Notions of record corn production weighed heavily on grain prices this week, despite a weaker dollar. For the week, July wheat lost 15 cents, while the nearby corn contract moved more than 10 cents lower. Old crop soybeans also headed south as the July contract declined by 12 cents. Nearby meal prices followed suit with a loss of $1.80 per ton. In the softs, cotton had another positive week as the December contract posted a weekly gain of $4.26 per hundredweight. In the dairy market, July Class III milk lost more than 60 cents while the August contract declined by 50 cents. Over in livestock, the August cattle contract lost 96 cents. August feeders were off 33 cents. But the July lean hog contract gained almost $1.50. In the financials, the Euro gained 121 basis points against the dollar. Crude oil advanced by nearly $2 per barrel. Comex Gold gained $4.60 per ounce. And the Goldman Sachs Commodity Index moved less than 5 points higher to settle at 630.60.
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: Good to be back, Mike.
Pearson: We mentioned there in the market outlook this past week we did see a little bit of a weakening of the dollar. And there's concern that is going to reflect in higher prices for commodities. What are your thoughts on the dollar's outlook?
Newsom: You know, short-term we could sure see the dollar continue to come under pressure. It's got a little bit of a downtrend established, we've got some money coming out but longer term I just don't see it. I think the dollar is going to find some support in here in the coming weeks and there just doesn't seem to be this ground swell of support for commodities. In fact, it's quite the opposite. We just don't have a lot of investment money coming into commodities right now and that is one of the reasons why we continue to see lower prices.
Pearson: Not a lot of reason to invest, not a lot of reason to drive the prices substantially higher from outside investors.
Newsom: Exactly. As you talked about in the piece before the drought situation isn't as bad and that is always something that can help bring investment money back in. There's no real supply and demand issue at this point and we've had the global equity markets move a great deal here in the recent weeks, some of them to new highs and this is pulling money out of other investment sectors as well.
Pearson: Alright. Well, now, as we talk supply and demand we do have harvest underway, the wheat harvest. Can you talk to me a little bit about what you've seen, reports you've heard on that harvest and what to anticipate here?
Newsom: Yeah, right now estimates for an average, a good average harvest really are way out of whack. Everything that I'm hearing from the western third of the southern plains stretching all the way down into Texas is yields just really aren't there. Initial reports coming out of Kansas in the southern tier of counties in Kansas, 10, 15 bushels per acre. There's talk of south central Kansas irrigated wheat maybe, and this is irrigated, maybe making 20 to 30 bushels per acre dry land, again, 10 to 15 and it gets worse the further west you go. So I know we saw USDA or actually it was NAS increase winter wheat production in this week's report and I find that fascinating and somewhat humorous in the fact that it is NAS weekly crop condition numbers, the same group that has been lowering these crop condition numbers every week for winter wheat. So conditions continue to come down, crop is in worse shape and then in a monthly report from May to June they increased total production. For those who want to look at these numbers and try to read something into them and use them as, use them as valuable I think that is evidence to the contrary.
Pearson: And, now, for producers out there as they're watching this market trade these USDA numbers, the NAS numbers that came out, we did see further slippage in wheat prices. Is that going to reverse once people get a full idea of harvest?
Newsom: Probably. I mean, it's not unusual as harvest starts to get into gear that we see some pressure on any commodity including winter wheat July Chicago, whichever one you want to look at. Both the July contracts in Kansas City and Chicago are trading near technical price support right now. Normally they do tend to trade sideways to down. I think at some point once we get to see some consistent yield reports coming in probably put the breaks on any pressure. Now, is there reason for the market to go up? No. Maybe we have a tighter supply but we really don't have much demand either. Demand has really been curtailed, we're not seeing a lot of exports in wheat right now. So we could see a short-term bump in the market, the July-Sep spreads in both Chicago and Kansas City looking quite bullish at this point meaning we've got some short-term concerns but longer term we just don't see the demand to help push the market considerably higher.
Pearson: So advice for producers as they're coming out of the fields with combines full?
Newsom: Probably wait a little bit. I don't know that I want to sell right off the combine. I think there's a chance that we could still see this market really once we realize, at least short-term, once we realize the bushels aren't there, they never were going to be there, it was ridiculous to think that they would be. I think that's going to help push the market up short-term until the reality of no demand really sets in.
Pearson: Until that hits, which is a story we saw really last year in corn. Talk to us a little bit about what we're expecting in old crop corn over the summer?
Newsom: Well, the old crop corn market I think is fascinating in the fact that it has already been moved to the back burner. Everyone is focusing on all these new crop issues but if we were to look at this July-Sep spread it's going out, it's at 90, 95 cents right now, the inverse, in other words, the premium that July holds over the Sep, this is telling us there is a great deal of concern over supplies and basis continues to strengthen so the cash market is strong, future spreads are strong, the reality is we do not have the corn on hand that USDA says we do, it just isn’t there. And if it is there then it must be of quality that can't be used in the market. So we've got a couple different things going on buy by and large old crop corn market remains bullish and should continue to find plenty of support from, basically from domestic demand.
Pearson: So, advice to folks with old crop corn in the bins, let this week's shock work through the system and then maybe consider selling? Or would this be a good time to --
Newsom: You know, the July contract, the July-Sep contracts, both of the, Sep is still considered somewhat of an old crop contract, both performed relatively well this week. They didn't see the pressure that the new crop market did. So if you're still holding onto some probably don't want to hold onto it a whole lot longer. You've got a little bit of time in here because harvest is being pushed back for new crop so I think it's going to give you some opportunities, strong basis market. Any time you've got a strong basis and an inverted future spread you can pretty much pick and choose where you want to sell cash.
Pearson: Now let's talk new crop corn. It's been the news lately, folks are giving up acres. What are your thoughts on abandoned corn acres, prevent plant, switching to beans? What do you think we're going to see?
Newsom: From what we hear from customers the most economic, the economical decision would be just to take preventive planting on corn and not go into soybeans. So the latest crop progress report showed planting at 95%. I don't think we'll see a lot more. Maybe we get up to 96%, something like that. That means we've probably got anywhere from 3.5 to 5 million acres that could be lost of the 97.3 that is being projected right now. So I do think at the end of the month when the USDA rolls out its next acreage update on June 28th we'll see a smaller number. I think that's where they will account for some of the problems we saw this spring so at that point then we start to adjust some of these production numbers and so on. We saw them back off yield a bushel and a half per acre in its, in the June report. I think that is going to probably continue to come down as well and before too long we'll probably be back below the 14 billion bushel production number.
Pearson: Alright. Now as we take a look at soybeans, old crop beans, similar story as old crop corn. We're seeing a lot of strength in the market.
Newsom: Yeah, the fun thing about old crop soybeans is the magical math that goes on in each one of these USDA reports, the way they move bushels around to maintain the 100 million bushel, 100 million bushel ending stocks figure. We were on pace to hit the export number of 1.35 billion bushels, in fact, old crop beans are still on pace to hit 1.4 billion bushels yet we took 20 billion bushels off this past week down to 1.33. Why? Because we increased crush and we had to find some way to offset that so we also increased our import number leaving us at 125 million bushel. But, again, July to August inverse, the premium the July contract has over the August tells us those bushels aren’t there, they haven't been there for months. So we've got a very tight situation going on in the United States. How is that going to affect the new crop market? Well, that is the beginning stocks as we look forward to 2013, 2014. The smaller the ending stocks are for the previous year the less we have to start off with when the next year rolls around.
Pearson: Now, what is your advice to producers as they are anticipating increased wetness or increased drought in some area? How do they market new crop beans?
Newsom: New crop beans, I think you have to be -- I think you're still going to have an opportunity. I mean, this is a market where -- we've been talking about spreads, if we look at the Nov to Jan spread there's not much carry in that. There's like a five, six cent carry right now so that is saying that despite all this talk of record production and large acres and all this the commercial side of the market just simply doesn't believe it. They want it to be proven first so it's still quite bullish. So I think we're going to have some opportunities. We've fallen back here over the last couple, over the last week or so, we've got some pressure up there around the $13.80, $13.85, up around the old high of around $13.90, we've pulled back. Probably testing some support here in the low $12.80s, upper $12.70s but then I think we gather ourselves, we see how the weather plays out, gives us another chance I think to get some marketing done.
Pearson: Alright. Now as we take a look at cotton, just very quickly we've seen a really solid run-up in cotton prices over the past several weeks. Talk to us about what is happening there? What are we seeing?
Newsom: Well, that's seasonal in nature for one thing. And as I look at my five year seasonal chart it shows that this second week of June is usually when the new crop Dec puts in a secondary high and then starts to move lower into early August. So we'll see how that plays out. But what we've seen in the cotton market is we just continue to see the ending stocks of cotton, continue to be whittled back as far as the new crop goes. So we've got a great deal of commercial buying coming in. Again, the Dec-March spread has really seen, has moved to a very strong inverse indicating a lot of concern over supply and demand. So you add that into some money coming back into the cotton market short-term on the idea we're going to have tighter supplies and it has been enough to push the market higher. Can it maintain this rally? If it does it will be a bit of a contraseasonal move so I would not be surprised to see it lose a little bit of momentum in here, start to come under some pressure again, maybe having nothing to do with supply and demand, more to do with the flow in and out of markets from investors.
Pearson: Just a good selling opportunity up around this price level perhaps.
Newsom: Could be because it has had a very nice rally here over the last two to three weeks.
Pearson: Alright. Well let's take a look at livestock. Cattle have been pummeled the past couple of years. Talk to me about, we're still sliding down in live cattle. What do you see?
Newsom: And I'm not laughing at the cattle situation, I'm laughing at this is a market that is completely ignoring its fundamentals. Again, if we look at the, if we've looked at the June-August, now we're looking at the August-October spreads, this is indicating we've got a bullish supply and demand situation. We've still got relatively tight supplies and relatively solid demand. The market will not react to this, it just continues to drift lower and in fact this week we saw enough pressure to reestablish the downtrend that we've been in it seems like forever. And can we turn this market around? We should be able to but it just doesn't look like we're going to.
Pearson: What is the shot in the arm that would turn this market around?
Newsom: It's going to have to be some sort of huge, number one, we're going to have to see the investors come back into this market, this is one they continue to ignore. Number two, we're going to have to see domestic demand pick up again. You know, we're into grilling season now but the weather just has not been conducive to get outside anywhere. So if the weather will start to cooperate, domestic demand starts to pick up maybe this will give us a little bit of a spark, a little bit of hope here as we head into the summer.
Pearson: But nothing on the horizon --
Newsom: I don't see anything right now unless we just see some buying coming in on the idea that if all the commodities, at least most of the ag commodities that we look at, maybe cattle is viewed as a little undervalued.
Pearson: Alright, now as we look at feeder cattle, same dynamic playing out?
Newsom: Similar dynamic playing out but the short-term downtrend that we've seen established in corn certainly seems to be providing some support to feeder cattle. Those two usually play off of each other allowing that market to move up a little bit.
Pearson: Alright. Now talk to us about the hog market. That's been another nice little rally.
Newsom: It's been on fire, we've got very strong commercial buying coming in, good demand for the hogs right now. This is kind of what we were sitting back waiting to see if it would happen and it certainly has played out this spring heading into the summer. So as long as we can maintain that demand, as long as we've got relatively bullish fundamentals it looks like we're going to be able to continue to support this hog market.
Pearson: Now, a question of circumstances, cause and correlation, the run-up in the hog market did start around the same time the big Smithfield announcement happened. Is there a correlation there or causation?
Newsom: If there is it comes more from -- because there's all this talk that that will increase our export of hogs, of pork. We did see that headline come out and these markets are so headline driven. I do think it was a nice piece to throw out there from the investment side because now all of a sudden I think hogs are now viewed as this global market, a lot of room to play in this thing. So possibly some change in overall supply and demand. Definitely a change in the investment outlook towards hogs.
Pearson: Alright. Well thank you so much, Darin, appreciate you being with us tonight.
Newsom: Thank you, Mike.
Pearson: That wraps up this edition of Market to Market. But if you'd like more information from Darin on where these markets 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 again next week when we'll examine the market impact of the Federal Reserve's decision on long-term interest rates. So until next time, thanks for watching. I'm Mike Pearson. Have a great week.