Market Analysis: John Roach

A WASDE report, weather in South America and the war in Ukraine all pulled on the market in different directions. For the week, the nearby wheat contract fell back $1.03, while May corn improved 8 cents. Cuts to production numbers in South America and a drought continue to support soybean prices as the May soybean contract rose 16 cents. May meal added $16.70 per ton. May cotton expanded $4.72 per hundredweight. Over in the dairy parlor, April Class III milk futures added 35 cents. The livestock sector ended on an up note. April cattle put on $1.52. April feeders added 73 cents. And the April lean hog contract moved $2.28 higher. In the currency markets, the U.S. Dollar index added 56 ticks. April crude oil fell $5.86 per barrel, a drop of 5.1 percent. COMEX Gold rose $18.30 per ounce. And the Goldman Sachs Commodity Index dropped more than 29 points to finish at 732.70.

Kohlsdorf: Joining us now to provide some insight on all of this is John Roach. Hi, John. Good to see you.

Roach: Hi Brooke, it's nice to be here. 

Kohlsdorf: Yeah, well we'll dive right in. So we saw Tuesday wheat peak and then come back down. Considering everything that is happening, especially with the uncertainty in Ukraine, why don't we see wheat go even higher? Why hasn't it gone higher and higher?

Roach: Well, the prices moved up to record high levels before they stopped their decline and they did it in a pretty exciting fashion. We were limit up for several days in a row. Prices in the United States are actually a little bit higher than what they are in the rest of the world. We just got out a little ahead of ourselves here. And so the market kind of softened to come down to equalize itself with the rest of the world. When you have a market that is reacting to the war situation that we have, it becomes extremely volatile and at these high price levels the volume of trade can get to be quite unpredictable.

Kohlsdorf: With that volatility, is what still considered a wild card? Do you think it's a wild card?

Roach: Well, you have to make a decision about what they're going to do with the crop or what they'll be able to do with their crop in Ukraine. The wheat is reaching a stage where it needs to be fertilized in order to -- most of their wheat crop there is a winter crop so it's already in the ground -- but it needs to be fertilized. And the question of how they'll be able to get that job done in the midst of the conflict that is going on and will the fertilizer be available? So the attitude is that we're going to reduce the crop there sharply but we don't know to the extent. And it could possibly be that we lose most of it or it's possible we could just lose a portion. But meanwhile the market has to trade this almost on a daily basis as we're getting the news from the area and the news has been quite erratic.

Kohlsdorf: Yeah, so many unknowns. So, China is reporting that its winter wheat conditions are worse than ever. How will this impact the market moving forward?

Roach: Well, China is a very big wheat producer and, you're right, they're signaling that their crop is in trouble and we also have our hard red winter crop in this country suffering from dry conditions. And we have dry conditions up in some of the northern regions as well for the spring crop. So we really have a real dicey situation that any way that we work the numbers through we're going to have to reduce the demand, ration the demand with price. And so the question becomes, what price does that take? And markets will be searching that price out really on a weekly basis as we go forward and we start to fill in some of the blanks about crop sizes in various locations.

Kohlsdorf: All right. Moving on to corn, corn on the other hand was down and then ended up, moved back up. Was there something in the WASDE report that was out on Wednesday that caused this?

Roach: Perhaps. The corn number was, the carry out number going into next year was a little bit larger but not substantially larger than what was anticipated. The ethanol production is going to be a little larger. And exports will be a little bit larger. They did reduce the carry over numbers compared to what they were last month. But that was pretty much adjusted into the trader's ideas. So when the government report did not give us too big of supplies, the suppliers that have been supporting the market came right back in and bid prices right up toward the highs here at the end of the week.

Kohlsdorf: Brazil was out with its corn production numbers, its estimate, and it was a little different from what the USDA had sort of been estimating. How will this impact prices going forward? Is corn done being high?

Roach: Well, I think that we're actually moving into a little dicier time of year for the Brazilian crop. That is a second crop, which has been planted really over the past 30 to 45 days, with some of it still being planted. And so that crop has its full risk, if you will, ahead of it. They've had pretty good rains in most of Brazil on the second crop corn after being very dry earlier. But it's still quite a risky proposition. And when the rains stop in Brazil they tend to just stop. And last year when that occurred we really had big crop losses there on that second crop corn. So that is still at risk and will be at risk for the next 45 days and the market is going to respond to that.

Kohlsdorf: The cash and the futures markets have been doing two different things. When are we going to see those two kind of come a little closer or be a little more even? And how will that play out?

Roach: Well, the buyer of grain from a farmer has big increases in their cost, the cost of hedging, the risk in hedging, the cost of transportation, the cost of dryer gas and they're handling a much higher priced product. So if you lose a percentage it's a lot more dollars than what that same percentage was a year ago or more. And so the basis levels have widened out to compensate for that. The basis had been very narrow and had been very tight, very strong, but it has softened as the buyers have had to take a little bigger margin in order to provide for their extra cost.

Kohlsdorf: We've heard rumors, is China looking to buy U.S. corn?

Roach: They really haven't been buying corn. They have been steady buying beans, both old crop and new crop beans, but they've really been slow in their corn buying. But we anticipate that they'll be back in the market. Remember, they had a pretty good crop this past year and so they haven't needed to reach out quite so much as they had in prior years.

Kohlsdorf: All right, well Brazil said this week as well that the harvest is lower than USDA estimates. And we have been asking analysts who have been on the show for a while now, is the crop really smaller than everyone thinks?

Roach: Well, it's smaller than the government forecast. The attitude is the Brazilian crop will be somewhere in the low 120s and the government is not down to that level yet. So everybody reduced their estimate and the government actually had a smaller estimate than the trade, but most everybody believes that the crop is really smaller than the government estimate and the private estimates are more accurate, down in the low 120s.

Kohlsdorf: Export sales were down. What is holding that back?

Roach: The export business actually had pretty good sales this week. They have been down because the demand softens a little bit at the higher price levels. The soybean demand is carried stronger here longer and we had actually the corn sales this week I think were the record for the year so far. So the demand has really not been hurt perhaps as much with these high prices as what you might imagine.

Kohlsdorf: Are the lower numbers influencing the fight over acres right now?

Roach: That is probably the biggest USDA report we get for the year is the March 31 planting intentions report. That gives everybody an idea of what farmers' intentions were and that may change of course as they get into their planting season but the market has to keep a reasonable relationship between corn and bean prices in order for each crop to secure the number of acres that are wanted by the marketplace. And this is a year when they want more corn and more beans.

Kohlsdorf: All right. Well we have a question from social media that I meant to ask you a little bit earlier. This is from Dennis in Iowa and he's asking, if Ukrainian grain production is severely reduced in 2022, how will that effect the world grain balance sheets? Is reduced grain production in Ukraine already priced in the market?

Roach: I think some of it is tied in. The estimates that I saw this week were to reduce the Ukraine crop and it wasn't a complete wipeout but just a substantial reduction and they went through the various, this particular economist went through the various countries and tried to find those tons of crop that were lost in Ukraine and when it came to the bottom line there weren't enough tons. And so what the conclusion was, we have to hold prices high enough to ration the demand. The demand we know gets rationed but we don't know what that price level will be and so the market really has to ferret that out. We've only had these high prices for a relatively short period of time. In February we had buy signals on wheat. We were down at relatively low prices. And so this is really a one month phenomenon that we've experienced so far so that we don't really know how that is going to, we know how it's going to impact, we just don't know to the degree that the buyers will back away. Who will back away? And that is what the market has to figure out.

Kohlsdorf: All right, well let's spend just a little bit of time on cotton. We'll ask you about that. The WASDE left cotton alone and cut the world production numbers slightly. Are supply chain issues still an issue? And are they still kind of the big driving factor on prices?

Roach: They really are an issue. And we had the cotton market slide down this week. We actually triggered a buy signal on cotton at the lower price levels. We think prices are at a spot where we should find pretty good support and see recovery from here. But the whole world is caught up in the supply chain issue. There's not a commodity or an item out there that isn't having to fight logistics.

Kohlsdorf: All right. Well we have, we'll move onto the meats now, to cattle specifically. We have dropped to prices that we saw back in October of 2021. Is demand lower overall? Or with the grilling season will it give this market a lift?

Roach: We think the market will come up. But we think we had people moving cattle this week because the basis worked well. Cattle futures down and the cash not down as much and so people were able to take hedges off, sell cattle and make an extra couple dollars a hundredweight. And so we moved more cattle into the pipeline than what we would have maybe otherwise. We think that we actually have had buy signals on both fat cattle and feeder cattle this week. We think prices move higher as we move into the grilling season.

Kohlsdorf: Okay, are we going to see inflation impact the way people buy meat, buy beef?

Roach: You know, the inflation numbers that we've been seeing for the last two months where we've been in the high 7% increases in inflation on an annual basis are sobering, they're really sobering. And so we're having the higher prices in just about everything but particularly in food and in energies. And when you look at the impact of higher energy prices taking dollars out of people's budgets and then we have higher rents and we just really are going to have a squeeze here on a lot of people's budgets with the inflation and it may turn into a squeeze, it may mean that they don't buy as much meat, particularly the beef at the higher price levels. But beef needs to be at a higher price level. So this inflation situation is sobering and there's no sign at all that it's getting any better.

Kohlsdorf: Well, with that said, where is there hope for the feeder market then?

Roach: Well, the hope for the feeder market is we have relatively tight numbers out there and we're still able to, even with where feeder prices are now, we're still able to if you look at what we call the cattle crush, which is buying feeders, buying feed and selling fat cattle on a 150 day ration, we're in the 80s, upper 80s to mid-90s on profitability. So we think that as time goes along we can move the fat cattle market up a little bit more, maybe narrow the margins that the packer is taking and put some profits into the farmers' hands again.

Kohlsdorf: All right. Thank you so much, John, for joining us, it has been a pleasure.

Roach: Thank you, Brooke.

Kohlsdorf: Well 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. 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 changes in the schedule. If you value the work of this program and your station, please consider making a gift of support now. Next week, we take a look at a startup that has made advances in preserving pollen. Thanks for watching and have a great week.

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