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Market Analysis: Virgil Robinson

posted on August 1, 2014

The private company Ag Resource predicted this week that U.S. growers will harvest a record 14.5 billion bushels of corn this fall. And as you might expect, grain prices continued to look for the bottom. For the week, September wheat lost 4 cents, while the nearby corn contract moved 11 cents lower. Old crop soybeans also headed south as the September contract gave up 40 cents. Nearby meal prices followed suit with a loss of $14 per ton. In the softs, cotton continued its selloff as the December contract declined by more than $2 per hundred weight. In the dairy market, September Class III milk gained 85 cents, while the deferred contract moved nearly a buck higher. Over in livestock, fat cattle gave back all of last week's gain and then some as the October contract lost $3.80. Nearby feeders advanced more than $2. And the decline in hog prices continued as the October contract lost nearly $4.50. In the financials, the Euro declined by 9 basis points against the dollar. Crude oil lost more than $4 per barrel. Comex Gold was off $10.50 per ounce. And the Goldman Sachs Commodity Index lost 18 points to settle at 616.50.

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: Thanks, Mike, nice to see you.

Pearson: We had a big week this week as far as export news is concerned. Did it support the wheat market terribly?

Robinson: I think it did, Mike. One of the bigger weeks we have had in this crop year and in recent memory, primarily hard red winter wheat, Mike, a higher protein type wheat, a Kansas City exchange wheat, and I think that underscores the concern quality wise in some areas of the globe, particularly Europe where they have actually had too much rain to accommodate the harvest.

Pearson: Now, is that -- does the trade anticipate some spillover support on the other wheat contracts as this continues? Will the wetness around the world continue to support the balance of America's wheat.

Robinson: Wheat exports in aggregate have improved at this point in time versus a year ago and versus the five year average. So, certainly it is the grounds by which a corrective rally could take shape, Mike. And I hesitate to put a price number in front of folks. But any 30 to 50 cent rally in really any of the varieties, soft red, hard red, hard spring, I think provides an opportunity to either create some type of floor or go ahead and make a sale, particularly if it's your first.

Pearson: Because as we look out over the long-term through the balance of this winter, is the overarching price trend still downward do you anticipate?

Robinson: Yeah, I think it is. And to that statement, Mike, the International Grain Council just this week increased their global wheat forecast month over month. It is a bit below last year's record production but not by much. So, wheat supply, at least as measured by this data, indicates plenty of supply.

Pearson: Okay. Alright. So, take advantage of a rally and maybe make a sale even if the price isn't the sweetest thing in the world.

Robinson: I think for many that have done nothing to this point, yes, I would.

Pearson: Alright. Well, now let's jump down and talk corn prices. We saw corn continue to slide again this week. We're talking a bigger and bigger harvest. Where do you think the trade is anticipating this harvest to come in? Are we expecting it to continue to grow through August?

Robinson: Well, large crops have a tendency to grow larger, Mike, and I think that is the mentality. I have not, in recent memory, can I tell you of a fixation on supply the likes of which we have today. One concern that I think will perhaps gather some attention moving forward is the fact that while cooler weather I think has sustained this crop prospect, in many areas it has actually slowed development. Colorado, Minnesota, North Dakota, Wisconsin, Michigan, Ohio, there is I think and will be a growing concern in terms of optimizing their yield potential should we continue in the next 30 days to remain unseasonably cool. That I think will get some play here in the not too distant future.

Pearson: And something like that where you're extending the growing season in a year that has been abnormally cool we should probably anticipate more chatter anyway of an early frost, perhaps is there a possibility the market might reward that thought with a little bit of a rally?

Robinson: If it should become more prevalent. The consensus of thought, certainly it could, Mike. As you mentioned earlier in the show, export sales have been shifting away from old crop and more towards new where the sales have actually been pretty strong. The market has come down significantly in value over the last several weeks, Mike. So, at any concern, any threat, imagined or real, could create some type of short covering bounce or a recovery.

Pearson: Okay.

Robinson: To bank on that, difficult for me to guarantee that. But certainly the market is susceptible to that type of behavior.

Pearson: Okay, and as we look longer term in the corn market we've got a question from one of our Facebook followers. Martin in Carroll is curious, should we be marketing '15 crop already? Should we have been? Or should we leave it open? The threat of record production this year is bearish looking forward.

Robinson: Well, there have been better opportunities than there are tonight, Mike. I would suggest that trying to put together some type of crop budget. I know that's difficult to do. But that would be the prerequisite in my mind before aggressively beginning to sell 2015 corn crop at these values. Clearly the next several months do not portend well for stronger prices. So, we all need to acknowledge that and try and manage our businesses accordingly. So, be looking for opportunities out there but certainly do so with some objective in mind.

Pearson: Sharpen your pencils first.

Robinson: That's always a good thing to do.

Pearson: Well, now let's talk soybeans. They were also the recipient of some pretty good news on that export sales report. We didn't see it translate into dollars in producers' pockets. What happened?

Robinson: Well, again, they're fixated on this supply notion, Mike. And as you mentioned to me earlier there are numbers out there that almost stagger the mind in terms of what this crop could potentially yield. I still think it's a little early. We have the month of August here to deal with and as I mentioned a moment ago there are select areas that are lagging normal development. So, the frost notion will come into play at some point in time. Underlying business has been very good. New crop beans and new crop meal, processing margins, Mike, the way I track them, both old crop and new, are better than they were a year ago at this time. So, there is a pretty solid demand structure within the marketplace. But, again, as long as we're fixated on this huge, huge crop it's going to be difficult to generate any kind of significant price recovery unless we have a weather trauma.

Pearson: Okay. And now, same question as we look into 2015 or even 2016 on the prices, with the notion of a record crop this year and once folks have planted some beans might keep planting larger bean crops, same deal, sharpen your pencil and consider sales farther out?

Robinson: Yeah, I think that is always a good strategy, Mike. But please understand at present the economics, both in the U.S. as well as in the southern hemisphere, are still slanted toward more soybean production. And the Brazilians I think will make an effort to sew more hectares this season than last. So, it is conceivable in March or April of 2015 the supply of beans in the western hemisphere would be at an all-time high. So, keep that in your mind as you think about your tolerance levels and your marketing tactics moving forward.

Pearson: Alright. Well, now let's jump down to the livestock sector. We had a pretty big fall in fat cattle price this week. We had news of Cargill closing a plant Friday up in Milwaukee. Where do we see this fat cattle price trending?

Robinson: Well, I think the market is going to remain strong, Mike. And we still maintain this pretty significant cash premium over futures. So, it's very difficult for me to get excited about selling futures for anything other than a relatively short-term type behavior or strategy. Export sales to this point in time are actually above one year ago. I think the market has been spooked by several outside influences, the behavior of the security market, corporate profits not being perhaps what everyone expected them to be, the geopolitical concerns across the globe. So, keeping the speculative element of the marketplace nervous and on edge and traditionally when that is the case, sidelines is their best policy.

Pearson: Okay. So, we'll see what happens next week. We've got another batch of reports to see what the broader economy does.

Robinson: Yeah, and to the extent beef demand -- I need to address that as best I can. I think it remains very solid, Mike. We have mentioned export sales to this point. I kind of watch the restaurant performance index and we have data now for June. There's a 30 day lag period. But for I think the 23rd or 24th month that index is above 100, which would imply and correlate I think to pretty strong restaurant, dining and food preparation away from home. They're employing more people. I think the demand for beef remains strong.

Pearson: Certainly. Few people go to restaurants for a salad. Now, as we talk feeder cattle prices we've seen the corn continue to fall, feeders stay very strong. A trend anticipated to continue?

Robinson: I'm sorry, Mike, I didn't hear your question.

Pearson: Feeder cattle price probably going to stay strong as corn falls?

Robinson: Yeah, as long as we sustain a strong, live cattle price and relatively inexpensive feed, yes, I think feeder cattle remain strong. The recent inventory report indicated the smallest herd size since '73. Clearly seeing fewer beef cows and heifers in the slaughter mix. So, there is an effort underway but it takes and requires quite a length of time to rebuild those numbers, Mike. So, this is not an overnight phenomenon.

Pearson: Alright. Now, Virgil, before we let you go, we've seen the hog market continue to slide this week. October hogs roughly down $8 in two weeks. Have we topped out in that market? Are we adjusting to the new reality of hogs?

Robinson: Well, the cash market has come down I think based on expectations of the little bigger slaughter numbers beginning here in the immediate future. But, again, Mike, I am reluctant to make any kind of a stand in futures when October and December futures are so discounted to the lean hog index. I just don't sense that to be a viable hedging opportunity. Perhaps some type of option strategy for those who are most concerned here. But I still think the live hog market is going to remain strong as a function of red meat price strength, poultry price strength and demand.

Pearson: Alright. Well, thank you for taking the time to be with us, Virgil.

Robinson: Thank you.

Pearson: 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 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 examine the outlook for agricultural trade. 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