Citing diminished foreign demand for American wheat, USDA predicted this week that domestic stockpiles will increase by 50 million bushels. And as you would expect, wheat prices headed south. For the week, March wheat lost 47 cents and the nearby corn contract moved 15 cents lower. Soybeans bucked the bearish trend as the nearby contract settled Friday with a weekly gain of 25 cents. Nearby meal followed suit moving nearly $15 higher per ton. In the softs, cotton rallied back above $75 this week with a gain of $1.30 per hundred weight. In the dairy market, January Class III milk lost 37 cents, while the deferred contract moved 22 cents higher. It was a strong week in the livestock sector where February live cattle gained $2.20 cents. Nearby feeders advanced by $4.30. And the February lean hog contract posted a weekly gain of nearly $2.00. In the financials, the Euro gained 230 basis points against the dollar. Crude oil advanced by 75 cents per barrel. Comex Gold declined by $8.50 per ounce. And the Goldman Sachs Commodity Index gained 3 points to settle at 637.25.
Pearson: Here now to lend us her insights on these and other trends is one of our regular market analysts, Naomi Blohm. Naomi, welcome back.
Blohm: Thank you.
Pearson: It was a big week. The Fed made their announcement regarding the 4th quantitative easing measure that they're looking to take. What does that mean for the markets, both the equities and the commodity markets?
Blohm: It means right now for the markets that the Fed, they're just trying to do their best to keep interest rates low. And they said that they're going to keep it low until mid 2015 which is a new jump for the marketplace. So they're trying to entice employers to hang in there and do their best, do hiring, you can try to plan on some sort of business aspect because interest rates will be low. They said that they will keep the rates low until unemployment either drops down to 6.5%, and right now we're at 7.7%, or unless the economic growth rate can climb a little bit more or even for the inflation part if it goes from 2% right now, if it gets up to 2.5% that would be the point where they say we'll have to start raising interest rates. So until those things happen we're going to continue to see interest rates low. Bernanke though has also said that if the fiscal cliff happens that this QE4 won't do much in the way of help. So there's a lot of pressure on these next couple of weeks for the marketplace to deal with, all this economic crisis.
Pearson: And with the way you look at things, what do you see -- what does the market think is going to happen with this fiscal cliff? We've been back and forth and back and forth and we're getting close.
Blohm: I think right now the market is assuming that if they don't get any sort of a new deal done by the next two to three weeks that they'll do some sort of an extension just to limp us along and get us through. So there isn't any I think imminent reaction that's going to happen come January 1st and the market is starting to show us that. It's starting to price some of these different scenarios in place. So I don't think we have to panic too much at the moment but there's a lot of uncertainty which rings true for many Americans, especially if the tax increases do happen and things along those scenarios.
Pearson: And that uncertainty, are we seeing that play out in the markets in any way or one form or another? People sitting on the sidelines? Or how are they reacting to the uncertainty in the markets now?
Blohm: There is definitely a situation where the funds are not as active as they have been. They're more content to sit on the sidelines and we're seeing that in some of the commodities with the volatility that comes and goes. So that is I think the biggest factor for now.
Pearson: All right. Let's talk the grain complex here. We had the December USDA world supply and demand estimates come out. And we saw that move the markets a little bit. Can you explain what happened in the wheat market?
Blohm: Sure. With wheat the biggest thing is that the USDA increased the ending stocks. We went a 50 million jump. That's huge. The market was only expecting maybe 10 million at most. So they increased the carry out levels in the soft wheat, also in the Kansas wheat, and it's because the exports just haven't been there. Most of the export market had been, of course, going to Russia and Ukraine and then Australia as well. So now we just sit and wait and hope and with the 50 cent price drop that we saw this week once that major support broke we now hopefully will see the exports pick up a little bit here. But $8.00 is where we're at right now in the Chicago March contract. That will probably hold. We're oversold so we should probably get a bounce back up to $8.50 but we just don't have that news yet to make the market go higher. We need either exports to pick up dramatically soon or something bad would have to happen with the winter wheat crop, which as we all know in the western Corn Belt and the plains it's dry and if there's any winter kill damage it's going to be a big factor which can make prices explode pretty quick.
Pearson: And when will the market start to price in that potential damage there in the western Corn Belt on the winter wheat? How soon will that begin to affect the market?
Blohm: Likely January. I would say mid to late January would be the soonest that it could come into effect and then also it will time into the USDA report that comes in January too.
Pearson: All right. And that should also be when we begin to see exports hopefully pick up or stay stagnant in the wheat market.
Pearson: Now, as we look to the future, are there any price points you see in wheat that you'd like to shout out beyond that $8.50 level here in the near term?
Blohm: I would say that if bad things happen to our crop or if our demand can pick up the pace I do still feel that $10 is a possibility down the road this spring. However, if we don't have any weather issues and if exports continue to limp along then we'll see prices stay near this $8.00 level for a while.
Pearson: All right. Let's look at soybeans a little bit. The USDA report moved beans as well, a different direction. We saw a little bit more of a bullish trend in beans. What is causing that?
Blohm: The USDA cut ending stocks on soybeans by 10 million bushels and that was somewhat expected but what the tweak was, was that they increased the demand for beans for crush and that was exemplified today in the crush report that came out. There's strong demand there. But what the USDA has not addressed yet is the export market and the exports are running 30% ahead of years ago and the USDA has not addressed it yet at all. So either one of two things are happening, in the January report we'll get a really bullish surprise or perhaps the USDA is saying, you know, everybody just relax a little bit because come March and April when the South American crop becomes available for harvest we're going to lose a lot of business then so we'll just let the balance sheets be for right now because we might not have exports down the road. So there's a couple of things to play off of. I would say for now $15.00 is going to hold as some short-term resistance on the charts. $14.00 is a great support level and we'll probably see the market just kind of zig zag in between those two levels into the end of the year and possibly even into the January report. And then otherwise after that it's not until February when we have more of some weather issues from South America.
Pearson: Okay. And you keep track of the weather pretty closely down there in South America. How have things been shaping up in the past week or two?
Blohm: The Argentina weather has still been a little bit soggy and their planting pace is behind normal. They are over 50% planted with corn and beans. So they're lagging but it still isn't anything that's screaming red flags at this time. And in Brazil some places a little wet, some places a little dry but no major issues for now.
Pearson: Nothing definitive currently.
Pearson: Let's talk corn. Corn a little bit bearish this week. Again, due to the supply and demand report?
Blohm: The USDA kept ending stocks unchanged this week and that was somewhat of a surprise. Some people were thinking that the carry out number might become just a little bit larger. And the reason it might be larger is because, of course, our exports have been so quiet lately. The one thing about the corn market still is that we are available to the world right now and so we should see demand pick up. March corn has solid support at $71.5 as evidenced this week and yet at the same time we don't have a reason to get above $7.75 with the March contract at this time either. Now, switching gears into the new crop, December, that market has been stuck between $6.00 and $6.40 for a few weeks now and there's so many scenarios that can unfold there that as a producer you really have to sit down and figure out, what is my strategy going to be if scenario A unfolds and we have nearly 100 million acres of corn planted and we have just average yields? Or what is my scenario going to be and my price targets going to be in case we do have another drought? And so with all of the uncertainty out there right now it's good to be really thinking about it. I'm still only 10% sold on that new crop because people have a hard time knowing for sure what their soil is going to yield this year with the drought. But you have to be thinking about it and be planning for anything that could unfold.
Pearson: Get out that pencil and paper and make the numbers work.
Blohm: Yes, yes.
Pearson: Let's talk dairy. We had a little bit on that on the show earlier today. Where is the dairy market headed as we approach the end of the year?
Blohm: It's in a mixed bag right now and the futures price for Class III has fallen anywhere from 50 cents to a dollar within the last few weeks and it's because there is this huge supply of cheese out there. Demand for dairy is down. And it's not just here in the United States, it's globally. We're going to probably continue to see that for a bit as long as the global economy continues to be just in a little bit of a flux here. The cheese exports are down almost 38% from normal and we have a lot of competition between Australia and New Zealand which is what is also just keeping our prices at bay. The market is technically oversold. I think we'll see a bounce of 50 cents so that will take prices into the mid, maybe the lower end of $18.00 depending on which market and month you're looking at. But the other thing with the dairy market right now is that for almost the past three months we've been culling 65,000 head a week. So the farmers in the United States are not doing anything to make production increase and of course with high feed prices we're going to see things stay stagnant. So I think $18.00 will be where we're going to be hanging out at for a month or so.
Pearson: Now, you mentioned high feed prices. Let's look at livestock a little bit. We saw a big bounce across the board in livestock this week. What is driving that?
Blohm: Well, what we have with the livestock market, of course, is the expectation that the production is going to be down so much into first quarter. The funds are actually trying to come into the livestock market a little bit because of that play. If you look at cattle futures, the live cattle futures they've got some solid support between like $130 and $132 and I think its' going to continue to old because of that production being down so much. The one thing I would add is that demand, I feel, is really going to slip into first quarter because people are going to get their credit card bills for Christmas and then they're not going to have too much money to spend necessarily on things like steak anymore. And also we're probably going to see the demand fall, especially if the cliff happens, because then normal people making between $40,000 and $80,000 a year are going to have between $1000 and $2000 less a year to spend and it doesn't sound like a lot but when you're on a fixed income it's substantial. So I don't think we're going to see those extremely high prices and bullish sentiment continue into the first quarter. I don't think we'll see things fall apart though either but just mostly stay firm.
Pearson: You mentioned live cattle finding their support. Where do you see feeders going in the near term?
Blohm: They had a great rally this week, phenomenal and between $152, $154 is I think where we're going to stay for another week. But based on the flag formation that just formed we could see it shoot up a little bit higher yet into the New Year and that is absolutely a fundamental issue of the supply being so low.
Pearson: And to that end you're not so concerned with the demand issues yet that are affecting live cattle?
Blohm: Not yet, no. But I think that's something that will pop up probably at the end of January, people will say oh, what happened?
Pearson: Now, is any of this shift in demand going to help continue, continue to help the hog market?
Blohm: Yes and it already has been helping it because Mexico hasn't been buying as much beef from us but they have been increasing their pork imports from the United States and we're seeing that all over. Our pork exports continue to be stellar and continue to grow and the pork production is also expected to be the lowest it has been in first quarter for years. So that's going to keep that market well supported also. But, like the cattle market, if we don't have a lot of disposable income people won't necessarily be buying high priced proteins. But for now pork is probably the leader as far as maintaining strength into the first quarter.
Pearson: What sort of price points do you see having support there on the lean hog contract?
Blohm: Yeah, on the Feb hogs I'd say there's some support right now at $85 but below there would be $83 and at the higher end it's $88 and so we'll probably stay in that range into January.
Pearson: January, February. As we look longer term what factors do you see it play in the hog market?
Blohm: It continues to be a supportive factor and if you look at the summer contracts they're already trading up near a buck. So the market is already realizing that supply is going to be down and they're assuming that exports will be strong enough, especially with our dollar being low and expected to stay low. So I think that the hog market actually has a bright future ahead of it.
Pearson: At the current prices we're seeing, would you look for producers to start addressing their feed needs in 2013?
Blohm: Absolutely. I've been working with some hog producers actually on that right now so we're working on pros and cons too. Do we book in actual cash needs now? And then if we do, do we buy a put under it or not? So lots of possibilities for that marketplace to deal with.
Pearson: Great, thank you so much, Naomi, really appreciate you being here with us. That wraps up this edition of Market to Market. But if you'd like more information from Naomi 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 impact of drought on Christmas tree growers. Until then, thanks for watching. I'm Mike Pearson. Have a great week.
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