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Market Analysis: Darin Newsom

posted on December 20, 2013

Grain prices were mixed this week as the long downward trend in wheat continued, while corn prices contracts posted modest gains.  For the week, March wheat lost 15 cents, while the nearby corn contract moved 8 cents higher.  Soybeans also rallied as the January contract settled with a gain of 12 cents.  Nearby meal prices advanced by $14 per ton.  In the softs, cotton traded sideways this week as the March contract declined by 7 cents per hundred weight.  In the dairy market, January Class III milk rallied more than $1.00 as did the deferred contract.  Over in livestock, February cattle gained just over $1.00, nearby feeders declined by a dime and the February lean hog contract posted a weekly loss of 92 cents.  In the financials, the Euro gained 6 basis points against the dollar, crude oil advanced by more than $2.00 per barrel, Comex Gold declined by $31 per ounce and the Goldman Sachs Commodity Index gained nearly 15 points to settle at 636.60.

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: Thanks for having me back, Mike.

Pearson: We set another record in the Dow this week despite news that the Federal Reserve was going to begin its tapering.  Was that priced into the market do you think looking at the broad macro picture?

Newsom: Yeah, you know, you go back to all those numbers and all those reports that you talked about at the very beginning of the program.  A lot of green arrows, a lot of bullishness out there right now.  And I really think that is what is pushing the Dow at this point.  Yeah, did there seem to be this kind of, they just pushed this idea of slowing down the tapering?  Certainly seemed that way this week.  Dollar really didn't even react to it that much either.  So it was an interesting reaction overall by the financial markets.  But yeah, the Dow just remains very stout at this point.

Pearson: Alright.  Now, we're not setting any records in the wheat market.  We have been on a downward trend.  It looks like there's a lot of wheat out there.  What happened this week?  Why do we continue to slide?

Newsom: Yeah, you could basically take the Dow chart, flip it over and that's what you've got for wheat.  There's just no interest in the wheat market right now and I don't say that to be mean about the wheat market but we've got plenty of world supplies.  A couple of weeks ago we had the Stats Can report come out and last week we had WASDE reports come out and everything just shows that there's plenty of world production of wheat, there's plenty of supplies out there right now and there's just no push, there's no real need to really move this market and really get interested in buying this market in a great deal.  So without that it just continues to grind lower.

Pearson: Now, as we watch the March contract, technically how far is the slide going to be or could be?

Newsom: Well, the bottom is zero but I don't think we're going to get there.  Now, if we look at all three of the different exchanges, all of them are showing technical signals that the market is grossly, sharply oversold.  That could be enough to spark some buying interest.  It's going to be short-lived and I'm not really anticipating a great deal of commercial support coming rushing back into this market.  But at some point it's going to be so oversold that someone is going to want to cover some short positions, maybe move a little bit -- maybe buy al little bit of wheat here and there.  That could be what provides support ultimately.

Pearson: Now, on the cash side as we watch this wheat continue to slide, at what point are feeders going to begin to look at feed wheat versus feeding corn as corn stays steady?

Newsom: Yeah, we're -- I don't think we're going to get there yet because, again, the cash corn price has been drifting down towards $4.00 as well, national average cash price.  So that spread stabilized a bit and I don't really see that coming into play yet unless wheat just continues to fall and corn for whatever reason thinks it needs to rally.

Pearson: Okay.  Things to keep an eye on there in the wheat market and just keep an eye out there.

Newsom: Right.

Pearson: Alright.  Now, as we look at the corn market we did see a little modest rally on the board this week.  What is happening?

Newsom: Basically nothing.  Corn has been in a sideways market, sideways trend for quite some time. But we're starting to see some headlines of export news being done so we're keeping this fire underneath this idea that we're going to see increased exports in the '13-'14 marketing year.  Sales are great but that's not the real story.  We've got to start picking up our shipment pace.  Right now we're still on target to be about 50 million bushels light of what USDA is projecting right now.  So we're going to have to see our shipment pace actually pick up.  Corn technically posted some bullish signals here this week that could indicate possibly, just possibly that it's getting ready to move a little bit higher.  Now, where is this going to come from?  I think it's going to -- I think the biggest -- I think most of the support that is going to come in the corn market could come from short covering.  Investors have been short this market for quite some time, most of 2013.  If they start covering that position because nobody is selling cash at this point then I think the corn market could rally for a little while.

Pearson: And now, that brings up a question, we've got a lot of producers out there, they spent the money to dry the corn, they've got it sitting in the bin, it's stored.  We're seeing a strong cash price at the Gulf.  Are they just not selling at this price?

Newsom: Exactly.  There's not much cash corn moving right now.  I think there's two camps out there and this is probably an overgeneralization.  There could be one camp that is waiting for the turn of the calendar because they don't need it for their taxes.  Or two, they're just not going to sell it until it gets to be a better price.  We'll see which one happens when we get to the first of 2014.  If basis starts to collapse that means we're starting to see the corn, you know, we're starting to see the corn start to fill the pipeline again.  If not and if everyone is still going to sit tight and wait for a better price, that could keep a good floor underneath the basis market despite all this talk of 14 billion bushel production and everything else.  That could keep basis well supported and maybe lead to a little bit of a rally this first quarter of '14.

Pearson: If we end up in that second camp, if that turns out to be the case, for producers out there with corn sitting in the bin, what targets do you have in mind?  Where could corn rally to looking at the charts?

Newsom: I think it's going to be limited.  If you can get -- this is probably going to get some folks really geared up on this -- but if you can get a 30, 40 cent rally I think that is going to be worth putting in your pocket.  Now, we're going to have to go back to old style marketing because of the carry in the futures spread.  So you're going to have to use all that to your advantage, plan it out as far as when you want to move it, how long you want to hold it in storage.  Don't just sit there open on it.  Even if it is rallying you've got to start using this carry in the market to your advantage.

Pearson: Dust off those ledger books, crack open that Excel and start crunching numbers.

Newsom: Exactly, again, old style marketing.  It's coming back into fashion.

Pearson: You bet.  Now, is the same story true in beans?  We do continue to have good export news.  Bean price staying strong.  Where are we going?

Newsom: You know, I'm still probably more bullish beans than I am anything else.  If I look at the overall makeup of the bean market I still think it's got one of the most bullish structures of any commodity out there right now.  We've got an inverted futures spread so there's no need to have a hedge against it.  If you're storing it feed the market a little bit, you feed an inverted market a little bit.  But I think this market can still go up.  We've got incredible demand right now.  Shipments are still very strong.  Yes, we didn't see any headlines of sales this week, of new sales this week but I have a feeling they're probably going on.  So in the inverted market firm basis is all showing us that.  So let the market run, let it move up a little bit, let it break free technically here if it can do it, again, feed a little bit at a time and we'll see how far it can go.

Pearson: You say let it break free technically.  What are we looking to break free from?

Newsom: You know, right now if we look at the Jan contract right around that $13.45 has just been a ceiling on top of this market and you've got about a $13.30 in the March contract.  So if we can start to break free of that and start to clear those hurdles a little bit then I think the market is going to gain some momentum and I think it's really going to start to move here to finish of '13 and early in '14.

Pearson: So it's really going to be the tail end of this month into early first quarter of '14?

Newsom: Right because hanging over the soybean market is this incredible crop that is being projected right now in both Brazil and Argentina.  Now, the futures spreads aren't showing that the traders are overly concerned about it right now.  That could change.  But we've got this opportunity, say through from December through February, for the soybean market to really make a statement, to really take off and run, pull corn with it and obviously wheat is not going to probably want to go too far.  But it might even try to go with it.  But I think soybeans are going to have to be the one that does the majority of the work here.

Pearson: They're going to be the heavy lifters.

Newsom: I think so.

Pearson: Well, let's take a look over at livestock.  We had the cattle on feed report today.  Total inventory down, placements down and marketings down.  What do we expect Monday morning on the market?

Newsom: You know, I think a lot of this has been built in.  I think the early, I think the pre-report estimate was something like 95% or something like that.  I think a great deal of it has been built into the market but if you want to go back to your question about feeding, month after month after month we're seeing smaller, I mean less on feed than we did the year before yet USDA is projecting a large increasing in feed demand.  I just don't see how that works out. So I think it's going to continue to provide support to the cattle, I like the way the Feb/April spread looks.  In the live cattle market I think it's trying to turn back around and re-establish its uptrend, the Feb contract is.  I think it's going to have a pretty good, I think it's going to have some pretty good air ahead of it.  I think it can rally a little bit.

Pearson: Now, you like the Feb/April spread.  What about the April and after spread?  How do things look there for producers going into summer?

Newsom: All of those still look bullish because I think we're still going to be dealing with a tighter supply situation and still a pretty solid demand.  So yes, I'm looking up front here at this Feb/April, shows me a good deal, shows me the cash should still be strong but even the deferred spreads are still looking bullish for further out.

Pearson: What targets do you see in fat cattle?

Newsom: You know, the prices obviously just slipped my mind, but where we are in the Feb right now I think we could tack, it wouldn’t surprise me at all to challenge the highs that we've seen recently.  I think they're going to get moving again and I think you've still got plenty of buying to come into that market.

Pearson: Closed at $133 this week, $133.90 -- is $135 possible?

Newsom: I think $135 is pretty easy within the next couple of weeks on the Feb.  If we look at the deferred contracts, yes, they've got a bit of a discount to them.  Maybe not get quite up into the mid $130s but I still think they can show quite a bit of strength.

Pearson: Alright.  Now, as we take a look at feeder cattle, we're seeing corn stay strong, we lost about a dime feeder cattle over the week.  Where is that market headed?

Newsom: I think feeder cattle is going to stay relatively stable for right now.  Yes, corn could come up.  But, again, nobody is really anticipating a huge rally in the corn market, more of a short covering thing than anything else.  And so if, you know, feeder cattle start to consolidate I think longer term they've still got enough support to go higher. And if the live cattle market is going up, feeders might try to ride that coattail for a little while.  So I still like the feeder cattle market, not as much as the live at this point because there is that idea that if corn goes up it's going to limit the rally potential in the feeders.

Pearson: Now, you spend a lot of time talking to farmers at conventions and seminars and so forth.  Are you hearing a lot of folks planning or intending to retain heifers and keep them out of the feeder cattle market to grow their herds?

Newsom: I've heard some of that because I'm hearing there's going to be this big demand coming back to rebuild the herd. The only way to do that is obviously to have the stock available to do it.  So I think there is some of that that's going to be going on.  And with the producers that I've been talking to, you know, recently concluded DTN Progressive Farmer Ag Summit, a lot of talk about it up there.  It was that same sort of situation playing out here over the next year, year and a half. 

Pearson: But probably not enough to put any major support into the feeder cattle market?

Newsom: No, I don't think so at this point.  I think there's still going to be enough coming along to really not say we're in an extremely tight supply situation on feeder cattle.  But demand is going to get stronger for feeder cattle as we work our way through 2014.  And so I think it's going to help pull the whole market higher.

Pearson: Alright.  Well, let's take a look at the hog market.  We've been hovering there a little bit above $86, $87 for the past couple of weeks.  Where is that market headed?


Newsom: To compare it to cattle which has a very bullish Feb/April spread, the Feb/April spread in hogs have been going the other direction, it's been trending down.  The Feb is losing ground to the April so the cash market is softening a little bit.  I would not be surprised to see the Feb contract continue to work lower.  I know it's testing some support around the $86, $86.50 area.  Would not surprise me to see the Feb possibly dip down into the mid $84s.  It just looks like it wants to grind a little bit lower in here.  Now, that having been said, support could come from the other livestock markets.  But fundamentally on its own there's really no reason right now for the hogs to move higher.  Long-term I think they're still bullish.  Short-term not so much.

Pearson: Now, as we look at next summer we know June hogs pushing $100.  Time to make a sale at $100?

Newsom: You know, I'm never going to tell anyone that it's not a good idea to sell if it's profitable and if $100 hogs are profitable, yeah, in the summer certainly take a look at it.  I think the market could move a little bit higher.  I think we'll be back into more of an upswing by the time we get into the spring and summer timeframe.  So I think there's some potential for the market but by all means lock in the profits.

Pearson: Alright.  Thank you so much, Darin, thanks for being with us this week.  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.  And be sure to join us next week when we'll look back on 2013 and examine the impact of key developments in rural America.  Until then, thanks for watching.  I'm Mike Pearson.  Happy Holidays.

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