Market Analysis: Don Roose

The war in Ukraine has increased worldwide concerns over tight supplies of fuel, seed, fertilizer, spare parts and labor. For the week, the nearby wheat contract skyrocketed $3.49, or 40 percent, while May corn improved 99 cents. A drought that cut output and the war in Ukraine pulled the May soybean contract 76 cents higher. May meal added $17.70 per ton. May cotton shrank by $2.21 per hundred weight. Over in the dairy parlor, April Class III milk futures added $1.14. The livestock sector had another down week. April cattle shed $6.15. April feeders cut $7.50. And the April lean hog contract declined $3.23. In the currency markets, the U.S. Dollar index jumped 185 ticks. April crude oil gained $23.51 per barrel. COMEX Gold jumped $78.90 per ounce. And the Goldman Sachs Commodity Index soared more than 20 percent – or 134 points - to finish at 783.15.

Kohlsdorf: Joining us now to provide some insight is Don Roose. Hi Don.

Roose: Glad to be back, Brooke.

Kohlsdorf: Yeah, good to see you. All right, so the big story is Ukraine. We've been watching the images, hearing the updates on TV. It's heartbreaking. You've been doing this a few years. Are we living history? Is this a big story that we're going to look back on in years to come?

Roose: You know, it is, Brooke. It's a historical timeframe, there's no doubt about it. It goes down to the Russian grain robbery of the '70s, it goes to the droughts of the '80, '83, '88. It goes into the financial problems that we had in 2008 where crude went from $150 a barrel to under $30 in the fall. So it is. And I think the importance is that Black Sea Region is one of the breadbaskets of the world, it accounts for 24% of the world grain trade, 29% of the world wheat trade, 19% of the world corn trade. So it's just a huge area and basically the Ukraine ports are shut down and bottom line nobody really wants to trade with Russia with Putin with all the issues. So consequently a dislocation of a lot of the grain and we're trying to figure out where, who wants to ship and all the issues that go around that. So that's the real problem.

Kohlsdorf: So, speaking of wheat, there was a historic run on wheat this week. Are we done going higher?

Roose: Well, we're in some historical times. Wheat last week was under $9, down the limit on Friday. This week we moved up over $13, $13.40 on March wheat, the highest we've ever been in history is just under $13.50 on Chicago wheat. So these are historical times. I think the one thing from an overall market standpoint, corn got caught up following it also. We had a time where nearby wheat was up the limit, 75 cent expanded limit, and December wheat was down the expanded limit. So it just tells you the dislocation. But where we're really going I think is if anything cools down from a cease fire standpoint, a cool down, things look more peaceful, the market unravels very fast. If not, if we still continue war attitudes, the momentum is still underneath the market. So it's a very dicey situation. The bottom line is there's no shortage of wheat in the world, it's just dislocated today.

Kohlsdorf: So what happens in Ukraine could potentially bring it down. Or is the market, is it overbought?

Roose: Well, definitely. Historically we keep overbought indicators, we've never really been this high in history other than Minneapolis wheat in 2008 when it went from $6 to $25 back to $6 all in a short amount of time. So yeah, I think the wheat market is one that it is very dicey, very dangerous up in here. But we also have issues now, Ukraine they have hard red winter wheat they're going to be harvesting here, same as us in the hard red winter wheat area. Can they get it harvested? And can they get their crops planted? What is the yield going to be? So there's just a lot of uncertainty. We're talking about the supply now, but what is the production going to be as we go into the spring and forward?

Kohlsdorf: Yeah, so many unknowns. So the WASDE report comes out next week on Wednesday. Given everything that has happened, what do you expect to see in that, that is different than say a month ago or two months ago?

Roose: Well, the big trade was focused on South America and the drought. We lost about a billion bushels of soybean production, 500 million bushels of corn production down in that area, and that has taken a backseat actually, the soybean market is now a follower. So, to answer your question squarely, the report I think the trade is going to look what are the exports? Is the government telling us that with all these issues we're going to have to increase corn exports X amount? Wheat exports? Soybean exports? So I think the trade is going to look at that very close. There's just a lot of unknowns out here, Brooke, and that means that you add risk premium to the market and that is what we've been doing. But we always say you take the stairs up, the elevator down. So you've got to be very careful when you're a producer looking at marketing, scaling marketing at these levels.

Kohlsdorf: Well, speaking of unknown, the situation in Ukraine and fear of the unknown pushing corn prices higher. What specifically are the unknowns?

Roose: Well, I think in the corn market one of them is Ukraine has 550 million bushels of corn unshipped between now and the 1st of September. Half of that goes to China. So are they going to ship the corn? Or does that get diverted to the U.S.? Does the U.S. end up shipping? Then does Brazil ship more corn? Now, Brazil is also right now planting their second corn crop, their big crop, their safrinha crop. Are they going to plant more corn? What's our acres going to be March 30th? Are we going to find more acres or not? And I think you've got to be very careful, Brooke, right now because the government can come up with some strange things that change the dynamics of this thing. Even on Friday rumors that the Biden administration looking very close at maybe reducing their RFS, renewable fuel standard. So that took soybean oil down. Also rumors that maybe they're going to start to look at CRP acres coming out, 22.8 million acres there, big unknowns, probably a low bet. But Europe is looking at that very close too, bringing some of their equivalency or pay acres out. So when you're at these lofty areas the dynamics can change and they can change on you very quickly. As we know it is a cyclical business.

Kohlsdorf: Yeah, it sure is. Well, in the State of the Union Address this week there wasn't much to suggest that President Biden wanted to back off some of the green initiatives. So how will that impact ethanol and corn?

Roose: Well, you say that today, and he says that today, and the pressure mounts and the political pressure can really start to change the dynamics. So I wouldn't be so sure. As we know even right now that we have some of the big oil companies that could produce more than they're doing right now, they're just not because they're afraid that if they start producing the oil will come down and they'll have the production started and they'll have to slow down. So I think the whole world was looking at this as a short-term situation but it is very much turning into a dicey long-term situation. So hopefully we don't look at the RFS, that is one that should actually be going up, not down. And that is -- agriculture is very much in the green hunt doing their job.

Kohlsdorf: Well, let's move on. So we'll cover soybeans. So this was a good week for U.S. exports, one of the best weeks that we've seen in a while. There's talk of less rain now in Brazil. And we have been asking this same question for a while. Is the crop larger than everyone thinks?

Roose: In South America I think when you look at it, it's very much like we have in the Northern Plains. We had a dry drought situation in the Dakotas. When we went to harvest the yields were bigger than we thought. In South America it was very popular to talk about how small the crop is, getting smaller even today, but the thing that we've had change is the weather pattern there has changed more favorable. The dry areas, Southern Brazil, Northern Argentina now have been getting some rains, in fact some big rains like 1.5 to 4 inches here over the next 10 days. So is that enough to change some of the late planted beans? I think so. The safrinha corn crop, the second corn crop, the big crop that they're going to plant looks like they're going to get well-watered. So maybe bigger acres and bigger yields. We'll see. So the cure for high prices, Brooke, is always high prices. I mean, that's the thing we always have to remember. So, just things change, you get world produced more, you use less. Somehow this magical thing, the supply demand balance, stays in line.

Kohlsdorf: Okay. So, we'll move onto meats now because I guess we're kind of running out of time here. So cattle, let's start with cattle. The higher corn prices pushing cattle prices down. So is this the only reason why?

Roose: Well, the cattle market got up to about $150 on April cattle. And I think really what happened in the cattle market, we dialed in all of this bull news, all of the cyclical bullish news that the numbers aren't going to be there. And then I think what happened, like we get in some of these black swans, things started to change. I think the biggest thing probably is the fact that the economy is starting to change. We're talking about interest rates going up, the consumer dollar spending may be less, we've got crude oil going up, gasoline going up. So I think it's the dollars in the pocket of the consumer that is changing and that is changing the market. We put a key reversal in cattle February 10th. Since then we've been rocketing lower, down almost $16 a hundred weight.

Kohlsdorf: Yeah, and you mentioned to me that boxed beef cutouts were down. But we're ramping up for the big grilling season. So is that the economy?

Roose: Yeah, we're coming into the best demand time of the year on beef and that is from now, grilling season, into Memorial Day, then you have Father's Day and Mother's Day, so this is a big demand timeframe. The good news is the boxed beef has been down like 7 weeks in a row. So you're getting to an area where we should buy some demand.

Kohlsdorf: All right, well what about feeders? Where are they headed?

Roose: Well, the feeder cattle just has an issue with the corn, the input costs. It's almost every day if the corn price goes up, the input cost goes up, the feeder cattle come under pressure. So it's a struggle. We're still liquidating cows yet. On the cycle we go usually three and a half years up, three and a half years down, we're liquidating the herd for four years in a row. That's good news for long-term building the herd back up.

Kohlsdorf: Okay. So we'll end with hogs. So production still lower. Where do you see this market headed in the short-term and the long-term?

Roose: Well, the hog market is one that the supply is just incredibly lull. They were down 8% on the slaughter in January. We're only supposed to be down 4%. It's really just all about the disease issues. The numbers just aren't there. We probably got a little bit ahead of ourselves, we went to $122 almost on June hogs. We've only had 2 times in history that we've been over $110. That was 2014 and then last year. But I think it's back to the consumer and the dollars. Two sides of the equation, you can have the supplies but then you also have the demand side that has to pick up the lower supply.

Kohlsdorf: All right, we covered a lot of ground today. Thanks, Don.

Roose: Thank you.

Kohlsdorf: Always appreciate you being here on the show with us. That will do it for this installment of Market to Market. We will talk more in Market Plus so be sure to join us there. You can find it on our website of MarketToMarket.org. Also, we are entering the time when public television stations like this one are asking for your support. We may also be airing in different time slots to accommodate for some of the changes in schedule. If you value the work of this program and of your station, please consider making a gift of support now. Next week, we take a look at the continued effect of the war in Ukraine on the rest of the world. Thanks for watching and have a great week.

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