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Market Analysis: Mark Gold

posted on April 5, 2013


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Grain prices were mixed this week as wheat rallied higher while corn continued to cope with an agonizing hangover from last week’s acreage estimates.For the week, May wheat gained 11 cents, while the nearby corn contract moved 66 cents lower.Soybeans continued their post-acreage report sell-off as the May contract posted a weekly loss of 43 cents. Nearby meal prices followed suit, giving up nearly $13 per ton. In the softs, cotton also moved into the red as the May contract posted a weekly loss of $1.67 per hundredweight.In the dairy market, April Class III milk gained 7 cents while the deferred contract moved 3 cents lower. Over in livestock, the June cattle contract gave back most of last week’s gains with a loss of $2.90. Nearby feeders were off 77 cents. And the June lean hog contract moved $1.37 lower.In the financials, the Euro gained 196 basis points against the dollar. Crude oil lost $4.53 per barrel. Comex Gold declined by $20 per ounce. And the Goldman Sachs Commodity Index lost more than 25 points to settle at 628.45.

 

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

Gold: Nice to be with you, Mike.

Pearson: We've got a lot of stories going on.  One of the ones that is catching a lot of people's attention is coming out of China and that is the new bird flu that they have got over there.  Can you talk to us a little bit, what kind of effect that might have on the market?

Gold: Well, certainly it has come about in the last four or five days really.  We had some news reports that two people died and then six people died and what is disconcerting about all of this is that this flu may not be easily recognized in the birds or in the animals.  So they're not quite sure how this is going to pan out.  And being news out of China, what are they going to do to try to suppress it?  We don't really know that.  So it is a story, it has certainly taken a toll on the meal market, helped drag the beans down.  We were all in this kind of liquidation mode anyway because of the report last week and now we've added this bird flu story into it and the problem is we really don't know exactly how bad it is.  We do know that it seems to be a different strain of the virus and it can be very serious not only for humans but for the animals as well.

Pearson: So it's just another bearish factor piled on top of this market.

Gold: Another bearish factor the market doesn't need right now.

Pearson: Alright.  One thing that is interesting and a lot of folks out there would be interested to see this -- we've seen crude oil this week drop about $4.50 while the dollar has stayed strong.  Can you talk to us a little bit about what is happening there in the crude oil market?

Gold: Well, you know, the crude oil market has taken this tumble.  The dollar remains strong even though we tried, we tried a key reversal on Thursday.  We made a new contract high, just missed closing under the previous day's low.  We were again soft late in the week.  But the dollar has held up.  Crude oil has taken a beating here partly because we're seeing more ethanol, with the lower corn prices we're going to start ramping up ethanol prices and I think that has had a little bit of effect plus the world economies aren't great out there.  So frankly what the crude was doing at $97, $98 a barrel in the first place kind of surprised me and we've backed off of those highs.

Pearson: Alright.  Just getting a little bit more into realistic price levels in crude.

Gold: Yes.

Pearson: Well, let's take a look at the grains.  Let's talk wheat.  We did have the bearish reports come out, the negatives in the wheat market but we didn't see a whole lot of movement on the board.  Can you explain a little bit about what's going on there with wheat?

Gold: Well, certainly, you know, the wheat numbers were the friendliest of, you know, some bear numbers out there.  But what we saw going into the report was the traders, the pros, the funds, heavily long old crop corn, old crop beans, short new crop corn and beans and they were long wheat, excuse me, they were long corn, short wheat, long beans, short wheat.  So since the report they have had to liquidate those spreads which meant that they have been buying wheat, selling corn and beans, they have been selling old crop corn, old crop beans and buying new crop corn and beans.  So it has been as much a function of the spread trade as anything else.  Now, long-term what does that mean?  We've got a December corn price that only broke 40 cents of 50 cents from the highs before the report in there.  But what we're seeing in here now is that you've got all these guys liquidating those short new crop positions.  I believe it is giving the pros an opportunity to get short in the new crop.  So eventually when I look at these acres, when I look at the whole scenario of what is happening in these markets we're giving the pros a real good chance to sell $5.40, $5.50 December corn in here.  The American farmer is still holding onto it, still concerned that there may be a drought or a weather problem this year.  They haven't sold much of anything of 2013.  And in my opinion I'd go with the money on the pros.  I believe that we're too high priced relative to what can happen out there.

Pearson: On corn.

Gold: On corn and beans.

Pearson: Corn and beans.  Alright.  Now, as we're talking about that, looking at new crop corn for folks out in the field, what would be your advice percentage wise for people to consider selling?

Gold: You know, we've been selling corn since back when December corn was $6.30 and $6.40.  Right now we're about 40% sold of our guaranteed bushels if they've got the revenue insurance on corn and beans and we want to be at those levels right now.  We've got puts underneath for everything else.  There are a lot of marketing people that have been bearish but only have 30% or 40% of their crop protected.  We've had 100% of this crop protected because we really believe that the risk today is on the downside.  We look at big acres.  People out there don't seem to want to think that you can have trendline yield after a drought.  Well this is the first year we've had a drought in '12 since 1988.  The genetics have improved dramatically since 1988 and I would certainly argue that we can grow trendline yield if we get decent moisture in June and July in the corn market and July and August in the bean market.  So when you add that to the number of acres we're looking at the reduced demand that we're seeing around the world, it tells me that these carryouts can get huge come harvest which tells me that there's a lot of risk.  Now, there are a few things that will temper that.  Number one, are we going to have another drought?  To me it doesn't look like that is going to be the case but obviously if we were going to have a second drought in a row prices are going to go right back to the highs.  The other thing that can temper this is when we've had some of these bearish numbers in terms of the stocks report, when we get the next supply and demand report the USDA giveth and then taketh away.  So could we see that, you know, we've got that report Wednesday on April 10th so could we see some adjustments there?  It's possible.  But longer term the pros are looking to sell the rallies in new crop corn and new crop beans.

Pearson: Now let's take a look at old crop corn after this recent massive sell off, folks that were holding corn, holding beans hoping to be able to capture some as the market stretched some over the summer.  What is your advice to people sitting on bushels in a bin?

Gold: Get back to church and start praying again.  We've lost a lot of value in this corn market, in one week basically a dollar a bushel.  The guys that are still sitting on the corn, you know, $6.30, $6.40 still isn't a bad prices for corn.  We would certainly be willing sellers of that corn.  We'd buy back some call options in case we do see something out here.  You can spend today ten cents on a legitimate corn option to get you through into the summer, into July for example, and see where you go.  But we don't want to see guys get caught certainly with 2 crops.  And, you know, the last couple of years the American farmer seems to think that, you know, holding it and not selling anything early has been the great strategy.  Well it has been the last two years.  Well, in every ten years you want to go back since World War II you have about two years that are good years not to be early sellers, the other eight tend to be pretty good years to sell early and I believe this is going to be one of those years where selling early is going to pay off.

Pearson: We're getting back into that --

Gold: Into that cycle of more grain out here and around the world.

Pearson: And I wanted to come back just real quick to wheat.  Would you be willing to throw some sort of guideline prices that you think we might be able to see some resistance or support levels at in wheat?

Gold: You know, I believe we're getting pretty close.  In Kansas City wheat I think if you're looking at, you know, $7.70, $7.80 that would be a great opportunity.  On Chicago on the soft wheat if we can get back to $7.30, $7.35 on those areas.  But that wouldn’t keep me from owning a put option underneath it right now.  We're getting a little bit of a rally because of the spread activity, it's a little bit artificial.  When you look at the supplies around the world on wheat, India, Russia, we're going to have some very big wheat crops out there.  Again, it's just adding to the bearishness and then if you add in the huge supplies in South America, what we can grow here, it seems to me that there's still quite a bit of risk on the table.

Pearson: Alright.  And now let's come back, same question looking at soybeans, old crop and we've already discussed new crop a little bit.

Gold: You know, that could be the one surprise out here is the old crop beans.  You know, we're in very historically tight carryouts out here.  Now we just picked up another 70 million bushels from the stocks report, gives us a little bit of room here.  But are they going to start upping the export numbers on the supply and demand report to show more Chinese buying than what was expected?  That could be the surprise out here.  I wouldn't be surprised on Monday or Tuesday prior to the report if we see some professionals buying some call options on old crop, maybe selling some new crop calls against that in that kind of position because we've done, you know, some pretty good damage to this old crop, not to the extent that we've done it in the corn on a percentage basis but, you know, we took 90 cents out of the old crop beans.  So would guys look to maybe buy some calls out ahead of this report?  I would think that might be a worthwhile strategy just in case the government, you know, taketh away again.

Pearson: Right and we see another --

Gold: Another friendly number.

Pearson: A big day.

Gold: Yeah.

Pearson: Alright.  Well let's take a look, looking down south let's talk cotton a little bit.  We've had a lot of reports of cotton numbers, acreage numbers shrinking and shrinking and shrinking and then this week we saw another slide in the price.  Can you explain a little bit what is happening in cotton?

Gold: You know, we've had a nice run in the cotton from roughly December cotton from about 73 cents up to about 89 cents.  There has been some good natural resistance on the charts between 88 and 90 cents. We've backed off to about 86.50.  To me they talk about more cotton acres coming in.  I'm not sure I see that.  I believe a lot of guys are going with corn, they have gone with corn in the south.  Are they going to buy back the planters?  I don't know.  Are they going to buy back the cotton pickers?  I don't know about that.  So I think it's a little bit different story.  I think guys like the corn, they have gotten used to growing it, we've seen a big expanse of acres in the south and I think that is going to trend for a while.  The odds of us seeing, you know, $2 cotton again seem remote but at these prices, you know, I think we're going to see cotton acres stay low, more beans and corn going in.

Pearson: As people continue to transition to --

Gold: Yeah, that's what I see happening in the south, yeah.

Pearson: Well, let's take a look at livestock.  Last week after the report we saw feeders rise, live rise and this week we saw a give back quite a bit on live cattle.  What is happening there?

Gold: You know, we're a little bit of a choppy market.  We've had the funds very short in the cattle market. We have made some good lows in here, the funds are still short.  We've had a nice bounce.  If you look at the charts we have kind of a v-shaped bottom forming in these charts.  The cash market this week went out $128 to $129, a little bit better prices out here.  Show lists are still low.  The production numbers are still down.  I believe that we've got a little bit of a chance here in this cattle market and I'm a little bit friendly to this cattle.  I see the demand hanging in there.  We've got the Dow Jones at historical highs.  Even though the unemployment numbers aren't great out here we're still seeing, you know, people feeling a little bit better, we're getting another growing season.  What kind of surprises me when you look at the June and August cattle, they're a little bit cheap out here when you would think in the summer months we could get a little boost there.  But I think long-term when you look at these charts with the funds as short as they are and corn prices coming down I think fat cattle have got a chance here to see a little bit of a bounce.  I still like the cattle market.

Pearson: Alright.  Now let's talk feeders.  Limit up last week after the report, continued that trend a little bit this week.  Where do you see feeders heading?  Is the cheap corn really the catalyst they needed to sort of spike back?

Gold: You know, I think that is part of it.  I think, again, the funds were short.  We pushed it a little too cheap, too quick in here.  The chart had a pretty elevator shaft style break in this market and we started to come back here now.  I like the feeder cattle market, I think it looks okay in here.  I don't see things changing.  I think with the cheaper corn prices, cheaper meal prices that that meat market is going to pick up.  I like the demand for meat, not only on the beef side but on the pork side as well.  People want to see what is happening in China if this potential bird flu is going to affect it.  To me the Chinese are going to still eat and could see a pick up of exports?  There's still the Palene question but I believe that demand is going to be there on both the beef and the pork.

Pearson: Now, with that in mind, looking at feeders is there a price level of support you think we might be able to reach out there?

Gold: You know, to me there's another $3 or $4 on the upside in this feeder cattle market easy.  That will take us back into some of the resistance areas and I think that is a legitimate area if they had some opportunities to make some sales up there I would certainly look at doing that.  I'd still keep a put underneath it.  We can't lose sight of history here.  $1.40, $1.50 feeder cattle, you know, 15 years ago we were at $55 feeder cattle.  So we still have a lot of potential risk out there so keeping that put option underneath while we're hoping for the higher prices is how we like to manage the risk.

Pearson: Alright.  Now real quick let's take a look at hogs.  What sort of price levels do you see support for out there in hogs?

Gold: You know, this 80 cent mark has been okay.  Depending on which contract we've been looking at we've been a little bit under it. Again, you know, we've got some of these export issues that we need to deal with. Domestically I think we're going to see pretty good consumption on the pork side.  If people, for whatever reason, want to shy away from some of the poultry they're going to go to pork.  So I think we're in a little bit of a support area here.  We've had a hard break and, again, I'd be looking for a little bit of a bounce in both the cattle and hogs.

Pearson: Something to look forward to.  Thank you so much, Mark.

Gold: Thanks.

Pearson: Appreciate you being here.  That wraps up this edition of Market to Market.  But if you'd like more information from Mark 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 the impact of USDA's latest estimates on supply and demand.  So until next time, thanks for watching.  I'm Mike Pearson.  Have a great week.

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