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Market Analysis: Jul 23, 2010: Darin Newsom

posted on July 23, 2010


Amidst the worst drought in 130 years, Russia - the world's 3rd largest wheat exporter --announced this week it would begin selling government wheat reserves to its livestock and dairy producers in an effort to contain food prices. According to the Russian Agriculture Ministry, at least 20 percent of the nation's grain will not be harvested. As you might expect, wheat prices continued to rally...

For the week, September wheat gained nearly 10 cents and flirted with $6. Despite yet another round of torrential rains in Iowa, Illinois, Minnesota and Wisconsin late this week, corn prices were under pressure and the nearby contract settled Friday with a weekly loss of nearly 25 cents.

Soybean prices also were under pressure this week despite the threat of decreased U.S. production due to wet conditions in the Midwest. The September contract lost 7 cents, but the nearby meal contract advanced $1.70 per ton.

In the softs, cotton had its first winning week in recent memory, as the December contract posted a gain of nearly $1.50.

In the dairy market, August Class III Milk futures rose 4 cents, and the deferred contract gained 21 cents.

In livestock, October cattle gained more than $1. Nearby feeders were up $2.20. And the October lean hog contract was up $1.32.

In the financial markets, the Euro gained 23 basis points against the dollar. Crude oil gained $2.60 per barrel. Comex Gold lost 40 cents per ounce. And the Goldman Sachs Commodity Index gained nearly 15 points to close at 516-even.

Market Analysis: Jul 23, 2010: Darin Newsom Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, welcome back.

Newsom: Thanks for having me back, Mark.

Pearson: All right. Well, you're welcome. I want to get back to talking about the wheat market here in just a minute. Let's kind of skip around the world here real quick and talk about a few other things that I think are always in the background lurking when it comes to agriculture. One of those is the strength of the dollar, which has been monumental since the lows last summer. It's been on a huge up move, certainly versus the euro, versus the yen, versus the whole basket the dollar has been strong. And this week it was interesting, Europe had all the stress tests on its banks, and apparently the stress wasn't that great. There weren't that many involved. Are we going to see the euro maybe start to strengthen, that start to stabilize over in the old -- in the old world?

Newsom: I think so, at least in the short term. You know, what we're seeing is the dollar is pulling back to some support levels that have been built up, as you talked about, in that rally that we've seen basically going back over the last year, eighteen months. The euro could start to strengthen. It's fascinating to me how we come in almost every morning and the opening in the DOW and the other financial markets just seems to hinge on the news coming out of Europe. Did the euro gain ground overnight or was it weaker? What about the European stock markets, Asia? Everything is so connected these days, and it's something you and I have talked about at great length. But the euro does seem like it wants to rally a little bit here, but the dollar does want to sink a little bit. Find some support. Then as we get, I'm going to say, late in the third quarter, early in the fourth quarter of 2010, we're going to see whether or not the dollar is going to start to move higher again and if that starts to bring some additional pressure into the euro.

Pearson: All right. And of course, all this means stronger dollar, a little less competitive for the ag export, which has held in there extremely well despite the dollar's rally.

Newsom: Well, we've seen incredible exports, maybe not actual exports but the talk of exports. You know, here for months now -- month, month and a half, we've been hearing about all these increased exports of corn going into China. We haven't really seen it show up on the books yet. Export sales and shipments still relatively slow, basically on pace to just behind pace with what USDA has been projecting for total export demand. But soybeans is incredible. We're at a record amount for not only 09-10 we're on a record pace, but the early sales through mid July for 2010-11 are already at a record as well. What's interesting about that is that in the July USDA supply and demand report, they actually trimmed next year's export demand from this year. So it seems to me that they're underestimating demand right now, unless we see some sort of falling off of a cliff of demand for U.S. supply. So very interesting in the soybeans, the amount of product that we continue to move despite the record harvest in both Brazil and Argentina. It certainly could continue if the dollar stays under a bit of pressure over the next few months.

Pearson: All right. Of course, where is this going to leave us as far as oil is concerned? Oil had a little bit of a move up this week. Obviously the stronger dollar helps us on buying oil overseas. What's your outlook for crude oil? Should producers be booking some crude oil? Are we headed for an upswing there?

Newsom: I'm still bearish the crude oil market. Overnight Thursday heading into Friday, we hit some key resistance on the longer term charts right around $79.60. We backed off from that point. Now, we didn't close under a great deal of pressure on Friday, but longer term it still looks like this market is a bit overvalued to me. We've still got a carry or a cantango in the future spread situation. If we look at the EIA stocks number, we're still running well ahead of average, well ahead of where we were even a year ago with gasoline demand not quite as strong as it's been in the past. So we've got builds going in crude oil, gasoline, and distillates, so it seems like fundamentally, technically, the crude oil market is a bit overvalued, so I would not be surprised if we didn't see the normal seasonal selloff once we get through the summer driving season and see crude oil come back under pressure.

Pearson: All right, if it comes under pressure this fall, do you want to cover some needs there for producers?

Newsom: Yeah, I think so. We get down far enough -- let's say we break that crude oil back below $75, I think we could actually get down to near $60. And I think we're going to see a similar selloff in both gasoline and diesel -- heating oil diesel. So I think at that point, that's going to give us a chance to look in late 2010, balance of 2011 needs. Once we see that selloff get into this winter time frame, I think we're going to have a better opportunity to get some diesel --

Pearson: I get hit up a lot about gold prices. We must have a lot of gold bugs watching our show. And gold has been very strong. It's finally shown some returns. The gold has never sat on an interest check -- or a dividend check, but that's okay. People like it. As we calm these international markets down, is the gold market going to start to slip and has it topped?

Newsom: Well, we've seen it -- as you just said, it's calmed a great deal. Part of the reason for that is -- I think it was in May, maybe early June we went to a new all-time high. And two things could happen there. One, we could see this huge rush of buying come in and just continue to push higher. But it was at that same time that the situation in Europe seemed to calm down, the gold market, the dollar, and the euro seemed to switch directions. So the buying just didn't come rushing back in to continue to push gold higher, so it has set back but it hasn't collapsed. So I think what this is indicating is that there's still a great deal of concern, not just in Europe but in the -- over the united -- over domestic economy as well. So I think gold is going to hold its own in here. I think we're going to see some buying come back in. It's just going to take some time. It's pretty high priced. We going to wait to see the August move off, possibly move out into the December contract, see if it's got some pretty good value as well, and then start to move it as we head toward the end of the year.

Pearson: Now they're all talking silver.

Newsom: Silver has been an interesting market as well. It's kind of that hybrid market, kind of a cross between precious metal and industrial metal. So it's starting to find some favor. The problem that the silver market has had is that component where it is -- it's an industrial metal because we've seen the industrial metals coming under pressure. Copper, most certainly. Platinum palladium as the economies have continued to grow. So silver has had to fight through that, but I think some spillover support from gold, plus this flow of money that we've got going back and forth. When one market starts to look undervalued and the volatility is way down, money moves over --

Pearson: Money shifts.

Newsom: Exactly.

Pearson: Like we've never seen it before.

Newsom: Exactly. So the gold was so high, volatility was up. They looked for somewhere else where they could go and put more contracts in, and silver was very attractive and off it goes.

Pearson: All right. Dad always told me to watch copper. That's a big construction. As you mentioned, it's been under some pressure.

Newsom: Yeah, the copper market is a great indicator of global economics. So if you watch the copper market, it's been indicating to us how -- for one thing, how the Chinese economy has been going, because they've been doing a lot of building, the using of copper. They've been importing a great deal of copper. Well, the copper market is starting to slip a little bit. The Baltic dry index is slipping a little. All of this indicating demand for goods going into China right now has slowed a bit, using their stockpiles that they've built up. So copper is a great indicator, something we look at quite a bit for a good idea of what might be going on overseas in overseas economies.

Pearson: Okay. Let's talk fundamentals. Wheat market, big problems in Russia. Rape seed, wheat problems in Canada too, Darin. Big rally there. Do we sell this one?

Newsom: We do because there's so much talk about this short supply rally in the wheat market. The only problem is it's not really a short supply rally. Yes, we've got 130-year drought in Russia. We've got problems in Germany. We've got trouble, you know, basically in the Black Sea region, but there's a lot of wheat in the world. The last WASDE report in July pegged world ending stocks at 28 percent. So let's say we even trim that further in the August report. Let's say we take it back down to 25 percent ending stocks to use or 20 percent ending stocks to use. We still have an abundance of wheat in the market. The domestic ending stocks to use is still at 50 percent. So what I think we've actually got going on here is we've got a non-commercial short covering going on in Chicago. We've got a lot of non-commercial buying tied to the outside markets in Kansas City and Minneapolis, and they're all chasing headlines at this point. But the fundamentals do not indicate that we've actually got a short supply situation. We don't see the spreads weakening. We're not moving to an inverted situation. And the basis levels are collapsing. So it's not commercial traders who are trying to buy this grain. So I think we've got a divergence between what's being talked about and what the market is trying to tell us. Usually in that sort of situation, markets return to its fundamentals meaning that wheat is probably a pretty good sell up here, not just for '10 but for 2011 as well.

Pearson: All right. So sell them both.

Newsom: I think so, yeah.

Pearson: Six bucks in Chicago, do you think we can do that?

Newsom: Yeah.

Pearson: Kansas City is over six bucks.

Newsom: Even if you look out into the new crop, July 2011, all three of the markets are above $6 right now, so certainly an opportunity to get some locked in.

Pearson: Sell, sell, sell. Short crop, long tail. I'm going to use all my truisms tonight.

Newsom: Unless we see something that starts to change in those spreads or the basis to tell us the fundamentals are changing, yeah, I'm going to continue to sell this market.

Pearson: Rain makes grain. Big rains in the corn belt this week. Corn settled back some. What's your thinking on the corn crop for 2010, Darin?

Newsom: The interesting thing about corn is that it's moving back into its long-term characteristic of moving sideways. All we're really doing now is drifting back down in towards that lower end in the low threes. I think we're going to find some support down in that $3.50 to $3.65 range. I think we got down to, what, $3.66, $3.67 today in the sep. so I do think the market has got a little bit of room to move down, but there's going to be good demand start to emerge. We're still in a strong demand market. We've got strong exports, ethanol demand is expected to go up for 2010 to 2011. So as we drift down, I think we're going to find some support. Then the question does become what type of production are we going to see in 2010. I think right now everyone is fairly comfortable with what USDA said in July. The biggest question is were the 2010 numbers accurate, because if you look at the quarterly stocks, what we've got left, what we've got in bins across the country does not mesh up with what we're still being told was production and total demand coming out of 2009-10. So certainly an interesting situation coming out of the old crop with everyone pretty well settled on what we may be having in front of us on the new crop.

Pearson: All right. So we've had a good rally. We're over $4 December. Do you want to sell some of that? Do you want to sell 2011?

Newsom: I've been doing some of all that, but not -- not in great chunks, just a little bit here and there. When we start getting over that $4.05, $4.10, or if we look out in the ‘11, ‘12, and ‘13 contracts out around $4.20, $4.30 and $4.40, I think it provides some opportunity, if nothing else, on a historical basis. That's a pretty good price. But we are in a demand market. We're still in a demand market for corn. So I think as we move into this lower end, I'm going to hold off on sales, find the buying -- the commercial buying that comes in, push the market back up, and then we're going to be able to get some more sales on later on.

Pearson: Soybeans?

Pearson: Soybeans are kind of a huge question mark right now because we had such huge -- we had such record production in both Argentina and Brazil. We had record production supposedly in the United States in 2009. But we really haven't been able to break this market. Demand just continues to pour in. So we've got some on the books for 2010. We've got a little on the books for 2011, but this market still has something underneath it. This demand, this overseas demand that's not going to let it go down, so I'm not really looking for a collapse. And the interesting thing is that just as we've torn maybe a little overstated for 09-10, I think ending stocks for 09-10 soybeans are also overstated. I think it's closer to that unofficial floor of a hundred million bushel. So if we trim 75 million bushels off of that and then -- you know, we talked earlier about the 2010-11 export demand, if that's actually greater than anticipated, 10-11 ending stocks could also be considerably tighter than what's being talked about right now. So I'm holding back a little bit, not getting too far ahead of myself in making sales because want to see what happens in this market. Spreads are neutral right now, not indicating that the fundamentals are going to grow bearish anytime soon. So I'm kind of taking a wait-and-see approach.

Pearson: Cotton market?

Newsom: I really like what the cotton market did from the fundamental point of view this week. We saw the market move. The Oct./Dec. and Dec./March spreads go from a pretty strong carry into a strong inverse situation in just a couple weeks time. So what this is saying is that the underlying fundamentals or the commercial outlook for the new crop has changed completely over the last month. This certainly indicates that the December contract can now go up and test that 80 cents, if not higher, possibly going back to that March 2008 high, I believe was up around 84 cents or something like that. Certainly indicates -- certainly looks like the market is starting to get some momentum. Again, this is a market that is -- where the rally is fundamentally supported, unlike wheat, so that gives it that extra side of support, that extra bit of support that wheat just doesn't have.

Pearson: Let's talk livestock. Fed cattle market. I know we had a jobs report and a negative housing report and we've had some bad news from Wall Street. The equity markets seem to be ignoring that, and the old truism there is that the market climbs the wall of worry. So with that out of the way, as we look at the outlook for the U.S. economy, which is a huge beef demand market, maybe strengthening some, what's your feeling on fed cattle prices?

Newsom: You know, I like -- from a technical point of view, I like the way the charts, particularly in the October contract, are setting up. It certainly looks like we could go up, test that 96, maybe get up a little bit higher than that. It certainly looks like there's some pretty good support building in this cattle market. Fundamentally, we had the cattle-on-feed report coming out today. We're sort of basing this against some questionable numbers where, okay, we're larger than where we were last year. But the previous two or three years, we had such small numbers going into the lots, we had such small numbers going on feed, really it's not a fair comparison. So I think if we just look at the direction of the market, look at what these futures spreads are telling us, this market still seems relatively bullish. It seems like money is wanting to come back in. Does that indicate what the general consensus is or there's a feeling out there that the economy is getting better, disposable income is going to go up? I'm kind of starting to get that hint by looking at the trend in the cattle market, but it would be nice to get past those past those old highs. Once we clear that level, I think that's going to make the market look that much more bullish.

Pearson: All right. So you're friendly to fed cattle.

Newsom: I am right now, yeah, until we start to see a change.

Pearson: How friendly are you?

Newsom: You know, I want to see this thing go up another $2, $3, and that could happen next week. But if we take out that high, I'm going to grow quite a bit more bullish. Now, we have to take that with a bit of a grain of salt. Now we're heading into the time of year where the cattle market starts to come down, so maybe this is a last gasp rally here, it runs out of gas, and then we start to fall down. So again, I think it's going to be critical how we test -- if we test that old high and see how we react up there.

Pearson: All right. Hog market?

Newsom: Hog market is similar. We posted a very bullish week this week. We've seen the cash starting to firm, and that's exactly what this market needed. It looks like the fundamentals are going to continue to support the hog market. If there's a problem brewing, it's that the market is pretty high. As we talked about earlier, a lot of money tends to flow to lower priced, lower volatility markets. If hogs start to be perceived as high priced, high volatility, regardless of fundamentals, we could see some money coming out of this. So I like the market. Just as with cattle, we're testing some critical highs. If we can't get through there, I'm afraid it might spook some money out of the market.

Pearson: All right. Darin, we will see what we will see, as my grandfather always said. Thank you so much, Darin. That will wrap up this edition of Market to Market. If you'd like more information from Darin on where these markets just may be headed please pay a visit to our Market Plus page at our Market to Market Web site. You'll find expanded market analysis, audio podcasts and streaming video of our program. By the way, it's all free at the Market to Market Web site. And be sure to join us next week when we'll continue our examination of what is rapidly becoming the quintessential weather market. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices dairy livestock markets news wheat