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Market Analysis: Apr 09, 2010: Virgil Robinson

posted on April 9, 2010

The Agriculture Department released its latest domestic and global supply and demand estimates Friday, calling for increased stocks of corn and decreased wheat supplies.

For the week, May wheat gained more than a dime, and the nearby corn contract moved a penny higher.

USDA left DOMESTIC soybeans unchanged from previous estimate, but increased GLOBAL ending stocks. For the week, May soybeans gained 10 cents, while the nearby meal contract was down 60 cents per ton.

In the softs, cotton trended slightly higher this week as the December contract posted a gain of 16 cents.

In the dairy market, April Class III Milk futures rose 9 cents, and the deferred contract moved nearly 50 cents higher.

Over in livestock, June cattle gained $1.22. Nearby feeders were up more than $2.60. And the June lean hog contract rose about $1.

In other markets of interest, the Euro lost 114 basis points against the dollar. Crude oil traded in a sideways fashion gaining nearly a nickel per barrel. Comex Gold advanced more than $35 per ounce. And the Goldman Sachs Commodity Index moved fractionally lower to close at 539-even.

Market Analysis: Apr 09, 2010: Virgil Robinson Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Virgil Robinson. Virgil, always great to have you with us.

Robinson: Thank you, Mark. It's always good to be with you.

Pearson: It's exciting in agriculture because we are such a global marketplace. It seems like there's so many factors that can influence what is received for corn and soybeans. The biggie is always what the USDA pegs numbers to be. And, of course, they did that in a big way on Friday with that USDA WASDE report. Virgil, I want to get into some specifics on that coming up in just a moment. Before we do, let's talk about a couple of the outside factors, dollar, gold, precious metals, international banking, the China economy. All these things really are factors that impact us now in the agricultural sector.

Robinson: The Chinese economy is an interesting one as it continues to grow. The last quarter grew rapidly to the extent that Chinese officials have become a bit concerned about inflation in as much as several markets and several commodities moving significantly higher in price. I think there could potentially be an asset bubble developing there, particularly in real estate. So, when one thinks of the ramifications that could have globally it gives one reason to pause as he or she thinks about their well-being here in the U.S. with products that we produce, particularly agricultural products.

Pearson: Other side of the world has been a factor too and that has been the European Union and the issues there, the dead issues in Greece, the weakness in the euro, stronger dollar. Where do you see that headed?

Robinson: The pigs, Portugal, Greece and Spain. I think interestingly enough the dollar index which you refer to frequently made an abrupt change in direction in December of 2009 which at the time kind of flew in the face of convention wisdom, couldn't figure out why that had occurred. I'm going to try and make a point here. As it changed direction from down to up subsequently thereafter we discovered the issues in the euro zone and as a result of that the euro, the British pound and the yen began to decline and, of course, the dollar began to strengthen. So, the point here is the futures market, on many occasions, can actually be, in my opinion, kind of a leading indicator of what is to come in the physical marketplace itself so it gives us reason to continue to watch the development in those charts pretty carefully.

Pearson: Good point. All right, let's talk about the grain markets. Let's start first with wheat and what the USDA was saying about global wheat production and supply and it seems to be more than adequate.

Robinson: Yes, I think that's true. But in the same context of what we just spoke about in the dollar, wheat futures, Chicago wheat futures had a good week. What I would describe on the weekly continuation chart as an outsider reversal week, which often times is the precursor to some additional price improvement. I think that observation combined with the fact that the CFTC released this afternoon the net position report, and I'll speak specifically about the non-commercial or the speculative element, the directional funds major, major shorts positions in wheat futures. So, I think the combination of that in conjunction with what we just referred to technically leads me to believe we are in position here for a short covering rally of all things after today's bearish report. So, Chicago July wheat near-term target I think around $4.95 to $5.00. Given that opportunity I would sell it. Minneapolis wheat approaching $5.45 basis July I think represents a good sale. Kansas City wheat basis July at around $5.30 the same. So, an opportunity here.

Pearson: Excellent. All right, some hard core targets. I like that. What about the corn market? What did the report tell us about corn and supply?

Robinson: I think there was some surprise in U.S. ending inventories only increasing, only, 100 million bushel. Given the recent stocks in all positions data and what we felt would be the end result in this new S&D still at 1.9 billion, we're talking about what is a comfortable supply of corn. And the USDA did increase global corn production as well and subsequently increased ending stocks there I think 2.5 or 3 million metric tons. So, bottom line, corn inventories, at least measured by these reports, appear to be comfortable which would imply then that rallies in the futures markets and cash markets driven by weather or other events are opportunities to seek defensive strategy or to employ defensive strategy.

Pearson: All right, having said that then, you're a little more interested maybe in getting some more corn price new crop?

Robinson: Again, my strategy in new crop for years has always been the put strategy at least through the spring period of time where we can maybe get a little better handle on planted acres as well as prospects for production. I think I'll stay with that at this point in time. But old crop is more concerning with a 1.9 billion bushels of carryover being projected we both know where much of that will reside, on farm sites, and that to me is concerning and implies that rallies when they do occur are likely to be met with pretty good farmer selling, producer selling.

Pearson: You gave us some pretty good targets on wheat for a price. What are your price targets on corn?

Robinson: I think around $3.60 basis May corn futures will attract some new sales. I think, again, assuming we have something of a near normal springtime ...

Pearson: Whatever that is.

Robinson: Yeah, whatever that might be -- futures I think could drift the old crop May and/or July down towards that $3.20 so there is clearly some risk involved from tonight's price levels.

Pearson: New crop December?

Robinson: I think I would be reluctant to make sales below $3.60 but as they approach on short covering rallies, weather driven or otherwise, that $3.90 to $4.00 mark basis the December 2010 futures contract pretty stiff resistance there and I would employ either a short hedge, a storage hedge or some type of put strategy.

Pearson: All right, soybeans. I talked to a fellow who farms in Brazil today and he said the older ground, the ground that has been in production for five years was producing tremendously and the newer ground that is just one or two years in production down there was pretty poor but overall yields were good.

Robinson: Yes. I think today's data would document that in as much as the USDA did increase month over month Brazilian soybean production 1.5 million tons I believe and Argentine production another half or 1 million metric tons. So, the combination of the two, those two countries, record large soybean production in the southern hemisphere.

Pearson: Okay. Producers have to take note of this.

Robinson: Must acknowledge this, absolutely. And I think, again, weather is a major issue, of course, this time of year and can create short covering rallies at any given moment. But I would use those, those short covering bumps and bounces to defend against what is likely to be a lower trending market over the course of the next three or four months.

Pearson: Give us some quick price targets on beans for old crop and new crop.

Robinson: In terms of sales I think the old crop contract in and around the $9.75 area I think represents a pretty good sale, new crop as it approaches $9.40 to $9.50 I would either make a sale or buy a put or some strategy of that nature.

Pearson: Take advantage of it. All right, Virgil, let's talk about the livestock sector. On the bright side, wow, we've seen this cash cattle market has been phenomenal, the feeder cattle market has been off the chart. We are burning hard again. You were getting pretty friendly to cattle towards the end of last year. It's finally kind of clicked here. What is your take as we go forward?

Robinson: A couple of things we can acknowledge, cattle inventories, smallest in the last 50 years, we can acknowledge that. I have not seen, at least in the data that I view and watch routinely, any suggestion that there has been fewer beef cows slaughtered or heifers retained which is normally a prelude to trying to grow the breeding inventory, the breeding stock. Haven't seen that to this point which is good news and does I think underpin the supply argument here. The other point, though, is of more concern to me tonight is the fact that beef prices are clearly beginning to climb higher. I don't think the full brunt of the recent rise in fed cattle prices has been witnessed at the retail counter. I think it's coming so demand is, of course, suspect I think in the near future. As a result of that I would be of the opinion that making some sales here, capturing some profit and some margin is probably a good idea, at a minimum some kind of a put strategy and create some kind of a floor here.

Pearson: Virgil, can you talk about the fact that there's been some concern, obviously it was a very wet crop last year, it was cool, wet, late harvest, wet harvest, some just getting harvested. I've talked to some cattle feeders, I was in Carney, Nebraska this week and they are concerned about the corn quality and, of course, corn -- the test weights were by and large lighter, you can't have a strange year like we did last year and not see that happen. Could that come around and impact that feed demand that USDA was talking about? They lightened the number on feed demand.

Robinson: They did. We fully expected to see a couple hundred million bushel reduction in feed and residual today and it was only 100 million so I think perhaps the USDA is beginning to acknowledge the lighter test weight issue, particularly as it pertains to conversion and the amount of corn needed to finish livestock.

Pearson: Let's talk -- we've got about 30 seconds -- your outlook for the hog market.

Robinson: The summer months are carrying a big premium to cash. Historically that's been an awfully good hedging opportunity because we know at some point those two must converge and I'm not sure which will be the dominant factor there. But I think there are some awfully nice hedging opportunities in the summer and fall hog futures contracts. If your balance sheet is pretty precarious this is an opportunity I don't think you can pass up.

Pearson: All right, so plan accordingly, take advantage, it could be a good seasonal move. Take advantage of that hedge opportunity. Virgil, as usual, great information, tremendous insights, we appreciate it. That is going to wrap up this edition of Market to Market. We'd like to get you more information from Virgil on where these markets can be headed so just visit our Market Plus page at our Web site. You'll find expanded Market Analysis and audio podcasts and streaming video of our program and it's all free, it's at the Market to Market Web site. Of course, join us again next week when we will turn back the hands of time and relive Nikita Khrushchev's visit to an all-American farm. 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