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Market Analysis: Virgil Robinson

posted on May 30, 2014


There's an old adage on Wall Street, to sell in May and go away. But after the S&P 500 settled Friday at its fifth record high in the last six sessions, some investors are wondering if they should change their tune in June. Grain prices, on the other hand, continued their pull back from contract highs. For the week, July wheat lost 25 cents, while the nearby corn contract moved 12 cents lower. Old crop soybeans gave back half of last week's rally as the July contract declined by 22 cents. The nearby meal contract followed suit with a loss of $2.40 per ton. In the softs, cotton was virtually unchanged as the July contract declined by less than a nickel per hundred weight. In the dairy market, June Class III milk lost 14 cents, while the deferred contract gained 13 cents. It was another wild week in livestock where the August cattle contract gained nearly $1.50. August feeders traded in record territory en route to a weekly gain of $4.20. But the July lean hog contract continued its decline with a weekly loss of #3.25. In the financials, the Euro was virtually unchanged against the dollar. Crude oil lost $1.64 per barrel. Comex Gold declined by nearly $46 per ounce. And the Goldman Sachs Commodity Index lost nearly 10 points to settle at 649.55.

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: Hello, Mike. Nice to be with you.

Pearson: Well, let's jump into the wheat market. As we take a look at it this week we have continued to see it slide. Are we just, again, overwhelmed with global supply? Is that what is pushing us lower?

Robinson: Well, I think that has been one of the problems, Mike. And in each of the last couple of weeks there have been wheat originations at values well below U.S. originations. So, clearly that competitive factor is illustrated in that regard. Interestingly, the International Grain Council just this week actually reduced global wheat production month-over-month by I think 3 or 4 million metric tons,  but more importantly, reduced it by about 15 million metric tons year-over-year. But given that, the exporting countries that produce wheat, Mike, have good prospects at present and the concerns and the issues that developed here in the U.S. have become secondary.

Pearson: The issues primarily the drought, the winter kill and the hard red winter side, that is what has sort of become secondary?

Robinson: Yeah, it is difficult I think to visit with a wheat grower in Texas, Oklahoma or Kansas who is trying to decide do I go to the effort of harvesting this crop, what little there is of it, and seeing on a weekly basis or now a monthly basis a decline of well over $1 a bushel. But, again, that helps explain and illustrate the globalization of these markets.

Pearson: That's the truth. And as we look at the globalization, particularly in the wheat market, as we look at this shrunken, perhaps, global production number, is there the opportunity for the demand side to pick back up and maybe provide some selling opportunities through the remainder of spring into summer?

Robinson: Well, it would be unusual if we were to go through an entire season without some type of weather concern whether it is perceived or real. I would think, given the fact that we have discounted wheat prices as rapidly and as abruptly as we have, there will be some opportunities, Mike, I can't guarantee they'll start Monday morning. But soft red wheat, the cash index, I looked at it this afternoon, just a tick above $6 and we haven’t been there for many, many months. So if there is procurement or are buyers that are in need we have clearly given them a wonderful opportunity.

Pearson: Alright. Well, now let's take a look over at the corn side. And, again, you mentioned weather problems probably going to be a factor. On corn we've seen most of it get into the ground. We've seen sort of the first weather issue go into the rearview mirror. Is the selloff then just traders relaxing after we finally got the crop in the ground?

Robinson: I think certainly that is a portion of it. But we need to note that as of late cargos of corn originating in Brazil and Argentina have dropped to a level where they are at or beneath U.S. values. So, there again illustrating the competitive element that has developed in these markets and will continue for the foreseeable future. You mentioned corn futures down I think 12 or 13 cents on the week. Cash values, at least the way I track them, only down about 7 or 8 cents. So, that tells us then the basis, which in my mind is one of the real good indicators of demand, really hasn't diminished but rather has, in fact, gotten stronger. You know, all of the liquidation in commodity futures, there are a whole bunch of reasons for that. But one that I can identify with is about 10 days or two weeks ago a major lending institution on the East Coast downgraded and, in fact, suggested, at least in my interpretation, eliminating commodities, many of them agricultural, from their asset base. And certainly I think that has led to some significant liquidation from the "speculative community". So, again, I'm seeing some things in the cash market that actually suggest demand has strengthened, which is completely at odds with the behavior of futures. So I think there will be a reconciliation here in the not too distant future. We'll take a look at crop progress on Monday as well as the first crop rating. I think the crop rating will be relatively good, Mike, but probably already accounted for in the futures market. I think the market is near an area of price stability and likely to create some type of futures recovery. So, if you're still lugging old crop corn, and I made this statement a week ago, I still think there will be a better opportunity to move that inventory than we have at tonight's marketplace.

Pearson: Alright. Now, you mentioned the cash market. As we touch on basis in particular, we've got a question from Calvin, he's one of our viewers who tweeted to us at the Market to Market account. And he is curious about the ethanol market in particular. We have seen very strong ethanol margins for the last two months. And so he is curious, what's on the horizon for the ethanol market?

Robinson: Well, we'll have some policy statements in the very near future, Mike. So, in lieu of that, I'll be careful here how I respond to that question. Ethanol is still the oxygenate of choice in terms of blending. I don't think that will change until there are alternatives or substitutes that are equally as good or less expensive. I don't see that in the near future. You mentioned that ethanol margins are strong and that's true. The demand for distiller's remains quite strong and likely to remain strong with $500 soybean meal at hand. So, you know, again, I think the ethanol processors have increased and strengthened their local basis, and I'll allude to that one more time, by as much as 5 to 10 cents a bushel just this week. So, clearly if your market polls include an ethanol plant or two and you have old crop grain that you would like to sell, they are a very good candidate to make that sale with.

Pearson: Makes it enticing here in the near-term and then longer term we'll have to wait and see what comes out of Washington, D.C.

Robinson: I think policy is a big factor here moving forward, Mike.

Pearson: Alright. Well, let's take a look over at the soybean markets. Again, a down week in beans, both old crop and new crop. As we look on the old crop side, we do have notoriously tight situation in America. Is that beginning to ameliorate at all with South American bean importation at all?

Robinson: Well, we had a couple of ships arrive this week, one in North Carolina, one in Virginia and assumedly there are more to follow. Could be upwards or near 90 million bushel of imports from the southern hemisphere. Now, I'm a little skeptical of that, Mike, but nonetheless that is kind of common knowledge in the marketplace. Old crop dynamics, in my mind, have not changed significantly because processing margins remain attractive, we have not seen any consistency in terms of cancellations from the Chinese and or other buyers, cumulative sales to this point in the calendar are in excess of what the Department of Agriculture is forecasting for a yearly export number. So, clearly they have the opportunity June 11th to adjust that number and I think probably will. Now, the one thing that remains kind of a head wind here is the notion, and it will require yet additional time to verify this, is that last year's soybean crop was underestimated. Okay, now that's possible, Mike, that's certainly possible. But certainly I don't know that and, as mentioned, will not verify that for weeks. But to this point I still think there is risk in terms of old crop soybean prices moving higher. If I had a relatively manageable amount of old crop beans in hand I'd continue to own those at least for the next few weeks. Last year in kind of similar circumstances, and I think this is the correct date, the cash index I think made its high, old crop bean price high on July 21st or 22nd. Now, I'm not saying that is a date of reconciliation but I still think there's dynamics in that old crop soybean market and I clearly would not be short bought that contract or that old crop/new crop spread.

Pearson: Alright. Speaking the new crop spread, do you see this new crop improving?

Robinson: In terms of price?

Pearson: Yes.

Robinson: Mike, it is conceivable here that the inversion just continues to grow as it did last year as we headed through the month of June into July. I think the inversion got to $3.50. New crop soybeans, you know, if all these acres come to fruition and they do in fact yield at what is commonly being used as a factor tonight will have an excess of new crop beans one year from now. So I still like the idea of some type of put strategy or if these prices meet your marketing goal objectives, certainly a sale of some increment would be appropriate.

Pearson: Alright. Let's take a look at the livestock market. We saw the fat cattle prices continue to pull up this week. Are we seeing some stability in the fat cattle marketing do you think?

Robinson: Well, I'm not sure I know how to address stability in any of these markets. But there has been some convergence between price of cash and the June futures contract and to a lesser degree the August. It is common knowledge, I think, that if the recent cattle on feed reports are accurate we'll see an increase in show lists beginning quite soon. So that would suggest an increase in available product. Now, to that issue, and again it's hard to track demand, but export sales remain relatively brisk and solid. I did see the restaurant performance index for the month of April, again, above 100 which is kind of an indicator of total meat demand from that sector hasn't wavered. So, demand remains strong and I think we'll sustain this $135 to $140 price level, Mike, for the next several weeks. That would be my opinion.

Pearson: Alright. Now, as we look at the feeder cattle market, we don't have much time left but we had a big move this week. Have we peaked out do you think looking at the trends in the market?

Robinson: Well, I'm not convinced we have peaked out. Picking tops is a dangerous business. But the feeder cattle market, a couple of things, feed costs have come down significantly, there has been some modest improvement in pasture and range conditions in select areas of the country, and those deferred cattle futures are quite attractive. So the sum of those things suggests to me that feeder prices are going to remain strong moving forward, Mike. Whether we can sustain this for, you know, a significant length of time remains to be seen. There will be a change at some point but I don't sense it at the present.

Pearson: Alright. Well, Virgil, thanks for being with us tonight. We will pick up the hog market story in the Market Plus segment online. 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 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 that Market to Market website. And be sure to join us next week when Missouri cattle producers will explain how the Show-Me-State's Heifer Improvement Program is paying off. Until then, thanks for watching. I'm Mike Pearson. Have a great week.


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