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Market Analysis: Oct 02, 2009: Walt Hackney and Virgil Robinson Discuss the Commodity Markets

posted on October 2, 2009

Informa Economics released its latest corn production estimates Friday, predicting U.S farmers would harvest 3.127 billion bushels of corn this fall with an average yield of 164.7 bushels per acre. Both figures, if realized, would be record highs. The projections did NOT bode well for prices.

For the week, December wheat lost more than 8 cents, while the nearby corn contract moved a nickel lower.

Informa pegged 2009 soybean production at a lofty 3.393 billion bushels with an average yield of 44 bushels per acre. And if that proves to be the case, both of THOSE numbers would be the highest on record. For the week, November soybeans lost 41 cents and the nearby meal contract fell more than $17 per ton.

In the softs, cotton barely kept its head above the $60-mark with the December contract posting a loss of $1.28.

In the dairy market, Class III Milk futures continued their upward trend with a gain of 25 cents.

But in livestock, October cattle lost $3.10. Nearby feeders were also off more than $3.00. And the October lean hog contract was down 70 cents.

In other markets of interest, the Euro lost 77 basis points against the dollar. Crude oil gained nearly $4.00 per barrel. Comex Gold surpassed the $1000-mark with a weekly gain of $12.70. And the Goldman Sachs Commodity Index gained more than 12 points to close at 452.50.


Market Analysis: Oct 02, 2009: Walt Hackney and Virgil Robinson Discuss the Commodity Markets

Pearson: Here now to lend us their insights on these and other trends two of our regular market analysts, Walt Hackney and Virgil Robinson. Gentlemen, good to see both of you again. You both look quite well. Virgil, let's start with you. As you look at the market this week, obviously the big thing going on in the corn and soybean world is harvest progress and potential yield and everything we're seeing including this Informa number I just quoted seems to be pointing towards pretty big numbers. Is that pretty much what you're reading into this whole thing?

Robinson: It is, Mark, and maybe it's lack of harvest progress more appropriately. A couple of things before I forget, Mark, a week from tonight there will be a new world ag supply and demand estimates report which the market I think will be anxiously awaiting particularly some of the global numbers. And then secondly at least based on a consensus of weather forecasts I saw this afternoon a major frost or freeze event is scheduled for October 10th and 11th. So, a busy week next week.

Pearson: As you think about that, we'll get into that in more detail when we talk about corn and beans, October 10th, is that going to be late enough to spare most of this year's production?

Robinson: I think corn maturity lags three to four weeks versus normal in select areas so I think, it's difficult to quantify, but I think there is a fair amount of corn vulnerable to a frost event or a killing frost should it occur October 10th and 11th. To what extend I don't know but I think the market will factor that into its price discovery process next week.

Pearson: Several of the forecasts speaking of which also are calling for some continued wet weather through a big part of the Corn Belt too. What kind of an impact is that going to have price wise? There's a lot of processors waiting for product to hit.

Robinson: I think that's true and I think there are a lot of train shippers, for example, that booked freight several weeks ago with expectations of a normal harvest who are probably now a bit anxious regarding their ability to secure those inventories. So, I think the cash markets, Mark, which leads me to tonight's theme here, at least about corn, are probably a better indicator than all of the emotions going on in the futures markets, specifically I watch that national cash corn index pretty closely and I think it's applicable to a lot of our viewers and a lot of our audience. It would be my opinion should we catch a daily close in the NCI, above $3.21, I think the trend of corn, believe it or not, cash corn will turn from down to up. We settle tonight around $3.05.

Pearson: So, potentially build harvest lows in.

Robinson: I would argue that, I think futures behaved exceptionally well through the month of September and to a technician's eye I think you could argue on the continuation chart, for example, three real serious probes at the $3.00 mark in futures all checked the decline and the market recovered smartly for me. So, I think you could argue the futures market has put together a seasonal low and now if we can combine that with some strong cash activity as aforementioned I think you've got an awfully good argument in corn.

Pearson: As we look at what is happening in the corn market this week, this cash market, slow harvest and a late harvest which we knew was coming just because we were late planting, cool, wet conditions. From everything that I'm hearing for some of the early results are these yields are for real out there.

Robinson: Early in the harvest and I would concur, they are. I would not argue the two private forecasts of this week at all. I think they are on the mark.

Pearson: Take us forward, we've got these kinds of numbers, maybe the harvest low is in, what is your target for making sales for those who haven't done much? We have heard from a lot of people who haven't done much, they didn't take advantage of prices when they were higher some time back and now what do you tell them?

Robinson: Well, I would assume given those circumstances that their personal equities are pretty strong since they have done nothing to this point in time. So, let's just assume that's the case. If it is I would continue that position moving forward. Now, there are attractive carries in both the cash and futures markets so those who are on the cusp here, for example, financially there are some opportunities to capture that carry by making a short hedge, by making a storage hedge, by establishing a hedge to arrive and then awaiting over the course of the next several weeks a narrowing of the basis before they attach basis and finalize price.

Pearson: As we look at this market now hopefully the harvest low is in and perhaps the harvest low is in, we'll soon get confirmation of that. Let's look at the soybeans and your take on the soybean market at this juncture. A lot more beans have been harvested, not enough to satisfy the cash market from what we're seeing.

Robinson: Pace lags there as well. There are two things, the industry is assuming now record large U.S. production as well as record large South American production so those are the two supply scenarios as we visit tonight. Now, demand quite a different story and I think as the year progresses demand will surface and we will come to discover that the demand for soybeans is unprecedentedly strong despite and in lieu of what the Chinese have done to this point in time.

Pearson: And you would be in agreement that South America is going to boost their production quite a bit in 2009-2010?

Robinson: Every effort will be made to do that. That's kind of a double edged sword. If you're a consumer or a buyer and you are of the opinion that is a given and it shouldn't or it does not occur be careful, be awfully careful. So, I think if you're in that boat and you have an argument certainly in that direction some type of price ceiling with a simple option strategy would give you the security should something change over the course of the next many weeks and the market again begins to ascend in value you would at least be covered.

Pearson: Are soybeans close to a harvest low yet?

Robinson: I don't have the same enthusiasm for that market as I do in corn based on the aforementioned formations I've seen in both futures and cash but I do think as we visit tonight the lead soybean futures contract and meal contract are at very vital support levels and I think they'll check in this area and recover within the next couple of weeks.

Pearson: Virgil, what are your technical signals telling you for price? What kind of a move back do you think we'll see?

Robinson: Well, much will depend on this weather concern of next week but at this point the cash market that I follow, the indicator and the cash index that I follow we would need a daily close above $9.70 to change the trend in that particular index and that is some 75 or 80 cents from tonight's settlement.

Pearson: So, we've got a ways to go. Same guy who hasn't sold anything, what do you tell him?

Robinson: Again, he must not be in need of cash.

Pearson: He's very rich, Virgil, he married money.

Robinson: He must be one of Walt's customers. If that is the case then, again, I would sit patiently. I think there will be a better opportunity to price beans than tonight.

Pearson: With that I've got to ask you real quick about the cotton market. A big hit this week again and they have had crop problems, they have had all kinds of production issues in cotton. We've had a nice rally and we've kind of held around 60. What is your take going forward? Is the world economy perking up enough where we're going to see better cotton prices?

Robinson: Well, GDP is forecast to grow globally in the vicinity of two to three percent in 2010 if that assists in answering your question. I think the other thing investor flow was kind of disrupted this week by the announcement of a major underwriter, index fund underwriter that they were going to rebalance their assets and I think that had a bearish effect on all markets. U.S. cotton consumption is forecast to exceed production, ending stocks are forecast to decline year over year as they are worldwide wise. I think either the December or March 2010 cotton futures contract will trade to the $75 area.

Pearson: Virgil, I forgot to ask you about the wheat market. That's totally unfair, such an important food grain in our world. The last I've seen from the USDA it looks like there is plenty of wheat everywhere.

Robinson: Yes, and I think that is the theme as we move forward. Cash wheat tonight is $1 a bushel lower than it was a year ago so I think much of that has been factored into the price discovery. But to suggest there is a big rally in the imminent future would be misleading. I heard last week's discussion, I'm in agreement with that, a 40 to 50 cent rally in any of the wheat exchanges is probably a good opportunity to make a sale if you have made none to this point.

Pearson: Virgil, we appreciate it. Let's move over and talk to the other side of this business and that is the livestock trade. Walt Hackney, I keep hearing the smallest cow herd since 1950 out there, I keep hearing the economy despite the higher unemployment is starting to improve in some areas, people dining out some more and yet I see a cattle market on the board this week which was awful, it was ugly. Are we starting to turn a corner in fed cattle? What's the story in the fed cattle market?

Hackney: Some real authoritative analysts for the last three months have been predicting in hogs and fed cattle that the fourth quarter of this year would reflect a shortage of numbers available for slaughter, a shortage of weight due to the current condition of the feedlots and all of those attributes that go with those comments. One problem, it didn't happen and as we are into the first part of October as we speak we've got hog producers at bay probably in worse shape than they were yesterday, we've got cattle feeders in worse shape today as they were a week ago and there is no real signals of a let up in that depressed market for the foreseeable futures. Now, one of the problems in cattle is the fact that as the market deteriorated six weeks ago, maybe four weeks ago market ready cattle resisted the cash price and they kept feeding them. Today we have got what I refer as an elephant class of fed cattle out here in these feedlots and they are a huge deterrent to the cash market because of their extraordinary tonnage they are putting into the trade as far as beef goes. We lose another $1 on the dressed beef, we've got cash cattle today getting bid $1.26 to $1.28, those cattle are going to lose $80 to $100 a head easily. That doesn't include the severity of the discounts on the extra weight cattle that are up to as much as $40 per hundred weight discounts on those cattle. The hog isn't a lot different. The difference is the hog average market weights are holding within three or four pounds of a year ago. But the problem is you continue to see 2.3 million hogs a week going to slaughter and we have not got an export trade big enough, viable enough to absorb that extra pork into the mix so as a result it is reliant on the domestic trade to absorb that extraordinary tonnage of pork. There is no let up in sight as we speak on pork. It looks like 2.25 to 2.3 million hogs a week is going to be with us until Thanksgiving. It looks like in the cattle industry 640,000 possible 645,000 on a weekly basis is going to be with us well into November. The problem in the cattle is the extra weight of 16 pounds a carcass over a year ago and you combine that with 125,000 to 128,000 head of cattle a day, that extra 16 pounds of beef is a real drug on our cash markets.

Pearson: So, fed cattle prices, you're saying we're not current at this stage of the game, going to see this pressure through the fourth quarter. When is the turnaround going to occur? Everybody is asking that question.

Hackney: They have a good reason to ask the question because we have missed the target up to this point. Interestingly I mentioned the heavy cattle, we probably are within a week or ten days of seeing a real dissemination of that class of cattle. When we get through that class then we'll be into the more commodity weight cattle that are usually expected to hit the fourth quarter of this year, tonnage is going to drop to a degree and the feedlots themselves are going to become much more current. When that transpires we're going to see a better optimism in the cash trade.

Pearson: Go back to the hog market here for just a second. I think we've got about half a minute or so. If you look at what's going on in the hog business going forward are we seeing some sow liquidation? Obviously we keep these numbers up it's going to be tough to see a turn around in price.

Hackney: We saw an extreme sow liquidation in the mega units such as some of the larger ones that are in our country today. But the individuals out here producing hogs we have not seen a cutback in the hog sow herd numbers. So, as a result we may have a three percent deterioration of the sow herd.

Pearson: Walt Hackney, Virgil Robinson thank you so much. That is going to wrap up this week's show. But before we go we want to remind you about a special Rural Economic Summit we'll be taping in Shenandoah, Iowa on October 22. It's the first of four special road editions examining the rural economy. We have assembled a panel of experts and you are invited to join the discussion by submitting your questions at the Market to Market Web site. We want to get the conversation going by asking you the following, how has the economic downturn affected you in your community? Last week Colin from northeast Iowa shared his experience of a community struggling with lost businesses and the resulting downward spiral of dwindling county services and rising property taxes. Visit the Market to Market Web site to read Colin's story, share yours and submit questions for the Rural Economic Summit. Be sure to join us again next week when we'll visit with the nation's largest producer of ethanol. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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Tags: agriculture commodity prices corn markets news