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Market Analysis: Jan 07, 2011: Walt Hackney and Virgil Robinson Discuss the Volatile Commodity Markets

posted on January 7, 2011

Grain prices cooled a bit this week due primarily to a rapidly strengthening dollar which makes U.S. commodities more expensive overseas.

For the week, March wheat lost 10 cents, while the nearby corn contract moved more than 20 cents lower.

Soybeans also were caught in the broader commodity sell-off as the March contract fell 11 cents and nearby meal prices declined by $6.50.

In the softs, cotton trended lower as well with the March contract posting a loss of $2.24.

In the dairy market, February Class III Milk futures gained 32 cents while the deferred contract moved 24 cents higher.

In livestock, the February fed cattle contract lost 95 cents. Nearby feeders were off 17 cents. And the February lean hog contract gained 57 cents.

In the financial markets, the Euro lost a whopping 353 basis points against the dollar. Crude oil traded $1.38 per barrel lower. Comex Gold declined by more than $40 per ounce. And the Goldman Sachs Commodity Index lost about 6 points to close at 616.75.

Market Analysis: Jan 07, 2011: Walt Hackney and Virgil Robinson Discuss the Volatile Commodity Markets

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.

Robinson and Hackney:Thank you, sir.

Pearson: All right, well, quite a year in 2010, Virgil. We're going to start with the grains. Obviously weather problems, shortened supply, big demand elsewhere, concerns about what's happening in South America, just the whole gamut. Let's get started with the wheat Market first, Virg. Obviously, ever since we saw the problems develop in the former Soviet Union, this wheat Market has been on a tear. It softened up a little bit this week, but isn't a lot of concern about this USDA report coming out next week.

Robinson: Winter wheat seedings report, Mark, as well as stocks?

Pearson: Yes.

Robinson: Yeah, I think there will be some potential game changers in that whole gamut, the whole grain and oilseed gamut, Mark. I think wheat in select areas there is some production risk, one clearly right here in the U.S., the hard red winter wheat belt. State crop conditions, Mark, are not particularly good. They do have kind of an ominous weather forecast here in the immediate future. There's chance for some snowfall but, to accompany that, some bitterly cold temperatures. So we have a winter kill concern, I think, Mark, that will surface probably Sunday evening's trading session. I also understand that we have some production risk in parts of China, particularly, and I'll try and pronounce the province correctly, Hunan, I believe, where upwards of a third of their entire wheat production normally is produced. And they do have some concerns there. The Australian concerns have been discussed on numerous occasions. Argentina has some production risk as well. So I think this week in the futures market, Mark, was predominantly one of profit taking, liquidation, perhaps some rebalancing, readjusting positions for various purposes. And there will be I think some additional back and filling. But if I were short bought wheat and needed to procure supply, I would be on alert. Another 30 to 50 cents lower, and I would clearly step in and make some adjustments in that position.

Pearson: All right. Virgil, as you look forward and as you think about what wheat producers are trying to do -- I just went through the entire state of Kansas a week ago. Even though I was off from the show, I was still out doing my thing, checking out agriculture. Let me tell you that risk in that hard red wheat belt -- I think you're absolutely correct -- there's going to be a lot of concern about that. That could -- with no snow cover, that could be an issue with those cold temperatures you talked about. We have a lot of wheat here in the U.S. worldwide is kind of where the problem is, and Australia has been a factor in all of this. But wheat prices are awfully strong in here. So would you recommend making some sales up in these levels before this report comes out?

Robinson: Now, you're talking about new crop wheat --

Pearson: New crop wheat sales.

Robinson: I think given the list of concerns as well as the macroeconomics -- and I think there are a number of factors there that will contribute to price discovery, Mark -- I would be more inclined to create minimum price. And I know that in most areas, new-crop wheat basis is ridiculously wide -- or unusually wide. So it does compel the producer to make a decision. He or she must decide is there an opportunity with a local elevator or a local terminal to make a hedge to arrive or do I make my short hedge in my own account or do I make that cash sale and selectively buy back futures. I don't want to finalize price, Mark, but clearly I'm on alert. These are prices that we've not seen for the last couple of years, and I do believe economically there's some awfully good profitability right here.

Pearson: No question about it. Let's move from wheat to corn then, Virgil. What's your take on the corn market? We've backed off a little bit this week, but these are still some phenomenally good prices historically.

Robinson: We have some major reports, Mark, next Wednesday. We'll have final production from last season, as well as stocks in all positions and the winter wheat seedings report as noted. This week was not a particularly good week in corn futures prices. They did decline pretty significantly. Kind of an outside trading week, which is oftentimes a signal there's some additional decline ahead of us, Mark. And I think that will in fact be the case. Seasonally it's not uncommon for the cash grain markets to handle a lot of corn and soybeans during the month of January. And clearly the behavior of the local basis, the basis in general, as well as the future spreads would suggest that of late we've taken on a pretty good injection of both cash corn and soybeans. It provides an opportunity, Walt, in my opinion, for the user -- the livestock feeder, for example, I think another 25 to 40 cent lower. And I'm basing that on that national cash index up in Minneapolis. It's currently up around $5.60. I think if it pulls down below 5.40, to me it's an opportunity to procure some supply, either cash or futures.

Pearson: Maybe we'll get a chance to do that. Obviously the USDA Report is what the focus is going to be on, so I assume there was some evening up this week. But there was also a concern about South American La Nina and Argentina. Your sources, Virgil, what's the take on the crop down there?

Robinson: My understanding, Mark, from reliable sources is that the Brazilian crop appears to be in pretty solid and pretty good shape. There are some production concerns and risks yet in Argentina. I'm not in position to try and suggest that the La Nina event has dissipated and, as a result of that, prospects will improve or whether conditions will improve. I would rather believe, Mark, that there's been some damage done to both the corn and soybean crop in Argentina, which underscores the need, in my opinion, for the U.S. this up and coming season, in our effort to sustain stocks and supplies moving forward, we're going to have to have some additional acres, Mark, and we're going to have to have a pretty good crop year to do that. So I'm not anxious to finalize the price of new crop corn or new crop soybeans at tonight's levels.

Pearson: Obviously USDA Report is really going to tell the tale. There's a lot of concern about this. It seems like people are extremely nervous where this thing could go because of the somewhat inconsistent nature of where we've seen this fall from USDA and the fact that it was a strange year in that it was a too wet year as far as the corn crop was concerned.

Robinson: I think in corn, Mark, there could be some surprises. I'm going to be looking particularly at a couple of line entries in the balance sheet. The first will be feed and residual in the area where the USDA has historically made some adjustments. And then secondly, the ethanol entry, the corn used for ethanol. Walt, you and I talked about this several weeks ago, you know, the prospect of using upwards of five billion bushels of corn to produce ethanol. It has come full circle. I think we're there.

Pearson: All right. We'll see what happens this week. But as far as producer recommendation, you don't want to finalize prices? Too many variables out there?

Robinson: On the new crop, Mark?

Pearson: On new crop.

Robinson: If you are asking me do I think the new crop futures contract has made its contract high, I would answer no, I don't think that's the case. I'm not convinced of that. Therefore, I think the prospect of yet higher prices over the course of the next many weeks is still in place. I think you have to guard against that.

Pearson: All right. Let's talk about the soybean market. Again, shorter crop than what was anticipated. Continued good demand. Is that going to start to change some, Virgil, the demand from China?

Robinson: I think it has, Mark. I think export sales have slowed of late. They haven't disappeared. They've slowed. A couple of concerns that I have, however, tonight. One, at least the way I calculate processing margins, they are significantly lower today than one year ago. And that compels the processor to try as best they can to acquire that raw inventory as cheaply as possible. And the basis has widened of late, Mark. And I think, again, it's a function of that and also the need and the realization that seasonally we sell beans. Producers sell beans and price beans in the month of January. The weather to this point has been conducive to deliveries and making deliveries, and I think that is a factor. The national cash soybean index, I'm going to refer to that, Mark. It's $13 tonight. I think if it breaks to $12.50 or below, it's an opportunity for those who need to procure supply to do so.

Pearson: All right. In terms of making sales, though, you're not in a big hurry, yet.

Robinson: No, sir, I'm not as we visit tonight.

Pearson: All right. Let's talk real quick about cotton, Virgil. It's been a very explosive market. It's been unbelievable. Off this week but that will be a big one, that report too.

Robinson: Yeah, I think acres will be of major concern, Mark. Clearly the price incentive that was exhibited a few short weeks ago will attract acres in the U.S., as well as worldwide wise. However, I don't think and I am not convinced that futures have yet made their highs. I think what we've seen of late is a movement of product to the pipe. The basis has widened. The spreads have in fact, deteriorated or widened. There's still an inverse but not as big as it was a while ago, Mark. So I think there will be opportunities to price cotton over the next six months at levels here, what we have tonight or higher. I think the risk in cotton prices as we visit tonight is yet higher.

Pearson: All right. All right, let's switch gears. Let's talk livestock. Walt is here. Walter, it's been a wild year in the livestock markets too. The cattle market has recovered pretty well. Fed cattle markets looked okay. But what do you see ahead on fed cattle?

Hackney: We've got a lot of conflicting reasons to not be as bullish as a lot of the industry wants to be for this year. We've got a fifty-year low for replacement value -- or replacement livestock cow. We've got near record high on cost of gains. And according to Virgil, we may have higher cost of gains as we go. So there's so many conflicting entities in there that probably we're going to have fewer cattle feeders as the year progresses, but we probably aren't going to lose that amount of cattle in the feed lots. The larger, more corporate feed lots that really need them are going to have to have them are going to be probably taking over the majority of the cattle feeders. What will that do in the markets? Well, demand is going to be the driving force behind feeder cattle, as we go into this year. There's no question about that. We are at a fifty-year low. There isn't going to be any chance of recovery. So as a result, we're going to have a real need for feed lot cattle. Can those cattle be hedged properly in the merc in order to make them fit for even the corporate entities that's going to be feeding them? That's going to be a huge question as we get through the first quarter of this year. The first quarter is pretty well made now. The hedge ability on those cattle is around $1.08 to $1.10. And as a result of that, those cattle are going to make good money. It's those cattle going into the second and third quarters that are going to have a huge question, Mark, about their hedge ability. As far as cash goes, we've got $1.05, $1.06, $1.07. On current cash live cattle. We've got $1.68 to $1.70 paid currently on dressed basis in the Corn Belt through the Midwest. Those cattle are making money as we speak. But interestingly the feeder market has accelerated to a level where those cattle, especially if we get an acceleration of cost of gains, again like Virgil might be indicating, those cattle are barely going to break even at the current level they're costing today to procure them as replacement cattle. So I haven't done a very good job of answering your question. But the fact remains we're going to have a very aggressive live cattle market on both fat cattle and again on feeder cattle as this year goes. Supply is going to be a driving force. Will they make money should be the question a lot of these people that are out here with just a blind impulse to buy feeders just because, those fellas might ought to get out their number 2 lead pencil and their yellow legal pad and start doing some figuring, because that's going to be an interesting point. Now, Canada is becoming a player in regard to our industry on the cattle. Canada as we're speaking is at an eight-year high on exporting beef, for instance. But they're also at a thirteen-year low on their hog herd up there. So our hog prices have got a chance of appreciating because of the lack of those sows and pork being imported from Canada. We aren't seeing the expansion in our national hog herd. And again, it's because of the cost of gain. This soybean meal is phenomenally high, and the cost of those gains are bumping 70 cents a pound in the finishing forwards. So there's not much incentive to expand. What I'm really saying, it looks like dressed beef is going to maintain a level similar -- within a buck of where it is now as far as retail goes. But pork, who's been at a real advantage competitively to the consumer's budget, they are looking as if they're going to have to be spending more money for pork at the retail level. So where will that take us as we approach the third quarter? I suggest that if the economy does not show substantial response compared to today, I've got a feeling that people are going to be looking at more of an alternative source of protein on meats than they are today as we get into the third quarter.

Pearson: All right. What's your outlook on the pork prices, then, Virg -- or Walter, on this hog Market? Do you think we're going to be stronger on pork prices, then, for the next two quarters?

Hackney: I think we'll go stronger on pork prices as the year progresses into the third quarter. I think there will become a level, though, if retail has to continue to reprice accordingly, I think that we'll see a certain amount of resistance from the consumer. I don't think the budgeted dollar -- shopping dollar is going to support an extremely high run up on the pork price in the retail counter. That may mean that you'll see a lot of the budgeted people opting to go with more of a poultry diet.

Pearson: Okay. Well, Walter, what it sounds like you're saying is the meat market now is kind of getting to that point where we've had these strong corn meal prices, and now it's translating into reduced supplies of beef, which we've been seeing for a long time. The thing that you didn't mention in either case was that you didn't mention expansion in either pork or beef at this stage of the game.

Hackney: I don't think we're going to see it. I don't believe -- I think the controlling influence over on the beef is there is no expansion in the national cow herd. Over here on the other side, I think the potential for expansion is there, but I don't think the cost of gain is going to allow them to do it compared to the current cash market. I think they'd expand in the mid bottom lines.

Pearson: So with that in mind, you're looking at what's ahead price wise? From a future's standpoint, what should producers be doing?

Hackney: Right now you have an interesting point on cost of gain because a lot of producers went into this fall and early winter with a lot of out-of-condition corn on hand. The discounts were so heavy on that out-of-condition corn that a lot of them have opt to put that into livestock feeding. Well, that's becoming used up now and they're going to have to go into the cash market to buy their needed ingredients. So that's going to be interesting because today, we've got a 70-cent gain cost on farrow-to-finish operations. If we have to get rid of that lower priced inventory of out-of-condition corn and go to the current level of the market price, that could easily go to 80-85 cents a pound. So that's going to control expansion in the pork.

Pearson: In the pork. And of course, as Virgil mentioned, maybe if we get a break here, that will be an opportunity for people to cover some feed needs in the sub 540 area of that national cash index. So these are going to be the kinds of times on the input side where we need to be really good Marketers. As usual, both Walter and Virg have given us some great ideas and some great insights. Walt Hackney and Virgil Robinson, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Walt and Virg on where these high flying 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. And be sure to join us again next week when we'll profile the man who was largely responsible for the iconic Ford N-series tractors and the famed John Deere 4020. Until then, thanks for watching. I'm Mark Pearson. Have a great week.


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