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Market Analysis: Nov 20, 2009: Walt Hackney and Virgil Robinson

posted on November 20, 2009

A rapidly progressing harvest and a strengthening dollar late this week pressured corn prices, but wheat prices continued their upward trend.

For the week, December wheat gained more than 20 cents, while the nearby corn contract was fractionally higher.

Soybeans followed wheat higher, as the January contract gained 59 cents, while the nearby meal contract was up $13.30 per ton.

In the softs, cotton broke through the $70 barrier this week as the December contract posted a gain of $3.31.

In the dairy market, November Class III Milk futures were up 2 cents, while the deferred contract advanced 29.

Over in livestock, December cattle gained 63 cents. Nearby feeders were up 11 cents. And the December lean hog contract advanced $2.60.

In other markets of interest, the Euro lost 38 points against the dollar. Crude oil advanced 37 cents per barrel. Comex Gold gained more than $30 per ounce. And the Goldman Sachs Commodity Index gained more than 7 points to close at 508.50.

Market Analysis: Nov 20, 2009: Walt Hackney and Virgil Robinson

Pearson: Here now to lend us their insight on these and other trends are two of our regular market analysts, Walt Hackney and Virgil Robinson. Gentlemen, welcome back. The global situation first, since we are part of a global economy, we celebrate the fact on Market to Market. How is the global economy doing and what do you make of the dollar strengthening?

Robinson: The global economy is improving led by the Asian communities first of all. I think the third quarter GDP in China was up 12% or 13% year over year, so they are doing just fine. U.S. GDP improved in the third quarter, I think rising productivity and profits and declining labor costs are sending signals of positive economic growth in coming months. I think the market has taken that to heart. How long we can sustain that remains a question. Crude oil, a couple of things, the Saudis made publicly known that they felt $80 crude oil was demand destructive and as a result of that they intend to create more oil production. With that, the market has pulled back a few dollars a barrel. My best assessment of the crude oil market, at least based on the methods that I believe, the trend of that market is still up in my opinion and I think we will again push through $80 in the not too distant

Pearson: With the global economy strengthening and, as you said, crude oil longer term has been stronger, we saw a little bit of a stronger market in wheat with proper protection issues with wheat, is that what is going on?

Robinson: I think that is a portion of the market discovery process. We have other issues in parts of the U.S.. There is talk of dry areas in parts of Argentina and Australia combined with, I think, the exuberance of the speculative community trying to acquire and find what they feel to be proud of. The reallocation, the rebalancing of the indexed bonds is well known and has been discussed on the show and a couple of the commodities that have caught their favor, one wheat and two lean hogs. Both had improved in value.

Pearson: If you are a wheat producer, with the 2009 wheat in the bin, what is your advice?

Robinson: I would sell given this opportunity, or if you want to be a bit of a market timer, I think both the Chicago wheat futures contract and the Kansas City wheat futures contract will take a swing at $6, which is only about 30 cents above the opening sometime between now and the end of the calendar year. Given that opportunity and in previous shows I made the statement I had sold wheat well in advance of this rise, but did selectively put on a couple of action strategies. With that in mind, as those contracts aforementioned approach $6, I am going to take a little profit out of the market and move to the sideline.

Pearson: Moving up to overall, do you want to take some profits on corn?

Robinson: A couple of things that struck me about the corn market, ethanol margins have improved to an epidemic, and clearly, use of corn for ethanol production is in the not too distant future. It is going to equal or surpass that corn used for the feed, so that is a major driver in the value of corn. Corn quality, particularly the moisture content of corn is the question here that probably should be asked of the producer. Do you have quality corn? Do you have corn that is storable and sustainable to acquire a base appreciation sometime in the spring of 2010? If you do, my best opinion would be to capture that carried by making either a short hedge in the May or July futures contract or had to arrive and then attaching basis most likely in the spring of 2010 while our neighbors are planting corn, so I like that strategy. If corn quality is an issue, and you haven't the ability to sustain storing that particular product, I think use this strength in the market that we have experienced and talent.

Pearson: All right, this soybean market is another one giving us some strength and with these typical who harvest the load, a big movement at one time it seems like we have sustained prices and had a good export demand. Are these prices at what you want to sell soybeans?

Robinson: It struck a nerve when you mentioned demand, I think both the export disappearance which has been addressed numerous times, China in particular combined with the fact that processing margins are profitable, the demand pulling on soybeans are genuine and strong. And as a result of that, that price of that particular commodity has moved higher. It is hard for me to suggest not pricing some of your crop at $10. Two months ago we would have been hard pressed to talk about $10 and here we are. Clearly if you have done nothing with crop production to this point I would seriously consider moving a portion to $10 or higher and a lot of times it will be there, so an opportunity, yes, I would agree with that.

Pearson: What about selling some 2010 corn and beans?

Robinson: I am hesitant to sell well in advance for your own protection issues. Do we have another issue in the southern hemisphere? We are expecting this 120 metric ton crop. What if this falls significantly short of that? Then the value of new crops would move higher. I like the idea of minimum price, if revenue per acre is your metric of choice, then clearly this is an opportunity. I saw Iowa State numbers just this week and like corn slight irritation, excuse me, it was estimated that the cost of production would be about $8.50 with a 50 bushel yield which is attainable for most of our viewers. Clearly, that would provide a nice return per acre under those circumstances. How can you criticize someone taking some of that? You certainly can't.

Pearson: He might be very impressed with that idea.

Robinson: I'm impressed.

Pearson: Let's talk about the meat side of this question. Give me your take on fed cattle. We have a month to go in 2009 and I want to see much of the way of sustaining rallies and fed cattle and the fed futures. What is your take at the end of the year?

Hackney: I am interested in some of the approach Virgil took because you're right, we haven't had a lot of good positive results in cattle or hogs. Right now my alarms have gone off as Virgil says, because he is telling me that the price of corn is going to get high enough because of the usage of the ethanol industry, but that is going to delete part of the demand for livestock. I would love to take exception to that. The problem is with our financial position we are in, it won't take much to erode the amount of cattle and feed, the amount of hogs in that respect by the independent producers. I look at his comments with kind of a jaundiced eye but, again, he could be correct. As well as the markets go, as livestock show, the cattle and feed report today was no great revelation. It came in just above prediction that marketing and was right around 97 and that was a month ago so it might be positive. The cattle and feed was 101 and a little bit above the estimates come at the placement or 101 and a little bit under the estimates. But, in our reality, the fundamentals, the basics of that cattle business as we know it is what is driving this market, not the cattle and feed report, not the price of corn, it is the price to be going into retail, but the consumer is probably going to resist higher prices. A lot of that cockeyed optimist like sometimes I am, that led to a predicted first quarter of 2010 to show us, but we are going to be hitting $90 fat cattle. The problem with that is that we can't sustain the beef price today in the supermarket with a budget that the consumer is carrying out, $82 and $83 cattle what we had before and so there you go.

Pearson: On that happy note, the smallest cow herd out there in 50 years, I think that is the correct figure.

Hackney: We have our house in order on the beef cattle side. If we do, and Virgil is right, and the global economy is picking up, hopefully the consumer picks up, we will see a bounce in fat cattle in 2010, maybe second quarter.

Pearson: I go along with we live in hope and sometimes die in despair, but the fact is that you have got a legitimate argument for a higher price of beef going into the second quarter of 2010. Again, the problem is can you assure me that the economy will improve to where the consumer budgets and food budget will allow her to take an increase in the price of beef commodities in the supermarket? It is hard to deal with all the pork out there. What is your thought on that?

Hackney: We have positive signs in spite of the fact that the cash market hasn't responded well enough at this point. We are back up on tonnage, we are backing up on the average market weight of the market talks, despite the fact that we are killing 435,000 hogs a week. Despite that, the tonnage per hog is going down. That is a good sign. That is a positive sign. Unfortunately, part of that is due to a certain amount of liquidation of producers and this market for this sow herd itself it is in fact why a lot of producers are having to go out of business. That is not a good sign. We have corporate, some of the largest in the pork industry are, in fact, taking bankruptcy as a result of the poor fundamentals that they have had to endure for two solid years. They can't take these losses any longer. The person that can sustain his sow herd and stays in the business has liquidity that will support that and maybe the middle of 2010 he may be in more of the driver's seat as far as the cash market.

Pearson: Give me some numbers on the hog market. What do you think we could see for prices next year? What are you looking for? Can we make some money?

Hackney: Right now out of the gate I don't know that you can, I don't know that you would to score a loss. But I do believe that the liquidation erosion of the hogs that we have coming available for the mid part of 2010, I think that is going to allow us to see a cash market at about $42, up $43, that doesn't include the premiums to the matrix of the hogs as they go in the plans. In that regard, the premium hogs are probably going to bring $45, $47 after all is said and done. Those hogs, at the current price of $3.70 corn, that will allow those hogs to make money.

Pearson: We have a minute left, and in a huge contract specifically, we have had them working together, we've had a herd liquidation. Are we seeing that come to an end now or are we still processing capital?

Hackney: They announced the 100,000 cow liquidation. I believe it took place back the first of November, I am not sure of that, but I believe I am correct. The point being, the beef cow herd is diminished enough that the extraordinary calling of the cows out of the dairies are not, in fact, any kind of a hindrance to the beef market at all. They are not hurting the market. I hope that the dairy men get the proper liquidation in order to control their inputs enough to make some money.

Pearson: Walt Hackney and Virgil Robinson, thank you so much. That wraps up this edition of Market to Market. But if you'd like more information from Walt and 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, all free, at the Market to Market Web site. Be sure to join us again next week when we'll meet the winner of the 2009 World Food Prize. 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