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Market Analysis: Sue Martin

posted on August 16, 2013

Grain prices were mixed this week as wheat futures contracts posted modest losses while corn climbed higher on bullish government reports and a weaker dollar.  For the week, September wheat lost 3 cents, while the nearby corn contract moved 8 cents higher.  USDA’s supply and demand estimates and strong foreign demand stoked the rally fires in the soybean pits, where the September contract settled with a weekly gain of 65 cents. Nearby meal prices rallied more than $18 per ton.  In the softs, cotton had another good week as the December contract gained more than $4 per hundredweight.  In the dairy market, September Class III milk lost 14 cents while the October contract was off 9 cents.  Over in livestock, October cattle gained $1. Nearby feeders advanced 26 cents. And the October lean hog contract posted a weekly gain of $1.66.  In the financials, the Euro gained 5 basis points against the dollar. Crude oil rallied more than $2 per barrel. Comex Gold advanced nearly $60 per ounce. And the Goldman Sachs Commodity Index gained nearly 20 points to settle at 649.80.

Market Analysis: Sue Martin

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

Martin: Thank you, Mike.

Pearson: We've had a big news week internationally with everything that has been going on in Egypt.  Talk to me a little bit about how that relates to crude oil prices that we're seeing recently, the recent run-up we had this week.

Martin: Well, it's continuing to support the crude oil market.  In fact, we've seen higher highs here today.  And so the market is still pushing -- it hasn't been able to get back under $102 very easily.  In fact, it hasn't.  We continue to come back and kind of percolate towards the top side and I think that the crude oil market is a market that still could go higher.  You know, there's objectives of $115 to $120 so the crude oil market is probably one I would not want to be short.

Pearson: And as you're looking at that $115, $120 mark is it going to take additional risk premium to push us up to that level?  Or is it supply and demand concerns that could be continuing to push upwards?

Martin: Well, I think part of it is the concerns although, you know, when you look at this market it's the unrest in many parts of the world and I think that -- yet on the flip side you're also seeing some improvement in the U.S. economy, thought to be improving economy in China and also in Europe.  That too could be underpinning this market and kind of pushing us a little bit higher.

Pearson: Alright.  So things to keep a watch out for as you're at the pump.

Martin: Yeah, exactly.

Pearson: Alright.  Now, talk to us a little bit about -- this was a big week for reports coming out of Washington, D.C.  First of all, we had the world agriculture supply and demand estimate report come out Monday along with crop progress and all the other traditional ones.  Talk to us a little bit about what the trade was expecting and what we ended up getting.

Martin: Well, it was a big surprise in of the fact that everybody expected, myself included, I didn't think that the USDA would lower the yield with what crop condition ratings were standing at 64% good to excellent.  I thought they would probably improve the yield considering the fact that you had all the, for most practical purposes, 90-95% of the crop pollinated at the time.  So therefore the adage of once you make pollination that accounts for about 90% of your yield I figured they'd probably increase.  And so I was in that camp thinking we'd go from 156.6 up to maybe 158.  That isn't where I really think it is but I thought that's what the USDA would do.  And I'm more in the camp that we're under 150.  And 150 would probably be the best that I could think we are at.  And then on top of that, I mean, that was the shock.  Of course, the bean yield was dropped.  I think that was really legitimate.  They dropped the bean yield 1.9 bushels to the acre, still 3 bushels better than a year ago.  But the key here is, of course, the weather on both crops.  But the other thing that we failed to notice was that the USDA did not increase domestic consumption very much for next year.  And that would be thought to be a little on the negative side.  Still I think at the end of the day the big news too that helped drive the market and especially on the corn market, you know, you get a 25 cent rally on Monday from the lows and then you turn around and you break back down on Tuesday, make a new low by about a penny, three-quarters of a cent and then on Wednesday an inside small up day and then boom you're off to a race and we end up closing the week out ten cents higher.  I think that when you look at corn, prices are just too cheap in my opinion.  We got prices down here in August to the $4.50 level, took it down to about $4.45 and three-quarters.  $4.44 is a 6.8% retracement of the September 2009 low of $3.02 to the September high of 2012 of $8.49.  That's huge.  That's a big massive break, very supportive area.  We have our wave counts that we've talked about, $4.37 is a major one and so is $4.08, which I've been noted to say it's like the brick wall of China, we're not going to go through it.  I think, you know, if we come back down and we tag $4.37, fine, but maybe the extreme would be $4.22 to $4.28.  But the bottom line is there's a lot of uncertainty right now in this market.  Today, one little thing that was negative to corn was the announcement that the USDA made of the fact that they're going to go back to a program that was enacted in 2008 where they will go in and buy sugar from the producer here in the U.S. and turn around and give it, not give it, but sell it at a reduced rate to ethanol plants.  And they think that that could account for about 60 million bushels of usage in corn that would go to ethanol.  So there's a little displacement of demand for corn.  But at the end of the day I think we have to realize what is going on in China is huge.  Their weather is horrific, I mean horrific.  The southern parts of the country are just embroiled in heat.  Some areas 108 degrees.  The northern areas are flooding.  You know, it has just not been -- the north central plains has been getting an awful lot of rain -- it's just not, even though you've had that Typhoon Utor and they've also had 11 typhoons this year.  If they come out saying they've had a record crop this year we know they're lying.  And so, you know, I just think you're going to see, and you're already kind of seeing it, they're into many markets buying.  They're buying the majority of Australian wheat, in fact, it is expected that they'll kind of displace Egypt as the world's largest importer this year, this coming year of 2013-14 and they'll also probably become Australia's biggest client as opposed to Egypt was.  They're buying corn.  You know, look how much we've seen in bean export sales out of the U.S.  And it's interesting because every time, even on Friday we got another 100 and -- or 200 and, I think it was 284 million bushels and 126 to unknown destinations.  But it seems like every time there is an announcement to China, there also is one to unknown destinations.  It just is too uncanny.  I think that it's also China.  And with all the issues -- but even if you took these issues away and their weather, we have seen since I want to say maybe 2009, certainly before 2011, China's cotton prices were not attractive and cotton was trying to get the area of Manchurian, to get those people to produce cotton because they wanted them to have more of a viable income and that type of thing, even though they're up in the northwest corner of the country and the mills are clear down in the southwest part of the country, or southeast I should say.  So infrastructure is a problem.  They still supported, came out with support prices or subsidies on cotton.  Well, what happens is the world prices fall after the 2011 highs and consequently the millers and everybody that needs cotton are buying from the world market.  China owns about 80% of the world's stocks because of the users buying from world stocks and China taking in their own domestic cotton and putting it in reserves and letting it accumulate.  Now, China wouldn't keep this up unless there's an ulterior motive, just like they had all these cities that were sitting empty and everybody kept saying, gosh, they've got all these cities, you know, sitting empty, they must be just trying to put people to work.  No, they were very long-term oriented, they're planning on moving 50 million peasants, farmers off of their land and into cities.  Well, as they move into these cities, one, they're going to get some money.  Two, those that can work will be working.  If you have an economy that is starting to percolate a little bit in China -- Europe and the U.S. -- maybe they're thinking these mills will be running more aggressive, they're going to need this cotton.  But it isn't just cotton, it's going to be many other commodities besides that and we’re already seeing it.

Pearson: Now, with all of that in mind, we didn't see wheat really take off this week looking at the large, global supply.  Do you see that changing any time?  What is your advice for wheat producers out there this week?

Martin: Well, wheat needs, you know, wheat is premium, pretty premium to corn and so without corn moving and getting turned around wheat is a little bit of a struggle to turn and move higher.  Many times it is October to November before you start to get that market percolating anyway.  And so I think wheat has got an issue here.  You know, all focus is on the corn and they seem to move these spreads around and, of course, corn was record short in open interest.  So when that happened, when these reports came out and then FAS comes out, or FSA I should say, comes out and lowers the, or comes out with their prevent plant acres everybody immediately says, oh, that's that many acres off of harvested acres.  No, it's not because maybe 80, no more than 86% of the farmers are in crop insurance but the rest of them sit out there and that displaces the situation and FSA is talking about what is certified.  You know, there may be some yet that they haven't worked through all the numbers.  If they had they wouldn’t be coming out in September on the 17th and again in October.  So it will be October before the USDA is going to address this again.  And we do think that acres will drop a little bit.  Remember, they didn't change corn acres at all.  And so we think that maybe corn acres can drop but probably no more than a couple hundred thousand, maybe by the USDA --

Pearson: Okay, they won't take away the 3.4 million prevent plant that was put out there on Wednesday.

Martin: No, I don't think so.  If you go back and look at the last two or three years there has been big discrepancies between FSA and the USDA.

Pearson: Okay.  Now, looking at that, the idea that we could be seeing reduced corn acres here in the next month to two months, how should producers be handling sales through this fall?

Martin: Well, when I think the price has gotten too cheap that means don't sell.  I think what I would have to say to producers, first off, if you missed some on old crop, if you still have old crop corn in your hands and you missed the rally of the summer and you missed the basis levels, which was fabulous, they fell next to nothing, now in areas they're coming back, $1.50, $1.70, I even heard of some ethanol plants at $2.00.  So if you're in an area and the basis is coming back and you're bullish, obviously you must be bullish because you're hanging on, so y recommendation would be move that corn to the market, get rid of it and move it to the market and take that basis and you're going to price enhance yourself because you can go back on the board and reown it.  So I would do that.  For producers who feel they have to make sales here, if they really think they've got to, then I would recommend going back in and buying the short-dated calls to kind of get you through the fall in case there is a frost.  If there's no frost we may turn around and come back down and look at these lows.  So I would say those short-dated options, they're pretty awesome.  I would take a look at those.

Pearson: It would be a good way to sort of hedge your bets as we head into this uncertain weather season we're going to have this fall. 

Martin: Exactly.  And that is also one thing I would say for producers is so many times I get this recommendation -- because we did put out recommendations this week on this rally up towards $12.71, we said take 10% new crop beans, get them sold.  And, you know, one comment I had from one producer said, well, how do I know what I'm going to have?  What if it frosts?  Well, sell them, go buy back those calls, those short-dated calls.  They're based off of November futures.  If you buy say the October they expire in September, I think around the 21st and those will be -- and if we get a frost around the full moon of the 19th, well, the market explodes, okay now you might at some, get exercised into a November bean contract.  So I would say be sure to protect yourself back and that will give you the peace of mind to be able to make that cash sale just in case something goes awry that we turn and flip back to the downside.

Pearson: And you mentioned that is the advice going to corn and bean producers, since we do have such a bizarre year potentially yet ahead.

Martin: And, see, beans have been so sideways all year and technical indicators are very wound tight, you know, the boundary bands and that type of thing.  Usually that is indicative of a move coming.  And on top of it you have the beans as the tightest crop you have of the two and they've been bidding for beans and can't even get them bought.  So, I think we're probably, if the truth was known, next to being out.  But it doesn't matter, they aren't going to admit it and for the fifth month in a row we came out, the USDA came out with 125 million bushel new crop carryout, or old crop I should say.  So that said, they just aren't going to change it.  But in the meantime there is another thing that is coming up behind all of this.  Our year is less than desirable and then we look at this fall and, of course, will we get a frost-freeze, I don't know but we're going to be pretty chilly.  And you've had several weather sources already predict very cold weather for this fall and then an early winter besides, which isn't good.  And so what is going to be interesting is everybody is so focused on our weather but what about South America?  All they started talking about was the record crop they're going to have because they're going to go backwards in corn production because the prices are so low there and they are discount to us but they're going to plant the corn.  They're going to plant beans.  And beans will go in at the expense of cotton maybe, wheat, but certainly at the expense of corn.  And so what we have to watch is, is that we're into a little mini La Nina and those spell bad trouble for South American production.  Usually it turns dry in Argentina and southern Brazil, wet to the north and their weather turns volatile.  So we need to keep an eye on that because usually that, what could happen is we could have a reduced crop here, better than a year ago, but a reduced crop here and turn right around and come on the back side and have South America with some disastrous problems too.  And Argentina is already dry but they're very cool and their crops are not doing anything.

Pearson: So really quick to wrap up beans, $12.70, $12.71 price to start looking at making some sales.

Martin: I would and then the next level will be $13.13.  $13.13 is a resistance from the trendline of the $14.09 and three-quarters contract high that was made a year ago for this year's November beans.  It is also, good grief, it's like three different things.  It's the three quarterly month moving average and so it's going to be some resistance there.  And then if you can get through that then the next thing is getting through the June highs, which is $13.35.  We have to realize $12.97 was the high in July.  We've not only been but, what, 25 cents away.  So this has been a wonderful rebound in the market.

Pearson: Alright.  Well, now talk to us a little bit about cattle.  We've been seeing the live cattle futures climbing.  Cash cattle trades still hovering in that $119, $120.  What does the future look like for fat cattle?

Martin: Well, if we don't get fat cattle moving then something has got to give with feeder cattle because they're going to be getting too high priced and producers won't be enticed to buy them.  But weather may hold a factor here as well.  You know, if we get some tropical storms coming into the Gulf, depending on where they hit, could bring rains up in through Texas and maybe into Nebraska, possibly reach into the western side, southwestern side or so of Iowa.  But the key is here, is that if these pastures can show improvement, you get these feeders are high priced enough now that all of a sudden -- and we know that supplies are going to get tighter, I think cow slaughter is going to drop off here as we get more into fall.  And on top of it if we can start percolating this fat market I think we'll see demand for feeder cattle step up to the plate and we'll see good, you know, the wheat pastures look like they're already off to possibly a good start with all the moisture they've had.  So I think we're going to see a demand for these feeders come into fall.  So I look at the cattle market and we realize that at some point here going beyond October we'll probably have some pretty good numbers I think coming to market in October.  But once we get past October we're going to, as we go towards February and towards April, we're going to tighten our meat supply a little bit.  And I think world demand is going to be good for it and not to mention that if the economy is growing in the U.S., truly growing and you have less people unemployed and you have things percolating in Europe and over in China, demand for beef might be pretty darn good.

Pearson: So future looks pretty bullish for cattle.  Do you see the same thing for hogs?

Martin: Well, here's the kicker. You know, I could see -- there's two ways we can go with this hog market.  I could see a reason to be putting on some hedges on the October futures.  I probably would go to the put options and the reason I would do that is because we've had such a good run here in August and once we get into September if we take out the August highs then there's a tendency, in fact, the first time I was ever on Market to Market I talked about hog prices going up like $50 in December, first time ever, and it was off of this higher highs in August followed by higher highs in September makes higher highs Oct, Nov and December.  And it could be that we're looking at something like that.  But the long-term picture for pork looks good because if you look at China's weather in that southern part of China, a big hog producing area, in fact, they're very key and they've had extremely high temperatures or hot temperatures.  The conception rate should be lousy.  And I think their pork production is pigs per litter, whatever you want to call it, is going to go down.  In the meantime to the north they're floating.  Heilongjiang is another province that is very key and they've just been cold and wet and so much moisture that I think they're having issues too.  So I think it's going to be a good outlook for producers.

Pearson: Thank you so much, Sue, appreciate you being with us.  That wraps up this edition of Market to Market.  But Sue and I will continue our conversation 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 feature another installment in our continuing series on farm succession plans.  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 dollar economy feeders gold live cattle markets Mike Pearson soybeans Sue Martin wheat