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Market Analysis: Mark Gold

posted on November 1, 2013

Grain prices fell again this week as the trade pondered notions of increasing stockpiles ahead of next week's official supply and demand reports.  For the week, December wheat lost 14 cents, while the nearby corn contract moved 13 cents lower.  The rally in soybeans ran out of steam this week as the January contract settled with a weekly loss of 42 cents.  Nearby meal prices followed suit giving up $28.60 per ton.  In the softs, cotton also declined this week as the December contract shed $2.50 per hundred weight.  In the dairy market, December Class III milk gained 31 cents, while the January contract moved a quarter higher.  Over in livestock, December cattle lost 90 cents.  Nearby feeders were off more than $2.50. And the December lean hog contract posted a weekly loss of $2.07.  In the financials, the Euro lost 32 basis points against the dollar.  Crude oil gave up $3.24 per barrel.  Comex Gold declined by $39 per ounce.  And the Goldman Sachs Commodity Index lost nearly 15 points to settle at 611.15.

Market Analysis: Mark Gold

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 again.

Pearson: We had another Federal Reserve meeting this week.  They decided not to taper.  Talk to us about how that effects the stock market going forward and what effect that might have on commodity market pricing.

Gold: Well, the stock market just keeps chugging higher, very strong market.  What was interesting after the announcement was made you would have expected maybe the bonds to continue higher.  They had bounced from roughly 129, 130 back up to 135.  But they have been on, since the report came out were down a couple of basis points here, which is a little strange even though the stock market keeps creeping up.  The bond market may be an indication that, and some people will agree with this, that the Fed tapering may come a little bit sooner than before the end of the year.  We'll have to see what they do.  But the bond market wasn't all that stellar and my own personal opinion is the stock market is kind of on borrowed time up here but we'll see.

Pearson: We might be getting a little toppy in the equity market.

Gold: As important as what all that has been doing to the dollar, which has been rallying the U.S. dollar, which is going to have a tendency to hurt our export market moving forward.  We're back over that critical 80 cent mark in the dollar.  It's been a nice rally when a dollar just looked like it was going to fall out of bed, it has come right back.  So that is an important point for the grain markets that it's going to affect our exports somewhat out here.

Pearson: You bet.  Now, as we take a look over to commodities this was a down week across-the-board in commodities beginning with wheat.  We lost about 14 cents there.  What happened in the wheat market?

Gold: Well, we had good rains in Kansas.  All those rains that did a lot of damage in Texas, Oklahoma, Kansas, that is going to ultimately help the crop.  We had great rains throughout the Midwest for the winter wheat crop.  We've gotten the crop in the ground well, now we've got the rains on top of it.  Couldn't look a whole lot better to get going here.  I think that puts some pressure on -- and the rally in the dollar let alone the fallout from the selling in the corn and beans as well.

Pearson: Could the wheat market, the winter wheat this year be similar to the corn market this summer?  Would this be a good time for producers to get in there and make some sales or is there some strength left as we get into spring?

Gold: We've been making some sales in the wheat over the last several weeks, three or four week, not huge, 20%, 25%, in that area.  We've got puts on for the wheat that we haven't sold.  And there's still some opportunities in the put market.  I'm not that bearish the wheat.  The corn and bean market are going to tend to drag it down in my opinion.  My on its own with the demand from China, from Brazil, Australia having a little bit of a problem, some problems in Russia, there's a lot of competition out there but I still believe on its own the wheat can hang in there, at least relative to the corn and the beans.  That doesn't mean that we can't move lower but longer term I would be saying that if you're selling wheat look to buy back some call options and try to keep that upside open.

Pearson: Because there are decent fundamentals.

Gold: Yeah, I still think that the wheat has got its own set of fundamentals that are a little bit different than corn and beans right now and I think there's some hope there.  But for the wheat you haven't sold maybe you're planning on raising this year, haven't got it protected, use a cheap put option to protect the downside.

Pearson: Just go ahead and save what's in there, what you've got already.

Gold: Yeah, exactly.

Pearson: Well, now let's take a look over at the corn market.  Throughout this year, Mark, we've had you on and you haven't always been popular.  You said there was a large crop out there.  And now we're rolling through harvest and it seems to be that's what we're finding.  How low can the corn market go?

Gold: Well, the last time I was here was in June and I said that despite the slow planting pace and the wet spring that we had we could still have trendline yield.  And, like you said, I took certainly a shellacking on the blogs out there.  As it turns out that we found out that even if we plant corn in wet weather if we have, we didn't even have good summer weather, we're still going to have crops.  The newest numbers from Informa and FC Stone that came out we're looking at yields of 162, 163 out there.  Big yields, big production, a crop well over maybe pushing 14.3 billion bushels out there.  What we found out this summer was that you don't have to have water to raise a huge corn crop.  If you've got cool nights, cool temperatures the dew and the moisture that is out there plus some rains was enough in a lot of areas.  Now, in Iowa, Minnesota, Missouri there was still some dry pockets that really got hit hard.  But for the vast majority of the country that didn't get rain and we're still looking at 200 bushel yields in places -- the Ohio yield is 190 bushels in Ohio.  What's going to happen in this country if we have good weather in this corn market in Illinois, Iowa, Indiana and the rest of, you know, we're looking at potentially huge yields one of these years.

Pearson: That's right.

Gold: But we've got to get good weather first.  But in the meantime that has put the pressure on the corn.  We've made new three year lows.  Haven't made quite contract lows.  You asked how low can it go.  Those contract lows are at $3.98 and a quarter in the December contract.  I think that is the initial target.  You start closing under that there's a lot of grain out there, there's a lot of grain that's sitting on the ground, we still have 4 or 5 billion bushels yet to harvest.  I'm not sure where we're going with all this grain and if we take out those lows it could open up another 50 cent risk in the market.

Pearson: Alright.  Now, before we get viewers start jumping out of windows, there has been some upside.  At least we had some pretty decent export news this week.  Can demand pick up enough to soak up 14.3 billion bushels of corn?

Gold: I don't believe it can soak up that much.  The demand numbers, when you look at what happened Thursday on the market we were expecting huge export numbers in the corn and beans.  We came in almost double what we were expecting.  The market in the first two or three minutes rallied right out of the chute, the professionals sold it and we closed sharply lower on the day.  When you reject bullish news like that it is certainly a red flag that there's some problems in this market and I continue to believe there's a lot of risk out here.

Pearson: And now speaking of risk, we're heading into next week, we will have the updated supply and demand report that was pushed back from the government shutdown.  In this market, with the market trending lower on corn, how should producers look to protect themselves both before this report comes out and then just in case of a general trendline slide?

Gold: Well, in my opinion, one of the most important things the American farmer must do right now is if they put this corn in the bin and they haven't protected it they've got to go out and capture the carry by selling December '14 corn.  That is picking up about 40 cents.  So if you put it in the bin you can collect that carry in the market.  Now, that carry, you can only capture it if you actually sell that deferred contract at the elevator to lock that in.  But doing that is a legitimate marketing play in order to pick up that money.  If you're not willing to do that and you've just got this corn in the bin thinking it can't go any lower I think you're exposing yourself to a risk that you might not be comfortable with two, three, four months down the road.

Pearson: Alright.  Now, as we take a look over at soybeans we've also been on a slide downward in soybeans, down 42 cents this week.  Same story in soybeans?

Gold: Unfortunately it could be a little bit worse.  The good news in the corn market, the funds were already short, heavily short the corn market.  Not so in the beans, even after yesterday, Thursday and Friday's action we're still probably long, somewhere in the neighborhood of 130,000 contracts of soybeans.  The American farmer I thought would sell soybeans off the combine.  He hasn't done that.  Basis' remain strong.  In my opinion, all the technicals on these charts we're now under the 10, 50 and 200 day moving average.  The averages are crossing.  We made new lows for this leg of this move this week on Friday.  I can't imagine why these funds are still sitting here long in a technical environment where they should actually be short.  So if the funds need to liquidate 130,000 contracts of beans at some point in the future that tells me there's at least risk down to those August lows, which is $1.00 lower than we are right now.

Pearson: Advice to producers if they're out there in the combine and they've still got beans in the field, if they've been binning beans.  How do you handle that?

Gold: I believe you sell them right now.

Pearson: Just get them on a truck and --

Gold: Yeah, there's no carry in the market, there's no incentive to store these beans.  Sell the beans.  If you're still looking for upside on the market then go out and buy a July call option or something, spend 25 or 30 cents to reown the crop that way.  But in the long run I think it's a much better marketing ploy or strategy than just hoping and praying, sticking those beans in with the funds long, the farmer long, I think that's a problem.

Pearson: It's a lot of bullish activity in the market.

Gold: Well, on the export side, on the demand side there is.  Certainly we've got good news on the demand side.  Unfortunately the sheer size of this crop, some of these estimates are up to 43 and I think we're going to push 44 before it's all done.

Pearson: A lot of beans.

Gold: A lot of beans.

Pearson: Well, let's take a look over at livestock.  We had the cattle on feed report come out last night.  Talk to us a little bit about what happened in the report.  How did the market anticipate it and trade it today?

Gold: You know, the placements were about what they were looking for, on feed about what they were looking for.  The marketings were 2 or 3 percentage points above what the average guesses were.  On just the face value it looked like it could be a little friendly.  The market didn't respond that way on Friday.  We were a little bit lower in cattle and feeder cattle.  We had some red flags, particularly in the feeder cattle market.  We've had some bullish input into this market and yet we can't make these new highs that you might expect.  And we've had a couple of reversal type days in this market and, again, not responding to good news I think is a red flag.  We're looking at $165 feeder cattle.  These aren't cheap cattle out here.  And the fats are out here at $134, $133 in that range.  Not protecting this gold mine that is out there in the meat industry in my opinion is something you just can't sit and hope and pray on.  Yeah, the stock market is good, the economy is good, we're moving the beef, the demand has been strong.  It all looks good except the technicals generally will lead a market.  A market will turn technically first before the fundamentals judge it or justify it and I think that's what we're seeing here is the fundamentals are saying, wait a minute guys, $134 fat cattle are pretty good and $165, $168 feeder cattle are pretty good, maybe it's time to take a little rest.  So I would certainly be buying puts to protect that downside.  If you want to sell futures buy a call option to protect against the margin calls.  But there is certainly, this is a once in a lifetime opportunity.  When I got in the customer side of the business back in 1995 feeder cattle were at $55.  Now we're at $165 and thinking that there's not risk out here I think would be a mistake even though the numbers are down, even though the Zilmax problem is out there and the problems with the hogs, I still think the cattle market needs protecting at these levels.

Pearson: Alright.  Get in there and take some cash off the table in the cattle market.  You mentioned hogs.  We did see a bit of a correction this week, down $2.00.  Where could the hog market be headed?

Gold: You know, again, the PED virus scare is pushing the market to really strong levels, not quite historic highs but pretty close, within a couple of bucks.  We've since backed it off.  Now, we didn't cure the PED problem overnight that I know about.  So, again, it's the technicals leading this market and that is, again, a bit of a red flag out here.  And when you're basically $100 hogs for the summer do you want to turn around and watch them go to $75 or $80?  I don't.  So I want to spend $2.00, $2.25 a hundred on an option to protect those prices.  It's an 8 or 9 to 1 risk/reward ratio.  Spend $2.00 to protect $16.00 or $18.00 or $20.00.  I think that is an investment.  If we go to $110 or $120 great.  You'll lose the $2.00 on the put.  But in the meantime if there is a problem out there for whatever reason, this market heads south you're protected.

Pearson: You bet.  And that’s what we need to be keeping an eye out for, locking in those profits, protecting that margin.

Gold: Absolutely.

Pearson: Alright.  Thank you so much, Mark.

Gold: Thank you very much.

Pearson: That wraps up this edition of Market to Market.  But Mark 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.  And be sure to join us next week when we'll examine the market impact of the highly anticipated USDA report on supply and demand.  Until then, thanks for watching.  I'm Mike Pearson.  Have a great week.

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