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Market Analysis: Oct 22, 2010: Virgil Robinson

posted on October 22, 2010

Thus far the speedy harvest has NOT pressured prices, but a stronger dollar this week combined with weak export numbers did. And, consequently, coarse grain prices trended lower.

For the week, December wheat lost 33 cents, while the nearby corn contract gave up 3 cents.

But the rally continued this week in soybeans with the November contract moving 14 cents higher to settle Friday just under $12 per bushel. The nearby meal contract followed suit with a gain of $2.70 per ton.

In the softs, cotton's record-breaking rally continued again as the December contract settled Friday with a weekly gain of nearly $10.

In the dairy market, November Class III Milk futures gained 33 cents, while the deferred contract moved 9 cents lower.

In livestock, the December fed cattle contract gained $1.58. Nearby feeders were up $3.18. And the December lean hog contract advanced $1.75.

In the financial markets, the Euro lost 34 basis points against the dollar. Crude oil gained 44 cents per barrel. Comex Gold retreated from record territory to settle Friday with a weekly loss of $46.40 per ounce. And the Goldman Sachs Commodity Index moved a little more than a point higher to close at 562.30.

Market Analysis: Oct 22, 2010: Virgil Robinson Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, good to have you with us.

Robinson: Thank you, Mark. Nice to be with you.

Pearson: It's been quite a run on these grain prices, Virgil. Wheat market shot up in August when the former Soviet Union's problems were figured out by the marketplace. As we look at this wheat market going forward, Virgil, we've had a lot of success getting the winter crop into the ground, what are you telling wheat producers? What should they be thinking about right now in terms of sales or not?

Robinson: A couple of things. It looks like a relatively good moisture pattern here the next few days for the hard red winter wheat belt as well as the soft red. So, the prospect, at least early on, and I emphasize very early on, is, in fact, promising. There could be two to four million additional acres year over year, Mark, so we have the prospect here for what could be a pretty decent wheat harvest here in the United States. I track a couple of different cash indexes, Mark, one being the soft red wheat index and my system or the system that I maintain turned down this week. So, with that in mind I would suggest for those who have wheat for sale or who are in need of cash that rallies back towards that $6.00 to $6.15 mark basis December is an opportunity, in my mind, to make that sale.

Pearson: All right, so, let's be alert here, as these opportunities present themselves take advantage of them.

Robinson: I think so, Mark. One other thing here, wheat is considered one of those primary food grains. The fundamental structure of the rice market is not particularly strong although it also has recovered in price here the last three or four weeks to a point where I think there are some opportunities there for our rice viewers. I think that 1550 to 1600 area if I were lugging old crop rice without protection or without an insurance program of some kind I think that is an opportunity to make a sale there as well.

Pearson: All right. Well, for our rice growers there. All right, Virgil, let's talk about the corn market. Obviously with the USDA's reduction and the crop shrinking as we have gone through the year, it turns out rain doesn't necessarily make grain. Where are you on these corn sales? A lot of people -- some yields are coming in, we're getting some of the more northern Corn Belt yields now which have been a little bit better but product demand seems to be pretty good. We continue to see new demand for corn.

Robinson: Yeah, ethanol margins remain attractive, Mark, clearly not what they were several months ago but they are, in fact, profitable. I wouldn't be a bit surprised when the dust settles to find that we have used more corn and ethanol production than is currently being forecast. Cumulative export sales are off to a very brisk start, Mark, but shipments are tracking in necessarily the same direction. It is conceivable over the course of time, should we produce another bountiful wheat crop here, that the relationship between those two commodities becomes such that wheat finds, again, its way into the feed rations. That probably won't happen, Mark, until spring or summer of 2011. There's just no margin for any kind of a supply surprise which could come in the form of, again, smaller production here in the U.S. or demand surprise. And to that point, Mark, I'm hearing from awfully reliable sources that the Chinese corn crop may, in fact, not be as large as is currently being projected by the department. So, there is the demand element or the demand surprise that clearly could spring forward here in the next few months. So, long story short while there will be price corrections in corn futures, as a result, I think of unusually large and overly exuberant speculation I still think the underpinnings to the corn market are awfully strong and we're going to need to produce more corn next season to accommodate that demand.

Pearson: We need to buy acres, that means higher prices, that is an acreage battle for beans too. Target wise, Virgil, are there some technical numbers that you're looking at in terms of where we need to make sales?

Robinson: Oh, I think sometimes these numbers become self-fulfilling prophecies, Mark, and of course, everyone is touting $6.00 as a next target and I have no reason to dispute that. We need clearly to pay close attention to our livestock industry as the memories of 2008-2009 linger here and clearly these feed prices are going to have an effect moving forward on livestock production as well as in the dairy industry. So, we can't lose perspective of that over the course of the next many months. To suggest there is demand structure at hand I can't document that but clearly let's keep that factor of the market in our minds here given all of the speculative exuberance or enthusiasm we have right now.

Pearson: Cash corn index that you follow, is that showing anything right now in this corn market?

Robinson: Mark, it hasn't turned down, it still remains up. It is in the vicinity of five dollars and some odd cents. It could clearly pull back towards the $4.60 area as measured by that cash index in Minneapolis for those who have an interest in tracking that. Should it do that it would provide those who have little or no coverage moving forward here into 2011 an opportunity to do precisely that.

Pearson: Let's talk about soybeans. A move up again this week close to $12 on soybeans. Yield reports seem to be decent but, again, I know they're trying to maintain acres in soybeans. The situation in South America, can you update us on that?

Robinson: Well, to the best of my knowledge, Mark, there are still some areas that are concerning because of it being too dry but there is still yet time to rectify that. So, let's not be discounting the prospect of what could be an awfully large crop in the southern hemisphere. It still looms large. Export sales this last week, Mark, were exceptionally strong and it goes without saying, the Chinese continue to underpin that market. I think four out of five days this work week there were announcements of new Chinese sales. Over the course of time, now, please understand that some of those sales could shift origins from here to the southern hemisphere if transportation and exchange rates and other variables would accommodate that. So, that is something we need to stay abreast of as well. Two cautionary notes -- if I read the report correctly this afternoon the net long position of the speculative community in soybeans is record large. And then secondly, Mark, I'm a little concerned about the domestic well-being of the soybean market to the extent that processing margins, at least as I track them, are off again week over week and they are about a quarter lower than they were a year ago. So, be advised that is a big factor as well in this demand equation.

Pearson: No question about it. Do we sell these $12 beans, close to $12?

Robinson: Mark, the trend of the market is clearly up and as mentioned, the Chinese continue to buy beans almost routinely to satisfy their burgeoning demand. I'm going to move my camp into the option strategies, Mark, and I've done that for quite some time here the last several years. That is where I'll stay. Just too difficult to pick a top here.

Pearson: Virgil, talk about cotton. This is an explosive market, these are explosive record prices. Where do you see us headed from here?

Robinson: The trend of the market is up, Mark. U.S. inventories may have been affected by the storm you alluded to in west Texas and parts of Texas. We are currently at about a fourteen percent stocks to use ratio in the U.S. If we use that as our proxy for supply that is small compared to the last many years. There is no margin for production problems there. Globally production is forecast to decline year over year, consumption grow year over year and ending stocks decline. Mark, again, too difficult to pick a top in that market. If you are worried about an inventory and a position a strategy, an option strategy I think is worth the premium here.

Pearson: You mentioned the livestock sector and these high corn prices. 2008 still fresh in everybody's mind. What do you see happening with the fed cattle market?

Robinson: Mark, it depends. Do I have my corn and feed needs bought or don't I? I can tell you this, the spring and summer cattle futures contracts made new contract highs this week and new contract high closes. Clearly the market trend is up. My concern evolves around demand and I understand that export sales have been relatively good year over year and we're slowly inching back to that number that we accomplished in 2003. But demand, domestic demand, Mark, remains concerning to me. I would use this rally in those deferred cattle futures to create price floors and then await additional news. Cattle on feed this afternoon fairly neutral, a little larger placement number than I would have guessed.

Pearson: Got about 30 seconds, Virgil, hogs?

Robinson: Mark, again, deferred hog futures all making contract highs. I think, again, all due respect to these feed prices if you recognize margin in the first, second and third quarter of 2011 I would suggest capturing that margin or creating a floor to protect against a significant decline driven by perhaps lack of demand, would be likely here. But we're going to probably continue to liquidate the hog herd because of these feed prices.

Pearson: Very good, Virgil, that's going to wrap up this edition of Market to Market. But if you'd like more information from Virgil on where these markets 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 and it's all free at the Market to Market Web site. And, of course, join us again next week when we'll examine the stakes for rural America in the mid-term election. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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