Market Analysis with Don Roose

USDA lent its voice to what many were already saying - there’s a smaller crop in the field.  For the week, the nearby wheat contract dropped by a dime, while the December corn contract lost 8 cents. Russia and Chinese leaders met giving the soybean complex something to parse along with harvest pressure. The November contract added 36 cents in response. December meal improved by $11 per ton. December cotton shrank $5.55 per hundredweight. Over in the dairy parlor, October Class III milk futures improved 48 cents. The livestock market was mixed. October cattle lost 18 cents. October feeders cut $4.33. And the October lean hog contract gained $3.72. In the currency markets, the U.S. Dollar index increased 72 ticks. October crude oil dropped by $1.29 per barrel. COMEX Gold sold off $41.90 per ounce. And the Goldman Sachs Commodity Index fell by almost 8 points to finish at 638.05.

Yeager: Joining us now to provide some insight is our good friend, Don Roose. Hey, Don.

Roose: Great to be back, Paul.

Yeager: Good to have you here. This wheat story has been a story of weather domestically, Russia and Ukraine globally, throw in Australia with a good crop. What's the concoction telling you right now here for the next little bit?

Roose: Well, if you look at it, Paul, number one, we haven't gone anywhere on wheat since the middle of July. We had the big flurry in February backing up when the Russia/Ukraine war really began and a lot of flurry around that, a lot of risk premium added to the market, a lot of fund buying. And then as the corridor opened up we just sank down to a level of support and really we have excess supplies of wheat if you count the Black Sea area, we're very, very tight outside of that. And so when it looks like the corridor opens up we come under pressure and we go the other way when it doesn't. So choppy, Paul.

Yeager: Okay, choppy but not volatile, right? Is there a difference?

Roose: Well, I think volatility is kind of the momentum that it has so I think you're right. I think it has been -- well just like we had a hook reversal down technically, pounded the market down on Thursday, rally sharply on Friday. It's just directionalist. But if you look at the U.S. from a competitive standpoint we're not competitive in the world market and the government said that in the last report.

Yeager: Well, and the government, you'd probably then say well the dollar. And is the dollar the big reason we're not competitive globally?

Roose: The dollar is a lot of it. Plus the transportation costs, the supply chains. Ukraine, if they can ship wheat out, they have Europe in their back door. Russia has a huge crop, probably the largest crop that they've had on record, the largest exporter in the world. So I think that is putting a cap on it. And they're selling wheat below the world market just to get some currency behind them.

Yeager: Real quick, if I'm somebody who is very in tune to this wheat market what am I doing?

Roose: Well, I think on setbacks you certainly aren't interested in selling. We have a very short supply down in the Southern Plains, well documented. But on rallies close to a $9 mark we're seeing producers trying to lighten up on some of their supplies, just saying we're not going anywhere fast.

Yeager: Well, somewhere where we're going is corn, uptrend, barely. Why?

Roose: Well, I think if you take the week in review for all of these grains, Paul, what we've really found out is on Monday we had a supply bullish market. Yields down, acres down surprisingly, a million corn, 660,000 on soybeans. That was the supply side. Got a big rally over 75 cents in soybeans. You couldn't stick it over $15, couldn't get up to the gap of $15.36. And then we retreat, the same thing on corn, we could not get over $7 let alone the gap of $7.28 and a half. So that was the supply side. That was a bull story for the week and then we stalled on that day after that. We had basically a market that on the demand side was negative the rest of the week. We had a day where the equity markets were down, the Dow Jones down over 1200, we had just a real weak overall fear of inflation, fear of interest rates continuing to rise, which next Wednesday probably rise three-quarters to a percent. So we're push and pull, supply bull, demand bear and that is what the government said too in the report if you really analyze it.

Yeager: I'm not getting that you maybe were too surprised by that government report on Monday?

Roose: Well, I think you had to be surprised at the acres.

Yeager: Oh, the acres, okay.

Roose: The acres on soybeans and basically if you look at the acres they took the acres down in a lot of these dry areas. A little surprising took the soybean acres in Illinois down 400,000. We're going to live with those acres. The yield, last year remember we had a yield that went up into the final. Is that going to happen again? That's the question mark.

Yeager: Well, the question that many are asking of what took USDA so long, and we have a commodity question we'll get to in a moment about that in the Market Plus, just discussing this crop that's not there. So I guess the question becomes, what do you make of harvest pressure that's about to enter the market as we're about to roll a whole bunch of combines across the country?

Roose: Well, I think that's a real question mark is what is the yield going to be? We're going to live with the acres. What is the yield going to be going forward? And so far early yields disappointing. I would say under what the producer had thought so far. But remember, the early yields are usually the worst acres that are harvested so not a big surprise there. I think, Paul, when you really back up on it you have to ask yourself, is this a typical year? And by that I mean you've heard before the short crop long tail and where we end up with that is right in the gut slot of harvest, usually we put in a low and in a short crop it's just the opposite, you put your high in, no carry in the market, the end user covers because he's definitely afraid and the merchandiser can't afford to carry the grain so he sells it and you drift lower into the spring. We'll see. Most of that depends on South America, Paul.

Yeager: Typical, we haven't seen that in a number of years. But this is certainly not. When you say South America, we'll flip over to soybeans now as we move the discussion along. I want to discuss this global story of Putin and Xi having the meeting. What does that mean to the American soybean producer?

Roose: Well, if you look at it, China really is shunning the U.S. from a purchasing standpoint. The largest buyer in the world, they buy about 60% of our soybeans. South America, between Brazil, Paraguay and Argentina they are expected to have a crop that is amazing, 1.35 billion bushels more than last year. So what you're looking at is Brazil can just start planting the soybeans September 15th so they just started. But their early beans will come in, in the middle of January. So if they don't have a weather problem, that's what it was all about last year. Are they going to have back-to-back weather problems in a La Nina year? China desperately wants to buy from South America and they have been. They're cheaper than us right now. But they may have to come to the United States if Brazil and South America in general has a weather problem. So watch it close. It's dry in Argentina, getting some typical good rains in the start of the rainy season in Northern Brazil so no problems yet. But I would say we officially start watching South America.

Yeager: You mentioned one potential buyer in the Chinese. Who else wants to buy the American crop?

Roose: Well, our neighbor to the south, Mexico, has been a big buyer of corn and soybeans and we have all the other Asian countries are still buying soybeans on the export front. But that's the risk with having one big buyer because so goes your big buyer so goes the market. So we'll see. In China of course they're in a continued lockdown on COVID and that's a real issue, that's a supply chain issue. And so their demand is really off on a lot of things.

Yeager: We do have a question about soybean meal, which is tied to the soybean trade there in a little bit and it's Mark in Illinois. And he asked us on Facebook this week, he says, how bad has the meal demand been hurt with the high meal prices? Goes back to the old what will kill high prices, high prices.

Roose: Well, and really what we've been doing is crushing the soybeans for the oil, not the soybean meal. So we had excess supply of soybean meal for a while and we moved to the bottom end of the range. Now we move to the top end of the range. But livestock numbers on hogs are supposed to be up 1.5% next year, poultry is back, demand is picking up. So I don't think it's hurt all that bad. But we're still crushing the soybeans for the oil and China's crush margins are negative.

Yeager: Well, let's stick with soybean meal, let's go into the hog market. You kind of mentioned it a little bit there. Kind of a cash market this week. What else happened?

Roose: Well, the big thing that has happened in the hog market is we had a convergence of the cash in the futures. The basis level is just way too wide and so we're correcting that, the October now is within a dollar and a half of the index. The December hogs still too big of a discount. But the hog market is going to be a stop and go type of market because the supplies in the fourth quarter are going to be down 1.5%, second quarter go up 1.5%, down in the second quarter 1.5%. So seasonally you're supposed to be a little friendly on summer hogs starting next week for into the middle of November so we'll see if the seasonals kick in. But up front it's all about weights picking up and demand on pork has been slow domestically, exports down 21% this year so that's an issue.

Yeager: Is there still a demand for beef?

Roose: You know, what's really amazing, Paul, is the beef demand is -- it's the highest priced meat protein but it also has the best demand followed by chicken and then pork. So yeah, the beef demand even at these high prices just very strong. And then of course we're getting into the cyclical tighter numbers so we'll see if the market moves back up on beef, if the demand stays there, if the economy can weather that.

Yeager: Well, I had that there was on Wednesday the boxed beef was dramatically lower. And the boxed beef prices usually gets the attention of those who might not follow livestock on a regular basis. When they see that they look at the consumer and things like that. Is that how you read it?

Roose: Well, I think the packer margins have really shrunk. They were up to this monstrous number, $400 a head at one time. They moved back to $80. And I think when you look at it the demand slows down a bit. It has good support, the boxed beef under 255 has good support around 250, probably doesn't go under that but who knows how the economy goes. But the numbers will tighten on cattle, Paul, as you get into the middle of October. And I tell you, it's one of the most well advertised bull markets that I can remember. You try and find a cattle person that's negative, they're just not out there and part of it is if you look at the feeder cattle and calves they're at an all-time low on the records. The calf supply this last year down 4% since the previous year. We just keep liquidating the cow herd just because of drought, weather problems and we'll see where it ends. It should end, Paul.

Yeager: Pretty expensive to feed doesn't exactly help either.

Roose: Well, and I think that's part of it. If you don't have the feed period you're going to liquidate the herd and that is what has been happening. And we think between Kansas, Colorado and that whole south they're going to be about 800 to 850 million bushels short on feed grain. That's a lot.

Yeager: So what does that mean? If I'm somewhere not in the states you just mentioned, do I figure out a way to expand a feeder operation?

Roose: Well, I think what you're seeing -- that's the goal is the feeder cattle have to get high enough that you say, listen, I'm going to keep the calf, not put it in the feedlot, I'm going to keep the heifers, I'm going to expand the herd. And that's why we usually run in a three and a half year up, three and a half year down cycle. Four years of liquidation should be coming to an end now and that's the cyclical bull market that the cattle trade continues to look at.

Yeager: We're almost at the end of our time. Real quickly in 15 seconds, the dollar. Does it have any more steam to keep moving higher?

Roose: Well, remember the dollar is sitting around $110 and it came on the board when it first came on the board at $120. As long as, we're the best of the worst, as long as the government keeps telling us interest rates are going up, the dollar keeps going up, slows down exports, that's the issue, Paul.

Yeager: Best of the worst. I've been called that before, Don. Thanks, good to see you.

Roose: Thank you.

Yeager: All right, that will do it as we put a pin in this analysis and we're going to continue with Don and answer more of your submitted questions in our Market Plus segment. You can find that on our website of MarketToMarket.org. It's available in both podcast and on YouTube. All of these resources, they're free. And we recently hit a milestone on our YouTube channel as more of you are finding the show, the Market Plus and our stories that are available each and every week. Join our family by subscribing to the feed of @MarketToMarket. Next week we are going to have the story of getting to one stop shopping for the overall health of your operation. Thanks for watching. Have a great week.

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