Market Analysis with Arlan Suderman

Arlan Suderman
Market to Market | Clip
Dec 1, 2023 |

Arlan Suderman discusses the commodity markets.

Transcript

Paul Yeager: Three year lows in corn and wheat were reached this week as export sales picked up on those reduced prices for the week. The nearby wheat contract added $0.26, while March corn improved $0.02. South American weather again kept the market moving as the dry pattern somewhat broke. The January contract shed $0.06 and January meal lost $21.40 per ton. March cotton shrank by a $1.57 per hundred weight. Over in the dairy parlor January Class three milk futures decreased $0.15.

The livestock market was mixed. February cattle shed a $1.85 January feeders subtracted $4.90, and the February lean hog contract improved $1.32. In the currency markets, the U.S. Dollar index shed 25 ticks. January crude oil dropped a dollar per barrel. COMEX gold put on $63.60 per ounce and the Goldman Sachs Commodity Index fell almost five points to settle at 551.50.

Joining us now, regular market analyst Arlan Suderman. Hi, Arlan

Arlan Suderman: Good to be with you again, Paul.

Paul Yeager: Good to see you. Let's start in your backyard, this wheat thing. A lot of the people that have been on the show in recent weeks have had to hear me ask almost the same question. How much lower can we go? Did last Friday finally put it in that low? And if it did, why?

Arlan Suderman: Well, maybe we've tried to put in a lot of lows and each time we end up at new lows. And I think it's important to understand if you try to correlate US wheat prices with US supply and demand fundamentals, the correlation is extremely low with figure. A correlation of 0.7 or higher is strong and we get correlations 0.1, point two depending on the time period.

So it's very low. It correlates better with Black Sea fundamentals or with European fundamentals, because Black Sea sets the price and once they run out, then it goes to Europe. The demand does. And once Europe's run out, then they come to United States. And the Black Sea right now has lots of wheat. Ukraine is able to ship. Russia is able to ship now.

When you actually go back to your question, it looks like Russia has finally found a plateau price for now anyway. It looks like may hold. And so if that's the case, perhaps we find a sideways trading range now for a while until we can try to build a story for support.

Paul Yeager:  But if you look at the four month chart, which we show here, it looks like it's been pretty sideways for that time period too. So when you mentioned Black Sea Regions, the story always becomes, well, what happens now? Are we, has the market fatigued on what's happened warwise in that region?

Arlan Suderman:  Of fatigue is a very good way to put it, because we've gotten tired of the headlines, so to speak, wary of the headlines. And it used to be that a headline of a missile attack, drone attack on port infrastructure would bring a sharp rally. No longer does a ship getting hit by a mine in the water no longer brings a market response.

And so the market is assuming that Europe is going to work with Ukraine to keep its agriculture flowing. That means keeping exports flowing. Russia has been unwilling to directly attack ships, although ships have been hit by running into mines or by an errant missile. But they're not targeting those ships per se. And so now we have military escorts of ships, etc., in land routes.

We're going to find ways to move overland as well. The markets are not going to care until or unless we get to that point where Ukraine has both the capability and the willingness to shut down or to curtail exports coming out of Russia. And we're assuming that's well below 50% odds now at this point at some time. That may happen in the future, and that will be a game changer for both the wheat market and the crude oil market both. But for now, that's a distant thought in the markets.

Paul Yeager: Corn has moved a little bit closer to wheat. I don't know which one's pulling which right now, but again, almost same question we've had wild movement. But if we maybe stuck that point in the red point at the bottom of this corn chart.

Arlan Suderman:  Yeah, that's a big, huge speculative position. Short positions sold positions were in the wheat market. Corn was also building up significant short positions with wheat kind of stabilizing. That allows corn to stabilize a little bit. There's not a bullish story in corn until or unless we see a short suffering a crop or winter corn crop in Brazil, that would be well down the road. And so we're we get short covering rallies periodically, but that's about it from a fundamental standpoint.

Paul Yeager:  Safrinha, you mention let's talk South America. Where is the biggest influence right now? Is it a corn story here in the United States or a soybean story?

Arlan Suderman:  It's a soybean story now. Big corn later. I mean, every time I talk to our Brazil people about the soybean crop, they'll say, yeah, but it's the corn crop that we're concerned about. The safrinha crop, which is where they plant right behind the soybean harvester, plant corn for produce through the winter months. And so if that crop is short, that would increase our exports of corn in the next marketing year, so a year from now.

So it's a long tail on that story. But on soybeans, the question is how much has excessive wet in the south and excessive dry in the north curtailed production? And I get wary of all the doom sayers who are out there. Maybe it's my age because I've seen so much happen over the last 40 years. But if you look back at the history of Brazil production and look at National Deviation from trend over the last 30 years, they've only seen a deviation from trend of 10% or more twice.

Once was 11% and once is 14% in the year. That's been most like this year in weather patterns is the 1516 growing season for soybeans. And in that year we saw an 11% below trend for a center west district. We saw 41% below trend for the Northeast, where that's not as concentrated planning in the South was like 9% above trend and nationally they were 8 to 9% below trend.

So let's just say this is a 10% below trend year that would be 147 million metric tons. Our team came out with a production estimate today from a customer survey. So what the farmers are telling us nationally of 161.9 million metric tons, down 3.1 from last month. Now that may come down some more, but that's still several million metric tons above a record crop.

We can go down all the way to 147 million metric tons without the necessity to increase US exports because of increased production elsewhere and because of demand. And USDA has a demand inflated right now on the balance sheet. And so it's going to take a while to really necessitate rationing demand with higher prices.

Paul Yeager:  Well, then let's tie that question to this one that came in from Saskatchewan. Ken in Saskatchewan wants to know, Arlan, We keep hearing we need low prices to spur demand. Are the prices low enough to spur demand yet?

Arlan Suderman:  Yeah. And I spoke to a group of Brazilian farmers last night and they were asking, you know, what's it going to take? Are we going to see a decrease in demand continue? And I said, well, the surplus supply is always create new demand. We're very innovative in the industry. We will create new demand, but it does take some periods of pain.

Are we there yet? No. Now that's not saying we're going to go there, but I don't think we're there at that point of the next big innovation right now on the corn side. But certainly that opportunity is there. If we could simply get the White House to agree to the formula that would be favorable for ethanol, for sustainable aviation fuel, then you'd have this whole new demand sector there. We're not we're not there at this point.

Paul Yeager:  Let's get to a demand story of a different ilk, and that is in the livestock market where we're moving past Thanksgiving. We're into that Christmas. But live cattle keep having this story of is there demand? Is there not demand? Is it still tied to everything in the stock market, is it not? That chart tells me not good things.

Paul Yeager: What's it telling you?

Arlan Suderman:  Well, the funds had built over 100,000 net long positions contracts eight weeks ago, eight, nine weeks ago. They've dropped it down probably below 25,000 now. So they've really liquidated and we've seen the price come down as a result. And that was largely because we pulled so many cattle forward because of the weather that we squeezed them all and feedlots are full.

That's why we one reason we've seen the feeder cattle market collapse. Feedlots in western Kansas are full. There's not room for any more right now. And so we've got this compaction of supply right now. By doing so, we've created a bigger hole down the road. Furthermore, we're still liquidating cows. The last weekly data showed 83,000 cows slaughtered. That's the biggest for the year.

And we're still liquidating this cowherd. Now, maybe we only contract on January one. Inventory report only shows a two and a half percent contraction versus a four and a half, you know, 6 million, two and a half million versus four last year or something like that. But it's still a significant contraction. We haven't started to rebuild. When we rebuild will tighten it up even more.

It comes down to demand by the consumer export demand has already been rationed. How much is consumer willing to pay? We're starting to see some of that happen now. Move down the value chain.

Paul Yeager:  And there's been sales in the hog industry, too. I mean, I keep watching some of the pork prices at the at the grocery store keep dropping. Have they already gone through this situation?

Arlan Suderman:  They have to a great extent. Now, the next few weeks are going to have some of our biggest slaughter of the year totals coming through. We're right in the middle of it now. We got another 2 to 3 weeks to go with these big slaughter numbers and entities is up even with that, we're seeing very heavy carcass weights.

Same thing as in cattle. We're seeing record stair weights, carcass weights, record of heifer carcass weights. So we're putting a lot of meat on the system. Once we get past the first a year, we should start easing that up.

Paul Yeager:  We have some very specific livestock questions that we will get to in market marketplace. But before you go all in quickly on cotton, this again sounds like a broken record. I think I say the same thing. You're going to tell me the same thing about it.

Arlan Suderman:  Deflationary commodity market right now, situation, same thing in cotton. We've come down now we're consolidating sideways. Demand is simply a problem. It's a soft demand economy struggling.

Paul Yeager:  Does anything change that here in the near term?

Arlan Suderman:  No, not until we get the global economy to really pick up. China has been picking up purchases lately, but not enough to really make a difference.

Paul Yeager:  All right, Arlan, I'm just getting started. I have a whole lot of questions. Some of these are very detailed, so we'll get to those in a moment. But just hold for right now. Thank you, sir. Arlan Suderman. And please hang on here because as I said, we're going to pause this chat, continue our discussion about the markets in our market Plus segment, you can find both analysis and plus on our website of MarkettoMarket.org. 

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