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Market Analysis: Mar 25, 2011: Walt Hackney, Virgil Robinson

posted on March 25, 2011

Nearby grain contracts traded higher this week as a late-week sell off failed to erase gains in previous sessions.

For the week, May wheat gained 10 cents, while the nearby corn contract moved 6 cents higher.

Despite rain slowing the Brazilian harvest, soybeans trended lower as the May contract settled Friday with a weekly loss of 4 cents. Nearby meal prices followed suit, giving up $10.70 per ton.

In the softs, cotton's days below $200 proved to be short-lived as the May contract rallied $5.37 per hundredweight.

In the dairy market, April Class III Milk futures gained 13 cents while the deferred contract advanced by more than 75 cents.

Over in livestock, the June fed cattle contract gained nearly $6. Nearby feeders advanced $6.80. And the June lean hog contract surpassed the century mark with a gain of $3.88.

In the financial markets, the Euro lost 86 basis points against the dollar. Crude oil gained $3.28 per barrel. Comex Gold advanced $22 per ounce. And the Goldman Sachs Commodity Index gained more than 16 points to close at 718.50.

Market Analysis: Mar 25, 2011: Walt Hackney, Virgil Robinson Pearson: Here now to lend us their insight on these and other trends, two of our regular market analysts, Walt Hackney and Virgil Robinson. Gentlemen, welcome back, you both look very handsome tonight. Let's get to the markets. I want to get to livestock here in a moment because this was a crazy week, Walt, and I know you're excited. But I want to get Virgil to talk a little bit about this big report we've got coming up from the USDA and that is going to be a focus. It has been a focus really since our last USDA report because, frankly, there's not a lot to focus on just yet, Virgil. Spring planting, which looks like it's going to be cold and wet for most of the parts of the Corn Belt according to the forecast, so this planting report is going to be a biggie. What do you think we're going to see?

Robinson: Got a pair of reports, actually, next week, prospective plantings as well as stocks in all positions. Industry consensus is something in the vicinity of 91 to 92 million planted corn acres and something near 76 to 77 million soybean acres. It would require, I think this early on, something well either above or below those numbers, I think, to really create a major fur in the market. Stocks in all positions will be interesting to the extent there are some who are of the opinion because of much better quality grain that perhaps we're not using as much in our feeding industry as we have used last year, for example, so the quarter over quarter comparison could be something of a surprise. Beyond that I think you and the group touched on other primary factors, one being our assumptions about weather, which generally are not particularly conducive here to an early spring planting particularly in the Red River Valley where the area where we could see a fairly significant year over year increase in acres is positioned and that is in North and South Dakota. So, those factors kind of underpin the market. We did have news today of some grain sales, some corn sales to unknown destinations, a pretty good chunk of old crop, small parcel of new. It is assumed that that was probably China and the market did not receive that particularly bullishly, the market closed quite poorly today. So, we have some concerns here near-term wise about the speculative exuberance in the market or lack thereof.

Pearson: All right. Well, we'll find out more when that report comes out. You mentioned the flooding up in the Red River Valley, which we talked about earlier in the show. It is a big issue on the wheat number too and spring wheat versus soybeans. So, we're really not going to know where we're going to wind up until June and that June report will become a very important one. Talk a little bit about the wheat market, Virgil, though. What do you see right now?

Robinson: A couple of things I track, Mark. I watch the soft red wheat cash index pretty carefully and a couple of weeks ago, at least based on the system I maintain, that particular index turned down, the trend turned down which implies then that rallies in that particular market should be met with some pretty significant selling. So, I'll kind of abide by that signal and stay in that camp here. I think those who need to be making some sales and have not made sales be on alert here, the next three or four weeks is your opportunity, I think.

Pearson: And some new crop sales as well on wheat?

Robinson: I would, Mark, if nothing else I'd create minimum price, particularly if it were attractive by that at or near, at or above your crop budget.

Pearson: Let's talk about the corn market. Talk about this poor close on Friday because, yeah.

Robinson: I wish I could explain it. I really thought the news this morning was such the market would be pretty strong all day long. It did not sustain the early strength and closed very defensively. Perhaps we have attracted the commercial pricing, those who were absent from the market for a long time with the break in corn futures and cash corn here of a couple of weeks ago, perhaps we have them up to speed and that part of the market is now secondary. So, it's going to be dependent on speculative exuberance, I think, to sustain these prices and move them higher.

Pearson: I had a special mug I was going to have out here, I was looking for that. Virgil, let me ask you this other question and let's move right on to soybeans because of our tight time tonight. But as we look ahead at the soybean market and, again, prospective plantings coming up, situation in Japan which wreaked some havoc and impacted what you're talking about with a lot of sales, people going to the sidelines. What is your take, though, on soybeans relative to what you mentioned earlier? That is the situation down in South America.

Robinson: The inclement weather, Mark, the weather prohibiting the advancement of the harvest? Well, I'm still led to believe, based on what I know tonight, that Soylandia, again, the sum of Brazil and Bolivia and Paraguay and Argentina, will in fact raise a record soybean crop so we need to acknowledge that. Historically that crop hits the international pipe March, April and May and clearly we are there. Now, it does alleviate the tight stock situation in the United States, that is still at hand. So, again, it will be dependent over the next several weeks, we better define acres and then the prospect of what crop we develop over those acres. I can't envision the market collapsing from current levels. Could we pull it down a dollar a bushel? Yeah, pretty easily, just with speculative liquidation.

Pearson: New crop minimum price? What do you want to see, Virgil, on sales?

Robinson: Assuming no sales to date, Mark, I'd use rallies in the new crop futures to create minimum price. We need to define this acre issue here in the U.S. and then the subsequent production thereafter. So, I'm reluctant, like I was a year ago when we had this conversation, to finalize the price of new crop grain.

Pearson: All right. It's been wild. Thirty seconds, Virgil, cotton market.

Robinson: Stocks to use ratio at ten percent here in the U.S.. $100 inverse between old and new. I'm a put, I'm a buyer of puts in new crop or vertical put spreads to create price floors. All of those should be well above crop budgets for producing cotton this coming season.

Pearson: All right. Let's switch gears, livestock market. Wild week, wild industry these days. I can't keep track, Walter, of these prices in this fed cattle market. What are you seeing out there? My gosh, over $1.20, we're seeing $1.92 in the beef. Where is this going? Is this for real? Is this forever?

Hackney: I'd give anything if I had the language that Virgil uses to describe these markets. I can't even pronounce...

Pearson: I know it. I'd have a Ph.D..

Hackney: I can't pronounce those words. But I agree it's exuberance, great exuberance. Now, with that being said, we're extremely current on our live cattle inventory in the feedlots. We were not, as a result of the three to five dollars we lost a week ago, at a dollar lower we experienced Tuesday of this week, it started creating a little bit of a buildup in the show list and in the inventory and all of a sudden Wednesday evening and Thursday we rebounded from $1.13 on live cash cattle to $1.17, $1.18. We rebounded yesterday from $1.85 on Tuesday to $1.92 on dressed cattle sales. What happened to create that exuberance? No one knows other than the simple fact that export have resumed a level, maybe not quite like it was before the catastrophe in Japan, but it is on the mend and it has also created another level of marketing for hogs also in regard to pork product. Export seems to be the key in regard to our, both markets, pork and beef. Nothing in the domestic trade has actually occurred to cause extraordinary use of the products domestically. But when you bleed off the excess of the inventory and go export with it all of a sudden you have maintained a balance with the domestic usage and you have created another market as far as export and that is what happened this week.

Pearson: Well, export market, world economy, the economy is improving. I mean, is this here to stay then?

Hackney: World economy would be another area that Virgil would be more adept to cover. But I can tell you that South Korea, China and particularly Japan, who has got to be looked at as our biggest importer in regard to red meat, they have picked up so significantly this week that I do think it caught all of our marketers by surprise. The funds couldn't wait to jump into the Board of Trade, they couldn't wait to jump into the Mercantile, they particularly did on the Mercantile today, they run cattle up nearly to limit, they run hogs up $1.25 to $1.50. It caught everyone by surprise. The hog report today was not completely friendly. It showed 100.5 on all hogs, it showed 100 on kept for breeding and it showed 100.5 on the marketing. That small amount of increase over estimates would normally have shown a bearish return from the investors starting next week but as we speak I think export is going to temper that emotion and I think that we'll see a steady static to possibly stronger trade again this next week.

Pearson: All right. Are we going to start to expand the cow herd? Are we going to start to expand the sow herd again? Are we seeing some responses out there in the countryside to these prices?

Hackney: I think logic would say we're more apt to see some increases in pork expansion simply because of this new onslaught of extraordinary exporting of the product. Beef I don't think so. I think the cash market is so far outriding the desire to keep a heifer back for an additional year before you can even breed her and I think the cash market is going to dictate they sell them into the feedlots.

Pearson: This calf market was phenomenal this week. This was a tremendous action.

Hackney: Well, any price you want to mention. Yesterday, as an example, 870 pound all natural black steers in Missouri sold at $1.36 a hundred weight. Now, under normal conditions that buyer would need a strong prayer book to make those cattle work. But in this environment it is his rock and roll and stay with the market.

Pearson: All right. I want to talk retail beef real quick. I know that has not become the main channel now, we've got this export thing, but are we clearing hamburger, are we clearing the beef and the pork in the meat case right now as far as our retailer is concerned?

Hackney: We are clearing beef in general. Unfortunately part of the beef is priced at a level that a restrictive consumer budget isn't picking it up quick enough, it's getting gray in the counter, they're grinding it and hamburger has become the big issue and used item of the beef industry.

Pearson: All right. So, that's where the push is going to be. So, it's going to be interesting to see where we go from here. These are wild markets, unbelievable prices on cattle and hogs and thank you for clearing all this up for us. As usual, Virgil, another great job of telling us where we're going in these markets. We appreciate it. Some great insights as we've got all these critical reports coming up this week. We're out of time, though, but thank you so much. And, of course, we'll talk about all of these on Market Plus but I want to thank Virgil and Walt. That will wrap up this edition of Market to Market. But you can find expanded market analysis from both Walt and Virgil as streaming video of our program and it's all free at our Web site so be sure to check that out. Then we want to thank you for your patience in recent weeks as Market to Market aired in some different time slots to allow America's PBS stations to conduct fundraising activities. We want to express our sincere appreciation for those of you who responded by phoning in a pledge and investing in Market to Market. Be sure to join us again next week when we'll examine the market impact of USDA's much anticipated prospective plantings report. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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