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Market Analysis: Mar 26, 2010: Darin Newsom and Walt Hackney

posted on March 26, 2010


A strengthening dollar this week and forecasts of favorable spring planting weather pressured grain prices.

For the week, May wheat lost nearly 20 cents and the nearby corn contract declined by 19.

Soybeans also followed the grains lower. For the week, the May contract fell nearly 10 cents and the nearby meal contract lost 70 cents per ton.

In the softs, cotton settled slightly lower with the December contract losing nearly a dime.

In the dairy market, April Class III Milk futures declined by more than 10 cents, while the deferred contract was down 2 cents.

Over in livestock, April cattle fell precipitously from last week's close at a contract high, losing nearly $4.00. Nearby feeders were off nearly $1.50. And the April lean hog contract also plummeted -- with a loss of nearly $3.70.

In other markets of interest, the Euro lost 136 basis points against the dollar. Crude oil lost nearly a dollar to close at exactly $80 per barrel. Comex Gold fell $3.40 per ounce. And the Goldman Sachs Commodity Index lost 9 points to close at 513-even.

Market Analysis: Mar 26, 2010: Darin Newsom and Walt Hackney Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt hackney and Darin Newsom. Gentlemen, welcome back. Walter, good to see you. Nice hair cut. I want to talk about what's happening globally. We're going to kick off with the grains. Darin, the strong dollar is what everybody has been talking about and all the problems over in Europe, which turns out we all should have been Greek. We'd all be retired right now. What's going to happen as you look at the euro, the situation with the euro and some of the divisions that's occurring among the European nations?

Newsom: Yeah, right now it certainly looks like the euro is going to continue to come under some pressure and this has been what's driving the dollar. We saw it move through resistance right around the 82 point mark and move above that. Now everyone seems to be thinking we could see 84, possibly 84.5 if this does occur. Usually you have to have some sort of move by the Federal Reserve to give the dollar this kind of strength. More than likely it's going to continue to come from investors getting out of European currencies moving into dollar. I'm not going to really call it a safe haven, but it's that similar sort of play, pushing the dollar higher. And what's been interesting over the course of this week, while we saw some losses in commodities, it wasn't as severe as it might have been or maybe it could have been. So if the dollar does continue to go up, it will be interesting to see how the commodities start to react.

Pearson: All right. So we've got a stronger dollar and stronger dollar worldwide. That's been playing a little bit to our advantage on one commodity front, which is imports of foreign oil. Crude oil around $80. What are your thoughts on that? I keep hearing there's plenty of oil out there, that it's -- we shouldn't have a problem when we get into the summer driving season and we start to see that seasonal move again. Do you go along with that?

Newsom: Yeah. I think that's really what's helping to support crude oil right now is that we do have a seasonal play going on. You know, normally about the time you get into mid January, early February, you start to see some buying coming into the crude oil market. We're seeing that again this year. It's been pushing it higher. It's pushing it up, you know, keeping it in the low 80s. But really the fundamentals aren't there. We have stocks above the five-year average. We have demand from gasoline -- for crude oil below the five-year average. So we've got plenty of crude oil. Demand still isn't picking up. We saw the mixed economic reports. Not really believing that we're going to see all kinds of summer demand coming back at the levels that we were pre 2007. So I think there are some issues in this crude oil market that could keep it in check right now. And if we do start to see this dollar rallying, something we really didn't see this week in the crude oil, it could start to put some pressure on this market if money starts coming out of crude oil again.

Pearson: All right. So that's going to bear some watching. Obviously any explosion or problems in the Middle East, Nigeria or wherever, we could certainly see a spike. But are you covering some oil needs for producers at this stage of the game with this price? Now that we're kind of before 80 bucks again, it's like people are kind of watching this. Should we be covering some needs here in the event of a problem?

Newsom: You know, if we haven't covered anything at this point, I would like to see it pull back a little bit. We have found very strong support up in the upper 70s. So even if we drop it down $2, $3, we've got to cover some spring diesel needs or something like that, let's see how it's reacting with the heating oil market, see if we can start pulling this thing down a bit. If not, we have to be very careful because if crude oil gets above the January high of 83.95, then I think it is going to bring a lot more money into this market. It certainly could get back up in that $95, $96 range.

Pearson: And the gold market negatively impacted, I suppose, with the stronger dollar.

Newsom: Yeah, again, it should have been. It should have been much weaker than it actually was. It's holding relatively firm right around that $1,100 mark. If we can -- if we continue to see this type of buying coming into the dollar, I think it is going to put a lot of inflation fears to bed for now, and I think one of the markets that does have some room to come down would be gold. But what interests me again is the fact these commodities are not behaving the way they normally do, in the fact that they're facing a strong dollar, making some very strong questions about how long the dollar is going to hold up here or whether or not it's just kind of a spike rally.

Pearson: All right. Well let's get down to the cases here. We've get to livestock with Walt in a minute. Let's talk about the grains first. The wheat market this week, there was pressure there. I mean you can't ignore the fact we had pressure in the wheat futures.

Newsom: Yeah. I mean it doesn't matter where we turn anymore, and it's been this way for months, going on years now, where the dollar -- where the wheat just has very bearish underlying fundamentals. IGC, International Grains Council, came out this year targeting 2010 wheat stocks, international wheat stocks at nine-year high. U.S. ending stocks total supplies still incredibly high. We're not moving much wheat on the world market. Our wheat is overpriced and the higher the dollar goes, the more overpriced we're going to get. So it looks like the wheat could continue to have some pressure. We went through the February lows here this week. And if we start to see some momentum building, seasonally wheat should still come down.

Pearson: We planted, what, eight million fewer acres, though?

Newsom: Yeah, about six million fewer acres just of winter wheat. The question out there is how many fewer acres we're going to have of spring wheat. So the problem is we're dealing with the old crop issues and we have to get into the new crop. even with the incredibly fewer acres this year, it's not going to cut into supplies enough now for these reductions that we're seeing in demand to really turn the table on the wheat market.

Pearson: All right. So your wheat advice to farmers out there is what?

Newsom: You know, sell on any rally. this market is certainly one of -- until we see some sort of change, if we get a rally, if we follow these other markets higher, the dollar sells off, causes a spike in the wheat, be sure to use this to your advantage. Get some sales on, ride it into -- start riding it into the new crop.

Pearson: All right. Let's talk about the corn market. There's a lot of things happening out there. Congress has a bill that they're looking at that's going to extend the ethanol tax credit, and it's also going to extend the tariff. So that certainly would have to be seen as positive, although we didn't see that reflected in the corn market. And of course, the thoughts that EPA might bump it to E15 maybe this summer now or that might be pushed back. But that was a big crop we made in 2009. A wet one but a big one. Where do we go from here with corn prices?

Newsom: You know, right now corn is doing what it should do at this time of year, and that's just move sideways, waiting for this big piece of news, whatever the next piece of news might be. It is starting to drift a little bit lower. We are dealing with increased supplies. Yes, demand remains strong. We're talking about almost 1.8 billion bushels of leftover stocks at the end of 09-10. This is a bit cumbersome. If indeed we do see the type of acreage that everyone is talking about with this --

Pearson: Give me your estimate. What do you think that's going to be?

Newsom: Well, you know, right now we're hearing anywhere from around 88.6 up to 90 million. I think we're going to be close to that 90 million acres compared to last year's 86.5. I think the number could come in a bit higher than what's being anticipated, and ultimately it could grow even further than that. Weather is starting to be a bit more conducive to getting back out into the field. So I do think we're going to see a larger acreage number. And if it does occur and trend line yields hold in place, you know, we're looking at another record harvest next year. And export demand remains slow, so we're going to have to rely on feed demand. we're going to have to rely on increased ethanol demand, or all of a sudden we're going to start building up these stocks to where we could start approaching 2 billion bushels, which I think would be a bit of a problem for corn market in 2010-11.

Pearson: All right. So what are your sales targets on corn?

Newsom: Right now I'd still like to sit back a little bit. Again, we're in a seasonal sideways pattern. Normally we get some sort of kick up in the spring during planting, late planting season. So I think we've still got a shot to get new crop December contract back up over $4, possibly $4.20 if we really get some sort of weather scare going. So, you know, if I haven't done anything yet, I want to sit back a little bit. The market has come down a little bit. Let's see what happens this next week. Let's see how the market reacts and I think wait for the seasonal move to put it a little higher.

Pearson: All right. Let's talk about soybeans and what you see happening there. Again, all the reports are still glowing in South America.

Newsom: Right. But the biggest thing in South America is that we continue to have rains in northern Brazil, and this is slowing the harvest down and keeping this interest on the U.S. supplies and it's tightening old crop situation here in the United States. So we've got the support continuing to come in. we've got strong commercial buying continuing to come into soybeans, and that's helping to keep it. You know, you talked earlier beans lost 10 cents where everything else was much lower. This is why we've got commercial support and I think we're going to continue to see that until the weather clears up in South America, until we get a better idea of what's exactly being brought in, in Brazil and as harvest starts in Argentina as well.

Pearson: Have we still got a big China demand?

Newsom: Huge Chinese demand. Right now we're above our pace. We're ahead of pace to hit that 1.42 billion bushels of exports. This is going to show up in next week's quarterly stocks report, just the type of usage we've seen in the second quarter for soybeans. So, yeah, everything is reliant now on how long Chinese demand stays with the U.S. and when we start to see it move to South America. The stronger the U.S. dollar is, the more likely it is we're going to start to see moving to Brazil.

Pearson: All right, price. Selling price. You haven't sold anything yet. You've still got to some old crop. What are you telling people?

Newsom: Yeah, if I haven't sold anything yet, I think we can see the old crop futures get back up that $10.20, $10.30, making a shot, maybe a run at $10.50. So I think there's an opportunity here just based on the tightening supply situation. New crop is a different situation. It's going to have to ride the coattails of the old crop. If we can get it back above $10, I'd certainly start looking at making some sales there as well.

Pearson: Real quick, cotton market. Not a lot of activity but it's been fairly bullish.

Newsom: Been fairly bullish. We've seen a little bit of a dip down. If we get this market back down into some support between, say, 76.5 and 77, I think it might start drawing some buyers back in. But what we have to be careful of, they're also talking about increased acres in cotton for next year as well.

Pearson: All right. Well, let's get over to Walt Hackney and let's talk about the other side of this whole grain thing and that's where we consume -- we still consume half the corn and soybeans that we produce out there. So, Walter, fed cattle market. Booming, strapping, bull market for a while there. Has the wind come out of it?

Hackney: I don't know that the wind has gone out of it, but I do think that we had a tremendous up quickly in that cash market. It would have been an opinion the rise was too fast. And it caught a lot of, including retailers, by surprise that cash six weeks ago would have come from 83 to 97 or 98 dollars. In anybody's language, that's a quick raise in the cash market. now, there's been reasons that we had an excellent response in the cash, and one of them was the fund buying going long on the MERC drove the hedge ability of some of these cattle to a level where the producers could have some risk management, loan repayment, or protection, if you will. Excuse me. The other side of that coin is we lost a hundred pounds or more during the winter, and we are yet to recover that weight loss in these feed lot cattle. So that supported tonnage is part, also, the reason we had the tremendous up. It's specifically the reason that dressed beef has finally come off high center and has shown a good positive response for several days now, including today at noon it was up 22 cents on choice. I know it isn't much, but it's positive compared to the consistent down side that we were having. So cash market did drop $3 this week. And that was partially due to the longs liquidating their position, scaring the feed lots into thinking it was a dead-cat bounce, and in fact deciding that $95 didn't look too bad compared to the $98 a week ago. So we sold a lot of cattle this week at $94 to $96 compared to the $98 a week ago. Is that going to continue?

Pearson: Right.

Hackney: Probably not. Probably we may have experienced some of the severe down side this week. Psychology of the Mercantile affecting the attitude of the feed lots, that probably is not going to occur next week. Most of the longs are back in position now to where they wanted to be. We've still got an extremely current inventory. We've still got about 25 to 30 pounds per head dressed on these cattle, lighter than a year ago due to the winter. So the combination of those things is going to continue to impress the dressed beef trade. Whether it will go on and above the current level, I don't know. But 95 cent fat cattle isn't bad. And it might help control this feeder cattle trademark, and so our suggestion is sell. Sell these cattle. Take this 95. You've got to remember a month or so ago, cattle feeders would have killed for $85, and today we got $95, and it's time to liquidate more of this inventory.

Pearson: All right. Okay, you folks got your marching orders. Walt, when we look over at this livestock picture, another bright spot really has been that move we've had in the hog market since September. Had that big move up through the first half of January and part of February. And the hogs and pigs report coming out today, they came out on Friday. And as you look down road, what's your take on this hog market?

Hackney: Well, the all hog factor in the hog and pig report today was that we're roughly speaking 3 percent under on all hogs. There's a problem with that, Mark, and it was a problem on the last report. It would be natural to think we're going to have fewer pigs into the mix in the market system. We're farrowing record numbers of litter size, and they're tending to offset the reduction in the sow heard. So the kept for breeding, granted, was down today. They are, in fact, calling this hog and pig report bullish today. Earlier today the estimate was it would be a nonevent, it would be basically sideways. It will be interesting next week to see how the traders take hold of this more bullish report in the mercantile. I don't think it will affect cash that much. I don't think it will alter the 420-, 425,000 head per day that we've been killing. Our average market weights need to reduce, and they're not doing it. We need to take ten pounds a head out of these hogs. We need to liquidate hogs. Rather than 3 percent, as it showed today, we need the liquidate 10 percent. But unfortunately this live cash trade has gotten producers back to a black bottom line in their production. As a result of that, it would be an opinion there also, but I suggest that there is a lot of replacement going on. I think there's some expansion going on. And ultimately that isn't going to help us. However, for the balance of this year, as we speak anyway, toward the fourth quarter, we should have a fairly aggressive hog trade. The product market should in fact respond positively all within the next 45 to 60 days. And if that's a historic trend, so be it. The fact is I think we'll start seeing fewer hogs for market as we get into early summer to mid summer. So cash has got a good opportunity to show some strength.

Pearson: All right. So with that in mind and maybe -- and like you say, with the better efficiency and the higher number of pigs per sow per year that we're looking at now, there's certainly ample supplies out there. Some good news on the China front from the H1N1 fiasco. They're now opening the doors again to U.S. pork. That's been a life saver for the hog industry has been this export market. Darin was talking earlier about the stronger dollar. What are your thoughts there? Do you think that's going to continue?

Hackney: It has to grow. If it only continued, Mark, I don't think it will have a good liquidity effect on our equity as far as cash markets go in these hogs. I don't believe it will. I think we have to grow the Russian and China and we've got to see significant growth. My idea on that is that that growth probably won't really respond until much later, possibly into the mid of the fourth quarter. At that point, hopefully, we've got enough of the political sword clanging out of the way that the actual product can move in better volume, which will dramatically help the cash market.

Pearson: All right. Walter, as usual, some great insights on what's happening in the livestock. I appreciate it. And Darin Newsom, thank you so much for your insights on what's happening globally in this whole grain market and world agriculture market that we trade in today. So gentlemen, we appreciate it. That's going to wrap up this edition of Market to Market. Now, if you'd like more information from Walt and Darin on where these markets just may be headed, you can visit the Market Plus page at our Web site. There you can find streaming video of our program and, of course, you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Market to Market Web site. Of course, join us again next week when we'll examine the impact of the much-anticipated prospective plantings report. So until then, thanks for watching. I'm Mark Pearson. Have a great week.

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