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Market Analysis: May 21, 2010: Virgil Robinson, Market Anlayst

posted on May 21, 2010

Wheat futures traded in a sideways fashion, this week, while rumors of Chinese demand supported corn prices, albeit modestly.

For the week, July wheat moved fractionally higher and the nearby corn contract gained 6 cents.

Soybeans trended lower again this week as the July contract lost more than 10 cents, while the nearby meal contract was down $1.20 per ton.

In the softs, cotton traded mostly sideways this week as the December contract posted a loss of 2 cents.

In the dairy market, June Class III Milk futures gained more than 50 cents, while the deferred contract was up 16 cents.

In livestock, June cattle declined nearly $2. Nearby feeders were down nearly $3. And the June lean hog contract lost nearly $2.

In the financial markets, the currency everyone's been watching carefully lately, the Euro lost 200 basis points against the dollar. Crude oil was down more than $5 per barrel. Comex Gold retreated from record territory with a loss of more than $50 per ounce. And the Goldman Sachs Commodity Index lost nearly 30 points to close at 472 even.

Market Analysis: May 21, 2010: Virgil Robinson, Market Anlayst

Pearson: Here now to lend us his insight in these and other issues, 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: Well, it was a wild week. It was a wild week in the capital markets, the commodity markets. You name it, it was wild. The currency markets were really wild, Europe, all the problems over there. Have we bottomed do you think, Virgil, on those issues? Is there more to come? Another shoe to drop? What are your thoughts on this?

Robinson: Mark, difficult for me to suggest that those problems have been resolved. There have been suggestions made and I think a path to follow. However, my take from most analysts who are familiar or more familiar with the euro zone than I am, for example, are very dubious of what has been ponied up in terms of a resolution. So, to answer your question, I suspect moving forward we can expect increased volatility. There will be periods of calmness but be advised this is a very turbulent environment here.

Pearson: Oh boy. Big impact on agricultural goods because we sell a lot into Europe and as we just pointed out the dollar, again, strengthened dramatically against the euro this week.

Robinson: Weakened late in the trading week to the extent that at least from my view, again I'm looking at this more from a technical perspective than I am from a fundamental or underlying fundamental point of view, I think there is some additional back and fill in the U.S. dollar coming in the very near future. To what extent I can't really measure but I do think there are a couple of basis point decline or a couple of hundred point decline here in the value of the dollar index.

Robinson: That should lend, if nothing else, some support to our ag products and perhaps encourage some additional buying because of that. So, I think, at least in that perspective, good for us.

Pearson: Crude oil, we also pointed out, down sharply this week which is a positive for production agriculture once that is distributed down at the retail level. But what is your take on -- obviously the stronger dollar is a big impact on that. But as we look at oil and the general world economy we have this nice recovery it seems like going and now we have a stall.

Robinson: Well, I think clearly the slowing or perceived slowing of the European communities, it would seem to me from what I'm reading from very reliable sources there is a noticeable slowing underway in China. I'm not talking about a complete crash or anything of that magnitude but clearly there is some slowing in the Chinese economy and I think that has had an effect in addition to the conversations and the pending legislation regarding regulation of various commodity markets and/or financial markets. I think that has taken a toll on crude oil. I would, however, be reluctant to press crude oil aggressively below $70 a barrel.

Pearson: All right. Let's talk about our commodities -- let's talk about our farm commodities and let's start with wheat where there just seems to still be plenty of it out there. It looks pretty good, Virgil?

Robinson: I think the hard red winter wheat crop is developing well, had some pretty timely rains and precipitation through May so expecting a good crop in that respect. There are some areas globally with some concern but in the recent WASDE report, I'll use that as our measuring stick here tonight, forecasting global wheat production to be about 672 million metric tons, which would be, in fact, a small increase year over year. So, the theme remains basically the same. Here in the U.S. as well as the world there is an adequate to ample supply of wheat, going to be very difficult to mount any kind of serious price advance given this supply scenario.

Pearson: What are your thoughts as far as farmer's sales are concerned? Rallies, just sell the rallies and then try the new?

Robinson: Yes. Old crop wheat I think many are kind of running out of time here and space with respect to what could be a pretty sizeable new crop corn and soybean market. So, space will be at a premium in many geographies, space that currently has old crop wheat. It would be my best opinion that probably it should be sold. If you want to leverage your money there is an option position or perhaps even a futures position that would assist you in that regard.

Pearson: All right, to maintain ownership. Let's talk about the corn market. Now, China buying corn. How big of a deal is that?

Robinson: Well, I think the precedent is large and maybe one of the indicators that will give us some insight that could occur as quickly as early next week where they, again, intend to auction off a million metric tons of corn domestically. Corn price in China, I don't think I 'm lying to you here, I think are at record high levels and these auctions have been gobbled up just immediately which indicates to me the underlying need and demand for corn.

Robinson: Now, in some instances economically, you can import corn cheaper than you can but it domestically and I think that has lent support clearly to our market and, in fact, driven some new sales. Bottom line, I think there are more in the wind.

Pearson: All right. Corn sales, you were pretty aggressive this winter when prices were better. What do we do now if we haven't done anything?

Robinson: Old crop corn there's a pattern here, it's a very noticeable pattern. Every time we catch a relatively good short covering rally or rally in corn futures we buy cash corn. We bought cash corn today. Interestingly enough through the week the basis actually firmed so it's unique when you have a stronger basis or a firming basis and stronger futures prices. I think that will follow through next week so old crop corn, if you are in fact still lugging old crop corn, I think next week provides an opportunity to sell it. July futures above $3.85 or near $3.85 I would use that as my trigger mechanism.

Pearson: All right. Some good prices there. New crop, Virgil, your thoughts there?

Robinson: I'm still reluctant to finalize the price of new crop corn at this point in the cycle. I still like the idea of minimum price. If your a local new crop corn basis is better than average, and in some instances that's the case, I don't have any issue with making a sale and then buying back some type of call position, either a straight call or a vertical call spread to retain ownership moving forward here as we try and decipher acres, yield and disappearance.

Pearson: All right, well, encouraging on that cash market. Let's talk about soybeans. Same thing there -- what do you see happening on that front where China has been a huge buyer?

Robinson: Yeah, I was disappointed this week in the market's behavior. I thought we would be stronger. We, in fact, futures wise declined modestly. Interior bean basis levels firmed which would suggest to me there's still demand for that product and for that commodity. Processing margins, at least the way I calculate them are profitable and that remains I think a pretty good demand pull. But as mentioned the market just could not retain any gain the last couple of weeks and that is disturbing given the fundamentals that we have, China in the marketplace, profitable crush. The market is trying to tell us something here. So, I will, in fact, respond and if, in fact, soybean futures rally from tonight's close another 20 to 30 cents I'm a seller of old and a minimum price of new.

Pearson: All right, Virgil, with a big crop in South America and the strong dollar exports are holding up okay?

Robinson: Surprisingly strong, again, one would have suspected that we would have shifted all business away from the U.S. and towards the southern hemisphere but I think they're having some shipping difficulties which is not uncommon. The Argentine farmer is reluctant to part with what he yet retains in terms of his soybean and/or her soybean crop, Mark, for a whole host of reasons, economic reasons. And the Chinese have continued to purchase at least modest quantities of beans here. But please understand, and I need to remind myself of this routinely, the Chinese have the opportunity to switch origin from one port to another and, in fact, if the economics warrant this cancel business all together. So, I'm wondering if the reluctance of bean futures and the bean market to retain gains the last couple of weeks isn't implying some of that is coming down the pipe.

Pearson: Okay, so a little cynical view there from the bean pit.

Robinson: Yes, a little concern there.

Pearson: Cotton market, we've talked about improving world economics and we've seen a big rally in cotton. Where do you think we're headed?

Robinson: Mark, when we last spoke April 9th I thought that cotton futures were a great sale, anything above $82. If, in fact, folks followed that advice I've changed my tune. I think the underpinnings of the cotton market have improved, specifically demand from China, domestic cotton prices in China are at record high levels and they're still buying and importing cotton. And I think there is likely more to be bought there. So, I think cotton futures over the course of the next several weeks, I'm not talking about Monday morning, but over the next several weeks are in position to trade back towards 90 cents.

Pearson: Wow, all right. Ratcheting up a little bit.

Robinson: Yes, I'm bullish there and I know we're at levels not seen for the last couple of years and it's dangerous but that's the way I sense the market tonight.

Pearson: That's what we want to know. Let's talk livestock. Fed cattle market, which you thought would improve with this shrinking cow herd and maybe a little bit better economics here in the United States. That has happened but we sure took some of it off this week.

Robinson: The last two weeks have been humbling. A couple of things, though. Tonight's cattle on feed report at face value, not a game changer, pretty much as expected by industry analysts. However, I thought the cold storage report that accompanied tonight's cattle on feed report was bullish. We witnessed a month over month decline in total frozen beef, decline year over year. I think that's very impressive, particularly when you take into consideration that retail prices have in fact moved higher.

Robinson: Now, there are a couple of caveats here. The Australian dollar has weakened significantly of late while our dollar has strengthened and I think there's been some additional importation of Australian beef kind of taking the edge off some of this hamburger market. So, having said that, I think cattle futures are in position to recover provided we don't have an economic collapse, which I don't sense tonight beyond the trauma we have already experienced. And I think we'll be able to sustain the third and forth quarter of 2009 a live market in that $94 to $97 area. So, given that as a price target, futures are currently, including basis, trading below that. So, I'm reluctant to make any kind of a futures sale at these prices. I think there will be better opportunities down the road.

Pearson: The cow calf producer looks a lot stronger today. Now, we did sell off the feeders too. But with this small of a cow herd that's going to have to be a good business to be in for the next couple of years.

Robinson: You know, we pushed up towards that old historic mark of about $118 to $120 futures. I'm going to speak to the futures market and we've pulled back since as has the fed market. However, I think it is not uncommon but more common to see pretty aggressive placements beginning in July and stretching out through October. I don't think this year will be any aberration from that seasonal which would imply then the demand for feeders should strengthen. So, as futures, as we visit tonight are beginning to pull down or have pulled down in value I would like to make some type of long hedge in the August feeder contract as it pulls down into that $106 to $107 area. And I would most likely establish some type of option position. More aggressive folks can use futures or, in fact, procure the physical product.

Robinson: October feeder cattle futures, as it approaches $107 I would do the same. I like that market and I think it's giving us an opportunity here for the balance of the year.

Pearson: We'll have to talk more on Market Plus about the hog market but about fifteen seconds. What do you see?

Robinson: Cold storage report was bullish, welcome back China, Japan is lurking. I think there's some additional export business imminent. I think hog futures, as we visit tonight, particularly the deferreds, are oversold.

Pearson: All right. Virgil, we appreciate it. Thank you so much. That will wrap up this edition of Market to Market. If you'd like more information from 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 streaming video of our program and it's all free at the Market to Market Web site. Be sure to join us again next week when we'll follow more than 350 members of the greatest generation on their honor flight to the World War II memorial in Washington. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news wheat