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Market Analysis: Mar 04, 2011: Darin Newsom

posted on March 4, 2011

Fear of growing oil prices gripped Wall Street and sent the Dow tumbling by week's end but commodity markets had a relatively strong showing.

For the week, May wheat gained 21 cents, while the nearby corn contract inched 6 cents higher.

May soybean prices climbed 39 cents. While nearby meal prices countered with a weekly loss of 90 cents per ton.

In the softs, cotton shot upwards AGAIN this week with a gain of more than $28. The May contract now rests at an unprecedented level of $212.70.

In the dairy market, April Class III Milk futures gained 38 cents while the deferred contract declined by 32 cents.

Over in livestock, the April fed cattle contract lost 5 cents. Nearby feeders declined 20 cents. And the April lean hog contract lost $1.72, to close below the $90 mark.

In the financial markets, the Euro gained 244 basis points against the dollar. Crude oil wrapped up another volatile week with a gain of more than $6 per barrel and jumped above the $100 mark. Comex Gold advanced nearly $20 per ounce. And the Goldman Sachs Commodity Index gained 28 points to close at 719.50.

Market Analysis: Mar 04, 2011: 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.

Pearson: Darin, what a wild, volatile, commodity world we live in today. Let's talk about the -- let's talk about oil prices first. Let's face it, you've got all these people running around talking about -- complaining about high food costs. We know from research that oil is nine times the cost of food as opposed to raw agricultural commodities. We're taking the heat for it. Obviously the situation in Libya, the whole northern coast of Africa. There's murmurings out of - now and Yemen and Jordan, and who knows what will happen in Iran. Everybody is a little uptight. We've got plenty of oil here in the United States. Down in Cushing, Oklahoma, you can do a backstroke in all the oil we've got down there. What's going on with this oil price? What do you see?

Newsom: Well, it's everything you mentioned. Yes, this is not a fundamental rally. This is not a supply/demand driven rally. What we've got going on here, we've got headlines being created almost every minute of every hour regarding what's going on in North Africa with what could possibly happen in the Middle East. So we have the investment money sort of switching gears. It's been in the grains for quite some time. We see it slowly switching over to the energy markets and the energy sector. We've got crude oil just taking off. There's really nothing to put the brakes on the market right now. Are we building risk into this? Some call it that. It looks to me like we just have a market that's a big run amuck at this point. Off it goes. It takes gasoline with it, heating oil, and therefore diesel prices are going up as well. The only one we haven't seen move when you had it up there was the natural gas market. It continues to lag everything else. But this is a news-driven market, driving more money into the energy sector, and it's allowing the entire sector -- the sector as a whole to just group by leaps and bounds.

Pearson: There's legitimate concerns, Bab-el-Mandeb being threatened, the hormuth -- there's some significant nationalsecurity issues that work at work here, but the bottom line is apparently we were stockpiling oil. Oil is trying to buy storage wherever we can rightnow.

Newsom: If we look at the weekly EIA stocks reports, we continue to see well above average, well above the five-year average. We're well above where we were at this point last year, so it's not that we're running short on crude oil. Now, if we compare the West Texas Intermediate, which is traded here at -- and compare that against the Brent Crude Contract, which would reflect more of what's coming out of North Africa and so on, we've seen a huge divergence in price. It seems like the West Texas Intermediate Market is now just trying to catch up and make up some ground with the Brent Market. So, you know, there is the possibility of some sort of supply disruption later on. If this escalates -- if it really starts to spread into areas that do supply more oil to the United States -- it's a possibility, but right now that's what everyone is betting on. That's what the investment side is banking on is that we do see some sort of escalation that does cause that supply disruption. We don't have it right now. You're right. We've got huge spreads in the futures market and in the futures spreads, indicating that this is not a supply/demand situation. So it's going to be interesting to watch play out over the coming months.

Pearson: All right, a lot of new money coming into all of these trading areas. Tell me this, as we look -- obviously we've got higher energy costs. It puts pressure on the dollar. I mean look at the euro gained huge against the dollar this week. What does that tell us about the dollar going forward, which is wind at our back in the farm game?

Newsom: Well, we've taken the dollar -- the u.s. dollar index through some key trend line support this past week just here to start off the month of march. If this continues, you know, we could drop the dollar down to 76 points, and the threat is dropping it down to the 2008 lows, which I believe was in the upper 60s. What would that do for commodities? Well, it's certainly going to keep this fire lit under the sector as a whole and the whole inflation argument. It's just then which market starts to pull in the most money. At that point, then they are going to look for the markets that have either the possibility of turning into a bullish supply/demand situation or markets where those types of situations, those types of fundamental situations already exist.

Pearson: Let's talk about gold real quick. Then we'll get to the grains. Gold was up 20 bucks again. Obviously there's instability in the world, so people go to the panic metal. Where do you see gold going? It's really been relatively flat in this 1400 range.

Newsom: It has. We went to a new high. We got up over 1440 this week, and then we backed off a little bit. I think a lot of that has to do with the money that's flowing into crude oil. Again, you're right, they're looking for safe haven markets. Gold has always been that. With the dollar tanking, they need somewhere to go with all the geopolitical unrest. So they were looking at gold. It just struggled a little bit in relation to crude oil, because I think you're going to see more money going in that direction.

Pearson: All right. Let's go. Let's talk about what's happening in our agricultural futures and, of course, these are all the factors that impact those. Let's talk about the wheat market first. A strong market this week for wheat, a rebound. Conditions in the u.s. -- we're going to have AWASASE Report next week to get a feel for what the government thinks we have for numbers for supply and demand. Give us your take right now on this 2011 wheat crop.

Newsom: That it looks like to me is the southern plains still missing out on most of the rain. It went into dormancy last fall, early winter, in very poor condition, the hard red winter wheat crop. It looks like it's going to come out of dormancy in very poor condition. So I think what we're seeing here is the concern in the winter wheat market that we were banking on the idea we were going to start to rebuild domestic supplies with the winter wheat, and it doesn't look like it's going to happen. In fact, we could lose some acres to some spring crops if the wheat isn't as -- it comes out of dormancy in such poor shape. So I think that's helped to support the wheat market. That's been able to fight off news out of China that the recent rains and snow have kind of alleviated some of the drought pressure that we -- drought concerns that we saw on that winter wheat crop. It's been an interesting market. It's also making up some ground on corn. We've seen that spread kind of realign itself. So a lot of factors in play, but I can't help but think that they're looking at the dry situation that persists over much of the growing area.

Pearson: Technically in all the commodities, there's been no real technical changes significantly, has there? So the underlying -- the underpins from a technical standpoint -- we don't talk about technicals a lot on this show, but wonder if we have some volatility -- we start impacting that. But we're still basically bullish fundamentals and bullish technicals on the grains and oil.

Newsom: You look back at that CRB Index that you showed. I mean that's a straight up line. That shows the commodity index as a whole, so basically commodities have this uptrend -- this technical trend that has not changed. Wheat may be a bit of a question mark, kind of in a lull right now. But long term, yeah, these markets have not changed direction. There's really nothing that changed on the charts.

Pearson: Is there much wheat in farmer hands still?

Newsom: I wouldn't imagine that there is. I think most of it's been moved. If there is, it's only a very small amount. I think we're seeing that play out in the basis market a bit, where we see some pretty firm basis, particularly in the soft red winter market at this point.

Pearson: And going forward, are you're commending wheat sales at this point with a rally this week? Is there where we should be unloading some and new crop as well?

Newsom: You know, if you feel pretty good about your condition coming out of dormancy in the winter wheat, if you're looking at pretty good conditions in the spring wheat as you get ready to plant, you could certainly look to get some on the books. Wheat has actually backed down a bit. As I said, it's lost some ground to corn. I think it may try to make it up. So I do think there's going to be some better selling opportunities ahead, but I'm not going to tell anybody not to sell at these levels.

Pearson: All right. We produce the world's corn in the United States, and it seems to be in very good demand and hair trigger supply. What's your take on corn?

Newsom: Well, the biggest thing in corn is that we know that the 2010 -- or we have a good idea that the 2010-11 stocks are very tight. Five percent ending stocks to use in the last WASDE Report, last USDA Report, equal only to 1995-96 as the tightest supply and demand situation we've seen. We're there now. It could actually tighten a bit more in next week's reports. We also know from the USDA Annual Outlook Forum that they're calling it -- USDA right now is projecting only 92 million acres. That's not enough. We're not going to rebuild our stocks with 92million acres. We're going to have to have an extraordinary yield for that to happen. So it looks like to me that we're not only going to finish 2010-11 with a pretty good run, that we can forecast that forward that we're going to remain in a relatively tight situation in 2011-2012 before we start to possibly break this market a bit.

Pearson: All right. So again, from a farmer sales standpoint -- and I talked to some producers today who still have some corn left. Not a lot. They're just waiting to see how this thing plays out. They think there could be another rally, maybe with that plantings report. That's next to the WASDE Report, that's the next big news.

Newsom: The March 1 Prospective plantings Report is what everyone is focusing on right now, but I think a lot of that steam has let out when USDA said, look, we're going to jump up to 92 million acres. But anyone can do the math and see unless we have that extraordinary national average yield, we're just not going to increase bushels that much. So from a farmer's point of view who's still holding some corn, maybe you can use '95-'96 as an analogous year. If you do it certainly projects $8, $8.20 for corn. But realistically, going to be tough to do. So these levels are very attractive. Certainly feed the market a little bit as we go along. We don't know how high this market is going to go, how long it's going to last.

Pearson: All right. So maybe make some new crop sales. Are you as much sold on new crop?

Newsom: I'm not heavily sold on new crop. I want to be relatively slow. I don't want to jump the gun too much on that because if there's any type of planting problems, early growing season problems, there's just such a small margin of error available for the corn crop this time around, I think we could see some better prices.

Pearson: All right. These prices are mainly cheap. All right. Let's talk about soybeans. Different scenario there. In South America -- I talked to a buddy of mine today who just got back from there. From everything I'm hearing, the bean crop is good.

Newsom: Yeah. You know, it's an interesting situation. Right now we're hearing about Brazil's possibility of raising a 71-, 72-million metric ton crop, record large for them. Argentina's crop, which was struggling because of the drought in Argentina, wiped out its corn crop. Seemed like some late-season rain certainly helped. So now there's talk of possibly anywhere from 49to 51 million metric tons in Argentina. So we do have a different situation than what we're looking at in corn. It looks like at this point once we finally start to get the combines rolling at a relatively good pace, get through some of these rains that we're seeing in South America, it could start to put some pressure on our domestic cash crop.

Pearson: China has been the big buyer and they're switching off to some seasonally some more South American purchases?

Newsom: I think they will in time. We're still seeing some very strong weekly sales and shipment reports week in and week out. Basis is still strong. But I can't help think that at some point we're going to see that switch over to South American supplies.

Pearson: Cotton market, this is wild. Are they going to intervene? Are the regulators going to step in on cotton? What's your take on that?

Newsom: I don't know what they're --

Pearson: They have to an extent.

Newsom: They have. I don't know what they're going to be able to do. This is a market that got caught in a very short supply situation and has just exploded. We're not seeing it solve itself at all with these record prices that we're seeing. If we don't see an acreage build in cotton just like we were talking about in corn, we could be facing a very similar scenario when we get into 2011-12 marketing year. So unless there is some sort of government action, this looks like a market that just wants to continue to run.

Pearson: All right. New crop sales, cotton?

Newsom: Very, very cautious with that because, again, just as with corn, if there's any problem domestically, this market wants to go higher. But certainly you could feed this a little bit at a time.

Pearson: All right. Let's talk livestock. Fed cattle market, board giving up some this week on fed cattle and on the feeders. But everything that I hear seems to be very friendly to the beef market. Apparently the processors are getting product clear to the supermarket.

Newsom: That's the big key to the live cattle market right now is that we've got such strong demand. We've been able to eat our way through and ship our way through. Really we haven't seen this downturn in supply. So we've been able to offset the supplies with very strong demand. The only concern I'm kind of picking up in the industry is if we -- if we continue to see large numbers in these cattle-on-feed reports, that seems to be the concern. With the feed costs as high as they are and if we start to see supplies actually starting to grow in the yards, this could start to put some pressure on the live cattle market not only on the futures but possibly on the cash market as well.

Pearson: All right. So strategy wise for cattle feeder?

Newsom: You know, I'm looking at these up above 110 and so on. It certainly looks attractive to make some sales. I don't know how much room is to the top. In all these markets, it's hard to say that we're getting anywhere near top. Certainly if these are some profitable levels, if you can cover your feed costs and everything else, you might want to think about locking some of it in.

Pearson: Spent cow market is strong. Bull market -- killer bull market is phenomenal. How do you explain that one?

Newsom: It's just right now we're in that cycle where if it's a commodity, particularly an ag commodity, it's just going to group. They all seem to be feeding off each other. Is that sustainable long term? Possibly but as with anything, it also creates its own vulnerabilities from getting too high priced.

Pearson: Hog market backed off a little bit on the board. What does that tell us? Does this change the game any?

Newsom: I think we've still got some pretty good demand for the hog market but again, this is one of those markets, it got a little bit overvalued. You saw some money moving out of the livestock sector, particularly of the pork sector, moving into some other sectors. I think this is the biggest thing that knocked the hogs down this week. Should they come back, yeah, I think we'll see a bit stronger week next week. But just again, because everything is so high-priced, you never know which market is going to be the next one to tip a little bit.

Pearson: I've only got thirty seconds but the money pulled out of pork. Where did it go?

Newsom: Most likely, energy markets.

Pearson: Energy markets.

Newsom: Yep.

Pearson: Okay. So we're going to see some shifting probably from the -- of course, once the big funds came into the livestock sector, boom, the top went off. Maybe we'll see it back off a little bit now with what's happening in energy. Hopefully that will calm down and we'll see it come back into the meats, because we're going to need some good prices on finished cattle and hogs to pay for all that high-priced corn.

Newsom: That's right.

Pearson:Darin Newsom, thank you so much. That wraps up this edition of Market to Market. But you can find expanded market analysis as well as streaming video of our program -- free -- at our Web site.

Pearson:Now, we want to let you know that Market to Market may be airing in some different timeslots in the days ahead due to PBS fundraising activities. So, if you value programs like Market to Market, please consider phoning in a pledge and investing in a service providing you with accurate information and timely market analysis.

And be sure to join us again next week when we'll examine the market impact of USDA's latest estimates on global supply and demand. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

Tags: agriculture commodity prices markets news oil