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Market Analysis: Jul 24, 2009: Virgil Robinson and Walt Hackney

posted on July 24, 2009

Ideal weather and an announcement by USDA it will resurvey the Eastern Corn Belt pressured grain markets lower.

For the week, September wheat lost more than 25 cents, while the nearby corn contract was down 6 cents.

Strong export numbers, released this week, supported the soybean market. For the week, the August contract gained almost 12 cents and the nearby meal contract was up $5.70 per ton.

In the softs, cotton lost ground this week as the December contract posted a decline of $4.45.

In the dairy market, Class III Milk futures closed down nearly a nickel at $ 9.96 per hundredweight.

In livestock, August cattle were down $1.85. Nearby feeders lost $2.05. And the August lean hog contract lost just over $5.60.

In other markets of interest, the Euro gained 76 basis points against the dollar. Crude oil gained $3.47 per barrel. Comex Gold was up $15.60 per ounce. And the Goldman Sachs Commodity Index gained 18 points to close at 449.50.

Market Analysis: Jul 24, 2009: Virgil Robinson and Walt Hackney Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Mr. Walt Hackney to discuss livestock in a moment. Virgil Robinson is also here along with Walt. Welcome back to both of you. Good to see you. You both look great. I want to talk about a couple of things, Virgil, just generally globally, the world situation. There seems to be, I'm not calling it euphoria, but there seems to be a little bit better feeling globally about the economy. Do you share that?

Robinson: Well, my opinion is probably irrelevant but the S&P futures ...

Pearson: Not on our program it's not irrelevant, Virgil.

Robinson: In that subject matter it probably is but the S&P this week made its strongest close in the last 41 weeks being back to October so it would be kind of misleading for me to say the near-term trend in that market is down, it's not, it's up and appears to be headed higher. So, if that is a barometer of economic behaviors and/or the perception of behaviors it's pretty darn strong as we visit tonight.

Pearson: Do you feel pretty good about this crude oil price where it is?

Robinson: It's $10 off its lows and only a few dollars from recent highs. It kind of flies in the face of conventional wisdom. I guess if I were long crude oil, which I am not, I would probably protect that position with some type of strategy, most likely an option strategy. If I were in the business of acquiring or procuring crude I would probably, in fact, create some kind of a ceiling. This is a very pretentious market and one that has a personality unlike I've ever seen and certainly anything is capable of happening the balance of this calendar year.

Pearson: A little weaker dollar encouraging maybe some ag trade?

Robinson: Well, weaker dollar but you'd be hard pressed to see the results of that in the futures markets this week. Corn futures steady to a fraction lower, wheat futures lower, soybean futures mixed so perhaps there's been something of a disconnect trumped I think by the perception of what many would lead us to believe is record corn and soybean production.

Pearson: Let's talk about wheat too while I've got you here and then we're going to talk livestock and dairy with Virgil. What is your take now on wheat prices as we have pretty much come close to wrapping up the harvest?

Robinson: A couple of things, I like to try and watch rough rice futures as well, very strong behavior there of late and there is something of a correlation in my mind between rough rice futures and wheat futures. So, combining the technical breakout -- I'm going to classify it as that in rough rice, I think that market is headed higher over the balance of this calendar year, I think that will have an influence on wheat futures. That doesn't speak to the issue of the basis so what I'd ideally do here, any futures rally in the Chicago, Kansas City or Minneapolis futures contracts to the tune of 25 to 50 cents I'd sell the physical product and then replace it either with some kind of cross hedge here, which is kind of a sophisticated strategy ...

Pearson: Not over the heads of our viewers.

Robinson: ... or some type of option strategy. I like the vertical call spreads when replacing inventory.

Pearson: Real quick because I'm also interested in this too -- USDA is going to re-measure the eastern Corn Belt, several states in the eastern Corn Belt -- what is that telling you about these reports?

Robinson: Let's speak to the issue of satellite imagery for a moment which is being employed more and more by USDA in their effort to try and accurately report information of this kind. It's going to be thoroughly tested. It's not unprecedented to see a switch July to August in planted corn acreage. Our models would suggest if there is a switch here based on this re-survey it's not likely to be terribly large.

Pearson: Your take on the corn market? I've been all around the Corn Belt, you've been all around the Corn Belt, really it looks pretty good. Now, I can't see all the flooded spots over in Illinois. I quoted my dad saying that everything looked really good in Illinois and he said, well of course it does now because the corn's up and you can't see the flooded spots.

Robinson: Well, perhaps this re-survey will address that issue so let's give the department the benefit of the doubt and assume it does. We have any number of analysts of the opinion that we have a record corn crop and record soybean crop coming down the pipe here and crop conditions, even though we are late in many areas of the Corn Belt, would I think underscore that. So, let's just assume we are talking here big numbers. It will put an emphasis, in my opinion, upon storage and marketing tactics associated with on-farm storage and using that on-farm storage to enhance return. There will be opportunities in those circumstances.

Pearson: Let's talk about soybeans, the soybean market you're looking at fairly good discount, old crop to new crop but it looks like that old crop is kind of affecting some of these what we might call transitional contracts as well.

Robinson: I think you have a market awaiting here the available supply out of the southern U.S. and of late there have been some beneficial rains and it looks like the soybean crop is going to be okay. So, I think that is taking the edge off that Gulf market as we visit tonight. So, while old crop retains a premium, with all due respect, old crop inventories in the U.S. and in the world are not particularly large, they are precariously small. But, again, the anticipation here of what could be record large soybean production stares us in the face and that has trumped most other factor in this market.

Pearson: Do you want to sell corn and soybeans?

Robinson: I'm reluctant to sell either below the cost of production. I would prefer to find some type of storage opportunity or thoroughly research all those contracts that are being offered by your local vendors. There are contracts that do resemble the ability to store on-farm, for example. Make sure you understand those because this is a year where over the course of the next many months prices are likely to stabilize and I think gradually and slowly improve.

Pearson: Let's talk about the other side of this equation, half the corn and beans we grow go into livestock and Walt, I want to ask you about dairy tonight too but let's get to that in a minute. Let's talk about the fed cattle market. Cattle on feed report out this afternoon, what is your reaction?

Hackney: Before we go to my reaction I want to address this farm storage issue Virgil brought up. As I drove to Iowa Public Television today a phone call told me a grain bin dealer in a small community in western Iowa last month sold locally 50 grain bins and they expect to hire two crews to help him put them up.

Hackney: Into the cattle and feed report -- we had two reports. We had an all-cattle total inventory report today. I think it's grossly overstated. I think that they have missed the target by a minimum of two and possibly three full percent. They are calling the all-cattle inventory only down to 99% of the year prior. I don't think it's possible because of the extraordinary rate that has been put in the fall of 2008 on the ranch country, on the beef herd because of extraordinary fuel costs and feed costs. The other side of that coin are the dairy producers who have taken phenomenal losses and continue to take them with that 9.96 milk you saw today. Those liquidation of those enormous dairies are in effect as we speak and I don't think they're included in that inventory report. That be as it may the cattle on feed report actually had the on-feed numbers as of July at 95%. That's fairly accurate I expect. They had their placements at 92, that is one percent under the trade guesses which is close enough for government and then in regard to the marketing that was the one that was a surprise. They had one more day of marketing and so forth in June except they were estimating the marketing to be at 99%, it actually came out 101%. So, that should in effect create more of a bullish attitude toward the cattle on feed report. I don't know how much of it is built in, I don't know how much of it would be reactive back to the cash market, probably none. The mercantile may show some positive reaction to it Monday but that is almost irrelevant to the cash market.

Pearson: We've got a couple of minutes left, your take for fed cattle prices, now that we've got this cattle on feed report, going into 2010 and even the fourth quarter of this year, what do you think we're going to see?

Hackney: Well, people much more steadied and authoritative than I am would be quick to tell you they anticipate a 90 cent cash market in the fourth quarter and potentially 95. I think I'll subscribe to the $90 cattle market in the fourth quarter. I'm not sure that the economy at the meat counter will support $95 cash cattle. That would be the only restrictor.

Pearson: Can you give any good news to dairy producers out there once we go into 2010 for those milk prices?

Hackney: Drink more milk.

Pearson: And hogs, let's talk about the hogs here.

Hackney: The hogs are in serious trouble and have been, severe losses, a lot of liquidation, many bankruptcies. The analysts as we speak are starting to change their opinion that the extraordinarily positive climatic weather we've had the last two months have increased the weight of the hog, increased consumption, increased tonnage. As a result that hole we were hoping for in August/September probably isn't going to create itself and so we probably are going to continue killing two million hogs a week or more as we approach the fourth quarter. That isn't going to support a higher cash market.

Pearson: Walt Hackney, as usual we appreciate your insights in this livestock market and appreciate very much Virgil what you bring to us on the grain side and what's going on there. It's going to be an interesting 2009, that's for sure. That will wrap up this edition of Market to Market. If you'd like more information from Walt and Virgil on where these markets just may be headed visit the Market Plus page, it's there at our Web site. You'll find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments free at our Web site. Be sure to join us again next week when we'll examine the brewing battle over raising the blend rate for 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 USDA