that?

Roose: No, I think that's probably what we have dialed in but not just corn prevent plant acres, it's prevent plant acres on total crops I think is what you're really looking at counting the soybeans and everything else.

Howell: Okay. Don, as I mentioned it was 4th of July, you're looking very patriotic today. We've got a question specifically related to the 4th of July date. We've got Gary Bruns from Wilton, Iowa sent in a question. He said, the saying goes that how the markets close the Friday before the 4th compared to the Friday after the 4th will set the prices for the fall. So how high will fall prices go in your professional opinion?

Roose: Well, one, that's a good question. Number two, I think when you look at it history has really been distorted this year because the planting is way late, way off so I would throw off some of those things. But I think the thing that we do know and I think you can look at this very close is we're probably in a short crop year. In a short crop year what happens traditionally is you put your highs in, in the fall, usually you're putting your lows in, in the fall, simply because as you start harvest you find out the yields really aren't there. Odds are that's what happens this year. But seasonally right now, and you can see what has happened is the market is really, really struggling, rallies can't really hold and that is because of seasonalities, this is one of the biggest negative seasonalities of the year from now until actually about the 1st of October on soybeans and from now until about the middle of August on corn. You've got wheat harvest coming at you, record yields down there. You've got Brazil corn harvest is about 35% done. You've got wheat coming at you from Europe and from Russia and the Ukraine. So what I'm saying is there's just a lot of grain coming at you in the market. And remember there's no shortage of old crop. The issue is domestic and it's out into new crop. And then remember next year probably the acres bounce back pretty big on corn so you have to keep that in mind. So seasonalities I would say are distorted but seasonality is probably coming into play here again.

Howell: Okay. Don, let's talk about the July 11th report when it comes to the soybean markets in particular. Do you see USDA adjusting the yield on next week's report?

Roose: Well, that's a good question because I tell you what, there's going to be some big adjustments. Number one, remember they're going to take the corn, the bean acres down 4.6 million. So that's what, 225 million off of a billion bushels. So instantly you're down to a lower figure. Then they're probably going to take the yield down because the crop ratings are 54% good to excellent historically that five year average is 68% so to have trendline yields probably doesn't make sense. So they're probably going to take the yield down one bushel or two bushels an acre instantly. I don't know if they're going to do anything on corn. But instantly rather than a billion carryout you're talking about a carryout probably 600 to 700 million. So not that that's a bullish figure but the crop is getting smaller, not bigger.

Howell: It's not necessarily bullish but it sounds like we're starting to move back towards that direction. Don, what do you expect then to see as an immediate reaction to that report assuming all those factors line up?

Roose: Well, I think we're going to see in a trading range because the carryout is big enough to go past $9.20, $9.30 on November beans, going to be very hard. To take the market any time soon under $8.40 to $8.60 is probably hard because you have just a huge respect for what can happen with the lateness in this crop. That is probably the biggest single thing that we have going forward now. I know we have pollination in corn and we have pod filling in soybeans. But realistically it's going to be tough. We're going to have to beat Mother Nature and you're going to have some of this corn that is not going to reach black layer stage until the third week of October. Think about, almost the first of November? Is that possible? I think as you get into August you'll hear a big debate on that.

Howell: Okay. Well we'll continue that in Market Plus. We've got to talk about the live cattle and feeder cattle markets. There seems to be a premium built in, in the live cattle markets. You look at the spreads, you look at what's going on in the later deferred contracts. Why is this happening? Why is this being factored in now?

Roose: Well, I think when you look at the cattle had a good trade here to end the week. We're in an uptrend. The cash market traded basically higher this week. We had some $113.50 in the Corn Belt and that was a good sign. But the futures market just got too low, Delaney. The typical seasonal top to the bottom would have put, we had about $129, $130 for the top in the spring cash cattle, that means the low should be around $109 in that area for a summer low and we took August futures down almost $103 at one time, closed at $107. So I think we just got too low, even the government says the first quarter of next year we're supposed to have cash cattle at $125. So even tonight we close at $116. So it looks like there's a little more upside. The cattle are trying to break to the upside. We'll see if they do or not. But it's all up to the demand.

Howell: And in the feeder cattle markets have we put in a low there? And are we starting to break out of this range? Or do you expect us to continue doing some rangebound here in the August feeders?

Roose: Well, the feeder cattle are just sitting down at the bottom end of the range. They followed the fat cattle down. But it's all about the corn market. It's all about the inputs. It's all about the breakevens on cattle going forward. If you can get the back months to move up in the cattle, live cattle, and if you can get the corn to come back down a bit I think feeders will find some support.

Howell: Okay. Don, your quick thoughts here, how much lower are we going to head in the lean hog markets? Or do we have support at these levels?

Roose: Supplies are just plain too big. I mean, our slaughter was 6.5% over a year ago. Our production 10% over a year ago last week. Too big. Without China, without Asia coming at the market with African swine fever I think you have to be afraid fall hogs go to $50 but that can change if we get some demand.

Howell: Okay. I'm going to ask you a little bit more about that in Market Plus. Don Roose, thank you so much.

Roose: Thank you.

Howell: That wraps up the broadcast portion of Market to Market. But we will keep this conversation going on Market Plus where we’ll answer more of your questions. You can find it on our website at Market-to-Market.org. When you subscribe to our YouTube channel you will get notified when the program and Market Plus are online. Find us at Market to Market. Join us again next week when we’ll explore how the next generation is learning the art of the hedge. So until then, thanks for watching. I’m Delaney Howell. Have a great week!

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