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Market Analysis: Nov 13, 2009

posted on November 13, 2009

USDA's prediction of a record corn yield would normally have bearish implications on prices, but this week a rally in wheat led coarse grains higher.

For the week, December wheat gained more than 40 cents, while the nearby corn contract moved 23 cents higher.

Soybeans followed suit with the grains, as the November contract gained more than 35 cents, while the nearby meal contract was up $12.30 per ton.

In the softs, cotton moved slightly higher this week as the December contract posted a gain of 56 cents.

In the dairy market, nearby Class III Milk futures advanced 4 cents, but the deferred fell 17.

Over in livestock, December cattle lost $1.68. Nearby feeders were off $1.50. And the December lean hog contract was down 70 cents.

In other markets of interest, the Euro gained 58 points against the dollar. Crude oil declined more than $1 per barrel. Comex Gold gained $21 per ounce. And the Goldman Sachs Commodity Index lost more than 3 points to close at 492.25.

Market Analysis: Nov 13, 2009 Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Darin Newsom. Darin, good to have you with us.

Newsom: Thank you, Mark.

Pearson: There's been a recurring theme by most of you guys and that has been the cheap dollar getting cheaper and cheaper. What are your thoughts on the dollar and what is the impact going to be on American agriculture?

Newsom: Right now the U.S. dollar looks like it's trying to find some support in the 74 point to 75 point area. We come down here and we kind of bang around down here in these low levels. Can't really go much lower. This week it was very interesting. We saw developing countries make a concerted effort to try to bring some support back into the dollar, start to weaken the other foreign currencies, all with the idea that in order to get the global economies going again, we're going to have to see this dollar starting to come back up. If that happens, if we see the dollar start to gain some support here in late 2009, early 2010, that could be a catalyst to start putting some pressure on the grain markets.

Pearson: The global economy is strengthening and the continued concern is that U.S. spending is out of control and the government is just printing money. Is that pretty much in a nutshell what the problem is?

Newsom: That is. That seems to be the general rule of thought that, you know, we've printed all this money. We've put all this money into the U.S. system, so why aren't we seeing inflation? Well, a lot of it's not actually filtering itself into the economy itself to everyone is putting it back or they're paying off other debts and so on. So we're not really seeing the inflation issue right now. It's being talked about a great deal, but it's still coming. Certainly they're pointing at gold saying, look, this is our example that inflation is on its way. But overall we're still not seeing it in the marketplace.

Pearson: The gold bugs are still out there, aren't they? Up $26 this week. Is this a bubble? I mean, we had all these other bubbles. Is this another bubble, the precious metal bubble? We're going to be going into the convenience store with a sliver of gold to pay our gas bill? I mean, where is this gold thing going?

Newsom: You know, it's interesting. It's very similar – in a way it's similar to what we saw in crude oil in 2008 where we're going to new highs and the question is now how much higher can it go? We went over $1,100. I think it was $1,123 the other day. How much higher can it go? The difference between gold and crude oil back in 2008 is that we have fundamentals. We have foreign governments still buying into gold. They're trying to buy as much gold as they can. We have the commercial traders in gold, non-commercial traders in gold all trying to buy the paper back that they might have been short.

Pearson: And you get all those infomercial guys. They're all saying buy gold now.

Newsom: Put your gold in this envelope and send it to me, everything is going to be fine. Yeah, those are great.

Pearson: Your ex-husband's ring, whatever, send it to me.

Newsom: So we actually have fundamental support in the gold market, so it's much more difficult to pinpoint how high this market might go. We're hearing some people say $2,000. That may be a bit high. Right around $1,250, $1,300 could certainly be a good target. But when it turns and we do start to see the dollar strengthen, we could see gold, like many other commodities, really start to come back.

Pearson: Coming back down.

Newsom: Coming back down.

Pearson: All right. That's interesting. As we've been following this gold thing, I've been kind of amazed by it. Like I say, this foreign demand – don't we reach a certain point where all of a sudden, hey, let's dig some more out of the ground?

Newsom: They are but if you look at the gold mining companies themselves, there's not a lot of investment going into new mines and to pulling more out of the ground. We've seen this play out in the oil industry before as well. They're quite happy with the market going up. They like the idea that the price of their commodity is just skyrocketing, so it's not really forcing the hand to go out and find more gold at this point.

Pearson: All right. Let's get over to the grain market here and talk about how all this is impacting that. And a stronger global economy, which you point to, which we're certainly hearing about including here in the United States. Wheat market, what's your take? Chicago was up on Friday. There seems to be plenty of wheat around the world.

Newsom: There is. We mentioned the USDA report. Bottom line is the USDA report is that the U.S. ending stocks to use is at 42 percent, an astronomically high number. Globally 29 percent and it's been higher over the past. Wheat is such a global market that we're not in a tight supply and demand situation at all, yet we continue to see wheat climbing higher. We're seeing basis levels firm in some cases. Right now we think we have a very short-term demand going on in this market. We're seeing some short covering on the non-commercial side, and all of this is acting to support the wheat down around the price levels – down around the low price levels that we've seen over the past few years. Now, this might be good. It might look good at face value, but longer term and a bigger issue of the thing is this whole lack of convergence with the soft red winter wheat market. This isn't going to help. The higher the wheat futures go, the slower it's going to be seeing basis cash and futures coming back together. It's actually going to create more of a problem in the wheat market if we continue to trade at these levels with the type of supply and demand we're looking at.

Pearson: Basis levels pretty soft for wheat?

Newsom: Basis levels are still relatively soft. I mean, if we look historically, they have firmed in some of the markets like spring wheat – spring wheat basis levels are getting relatively firm, but soft red winter is still pretty weak.

Pearson: You don't make sales here?

Newsom: If I've got some in the bin, I'm going to use this rally because I look at all the things that are affecting this wheat market, and just isn't logical that it's rallying. So I do reward that rally that we're in with some sales if we have anything left over from this harvest.

Pearson: We're kind of rallying in corn? Do you want to reward the market there?

Newsom: We're very close to the $4 mark. The low $3.90s and then say $4.10, $4.15, I think you do make some sales because we're still looking at the second largest – projected to be the second largest harvest on record. They're about to get done with soybean harvest so the producers are going to turn their attention to corn and I think we're going to see a lot of cash corn being sold into this market.

Pearson: Weaker basis, will the board stay fairly strong, or what do you think is going to happen?

Newsom: The board could stay fairly strong, but one negative against – one bearish thing against it is demand is starting to slow. We're seeing this in the weekly export numbers. If production is as large as what is anticipated and quality isn't that good – and we're hearing a lot of concerns over quality – then not only could basis come down but futures could start to soften as well. So I do think you reward this rally that we've seen over the last couple of weeks up to near $4.00 in December and you make some sales.

Pearson: Do you make some sales for 2010?

Newsom: You could. I think there's a lot to play out. I think we're going to see a huge acreage fight. I would not be surprised to see the 2010 contract get up in that $4.40, $4.50 mark as we get into the spring. So if I'm going to make sales out that far, I'm going to be a little conservative. I'm going to wait to see what happens later this spring.

Pearson: All right. Talk about soybeans. No carry in that market. What's your feeling on soybeans?

Newsom: Right now we've got two completely different views on what the underlying fundamentals are. As you pointed out, the market itself is looking at – they're seeing a tight supply and demand situation. There's no carry. The commercial traders are pushing, trying to buy as many beans as they can. Bean meal is playing a huge role in this. But yet on the other side, you have USDA coming out and saying we're going to see a record harvest. That South American production is going to be 116 million metric tons, some are saying up to 120 million metric tons, possibly pushing global ending stocks to use to almost 30 percent. So you've got two completely – you've got night and day in these two views. So right now it's helping to support the soybean market. It's helping to give it a little push. We're seeing nearby futures trading up over $10. Again, I think you have to reward this sort of situation. Yes, we're tight domestically, but once those South American crops look to be done or get further along in its growing season, I think we're going to start to see some pressure building in the U.S. soybean market.

Pearson: All right, make 2010 sales on soybeans.

Newsom: Yes, I think so because if indeed the South American crop is 120 million metric tons, I think we're going to want to have some on the books because longer term the soybean market could come under some pressure.

Pearson: All right. Well, make note of that. Let's talk livestock. Fed cattle market, the cash market was nothing to brag about this week. I keep waiting for this demand to start really emerging in this cattle market and break out of the high eighties. Not much support in the MERC. There's not much cash demand out there. What are you telling cattlemen?

Newsom: You know, I think this week was really very disappointing because we've seen the last couple weeks slowly starting to build, hopefully building towards some momentum. We're getting close to the holiday season, and normally cattle demand starts to back off as we get towards Thanksgiving and Christmas. So not overly surprising. I still like to look at the live cattle market as a pretty good economic indicator for the Dow as far as consumer confidence is going. This doesn't really instill me with a lot of confidence, the fact that we cannot keep the cash market moving up if the futures continue to stumble trading sideways down near its lows. So I think we're still in a wait-and-see mode. I do think 2010 is going to be better than 2009. I think we're going to start to build some momentum, maybe not until we cross that line into 2010.

Pearson: Okay. So maybe first quarter of 2010, we'll start to see this fed cattle market improve. Real quick, calf market, what are you hearing? The smallest cow herd in modern times.

Newsom: Again, I think it's going to take a little time to filter that into the market but, again, I think 2010 is going to be much better for the cow-calf folks than 2009 was.

Pearson: Let's talk about the hog market and what you see happening with hogs. Again, I mean, the H1N1 thing must have a much bigger impact than what anybody had anticipated. It's totally unrelated, by the way, to pork consumption. Hello world!

Newsom: That's right. But it kicked the legs out from the hog market this past spring and summer. IT has not been able to re-group from that. What the market had to have, the cash market start to firm up. We were starting to see it. This week the wheels fell off. The cash market came back down. Futures went through support. So both sides of the market turned more bearish. A little bit unforeseen because we were starting to build some momentum. Now, long-term it still looks like this market is going to try to build a little bit of a bottom in this area and start to slowly work higher. So just as with the live cattle and the cow-calf we could be looking at a better 2010. I just don't think it's going to be as strong a what we might be looking for in the cattle market.

Pearson: All right, so continuing pressure on hogs. The bright spot is if we do get a weaker basis, maybe cover some cash feed needs, is that what you're thinking is?

Newsom: Right. You know, if we can back this corn market down, which I think we should at some point, and then the basis certainly starts to weaken, yes, I think you can start getting your 2010 corn – your feed corn needs covered.

Pearson: Real quick, dairy cattle, are we going to start to see that move up finally?

Newsom: I think so. I like the dairy market. It's done pretty well. I think there's a little bit more upside to it.

Pearson: Glad to hear it. Darin Newsom, thank you so much. That will wrap up this edition of Market to Market. If you'd like more information from Darin 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. Of course, be sure to join us again next week as we celebrate an octogenarian's request to step back in time and harvest the old-fashioned way. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news USDA wheat