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Market Analysis: Darin Newsom

posted on July 11, 2014

Despite bad weather throughout the Grain Belt, the potential for record large corn and soybean crops and higher ending stocks pressured grain prices lower. For the week, September wheat lost 54 cents, while the nearby corn contract moved 32 cents lower. Friday's USDA report revealed more than adequate soybean stocks, which pressured the August contract downward by $1.04. Nearby meal prices followed suit with a loss of $29.90 per ton. In the softs, cotton continued its third week of declines as the December contract gave up $3.94 per hundred weight. In the dairy market, August Class III milk gained 12 cents, while the deferred contract gave up 43. Over in livestock, prices fell back from last week's records as the August cattle contract lost $5.88. August feeders declined $7.25. And the August lean hog contract was $2.93 lower. In the financials, the Euro held relatively even, gaining less than 1 basis point against the dollar. Crude oil declined $3.10 per barrel. Comex Gold gained $16.80 per ounce. And the Goldman Sachs Commodity Index lost nearly 20 points to settle at 631.60.

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: Good to be back, Mike.

Pearson: We had the USDA report out today. We'll cover that in pieces as we get to each commodity. Let's break into it with the wheat market. Any big news?

Newsom: Well, we can start with wheat because there was nothing in this report that is going to change the direction of the mood of the wheat market. I hate to always be bearish wheat, but what we saw, large projection -- projections of larger domestic and global ending stocks. U.S. domestic, sorry, domestic ending stocks to use now pegged at something like 31.7%. So, almost a third of total demand leftover in stocks when all said and done. Hugely bearish situation, certainly easily readable on what we've seen in the September/December spread, the carry moving out to about 24, 25 cents. So, the market has not changed its tone for quite some time. It's still going to struggle. There's just simply still too much wheat worldwide.

Pearson: Any chance we're getting close to a harvest low? Or does that overhang of wheat push us farther down?

Newsom: Yeah, the biggest thing with wheat, and we'll talk about this with other commodities as well, is that it's oversold right now. But we get into these situations where fundamentals outweigh possibly non-commercial wanting to get out of a short position. It doesn't really matter if it's oversold, doesn't matter if it's low priced or maybe undervalued, they want to keep pressing the market lower because there's just no fundamental reason for it to rally. Can we say the low is in? Wheat is one of those that likes to surprise by putting spikes in. I just haven’t seen any indication that it's there yet.

Pearson: Alright. So, maybe hold on and see if we get a spike and then sell it, it sounds like.

Newsom: I was asked today if today was the day to sell wheat and this was before the report came out. What do you do? If you're still holding wheat, it is a tough call. But you would think that at some point we would be able to rally out of this hole, even if not just a little bit, for just a little bit.

Pearson: Alright. Well, let's jump on over, let's look at the corn market. We did have some corn news today. Let's break down the USDA supply and demand report on corn.

Newsom: The biggest, again, as with wheat, both domestic and global ending stocks were increased for old crop and new crop. The biggest news to me -- they did leave, USDA did leave the new crop production alone, as expected. The acres were from the June 30th report. Yield isn't going to change this time around. They'll probably move it in the August when they have their actual survey numbers. So, the production side was basically left unchanged. Total supplies did increase because old crop ending stocks edged higher. We saw a little bit of a reduction in feed demand. That backed off a little bit. They left exports at 1.9 billion. They came in at 1.246 billion bushels ending stocks, which is pretty close to what their June 30th quarterly stocks report implied with average fourth quarter demand that corn stocks would be. So, we were looking for a bit of an increase. Actually I think at some point we're still going to get closer to that 1.3 billion bushels, carry that forward into the New Year. Now all of a sudden when we do see USDA change its yield estimate, most likely in August, and they bump it up from the 165.3, maybe 167, 168, we're dealing with a crop of 14 billion bushels, we're dealing with total supplies of over 15 and the most alarming thing to me in the corn report today was the fact that we have now trimmed 200 million bushels from demand year to year, from '13-14 to '14-15. So, we've got building supplies, demand coming down, this is not a recipe for a continued bullish market.

Pearson: Make sales Monday. Is that the time to get in there before these big yield numbers start to change?

Newsom: You know, I think what we -- we have to see, you know, how the market is going to react. We saw the market come under pressure today and then it trimmed its loss a little bit. So, like wheat, corn is sharply oversold and desperately in need of a rally to take some of this bearishness out of it. But when it does it's going to be a market that everyone is looking to sell because everyone is waiting for that August report now. They've got it penciled in. that is when this thing is really going to get hammered next. So, between now and then could be an opportunity to get some sales on.

Pearson: Alright. Well, let's jump over to soybeans. Big move down in the nearby contract. We have a lot of beans. Talk to us about what we learned today.

Newsom: Number one, we don't have a lot of beans. And I don't say that, no disrespect in that whatsoever, but the misconception today was that this old crop number was bearish when they raised ending stocks from 125 million bushels to 140 million bushels. The USDA did that by increasing demand by 50 million bushels and decreasing imports by 5 million bushels. What happened was they took residual use, this catch-all category, which has no explanation and no definition, it's kind of a wild card. We knew it was coming at some point and July seemed to be the obvious case, again, before the survey comes out in August. But they took it down to a negative 70 million bushels, completely erasing the increase in demand and what would have pulled ending stocks down below 100 million bushels. By adding that 70 million bushels on and taking residual use into the negative territory we created a situation where it looks like we have more ending stocks now of 140 million bushels. That's fine. But let's look at ending stocks to use. It is still a record tight 4.1%. We've never seen this situation before and that is because we did see that overall increase in the other demand, in crush demand, in export demand. So, we've still got a very tight situation in old crop soybeans. The problem is we're at that point of the year where nobody cares anymore. It's all weather. It's all new crop. But as we look to see what happens now in the new crop market, do not be surprised as the next marketing year comes along, that somewhere along the line those 70 million bushels start to get whittled back out of the new crop because they simply don't exist. Maybe the old crop production gets adjusted at some point to probably bring residual use back close to zero. But I think it's going to happen in the new crop market. You're going to see some adjustments made because we are at a projected, more comfortable level of something like 415 million bushels for new crop, wiggle room to take that 70 million bushel back out once we get into the '14-'15 marketing year.

Pearson: Alright. Well, let's jump over to the livestock market where we saw another pullback again this week. The fat cattle trade dropped lower pretty, a little bit today, a little bit on Friday. Where do you see us coming in this next week?

Newsom: It's a -- you could go anywhere. This market, it shot up so fast, so high that it left nothing underneath it. It's what I like to call a vacuum market. And so when you start to get into a situation where the buyers step out or they just take a break and they maybe pocket some of the gains that they've had over these last number of weeks you have no fresh buying to come back down to. So, this is where you really have to lean on the cash market. Cash market is going to have to stay strong. If we start to see some problems in basis, if we start to see the cash market weakening in relation to the futures, this whole thing could come tumbling down quickly because, again, there's just nothing underneath it. Initially I had targeted, you know, after doing some work on the long-term charts, maybe that $160 area would seem to have patterns fitting, looking back at the charts and possibly projecting ahead. We didn't quite get there, got up to the $156, $158, something like that and now it has backed off. We have created some bearish technical signals on the weekly charts. Those have been ignored here over this run. So, whether or not the top is actually in, not going to be on the books saying it's the first one, but we have to keep an eye out for these warning signs, number one being this basis, if there's any basis change in the coming weeks.

Pearson: Alright. And now we did see a sizeable pullback in the feeder cattle market here towards the end of this week and then it rallied on Friday. Just on the corn falling?

Newsom: I think the early move, the 11 to 12 o'clock move into corn when it was posting double digit losses certainly sparked some buying interest back in the feeder cattle market. But, again, we are still dealing with a tight supply and demand situation, feeder cattle, live cattle. So, that is helping to provide support. When we see these sell-offs, particularly in a lightly traded market like feeder cattle, a few buy orders coming in late in the week is going to be able to bump, erase some of the losses. So, what is important is how this market reacts next week. If we continue to see some pressure, if, again, like with live cattle the cash market starts to sag a little bit, then I think we're going to have to start paying some more attention that maybe this market is getting ready to break. Right now, not really indicating it, but certainly could when we get around to next week.

Pearson: Okay. So definitely something to keep an eye on as we roll into next week.

Newsom: Yeah, you know, calling a top in these markets very difficult. As far as selling them you basically just have to close your eyes and do it, particularly when they're this high.

Pearson: Alright. Well, let's jump over to the lean hog market, we just saw the story on PED, continuing to affect the market though we had a pullback this week of about $3.

Newsom: We did, we saw the hog market come down and it's interesting, you know, to look at this, at the hog market short-term and then compare it to what we see long-term. I was asked by a long-time DTN customer if I could post my three to four year cycle chart that goes back into the '90s and if it still holds true, if this type of cycle still holds true in the hogs then this past June would have been the cycle high and the market would now back off into September. Fundamentally what is going to cause that? We haven’t seen the same sort of supply and demand support in the hog market that we've seen in the cattle. So, if we start to see the cash market sag a bit, if we start to see demand start to pull back a little bit because of high prices, who knows, that could be the trigger that does send us down into the first low that, again, would happen this fall.

Pearson: Alright. Well, not a whole lot of excitement on this weekend for us, Darin.

Newsom: I know.

Pearson: Well, thanks for taking the time to be with us and discuss these markets.

Newsom: Thank you, Mike.

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 about a photographer who is capturing the changing role of women in agriculture. 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