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Market Analysis: Dec 11, 2009: Market Analyst Virgil Robinson

posted on December 11, 2009

The Agriculture Department released its latest supply and demand estimates this week. And while tighter global supplies were friendly to corn, ample ending stocks of wheat pressured prices.

For the week, March wheat lost more than 20 cents, but the nearby corn contract gained 15 cents.

Despite USDA's reduction of U.S. and global supplies, soybean prices retreated again this week as the January contract lost nearly 10 cents, while the nearby meal contract was down $2.90 per ton.

In the softs, cotton flirted with the $75 barrier this week as the March contract posted a gain of $1.40.

In the dairy market, January Class III Milk futures were up 41 cents, and the deferred contract gained 43 cents.

Over in livestock, December cattle lost nearly 85 cents. Nearby feeders were down $1.78. And the December lean hog contract gained nearly $3.00.

In other markets of interest, the Euro lost more than 200 points against the dollar. Crude oil fell $5.60 per barrel. Comex Gold fell again this week with a decline of nearly $50.00 per ounce. And the Goldman Sachs Commodity Index fell more than 20 points to close at 479.70.

Market Analysis: Dec 11, 2009: Market Analyst Virgil Robinson Pearson: Here to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, it's good to have you with us.

Robinson: Thank you, Mark. Nice to be with you.

Pearson: Well, let's talk about a couple of things first. I want to talk first about the supply demand report from USDA released Thursday. A little bit friendlier on the grain side except for wheat.

Robinson: The story in wheat really hasn't changed a lot, Mark. U.S. and world supplies are perceived to be well in excess of demand. Yet surprisingly wheat futures and the cash markets in select areas have hung together pretty well, Mark. Interesting to note that index funds continue to build a long position in several commodities including wheat. So that being said, I think that's likely to continue at the turn of the calendar. We are of the opinion from reliable sources that there could be upwards of $60 billion tributary to a host of markets including commodities markets, and I think wheat will be one of those on their shopping list. So let's use those rallies, Mark, in all three varieties of wheat and do some marketing, do some merchandising, and look seriously at those new crop contracts for opportunities as well.

Pearson: What about on the oil seed fronts, Virgil? Big South American crop, it would appear.

Robinson: The forecast is for record large production out of the southern hemisphere, Mark. So we really have the same scenario tonight we've had for the last several weeks, unusually strong up front demand for U.S. soybeans, as well as other points of origin, with the prospect of what could be record large soybean production and the southern hemisphere becoming market available sometime in late February and March.

Pearson: Let's talk about something that occurred after the numbers for that report were put together, and that's the blizzard that hit the corn belt and the bean belt. With the amount of corn that we have out there, based on the USDA's number, I've heard estimates from anywhere from half a million bushels to 800 million bushels potentially still out in the field. Some of that is not going to come in until next spring, Virgil. What are your thoughts on that?

Robinson: Some still standing but not all in the path of the recent blizzard. That was pretty well confined to the likes of Kansas, Nebraska, Iowa, Southern Minnesota and Wisconsin. I'm led to believe from reliable sources that there could be a loss in the confines of that aforementioned blizzard path approaching 75 million bushels. The balance of that grain market, I think there will be an effort to bring that in if weather will cooperate, so it's probably a bit early to make any kind of major reduction in production. But the USDA clearly will be confronted with that in their January 12 final production number.

Pearson: All right. Let's talk about one other thing, Virgil. That's we had a strengthening dollar we just mentioned up this week. And really a pretty good week for commodities, and it's been almost a teeter-totter. Dollar goes down, commodities go up. What are your thoughts on the dollar tonight?

Robinson: There has been a pretty strong correlation between the value of the grain and the declining value of the U.S. dollar. First of all, to the best of my abilities, I think what's happened – what's developed in the dollar index, and that's the barometer I watch, I think it's basically a short covering rally in what I believe to be yet a bear market. So let's at least assume that's correct. If so, over the course of the next several months, I don't sense that we've breached that relationship between a weaker U.S. dollar and stronger advancing grain prices. I still believe that relationship to be in place.

Pearson: All right. Let's talk specifics. You mentioned wheat earlier and taking advantage of this market and dealing with better merchandising. Tell producers what you think they should be doing at this point.

Robinson: Well, Mark, I think as we visit tonight there's the prospect of the old crop wheat contract. I'm going to refer specifically to the soft red, the Chicago wheat futures contract. I think it can recover back into the $5.80 to $5.90 area, at which point if I still own old crop wheat I'd use that futures level to trigger cash sales. New crop wheat, again, I'm always reluctant to finalize the price of any new crop early in the crop year. So I would use a rally in July wheat futures back toward $5.95 to $6.00. And I'd put together some kind of a minimum price strategy, Mark, using an option or even maybe a bear put spread.

Pearson: Okay. Let's talk about the corn market. Obviously things seem to be looking – it's kind of swung a little bit. A little bit of momentum in corn right now. Obviously the weather is really a factor, but USDA's numbers too.

Robinson: Yeah, they did acknowledge the fact that export sales to this point in the crop year have lagged their earlier target, and they did make a 50 million bushel reduction in that particular line item. It remains to be seen how, as mentioned earlier, the effect of the dollar, and also the effect of additional investment and speculative equity has effect on these markets. I think corn futures remain in an up trend and the economics involved with ethanol production remain pretty solid. I can build a pretty solid case for corn moving higher over the course of the next several months. There's no question that we've taken on a pretty good slug of cash corn here through this harvest season. And I think we addressed that last time. There were some quality issues people were having and some concerns about storing and warehousing corn for extended periods of time. I think a lot of that grain has found its way into the pipe and has been absorbed.

Pearson: All right. From a producer's standpoint, from a selling standpoint with the idea of a stronger market going forward, you're not in a hurry to make sales?

Robinson: Mark, I've made sales to this point. With old crop grain that remains, I would use the March futures contract and trade back to the $4.25 area or fractionally above that. I would use that as my trigger, and I would again make old crop corn sales. New crop I'm more reluctant to finalize price. I think new crop futures will, over the course of the next several weeks, make another swing at a $4.50 or something above that, where I would again put together some type of minimum price strategy. Buying a put – I know they're pricey. I would buy a put or I would buy a vertical put spread and create a minimum price, and let's see how things shake out with acreage, let's see how things shake out with this assumed large oil seed crop in the southern hemisphere. Those aren't in the bin by any means at this point in time.

Pearson: You're absolutely right. And let's talk about soybeans. They were so friendly to the soybean market. This soybean export number has been huge year to date, Virgil. It's record breaking. Soy protein demand seems huge. Big crop in South America almost seems needed. So what do you see ahead for soybeans?

Robinson: Well, I think you've outlined the scenario with awfully strong up front demand here in the United States that has not subsided to this point in time. I think producers have responded and have moved a pretty significant quantity of their soybean crop. The balance of what they possess and I think will be warehoused, I don't think we're going to see that for quite some time. So the domestic user of beans is confronted with something of an issue here too as they move into 2010. I think they'll need soybean supply to accommodate pretty good demand for both oil and meal. Processing margins are profitable right now, and I think the demand for U.S. soybeans will remain pretty firm both domestically and for export at least until we get towards the month of February 2010.

Pearson: All right. So you're not in a big hurry to make bean sales.

Robinson: I've already made some. I have a few old crop beans remaining. I would use any kind of a recovery in the March soybean futures contract back toward that $10.90 level or higher to complete old crop sales.

Pearson: Do you want to do any new crop sales on beans?

Robinson: Minimum price, Mark. I think new crop soybeans will take a swing at $11.00 over the next several weeks.

Pearson: All right. Let's move over to livestock. It's been tough. We had these blizzard conditions. A lot of people thought maybe the fed cattle market might make a jump or something. The board dropped. What's your take? Where are we on this fed cattle market?

Robinson: Mark, a couple of things I think are worth noting. One, beef production is down about three percent year over year. Slaughter numbers are down about four percent year over year. I think the market is relatively current. And if most recent cattle-on-feed data is accurate, we should have a little hole here or at least we should have fewer live cattle for sale the next four to six weeks. I think we've an opportunity here, a window for a recovery in the futures market, and I think that recovery began this week. I think it's capable of trading another $3 to $5 higher, at which point, I would look at the February contract, the April contract and the June contract for a hedging opportunity. I think live cattle the first few months of 2010 will probably trade in the mid 80s at best. Third quarter, I think we could argue something higher than that. So, hedging opportunities as we visit tonight, I don't think there are any. I do think there will be in the next three to four weeks.

Pearson: Okay. So a little bit of hope out there on the cattle side, which is all we have anyway. What about on the hog side, Virgil? Are we going to start to see these numbers come down? What's your take on hogs?

Robinson: We have at least versus last year's gigantic numbers. Pork production is down two percent year over year. Slaughter number is down three percent year over year. A couple of other encouraging factors here I think the recent cold storage report, October's data, did show a draw down in total frozen pork inventories traditionally at a time where they grow. So I thought that was encouraging. Pork cutout has kind of surged here the last couple of months. Packer margins are good. They're trying to acquire and buy hogs. I think the market is in position for some recovery the next three or four weeks there as well.

Pearson: All right.

Robinson: Prices moving forward I think the first quarter of 2010 probably in the low to mid 40s, mid 40s in the second quarter. And then I'm not sure, third, fourth quarter of 2010.

Pearson: All right. Well, maybe turn the corner, Virgil. We appreciate it, as usual, appreciate Virgil being with us. That's going to wrap up this edition of Market to Market. If you'd like more information from Virgil on where these markets may be headed go visit the Market Plus page, it's right there 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. And join us again next week when we'll examine a cooperative effort to provide health insurance to rural Americans. So, until then, thanks for watching. I'm Mark Pearson. Have a great week.

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