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Market Analysis: Darin Newsom

posted on February 21, 2014

At its annual Agricultural Outlook Forum this week, USDA officials called for recordU.S.corn and soybean yields this year and near record yields for wheat.  Nevertheless, grain prices moved higher.  For the week, March wheat gained 11 cents, while the nearby corn contract moved 8 cents higher.  Notions of diminished production inSouth Americasupported soybean prices this week as the March contract gained 33 cents.  Nearby meal followed suit with a gain of $5.80 per ton.  In the softs, cotton's recent rally fizzled this week as the May contract lost 69 cents per hundred weight.  In the dairy market, March Class III milk gained more than $1.00, while the deferred contract advanced by nearly $1.50 per hundred.  Over in livestock, the April cattle contract gained 35 cents.  Nearby feeders advanced by 23 cents.  And the April lean hog contract gained $3.18.  In the financials, the Euro gained 3 basis points against the dollar.  Crude oil advanced by $2.00 per barrel.  Comex Gold improved by $5.00 per ounce.  And the Goldman Sachs Commodity Index gained nearly 10 points to settle at 650 even.  

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: Good to be back, thanks Mike.

Pearson: We're glad to have you.  It's been an interesting time in the wheat market.  Talk to us a little bit about where things are headed here in the short-term.

Newsom: Short-term wheat market probably wants to go up.  It has been down for so long.  It seems to have turned a corner.  We've got some buying coming into this market.  We've got some domestic demand that is still helping to provide some support.  So if I look at theChicago,KansasCity andMinneapolis, all three contracts, all three markets look like they want to try to go up a little bit from here.  Now, is it sustainable?  Is it long-term?  No, because we still have all these supplies up inCanadaand once we get the transportation figures, problems figured out, if that ever happens, then all that wheat is going to start to move.  So short-term I think wheat has got a chance to move higher.

Pearson: And short-term with the hang up being transportation issues we could see this strength a month, maybe two?  Is it winter transportation that is mainly the trouble?

Newsom: I think that's the biggest thing right now because, again, we're not seeing great export numbers so it looks like it's domestic and it's just getting things moved around at this point.  We've got solid spreads going on right now in all three markets.  So it certainly looks like we've got a little bit of fundamental support.  At some point as we get to spring, if we ever get to spring, we're going to start focusing on the winter wheat, on the new crop winter wheat, what type of condition it comes out of dormancy, if this winter has caused any problems.  It's too early for any of that talk yet.  But, again, once we get into spring I think we'll hear more of it.

Pearson: Alright.  Well, now let's take a look over at the corn market.  Again, some recent strength.  Let's talk old crop corn, selling opportunity today?

Newsom: You know, we're probably pretty close.  The corn market has been moving up.  It's been a slow, grinding rally.  This market really doesn't want to go up but there's just enough support out there to push it higher.  Now, a couple of interesting things that we've seen start to develop.  As this non-commercial, or as this investment lead rally, they have covered their short position and they built a small long position, as this has pushed futures higher basis and spreads are starting to weaken a little bit.  This means that we're seeing those cash sales from last year's crop that really everyone was sitting tight not wanting to move.  We're starting to see those occur now.  So basis is weakening.  Spreads are weakening.  I think that's going to limit the amount the old crop market can rally.

Pearson: Okay.  So we're probably getting near the top?

Newsom: We're getting close.  Maybe -- at best another 15, 20 cents, 25 cents on spillover support from beans.  But by and large I think the attention is going to start to shift to the new crop market.

Pearson: Alright.  And new crop, have we had a selling opportunity yet in corn?

Newsom: I don't want to get too excited.  We're still figuring the average price using the daily closes of the Dec contract and February for insurance purposes.  It looks like, again, we've got so long to go, we've got so much yet to have happen to this crop.  I don't want to get over excited about selling a bulk of it right now.  But there's going to be an opportunity, and it might be short-lived as well, when this market moves up, spring weather problems, whatever the case might be, late entry into planting, whatever it could be, that we're going to have to take advantage of, we're going to have to jump on it and then I think the market is going to get a little dicey by the time we get into the summer, late summer and later on in the fall.

Pearson: Alright.  Now let's take a look over at the soybean market.  Old crop soybeans have been on a tear for about the past oh two weeks nearly.  Are we to a point where farmers with old crop beans in the bins, just get her to town and get rid of it?

Newsom: I think we piece some in here.  I still like the bean market.  Again, we're starting to see a little bit of basis weakness.  I like the May/July futures spread, still showing a very strong inverse, this despite all this talk of record production inSouth America.  We've got a lot of demand, we've got great demand forU.S.beans so far.  Sales are well above what USDA is projecting.  Shipments continue strong week in and week out.  So we still need beans.  So I think if we feed this rally a little bit at a time, by the time we get to early spring or so, maybe mid-spring, we'll have cleaned out the bins and we'll be focusing again on the new crop market.

Pearson: On the new crop side we're also seeing a little spillover strength there all based on the downturn in the weather inSouth America?  Is that what we're seeing?

Newsom: I think to a certain degree, yes.  We're seeing that 90 million metric ton estimate for Brazilian production alone start to be whittled back a little bit.  That tends to happen.  The weather hasn't been too favorable here the last few weeks.  So that is providing a little bit of support in the new crop soybean market.  Plus I just really think that we haven't completely figured out how tight the old crop market is.  And so we don't really know what we're carrying forward into the new crop and if we have any problems, if we plant more corn acres, all these things that could happen I think is going to keep a floor underneath new crop beans for now.

Pearson: And give you a better selling opportunity later on.

Newsom: I think so, better selling opportunity later for both corn and soybeans.

Pearson: Okay.  Let's take a look over at the protein market.  We're seeing fat cattle continue to show a lot of strength.  Where do you see this market headed?  We had the cattle on feed report today.  Any surprises?

Newsom: No real surprises.  As we look at the numbers I think on feed was down 3% from last year, placements were up 9% from a year ago.  So I think this is the trend that we're going to start to see larger placements and on feed for now continuing to lag last year.  This keeps the focus on the tight supply and demand situation that we have in front of us.  Longer term it's probably going to start to get a little bit bearish.  But short-term still looks like it's well supported.  As far as the April cattle contract goes I like the way it sets up against the June, continues to indicate the cash market should stay strong.  But I really need to see the April contract go to a new high, to extend this rally that it's on.  Had a nice close this past week but now we have to see it push higher on the weekly chart as well.  So get that done, get that out of the way and I think the market could continue to run a little bit.

Pearson: Now, we were talking earlier about the impact of drought inCalifornia, talking to some ranchers, there was a report out today, National closed a packing plant inCalifornia.  Are these going to have big impacts on the fed cattle market or are they rather localized?

Newsom: I think it's going to be localized but if you have enough of them put together then it starts to make a bigger ripple.  So it's like throwing one stone in versus a handful of stones in, at some point it's going to make a pretty good splash.  So right now I would say it's more of a localized, it's going to change the local market.  But traders as a whole are going to be looking at this thing because the supply and demand situation remains tight.

Pearson: Alright.  And now, the strength going to continue to support the feeder cattle even with corn at that $4.50 level?

Newsom: I think so.  We haven't seen enough of a rally in the corn market to really cool things a great deal in feeder cattle.  I think there's going to still be demand, particularly if we're going to start upping placements again.  I think there's going to stay pretty good demand for the feeder cattle market and that's going to help push it higher as well.

Pearson: Alright.  Now let's take a look over at the hog market.  April on fire this week, up $3.18.  What happened?

Newsom: Well, and this is a meteorological term.  This isn't my term.  We had this next weather system that moved through this week, thisTexashooker that moved through.  I don't know what that means in weather terms but that's what they called it.  And I think that caused a lot of concern as far as getting hogs moved to market.  So, again, there was a short-term fear of supplies.  We saw the April contract take off.  Cash went with it.  We've got good demand still.  All things have come together to really help pull the lean hog market higher.  It looks like it's going to stay around at least for a little while.

Pearson: You think this $98, high $97 is going to be there in April for a week or so?

Newsom: Yeah, we have to be careful with this because this could be a normal weather spike high, some sort of spike rally so we have to be very careful.  But I do think it's got some staying power.  Again, April gained on June indicating there's some support from the cash market.  We just have to make sure that we don't lose it, that it just spikes up and then falls right back once the weather clears.

Pearson: Now, as we look longer term in the hog market we have seen incredible values out there, June, July, looking over the summer months.  Is there still room to run in that as pork is a discount value to beef in the grocer's meat case?

Newsom: It's possible but I would be very concerned about the livestock, all the meat markets at some point.  We're going to want to get some sales on because we're going to start increasing our numbers again and at that point supply concerns are going to start looking forward and those concerns are going to start growing a little less.  So we see some profitable numbers out there.  I think we're going to have to start taking them as we start looking ahead towards the summer and fall contracts.

Pearson: So go ahead, this would be a time to maybe --

Newsom: I think so.  Start piecing some in.  Never any harm in doing that, particularly if they are at profitable levels.

Pearson: Alright.  Now the other thing that has really been on a surprising rally over the past couple of weeks has been crude oil.  Where is that going?

Newsom: Well, the crude oil, this is the time of year for crude oil to rally.  We've got a lot of commercial buying coming in, everyone is getting ready for the driving season that is theoretically going to start as soon as the snow stops falling and the ice quits littering the interstates.  So we're going to see increased driving.  So you get into February and from February on you see the market rally because of this seasonal buying.

Pearson: Alright.  Thank you so much, Darin, really appreciate it.  That wraps up this edition of Market to Market.  But you can find expanded market analysis as well as streaming video of our program free at our website.  Now, we want to let you know that Market to Market may be airing in some different time slots and in some cases even on different channels over the next few weeks due to PBS fundraising activities.  We really want you to check your local listings for details.  And if you value programs like Market to Market, please consider making a pledge and investing in a service that provides you with accurate information and timely market analysis.  We do appreciate your support.  Until next time, thanks for watching.  Have a great week. 

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