Market Analysis with John Roach

Spec funds sales were too much to overcome in the trade this week as corn joined all three wheat markets suffering in more than just the heat. For the week, the nearby wheat contract lost 26 cents, while December corn subtracted seven cents. The soybean complex benefitted earlier in the week from hot and dry conditions while the crop faltered. The November contract sold off 19 cents on the week and December meal fell $15.40 per ton. December cotton expanded by $2.64 per hundredweight. Over in the dairy parlor, October Class Three milk futures added 27 cents. The livestock market was mixed. October cattle declined $1.03. October feeders gained 67 cents. And the October lean hog rallied by $3.22. In the currency markets, the US dollar index added 18 ticks. October crude oil improved 5.73 per barrel. COMEX gold expanded $26.40 per ounce. And the Goldman Sachs Commodity Index increased just over 14 points to settle at 597.70.

Yeager: Joining us now is senior market analyst, John Roach. Hey, John.

Roach: Thanks, Paul.

Yeager: Wheat, all three, tough, tough times. If I keep looking at these lows and this trend, eventually we have to hit bottom, right? When is that going to happen?

Roach: Well, eventually we will, for sure we will. We've had a buy signal on wheat I think we're up to 18 days now. So, we've already gone down into the technical support area where the market should find buyers. But what we're finding instead is speculative funds willing to sell and very few over on the buy side really willing to buy very much. Keep in mind that what we have going on in Ukraine and Russia, the biggest exporters of the world are right now really having a difficult time being able to make any exports. Russia is restricted by most all of the peace-loving nations and Ukraine has shipping problems. So, if anybody buys from Russia or Ukraine, they're buying at a discount. And that is holding the whole world price level at a discount, in my opinion. And my hope is that we get past that. But at the moment we don't have that on the horizon at all.

Yeager: And those people that are buying from Russia are big buyers.

Roach: Oh, of course, but it's Iran and China and others in the world that are willing to do business with whomever regardless of what the U.S. says.

Yeager: All right, let's talk domestic producers who are looking at a down market, looking at dry conditions in their fields. Are you thinking changing any crop planting in the wheat belt in the United States right now for next year?

Roach: Perhaps, we may well see some people shift back away from wheat. We had some movement back into wheat this year. We could maybe see it move back out a little bit. We certainly did better in the hard red winter wheat area with some of the corn plantings than we did with the wheat. And so, there's sure a possibility of that. But at the moment I wouldn't look for any real big change in acreage.

Yeager: Do you have a price target down?

Roach: No, I really don't. I never know. The market -- funds will continue to sell and follow the trend. It's the old adage the trend is your friend, and we say that, but they literally do that. If the market is trending down they're going to continue to sell until the buying overwhelms their selling. And I don't think that's very far away. And so, we think this is a market to be buying. As I said, we've had a buy signal on for coming up on 20 days. So, these are places where you make purchases. But understand we don't really have a reason to turn and go higher tomorrow.

Yeager: So, we don't have a reason for people to go from one end of the boat to the other yet?

Roach: The farmers are in the boat that they're holding onto inventory right now. And I think you just have to stay in that boat if that's your position as a wheat farmer.

Yeager: Spec funds also controlling corn right now, weather be darned. Is that right?

Roach: Yeah, the corn market has another couple of things going on. First of all, the open interest is not as big as normal. And so, with a smaller open interest you have to look at the players. And the users are not anxious to go out and buy a substantial amount of inventory until we get into harvest and they see a crop that is coming on. And so, they're reluctant to buy. Farmers are in a position where they don't really want to sell anything. And those who have bought have already been stung with margin calls enough that they're not really coming in. And so, the spec funds, even though they're not trading in huge volumes, it's enough to just put pressure on the market and hold it under pressure. And it's going to continue that way until the trend turns higher. Now, you ask about wheat, are we making a bottom in wheat? I think we are making the bottom in corn. We had the Farm Progress Show in Illinois this week and we've made the bottom several times during that timeframe because that is when the August 31st deferred pricing contracts, or delayed pricing contracts, many of them got priced through this week because they came to their deadlines. And so, that is about as big of a wash of inventory moving into the market that you're going to have until we finally get into harvest and harvest is still a couple of weeks away. So, I think the corn market is bottoming here.

Yeager: Well, okay, corn harvest about to start. In your area where you were at with the Farm Progress Show, that is an area we've heard is drier and harvest is starting. Did you see many machines in the field down there?

Roach: I didn't see any other than at the Farm Progress and it was reported to me the field that they harvested right next to this at 195 bushels an acre. I talked to the farmer that farm he was on and he expected 200 when he went to the field and I think it was 87-day corn. So, really those numbers are not as frightening as some we've heard from other people. A lot of variability in the crop.

Yeager: Well, you mentioned DP, I want to get a little detailed question. Bradley in Nebraska submitted this one this week. Always like to hear what Bradley has to say. He asks you, John, how much of this week's corn selloff was managed money? And how much of it was commercial hedging as farmers are forced to price DP contracts and have terms expiring at the end of August? Pretty much what you just said, right?

Roach: That's exactly right. I'm not sure what percentage falls in each camp, but if you add the two of those two percentages together that is going to be, I think, 90% of what got sold this week.

Yeager: I want to go back to the harvest low possibly that's in, or the low. We've seen in the last 10 years rallies anywhere from what, 30 cents to $1.30 after the harvest low comes in? Do you expect that to follow a pattern somewhere in there?

Roach: I think the market will have some rally once we finally get the crop put away. But right now, what we're all waiting for are the first combines that go in the field, as you said it's going to start, because we want to see what their combine monitor says. We want to see what are those yields? And I talked with one farmer at Farm Progress who said, I think the needle is going to bounce from the far left to the far right on this farm. There's that much variability. And so, we want to hear some numbers and then once we hear some numbers, okay now we'll be able to start looking out forward. There's a possibility we've heard enough of this crop that we've changed the fundamentals. That's the possibility. Is it real? I don't know. I'll know when I see combine monitors.

Yeager: Will you know in beans that if this late heat has done damage to the bean crop?

Roach: In two or three weeks, same story, because we just don't know. And when I would try to pin a farmer down and I'd say, well what do you think is really out there, they really just don't know. This is such an unusual growing season for so many people. And so, it makes it really dicey. And the possibility here is we could change the fundamentals enough that we could have a much bigger market than we think we have with the current fundamentals. But, bear in mind, again, where are you at in the canoe? And if you're a corn producer now is not a time to sell. You've got crop insurance that you're protected, if it goes on down your crop insurance will protect you, if it goes up your crop insurance will shrink but you'll end up basically the same number of dollars. The problem happens if you do something and you sell your crop and then the price goes up and the insurance, if the price goes up it's not a problem, if -- let me start over here -- if you sell your crop and then the price goes up and then your insurance payment is less it doesn't cover. So, the only thing you can do right now if you're a farmer with corn is be patient and wait a little bit.

Yeager: With respect to beans, you had a sell signal on --

Roach: We had a sell signal on beans, yeah.

Yeager: But do you see that there's -- what is going to get that signal back?

Roach: The sell signal?

Yeager: Yeah.

Roach: We lost it. We're going to have to have some kind of concern on the supply side or a continuation of better than expected demand to change the big numbers. IF you look at the last USDA report, the world ending stocks on beans are the biggest they've ever been and it's a huge big increase compared to where we've been. Now, that's going to change according to the U.S. crop, it's going to change according to world usage, but at the moment the forecast is big surpluses of beans coming. And so, we've been relatively willing sellers on beans. Our recommendation has been to get half sold of your new crop. We started some time ago but we made more sales again this week.

Yeager: In the livestock sector, there's some technical things that are flashing. In cattle specifically, it looks like there may be a bear trend starting to set in. Do you buy that?

Roach: We have sell signals. We're selling into it. We don't think really that the market is ready to fall apart. I can't point to things in the cattle market, the cash market, that are so frightening that I think we're ready to give up and start to go down. But, we certainly have a difficult time moving much higher. We're in a sideways kind of a pattern here and we're at very high price levels and this could sure be the top at any time. But, we really don't yet have those fundamentals put together. The cattle are very profitable coming out of the feedlot right now. People aren't holding them any longer, they just move them as quickly as they can get to those profit levels and that keeps your supply under control. Our economy continues to kind of percolate along, so the high-priced steak restaurants are still full. But that could have a change out ahead too depending on economic conditions. So, there's some things out there to be concerned about, but we're not really saying that it's over yet. Be cautious if you're on the buy side of this thing and keep your hedge protection in if you're putting cattle in a feedlot.

Yeager: Yeah, the feeder then, that looked like maybe we've gone, who knows how much longer that rally should have lasted. Just when you thought it was over it rallied again.

Roach: Did it again.

Yeager: Where is that steam coming from in the feeder market then?

Roach: Well, it's called availability. And when a cattle feeder takes cattle out of the feedlot, they make $200 or $300 a head it's awful hard not to put more cattle into the feedlot, particularly if you think this is going to be one of the peak markets, you just want to have cattle if that's the business that you're in. And so, it's hard to not buy the feeders.

Yeager: Hog wise, what are you seeing there, because, again, it looks on a chart that the bear might be lurking?

Roach: Maybe. But the pork prices are too cheap, in my opinion. Hog prices compared to beef prices compared to pork prices, there's too great of a variance there. And so, we think the demand will start to pick back up, particularly if the economy starts to struggle a little bit in here. And remember, we still have a lot of people out there that are on the lower side of the economic scale and beef is out of their budget completely and pork is very competitive.

Yeager: Always something to talk about with you. And we'll get your thoughts on cotton in Market Plus, so hold tight, John. Thank you.

Roach: Thanks, Paul.

Yeager: Good to see you. We will keep John here for a minute because we're going to pause our analysis, we'll continue our discussion about these markets in our Market Plus segment. I have a number of questions ready from all of you. You can find both analysis and Plus on our website of MarketToMarket.org. We do enjoy hearing from you and here is how you can do that. Send an email to markettomarket@iowapbs.org. That inbox is available around the clock. Next week, we are going to look at how duck producers are hitting economic curveballs. Thank you so much for watching. Have a great week.

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