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Market Analysis: Darin Newsom

posted on March 28, 2013

The reports brought the bears out of hibernation on La Salle Street where corn led the way lower with a limit down move Thursday of 40 cents.  For the week, May wheat lost 42 cents, while the nearby corn contract moved 31 cents lower.  Soybeans also sold off Thursday as the May contract posted a weekly loss of 35 cents.  Nearby meal prices followed suit giving up nearly $15 per ton.  In the softs, cotton bucked the bearish trend as the May contract posted a weekly gain of $1.17 per hundred weight.  In the dairy market, April Class III milk lost 12 cents, while the deferred contract moved 14 cents higher.   Over in livestock, impressive rallies this week as the June cattle contract posted a gain of $3.25.  Nearby feeders moved limit up Thursday capping a weekly gain of $4.82.  And the June lean hog contract moved $1.23 higher.  In the financials, the Euro lost 168 basis points against the dollar.  Crude oil rose $3.52 per barrel.  Comex Gold declined by $11.30 per ounce.  And the Goldman Sachs Commodity Index gained more than 8 points to settle at 654.25.

Market Analysis: Darin Newsom

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

Newsom: Thank you, Mike.  Looking forward to it.

Pearson: All right.  We've got a lot to discuss today.

Newsom: Yeah we do.

Pearson: Had big market moves today.  Let's get into it.  Let's talk about the quarterly stocks report.  Tell us your thoughts on that 5.4 billion bushel number and where you see us going.

Newsom: This was nothing more than the normal shell game that gets played with corn quarterly stocks.  We see it more in corn really than we do with anything else and that is the sudden appearance of 300, 400 million bushels or disappearance of 300, 400 million bushels.  In this case we had 350, 360 million bushel come out of nowhere.  Now, again, this is normal operating procedure.  It isn't anything that we shouldn't be expecting to have happen, particularly at this time of year right before we start to turn the focus on the new crop markets.

Pearson: But since these reports came out we've added these new, the new bushels.  Headlines are out and that's what drove us down today.  It was the computer based trading algorithms.

Newsom: Yeah, I mean, because the very second these numbers came out, I mean the headlines hit the wires, bearish corn quarterly stocks number and if we were sitting there watching the prices the selling started in the old crop market, May contract fell apart followed by the July going on off to the new crop Dec, then it hit the soybeans, then it hit the wheat.  All of it seemed to hinge on that one number.  So, you know, as we look across all of these numbers, and it wasn't that many today anyway, but there was really only one bearish number and that was corn quarterly stocks and it was enough to create havoc.

Pearson: Well, then let's take a look at corn first.  Seeing this big slide today capping a week that was relatively stable, a bit of a gain actually before we got to today, where do you see cash corn prices going?  What should those holding old crop corn be expecting here in the next week or two?

Newsom: Well, the best thing about those who are holding cash corn, it's a three-day weekend.  So, you know, you've got time to turn the machines off, you can go out, enjoy some spring weather, come back in.  Now, basis should stay strong.  It should get stronger because quite simply we still don't have the bushels.  I don't care what this report has to say, the bushels aren't there.  Merchandisers are still going to push the market like they have all season long trying to get ownership because there is still some demand.  So I would say within a week, maybe ten days let this thing kind of settle down a little bit, markets should start to move back up as is its seasonal tendency.

Pearson: Now, as the market starts to climb back up, as people begin to think through this, where do you think corn might go with this figure hanging over the market's head?

Newsom: You know, it is going to be doing that.  Again, will calmer heads prevail?  Can we get the old crop futures, say the May and if not the May let's say it goes into delivery at that point maybe the July, can we get it back up in that $7.20, $7.50?  It's not out of the question.  It's just going to take some time. Gravity always seems to work in these markets where they go down much faster than they go up.  They're going to have to generate some, not only some fundamental interests but they're going to have to generate some investment interest as well.

Pearson: And the investment interest has been pulled elsewhere with, as we mentioned earlier, the S&P hitting its new high.  Is that what is really drawing that non-commercial money out of the market?

Newsom: Well, it is, it's one of the -- it's one of the key things.  We see the dollar going up.  You mentioned the Euro going down.  All kinds of economic problems just starting to come out with spring.  And so we've got the dollar going up, makes it very hard for commodities to rally.  We've got the Dow going to new highs, the S&P, both of them had great first quarters, the economic reports are showing slow signs of growth.  So long-term investors are getting more comfortable moving money back into equities and not so much into commodities.  What they're going to be looking for is a commodity market, if they're going to play, that has bullish fundamentals right now.  Given the numbers today they're not going to feel like they have to go into old crop corn.  New crop corn, different story.  But, not so much old crop corn.

Pearson: Well, let's talk new crop corn.  We saw it take a beating today along with the old crop.  Where do you see new crop headed in the near-term?

Newsom: I still like new crop corn.  I think there's too many questions out there.  The report I think it's something like 97.3 million acres, an increase of something like 100,000 acres from last year with 97.2.  That is minimal, particularly if we figure the drought is still in effect.  The western Corn Belt is still having all kinds of subsoil moisture problems, eastern a little bit better but now they've got too much snow on the ground and they're going to be delayed getting in the fields.  So what this does is it pushes us back later for pollination, possibly into a hotter July timeframe which is what wiped out the crop supposedly in 2010-2011.  So I think there are so many questions out there for the new crop corn market.  I think if we -- we need to give it some room.  We need to give it some time.  And so over this May, June timeframe I think we're going to have some better marketing opportunities.

Pearson: Okay.  So this would not be a time to consider making any sales on the new crop corn.

Newsom: Absolutely not.  No.  No, I mean what you had in place with your insurance and maybe some other put options and so on going into this report just for safety sake, leave them on.  Now, as the market starts to regroup, starts to rally a little bit based on weather I think it's going to provide us some better opportunities.

Pearson: All right.  Let's take a look at wheat.  We saw again the selloff impact wheat today.  We had the prospective plantings report come out on wheat.  Not a huge change.  Where do you see us going in wheat?

Newsom: Well, It is always fascinating to me, it's almost like wheat is an afterthought with the USDA.  I mean, let's look at the, let's look at the quarterly stocks number.  1.234.  It's almost like they had no idea what to do so they took the first four numbers, added a decimal point and said, okay, we're done, nobody is going to pay attention to it because they're going to be looking at this corn number.  So wheat really isn't in a very bullish situation, it hasn't been in a bullish situation.  The prospective plantings number, the only thing we really saw that was not really out of the ordinary but that might have gotten some attention was a slight increase in spring wheat acres, which, again, plays into this idea that corn didn't go up as much because some of those acres in the northern plains were supposed to go to corn, looks like they're going to stay with spring wheat.  So really it wasn't much of a -- it was much ado about nothing in the wheat market and, again, all it really did was ride the coattails of corn lower.

Pearson: Now one of the factors that has been keeping wheat relatively strong for the past couple weeks has been its use in ethanol and feed as corn has been priced out of the market.  With this slump in corn prices are we going to see that source of demand fade out on the wheat side?

Newsom: Well, it could but, I mean, let's, again, look at these quarterly stocks.  And again, this goes back to the beginning of March, end of February, beginning of March.  The number coming in larger than expected says we didn't have that demand so we didn't have that demand in corn, we didn't have that demand in wheat.  Where did it go?  You know, maybe that comes back to we just don't simply have the herd size to be feeding anyway.  But I think we are going to -- we could see demand start to build a little bit in wheat.  We're starting to see the first signs of some possible export interest but it's going to take some time and we have a new crop right around the corner and I really think that's, you know, starting this coming Monday with the first official release of weekly crop condition reports I think the attention is quickly going to turn to new crop and the old crop is going to be forgotten.

Pearson: Now real quick what are your thoughts on new crop prices?  What should producers be looking for?

Newsom: You know, in the new crop wheat you've got to be very careful because number one, it's still in terrible condition both in the southern plains and across much of the Midwest.  I think we could see a rally.  It's going to take some time to erase what we saw today.  But you have enough problems, again, you have the drought is centered over the heart of the southern plains and so I think the markets are going to start to rally again, it's just going to take some time and don't really want to pinpoint a price because it's going to be very difficult to forward contract in this market.

Pearson: Especially for the next week or so as we're digesting all these --

Newsom: Absolutely.  And then after that, you know, winter wheat producers are going to be sitting there going, are we going to raise 5 bushels to the acre or is it going to be 50 bushels to the acre?  There's really not going to be much in between.

Pearson: And so it is just going to take time to have this story play out and then in order to get that rally going it's going to have to be a compelling enough story to bring back in those non-commercial investors.

Newsom: And I think it will.  In the wheat market it's going to mostly come from the commercial side.  It would be great to see the investors come back in.  If they do they're probably going to be looking at corn and beans.  They may get interested in new crop wheat but there is just so much wheat worldwide it's hard to keep their interest.  So I think it's going to have to ride the coattails of the other markets and rely on some commercial interest.

Pearson: All right. Let's look at soybeans.  Again, not a huge shocker on soybean numbers today but we saw that drop off.  Talk to us about where old crop beans might be going.

Newsom: Well, you want to know the most interesting thing about this quarterly stocks report was the 999 million bushels supposedly in soybeans.  You carry that out over the last half of the marketing year, normal demand, just average demand and we have a minus 135 million bushels of ending stocks.  Minus 135.  USDA will not go below 100 million bushels so we're going to see additional adjustments somewhere.  We're already on pace to hit our 1.345 billion bushels of exports by the end of April.  So, I mean, again, this number, everyone is saying oh it's bearish because it came in above.  No.  Can hardly be further from the case, from the truth.  This market, again, needs to, more than likely will start to rally again.  Commercially it is still a very bullish market.  We still have a very strong inverse in major live future spreads.  We have a very strong basis similar to what we see in corn.  I think we're going to see continued strong export demand.  I think it's going to start bringing the market back up and this lower price is only going to increase the demand coming out of china.

Pearson: Because -- and that is one of the stories we've been talking about recently is the infrastructure, the slow load out happening in Brazil, the recent barge accident slowed things down even more.  We're going to continue to see exports coming to America.  Your thoughts -- through April, into May?

Newsom: Well, and this is the genius of USDA, their 1.345 billion bushel projection only covers through April.  So, in other words, what they're saying is May, June, July and August we're not going to ship any soybeans and that's just not going to happen.  We saw stories this week that the situation is getting better in Brazil, it's only down to a 57 day waiting period.  Well that's fantastic except for there's people that really want some soybeans and that is going to keep, yes, demand coming to the United States and particularly with this sharp selloff in the old crop market I think you're going to see it almost, you know, right off the bat when we get back into things on Monday.

Pearson: Suddenly we're going to see a lot more export news --

Newsom: Oh I think so, yes.

Pearson: -- because they're buying at a discount.

Newsom: I think so.

Pearson: Thanks to today or thanks to Thursday's move.

Newsom: Right.

Pearson: Now, let's take a look at cotton.  Cotton has been up and down recently.  We saw a nice little rise today, $1.17.  Where do you see cotton going?  That was another big news in prospective plantings.

Newsom: You know, again, everyone was anticipating them to trim cotton acres and they did, back down to 10 million acres, lowest in two, three, four to five years.  So fundamentally probably starting to build some support in here.  It has been taking a beating but the old crop May and the new crop December both been getting hit pretty hard but finally starting to find some strength in here.  Is it enough?  You know, we have to see I think more from both sides of the market. We have to see the spreads really start to react.  We have to see the commercial traders saying, look, we were going to have a tight supply and demand situation further off in the '13, '14 marketing year, maybe we saw the early signs of it here late this week.  It's going to have to try to build.  But it's going to be going against history because this is the normal time of year when cotton, both old crop and new crop, tends to come down.  So it has got some problems but, I think this report might have been the trigger to kind of help pull it higher.

Pearson: Push it back up off the bottoms.

Newsom: Possibly so.

Pearson: Well, let's take a look at livestock. Cheaper feed costs coming out of the report today.  Where do you see live cattle headed?  We saw a nice run up this week.

Newsom: Well, talk about pushing off the bottoms.  I mean, live cattle has needed something, it has needed some shot to get it going again because fundamentally this market is bullish.  I mean, we have very tight -- month after month on the placement numbers just continue to come down.  We're moving into grill season if and when the weather ever decides to cooperate and we actually get into spring and summer.  So I think if we look at these April and we look at these June contracts, we look at the spread between the two, very bullish situation and the June, August similar situation.  I think the market is getting ready to move pretty strong.  I think we're going to see a pretty good run in the June contract.  Certainly lower corn is going to help.  How long we can keep the corn price down I think will depend on, will help determine how far the market can move.

Pearson: Now, just in your opinion as we look towards this run up as we get into grill season, what sort of ceiling do you see?  How high could they go?

Newsom: Well, you know, I have to be honest with you, Mike, the numbers have kind of slipped my mind at this point.  But I would not be surprised if we can't get back at least 50% of that selloff that we've seen here over the winter and early spring.  So I would look for the June really to be the leader in here because we just don't have the cattle numbers at this point.

Pearson: No supply.

Newsom: That's right.

Pearson: Now, let's take a look at feeder cattle.  Limit up on Thursday.  Lower feed costs great news to the folks out there feeding cattle.  Where do you see us going long-term?  Is this another one day jump?

Newsom: This could be more of a blip than what we see in the live cattle market because number one, we have to see the demand come back for feeder cattle and if we keep posting these low, live cattle numbers we're just not going to see the demand automatically come back for feeder cattle.  The lower corn market certainly helps.  So the longer we can keep the corn market under pressure the more support we're going to build in the feeder cattle.  I just don't think it has the same commercial or the same supply and demand fundamental situation that live cattle have.  Yes, we could see a decent rally come out of the feeders but it's going to depend a lot, I think, on help from both live cattle and corn.

Pearson: And, again, would you be looking at those mid-summer months as the leader?

Newsom: I would and possibly in the feeder cattle we might be looking a little further out because if we're going to start rebuilding this herd it's probably not going to be for the summer months, it may have to be for the fall and winter.

Pearson: Now, with this in mind, what are we seeing on the cash market for cattle?  How has that been happening?  And what should we expect?

Newsom: You know, cash market has actually been holding together relatively well if we compare cash to futures.  The futures has been such a disaster it has obviously put pressure on the cash market.  But livestock like to be led by cash markets and so if we turn this corner I think we are going to see the cash market start to firm.  I think, you know, again, tight supplies are going to have a hard time getting their hands, you know, on what they want heading into this summer season.  So I do think we're going to see a stronger cash market here in the coming months.

Pearson: All right.  Something to keep an eye on as we get into, it's going to depend on demand again and keeping feed prices low.

Newsom: Right.  So much so, yes.  Right.

Pearson: Making sure that there's profitability in the industry.

Newsom: I think so.

Pearson: Well, let's take a look at hogs.  Again, cheaper feed prices after today.  Where do you see the hog market headed?

Newsom: Hogs have been all over.  Number one, the herd has rebuilt much faster and it always does, than the cattle market, so demand isn't as much of an issue.  Cash market has been all over the place.  We did see a nice rally on Thursday to close out the week and I really think we can see it follow through into the following weeks.  It's just so hard to keep that demand in place because all of a sudden it comes and goes.  But live cattle is probably the leader.  I think lean hogs could certainly give a good chase here for the next couple of weeks.  But if we don't see that cash market come back, if we don't see demand really start to pick up heading into the summer it's probably going to struggle more than the cattle market.

Pearson: Now, an issue in the hog market in particular, as we look to the future with the stronger dollar and perhaps recessions starting around the world, what should we be anticipating on the export side?

Newsom: Exports could probably -- they're going to suffer.  You know, that's one of the things.  We still have this economic situation, global economic situation.  Again, we talked about the U.S. seeing some early signs of growth but the higher U.S. dollar could certainly start to slow things down again.  If things can start to look better this summer, I mean, not just domestically but globally, if we don't see as many headlines of economic meltdowns, maybe that will prolong some of this export demand that we've seen start to try to build up on the hog market.

Pearson: And that's going to be essentially, you think, to get us pushed up to the --

Newsom: I think so.  We can only do so much domestically, particularly if we are rebuilding the herd.  We are going to have to ship some off and it's certainly going to help if we can keep exports strong. 

Pearson: All right.  All things to keep an eye on, keep an eye on the worldwide news as we move to the future.

Newsom: I think so.

Pearson: Thank you, Darin, really appreciate you being here with us today.  That wraps up this edition of Market to Market.  But if you'd like more information from Darin 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. And be sure to join us next week when we'll examine early reports on spring planting.  So until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

Tags: agriculture analysis cattle commodity prices corn cotton Darin Newsom drought economy hogs markets Mike Pearson soybeans wheat