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Market Analysis: Virgil Robinson and Walt Hackney

posted on February 28, 2014

Wall Street surged higher this week as the S&P traded at an all-time high, while the tech heavy NASDAQ hit its highest level in 14 years.  Grain markets, on the other hand, were mixed.  For the week, May wheat lost 3 cents, while the nearby corn contract moved 5 cents higher.  Prospects for reduced production in South America and strong foreign demand were friendly to old crop soybeans again this week as the May contract gained 53 cents.  Nearby meal followed suit with a gain of $17.45 per ton.  In the softs, cotton continued its recent decline as the May contract lost more than $1.00 per hundred weight.  In the dairy market, March Class III milk gained 35 cents, while the deferred contract dropped by nearly 10 cents per hundred.  It was a huge week in livestock where the April cattle contract gained $3.50, nearby feeders advanced by almost $2.00, and the April lean hog contract gained a whopping $7.50.  In the financials, the Euro gained nearly 9 basis points against the dollar, crude oil advanced by 33 cents per barrel, Comex Gold lost $1.00 per ounce and the Goldman Sachs Commodity Index moved fractionally lower to settle at 649.65. 

Market Analysis: Virgil Robinson and Walt Hackney

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Virgil Robinson and Walt Hackney.  Gentlemen, welcome back.

Robinson: Thank you, Mike.

Hackney: Thank you.  Thank you, Mike.

Pearson: It's good to have you both.  We've got great stories going on both on the grain side and on the livestock side so we're excited to have you both here.  Virgil, let's start with you.  Let's talk about the wheat market.  We've seen the rallies in some of the other commodities, we're not seeing it in wheat.  Talk to us about what is happening.

Robinson: Well, big supplies of wheat globally, Mike, which has been well documented in shows past.  However, the situation in the Ukraine is of concern in as much as they originate and move quite a bit of corn, wheat and other coarse grains.  So clearly that is of concern to the marketplace.  I think equally as important is the fact the U.S. dollar in the last few weeks versus most currencies, and I'll use the dollar index as our barometer, has come down pretty sharply and I think that has made some of our product, including agricultural product, more attractive.  Weather concerns through parts of the hard red winter wheat belt as well as other areas of the United States can't be discounted either.  We've got some drought, we've got some adverse winter type weather sweeping through the middle part of the country again.  So I think the combination of those things, Mike, has led to a nice recovery.  Trend followers are going to be hopped up here in as much as the trends in a lot of the short-term and intermediate-term indicators have turned up.  So I think we have juiced the markets here with a little speculative exuberance as well.

Pearson: Alright, and you mentioned the Ukraine, we saw a lot of headlines coming out of the Ukraine late this week with the airport situation.  As we look into the next week, probably in the next couple of weeks while that situation sorts itself out, does that make wheat an interesting buying opportunity to maybe capture some of that uncertainty as it rolls forward?

Robinson: You know, at present, Mike, I think it has probably provided a better selling opportunity.  Keep in mind wheat has been plummeting downward for several months and the reason, as mentioned I think, is the global supply.  It is not just the Black Sea area, it's Argentina, it's Australia, it's Canada.  There is plenty of wheat in the global marketplace.  So if I were lugging old crop wheat I'd be using this type of a recovery as an opportunity to move through that inventory and then think seriously about pricing some new crop wheat or at a minimum creating some type of minimum price.

Pearson: Get some protection under you in case the market resumes its previous trend.

Robinson: I would, Mike.  I still perceive there to be some downside risk in that commodity.

Pearson: Alright.  Well, now you mentioned old crop wheat, as we take a look at the old crop corn market we did see a little bit of a rally continue this week up almost a nickel on old crop corn.  What was driving us there?

Robinson: Well, I think demand has surfaced, again the Ukrainian situation comes into play, there are some adverse weather concerns and conditions in parts of Brazil where they're trying to take the summer crops off and get busy sewing their winter crop, their second crop.  So we have some concerns there, particularly in areas that would traditionally grow some corn.  So I think that in combination with the dollar in combination with the strength in the protein, the soybean markets, has lent good support to corn.  Ethanol economics are good.  Livestock economics are good.  So the demand base for corn is pretty darn solid right here, Mike.

Pearson: Alright.  Now as we look at the new crop situation USDA at their Ag Outlook Forum last week released some numbers that were probably a little unsettling to a lot of corn producers this year.  I think they were saying $3.70 as probably an average price for '14-'15 corn.  Looking at those numbers and this little market rally, does a new crop corn sale maybe make sense up here in this neck of the woods?

Robinson: I think, again, if your personal crop budget warrants attention here, protecting an equity, perhaps you're growing a few more acres or you're in a rotation of some kind or another, yeah, to answer your question I do think this is an opportunity for someone that has done nothing to this point.  Now you have insurance numbers put together as of the end of this month.  There are any number of quality decision assisting tools at university ag extension sites.  So I think you put the combination of these things together, Mike, and clearly entertain the idea of beginning to protect that new crop price value.

Pearson: Because the story is coming back we're probably not going to see, barring a weather event, the opportunities at harvest to sell at the season highs like we have the past two years, time to manage a little bit more aggressively maybe.

Robinson: That would be the assumption and I think the consensus amongst folks tonight -- now please understand that Walt and I were talking about this not long ago -- the U.S. drought monitor continues to be quite concerning and it appears to me areas of the drought have spread now more through the state of Iowa, parts of Minnesota, parts of Missouri, so it appears at present to be expanding, not contracting.  That clearly has to be a concern moving forward as well. So crop insurance becomes a pretty valuable tool here.

Pearson: Certainly.  Now let's take a look to the kind of the sweetheart, Cinderella rally of these past two weeks and that is soybeans, particularly old crop soybeans.  You mentioned some of the troubles in Brazil.  Would you like to expand on that a little bit?  Is that the core driver on that old crop bean market?

Robinson: Well, I think it is certainly one.  The other is that processing margins have been very attractive, Mike, even as the price of the raw product has gone higher in value.  Again, currency probably comes into play.  I think there has been some speculative exuberance also surface here. You know, it's kind of interesting, inverses, the likes of which we have in the soybean market today, it has been my experience over the last 40 some years whenever I have seen an inverted market it ultimately gives way to a carrying charge market because that strong price signal attracts attention and it attracts an effort to grow the supply and I think that will be the case here in the U.S. this season.  So please understand as you get closer and closer to spring and then early summer, carrying an old crop inventory into the breach of what could be a pretty significant new crop here in the United States, there's a lot of risk involved in doing that.

Pearson: Alright.  Things to keep an eye on as this year rolls forward.  Thank you, Virgil.

Robinson: You're welcome.

Pearson: Now, Walt, we're excited we've got you here this week, especially with all of the action we're seeing on the livestock markets.  As we look at the fat cattle market we saw cash trading again up in that $150 area in Iowa in the northern parts.  Where is this market going?  Have we topped out?

Hackney: I told a cattle feeder this morning in Hubbard, Iowa, he's in the catbird seat as we speak.  But greed is the one area that hasn't been addressed in this entire optimism we've got.  And granted we have $150 in regard to fat cattle prices today.  And we probably are going to have that, if not higher, going into this coming week because availability, as we speak again, is the key to the beef complex.  We thought the consumer would not be able to support $1.40 a hundred weight on fat cattle.  Today the packer seems very willing to step in at $1.50.  I don't know where the retailers' limitations are but I do know that $2.40 to $2.42 or $2.43 dressed in the country versus the $1.50 cash is easily come by here in the Corn Belt. Somewhere in that equation the consumer is going to opt to spend her spendable beef dollars on a lower quality product than the luxury cuts in choice beef.  That would be select beef.  And if you are a student of that market you have seen that spread between select and choice gradually come together.  Today I'm not sure how it closed this day but it was only about a $2.00 to $3.00 differential.  Now that is a huge encouragement to a person on a strict budget to buy that more of an economy product.  What will that do to choice beef?  Where will the lack of attention by the consumer affect the price?  As long as we are so limited as we are in the beef complex out of the feedlots, probably it won’t' have any effect. But you've got the packer immediately start buying cattle that are gaining weight instead of losing weight from this extreme weather we've had over the last two months.  You let those cattle start gaining weight, you let them start complaining of heavier weight cattle and you watch what the choice beef will do in comparison to the select beef trade or the more economy cuts.

Pearson: Alright.  Now you mentioned the extreme weather we've been having and I know you were out in California recently.  As we look at the feeder cattle market what are we seeing there?  How are regions coping with this weather?

Hackney: Well, there's such a differential in the weather, per se.  The Corn Belt, as Virgil mentioned, Missouri, Iowa and the like of that, the weather here has been the extreme of the cold and the effect it had on the gainability of these feeder cattle and fat cattle because they're using up a huge portion of their ration they're eating to maintain their body weight.  And in a lot of cases when you've got zero to ten below real temperature these cattle are actually not able to support their intake with a gain.  They're losing weight and they're showing that coming out of the feedlot as finished cattle.  The feeder cattle is a different deal.  The feeder cattle are purely dependent on the roughage feed supply they have got on hand.  Now, the California producer, I happened to be involved with one that had 2,500 head on high desert out by Bakersfield, he didn't want to sell them all but he had enough feed left to support the light half of those 2,500 head and that's what he wanted to sell was the heavier end in order to regulate the availability of feed that he had.  Mike, hay in California on the high desert has cost him $20 to $22 per bale.  Now that is not an Iowa bale like you have here in your set, that is an 80 pound bale and you can't afford to feed cattle with $80 a bale, you can't afford to do it.  So the objective is, as he did, he had enough on hand to take care of the light half of his cattle and that's what he did.  I helped him do that.

Pearson: You bet.  Move the rest off to some place with greener pastures, so to speak.

Hackney: As far as feeder cattle go, as you mentioned, we're in a severe deficit of feeder cattle.  In the fall we thought we were going into a little better opportunity with winter wheat pasture in the southwest.  They had some moisture, enough to produce decent pasture.  That went away here about a month ago and those guys have had to liquidate off of that wheat.  You saw it in your placement factor in the cattle on feed report.  That was all light cattle.  That was all cattle that are to come way down the road, nothing in the immediate, it's all in the deferred contracts.  And so as a result they're going to spread that marketing on those light cattle and it probably isn't going to have any effect on the inventory because we still are going to be very current on feeder cattle.

Pearson: Alright.  Now as we look at the other protein, the other white meat, as we look at the pork market, the up $7.25 this week, incredible move in the nearby hog contract. Is it all related to the PED virus out there?

Hackney: I think a large percentage is. We've had a new participant in the PED virus and that is Canada.  That has caused enormous concern in the American opinion of expansion.  They're not going to do much expanding in the hog operations until they get some kind of control on the treatment of this PED virus and the opportunity for it, if it isn't controlled, is for it to take out of our total market hog herd 5% this year.  Now that is enormous in terms of hog nomenclature and it's a huge amount to come out of.  That brings it from like 225, 210 million a week, that will drop you down to around 1.7 million.

Pearson: And we could see the same effect next year in Canada's hog herd unless we come up with a vaccine or a treatment.

Hackney: You just nailed it right there.

Pearson: So as we look to the deferred months this year, as we look into the summer contracts, do you sell in here or do you let this PED continue to put some pressure on these markets?

Hackney: Where is your level of greed?

Pearson: That's what it comes down to.

Hackney: Totally.

Pearson: This would be a good selling opportunity if you're okay leaving some profit potential on the table.

Hackney: I had one of my most dearest cattle clients this morning indicate to me that he knows that he could use a basis contract for cattle right now and lock in around $250 a head net profit.  But he thinks maybe it's going to $1.60.

Pearson: Right.  There's greener pastures out there in theory.

Hackney: Yes.

Pearson: Alright.  I bet he's not the first cattle feeder to think that.

Hackney: I'd say he's of the, particularly of the major group.

Pearson: Alright.  We're excited to have you back with us, Walt.

Hackney: Thank you, Mike.

Pearson: Thanks for taking the time this week.

Hackney: It's a great pleasure for your thoughts and prayers and I appreciate that too.

Pearson: Thank you much.  And Virgil, always wonderful having you with us here tonight.

Robinson: Thank you, Mike.

Pearson: 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 remind you that Market to Market may be airing on some different timeslots and in some cases even on different channels over the next few weeks due to PBS fundraising activities.  We do encourage 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.  And until next time, thanks for watching, and have a great week.

Tags: agriculture analysis cattle commodity prices corn cotton dollar economy feeders gold live cattle markets Mike Pearson soybeans Virgil Robinson Walt Hackney wheat