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Market Analysis: Virgil Robinson

posted on November 21, 2012

We're producing our show on Wednesday this week to give the people who bring you Market to Market an opportunity to gather with family and friends over the extended Thanksgiving weekend.  And during the abbreviated week, grain prices are on the rise.  As of Wednesday's close, December wheat gained 7 cents, while the nearby corn contract moved 14 cents higher.  Soybeans also rallied this week as the January contract settled Wednesday with a three-day gain of 25 cents.  Nearby meal prices followed suit improving by more than $3.00 per ton.  In the softs, cotton was the only major commodity that lost ground during the abbreviated trading week as the December contract moved 35 cents lower per hundred weight.  In the dairy market, December Class III milk gained 15 cents, while the deferred contract moved 25 cents higher.  Over in livestock, December cattle rallied nearly $2.00.  Nearby feeders improved by $1.75.  And the December lean hog contract posted a weekly gain of $1.43.  In the financials, the Euro gained 79 basis points against the dollar.  Crude oil gained 46 cents per barrel.  Comex Gold advanced by $13.50 per ounce.  And the Goldman Sachs Commodity Index rose nearly 10 points to settle at 645.50.

Market Analysis: Virgil Robinson

Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson.  Virgil, welcome back.

Robinson: Thank you, Mike.  Happy holiday.

Pearson: And a happy holiday to you as well.  Wanted to start off with something that's been on the news all over since the election and that is the fiscal cliff that is coming up.  What are your thoughts on that?  How is that going to affect the market as we go forward?

Robinson: I'm reminded of a quote from a brilliant scholar and statesman, Sir Winston Churchill who stated, "Americans will always do what's right after they have exhausted all other possibilities."  The day has come.  I think there will be either an extension of the deadlines agreed upon by this lame duck Congress and the President.  And make note I said agree.  Or if you believe in miracles perhaps some resolution.  So I think it's time now to kind of put that fear at a mid-point in the process, the mind thought process here, Mike.  That's old news.  I think we're going to move beyond that.  There are pretty good signs of economic recovery in China.  The purchasing manager's index for each of the last three months has improved and is now in positive territory.  So it appears to me the policy by the Central Bank of China has worked.  And there is a precedent there. They have been pretty good at micro-managing their economy.  So I think that economy, as measured by exports in each of the last three or four months, has improved.  So, improvement there.  Some of the sectors here in the U.S. that perhaps have gone unnoticed that are improving, at least in my opinion, the consumer sector, consumer confidence is as high as it has been in years, housing, transportation and chemicals.  So we have some positive things I think going on.  An agreement to extend the deadline which would include the Bush tax cuts, which would include the two percent payroll tax cut as well as unemployment insurance benefits I think are likely to move forward in 2013.  I think there are some positive things taking shape here.

Pearson: All right.  And it's interesting you bring that up.  We've had a pretty good week in the commodities, at least so far here until Wednesday.  Is that mindset trading over?  Where is wheat headed here in the future?

Robinson: Price wise a couple of things that need to be noted.  The condition of the winter wheat crop here in the United States at least is measured by history, not particularly good.  Now there isn't a real strong correlation between early percent of good and excellent and final yield.  A lot can develop in the spring of the year.  But clearly that underpins the market in my mind.  We're still trying here to quantify quality and quantity out of the Black Sea region, some issues in Argentina, some issues in Australia.  I think the market kind of limps along here.  I think the basis will continue to strengthen, Mike, and opportunities 25 to 50 cent price rallies I think will develop in 2013, the first quarter of 2013.  I'd use that to do one -- either sell some cash or buy a put.

Pearson: All right.  And how about in the corn market?  We've seen a little bit of a move up this week.  Is that going to continue?

Robinson: I like the corn market, the fundamentals of the corn market.  A couple of things there -- we cannot divorce ourselves from the concern weather wise or drought wise here in the U.S.  It's not likely that issue is going to be resolved through the winter.  Having said that, please understand there are other head winds associated with the drought.  The level of the Mississippi River and our ability to navigate.  Should exports increase, and I sense and believe they will in the second half of this crop year, as the spread between, for example, fob New Orleans corn and fob Paranagua or Santos corn, that spread has narrowed pretty dramatically for January and February which would imply the supply of grain down there has in fact dwindled.  So I expect the USDA to address the export issue in their up and coming WASDE report.  Should they leave that figure unchanged they too are obviously expecting a pretty significant increase in export sales the second half of the crop year.  I think corn is firmly underpinned.  If you're not in need of cash, and please understand farmer's balance sheets are the strongest they have been in 50 years, at least row crop farmers, it's going to be hard to source corn the balance of this crop year.

Pearson: All right.  And how about beans?  Tight story there as well.

Robinson: Yes, similar.  Although at this point in time a couple of things have happened since you and I last talked two months ago to the day.  One, the size of the U.S. crop grew larger in late year development, late crop year development.  Secondly, the projected size of the crop in South America has also grown larger to record proportions.  And as a result of that the market has had to absorb a lot of selling from that region of the world which is consummated by short futures sale in Chicago.  Now, should there be any weather concern, and in my 40 years I have never witnessed a growing season in South America where there hasn't been at least one weather concern.

Pearson: So there is potential there that we might see another rally in the bean market.

Robinson: Yes, in that same context, Mike, since we last talked futures are down a couple of dollars but cash is only down $1.70 or thereabouts, the basis continues to firm.  Processing margins here in the U.S. are much better today than they were one year ago.  So the demand for beans at least is measured by that indicator remains strong.

Pearson: All right.  Another report that came out today I was hoping to get your thoughts on was the cold storage report.  Where do you see that pointing us here in livestock?

Robinson: A couple of things, again, the aggregate of red meat grew year over year, not surprisingly, Mike.  We've had a flush of pork driven by a pretty serious sow slaughter.  Now, in each of the last two or three weeks that has been slowing down.  So I think that flush of pork has hit the marketplace.  I expect that to slow down over the course of the next several weeks.  In addition to that, we have a major supply shortage looming in the cattle market, both the availability of replacement cattle as well as the availability of cattle on feed.  So, consumer prepare yourself.  Now, one of the head winds that we need to also mention here in our discussion about red meat and price prospects, which I am bullish on, is the fact that Japan, one of our major importers, is experiencing a pretty serious recession and that is likely to continue moving forward.  So please understand, they are a big beef and pork importer.  That is a head wind we need to acknowledge.

Pearson: And is that a head wind that hasn't been priced into the market?  I believe feeders and live cattle were both up this week so far.  Is that going to continue until we get a handle on that?

Robinson: Mike, I wish I could tell you without hesitation that the trend in the marketplace will continue higher.  There will be all kinds of periods of moving higher, moving lower. I guess at this point I am reluctant to sell futures against live cattle production.  I would be more inclined just as an insurance tactic to look at some type of put strategy.  At least you can budget for that.

Pearson: You bet.  You bet.  That's important to help contain your costs.  Now looking at hogs, you mentioned the major supply of pork probably already hit the market.  What do you see that doing to hog futures as we roll through the end of this year and into 2013?

Robinson: Mike, I think the liquidation phase, the sow liquidation phase has subsided.  So that doesn't mean there won't be live hogs yet available to the market.  There will be, given the hog and pig report, the recent hog and pig report.  But I sense, as mentioned earlier, I'm pretty bullish on cattle prices and clearly that will have some effect on pork.  All you need do is look at the forwards or the futures contracts in the forward months in pork and sense that hey, we're at life of contract highs.  Clearly the market senses a shortage of that product as we move into 2013.  My best idea tonight with respect to that market, here again, I'm inclined to look at put strategies, create some kind of a safety net.  Those who have a stronger balance sheet perhaps take their chances and do little or nothing moving forward here.

Pearson: All right.  Now one thing that we've talked about a little bit is your view that the economy is going to strengthen.  We've seen a lot of encouraging things.  Earlier on the show we saw the video of land prices increasing.  How long is that going to continue for folks in the ag sector, these rising farmland prices do you think?

Robinson: Mike, as long as commodities prices remain firm, and at this point I think they will, and as mentioned by your guest as long as interest rates remain at or near current levels and the fed open market committee has verbally stated we will keep these low at least through 2014, I sense maybe a plateau in values in some geographies but at present I don't sense a collapse.

Pearson: And probably continuing at least through that 2014 marker.

Robinson: 2013, 2014 in my mind appear pretty solid regarding land values.

Pearson: All right.  Well, thank you so much, Virgil.

Robinson: My pleasure.

Pearson: Really appreciate having you here and I hope you have a wonderful Thanksgiving.

Robinson: Thank you.

Pearson: That wraps up this edition of Market to Market.  But if you'd like more information from Virgil on where these markets just may be headed, visit the Market Plus page at our website.  You'll find expanded market analysis, audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account all free at the Market to Market website.  Be sure to join us next week when we'll examine the outlook for agricultural trade.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture cattle commodity prices corn drought economy feeders hogs markets Mike Pearson Virgil Robinson wheat