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Market Analysis: Feb 26, 2010: Virgil Robinson

posted on February 26, 2010

Grain prices rallied this week as the trade pondered whether the February lows had come and gone.

For the week, March wheat gained more than 15 cents and the nearby corn contract matched that by rising 18 cents.

With more than 15 percent of the Brazilian crop in the bin soybean prices also trended upward -- albeit more gradually... For the week, the March contract gained more than 5 cents, and the nearby meal contract actually declined nearly $3.25 per ton.

In the softs, cotton broke through the 80-dollar barrier posting a gain of $3.82.

In the dairy market, March Class III Milk futures declined 30 cents, while the deferred contract was down 8 cents.

Over in livestock, February cattle lost nearly $2.50. Nearby feeders were down $1.55. And the April lean hog contract gained $3.15 cents.

In other markets of interest, the Euro gained 26 basis points against the dollar. Crude oil lost 40 cents per barrel. Comex Gold declined $3.20 per ounce. And the Goldman Sachs Commodity Index lost nearly 5 points to close at 518.25.

Market Analysis: Feb 26, 2010: Virgil Robinson Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, good to have you back.

Robinson: Thank you, Mark, nice to be here.

Pearson: Well, another interesting week in the global economy with problems in Greece upsetting the EU and looks like the dollar has kind of been on a run here. Is it going to continue?

Robinson: It kind of pulled back a bit today, Mark, with news that Germany perhaps will throw a lifeline towards Greece's economy and shore things up a bit there. But on the month, today is the end of the month, it did have a good month. The third consecutive stronger close that we've seen in the dollar index so it would appear to me that indicator is in position to push a little higher over the course of the next few weeks.

Pearson: All right, so strengthening dollar, so maybe some trouble for commodities overall, for gold, for oil, as well as the stuff we talk about?

Robinson: Well, historically a stronger dollar hasn't been particularly bullish on commodities but we've seen kind of a divergence of those patterns of past and all commodities have taken on a personality of their own. So, I'm not sure we can use that old relationship as it existed a few short years ago.

Pearson: All right, good point. What are your thoughts on gold, for instance, precious metals?

Robinson: Mark, the best that I can do for you is lend you a bar chartist's opinion and this month was a very good month in gold futures leaving a couple of previous monthly closes below it. It appears to me it's in position to make a run at those historic highs again.

Pearson: All right, Mr. bar charter, what about oil? You're a pretty smart guy so I like your technical observations. What do you see there?

Robinson: That's very kind and very generous of you, Mark. Crude oil futures contract, I watch those continuation charts and crude oil made its best and strongest close of the last 17 months the month of February. It would be kind of naive of me to suggest the trend of that market or at least the intermediate trend of that market has turned down, it hasn't. I think there is a risk of that commodity yet moving higher and I would guard against it if I were obligated to do so in a procurement type process.

Pearson: All right, good point. Let's talk about our commodity markets and let's lead off with wheat and what you see ahead. I was in Albuquerque this week and I talked to a bunch of southwest producers, a lot of plains producers, they feel pretty good about moisture and the situation the U.S. crop is in. What do you see ahead?

Robinson: Mark, it's difficult to speak bullishly about that commodity when you look at balance sheets, both U.S. and global. I see this week the International Grain Council did forecast that global wheat production this year would decline I believe 15 or 16 million metric tons year over year. But using that number and the forecast the department has given us for disappearance we still speak to the issue of a very adequate supply of wheat. So, kind of interesting, year over year soft red cash wheat values -- and I checked this before I came to the show -- actually higher today than they were a year ago. Now, perhaps in geographical areas the feed demand for that particular commodity is underpinning value because it certainly isn't export sales, Mark, they're quite anemic and very poor. So, let's just assume here feed disappearance is having an effect on that particular commodity as well as I think the continued presence of investors seeking value and wheat is perceived to be one of those value commodities.

Pearson: So, big funds in Chicago, there's still money pouring in their long wheat?

Robinson: Well, I'm not sure it's pouring in but I still think there's sufficient equity there to support the market. If I owned cash wheat all of last year's crop I would be inclined to look for some opportunity here to sell at least that cash holding and then think a little more seriously about my new crop and what I intend to do there.

Pearson: And perhaps make some sales.

Robinson: Mark, I would. I mean, the supply argument, it's not a strong argument, it's weak, it's bearish.

Pearson: All right, corn market, what do you think is going to be happening there now as we get through the month of February?

Robinson: Well, I think this week we saw a lot of cash corn move to the market with a 20 cent rise in cash values week over week and much the same in futures. Ethanol economics remain relatively strong. We've lost a bit of our bloom here the last couple of weeks as corn prices have risen but still there's profitability in making ethanol. Feed demand, I think when the market is pulled down so sharply last month, in the month of January, there was a very noticeable increase in the commercial, the user type buying of that particular commodity and now that prices have moved higher again I think that has slowed now. I'm seeing a little basis deterioration in select markets, not in general, but some which would imply that. So, old crop corn there's a quality issue. If you discover or you're concerned about being able to sustain the quality of that grain on your farm given this recent rise in price I'd sell that grain.

Pearson: New crop, Virgil?

Robinson: I'm always reluctant to finalize the price of new crop this early in the year so I'll stick with my old strategy and that is to acquire some type of either put or vertical put spread creating some type of price floor and ideally that floor is either at or above your break even costs. I still like that strategy.

Pearson: Let's talk about -- we've got some USDA reports coming out in the month of March and we still have this issue and I've seen it, there's a lot of corn in South Dakota and North Dakota, there's a lot of corn still in Illinois and Iowa, parts of Nebraska and I know it's 500 million bushels or so I think was the last estimate that we had and I know some of it has been harvested. So, we're starting to chew that down. But could that be a catalyst for this corn market perhaps?

Robinson: Well, on the 10th the USDA is going to provide the data from this re-survey and there are a lot of different camps addressing this issue. Personally I would be of the opinion there's probably been some loss and it will probably be recognized and acknowledged in this re-survey. However, in the same breath I think we could argue the anemic pace of export sales to date is likely at some point to be adjusted from current projections -- and by that I mean lower. So, I can see some kind of a net zero there and I think that's kind of the mindset of the industry as we visit about that issue.

Pearson: All right, let's talk about the soybean market and what you see happening on the soybean front. I have some sources in South America who are telling me it's good down there.

Robinson: Yeah, well we're led to believe it's the biggest production cycle they've ever experienced and at present I don't think there's any reason to doubt that. How it is distributed remains an unknown. By that I mean do they have the logistical ability to source the kind of volume necessary to accommodate big, strong global demand? That remains to be seen. I think they'll certainly make an effort out of that. So, the take away is probably we need to acknowledge the fact that there is big production in that region of the world. It is likely to be a very competitive element. As we know the U.S. markets today or have experienced the U.S. markets today so for no other reason than that please understand we're talking about a supply situation that could pull $1.00 out of soybean prices relatively easy. Now, if you reconcile yourself to that kind of a risk and wish to retain that position moving forward because of weather concerns here in the state or what have you, I understand. If you can't, your balance sheet won't tolerate that, then I would use the recent strength in old crop soybean futures and I would sell that product.

Pearson: All right, would you sell some new crop too, Virgil? I know it's early.

Robinson: Yep, Mark, again, I'll kind of duck under the radar here for a moment and use that minimum price or that put strategy because again it's been my experience over the last many years that that minimum price strategy has proven to be pretty effective over the course of several years and I'll stick with it.

Pearson: All right, let's talk about this cotton market, Virgil. It's been wild. There's a bull market. If you're looking for one there she blows.

Robinson: I went back and looked at our conversation eight weeks ago tonight and we talked about the possibility of seeing maybe 75 cent cotton futures. Well, now we blew through that and there are targets near 90. The strategy I used back then was much the same, I thought that was a wonderful opportunity to go ahead and sell your cash cotton and if you had concerns whatever they might be replace that with a call or some type of position like that. I'm going to stay with that, Mark.

Pearson: You're winning on that one, Virgil.

Robinson: Well, not as well as I would have been by doing nothing but I still think that's a pretty effective risk management product.

Pearson: All right, so you're still friendly to the cotton then?

Robinson: Well, I think the trend of that market is up, Mark, but please be advised we've tacked $20 a bale on that commodity in the last few days. It is certainly subject to some type of correcting behavior here.

Pearson: Absolutely, point of caution well taken. Let's talk livestock. What do you see for fed cattle?

Robinson: Smaller supplies, declining beef production I think or underpinning the market. You have to be impressed by recent cold storage data showing a year over year decline in frozen beef in the inventories despite the gloom regarding the state of the economy. I don't think that market is in position to spike higher but given the fact that we're seeing some economic recovery in select areas of the United States I think beef disappearance going to improve. And if we can, in fact, sustain this export projection by the USDA I think we can, in fact, sustain a fed cattle market in the lower to mid 90s from this point in the calendar through at least the third quarter of 2010. So, I don't see at present any terrible dangers. For those that are a little gun shy of my analysis there a simple put strategy would provide some insurance but I like the market moving forward.

Pearson: All right, got about a minute, Virgil. In concert with that it's what is ahead for hogs. What do you see happening in that market? It was a good week for futures on hogs.

Robinson: You know, the red meat markets have done a terrific job of realigning supply given demand prospects and pork no exception. Pork production is down over seven percent year over year. Weights are not particularly large, cold storage inventories drawn down year over year, disappearance is pretty solid. And, of course, the market has responded. I think I would employ some type of protective strategy the balance of the second and third quarter given the recent rise in hog futures and they rallied pretty sharply this week. So, I think there's profitability there. And, of course, given our balance sheets in this industry we're not in the position to make too much more of a gamble moving forward. So, minimize price, buy a put, buy a vertical put spread, create a little floor in that second and third hog production and I think that's the way I would travel forward.

Pearson: Virgil Robinson, thank you so much. That's going to wrap up this edition of Market to Market. If you'd like more information from Virgil on where these markets just may be headed the right thing to do is visit the Market Plus page at our Web site. You'll find streaming video of our program and, of course, you can download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. Of course, join us again next week when we'll examine the latest efforts to preserve wildlife habitat in rural America. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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