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Market Analysis: Blue-ribbon Panel

posted on August 22, 2014


Grain futures prices were mixed this week. And despite modest rallies on Friday, both corn and wheat traded sideways. For the week, September wheat inched slightly higher while the nearby corn contract moved fractionally lower. Strong foreign demand was friendly to old crop soybeans as the September contract improved by 64 cents. Nearby meal prices followed suit with a gain of $45 per ton. In the softs, cotton rallied this week as the December contract gained $1.38 per hundred weight. In the dairy market, September Class III milk gained nearly $1.40 as did the deferred contract. Over in livestock, the pullback from record highs continued as the October cattle contract lost 75 cents. Nearby feeders moved $4.20 lower. And the lean hog contract gave up more than $2. In the financials, the Euro lost 14 basis points against the dollar. Crude oil declined by $1.46 per barrel. Comex Gold gave up $25 per ounce. And the Goldman Sachs Commodity Index shed more than 4 points to settle at $602.80.

Market Analysis: Blue-ribbon Panel

Pearson: Here now to lend us their insight on these and other trends are four of our regular market analysts, Sue Martin, John Roach, Tomm Pfitzenmaier and Naomi Blohm. Folks, thanks for joining us tonight. It's a special edition of Market to Market. Sue, let's start with you. We saw the wheat market continue to trade sideways. Have we put in the harvest low? Are we looking for a reason to bounce?

Martin: I think we are. The market seems to have more of a sideways approach. We broke through the 40-day moving average today but we still came back and closed lower for the week, minimally. I think that there's concern in the wheat market. First off, you've got the French wheat. France started importing Lithuanian and Great Britain wheat here today and yesterday and I think that it's been, I'm trying to think when the last time was they did it, it has been a very long time. And I think that what they're trying to do is blend off some of the wheat that they have for milling so that they can take care of orders they have had ahead of time. In the meantime, you have also had weather that was a little bit disadvantageous to the Canadian wheat crop as well as North Dakota and concerns over Vomitoxin is there. And they're talking about Vomitoxin being the worst it has been in nine years with 2.2 parts per million. And so I think that you have that and the you put the Ukrainian situation on top of it and Ukraine's production may drop about 9.4 million metric tons from what they originally thought. And I think that wheat has a reason to base here. And I think that when you look at the prices I could see wheat going higher yet. I don't think we're done. I think wheat can probably move up. The hard part is going to be getting through $5.91. And I think if we can do that then we'll ratchet Chicago wheat up over $6 to probably $6.20, $6.21, something like that. But the $5.89 to $5.91 area is a tough area.

Pearson: Okay. Alright. Now, John, as you take a look at this wheat market, Sue mentioned the Ukrainian wheat might not be there and there was a couple of reports on that this week. For producers, are we into a sell signal at all on wheat for you?

Roach: No, we're not. The market bottomed, came up and gave us a sell signal and then went back down and re-tested bottoms, broke them out actually and now we're bouncing back up again. So, this is a basing action. I think Sue is exactly right. And I think that the market has been so complacent about the Russian invasion of Ukraine in the spring it really stimulated the speculative buyers. This time the buyers don't seem to be as concerned and I think the situation there looks just as difficult today as it ever looked in the spring. So, I think there's not enough premium in for the difficulty that they're going to have getting that crop planted. I mean, they're moving into their planting season and when you have those kinds of concerns it's difficult to secure all of the financing and get all of the work done and duck from the bullets.

Pearson: Certainly. And so that should lend perhaps a little better selling opportunity here in the near term, would you guys anticipate here in the next month or so?

Roach: I think so. I guess what I think is that the specs that are in the market, we still have a big spec position on the short side. According to the numbers I looked at today it was about 10,000 contracts less than it was a week ago but they're still short about 60,000 contracts. And that is a big spec short position that if it starts to trade through some of these uptrend lines or downtrend lines then you're going to get more of that speculative short covering I think. So, I would look for a rally in the short-term.

Pearson: Alright.

Martin: And, Mike, I think too wheat is building a, could be building a W formation, very typical of a wheat market.

Pearson: Okay. Alright. Well, now let's jump down to the soybean market. Let's talk old crop soybeans to begin with. As we look at that 64 cent, almost 64 cent climb this week, Naomi, was it strictly export news that was driving that old crop soybean bump?

Blohm: It helped. That was definitely a good reason for the speculators to come back in. But also if you look at basis in the countryside it continues to be strong and stronger yet for remaining old crop until the harvest is able to become available. So, we're starting to come to that window though that because the new crop will be here sooner than later I wouldn't be surprised if we see maybe the September futures tart to ease up a little bit. But mostly some sideways trading, especially for that new crop right now as we probe to find maybe a short-term temporary low, especially until we see if we have any signals of early frost, which could really throw things around here a little bit differently.

Pearson: Now, we did hear this week the Pro Farmer Tour was out and about in the countryside. Tomm, their reports came in at 3.8 billion bushels, roughly close to USDA's number on soybeans. Has the market begun to put any sort of a weather premium on this new crop soybean market?

Pfitzenmaier: I don't know that you'd say it has begun to put it in. I think they're just not taking it out. We have dropped, obviously, quite a bit from the spring on beans. But the Pro Farmer number wasn't that much different, actually it was a little less than what the USDA has been using. They came up with a number that is barely a bushel above what is probably going to be an adjusted, upward adjustment yield from last year. Does really anybody believe that you look around this crop, you look at the pod counts, you look at all that, that we're only a bushel per acre better than last year? It looks to me like there's a lot of downside in beans from this level and I think Naomi is right, we're going to maintain a weather premium for a while. But the odds of ruining a bean crop from frost, I mean if it hits your farm and you get nipped there's obviously some problems, but ruining a crop probably isn't going to be a problem.

Pearson: If you're waiting to make sales don't hang your hat on an early frost --

Pfitzenmaier: I mean, we're looking at a carryout of 400 to maybe 500 million bushels. So what if a few beans get nipped, I mean, in reality?

Pearson: So, would you be using this opportunity to make some sales in here?

Pfitzenmaier: Absolutely I would.

Pearson: Okay. Alright. Sue, any other thoughts on the bean market?

Martin: Well, I think that one thing we have to look at is the ratio between beans, new crop beans and new crop corn continues to be abnormally wide. And I think there's another undertow here that is happening to the beans because if you look at new crop beans they're going down like pushing water uphill. And $10.16 is an objective from the gap of the Fourth of July and $10.06 is a wave 4 count on the downside, which usually gives very good support. $9.85, $9.95 might dip into that. But if you look at South American production this last year they were touted to have a 91 to 93 million metric ton crop and demand was ramped up for that. Instead, with weather, the worst drought in 50 years, or what many can remember, they had a crop of 86.6 million metric tons, the USDA is maybe at 87. And so this year they're talking around maybe 91 by Solaris and Ag Rural is at 94 million metric tons. I think this bean/corn ratio is kind of sticking around trying to enhance that South American production. And getting lending for some of these farmers with corn prices so cheap down there, corn is taking a backseat to the bean production. So, because we're the only game in town right now a lot of the South American production has been exported that's going to be. I mean, they still have some but still, it's not the competition and it never really has been. And then you've got Argentina who I still say the Peso fell to a new record low against the dollar overnight. And that is another thing that is kind of creating that farmer in Brazil, I mean, Argentina, not to sell. So, all of those factors are playing a hand in here. But once they get a smell that the planting is going good in South America things are going to look a little differently I think.

Pearson: Okay. Now, John, as we take a look at the demand side of the ledger here for the new crop soybean market, we did see China place another sizeable order here this week. Does it look like Chinese demand is going to be able to grow along with these lower prices from last year?

Roach: Have so far. I mean, they have not backed off at all. Export sales on the new crop passed last year's export sales at this point, in a numerical basis. There still is a percentage of total expected sales a little bit smaller yet. But the business is going brisk even though we know that a month from now or six weeks from now well gosh the price is almost $2 a bushel cheaper. So, why are people buying in the face of that kind of an inversion other than there's solid demand and they're not being patient to wait until the bigger supplies and lower prices come.

Pearson: If they could still make a profit at this level --

Roach: Well, they're still needing the supply. And so you have to look at this demand and say, are we correct on the demand estimates for the new year? Are we undercalculating what the demand looks like for this upcoming year? And so, so far, what we have been spending all of our time doing is focusing on the size of the U.S. crop and it is big, big or bigger. I mean, maybe not quite that big but even bigger or just take your degree of big and that's what it is and the market has come down and now we get a little nervous about bringing the crop home. There's also a gap between now and the time beans become available. And I believe that when beans become available they won't be available. Farmers are not going to rush to sell beans at this price. They will drag their feet, they'll have their heels buried in the ground and the buyer is going to be frustrated trying to get his hands on those beans.

Pearson: So, basis will probably respond positively should that situation arise.

Roach: As we saw this week.

Pearson: You bet.

Martin: You know, Mike, I've got to add one thing in here. To put in perspective the amount of beans that China is going to import, the 74 million metric tons that the USDA is projecting they will over 2014-2015, that is four cargoes a day that they have to be buying. So, we're going to see them in the marketplace. And also if you look at Brazil's weather, their weather -- remember that horrendous drought that they had in January, February and March has come back and is still dry at an abnormal time when they ought to be wet and especially in the Cerrado area. So, I think there's some concerns there and we just need another month or so on the calendar and then we're going to have a little bit of a better picture I think.

Pearson: Alright. Well, now let's jump back to the corn market. Let's talk a little bit about that. Again, the Pro Farmer Tour being all the chat in the ag media this week, 14 billion bushels, roughly on track with USDA numbers, 169 and change as the average national yield. Naomi, as you take a look at the -- let's talk old crop corn. Let's jump backwards. There's still a lot of farmers perhaps with some corn in the bin. What is your advice to those folks sitting there as we approach harvest time?

Blohm: We'll likely see the market trade in about a 25 cent sideways trading pattern. And any time you can get it to the higher end of that range if you need to move some it might be prudent to do so. Looking down the road thought, going kind of back to the South American conversation too, they're going to be planting 9% less corn acres in Brazil. And so that is going to actually then affect us here as we do our fight for acres in the fall and things like that. So, I think there is some upside potential coming, not anything tremendous though by any means. But I think we have some upside potential. But between now and the September USDA report there's not that much to talk about. And the Pro Farmer numbers, when you compare them historically to the September USDA reports, there's not that much of a big difference in between. So, we still have this sideways trading platform that is most likely the only thing in town for a good month or so. But then hopefully we see the longer term demand situation pick up again because there's just that demand out there and it's cheap corn. It is cheap.

Pearson: And now you mentioned a 25 cent trading range, Friday closed at $3.65 and a half. Would you look at 25 -- are we in the middle of that range today? On the low end? On the high end?

Blohm: We were more on the lower end yet.

Pearson: Okay, so close to that $3.75 to $3.80 might be a good time to make some sales.

Blohm: Right, yeah.

Pearson: Alright. Well, now let's jump into the new crop. Corn decision making time as we're there, we're on a rally, we've been -- farmers have been seeking a rally for a time. Tomm Pfitzenmaier, do you make some sales in this rally? Or do you hold out and see if it'll keep climbing?

Pfitzenmaier: Absolutely you make sales. I mean, everybody is running around here saying, well, prices are cheap, demand is going to be coming roaring in here. Where? Exports -- we've got the highest priced corn in the world so export, how is that going to go up much? Ethanol is capped so we're not going to go much above 5.1 billion bushel for that. Livestock numbers, obviously cattle and hog prices are high because the numbers aren't there. And while I understand that eventually that is going to turn around it's going to be a while. So, I just don't see enough demand swooping in here to gobble up a 1.8 to 2 billion bushel corn carryout.

Pearson: John Roach, any other thoughts on the corn market?

Roach: I think it will be like the 2 billion bushel carryout we had last year that by the time we come around to today it's not 2 billion bushels anymore. We had to push $5 plus corn out to everybody last year and we had phenomenal increase in worldwide demand.

Pfitzenmaier: But, John, everybody's bins were empty a year ago and this year everybody's bins are full, they have bought everything they need. They were operating on a period where we didn't have anything and they were kind of sweeping up the bins to get -- this is a whole different situation this year, isn't it?

Roach: Well, I think it is and I think initially that the demand we had last year right at harvest time we probably won't see that for that reason. But I think as we look at this longer term, I think Naomi is exactly right, and that is that we're going to see acres down in South America, we're going to see U.S. acreage down. All the guys in the Dakotas that are getting these horrible cash bids at $3. And below, they're not going to plant corn there next year. So, corn acreage is going to be down around the world, in my opinion, next year and I think with these kind of price levels you can expect demand to be up. Normally worldwide corn demand is up 2-4% per year. Let's just say it goes up 4%. We're going to not have a 2 billion bushel carryover a year from now.

Blohm: Yeah. And the thing too with China to be thinking about is that internally their corn is more like $9 is what it costs and our corn, if we sent it there, would be closer to $7. So, they're just boycotting our corn right now because they need to get rid of the yucky corn that they have that is three years old in the bins and so they're trying to get rid of it. So, you know, you're right. We might not see something where just this demand pace just picks up tremendously and people are importing corn. But I think we see that slowly start to build and come back.

Roach: Now, the question here that farmers need to make sure they understand and that is although we're talking strong demand and some of these other things, we're not talking big prices. What we're talking about is solid demand, a solid kind of a market. And what the market has to do is it has to find a price level where we can transact record quantities of corn, wheat and soybeans for this upcoming year. And all I'm saying is that at today's price level I don't think -- once we get through the harvest and we finally get things put away I don't think we're going to be trading at these kind of price levels because of the demand.

Pearson: Alright. Well, now let's talk -- as we are talking about increasing demand let's take a look at the livestock sector. Cattle on feed report out today. Tomm Pfitzenmaier, how did it come in versus trade expectations?

Pfitzenmaier: Well, we rallied pretty sharply on Friday in anticipation, or today, in anticipation of that report and it came out maybe a little bit not up to what the expectations were. So, I'd guess it was maybe neutral to maybe a little weaker probably.

Pearson: Okay, probably see not a whole lot of response come Monday? If so, possibly downward?

Blohm: They already had opening calls for 75 to 100 points lower. That already came over the newswire.

Pearson: And now has the cash trade been transitioning along with the futures to be a little bit lower?

Martin: Well, I think, Mike, when you look at the cash and you look at what the beef market is doing, actually the cash market is too cheap. It should be like $160, $162. But then again you look at the futures market and here we are discount again to the cash market and we're running on October futures about $6 discount to where the cash market is today and normally you should be $3.18 premium. So, I look at that and I say to producers, how can you hedge that on the fat market? If you're going to hedge do it only with put options and leave your top side open because I think by the end of the year we're going to go for a basis change in here. But the key is demand. Here again it has been a supply oriented market. I guess on feeders you'd call it demand because of the buying. But you look at the product and with what -- and product is kind of working its way down, which it should be -- but you look at the hog market and it's like dirt cheap compared and you've got Canada with 1.2% more hogs right now and they're looking at expanding. And you look at their beef industry and they're sending heifers south. But I think that when we look at this market and diets have been changing over the last two, three years, maybe longer where they're shifting more towards poultry, away from red meats. And you've got a poultry industry on the cusp of good expansion. It doesn't take long. So, there's going to be competition. That said, I think if I was a feeder cattle producer I'd be hedging my feeder cattle. What have we see on this break? People who have hedges on dumping them. And I think that's a bad omen.

Pearson: Okay. And Naomi, you're nodding here right along. We've seen $4.20 move out of this feeder cattle market. What are your thoughts?

Blohm: Just, maybe just a period of just continued lower prices on the futures market because the speculators have stepped out yet. But we haven't seen any bottoming formation signal there. But Sue, everything that she said is right on as far as the demand goes and the longer term demand and things like that. So, I'm hoping that this is more of a short-lived moving price lower that we've had here and that we see the market come back up, cash markets along with the futures price as well.

Pearson: See it turn around.

Blohm: Yeah.

Pearson: Now, John Roach, as we get ready to head out, as we take a look at the hog market today, Sue mentioned dirt cheap especially relative to the fat cattle market and still falling. Does it look like we're going to bottom out?

Roach: I think we're not far from doing that. I think we're not far from bottoming both the cattle market and the hog market and staging some rebound. The futures market has really gotten itself ahead of the game here because of the margin situation, the way the trading works there. And so I think that we're closer to a bottom than -- and so I'm not interested in hedging here.

Pearson: Not interested in hedging, not interested in selling at these prices. Should start to see things turn around. Alright. Well, folks, thank you so much. That wraps up our special edition of Market to Market. But we 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 shifting U.S. Food Aid policy is affecting the agricultural sector. 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 John Roach live cattle markets Mike Pearson Naomi Blohm soybeans Sue Martin Tomm Pfitzenmaier wheat