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Market Analysis: May 06, 2011: Virgil Robinson and Walt Hackney

posted on May 6, 2011


A stronger dollar, two weeks of reduced export sales and a commodity fund sell-off all served to push the grain markets lower.

For the week, July wheat lost 42 cents, while the nearby corn contract moved 70 cents lower.

Soybean prices also were caught up in the commodity fund sell-off, as the July contract fell by nearly 70 cents on Friday. Nearby meal prices also trended lower and finished with a loss of $14.10 cents per ton.

In the softs, Cotton continued its retreat from all-time highs as the July contract lost another $12.46 per hundredweight.

In the dairy market, May Class III Milk prices continued its upward trend with a gain of 11 cents, while the deferred contract went backwards and lost 19 cents.

Over in livestock, the June cattle contract lost $3.50. Nearby feeders were off nearly $3.20. And the June lean hog lost $2.85.

In the currency markets, a stronger U.S. dollar put the Euro on the ropes as it lost 497 basis points against the greenback. Crude oil lost $16.75 per barrel. Comex Gold lost all of what it gained last week - and then some – dropping by $64.80 per ounce. And the Goldman Sachs Commodity Index lost 88 points to close at 671-even.

Market Analysis: May 06, 2011: Virgil Robinson and Walt Hackney Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson. Gentlemen, welcome back.

Hackney: Thank you, Mark.

Robinson: Hello, Mark.

Pearson: Boy, a big sell-off in cattle, Walt. I want to talk about that. And of course, maybe a big fundamental shift -- is this a fundamental shift, Virgil? Is that the way you're looking at what's happened here this week, stronger dollar, soros fund deal?

Robinson: I think the stronger dollar, Mark, can be attributed to the concern that has again surfaced regarding the likes of Spain, Portugal, and other countries within the E.U. that are having financial difficulties. None of this has been documented, Mark, but clearly a flight to quality in the U.S. dollar satisfies that quest. In terms of a significant fundamental change, I'm hard pressed to define it. Perhaps the unemployment situation lingering here at 9 percent, I think all of us had hopes that we were making improvements, slow but steady. That doesn't appear to be the case. Weather concerns have not been eliminated. You alluded to that in the earlier part of the show, and I think that will continue over the next several weeks to be a primary factor. Now, you also mentioned export sales have slowed, Mark, and this is true, not only in corn but also soybeans and cotton and soy products. I don't think the demand has been fully satisfied, but I do think the market paused here, took stock of what has occurred, and gave, I think, those who are in need of making purchases that opportunity. And that would be my point tonight. And Walt may address that with respect to livestock feed needs. If I were dependent upon the market -- the feed market, I would be making arrangements today to assure myself of sufficient inventories through certainly the month of august, early September, Mark, the height of the weather concerns here in the country.

Pearson: All right. Well, let's talk some specifics and let's talk about the wheat market first. The U.S. crop is not in that great of condition. You mentioned weather issues and we've been talking about the wetness delaying corn planting, but this wheat issue has become a much larger one.

Robinson: You know, some statistics this week out of Kansas with respect -- Kansas wheat tour, they're suggesting the hard red winter wheat crop, and Kansas could be off a hundred million bushel, in aggregate in the primary producing states, perhaps 30 percent. To me that's concerning, Mark. I think the markets have discounted, at least in my mind, the global supply. I'm not a willing seller of wheat, any of the subclasses, hard red, winter, spring, and/or soft red wheat at tonight's values. I think there will be better opportunities in the next few weeks.

Pearson: All right. Let's talk about the corn market, Virgil. A lot of concern -- a lot of wet weather around the Midwest. A lot of acres in the Dakotas. We've got a lot of viewers up in the Dakota region facing swamp-like conditions in a lot of the areas up there. We're going to lose some corn acres. So what's your take on corn tonight?

Robinson: Well, Informa was of the opinion that we'd lose probably 300,000 acres in North Dakota alone; however, Mark, sources that I feel are fairly reliable and dependable are suggesting there was work done this week in the North Dakotas. So we are making some progress. The USDA has a deck of new reports next Wednesday, both U.S. supply and demand, old crop, Mark, as well as their first effort at new. And I think bottom line in both corn and soybeans, that new crop S&D will continue to show relatively tight stocks, which implies the margin here for a crop shortfall in the U.S. and/or North America is razor thin, and I think that will again surface and be a market driver in the next few weeks.

Pearson: Sales?

Robinson: If I had old-crop corn remaining and it was 10-20 percent of what I produced last fall, I'd retain it. I wouldn't sell it. New crop, Mark, I wouldn't finalize the price there. For those who are inclined to utilize risk management practices, a floor price, a minimum price, I think, would be the route I would take.

Pearson: All right. Good strategy as usual. Soybean market, Virgil. Obviously we should be able to blend in and get caught up with soybeans in many areas. This reduced export demand has people kind of shaking their heads a little concerned.

Robinson: Well, I think, Mark, at least as measured by the Ag Outlook Forum data in February, the size of the southern hemisphere soybean crop has gotten larger. Now, that will be addressed next Wednesday. So I think that's been a factor, Mark. Processing margins here in the u.s. have not been particularly strong or at least as measured by last year's values. And I think that's taken a toll on old-crop soybean usage. None the less, however, I still think, Mark, with the entire growing season ahead of us, that there will be opportunities in both old crop and new crop to make sales, to make a minimum price, to establish a floor that will be better than tonight's levels.

Pearson: You have to touch on the cotton market with that big selloff there in the July contract, Virgil. Is this going to be a continuation of this as cotton kind of comes back to more historical realities?

Robinson: Well, I think you mentioned also in the early part of the story that investors have realigned their portfolios, Mark. They have, in fact, deleveraged or removed some of their commodity, ag-related investments. That's not to say they won't return. I think in due time they will. My take on old-crop cotton, while sales have slowed of late, the cotton basis, at least as I track it, Mark, I've never seen it stronger than it is tonight. It's well, well above the three-year average. That to me is not a bearish indicator. I think the demand for cotton remains strong and will resurface. I think July cotton will trade back to $180 within the next several weeks.

Pearson: Final question, Virg, the oil market. Huge selloff. Obviously a little less concerned. The stronger dollar is obviously a factor there as well. What's your take on the oil market?

Robinson: Tough question, Mark. I wish I could help people with the MENA situation, the Middle East and North Africa. Libyan production is a wild card. OPEC capacities is a wild card. If I were charged with procuring crude oil as a business or as a job, I would use this break in crude oil values to create at a minimum some kind of an option strategy to protect against higher values over the course of the next several weeks.

Pearson: All right, Virgil. Appreciate the insights, as usual. Walter, talk about this cattle market. This is a big selloff this week on the board. Cash markets, were they hit as well?

Hackney: Cash markets were particularly hit, Mark. Three weeks ago we had $1.25 a hundredweight -- or a pound top all-time price in fat cattle. This week, $1.14. Now, you take a 1,300-pound steer, he may still make money at $1.14 for the cattle feeder, but think of the cash flow loss that he's had. He's had over 135 bucks a head cash flow loss in his operation. Nothing happened to the feed costs. Nothing happened to the cost of gain. Nothing happened to the fuel that was required to produce that animal. The point being, it was a pure loss with no recovery. And that's where we're at. We went from $1.25 to $1.14. Granted there were some northern cattle bring $1.16 this week in Nebraska particularly. So the point being our inventory stayed constant. The live weight of the cattle have remained lighter due to extraordinary feed costs. But yet the market went flat on its back, to be blunt. Now, demand is the culprit. It's not anyone else that are subjecting the cattle feeder to these drops in our cash flow. It is the demand on beef. And I guess we finally hit the wall in the retail level as far as the American consumer is concerned. He simply could not maintain the price races that the retail was putting on the price of beef. Unfortunately, we're starting to get into that same problem in the pork industry.

Pearson: Talk about hogs, Walter. What do you see happening there?

Hackney: Well, that's a problem we're starting to inherit in the pork industry. Pork primals are starting to approach that untouchable level for the American consumer. We have to realize that in spite of all of the optimism that we've heard in regard to employment and those type things, we've got to understand that the budget for the American consumer is extremely restricted. And he or she or they are not going to be able to sustain these consistent higher -- constant higher prices at the meat counter. So that's the problem. Export we've got a hoof and mouth issue. We've got Korea that are coming back at us and dropping their purchasing of pork from us. We've got a problem in our exporting that we didn't have a month ago. We've got some problems with our export problems, due to policies and procedures and regulations in those receiving countries. So it's still the ability of the American consumer to take the majority of the tonnage we produce in both pork and beef in order to keep the price up there.

Pearson: All right. Walter, with that, I mean if the economy continues to show some signs of life -- continues to improve, could we see cattle and hogs retrace those highs?

Hackney: Probably not. We may have seen an all-time record in the price of cattle. Hogs as you well know, Mark, have not went back to that level as the cattle have. And it was an emotional thing. It was a cockeyed optimism type thing that caused the market to go to those levels, and we probably aren't going to go back to them. Next June of 2012, you know, here ten days ago was $1.20 and a half. Today it's $1.17.

Pearson: Walt, Virgil, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Walt and Virgil on where these volatile markets just may be headed, visit the "Market Plus" page at our web site. You'll find "Expanded Market Analysis," audio podcasts and streaming video of our program -- all FREE -- at the Market to Market Web site.

Pearson: And be sure to join us again next week when we'll examine these volatile commodity markets. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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