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Market Analysis: Virgil Robinson and Walter Hackney

posted on February 15, 2013

Grain prices fell this week due to a stronger dollar and news of an economic slowdown in Europe.  For the week, March wheat lost 14 cents while the nearby corn contract moved 10 cents lower.  Bearish export numbers and the looming threat of massive crops in the southern hemisphere pressured soybean prices as the March contract posted a weekly loss of 28 cents while nearby meal prices declined by nearly $13 per ton.  In the softs, cotton also headed south this week as the March contract lost $1.35 per hundred weight.  In the dairy market, March Class III milk fell 9 cents while the deferred contract moved 24 cents lower.  Over in livestock a late week reversal enabled April cattle to gain 33 cents.  Nearby feeders were off more than $1.50.  And the April lean hog contract posted a weekly loss of $1.87.  In the financial, the Euro lost 8 basis points against the dollar.  Crude oil advanced 14 cents per barrel.  Comex Gold fell by a whopping $57 dollars per ounce.  And the Goldman Sachs Commodity Index fell 2 points to settle at 677.35.

Market Analysis: Virgil Robinson and Walter Hackney

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson.  Gentlemen, welcome back.

Robinson: Hi, Mike.

Hackney: Hello, Mike.

Pearson: The big news is still the persistent weather and as we look at the wheat crop that is out there, the hard red winter wheat, what are you seeing, Virgil?  How are things looking?

Robinson: Well, it went into dormancy, Mike, in generally poor condition.  Now agronomists in select areas tell us that if there are timely rains and timely moisture prior to breaking dormancy or shortly after breaking dormancy it can still produce something of a crop.  But to suggest it is one of the better winter wheat crops would be misleading.

Pearson: But we don't see that really affecting the price at all.  Is the market not trading that information yet or is it kind of a wait and see period?

Robinson: I think the market has a close eye on global supply in addition to the localized concerns.  And wheat at present globally is not a major concern, Mike.  Now, the hard red winter wheat basis, at least as I track it, the basis has strengthened pretty significantly so the strength in that market is more a manifestation of its cash value or basis value than it is flat price.

Pearson: So do you see things in the wheat market beginning to pick up steam?  Or what is going to cause the market to change?

Robinson: Well, soft red wheat, the value of it has declined and aligned itself again with corn value or pretty darn close in select areas.  So I think it is the recipient of some feed demand.   And the department acknowledged that in February increasing wheat for feed.  And as long as those two price levels remain fairly close I think wheat will be in demand as far as feed is concerned.

Pearson: And on the international scene, the wheat coming out of places around the world, quality wise pretty similar to America's or not enough to really cause any substantial --

Robinson: Well, there can be differences and there can be concerns in terms of toxins and other issues but on average I'm not aware of any major dilemmas, Mike, in that regard.  Certainly it can develop but at present, no, I'm not aware of any significant problems.  The competition out of the former Soviet Union, those countries wheat wise, has grown progressively and remains pretty darn intense.

Pearson: So that's something to keep an eye on through this year and then into the future as they continue to improve?

Robinson: Absolutely, I think as technologies and farming practices continue to improve in those regions they will be a formidable competitor of the U.S.

Pearson: All right.  Something to keep an eye on.  Let's talk some of the acreage estimates for corn and soybeans, they came out this week.  What do you see in the CBO report and how does that relate to the market's expectations?

Robinson: Well, the CBO and the USDA baselines, now please understand they can change and likely will change over the course of the next many weeks but in essence they are forecasting a year over year shift in ending stocks from what is perceived in my mind as pretty darn tight to fairly adequate or even abundant and I think the market has taken that to heart in addition to the fact that production expands whenever prices are high and that clearly is the case I think worldwide wise.  So as mentioned, the competitive factor not only with fellow farmers, fellow producers here in the U.S. but certainly globally has intensified and will continue to grow.

Pearson: Looking at old crop versus new crop corn this week, through the week it was generally bearish sentiment throughout and then today we saw a bit of a divergence.  The trade fell on the new crop and we saw a little bit more impact on the old crop.  What was driving that?

Robinson: Well, I think the old crop basis remains strong, Mike.  There continues to be an inverse, albeit small, in the futures contracts from old to new as well as in the cash grain markets.  The basis in several areas of the U.S., at least as I have tracked it over the last many years, is historically strong, which implies that those producers that still own old crop quality corn are very tight holders.  And in many cases they are likely, or at least I think planning on maybe growing a few more beans this season than last so that old crop inventory is kind of a hedge.  If in fact they're going to have fewer corn acres this season than last they'll be tight holders of that inventory for the foreseeable future.

Pearson: Now looking out at the future in this inverse situation we've been in now since last June or July, when do you expect to see us reverse?

Robinson: Well, if you accept the CBO and the USDA's baselines at face value, next season.

Pearson: Okay.  All right.  So we're going to have to wait until we get the crop in the field and really start to see what is coming.

Robinson: With respect to new crop, Mike, I might inject here, again, if these baseline projections are at least in the right direction those who possess on-farm storage have the financial wherewithal and marketing skills they are likely to put together some very attractive storage hedges this coming season in contrast to last, as you mentioned.  The spread between December 13 corn futures and July 14 is currently at or near 25 cents.  I think that could widen out towards 40 and offer an awfully attractive carry this fall.  As mentioned, the criteria, on-farm storage, financial wherewithal, quality grain and some marketing and merchandising skills.

Pearson: So those with a good sense about them could be able to take advantage of this.

Robinson: Certainly improve price versus what new crop is offered or bid at today.

Pearson: All right.  Well let's look at soybeans.  We saw the same trend happening in soybeans still with regard to prices.  Disappointing export news this week on beans.  Was that a big mover?

Robinson: I think that was one of the catalysts.  You know, several folks on the show have talked about lack of speculative exuberance or liquidating positions and moving towards something else.  The other factor that probably needs to be talked about briefly is processing margins.  At least as measured today versus last year soybean processing margins are off pretty significantly.  Now that would imply one of two things to me.  Either bean prices are too high or product values, that being soybean meal and soybean oil, are too low.  Tonight I'm going to argue that products, meal and oil, are too low.  I think the prospect for increased soybean oil usage to produce biodiesel in the next several months is very strong.  Soybean meal exports have been very strong.  If processors take to heart the lack of profitability and reduce their processing capacities the availability of those two products is going to be significantly smaller and as a result of that be advised if you're a user of each of those two products that possibility exists and you need to manage the risks associated with that.

Pearson: So be aware.

Robinson: Absolutely.

Pearson: All right.  Let's turn to livestock.  Walt, talk to us about what is going on in the live cattle market.  We saw it in feeders this week.  We had nothing technical, nothing fundamental changed substantially one week to the next and yet we saw a massive sell off across the board in livestock.  What was going on?

Hackney: You're right.  We've experienced the week of disaster, to be blunt.  We have lost $10 a hundred in the feeder cattle market this week.  We lost $2 a hundred on the cash feedlot cattle and we lost $4 a hundred on the dressed value of feedlot cattle for no good reason except one.  We had a European bank, a financial institution that had an enormous loan fund position and Barclay, as the principle, made a business decision, they lost all the money they intended to on their loan fund position and they alerted all their people that they were going to liquidate this week all of their loan position.  Well that obviously panicked the Chicago Mercantile because part of that dealt with livestock, part of it dealt with metals.  It was soft commodities primarily.  As a result we are lucky, as it turned out, that we didn't lose the limit per day on live cattle on the Mercantile and on feeder cattle and it had, as you said, nothing to do with anything but their liquidation of their loan fund positions.  We think by the night trade on Wednesday that they had primarily gotten through their liquidation process.  Now that doesn't mean as a company they are through.  They're going to lay off 3,700 employees as a result of this disaster they got themselves into.  We oversold our market through panic.  The packer was able to take advantage of the situation by bidding down.  The cattle feeders were in a highly concerned position.  They sold thus we lose the $2 to $3 on cash cattle and $4 on dressed cattle to the packer this week.  We started seeing some recovery yesterday of this oversold position.  And today we saw more of it.  Cash has responded maybe a dollar by this afternoon.

Pearson: Walt, let's look at hogs real quick.  Relatively unaffected by this, less so.  Where do you see hogs going?

Hackney: The analysts that make a career in studying the hog industry are as confused as everyone else.  Their anticipation of a reduction in the hog herd inventory was that by now we would have a substantial fewer market hogs available to the market.  It hasn't happened.  Profit margins have created a management decisions again in the pork industry that they're going to kill feeder hogs.

Pearson: All right.  And we'll talk about more analysis on hogs as we get to the Market Plus segment.  Thank you guys both so much for coming, really appreciate your commentary.  That wraps up this edition of Market to Market.  But if you'd like more information from Walt and 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 explain the market impact of the latest cattle on feed report.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture analysis cattle commodity prices corn drought economy hogs markets Mike Pearson soybeans Virgil Robinson Walter Hackney