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Market Analysis: Aug 20, 2010: Market Analysts Virgil Robinson and Walt Hackney

posted on August 20, 2010

For the past 45 days wheat prices have enjoyed positive fundamentals in the form of drought in the former Soviet Union, and too much rain in parts of North America. Last week, though, the rally ran out of stream, and the sell-off continued this week...

For the week, September wheat lost nearly 25 cents. Nearby corn prices, however, moved 10 cents higher. Oilseeds followed the coarse grains lower. For the week, the September contract lost more than 40 cents, while the nearby meal contract settled Friday with a loss of $1.90.

In the softs, cotton failed to break through the psychologically important level of $85.00 with the December contract posting a loss of 63 cents.

In the dairy market, September Class III Milk futures were up nearly 15 cents, while the deferred contract moved nearly 20 cents higher.

In livestock, huge week for cattle producers as the October fed cattle contract rallied nearly $5.00. Nearby feeders were up $5.35. And the October lean hog contract was up more than $2.50 cents.

In the financial markets, the Euro lost 43 basis points against the dollar. Crude oil declined nearly $2 per barrel. Comex Gold gained $12.00 per ounce. And the Goldman Sachs Commodity Index lost more than 2 points to close at 506-even.

Market Analysis: Aug 20, 2010: Market Analysts Virgil Robinson and Walt Hackney 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, good to see you both. I want to welcome you back. Let's talk about this wheat rally or maybe the end of the rally. Virgil, what are you seeing? I know on the show before you've talked about worldwide we have plenty of wheat. It may not be in the places that we would expect it to be at time of the year. But have we done all we're going to do in this wheat market?

Robinson: Mark, I think the essence of the market is we did lose one of our major exporters in the form of Russia and the former Soviet Union countries. But, as you mentioned, there is wheat available elsewhere. Stats Canada out today projecting a little bigger wheat crop than the USDA forecast just the last couple of weeks. So, again, we've drawn down inventories globally. We haven't decimated them. There's plenty of wheat. So, I think the theme here is until we can better quantify the degree of loss in the former Soviet Union and Russia the market is likely to react to any kind of weather trauma and I think there is another taking shape in Australia. So, I wouldn't be surprised in the next couple of weeks to see some price recovery in the wheat futures market which will provide those who intend to grow more wheat, and there are a lot of producers in the U.S. in that camp, an opportunity to create some type of risk management program either in the form of a cash sale if profitable, use of a futures contract, a hedge to arrive contract or perhaps even a minimum price by using an option.

Pearson: All right. Virgil, though, as we look at this market even tonight and with the huge rally that we've had are these selling opportunities for wheat producers still?

Robinson: Mark, again, it's a matter of economics and I've been in Illinois, I've been in Ohio just the last week and had any number of producers inform me they are going to grow more wheat. Some have gone through the budget process and can calculate something in the term, in the area of $400 to $500 per acre given a normal yield. Clearly you can't pass that up. If over the course of time you wish to repurchase that inventory on some type of price decline there are any number of vehicles that will allow you to do that.

Pearson: What kind of a target do you have in mind? You mentioned Ohio and Illinois and, of course, they really have three choices because they could, if the wheat market does fall apart and they're not hedged they can burn it down and replant it to corn and beans or they can, with the soft red winter wheat, they can double crop some beans in there if things work out right.

Robinson: Yeah, well, clearly if you're going to go to the expense and the effort of growing a wheat crop, Mark, you want to do so profitably. And, as mentioned, the futures markets and some combination of basis, and that is a bit more difficult to calculate these days, but there are I think awfully attractive economics as we visit tonight. So, it's a matter of degree. If you have the risk tolerance ability to wait patiently here until we better quantify this wheat problem in the former Soviet Union and Russia, do so. If you can't and the economics are good, capture some of it.

Pearson: How worried are you about that Australian crop?

Robinson: Well, I'm beginning to get a bit more worried, Mark. It has made the headlines the last two or three days and normally where there's smoke there's fire. So, clearly that's something we need to watch closely in the next couple to three weeks.

Pearson: All right. Corn prices were stronger this week, Virgil. Again, Pro Farmer Crop Tour was out this week talking about not quite the crop in many parts of the Corn Belt this year. What is your take on all that right now? They really weren't that far off really from the USDA number I guess in August.

Robinson: No, that being said, Mark, they are forecasting the biggest yield ever and the second largest corn crop in the history of the U.S. Now, they do clearly preface those numbers with degrees of variation and that is certainly the right thing to do. But the prospect is, for a big crop, but as importantly the forecast is for record disappearance over the course of the next many months. We need a big crop of corn in the U.S. to satisfy demand, Mark. And as we visit, Walter and I were visiting earlier, export sales this last reportable week were the largest they have been since 1994. So, I would not be a bit surprised to see the USDA alter their current yearly export projection by bumping it up. That being said, Mark, it is likely that ending stocks one year from this August could well be at or very close to pipeline needs. So, the need for a big corn crop, Mark, is very obvious in my opinion.

Pearson: All right. Are you in a hurry to sell the balance of the 2010 crop if you haven't done so? Or do you want to sit tight and see how this market plays out and maybe see some better opportunities down the road?

Robinson: Mark, I think most of us have already sold a portion of our 2010 crop, many of us up to 50% and I think that has been good business. For someone that has sold nothing I would clearly do something here with an eye towards the futures market and an area of price resistance that has been very, very solid over the course of the last many months and that is the $4.50 to $4.70 area. I think the market has the opportunity to push up into that zone, Mark, and I would capture, at very least, a minimum price situation given that opportunity.

Pearson: One thing that the Pro Farmer Crop Tour mentioned was how quickly this crop seems to be maturing. Are you anticipating more of a normal harvest low then, Virgil, or what do you see?

Robinson: Well, Mark, again, the circumstances because of this global situation I think have kind of skewed the seasonals. Traditionally we would be tracking irregularly lower and we wouldn't have the kind of price improvement we've seen in both corn and beans that we currently have. So, the seasonal aspect maybe needs to be tabled for a moment. We need to quantify some production here globally as well as in the U.S., Mark, and until we can feel more comfortable with that I think there are yet opportunities ahead of us from a producer's perspective.

Pearson: All right. Let's talk about soybeans, the soybean market. Again, the Pro Farmer Crop Tour looking for a better bean crop than I think a lot of people had expected. There are some SDS issues out there and there are still some holes out there, there's some areas that have been washed away. By and large it looks like a big bean crop at this point, Virgil, but big demand there too.

Robinson: From the tour's perspective, Mark, they are projecting and forecasting a record soybean crop here in the United States, 3.5 billion bushels with an all-time record high yield of something near 45, 44.8 or 44.9. Now, again, they have a variance factor and certainly the balance of August, the first two weeks of September yield prospects could change based upon weather and the uncertainty of what lies ahead. But, again, to the point of a big crop, we need a big crop, Mark, in as much as disappearance is forecast to be as larger or larger than it has ever been. And we're likely to see some additional export adjustments in current supply and demand or balance sheets and I think they'll be higher given the Chinese presence in the marketplace as well as the Europeans procuring some additional soybean meal, they usually feed more wheat, due to a shortage of wheat meal has been the product of choice. So, it's likely that our carryout one year from now grows but not to the extent that we were forecasting a couple of months ago.

Pearson: What is your resistance level on soybeans on the up side?

Robinson: Mark, I think we'll eventually push back towards that $11 mark. Now, it may require several weeks before that occurs so don't hope for that Monday morning. But I think the structure of the market is such that we can not tolerate any kind of crop inconsistency here and clearly in the southern hemisphere moving forward to accommodate this foregoing demand.

Pearson: All right. Let's go to Walt Hackney and talk about the flip side of all this, the livestock side. Walter, the fed cattle market this week, this is a huge up move on fed cattle on the board. What is going on with this cattle market? Better cash prices. What are you seeing out there?

Hackney: We're looking at an inventory that is about 120% current. We're marketing cattle probably two to four weeks premature of the expected finish date. We're looking at a real premium in regard to choice to select indicative of the fact that we are short on finished cattle. We're looking at -- I was interested in Virgil's comment about the grain export trade and the potential of it being extraordinarily high over some predictions. You're going to see the same thing in the red meat. That is one of the driving forces behind this cash market that we have got right now. The packing industry has made excellent profits. They will continue to make excellent profits as long as the export keeps driving the price of the dressed product and as long as the cash market doesn't override their ability to extract profits which is pretty simple arithmetic.

Hackney: We had 98 to $1.00 Wednesday on our cash market. It was unexpected, it caught a lot of cattle feeders that sold early in the week flat-footed, sold out at 95, 96. You know, it makes you feel like a piker to sell cattle at 95 when in two days they bring a buck a pound. The fact is all the cattle were making money for the cattle feeder which is probably the healthiest thing that has happened to the beef industry maybe in history but for a long time. Can we sustain that I think is the question. The cattle industry has gotten an opinion that we better go ahead and market which is a healthy attitude. We need to continue marketing because there could be a factor come out of this that will cause the other foot to fall on the cash and break it back down. I doubt -- if that doesn't occur I doubt if there's very much going to alter this cash market for the next probably two months at a minimum. The only reason I say two months, there is a possibility that there will be some overfeeding waiting on a higher market and if that occurs, and it invariably will at times and in this market it might, if a guy is sitting there overfeeding cattle waiting on better money when he can make 200 a head today at a buck a pound or more than will tend to put the breaks on this cash trade.

Pearson: It always does.

Hackney: Every time.

Pearson: Start backing up cattle and maybe with Virgil's other talk about this corn price staying high maybe that will force them to keep the cattle moving and stay current this time, Walter. It would be the first time in our lifetimes that happened.

Hackney: You're right but, you know, Mark, I haven't heard one person in the feedlot complain about the price of rations when he's getting a buck a pound.

Pearson: Buck a pound he's happy. All right. Let's talk about the hog market. What are you seeing there?

Hackney: We've got a healthy hog market as we speak. It could be higher and the cash trade could be better but the fact is we're marketing hogs today that are one -- I think 1.2 pounds lighter than a week ago. They are 1.5 pounds lighter than a year ago. Now, that doesn't sound like much but when you throw that, again, over 2 million head of hogs a week that is a lot of lack of tonnage going down the pipeline to the retail. And as a result of that this hog trade, the cutout value has been holding relatively strong. It has got a good chance of remaining that way. The country inventory on the hogs are extremely current. They have done a wonderful job of keeping the feeding pins completely cleaned out this entire summer. The heat and the fear of extraordinary heat and loss of weight and so forth in the feeding environment has created some of this. But right now these hogs are absolutely as current as the cattle are and the hog buyers are having to scramble to find enough hogs to put 400,000 head a day through the packinghouses. I think the hog industry appears to be relatively healthy as it can be. Expansion is an unknown right now. If they could get the money, if they could get the vendor's confidence after coming out of the last two to three years of bankruptcies and foreclosures and so forth, if they could get the money I think you would start seeing some extraordinary expansion. I think there would be some extra guilt retention compared to the guilts going to the slaughterhouse now. I think that there would be more of them being kept back for breeding. But, as long as we're in the situation we have right now, it's very healthy.

Pearson: All right. Pulling these fat cattle forward is a good thing. I've got about 30 seconds. I didn't ask you about the feeder market. These ranchers have to be smiling.

Hackney: Ranchers have been smiling all year. They started out $6 to $7 higher than a year ago on their contracts for October November delivery. Now they are up probably $10 to $12 higher than they were a year ago for October November delivery. Six and a half weight calves bringing in 117 to 118.50 in Montana. You got $6, $7 freight on those cattle. There's nothing cheap about the feeder industry.

Pearson: But maybe we'll start to retain some heifers and maybe start growing a cow herd again?

Hackney: I doubt it. I wouldn't if I was a rancher.

Pearson: All right. Walt Hackney and Virgil Robinson, thank you so much. That will wrap up this edition of Market to Market. But if you'd like more information from Walt and Virgil on where these markets just may be headed visit the Market Plus page at our Web site. You'll find expanded market analysis, audio podcasts and, of course, streaming video of our program and it's all free at the Market to Market Web site. Of course, join us again next week when we'll learn how Heifer International passes on the gift of self-reliance. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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