Grain prices were pressured by the global equity and commodity sell off late this week, but not enough to offset gains in earlier sessions. For the week, July wheat gained 17 cents, while the nearby corn contract moved about 7 cents higher. Soybean, however, endured another losing week as the July contract declined by 23 cents. Nearby meal prices followed suit with a loss of $3 per ton. In the softs, cotton gave back all of last week’s gains – and then some -- as the December contract posted a weekly loss of nearly $5 per hundredweight. In the dairy market, July Class III milk lost 28 cents while the August contract declined by 27. Over in livestock, the August cattle contract gained $3.28. August feeders advanced by $3.50. And the July lean hog contract posted a weekly gain of $1.73. In the financials, the Euro lost 206 basis points against the dollar. Crude oil declined by $4.38 per barrel. Comex Gold lost nearly $100 per ounce. And the Goldman Sachs Commodity Index moved more than 20 points lower to settle at 610.55.
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: Thanks, Mike, nice to be here.
Pearson: Glad to have you. The big news this week obviously been Bernanke and the Federal Reserve, the FOMC minutes. Talk to us a little bit about your anticipation as to what effect this global equity sell off is going to have on the commodities as we look forward.
Gold: Well, one of the things that we're going to see is, as some of these other markets get hit, the bond market took a big hit, crude oil, gold, silver, a lot of commodities across the board, it's going to create margin calls which could create more pressure on the grains. Long-term higher interest rates and a lower stock market I don't think is necessarily going to be helpful for the grain markets. More importantly, the effect of the U.S. dollar. We've seen the Australian dollar break significantly, the Brazilian real break significantly against the dollar. And that is going to give our competitors a bit of an advantage with those cheaper prices out here. So I think between the inflationary aspect of the interest rates moving higher and maybe the economy getting a little bit weaker here I'm not sure it's friendly to the grain markets.
Pearson: Now, one thing we've talked about on the show for the past several weeks has been the fact that there just hasn't been any interest in managed money in the commodities due to the returns they're able to get on the stock market. Would this shift potentially encourage more managed, fund money to look at commodities as an investment?
Gold: You know, honestly I don't see that. As a matter of fact we see the exact opposite. There was an announcement today that one of the big commodity firms was going to be backing out of their commodity trading activities, we've seen managed money getting tougher and tougher to come into these markets. These funds have taken, some of them taken a pretty big hit in these markets and the volatility that we've seen. When the dollar goes from 84 to 80 back to 84 back to 80 back to 82.5, when you see crude oil go from 93 to 98 back to 93 and gold taking the devastating drop it has taken, silver is back under $20 an ounce for the first time in three years, gold is under $1300 an ounce for the last time in three years. So these funds have taken a beating and I think it's going to be tougher and tougher to get that money back into these markets.
Pearson: Sit on the sidelines and lick wounds for a little bit.
Gold: I think so.
Pearson: Alright. Well now let's talk about the wheat market. We did see a little jump in wheat prices on the week. Talk to us a little bit about what is going on there.
Gold: Well, I think there's two factors. First of all, the trade got excited on Thursday because there was an announcement that China bought 200,000 metric tons of French wheat. I didn't particularly think that was that friendly for the U.S. but we rallied 20 to 25 cents across the board in the wheat on the thoughts that China may be back in the market for more wheat. Until we actually see them buy U.S. wheat I don't know if I'd get too crazy excited about the bull side of it but it helped. The other problem with the wheat market is the yields in Kansas, some very spotty yields. We've seen some of the early tour results coming in at 40 and 50 bushel wheat with good test weights. We're hearing other stories of 10 to 20 bushel wheat in Kansas. So the hard wheat is having some troubles. The soft wheat looks phenomenal and the yields could be very, very impressive, particularly east of the Mississippi, Illinois, Ohio, Indiana could have some really big soft yields. Combine that with larger crops we're looking at a 38% increase in Russia, about a 25% increase in the Ukraine, Australia's crop looks to be up around 15-20%. So we're going to have plenty of competition, there's going to be a lot of exportable grain out there so I'm just not sure that we're going to be able to sustain this as we move forward. But if anything I'd probably want to be long Kansas City and maybe short Chicago in here.
Pearson: Alright. And until we get some confirmation, until harvest starts rolling and we see then umbers coming out of the fields.
Gold: Yeah, that's been the impressive thing, wheat has had this ability to rally right in the middle of harvest so that's a little bit friendly. My advice to my clients has been if you're selling wheat off the combine buy back some call options. I wouldn't buy the calls back in Chicago, I'd buy the calls back in Kansas City, even if you're selling soft wheat I'd buy back the hard wheat calls. But I think that makes some sense to try to reown it at these levels and see if we can't get a bounce out of it.
Pearson: Certainly. Now let's take a look at corn. As we look at the old crop corn situation we do have the USDA stocks report coming up next week. Talk to us a little bit about what to anticipate in this upcoming week old crop wise.
Gold: Well, old crop, you know, we know how tight we are. We look at the basis here in Iowa, 50, 60, 70 over for old crop. Guys are having a tough time sourcing grain out here. We know old crop stocks are incredibly tight. That being said we've had a gap in the July corn chart at $6.76 since the March 28th report. We went up and filled that gap, I think it was on Wednesday, but then closed well under it on Friday. So I’m not sure that's necessarily a friendly signal to go up, close into the gap, close over it and then come right back under it again. But it is really, the old crop July situation is going to be a function of that stocks report at the end of the month. Most people believe that we're tight, I believe we are tight but the market hasn't really had that explosive energy that you would think you might see as we're getting closer and closer to running out of these stocks.
Pearson: Alright. So it might be a wait and see come the end of next week.
Gold: Yeah. Absolutely.
Pearson: Now as you look at new crop what is your anticipation there?
Gold: My anticipation on new crop is we're growing a lot of grain in this country. Yes, some of the crop got in late. Yes, we may have missed some of the optimal sun rays, we're now at the solstice as of this weekend and we're going to be seeing a decrease in sunlight and people want to keep telling me, every agronomy report I see, a lot of the farmers keep telling me we can't not be growing big yields with how late the crop went in and with the problem now that we're on kind of the back end of the sunlight. I would disagree. I believe we're still capable in this country of growing a huge, huge corn crop. And when it's all said and done, yes, there are going to be some places that are going to be tough, parts in Iowa here, parts in Illinois, Minnesota, Wisconsin are going to be tough. But the weather over, the July forecast now that the government just put out shows the southwest being hot and dry, the rest of the country in pretty normal shape. If we can grow 125 bushel corn in the worst drought in U.S. history, can we grow 165 bushel corn even though it's late? In my opinion we can.
Pearson: So, now might be a good time to look at some sales?
Gold: Not only looking at some sales, you know, we don't want to get too ahead of ourselves until maybe after July 1st. Take a look at your crops, if you've got the crops out there July 1st then you certainly want o be looking at some sales or at least getting some put options underneath to protect that down side.
Pearson: Alright. Well now let's take a look at soybeans. We've been on a two week slide on beans. Where do you see this headed?
Gold: Well, people want to tell me, and I don't necessarily disagree, that the real tightness is in the old crop bean situation. There's been a key number of $15.25 in the July contract, had a lot of trouble getting over it, we closed over it a couple of days then right back under it, closed under $15.00 on Friday. We couldn't even get the July contract to close at $15.00 as the options went off the board. Normally they try to get the puts and calls to expire worthless and $15.00 was that benchmark, they couldn't do it, we closed under that. If we start closing under where we closed on Friday again it's telling me that maybe things aren't as tight as some people would say they are. I'm a firm proponent in that if this old crop grain, corn and beans, isn't any good the new crop makes it tougher. And one of the things we've seen in both corn and beans has been the funds roll out of the July contracts, into the new crop now, so now they have moved those long positions, I've been telling my clients that we firmly believe that every one of these rallies that we've seen on these rolls with corn at $5.50, $5.60, $5.70, with new crop beans at $13.00, $13.20 has been a great marketing opportunity to get something sold, to get cheaper puts bought, to do something because now these funds are long the new crop. If we have the crop there's a lot of risk to the down side in my opinion.
Pearson: Alright. Take advantage of these little rallies as they come.
Pearson: Now, let's take a look in the livestock market, particularly in cattle. It's been a long time since we've had good news to talk about in cattle. This week we did see a little bit of a rise. Where do you see us headed in the fat market?
Gold: Well, we've been struggling, we keep ratcheting down and making lower lows. We try to rally it only to make another new low. We've held a low here now for the last several weeks. We try to test it again early in the week as the cash prices were down around $120 in that area, we were able to move it today significantly and even above the trendline of both the feeder cattle and the fat cattle. So even though the report on Friday wasn't necessarily friendly, it was maybe a little bit skewed to the bearish side. If we can close strong Monday, considering what is happening in the grains, considering what is happening in the stock market, if we can do that I like this cattle market a little bit in here. As long as we hold the lows.
Pearson: And a strong close you'd be looking at above $120.5, $121?
Gold: Over $121 I think would be a good benchmark in here. And regardless of where we're closing we're on such a hard break on this cattle right now, if you are selling cattle I'd certainly look at reowning some call options, you know, spend a buck, buck and a half, try to keep the up side open in case we can get a six, seven, eight dollar rally out of this thing and maybe turn this thing around hopefully.
Pearson: Hopefully. And now as we take a look at the feeder cattle market we did see lower corn prices being a little bit supportive of that and now we’ve got hopefully a little better returns on the fat market. What's your thoughts on feeders?
Gold: Same thing on the feeders. We've been under pressure, we keep trying -- that $150 level has been kind of a key level across the board. We had a good close on Friday, again, over the trendlines, we've been trying to establish those lows, we've been able to hold it this time and to close over that trendline. So, again, if we can get another good Monday close with everything else that is going on in the world I would say that's pretty positive.
Pearson: Now, how long lasting do you see a rally like this being? You mentioned touching the highs then dropping to lower lows. Is that a risk here in this little rally?
Gold: It has been over the last six months, every one of these rallies we have seen the new lows. But this is the first time we've been able to really dig out the trendline. So that encourages me in here. The high hog prices also gives me some encouragement. We're seeing good Chinese demand on the hog side, Smithfields, the sale of Smithfields, that really in my opinion was the impetus to put July hogs up around $100. We're having all kinds of trouble and have over the last six months of getting it to close over $101, in that area. We made a new contract high, backed off. But my point here is that you've got high priced pork and what's your preference, buying cattle at $120 or buying hogs at $101? Well, I know a lot of people that would prefer the beef at that kind of price relationship. So I'm just not sure, yes, there's a lot of long-term demand from the Chinese on the pork market but the beef market, you know, I kind of like it on these lows in here.
Pearson: Alright. Now, quick update on the pork market, you said that $101, is that within striking distance?
Gold: You know, that is really critical in this July contract. We've gone up there and tried to do it at two different timeframes now, over a broad period of time. If we can close over that $101 a couple days in a row then I'd say we've got a little bit of potential to maybe run it up to $110.
Pearson: Alright. Things to look for. Thank you so much, Mark.
Gold: Thank you, Mike.
Pearson: 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. Be sure to join us again next week when we'll examine the market impact of USDA's acreage report. So until next time, thanks for watching. I'm Mike Pearson. Have a great week.
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