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Market Analysis: Oct 29, 2010: Darin Newsom, Market Analyst

posted on October 29, 2010

A fragile dollar this week coupled with bullish fundamentals stoked the barn-burning rally in grain prices.

For the week, December wheat gained 46 cents, while the nearby corn contract moved 22 cents higher.

The bulls were evident in the soybean pits as the November contract moved more than 25 cents higher. The nearby meal contract also rallied with a gain of $6.80 per ton.

In the softs, cotton's record-breaking run continued again as the December contract settled Friday with a weekly gain of $5.55.

In the dairy market, November Class III Milk futures traded at a two-year high before settling Friday with a weekly loss of 18 cents. The deferred contract moved 61 cents lower.

In livestock, the December fed cattle contract lost $2.87. Nearby feeders were off $2.22. And the December lean hog contract declined by nearly $4.50.

In the financial markets, the Euro lost 31 basis points against the dollar. Crude oil gave up 50 cents per barrel. Comex Gold gained $32 per ounce. And the Goldman Sachs Commodity Index moved nearly 2 points higher to close at 564-even.

Market Analysis: Oct 29, 2010: Darin Newsom, Market Analyst Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, big up week in the wheat market. You're a Kansas boy. What should these producers down there be doing?

Newsom: Well, I think number one is there's probably a little bit of concern over what they're going to have next year and that is certainly what spiked the market. I mean, you mentioned the dollar, the dollar has been going up, it's been going down, it hasn't really been able to achieve much support in this market. The wheat is paying attention. Top that and you combine that with poor crop prospects right now or crop conditions and we really saw the reaction in the spreads, in the deferred spreads, in the new crop spreads for the winter wheat markets, Chicago and Kansas City. So, I think there is a great deal of concern and if Kansas farmers, southern plains farmers, winter wheat farmers as a whole are probably going to sit back and watch this market because it extends off into the Russian and Black Sea region as well, it's not really improving that much. So, the 2011 wheat situation is still looking pretty tight and I think they're just going to sit back and they're going to let this market run for a while.

Pearson: We've had this phenomenon in the wheat market for the last couple of years, we've had these great futures prices and a cash price that's been terrible. Is that improving? Are we seeing any basis improvement on wheat?

Newsom: We've seen a little bit of improvement in the basis. Now, that is very regionalized but if we look at the DTN national cash averages overall wheat basis is still relatively weak and that is because the old crop situation is still not horribly tight. We've still got very strong carry in the futures market, we've still got problems in the futures market and it's spilling over into the cash markets still. Now, next year if we don't see an improvement in global supplies I do think we're going to finally start to see some strength come back to these basis markets.

Pearson: All right. At this stage of the game with the concern over the prospects here for this winter with the weather we've been having and the other issues we've been dealing with you're not advocating taking a stand here and making sales?

Newsom: No, I don't think so. You know, you just ran through this list of commodities that are going to all-time highs. I think wheat is going to want to follow and it's going to be one of those commodities that just joins in the race and I think we're going to see higher prices in 2011.

Pearson: Farmer friend of mine says, just let the buggy run.

Newsom: I think that's pretty good advice.

Pearson: All right. Same thing on corn, another big week in corn, corn is going up and up.

Newsom: Yeah, just ...

Pearson: Big government report is coming out soon.

Newsom: There is. It's just so hard to find anything bearish to say about corn right now. We've looked at the idea that it is overbought. We've seen demand slowing down and the weekly export sales, shipments, inspections, all of these. There's an idea out there that maybe we're going to start to see demand pull back a little bit. But long-term if we look at this market I can't help but think that it's going to be one of the more bullish commodities in 2011 and not just futures but cash corn as well. I think we're going to get into a relatively tight situation. I think demand is going to continue going up. So, yeah, I think we're just as the cusp now. Longer term we're going to see the market go up. There is a threat for it going down but one just can't help but be bullish the corn market.

Pearson: So what price do we start rationing? When do we make sales here? $6.00 is that reasonable?

Newsom: You know, from a cash perspective I think it is. Could we challenge what we saw in 2008? I think we certainly could. The only thing is if we really start to shut down this demand and it's going to be very difficult because with the U.S. being the number one provider of corn to the world and with its crop in question I think it's going to be very hard to shut down demand this year.

Pearson: We look at the corn market and I looked at corn out in 2011 and they're starting to shrink there too. Do we want to lock this in? I mean, do we want to let $6.00 corn slide by us? I'm getting to be an old man now, I'm 53 and I'm watching these corn markets and boy this is historically these are good prices.

Newsom: Yeah, it's hard to, you know, I can't tell anybody to not lock these prices in because you're right. But I would be very conservative in doing so. Again, if I was to have to pull one market that I think has got the best chance for having a very explosive 2011 it looks like it's going to be cash corn. So, I think there's going to be some reward for sitting back and seeing what develops in this market.

Pearson: And you're saying cash corn?

Newsom: I'm saying cash corn. I think the cash is going to gain on the futures. I think you're going to see the basis strengthen. I think there's going to be a push by merchandisers to try to lock in supplies. We're already seeing a pretty tight situation in deferred spreads so I like the cash corn market even over corn futures themselves.

Pearson: All right. So, keep the bins full.

Newsom: You know, if we do see the bin doors slam shut I think that's just going to light a fire under this thing as we head into the spring and next summer.

Pearson: All right. So, let's talk about soybeans. What do you think we're going to be doing there? South America is getting better. Is it still dry down there? What's the skinny on South America?

Newsom: Well, it's interesting. One report comes out or one news article comes out and you hear that South America is going to have better production than they had, than their record production from 2010. Others say it's going to come up a bit short. I don't think it's going to matter. Again, I think this market is very strong and there's just an unquenchable demand now coming from China. Almost every week we're seeing incredible sales, we're seeing incredible shipments from the U.S. point of view. As long as the dollar stays relatively weak and there's no reason to think that that's not going to continue throughout 2011 I think we're going to continue to see that sort of demand. I think demand is going to be strong enough to offset the prospects of having record world production again. So, again, very similar to corn. It looks like this market wants to run higher in 2011. It looks like it's got plenty of support and the only difference between it and corn is that there are two major harvest that go on during the course of the year, one every six months where corn doesn't have that. So, that could cool the rally a little bit in soybeans where corn won't see that.

Pearson: Don't we have decent carryout in beans?

Newsom: We do have decent carryout in beans but I think it's in question. I don't think they're really confident in the type of production numbers that's being talked about and if you look at the deferred future spreads, again, in soybeans there seems to be no confidence in the idea that we're going to have as large a carryout as what was projected in the October USDA report.

Pearson: All right. We've got to buy bean acres too let's not forget and you're already talking we could challenge $8.00 in corn so with that in mind this soybean market has to rally as well. So, where do you think beans are going?

Newsom: You know, again, would it be possible to test the 2008 highs? I think so. I think corn is going to be ...

Pearson: In the mid-teens.

Newsom: It's a possibility. I'm not going to say that we're not going to see it because we've got this setup in commodities right now where they just want to rally and markets that don't want to go down or won't go down usually wind up going up and that is exactly the situation we're talking about. You mention acres, it's going to be quite a fight next year. You've got corn acres, soybeans, wheat and cotton all going to be fighting for acres next year so I think it's going to be very interesting to see how this plays out.

Pearson: All right. So, despite these high prices don't sell wheat, don't sell corn, don't sell beans yet.

Newsom: Yeah, it's very against my nature to say that. Usually, as you well know, I'm not this bullish. But I do say make sales if you absolutely have to, you absolutely want to but I do think there's going to be string prices in 2011.

Pearson: Cotton, $1.25 a pound, do you want to sell some of that one?

Newsom: I do. That is the one market because what we're seeing there that we're not seeing in the other spreads, the other markets is that the spreads are starting to weaken. It looks like the short supply situation is about to run its course. The only reason, the only rationale cotton would have now to stay higher is to try to fight for some acres and I think that with the idea the crop is going to be bigger next year anyway globally this market could start to come down, could start to lose some ground to some of the other markets. And so if there is one that I wouldn't really hesitate in selling into it probably would be the cotton market.

Pearson: All right. We found one. Let's talk livestock. Weird week in futures on fed cattle. Let's talk first about the fed cattle market. We've seen great cash prices, the market has been strong, looks like pretty decent demand out there. What happened?

Newsom: You know, you pointed out that it was a weird week and we're here at the end of the week and the last week of the month and sometimes we start to see some odd things happening in the markets and there were other examples of this as well. I think that had more to do with it than anything. The Dow Jones couldn't really get off and run as the earlier piece said. The news was conflicting in all the different reports coming out and I think the cattle market just looked a little bit tired. We've been getting some bearish technical signals so I would say this was more of a non-commercial sell-off than a commercial sell-off. But the thing I'm concerned about in the cattle market is the way this December February spread is acting. We see the December contract losing ground to the February. This could be indicating that a weaker cash market is to come here early in the winter and so I would certainly keep a close eye on that to see if that sort of situation continues to develop.

Pearson: All right. That would also kind of match seasonal trends.

Newsom: Yes, it would.

Pearson: Thanksgiving, Christmas. So, some weaker cash prices. So, maybe get out there and look at taking advantage of these stronger cattle prices that we have now before the thing weakens up too much.

Newsom: I think so. If you see a pop in the December contract I think you've got an opportunity to sell into it, take advantage of it a little bit, look out at those deferreds and I wouldn't get too crazy about it because, again, commodities want to go higher. I want to see how this Goldman Sachs Index also, if it continues to work higher as well. But commodities as a whole want to go higher so I wouldn't get everything sold but I would certainly take some protection say in the cattle market.

Pearson: The feeder cattle took a hit this week and obviously a move up in corn isn't going to do it any good.

Newsom: Yeah, and if we're looking at this type of price move in corn, an extended price move in corn I think it's going to have some negative effects on the feeder cattle market. This one still looks like it's going to have some trouble so much like with the live cattle if you see some pops in this market, short-term rallies I think you're going to want to use it to your advantage as best you can.

Pearson: Let's talk about hogs, again, a big hit on the board this week but it's been a great rally in the hog market. Is this the game changer? What's your outlook for pork?

Newsom: I would look, similar to the cattle market I would look for the pork to start to come under a bit of pressure. Now, the spreads, the December-February spreads aren't quite as bearish as they are in the cattle market. So, again, I think what we're seeing is a bit of position squaring, I hate that phrase but I think that's really what we were up against this week. Technically the market looks a bit bearish so a short-term sell-off in the hog market would not be that surprising. Cash holding for maybe just a bit weaker as we go over the next 30 to 60 days but then looking to, you know, just like most other commodities would not be surprising to see it find some new support.

Pearson: You're talking about stronger commodity prices. You track oil, you track gold, you track the other commodities out there. Are we going to see similar impacts there? Should we be a little concerned about what could happen with diesel prices and so forth as we head into the winter?

Newsom: You know, that's a great question because what I've tried -- looking at these markets going into 2011 you kind of have to evaluate them by judging are the fundamentals bullish or bearish and what we've got in the energy markets we're still dealing with bearish fundamentals. Could the markets continue to rally? Yes, they could. Will they go up to the same degree that some of these other markets are going up? No. They shouldn't. We're talking about gold, crude oil, heating oil, these sorts of things. Is there an opportunity to lock these things in? I think so. I mean, if you can get your 2011 needs locked in, if the market does dip down here a little bit over the winter and we could take advantage of it I think just from a commodity wide market sector alone we're going to have to do that regardless of what the underlying fundamentals are. So, if it provides an opportunity I think we're going to have to step in because the markets are going to rally and next summer we're going to be talking about higher prices, whether or not the fundamentals support it or not.

Pearson: All right. Darin Newsom, as usual some great insights. We appreciate it, sir, very much. That will wrap up this edition of Market to Market. Now, if you'd like more information from Darin on where these high-flying commodity markets may be headed join us at the Market Plus page. You'll find it at our Market to Market Web site, you'll find expanded market analysis, audio podcasts and streaming video and it's all there and it's all free at the Market to Market Web site. And, of course, be sure to join us again next week when we'll preview USDA's November crop reports. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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