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Market Analysis: Darin Newsom

posted on August 9, 2013

Grain prices declined this week as the trade pondered private estimates on U.S. crop production ahead of the Agriculture Department’s official report next Monday.  For the week, September wheat lost 27 cents, while the nearby corn contract moved a dime lower.  Soybeans improved modestly as the September contract settled with a weekly gain of 6 cents. Nearby meal prices rallied more than $5.50 per ton.  In the softs, cotton posted a solid move north as the December contract gained nearly $4 per hundredweight.  In the dairy market, September Class III milk lost 20 cents while the October contract was off 28 cents.  Over in livestock, October cattle gained $2.40. Nearby feeders advanced 47 cents. And the October lean hog contract posted a weekly gain of just over a buck.  In the financials, the Euro gained 54 basis points against the dollar. Crude oil declined by nearly a dollar per barrel. Comex Gold advanced $2.30 per ounce. And the Goldman Sachs Commodity Index declined by more than 5 points to settle at 637.05.

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.

Pearson: We're still in that bearish trend, it seems, across the board, particularly this week in wheat as we look at September and December wheat contracts.  We're down roughly a quarter, a little over.  What is going on in the wheat market?

Newsom: Well, the biggest thing is in wheat and the other grains there's just no interest in buyers right now.  We've seen some headlines come out for the wheat market that are more bullish but we just cannot maintain any type of buying or any type of bullish momentum in this market.  And so what happens is it just keeps grinding lower.  We went to another new low this week.  It certainly looks like we're on that path.  There's no one really stepping in.  So can we go lower next week?  Absolutely.  Now, at some point this thing will turn around but there's just no one interested in putting the brakes on it at this point.

Pearson: And is there just no one interested in American wheat?  Are they buying sources from other countries?  Is this a global supply --

Newsom: We're seeing, yeah, we're seeing global prices coming down but so much of that has to do with the markets traded here in the United States.  Now, there's wheat moving.  I mean, every day you see some tenders, every day you see some business being done.  The U.S. export business has actually picked up over the last couple of months so that is certainly helping to support the market to a certain degree.  The biggest thing is there's -- the investment side of the market, not only in wheat but many other commodities, just isn’t interested in being long.  They're selling.  They've actually got a net short futures position in the wheat market and they're not interested in buying that back and that continues to put pressure on the Chicago wheat.

Pearson: So hold off, wait until we start to see the traders turn this thing around and break the spell.

Newsom: And this is going to be a common theme as we talk about the grains is, you know, what do we do at this point?  Do you sell when we're in this big of a hole, when the markets are this far oversold?  But after Monday this could look like a good price and things could be much lower.

Pearson: Okay.  A little downer of a harbinger of things to come.

Newsom: Yeah, there you go. 

Pearson: So you're not bullish on Monday's report.  If we do see a big price spike you think it will be to the downside?

Newsom: You know, I sit there and I look at all the different numbers and all the different categories of information, quote, unquote, that's going to be coming out.  And I can't think of anything outside of possibly soybean ending stocks that could be bullish.  Other than that, you know, unless we've priced everything in with this month long sell off now it looks like the market is going to want to be bearish once again when this report is released.

Pearson: Okay, in general producers looking to protect themselves, report comes out Monday at 11, anything to do Monday morning in case we do roll into the sustained downturn?

Newsom: You know, the CME has a number of short-dated options.  You can go short-dated new crop options, you can go nearby options and so on.  People might want to take a look at that on Monday morning because it's going to, it should be relatively quiet.  Now, what we have seen over the last couple of months is a lot of activity, you know, in a couple hours leading up to the report.  So it's almost like there is some front running starting to build in these markets.  And so it will be interesting to see if that occurs again tomorrow.  But there should be an opportunity,  if someone wants to get some late protection on to look at some possible put options.

Pearson: Okay.  Well let's talk corn a little bit.  We did see what we thought might be a break in the bearish trend yesterday, a couple pennies up on corn, today we reversed.  What is your thought on the corn market?

Newsom: Corn doesn't have any friends.  It's in a strong downtrend.  It looked like at one point this week it was stabilizing and it could try to rally but when all is said and done we closed lower for the week, we closed lower on Friday and this is the market where, you know, I think everyone is pointing to the most. This is the market that everyone is pointing to the most that could see the most bearish news on Monday.  Production over 14 billion bushels, the possibility of ending stocks coming in for 2013 over, '13-'14 over 2 billion bushels.  There are a lot of bearish possibilities right now for the corn market.  And I've been asked, what is it going to take to see a bullish response?  Maybe the report not being released would be the biggest thing.  You know, something happens where it just doesn't, the numbers just aren't known, that could create enough uncertainty maybe that sparks some buying.  But outside of that I just don't really see anything that's going to provide support to corn.

Pearson: That being the case, as we look at continued strong ethanol production, relatively strong exports or at least beginning to pick up, is there hope down the line?  Are we going to have to wait to get through harvest or into harvest before we might see a bullish trend?

Newsom: You know, it's possible but if we have production to the level that everyone is talking about, and that's a huge question mark at this point, the next issue is how much is demand still going to be cut?  Are we overestimating demand right now meaning that we aren't going to see it build back after losing ground these last three years due to tight supplies, tightening supplies?  So that's the real threat is that demand doesn't come back to the degree that everyone is talking about at this point.  And if we don't have the demand that we think we're going to and we have a larger crop, say 14 billion bushel plus, all of a sudden we've got an abundance of corn available and that is going to really weigh on the market.

Pearson: Okay.  Well let's talk soybeans.  We did get good news in soybeans yesterday, strong export sales to China, they've got continued hot weather over there, crop outlooks not looking so good in China yet beans continue to -- well we did see a little gain but we sold off today.

Newsom: Saw a little gain, we saw, you know, Thursday had a solid rally but by and large the market is struggling.  And we have seen good export news, particularly in the new crop market.  Week in and week out we get the headlines and the following week we get the updates on the export sales and shipment reports.  But, again, just as with these other grains that we've talked about there is just no interest in buying these markets right now.  And even with a bullish fundamental outlook, even with, you know, commercial traders still trying to own some soybeans to get them shipped no one, I mean, it's just not enough to provide support.  And so when all is said and done, the dust settles, the market has worked lower again.

Pearson: Now, the acreage recertification they're doing on soybeans going to be a market mover do you think?

Newsom: Well, it just means it's just another month when we really don't know what is planted or what is going to be harvested.  So there will be further revisions as the year goes along.  I think the biggest thing will be new crop ending stocks to see if that actually comes in below 200 million bushels, which is what some are suggesting.

Pearson: Okay, keep our eyes open.

Newsom: Exactly.

Pearson: Now, as we take a look at the livestock market, as we look at fat cattle we're seeing some strength in the market this time.  Is that being reflected in the cash trade?  Are you sure?

Newsom: You know, it sounded late in the week like we were seeing some buying in the cash but what we're really looking at right now is the possibility of a much stronger cash market later this summer and then later this fall.  So it looks like the market is really starting to get going.  We had some headlines come out this week that looks like it's going to provide some support and if nothing else, if it's going to provide this short-term boost and then maybe when things start to calm down a little bit then we see the markets pull back somewhat.

Pearson: Now, the headlines you alluded to, Tyson meat not slaughtering after September 6th, cattle fed, the Zilmax beta-agonist and the concern is that that's going to reduce the supply of cattle across the board.

Newsom: It's going to stretch it out a little bit.  So the beef isn't going to be readily available on hand.  I mean, they're going to hold them in the yard a little bit longer to get them up to weight or they're going to be selling them at lighter weights.  And so it's going to reduce, possibly reduce short-term, short-term beef supplies.  And that is why we saw the October contract really react more so than many of the deferreds.  Strong commercial buying coming in, some investment buying as well on this news which is the scary side because if, you know, once this story gets old and they start to work through some of the particulars that same group that was buying could turn into sellers again. 

Pearson: We get that strong uptrend we saw this week turn into a strong downtrend if they decide to exit in a rush.

Newsom: It's always possible, yeah.

Pearson: Alright, now looking at this stronger fat cattle trade that's giving some more hope to feeder cattle producers because we are seeing feeder prices continue to climb.

Newsom: Right.  And another big thing for the feeder cattle market is this lower corn.  So you've got the strong live cattle market, you've got a weak corn market, that is sparking this renewed buying interest in feeders, something we haven't seen for a while and it's really starting to catch fire.  It's really starting to move pretty well.  So, again, as long as we can keep the corn market under pressure and as long as this live cattle rally wants to hold together I think feeder cattle are going to perform pretty well.

Pearson: Now, if we roll through, as you were mentioning, October, we get the lightweight beef into the system, start to put some pressure back on fat cattle prices, would that have a significant effect on feeders or are we primarily being driven by corn at this point?

Newsom: I think the biggest player right now is corn.  You know, if there's talk of going back down, I mean, not talk, there is talk of the market possibly going back down to 2008 lows.  If we see that down in the low 3's, you know, your feeder cattle market is going to look pretty good.  I think it's going to stay well supported.  If somehow corn puts in a low in here and starts to work back higher, starts to find some buyers, you know, some non-commercial short covering, some increased exports once we get into the New Year, maybe at that point that puts a top in the feeder cattle market.  So I think a lot of it is going to hinge on what happens in corn over the next few months.

Pearson: Where this December corn in particular ends as we roll into harvest.

Newsom: Absolutely, right.

Pearson: Now let's talk about lean hogs.  Been a compelling story, we've talked about it week after week, it continues to climb this week. Déjà vu all over again, we're up another buck.  How high can we go in hogs?

Newsom: You know, the hogs look like they just want to keep moving higher.  They're well supported by the cash market.  We've got good demand for the hog, for pork.  So right now it looks like maybe we want to test some of the highs that we saw earlier this year.  The October has got a nice base building under it. It's not just one of these spike rallies that fall apart.  You know, it's going up and it's finding new buying and it is continuing to push higher.  So it looks to me like it's a market that is gaining strength, it's gaining the right kind of strength so in other words coming from the cash and commercial side.  I really don't see this thing breaking.  Of course, hogs can be hogs and at any time they can change their mind.  But I don't really see it breaking any time soon.

Pearson: And, again, primarily what is going to be the driver?  Are we looking at corn prices again as the main --

Newsom: Partially.  But the biggest thing that I see in the hog market is as long as we can keep a strong cash market underneath it, that plays such a huge role in the livestock but in hogs in particular.  So certainly keep an eye on the cash hog market.

Pearson: Alright, keep an eye on the cash.

Newsom: That's right.

Pearson: Thank you so much, Darin, appreciate you being with us here tonight.

Newsom: Alright, thanks, Mike.

Pearson: That wraps up this edition of Market to Market.  But Darin and I will continue our discussion and answer some of your questions in our Market Plus segment on our website.  You'll also find audio podcasts and streaming video of our program as well as links to our Twitter feed and Facebook account exclusively at the Market to Market website.  Be sure to join us again next week when we'll examine the market impact of the Agriculture Department's latest estimates on supply and demand.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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Tags: agriculture analysis cattle commodity prices corn cotton Darin Newsom dollar economy feeders gold live cattle markets Mike Pearson soybeans wheat