Pearson: This is the Friday, October 21, 2016
version of the Market Plus segment.
Joining us now is Don Roose.
Don, welcome back.
Roose: Thank you, Mike.
Pearson: We've got several questions from our
followers on social media, both Facebook and Twitter.
But first I wanted to pick your brain on this cotton
market, Don Roose.
Big week to the upside last week.
Sizeable week to the downside this week, $1.50
lower.
What are we doing?
Roose: Well, cotton is very much like a lot of
these other commodity markets, the grain
particularly.
When you move to the upside you just run into
consumer resistance, you run into a lot of
resistance.
So when you get up around the 75 area of resistance
you get down to the 60 area as a support zone and
I think when you back up and you look at it it's
really the Chinese that continue to control the
market.
They have the big ending stocks and they have the
big demand underneath of them.
So I think some of the other countries like
Vietnam and such are supportive underneath the
market.
But I think it's one of those that I think they're
going to be cautious on chasing rallies with the
big supplies.
Pearson: You get a bump up towards 70 here in this
current market make some sales and reown down
around 67, 65?
Roose: I think until you get some weather problems,
something changes or some economic thing that
changes I think you're in that type of range, 70, 75
top end of the range for right now.
Pearson: Okay.
You talked about China controlling so much of the
world cotton stocks, for years, three years at
least, we've been talking about China's massive corn
stockpiles and they announced earlier this
year China was going to begin to export corn.
Big announcement.
I think we talked about it on this program.
And I haven't heard anything.
Is anybody buying Chinese corn?
Roose: Well, I tell you, when you look at it the
Chinese, they did, they made another announcement
this week and to put it in perspective they have
about 50% of the world surpluses from an ending
stocks standpoint.
They are artificially high as far as corn to the rest
of the world.
Their producers are being paid too much.
They want to send an economic incentive.
Actually what they've done is they have a five year
program where they want to increase soybean acres,
increase the soybean production and cut the
corn production and they're making some real
moves.
Look what they did on the DDGs as far as basically
putting restrictions, the big tariffs on the five
companies.
So no doubt they're trying to get their corn market
back in line with the rest of the world and
incentivize their producers.
Pearson: And if we're looking at a year, this
next year with potentially 5 million more acres of
beans and beans do make a lot of sense from a cash
flow perspective and a $10 perspective, how much
should we be worried about five years from now when
China has increased their soybean production?
Will they do you think?
Roose: Well, my experience since I've been in this
business, I remember when I first started, the EU we
were going to be selling all kinds of grain to EU,
now they're an exporter.
Then it was Russia was going to be our big savior
from an export standpoint.
And now they're exporting.
Now it's China.
So I tell you, I wouldn't underestimate the Chinese
to secure their own food supply and produce.
All they do is have to move from a non-GMO to a
GMO and you've got excess supplies just like that.
So I think those are some things you have to watch.
I think they want to be self-sufficient on their
food supply and I think that's their goal.
And thy have issues just like we do.
Their hog growth is huge now after big cutbacks,
they're down 20% on the year over there too on
hogs.
Pearson: Alright.
Let's get to some of our Facebook questions,
actually Twitter.
This is from Philip Shaw, our friend up north in
Ontario, Canada, @Agridome on Twitter.
Phil wants to know, what are the chief reasons corn
prices have rallied since August?
And then he wants to know as a follow-up, do we go
sideways or down from here?
Roose: Well, that's a good question and the market is
pretty smart.
We put our lows in the end of August, that was right
at the time when we thought we had 175 bushel
yield, there was talk of even bigger 176, 177, who
knows.
Since then if you really look at it, step back,
it's gotten smaller from a yield standpoint, still
too much there's no doubt about that.
The other thing the producer when he looked at
it he was not going to sell corn sub-$3, he
wasn't going to sell it at this cheap price and so he
didn't, he's squirreling away everything he can,
he's still not selling it.
He's trying to figure out how to merchandise at
higher levels down the road either through the
carries or something.
So where do we go from here?
We're in a trading range, if we don't get some
weather, we're in a trading range $3.30 to
$3.63 like we talked on the show, head and
shoulders top up there, tough resistance, puts
corn near $4 on '17.
Without weather problems in South America, which we
could, there's a weak La Nina, like we said, you're
going to run into maybe your first harvest,
probably really the second harvest in the winter when
the producer here in the U.S.
has to sell, at the same time South America is
starting to harvest their first corn crop and their
soybean crop.
Remember, they start harvesting their soybean
crop the middle of January.
Pearson: Right.
And so we've got, we're coming through, we're into
a New Year, we've got tax implications, farmers are
making some sales here.
With that being the case, should producers looking
to store a lot but knowing they're going to need cash
in January be making those January cash sales today,
go ahead and contract those out if possible?
Roose: Yeah, I think you should be doing something.
There's no doubt when you're off the mat by a
long ways, like we said this last week you got up
to over $3.80 on July corn, not a great price
but it's better than what we had.
And you can do some options.
You can buy some $3.80 puts and sell some $4.40
calls for not much money and still give yourself a
chance to go to $4.40 but you're protected at $3.80
with a carry.
And remember, September corn was $3.02, Dec corn
put a low in about $3.15 so July doesn't look so
bad at $3.80 and at least it helps pay some bills.
Pearson: Are you also marketing your 2017 corn
crop?
Are you selling some of these Dec '17 at roughly
$4, $3.85, $3.90?
Roose: Well, if you don't think you're going to have
a dry drought crop issues, when you get close to $4
most definitely you should and on top of that if we
don't get problems going forward when you sell 2018
corn at $4.15 to $4.20 that doesn't look so
attractive.
Those sales you can also buy some insurance with
some call calls to the upside but you have some
management and you're able to keep the cash flow
going.
So those are not bad levels.
I know we're just coming off of a multiyear of good
crops.
So any time we can stumble here and 80% of a market
is always weather.
Pearson: Alright.
Next question from Tomm in Urbandale.
We talked about this a little bit on the show but
I'd like to get into a little more detail.
Tomm is asking, would you be looking to forward sell
the '17 bean contracts that are over $10?
Look into, I suppose you've got to go into
March of '18 to get over $10?
Roose: Well, yeah, because you have November '17
beans close out at $9.85 and so you put a carry on
that market.
But if you look at it, if you think we're going to
get a big crop you can sell the November '17 and
you'll build a carry in.
Look where we're at this year, you're going to
build in a 30 cent carry, so you're at $10.15
already if you really look at it from Tomm's
standpoint.
So those are attractive levels.
And, like I say, you can sell those anywhere in
this zone and then you can do some insurance with
some call calls but you've got to plan going forward
and I think that's more important because we don't
know if we're going to have multiyear bear
markets or we're going to continue with the good
weather.
It would be odd to not run into some weather problems
here pretty quick that are serious.
But you have to market today so you can survive
tomorrow.
Pearson: Marketing today, are you selling November
'18 beans?
Roose: We're a little more hesitant on '18 beans just
because they can be so dicey and can change so
fast and it's a little bit thinner out there.
Corn we're a little more aggressive on the '18.
And don't get me wrong, we're not selling 100% of
the crop, but I think you can go out there and sell
10% to 20% in 2018 and get something going or do some
window contracts.
You can do like $4.20 puts against $5.20 calls,
that's a pretty good range.
Pearson: Yeah it is.
Put $1 in there, it's not bad.
Final question, Chris Swenson from Northwest
Minnesota, Chris is asking, are we still in a
10 year cattle cycle?
Does that model still apply today?
And if so, where are we?
And you talked about it, you think there's still
some downside.
Does that 10 year cycle still exist in the cattle
market?
Roose: Well, I'm a cycle trader on cattle but I
think it's more of a 7 year cycle.
I think it's 3.5 up, 3.5 down and if you look at it
that's why we put the top in here about a year and a
half ago, two years ago.
So we've got a ways to go here yet.
So I don't think it's as far out as you think.
I think you're talking another year and a half
and the market starts to look pretty solid,
probably down to some levels that we can live
with from profitability in the cow-calf operation and
also from feeding cattle and hopefully the grain
cooperates.
Pearson: Now, we've seen tremendous bloodletting in
the cattle feeding sector.
Are those guys just going to have to manage pretty
tight margins for a couple of years before they can
look to make some of that equity back?
Roose: Well, I think so.
The good news in the cattle business is yeah it
has been painful coming down here, we slashed all
these commodities about 50% or more, so cattle are
just playing catch-up with everything else.
But we're actually getting down to some risk
management where you can buy some feeders, make
them work, lock in your corn, do a crush and the
risk is much less now than it has been.
You don't have probably some of these huge
downsides like we had at one time and you've got a
chance to make some money, hit some singles at a time
rather than home runs.
Pearson: You bet.
You're not hanging a $1,600 price tag on a calf
on a rainy day, which is a pretty good sized risk.
Roose: Exactly.
Pearson: Final question for you.
I lied earlier.
We like to ask our analysts questions, help
define the terms we discuss on this program.
I wanted to get your definition, what does it
mean when a fund is short covering?
Roose: Okay.
When a fund is short covering, and right now
what we have is the corn and the wheat are both
short, in other words they're negative
positions.
And short covering means that they have a position
sold, it's a negative position, and they want to
get out of it, so they're buying it back, so that
automatically pushes the market higher, buying back
a position they previously sold and we call it short
covering.
Pearson: So when a fund, when the funds are
massively short as we have seen in the wheat market
and in the cattle markets, you could expect a bounce
just from them buying those positions out on any
piece of bullish news.
Roose: Exactly.
It's kind of the theory that, and people track
that, how short the funds are.
How short have they been before?
How big of a negative position they have.
And it's kind of one of those we have run out of
sellers.
So that's about the story.
Pearson: Alright.
Well, Don Roose, thank you so much for your insight
and your wisdom.
We appreciate it.
Thanks for joining us.
Roose: Thank you, Mike.
Pearson: Thanks to all of you for sending in your
questions via Facebook and Twitter.
Please continue to do so and tune into the MtoM
podcast.
Thanks for watching and have a great week.