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Market Analysis: Virgil Robinson

posted on August 23, 2013


The fact that crop maturity is behind last year and the Chinese were buying grain overshadowed Midwestern showers and promising scouting reports. For the week, September wheat gained 4 cents, while the nearby corn contract moved 22 cents higher. Tight inventories served to push old crop soybeans up 82 cents. Nearby meal prices increased almost $25 per ton. In the softs, cotton lost what it gained last week and then some as the December contract fell more than $9 per hundredweight. In the dairy market, September Class III milk lost 84 cents while the October contract was off 29 cents. Over in livestock, October cattle fell $1.20. Nearby feeders lost just $1.00. And the October lean hog contract posted a weekly loss $1.62. In the financials, the Euro gained 47 basis points against the dollar. Crude oil fell almost 90 cents per barrel. Comex Gold advanced $24.80 per ounce. And the Goldman Sachs Commodity Index lost almost a point and a half to settle at 648.50.

Market Analysis: Virgil Robinson

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

Robinson: Thank you, Mike.  Nice to see you.

Pearson: Let's get right into it.  Let's talk wheat.  Where do you think we are sitting -- crop quality condition report and worldwide stocks -- where do you see this wheat market headed through fall?

Robinson: Well, I think a quick review of supply and demand is appropriate here I think, Mike.  First, the recent WASDE is forecasting that all wheat varieties globally we will in fact enjoy record production.  Now that is part of the discussion.  The other part is they are also forecasting an increase in disappearance to the extent that the stocks to use ratio, which you often times hear us use, which is kind of a proxy for supply, the bigger the ratio more supply, smaller the ratio theoretically smaller supply.  Actually declines globally as well as in the U.S.  So I'm at wits end here to explain the depth of the decline here in wheat futures particularly since we've seen a real good start to our export program this year.  Bottom line I think it's a poor place to finalize the price of soft, hard and our spring wheat.  I would defer that, if one can, to a later date.  I think there will be better opportunity.

Pearson: Now in your opinion, as we look at the shrinking stocks to use ratio over last year, is that primarily a consequence of high priced corn and feed producers switching to wheat?

Robinson: Yeah, I think that's some of it, Mike, and I think it has improved diet including some different pastries and various items of that nature that have increased wheat disappearance.  But certainly soft red wheat spent an extended period of time below the price of corn.  And in my mind there was no question in select areas that captured the feeder's market.

Pearson: Certainly, certainly it was good to have something to --

Robinson: Yeah, and that price differential has just this week again realigned itself.  Soft red wheat is only a few cents above corn now in select markets.  So it has kind of, again, reentered that picture as a feed ingredient.

Pearson: Alright.  Now in wheat we saw a few cents increase on the week.  Soybeans, big story, old crop and new crop both had substantial up weeks.  What do you attribute it to?

Robinson: Well, the crop year is going to end now the end of the month, Mike, so we'll be concentrating on 2014 here in the very near future when you refer to new crop.  The Chinese continue to buy soybeans, not only from us but from other sources, particularly in the southern hemisphere.  The old crop supply I think is well documented.  It is relatively tight, Mike, and there is obviously some concern about recent weather and its effect on yield, which I think was documented by the Pro Farmer Tour this week.  You know, the wheat yield as well as the harvested acres, both those factors remain moving targets, as they do in corn.  So there is concern in next week's weather forecast, at least here on Friday evening, is concerning with regards to some type of dome system or dome formation covering much of the middle part of the country and creating some hot and generally dry conditions.

Pearson: And now is that especially a concern this year with the lateness of the crop planted?  I mean, is the market really going to be trading that next week?  Is there anything on the horizon that they might trade other than weather?

Robinson: You know, historically the month of August, the first part of September is the pivotal time for creating soybean fill and pod, excuse me, bean size and other vital factors to production and this year clearly will be much the same extended into I think much of September.  So, you know, if we'd happen to have a wonderful growing season in September and avoid an early frost throughout the primary corn and soybean belt, yields could certainly change from what Pro Farmer found and they did note that with the variance factor plus two percent either way from what they forecast today and I think plus one percent, plus or minus one percent in corn.  So they have noted the volatility that weather yet plays in this marketplace.

Pearson: And the trade is just going to continue to focus weather, weather, weather until combines start to roll and we start to see what the yield actually is.

Robinson: Yeah, I think that's probably true, Mike.  As mentioned in your pre-report here the Chinese continue to be a dominant factor in soybean purchases and they have aggressively acquired bean inventory, not just for immediate delivery but for delivery in the future.  So, you know, perhaps there's some concern about the size of their crop or clearly their economy is shoring up, beginning to firm, beginning to be more consumer oriented and I think the prospect there regarding agricultural commodities and other goods and services remains pretty darn good.

Pearson: So the demand picture looks pretty bright for soybeans.

Robinson: Yeah, it does from my perspective.

Pearson: Well, now let's talk to us about corn.  We did see another run up in prices this week, same weather concerns as we're seeing in beans.  Does the demand picture look as solid on the corn side as it does on the bean side?

Robinson: Well, if we were measuring that prospect by export business and export sales, not so good.  Cattle on feed report this afternoon, Mike, fewer cattle placed last month and quite a few less cattle in feedlots at present versus one year ago.  So from an animal consuming unit perspective there's some concern there about protein disappearance.  Now, on the other hand there are indications that the hog herd is beginning to grow albeit quite slowly as well as the poultry industry.  So we've got some good news in terms of protein consumption in those two camps.  A little more concerning in the beef in the live cattle markets.

Pearson: Now with crude oil prices being where they are and RBOB staying relatively high, is ethanol going to be an active consumer of corn through the fall and into next year do you think?

Robinson: Yeah, I think, you know, again, we have the blend issue that looms here and what could potentially be some adjustments from the EPA regarding mandated usage.  Now, I can't speak to that issue because I don't know and then secondly even if I did it wouldn't be the correct domain.  But that is a concern moving forward.  The value of our dollar regarding the potential of perhaps exporting some of that or continuing to export that product remains a good, strong possibility.  So, regarding usage, at least for the immediate future, Mike, I think we'll probably use something approaching 5 billion bushel of corn to produce alcohol, or ethanol, in the up and coming, the new crop year, '13-'14.

Pearson: Okay.  Now, you touched briefly on the cattle on feed report out on Friday.  As you mentioned, lower placements.  Any shockers in there?  How do you think the trade will interpret the report come Monday?

Robinson: Well, the number placed on feed and the total number were well below pre-report estimates.  So if that serves as a shock then so be it.  You know, calls shortly after the report were out for higher cattle futures come Friday and I certainly wouldn't dispute that.  I think equally as important, however, is the fact that when measuring disappearance, which is difficult to do, I often times will refer to cold storage report which is a monthly report that is awaited by the trade.  And as mentioned earlier, beef prices, retail beef prices are high relative to today's dollar, let's say.  But disappearance month over month and year over year in beef given those higher prices was impressive in my opinion as it was in pork, total red meat supplies are below a month ago, below a year ago.  So if that would be our only barometer of disappearance in my mind it would be very strong.

Pearson: Alright.  Now, so that is going to bode well for live cattle futures.  Is the cash cattle market catching up do you think to where those futures have been trading?

Robinson: Mike, you know, you're referring to a basis factor there.  And seasonally often times the basis in the fourth quarter of the year will kind of widen.  I don't sense that as we visit tonight.  And, again, I think the demand for beef, domestically and arguably for exports, going to remain strong.  If the dollar would happen to weaken, which I think over the course of the next many months, not Monday morning necessarily, but the next many months I think it will, should continue to support the beef market.  One of the other wild cards is the Zilmax issue and what implications that might have to finished cattle and the finished cattle industry and frankly I don't know.  But certainly it could be a factor and it could slow the growth of cattle and slow the pipe in terms of supply.  So that's something that also needs to be factored in to a livestock man's budget and/or his objectives.

Pearson: Certainly.  And now real quick your thoughts on feeder cattle as the market stays strong for fats.  We'll continue to see strong demand for feeders as well?

Robinson: I think so.  You know, the supply situation has been well documented and if we sustain a fairly strong live cattle market I think it will underpin the value of replacement cattle.

Pearson: Alright.  Now real quick we did see a bit of a move downward in hogs.  Just the market adjusting to the levels we've been seeing lately?

Robinson: You know, the October contract pretty deeply discounted to the cash index.  I don't think this is a particularly good hedge right here.  If I were going to do anything I'd look at that December and the first quarter of 2014 and consider some type of put strategy and create some type of floor.

Pearson: Thank you so much, Virgil.

Robinson: Thank you, Mike.

Pearson: That wraps up this edition of Market to Market.  But Virgil 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 take a close look at the legacy of FDR's popular New Deal program known as the Civilian Conservation Corp.  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 Virgil Robinson wheat