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Market Analysis: Darin Newsom

posted on April 11, 2014

Grain futures contracts traded modestly lower this week in the wake of USDA's supply and demand estimates.  For the week, May wheat lost 4 cents while the nearby corn contract moved 3 cents lower.  Soybeans gave back some of last week's rally as the May contract lost 11 cents. Nearby meal followed suit with a decline of $6.20 per ton.  In the softs, cotton's rally ran out of steam this week as the May contract lost $3.38 per hundred weight.  In the dairy market, April Class III milk gained 4 cents, while the deferred contract lost 56 cents per hundred.  Livestock prices continued their run in record territory as the June cattle contract gained 97 cents, nearby feeders advanced by $1.55 and the June lean hog contract bounced back from last week's loss with a gain of 67 cents.  In the financials, the Euro gained 20 basis points against the dollar, crude oil rose $2.60 per barrel, Comex Gold gained $15.50 per ounce and the Goldman Sachs Commodity Index advanced by more than 7 points to settle at 652.65.

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.  Welcome back.

Newsom: Good to be back, Mike.

Pearson: We did have the USDA world agricultural supply and demand estimates report come out this week.  Give us your breakdown. We heard the numbers earlier in the show.  How do they affect, let's talk wheat market first?

Newsom: Wheat market if we're just going to, if we're going to take a look at what USDA released this week you'd probably say the numbers were bearish for wheat.  They increased domestic ending stocks, they increased global ending stocks.  The interest in those numbers, as far as wheat goes, lasted maybe ten seconds, could have been closer to five, before the attention turned back to the weather. I mean, numbers are fine but right now the focus is on how dry and how cold it was over much of the southern plains this past winter and the anticipation on Monday that was delayed until Tuesday for the initial crop condition report for the winter wheat crop.

Pearson: And as we take a look at the wheat market, understanding that there is still a tough situation as we look at the ongoing drought, probably selling opportunities here in the future as we sort through how everything emerged from the winter?

Newsom: Yeah, the problem is if producers, if winter wheat producers used the winter rally, or the rally that we've seen say up until the last couple of weeks, if they used that to get some forward contracting done, now given the dry conditions, the poor crop conditions as it comes out of dormancy, they're not going to really be able to sit back and do much more selling until they see what the crop is.  I'm going to guess most of them have 30%, maybe 40% of their crop forward contracted on the last rally.  There's really no way to go much beyond that right now because 30% can turn into well over 100% in the blink of an eye.  So I would say markets pulling back, July Kansas City wheat is testing the technical price support around $7.29 and a half, probably stagnate there for a little while, Monday we'll come back in, it won't rain over the weekend, it will go back up.  But producers probably aren't going to be able to take advantage of it like they'd like to.

Pearson: Alright.  Well, now let's jump over to the corn market.  After the report we did see a bit of a bump both on old crop and new crop corn numbers and then it fizzled out a little bit. Talk to us what we're seeing in the old crop corn market.

Newsom: Well, it fizzled out because nobody believes the numbers anyway.  Ending stocks were lowered to 1.331 billion bushels, we increased exports by 125 million bushels despite the fact that all we're hearing is because of the GMO fight China is going to really shut down on U.S., imports from the United States.  Even before the report with the previous export demand projection we were still running 5%, 6% behind on total shipments.  After the report, and then we get the next weekly shipments report out on Thursday, now we're running 8% behind.  So it is unlikely, it is unlikely that we meet this new 1.75 billion bushels, meaning that ending stocks probably closer to the 1.45, 1.475 billion rather than the 1.3.  So that is why the market really wasn't able to push up and explode higher.  Nobody believes the numbers.

Pearson: Alright.  Now on the new crop side, we heard the numbers from the USDA, we heard still digesting the acre numbers.  Producers should just wait for a weather event to push this a little bit higher?

Newsom: Yeah, you know, it's early.  We've got the December contract testing resistance in the low 5's.  I think it's like $5.03, $5.04 for the technical resistance in Dec. corn.  Seasonally it does tend to move up.  Again, we're just in April.  We haven't been able to get into the fields.  But if it warms up, if it starts to warm up across the Midwest and the planters start to roll the U.S. has shown it can plant a lot of corn in a hurry and if the prices are relatively favorable they can still switch, they can still change their mind somewhat from planting soybeans to corn.  So we don't know what acres are.  I mean, it was a nice guess by USDA in its prospective plantings report but it's just that, they don't know.  We'll find out later what -- theoretically we'll find out later what was actually planted.  Again, we'll never know for sure.  But, market right now seems to be sitting back waiting to see what develops.

Pearson: Alright. Now, let's take a look at the soybean market.  Again, we saw a bit of an impact from the USDA report and then on the old crop side really seemed to fall apart towards the end of the week.

Newsom: Yeah.  And, again, to me it had nothing to do with USDA because the numbers are wrong.  They came in at 135 million bushels ending stocks domestically, they trimmed global ending stocks down below 70 million metric tons.  The fact is they had to change, USDA changed almost every category of supply and demand in its table to maintain some sort of reasonable ending stocks figure letting the ending stocks to use kind of slip under the radar, dropping to a record low 4%.  Now, we're on an incredible pace still.  We've been on an incredible pace for U.S. exports.  The inverse in the future spreads, particularly the May/July has been very strong for months and months and months. But what we're seeing now as this week came to a close and even somewhat last week, towards the end of the week, is that inverse is starting to weaken.  There's something going on fundamentally where, yes, we are tighter than the 135 million bushels, that is granted, we know that.  But something is going on fundamentally. Either there's some cancellations occurring or as there's been talk of China sending some ships back because of credit problems.  Something is going on, on the fundamental side, that we won't see the headlines now for a while, that is changing the structure of this market.  And the weaker, or the less bullish these spreads get, the more pressure we could see starting to come from the investment side, the fund side as they start selling some of their positions.

Pearson: Alright.  Well, now let's take a look at the livestock markets.  We did see the June cattle come up a little bit this week.  We still haven't seen April quite catch up to cash.  Where are we headed on the fat cattle side?

Newsom: Well, as we look at -- we talk about spreads a lot.  As we look at the June/August spreads it's still very bullish, there's still a very tight supply and demand situation.  So we saw a little bit of a dip down.  We've got technical signals galore saying that cattle should be going down.  But one thing that has always been fun about trading the cattle or watching the cattle or analyzing the cattle market is that they don't care about charts.  It's a cash driven market and as long as the cash market remains strong you're not going to be able to break the futures for very long.  You'll see a couple of weeks down but it'll come roaring back and I still believe that is where the cash cattle market is, that is where the live cattle futures are.  Look for the June contract to continue to run, April is really losing some steam in here because it's getting close to going off. But June cattle should continue to run.

Pearson: Alright.  And if June cattle continues to run, corn doesn't hit any new highs, we should probably see feeders continue to stay strong.

Newsom: I would say so.  If the corn market has kind of hit a little plateau in here until we get something to move the market, I would say feeders same situation, tried to back off, really couldn't break the market.  Now, if the live cattle are able to go up I would think feeders would be able to follow along.

Pearson: Alright.  Well, now let's take a look at the hog market.  We did see after last week's $9.00 sell off a bit of a bump this week, 67 cents.  What happened?

Newsom: If you could tell me that would be great.  The hog market has become the new pork bellies.  It's completely irrational.  We'll see a $2.00 to $3.00 move one day going up, another $2.00 to $3.00 going down the next day.  For those of us who are old enough to remember how pork bellies used to trade it's exactly what is happening now.  I don't know if it's a lack of liquidity, if it's fear over the fundamental side of the market, if funds are just getting used to trading hogs.  It's kind of a new market.  They got into cattle, now they're getting into hogs more.  But there's a lot of things going on and really it's a market that defies logic at this point.  So if you're going to trade hogs you have to do so very carefully.  If you're a producer you have to pick your spots.  Fundamentally they're still bullish.  June/August spread still bullish.  Showing a tight supply and demand situation.  So, use that as a guide. Price accordingly.  But be very careful with this market.

Pearson: Now, you mentioned we're still seeing bullish spreads.  Is the enthusiasm for those bullish spreads still tied to the PED?  Is that still the main driver in the hog markets?

Newsom: I think so.  And to me if it was just the headlines that would be the non-commercial side, that would be the fund side, that would be the investors trying to play the latest piece of news.  But the actual spreads themselves are indicating that those who are on the commercial side, those who trade the cash hogs are still concerned.  Now, out into the summer about the supply of hogs to meet demand.  Could this come to an end?  Sure.  I mean, once we work our way through spring, early summer maybe this starts to come to an end.  But for right now we're not seeing it.  We're still seeing good strength in that spread.

Pearson: Seeing good strength and we're still seeing consumers willing to pay the record high lean hog cutout.

Newsom: We are.  Again, going back to the cash cattle market, cash hogs, very strong market, still solid demand, we're just hopefully coming into spring, not far away from full out grilling season.  I think that is going to keep some support underneath these cash markets.

Pearson: And as you say, they're probably not going to see a lot of rain this weekend.  Some warmer temperatures.  Might see some grills fired up.

Newsom: Very possible.  Very possible.

Pearson: We'll see how that affects the cash markets come next week.

Newsom: That's right.

Pearson: Well, Darin, really appreciate you taking the time to be with us this week.

Newsom: Thanks again for having me on.

Pearson: 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 online.  You'll also find audio podcasts and streaming video of our program as well as links to our Twitter feed, Facebook page and the rest of our social media outlets exclusively at the Market to Market website.  And be sure to join us next week when we'll learn how one military veteran is embarking on a new mission as a beginning farmer.  Until then, thanks for watching.  I'm Mike Pearson.  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