The holiday-shortened week came to an end on an uptick despite official reports showing an excess of grain around the world. For the week, May wheat gained 6 cents and the nearby corn contract moved 11 cents higher. WASDE and CONAB reports revealing burdensome supplies did little to discourage market bulls as the May soybean contract rose 14 cents. May meal added $10.10 per ton. In the softs, May cotton was $2.16 per hundred weight lower. Over in the dairy parlor, May Class III milk futures bumped up 11 cents. The livestock sector was friendly to cattle but not so much for hogs. The June cattle contract strengthened $2.90. May feeders soared $4.53. However, the June lean hog contract shed 27 cents. In the currency markets, the U.S. Dollar index lost 65 basis points. Crude oil put on 94 cents per barrel. COMEX Gold gained $28.60 per ounce. And the Goldman Sachs Commodity Index climbed more than 4 basis points to finish the week at 401.30.
Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Don Roose. Don, welcome back.
Roose: Thank you, Mike.
Pearson: Before we get started, you can listen to our market discussion anytime by downloading our Market Analysis podcast on our Web site, iptv.org/mtom.
Pearson: Don, let's start, we had the WASDE report out this week and it just seems like we keep finding more and more bushels of wheat globally. When is this crop going to stop growing?
Roose: Well, you're exactly right. We not only found more wheat but we found more of almost all the grains. So we've just got huge world supplies, corn, soybeans and wheat. But the good news is pretty much all that news has been baked into the market right at the present time, Mike. We went down, we continued to hold this $4.20 in nearby wheat, we really can't break under that. And you're right, the acres in the U.S. are at 100 year lows. We're 9 million under 2015. But I think when you really back up and look at the wheat market, the U.S. raises 8.5% of the world wheat, so we're not the big player in the world and I think we're starting to watch the weather in the Black Sea region. They raise about 33% of the wheat. Europe raises about 20% of the wheat. So those are the two big players when you're raising 50% of the wheat that we're going to watch and weather conditions here in the U.S. continue to improve. So I think it's more start to watch the world weather in those areas.
Pearson: Anything out there in the Black Sea region or in Europe today weather wise that could give a little pep in the step here of the wheat markets?
Roose: Well, that's a good point. I think we are a little bit dry in both of those areas, not anything big yet, but I think we just kind of watch it. And I think the other thing that you have to be real careful of is the funds are sitting near record short and this market very much is a technical market anymore. When these funds start to move they move and move fast. So keep an eye on the technical points and keep an eye on the weather more so I would say in Europe and in the Black Sea region.
Pearson: Let's talk about the corn market. We did see a little bit of strength this week. It seems to be kind of comfortable trading where it's at. Are we to a point now where we're starting to watch the weather here over the Corn Belt, seeing these thunderstorms roll through the heart of the Corn Belt, is that going to give us a little premium as we move on into planting season?
Roose: Well, I think it is. And I think if you look at it much like the wheat we've got an awful lot of negative news already into the market. We had some negative supply demand numbers this week, really didn't budge the market. A big crop in South America, Argentina and Brazil on corn. But when you really look at it, it's that time of year that we watch the weather. This is no time of year to be real overly bearish on the grain market because the weather is a dominant issue. And like you said, I think with 3% planted on corn last week, probably going to be up around 7% or 8% planted this weekend but I think the trade is going to get more concerned if we move into April if we're not close to 50% planted then I think you'll add some more weather premium. And then it's not only the acres, you talk about do you have prevent plant acres more? Do you have less corn acres? Do you have more bean acres? Could the yield be less? So you start to just add some risk premium to the market, like you said. But it's a market that we're well supplied with grain so rallies are still very much short covering risk management opportunities.
Pearson: What price level do you want to start making those new crop December '17 sales at for a producer? What numbers are you watching?
Roose: Well, when you look at the big supplies, about 2.3 billion carryover on corn plus probably next year the same, so big supplies in the world, you have Argentina and Brazil both with big supplies of corn coming at us. They export about the same supplies we do. Last year their crop was getting smaller, this year it's getting bigger. So your real question is, what price do we make some sales at? And $3.95 to $4 is a tough area on Dec corn. But here's one when you look at it usually from the winter lows we usually have about a 50%, 50 cent rally in the corn sometime during the summer and so that puts you up to $4.28 so it's possible with weather scares to get up into that zone. The last two years we went up close to $4.50. But also look at 2018 corn, you get between $4.10 and $4.20, those are probably risk management opportunities, if you put a 30 cent carry on that you're $4.50 out into July '19. So it's a long ways out there but keep an eye on it.
Pearson: You're right. And that is a place you can get plus $4 corn today when you look out into the future.
Roose: Exactly. And you don't have to have tight sales out there, you can do some risk management with some loose option strategies that still give you the up and the down.
Pearson: Alright. Soybeans, it's been a tough two weeks or three weeks, four weeks in the soybean market. It looks like from a chart perspective maybe we have put a low in. Is the low in, Don Roose?
Roose: It looks like an intermediate low. And I think what we really had this last week, we had a reversal week in both soybeans and on the soybean meal. The trends on all these grains, short-term trends, are up. The funds are back to about pretty much neutral. Big supplies are baked into the market again over there and usually, much like the corn, on the soybeans sometime from the winter lows to the summer highs on average we have about $1 rally. So you take the low was $9.41, it looks like a little bit of a low right now intermediate, if we hold that, $10.41 sometime during the growing season is possible. Right now short-term $9.80 to $10 looks like catch-up sales if you're not banking on weather.
Pearson: Alright. And that leads us right into we've got a question here from Richard in Wisconsin. He sent this to us on Twitter. We encourage all of you to find us on Twitter and on Facebook. Just search for Market to Market. Richard wants to know, are we at the bottom of the grain bear market? Looking at the industry as a whole, harvest futures are red with dispiriting losses before we even finish planting. You mentioned there's hope. How realistic is that hope? As we look at the 50 cents in corn, $1 in beans, if you were a gambling man would you say there's a 90% chance we'll see those rallies?
Roose: Well, I think what you need to do is make sure you do some risk management. When you're carrying around big supplies and you need weather really to turn into something that can reduce the size of the crop I think make sure you do some risk management and hope for that. But I think, Mike, just quickly in the big range I think the corn market, the new era we found out we're probably in a range of $3 to $4.50. The olden days it was $2 to $3. Soybeans I think we're in a range from $8 to $10.50. The olden days we were $6 to $8, $6 to $9 and then weather markets can push you past those areas. So this again just is not a time to be negative but fundamentals are overwhelmingly negative for the pull.
Pearson: Okay. Now, you're a cattleman, long-time cattle producer. We've seen a lot of enthusiasm in the cash market for live cattle. The bids just keep getting stronger and stronger and stronger. On top of that, as our friend Shelby in Decorah, Iowa points out from Twitter @ShelbyCorneliu2, he's asking, with China lifting the ban on U.S. beef, how long before we see that impact of maybe some Chinese purchases in the cattle markets?
Roose: Well, President Trump did have the meeting this last week with the President of China and that's where the optimism bubbled to the top again because actually the beef ban has been lifted since September and it's the regulations that they can't seem to overcome and they're talking optimism in the next 100 days that something is going to happen. But here's one that is very interesting is that our import pace equals our export pace. Our export pace is about 10% of our production but this next year we're actually going to import more beef than that. So it's really domestic consumption that you're really hanging your hat on.
Pearson: Okay. And the consumer as we go into summertime, do you anticipate to see that domestic consumption continue to grow?
Roose: Well, we always say if the economy is good the beef market is good. The economy has been pretty decent here. But I think when you look at the cattle market seasonally this is the time of year where you have to be a little bit cautious on a market. We probably work to the downside. I'd say that we're putting in a top in the cash, it's just that the futures market has been trying to do that for basically a couple of months, hasn't had much luck. But the government has cash cattle at $110 to $120 for the year. The problem is they haven't been very accurate. They were off $36 a hundredweight last year and $26 the year before.
Pearson: And they were off to the upside. This year so far they're off to the downside.
Roose: Exactly, that's right.
Pearson: So how aggressive, if we are approaching a top in here, how aggressive do I need to be on my forward sales, my forward risk managing out through the summer?
Roose: Well, we're going to have about 7% more cattle all the way during the summer. Then in the fall we're about a half percent more. So I think you have to be more aggressive during the summer. August cattle and June probably are the most negative. The most positive are probably December and February. But we're going to have big supplies. We're going to have 4% more beef this next year. We're going to have 2% more poultry and about 5.5% more pork. So there's no shortage of protein meat out here and that is why you have to keep your risk management up when you're on this kind of a rally, particularly the feeders, they're an overachiever also.
Pearson: You bet. And let's talk about that. They are an overachiever, especially this week. We saw gains in the feeder market well outpaced gains in the live cattle side. Is that just a function of cattle feeders, especially the unhedged ones, are making some money now, they're pouring it right back into feeder cattle and we're seeing that on the board?
Roose: Yeah, I think that's really what has happened. Actually we're in contract highs not only in the feeder but also on the fat market. And more than that, on the live market we've got more players than we've ever had in history right at it. Open interest is at an all-time record. So the speculator, the funds, the hedgers are all involved in the market. So it's a big market out here and the index funds are long.
Pearson: Okay. And so the specs, they're all long this market, both feeders and fat cattle?
Roose: Exactly. And so that's a good story today and if they start to move, and that's what I mean you have to keep an eye on the charts, these technical points, you have to know them sharp because when it tips over it can move over pretty fast.
Pearson: Do you have points in hand that you're watching from a technical side on the feeder cattle market? Closed right up here around $138.40 in the May contract. Are we getting close?
Roose: Yeah, I think if the cattle, if the feeder market drops about a buck and a half I think the trends will start to turn weaker. So watch for that. It's all good until, it's like musical chairs right now, don't be the last person trying to find a chair.
Pearson: Alright. And then lean hogs, before we let you go, are we just at a point of stability here in this market? We see some up and down each week but at the end of the day we move 27 cents on the week. Where does this market go into the summer with that growing hog population?
Roose: Well, we're trying to figure out if we're at a bottom here. And the government has an idea, they're saying for the rest of the summer 60 to 63. The futures are well over where the government is saying. We're going to have about 5.5% more, 5.1% more hogs during the second quarter and then 5.5% more in the fourth quarter. So we've got a lot of numbers coming at us. The real thing you have to remember is seasonally we usually start a rally on the hog market but you have to be careful with these big supplies if we're going to have a contraseasonal, like we had in 2002, everybody was looking for a rally, we never did, the big supplies overwhelmed the market, we went lower right into the beginning of June.
Pearson: So how do you want to manage risk given that that potential threat is out there?
Roose: Well, the fourth quarter no doubt has a lot of premium in the market out here. The government is saying 48 to 51. Where we were last year on hogs, we went to 42 on the board and right now they're saying we're going to have 5.5% more hogs. $2 to $3 rallies in all these months are risk management opportunities.
Pearson: Alright. Well, Don Roose, we want to thank you so much for taking the time to visit with us this week and I hope you have a great weekend.
Roose: Thank you, Mike.
Pearson: That wraps up the broadcast portion of Market to Market. But Don and I will keep the conversation going including answering more of your questions during Market Plus which you can find on our website. While you’re there, iptv.org/mtom, check out the Classroom. This virtual schoolroom allows you to explore the science, technology, and business of agriculture. And join us again next week when we explore a sour note in a sweet domestic industry. So until then, thanks for watching. I’m Mike Pearson. Have a great week!
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