Pearson: This is the Friday, November 21, 2014 version of the Market Plus segment.
Joining us now is Don Roose.
Don, welcome back.
Roose: Thank you, Mike.
Roose: We didn't address weather very much during the show.
Has this snowfall and this cold snap done much to impede harvest in parts of the country
have you heard?
Roose: Well it definitely has.
If you look up around the Great Lakes area, Michigan and such, they're struggling to get
the crop out.
I think we still have 40% of the crop yet to get out of there in corn.
So there are some areas, I'd say in the gut slot of the Corn Belt there it hasn't been
a real issue, but yeah, no doubt there's some areas that it's really tough.
Pearson: Has that led to any interesting basis plays for producers up in Michigan or those
other places that were snowbound?
Have we seen a basis response?
Roose: Not so much I think.
But we have seen basis improvement in some of the real demand areas in the eastern Corn
Belt and as you get closer to the western Corn Belt.
We've seen the basis levels on corn and soybeans reach some areas that really are target objectives
particularly when you have a 2 billion corn carryover and a 450 million bean carryover.
Pearson: Now that kind of leads right into William's question.
William from Hiawatha, Kansas is curious, with increased farm storage and a record crop,
is the market going to have to bid up to buy this grain?
Is that what we're seeing today?
Roose: Well, and that is a good question because I think that goes to the heart of the supply
demand situation and it is really musical chairs because I can tell you the way the
market is going to work is you're going to buy enough grain as the basis tightens up,
it's not going to necessarily be the flat price and eventually you're going to reach
where you see enough movement and the basis backs off again.
So I think when you have a 2 billion bushel carryover, remember the government has cash
corn average price $3.20 to $3.80 for this next year so right now fundamentally we're
an overachiever, we've got areas that the basis reach proper objectives.
So make sure you don't overstay your hand.
Pearson: Alright.
And by proper objectives what do you use to decide that?
Roose: Well I think when you look at it if you really believe that the corn $3.80 is
at the top end of the cash market, which we do, when you have futures trading at $4 plus
that you’re overvalued fundamentally and particularly when you have some other issues
like feed wheat from around the world coming into the U.S. we're sending the wrong signal.
We need to send a signal to export our grain and we're sending a signal to import not only
corn but soybean meal.
Pearson: And that feed wheat that is coming in from Europe, is that just so low quality
that it's cheap enough to bring over?
Is that what we're seeing?
Roose: Yeah, exactly.
And they just have plain just too much wheat so they have to do something with it.
And that goes to another problem because Europe imported corn from the Ukraine so now that
is backing up to the Ukraine so the Ukraine has more corn to export.
So it's great to be in a world environment but you have to make sure that you don’t
get too far out of it when your price objectives, when you're looking at price objectives.
Pearson: Alright.
And speaking of price objectives, Kim in Eagle, Wisconsin is curious, what is your suggestion
for unpriced crop?
And let's talk about old crop '14 but let's also talk a little bit about unpriced '15
and maybe even '16 crop.
Roose: Yeah.
Well and I think when you look at '14 I definitely would look at the basis.
If the basis has hit the objectives sell the cash.
If you want to reown it, reown it with some options.
So I think you're up at these areas fundamentally that you're at the top end of the range on
the price I think when you look for 2014.
When you look at 2015 there's some things that you can really do.
Are we in a new price era or not?
Well it's hard to say.
But you can still go to work in market for profitability.
You can buy some $4.20 December corn puts of 15, sell some $5.20 calls, hope you get
that as a target to the upside so you can give yourself a nice range.
Same thing on soybeans, from a basis standpoint it's the same.
On 2015 you can buy $10 November puts and sell some $11.80 calls, give yourself that
big range, 10 on down, still get a chance to get $11.80.
Pearson: Alright.
Would you look out at '16 yet at all?
Roose: I don't think it's too premature to look at '16, particularly if you use some
of these window contracts where you buy, like the same thing as we said on '15, on '16 buy
some $4.20 December puts, sell some $5.20, $5.30 calls out there and the same thing on
soybeans because if we're in a new price era this is the top end of the range but you still
give yourself an objective or a chance to have some bigger moves to the upside if we
have some weather problems.
And 80% of these markets they always say are about weather.
So we don't know what the weather is going to be out that far but we do know we have
a price that is at the top end of the range.
Pearson: Alright.
Now you mentioned on the show we're probably going to see the opportunity for some acre
switching and that going forward.
Do you think as we being to prepare for the '15 planting season we'll see as many folks
planning to plant corn as we did in '14?
Roose: It looks like we're probably going to be down 2 to 3 million acres on corn.
It looks like we could be up 4 million on soybeans.
What that does is gives you a chance to have a 600 to maybe even 700 million bushel carryover
on soybeans if you get a big yield.
Think about it, on the corn even if we take the acres down 3 million, if you have a yield
of 170 bushels you still have a carryout of over 2 billion.
So without a real weather problem, even if we have an acre reduction, you still end up
with abundant carryovers and that is the issue you're lugging around too big a supply.
Somebody around the world has to, if we don't have weather problems, has to cut back on
acres.
Pearson: Alright.
It's interesting, a 4 million increase.
So 87 to 89 million bean acres potentially in '15?
Roose: We could have 88 million soybean acres so that's a big number.
Pearson: Yeah it is.
Now let's talk a little bit on the demand side of the corn market.
The RFS apparently has been punted again.
What does that mean for the trade knowing that the 2014 RFS regulations might not come
into effect until 2015?
How does that even work from a trader's perspective.
Is there any way to capitalize on anything there?
Roose: Well on Friday we had a real volatile trade as they were speaking because the market
was higher by we'll say like 16, 17 cents, on soybeans we went 2 cents lower.
Same thing happened on corn, we went from 6 cents up to unchanged.
And I think basically you’re right, we did punt, we pushed forward, we kicked the can
down the road again, all those things.
And I think you can look at it both ways and I think the trade is really saying that they're
confused on it because you could look at it as positive and say okay we held off so it's
going to be a positive and we're going to increase the mandate or keep it the same.
You can look at it the other way and say they're holding off and waiting for a reduction.
You have to say probably odds favor reduction because remember that was their proposal for
the 2014, lower it from 14.4 to a 13.2 billion usage.
Pearson: And where is ethanol, where is corn demand for ethanol at so far this year?
Have you looked into those numbers at all?
Are we getting close to that, where we should be?
Roose: Yeah we're over the production.
We're going to have to try and export some stuff.
The problem that we have with the export of ethanol is that Brazil is about 40 cents a
gallon cheaper.
So it doesn't work for us to really export.
So that's the other issue that you really have.
Pearson: Brazil and we've got a strengthening U.S. dollar and a declining Real in Brazil
if I'm not mistaken.
So another issue there.
Now before we let you go, what are your thoughts as we look out on the broader -- you've talked
about being a globalized industry, we trade worldwide.
As you look around the globe, what else do you see out there from other countries' economies?
What are your thoughts?
Roose: Well where we're at really right now, Mike, is the U.S. is the number one currency.
We're just seeing a lot of investment coming into the United States and when you see China
lowered their interest rates because their economy is slowing, they lowered it for the
first time in two years.
We see Europe is thinking about a QE program again.
So what is happening is the rest of the world is trying to put a lot of money into the United
States.
I think that is partly what has happened in the commodities but also they're investing
in the stock market and they think they can have a double double, they can get the commodity
going up and also the dollar going up.
Pearson: Alright.
Well, Don, thank you for taking the time to be with us here this weekend.
We appreciate it.
Roose: Thank you, Mike.
Pearson: And thanks to all of you for sending in your questions via Facebook and Twitter.
Please continue to do so, tell your friends to do so and we will continue to get expert
analysis right to you.
Thanks for watching and have a great week.