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Market Analysis: Virgil Robinson

posted on November 27, 2013

We’re producing this episode of Market to Market on Wednesday to allow the people who bring you the program each week an opportunity to spend Thanksgiving with family and friends. And during the holiday-shortened week grain prices were mixed. As of Wednesday’s close, March wheat gained 6 cents, while the March corn contract moved 3 cents lower. Soybeans traded sideways during the abbreviated trading week, as the January contract settled fractionally higher. Nearby meal prices followed suit advancing by more than $8 per ton. In the softs, cotton’s put together a winning week as the March contract advanced by $1.21 per hundredweight. In the dairy market, December Class III milk gained 39 cents while the January contract moved 38 cents higher. Over in livestock, February cattle gained $2.30. Nearby feeders advanced by $1.82. And the February lean hog contract posted a weekly gain of 80 cents. In the financials, the Euro gained 11 basis points against the dollar. Crude oil declined by $2.50 per barrel. COMEX Gold lost $6.70 per ounce. And the Goldman Sachs Commodity Index declined by nearly 4 points to settle at 621.30.

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.  And Happy Holiday to you and our viewers.

Pearson: And as well to you, Virgil.  We're glad to have you here.  We've got a lot going on around the world.  We're getting to that time of year where we start to get forecasts coming out of every other place.  What are we hearing?  How do things look on the worldwide stage?

Robinson: Mike, our forecasts for world GDP are improved 2014-2015 versus this year.  World GDP will grow about 2.3 or 2.4% in 2013.  We're looking for about a percent increase in 2014.  So that will, I think, underpin demand as we continue to think over the course of time about this growing and more affluent middle class.  In the context of economics maybe we should add here, Mike, on Thanksgiving week, on an adjusted, on an inflation adjusted basis the U.S. farm income for 2014, excuse me, 2013 will be the best it has been in over four decades.

Pearson: Wow.

Robinson: On average, not all, on average most producers' debt to asset, debt to equity ratios are the strongest they have been in many, many years.  So clearly we do have much to be thankful for.

Pearson: Yes, indeed.  Now, as you mentioned we're seeing world GDP rising as a whole.  What are the bright spots?  Who is really growing here or projected to grow through the remainder of this year?

Robinson: You know, I think, Mike, the U.S. will be amongst the leaders.  Again, clearly there are headwinds and there are issues that must be, in fact, resolved or at least addressed and I think they will be.  Great Britain is another region which for the last few years has been relatively stagnant and I think it will grow.  The old brick group, again, China's growth has slowed but to suggest it has stopped would be very misleading.  Their economy is kind of switching to a more consumer driven economy than in years past.  But I think and our forecasts are suggesting about an 8% growth in 2014.  There are other countries growing, the likes of Mexico, parts of the southern Pacific areas that are I think growing more accustomed to improved living styles and behaviors and that certainly should help underpin demand for a lot of goods and services including agricultural product.

Pearson: Certainly.  And as we look at the broader equity markets, in America especially, we've seen record high after record high and another record high this week.  Is that increase in global demand a major driver of that?  Or are those primarily American policies you believe causing that equity run up?

Robinson: I think the growing affluence globally.  We've addressed the growing middle class on many occasions.  I think that still pertains and forecasts growth that will be consistent and genuine and certainly will have competition to meet that growing demand but it certainly does give us an awfully good opportunity moving forward here in terms of agricultural product.

Pearson: You bet.  As people grow a little more affluent they like to eat a little better and hopefully that will come home to us.

Robinson: Livestock and dairy intake or consumption I think will continue to grow, Mike, over the foreseeable future.

Pearson: Alright.  Well, let's take a look at the wheat market.  We did see a bit of a run up this week on wheat.  We've been in a trading range recently.  Where is the wheat market positioned as we look to the future?

Robinson: Well, it has been declining, Mike, for quite some time.  Again, the underpinning to that market, and I'll define that as, and I use this often, the global and the U.S. stocks to use ratios, they're at four and five year lows respectively.  I think any hint of significant weather trauma and as we head into the hard red winter wheat dormancy period that crop is in relatively good condition but certainly there is a winter here to endure and some are of the opinion it will be unusually harsh through that part of the country.  So should that come to fruition certainly that could create some additional interest in wheat and some price improvement.  I think at least as of tonight the soft red, the hard red, the hard red spring wheat contracts, I think seasonally are positioned here for some modest improvement into that February-March period.  And let's just define that tonight by a 40 to 60 cent rise from prevailing values.  I would certainly use that, Mike, to market some old crop wheat and certainly look seriously at your crop budget and what type of profit or margin might be available for new given those circumstances.

Pearson: Certainly.  Certainly.  Know when you can take a profit and put a little in the bank account.

Robinson: You know, I think with margins tightening, Mike, marketing plans become more important, risk management crucial and cost savings matter a great deal.

Pearson: And another market where that is just as relevant, of course, is the corn market.  We've seen increasing production costs on that market while we've seen the price continue to slide and slid a little bit down this week, down three cents or so.  Trend continue downward or do you think we're possibly in a range?

Robinson: Well, there's been good demand, ethanol margins are profitable, export sales and shipments have been brisk early on here in the crop year.  As mentioned, or as we'll discuss I think in the next few minutes, it would be my opinion that the U.S. hog herd will grow over the next several months as we have now had five consecutive months, at least based on Iowa State data, of profitability and that historically has been the trigger for expansion.  Egg sets and chick placements have increased pretty consistently the last several weeks.  So we're building a pretty good domestic demand base there, Mike, and a relatively strong export sales book.  So that combined with - and I looked just before we came on here at the three and five year seasonals in corn and more often than not there's kind of an irregular price improvement from about this time of year into the late winter, early spring of each year.  So I think there will be an opportunity over the next several weeks at a better price for old crop corn that yet remains in farmer's hands and producer's hands as well as ideally a little improvement in new crop value.

Pearson: As we continue to see if that demand is going to continue to grow, particularly I suppose we're looking mainly at export demand, continued growth and then the domestic demand, particularly the livestock side.  Will that continue to expand enough to meet the needs of a 2 billion bushel carryout?

Robinson: Well, I think we could argue, Mike, that the USDA balance sheet could change and the ending stocks could decline modestly.  Now I'm not suggesting here a major decline in supply.  Supply is very adequate and I think everyone is in tune with that.  But there will be some opportunities, I think, as we move forward here and there will be some periodic strength in the corn market.  I think one of the factors will be corn has been stored on the farms and on farm storage has expanded over the last four or five years and as earlier mentioned most of their balance sheets are as strong as they have ever been.  They are going to be pretty firm holders of that commodity, Mike, in an effort to try and create demand because of their efforts to hold grain tightly.  So there will be some periodic spurts that I think we can take advantage of that will be better than tonight's values.

Pearson: Alright.  And now as you mentioned, farmers holding things back, so probably producers in areas where there's a lot of on farm storage should be keeping their eye out for substantial or at least basis improvements in their neck of the woods.  As they withhold it that's where you're going to recognize that shortage of grain first.

Robinson: The strength in cash could clearly be a manifestation of their local basis.  But if combined hopefully with some seasonal improvement here -- now I'm not talking about a dollar a bushel, Mike, I'm talking about something less robust than that.  But I do think there will be some opportunities to meter that grain to the marketplace at values as good or better than tonight.

Pearson: Alright.  Now let's take a look at soybeans.  Now that is a market that we were in a little bit of a down trend.  Two weeks ago last week we broke free of that, pushed north of $13 and we seem to be holding steady.  Is that primarily export driven?

Robinson: I think it is certainly part of it, Mike, and we did buy a bunch of beans in the last few days.  Having said that, at least the way I calculate it, the local spot basis really has not suffered much.  So I think what is happening there is, at least in the old crop part of the soybean market, you've got dual demand pulls, that being export sales and shipments, which have been strong to this point, as well as a real strong interior demand from the processor.  The way I calculate processing margins, they're much better tonight and on forward than they were a year ago.  And as long as there is profitability in buying and processing beans the demand will be brisk and strong.  So I think that will create some old crop opportunities here moving forward.

Pearson: And now the hedge on everybody's bet when we look to the future is South America still planted a record soybean crop if I'm not mistaken.  How are we looking weather wise down there?  Does it look like so far that crop is growing?

Robinson: Yeah, to the best of my knowledge there are no major concerns.  However, given my experience in the industry the last many years, Mike, there seems to be inevitably at least one concern with that crop through the cycle.  So whether it is weather or pests or some combination of the two, political issues, strikes, logistics, all those things will come into play.  So there will be some periodic opportunities I think in the new crop contract in lieu of the fact that U.S. acreage is projected to increase this coming crop cycle four to five percent.  So clearly we need to acknowledge the supply at present is not a major concern but there are enough demand factors at present to give us some periodic price improvements.

Pearson: Now last year as we watched the spring roll into summer we never really saw the price of U.S. beans fall off to the level that we had been talking on Market to Market in the springtime because South America was never able to get their beans out in a timely fashion.  Is that projected to increase or are they making strides on their infrastructure?

Robinson: Well, I think they're making strides, Mike.  Statistically there were a number of reputable sources that brought to our attention on a month over month basis the combined lifting and exporting of beans and products out of both Brazil and Argentina was record large.  So the old thing is show me the money and clearly that creates a big incentive in many regards.

Pearson: You bet.  Now as we take a look over at the livestock markets, we've seen fat cattle go on a little bit of a run, just this week we saw cash prices come up a little bit in a lot of places in the Corn Belt.  Is this strength in the cattle market long-term on the fat side do you think?

Robinson: Well, I think the supply issue has been well discussed on the show.  I don't sense any significant increase in beef supply until at least 2016.  The issue has really been can we sustain higher retail price export trade given the numbers and the increase in value of that product?  And my answer simply would be yes, I think we can.  And we kind of discussed that earlier in the show with respect to the growing affluence worldwide wise.  Do I expect a straight up ascent in the market?  No.  But over the course of the next many months I think beef prices will continue to irregularly move higher.  Replacement values, again, I think it's -- I forget the date in January, we'll have our annual cattle and calf inventory report and I think it will indicate and show for the eighth consecutive year a decline in beef cow inventory.  So clearly that supply is not going to replenish or grow significantly for quite a long time.

Pearson: And now that leads us right into the feeder cattle market.  If we're not having cows we're not having calves, we're going to see that market continue to stay very tight for some time.

Robinson: Yeah, I think conditions have improved, pasture conditions and there will be an effort to grow the herd, Mike, but it doesn't happen overnight.  And therein lies my thoughts about beef supply.  I don't think it's going to grow much.  It will probably decline through 2014.  I don’t' think it will grow much for the next couple of years.

Pearson: And then once we do start to grow it is basically a three year timeline to kind of gain back what we've lost to date.  Is that the number that the market is still using?

Robinson: Yeah, I'm kind of incorporating the next couple of years as part of that scenario, Mike, yeah.

Pearson: Alright.  Now that is on the beef side.  As we take a look at the hog market we have seen a little bit of a rise in hog prices.  Again, we're seeing numbers increase, as you mentioned.  Does the hog market have staying ability here where we're at today?

Robinson: You know, I think it does.  Hard to really document that but I'll make an effort here.  The October cold storage report indicated a 6% year over year decline in total frozen pork inventories.  Now that comes at a time where retail pork prices were at an all-time high.  So clearly the demand, at least as measured by this simple illustration, it's pretty darn strong.  Now, exports have declined year over year, Mike, and that is a matter of concern but I think they'll improve in '14 and '15 as the dollar kind of flattens and at least in my mind will most likely weaken.  So I think hog prices are pretty darn solid for the next several months.  As mentioned, Iowa State brought to our attention five consecutive months of profitability has historically triggered an effort to increase hog numbers.  Should that come to fruition, no reason to believe it won't particularly with less expensive feed, we need to be concerned about the fourth quarter of 2014 forward and the futures market has already acknowledged that.

Pearson: Alright.  Now as you mentioned Iowa State showing growth.  In the past historically has there been a percentage increase in hogs that we see after that five months of change or does it vary each time we get that?

Robinson: Yeah, I think it -- I don't have an answer for a percentile growth, Mike, but again, given the profitability in those producers, bless their hearts, that made the transition from very difficult times to better, I think now are in position to grow their herd and do so profitably.  So there will be growth over the course of the next several months.

Pearson: Alright. 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 next week when we'll visit the first public hearing on the Obama administration's proposal to reduce the amount of ethanol in America's fuel supply.  Until then, thanks for watching.  I'm Mike Pearson.  Happy Holidays.

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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