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Market Analysis: Jun 25, 2010: Erin Golly and Virgil Robinson

posted on June 25, 2010

China's decision to allow the Yuan to float against other currencies was friendly to major commodities briefly this week, but by Friday's close forecasts of ideal growing conditions pressured grain prices.

For the week, July wheat lost 5 cents and the nearby corn contract was down more than 20 cents.

Soybeans followed the coarse grains lower with the July contract losing about a nickel, while the nearby meal contract advanced 20 cents per ton.

In the softs, cotton traded in a sideways fashion with the December contract gaining 4 cents.

In the dairy market, July Class III Milk futures gained 18 cents, but the deferred contract lost 2 cents.

In livestock, August cattle gained $2.75. Nearby feeders were up more than $3. And the July lean hog contract advanced $1.25.

In the financial markets, the Euro gained 22 basis points against the dollar. Crude oil advanced 60 cents per barrel. Comex Gold retreated from record highs with a loss of $2.10 per ounce. And the Goldman Sachs Commodity Index gained nearly 2 points to close at 513-even.

Here now to lend us their insight on these and other trends are two of our regular market analysts, Erin Golly and Virgil Robinson. Folks, welcome back.

Market Analysis: Jun 25, 2010: Erin Golly and Virgil Robinson Golly: Thank you.

Robinson: Hello, Mark.

Pearson: Virgil, let's talk about the grains first and what you see happening over there. There's been a lot made about China's decision. This is a landmark decision and it changes things for how China really participates in the world market and could actually fuel more growth in their economy. People think that could translate into more demand for commodities.

Robinson: Particularly if over the course of time the currency, the Chinese currency continues to strengthen and the dollar over the course of time weakens clearly that would make our grain more attractive to the Chinese. So, yes, I think that is very possible moving forward, that is to say more business relationships with the Chinese in a multitude of goods and services including agricultural product.

Pearson: Let's talk about the wheat market, the Chinese could buy more of that and it wouldn't hurt anybody's feelings, there's plenty of it around the world. The crop looks pretty good in the U.S. What is your outlook for wheat?

Robinson: Well, we do have a couple of areas of concern, western Canada, which we have talked about on the show or has been talked about as well as the former Soviet Union. There are some dry areas so there will be periodic rallies I think in the U.S. futures markets and I've used those rallies to make old crop sales. I'd get those completed and make some new crop sales as well.

Pearson: So, we were in rally mode and you're talking 10, 20 cents?

Robinson: Which isn't by historic standards much of a bump but 20 cents plus I'd certainly be willing to part with inventories on those kind of rallies.

Pearson: Let's talk about the corn market too and what you see happening there. A lot of disappointment over this EPA decision. We talked about it earlier in the show. There's no secret we're using a third of the corn crop to produce ethanol. We're displacing apparently some of the oil baron's money down there and they're certainly getting their way in Washington these days despite the situation with British petroleum down in the Gulf. How big of an impact is that? We knew it wasn't going to just turn the spigot on for more ethanol if the EPA did come out this summer but this constant delay, what does that do for future corn demand?

Robinson: Well, there are a whole host of other events that are equally or more important. I think the issue will be revisited. Now, budget concerns crop up here as well moving forward but I do think there will be an increase in the blend from E-10 to E-12 most likely but probably not until fall of this season, of this year.

Pearson: All right. Give us your outlook for corn.

Robinson: A couple of things, a couple of reports next week, stocks in all positions as well as acreage on the 30th of June. I think the market, after listening to Elwynn, is certainly subject to a short covering rally at any given moment, particularly if the weather does turn hot and dry which I think will likely occur if these ten to fifteen day forecasts are accurate. So, the theme has been for the last several months sell rallies in old crop corn and protect new crop production with some type of defensive strategy and I've chosen options over the course of the last several months.

Pearson: Erin, you're bobbing your head there so you're kind of in the same camp, sell the rallies but the overall trend still is probably lower for corn?

Golly: I think so and the basis is really tight right now because we do have a large crop coming at us. I'd rather wait for feed needs for livestock producers to look at locking in the needs. Once we hit this fall price it should move lower and the basis should widen out.

Pearson: All right. Virgil, what about 2011? Do you want to make sales there? Are you in that big of a hurry to price some crop?

Robinson: You know, we've addressed this. I'm one that is fond of putting together crop budgets and then some type of objective and there have been opportunities I think for folks to do that and there's been limited sales made in the 2011, even out into 2012. And I don't have an issue with that provided they are driven by economics. I do have an issue with those who are suggesting, however, over the course of the next many months will not revisit $4.00 or higher. I couldn't certainly adhere to that thinking. So, crop budget, financial objectives are met, I don't have an issue with that.

Pearson: Let's talk about soybeans then and, again, if you drive from say, Grand Island, Nebraska over to Burlington, Iowa and over into western Illinois you see some pretty tough looking crops. You see some corn has been washed out and you see some corn that has been re-planted, you see some beans that are extremely yellow, particularly in those levy areas along the Mississippi River, half million acres or so impacted there. Really it doesn't seem to have much of an impact on the board at this stage of the game. But what do you think? Where are we headed in this bean market with all those issues included?

Robinson: Well, to your first point crop condition reports are released every Monday and they just do not document what you're discussing. I think there are select areas but on average crop conditions remain at very lofty levels and have every analyst believing, at least given those as their modeling device, that we are on track to trend or above trend yields. So, it's very difficult to argue with those crop condition reports, Mark, in as much as that transparency transcends through the industry and through the world.

Pearson: Absolutely. Getting back to beans, though, what are your thoughts on soybean sales and what could be some catalysts here for these markets?

Robinson: Well, export sales remain pretty strong. We yet have China in the mix. I track the national cash index, the national soybean index, I still have it in an up trend however on a daily close below $9.00 the trend changes so please be advised that's something that we can all watch in as much as it is very transparent at the Minneapolis exchange. New crop beans, I've been a proponent of minimum price, I'll remain in that camp, we yet have July and August coming, Elwynn has forewarned us there could clearly be some weather changes. There's a lot of time here before we talk about record yields and record production in the soybean market.

Pearson: Good point. Let's talk about the livestock, the flip side of all this feed demand. Erin Golly, fed cattle market. We've had a nice recovery and we saw some black ink again in the feedlots. What is your outlook? What do you see going forward?

Golly: Well, what we learned from last week's cattle on feed report is that we are going to see an increase in the livestock numbers, or cattle numbers, going into the rest of the year. Market ready supplies are going to be real tight and going to remain so but the things that concern me is the outlook for where we are economically and the box beef demand. Those two things are going to be the major hurdles going forward.

Pearson: All right. That's a good point. The unemployment rate is still high, we talked on the show that the GDP was not as big as we hoped it would be. Are we seeing demand at the meat case for beef?

Golly: I think we're seeing limited demand, people that do not have jobs have a hard time going out and buying steaks and that's just the way it goes. But what I've been telling producers to do is look at buying $90 puts in the August and October timeframe. The August puts are at $2.00, Octobers are at $2.50. For protection against the kind of demand issues that we could see and protection against world economic issues that could pop up and those puts ensure a bottom just in case of those instances. So, then as we look into the fourth quarter key support for the December contract is at $90.70, $90.75 and I think if we can get back up there and move up to the next key support, $93.25 I think there's some good opportunities for producers to make some sales.

Pearson: Let's talk about the calf market because as Virgil mentioned in our overall trend, our overall condition of the corn crop is quite good and that would put some pressure or certainly could give us some pricing opportunities for these calves if prices continue to shrink, we get that teeter totter going, cheaper corn, better demand for feeders.

Golly: Mm-hmm. I think actually the calf market is going to be very good for the next few years. We've had cow slaughter up 13% compared to a year ago levels. Past year conditions have improved greatly with the excess moisture we've received so I feel very good about calf prices.

Pearson: What do you think we're going to see going down the road?

Golly: I think moving into the feeders I think we're going to be short-term for the next three to four weeks, $108 to $112, after that into the third quarter $112 to $118 basis the feeder cattle index. It also depends on how the corn market shapes up.

Pearson: All right. It's all interdependent. Now, let's talk about the hogs and pigs report that was out Friday. What is your impression?

Golly: It was pretty neutral, came in right in line with estimates, no big surprises and so when we take those numbers and look into a count of the December contract and where we're trading key support for the December contract is right where we're at, $72.30, $72.35. If we can move above it this next few weeks the next key area and objective is $75.15 and that is the contract high for the December contract. If we can get up there I think that producers should look at making some sales. There is a second chance for a lot of producers that missed out the last time on the December contract and I think it's a good opportunity for them to lock in hedges.

Pearson: All right. Talk about some of the drivers of this hog market. We've had this strong dollar and people in the industry are telling me that is impacting this pork export trade. What is your outlook for the dollar and export business for pork going forward?

Golly: Right, we had a USDA meat supply report this last week showed that total U.S. frozen stocks on hand for the end of May were down 23% compared to a year ago and that's pretty huge. We're continuing to see weights go down, weekly hog weights were down four tenths of a pound compared to the week before and I think weights are going to continue to move down through the summer. Forecasts are lower for hog slaughters throughout the summer so I think with all those factors it's going to build a very solid demand base for the pork industry.

Pearson: Okay. What about covering feed needs? Now, you were talking earlier with Virgil that there's going to be some rallies but the overall trend as long as this crop looks good is lower. How are you handling feed?

Golly: I think we're just going to wait until the fall, like we said, on the bean meal side the minimal basis pricing in as well. But from all the producers I talk to they're waiting until the fall to get coverage.

Pearson: All right, and then you'd buy cash?

Golly: Buy cash or look at some call strategies on the way up.

Pearson: All right. Well, as usual some great insights. Erin, thank you very much. Virgil Robinson, thank you so very much. Appreciate both of you being here. That's going to wrap up this edition of Market to Market. If you'd like more information from Erin and Virgil on where these markets just may be headed visit the Market Plus page, it's at our Web site. You'll find expanded market analysis, you'll find audio podcasts and streaming video of our program and it's all free at the Market to Market Web site, check it out. And be sure to join us again next week when we'll examine the regulatory overhaul of America's financial sector. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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