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Market Analysis: Jul 03, 2009: Darin Newsom, Market Analyst

posted on July 3, 2009

USDA's Planted Acreage and Quarterly Stocks reports continued to pressure corn and wheat prices the rest of the week.

For the holiday-shortened week, July wheat lost nearly 35 cents, and the nearby corn contract was down 38 cents.

Tight supplies of old crop soybeans supported the rally in the soybean pits, where the July contract gained 42 cents and the nearby meal contract was up more than $6 per ton.

In the softs, cotton moved back above the $60 mark as the December contract posted a gain of $4.08.

In livestock, August cattle were up $2.47. Nearby feeders gained nearly $4.50. And the July lean hog contract gained $3.27.

In other markets of interest, the Euro lost 50 basis points against the dollar. Crude oil declined $2.43 per barrel. Comex Gold was down $10 per ounce. And the Goldman Sachs Commodity Index lost more than 15 points to close at 436-even.

Market Analysis: Jul 03, 2009: Darin Newsom, Market Analyst Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, good to have you with us.

Newsom: Thank you, Mark.

Pearson: Another big week in the commodities world, a big report out, I want to get to that planted acreage report. Crude oil we mentioned kind of bouncing around. The general economy, the world general economy seeming to be fairly flat right now. Are we starting to see some bright spots in this general economy worldwide?

Newsom: I'd like to say yes but really the answer is no and as you talked about earlier in the show we had this unemployment number that came out later this week that shows that we've still got some hurdles that we're going to have to get over and I think that's going to continue to weight on the Dow and then that's going to spill over into commodities and I think as we head into the late summer, get started into the fall we're going to continue to see this pressure build.

Pearson: So, with that in mind, the pressure is going to continue on this global economy until we start to see some confidence regained? Is that what we're looking for?

Newsom: I think so. What we're going to have to see, instead of less bearish reports which is what we've been building some of this spring-summer rally on the Dow, we're actually going to have to start to see some bullish numbers, some actual evidence that the economy is turning around, not just stabilizing. In the last Federal Reserve meeting the comments themselves said we're seeing a stabilization in the economy. We're going to have to start seeing some growth, we're going to have to start seeing some strength and I think then the turnaround begins to come and it might be later in '09 but more than likely it's going to have to start coming in 2010.

Pearson: With that as a backdrop, planted acreage report out this week, highly anticipated, big surprise on the corn acreage but expected on soybeans, fewer wheat acres. Talk about the wheat market. You're a Kansas boy. What do you see now?

Newsom: Well, there's nothing bullish going on in wheat. No matter how hard we look and how hard we try you just can't find anything and if we look at that acreage number increased acreage for all wheat, spring wheat acres were up when they were expected to be down so it just adds more fuel to the fire here that keeps traders, keeps sellers coming into this market and then when you add in the fact that the dollar, as we were talking about, the dollar continues to move higher, it just makes the U.S. wheat that much less attractive on the world export stage.

Pearson: So, if you're a wheat producer and haven't made a lot of sales yet what are you supposed to do?

Newsom: I think you sit back. Let's get through harvest here because I still think we could see some sort of post-harvest rally. I think what we're going to have to rely on at that point is if numbers start coming in of reduced production and these kinds of things maybe that starts to give us some strength, we get into mid-August, possibly a little later than that hopefully we can start to rally this market at that point.

Pearson: What kind of a rally would you expect?

Newsom: Not very much initially particularly if we've got the Dow coming under pressure, non-commercial traders continuing to sell corn, maybe beans also working a little bit lower but if we can start to get some momentum, some 40, 50 cent moves over time I think that's going to start to attract some attention and what we'll actually see in the wheat market could possibly be some non-commercial short covering. It's one of the markets where they're actually short, they might start to cover some of those positions.

Pearson: Short covering rally and that would be a chance for producers to make additional sales. Corn number, 87 million acres, that's a lot of corn acres out there, second largest since 1946.

Newsom: It really is and if you start adding in, if you start doing all the math that USDA has provided us not only with the quarterly stocks larger so now you might have larger ending stocks going into 2009-2010, now you've got 87 million planted acres, possibly 80 million harvested acres and if yield jumps from this 153.5 that they're projecting right now up to more of a trend line 157.5, 158 we could be possibly talking about ending stocks in '09-'10 around that 1.8 billion bushel mark. Four to six weeks ago we were talking about maybe 500, 600 million bushels left. So, a huge swing in the corn market, a lot of it's still going to have to do with the weather as we go forward but it certainly has cast a bit of a bearish pall over this market.

Pearson: Same thing, corn grower who hasn't done anything for 2009, what are you telling them to do?

Newsom: Again, you have to sit back. This market has lost a lot of ground, it's actually coming back down towards support, you've got the December contract pulling back in that $3.50, $3.60 area, you've got nearby contracts moving back down towards $3.30, $3.40. I think at some point we settle down in here, we take some of this volatility out of the market and then like what we've seen in years past we start to put a harvest low in or a pre-harvest low in that August, mid-August to early September timeframe and then if this doesn't pan out as anticipated and we know we're going to see revisions in these numbers possibly that will be the catalyst to start to drive corn higher.

Pearson: Let's talk about the soybean market, a big number there but not quite as big as it could have been, certainly within the trade estimate. So, soybeans going forward they took a big hit right after this thing happened, right after this report was released.

Newsom: Yes, I think the most important number coming out of the soybeans was the quarterly stocks number up near 600 million bushels. USDA is still sticking with its ending stocks figure of 110. We'll find out Friday, July 10th if they're going to stick with that or not. It's going to be very difficult to hit that level with only one quarter left and we're sitting at 600 million bushels. So, that's why we saw the initial pressure on the market but what was interesting to me is how soybeans recovered late in the week basically shrugging the shoulder and saying, look, we don't believe that quarterly stocks number, we think it's much tighter than that, we think this inverse that we've seen over the last year in the old crop future spreads is indicating that the market is much tighter than what the quarterly stocks number is indicating. So, off we went, market still remains supported by supply and demand situation, strong exports to China, strong demand all the way around I think is going to keep this market underpinned for a while.

Pearson: So, new crop sales what are your thoughts?

Newsom: We've got some on the books and I wouldn't be overly aggressive but we're at a point right now around the 4th of July where beans tend to turn lower. So, if we don't have anything done right now certainly get some on the books, possibly up to 50%, possibly a little more than that and then let's see what happens because again, this is a very critical time in the marketing year, time when the soybeans tend to start to work lower.

Pearson: Let's talk about the cotton market, again, a big jump this week, less acres in cotton, that was a bit of a surprise.

Newsom: It was and the biggest thing in the acreage report for cotton is they did bump it up to nine million acres. It's down from where we were in 2008 but visiting with some cotton analysts what we're seeing is that the increases in acres are in areas that are really not very productive. In the better growing areas they actually saw a reduction in acreage. So, it looks like we're going to be tightening up this supply and demand situation, the Dec., March new crop spread certainly is seeing some of the carry coming out of that setting the stage for this Dec. contract to make a run at 70. It looks very strong right now heading into July, early parts of July, looks like it could really start to build some momentum.

Pearson: Let's talk livestock, it's been so tough in the livestock and poultry sector it's hard to fathom. Hearing those cattlemen talk earlier there's a lot of frustration out there in cattle country and hog country and poultry country and dairy country right now. What do you see ahead for fed cattle? If this economy continues just to bang along here in first gear what do you think is going to happen?

Newsom: That's one of the concerns and I was going to point out to you when was the last time on one of these weekly shows that you got to actually say all three of those markets closed higher for the week?

Pearson: It's been ages but is it for real? We've had a lot of false starts.

Newsom: And it certainly looks like it could be but we've got some pretty good momentum particularly in the live cattle market. A couple of weeks ago we had a bullish technical signal, we've seen some follow through cash markets firming a bit but you're absolutely right, if this economy is as we think it is and it's not quite as strong and might not be able to hold going into the summer and fall that's going to put some pressure on the cattle. But I think we've built some momentum, we've built the base that we're going to be able to start for the July-August timeframe get a little bit higher market, pull the cash market with us.

Pearson: The deferred contracts in cattle, they're in some better territory already.

Newsom: Yes, they have and I think that's a good sign. We're seeing the strength starting to build out there so I think this is certainly implying that we're going to have stronger cash markets as we get into the next quarter, certainly into the fall.

Pearson: Your take on hogs?

Newsom: Hogs have really been needing something, they've been needing anything to start to give them some support. We all knew for a long time it was going to have to come from the cash market and there's been some signs here recently that that floor, that bottom may finally, finally have been established. Futures have been a little bit slow in reacting but even there we're starting to see some buying interest, we saw it this week, follow it through here on another couple of weeks and hopefully we can start to push this market higher working those two things in tandem.

Pearson: So, we're going to see hopefully things improve a little bit and obviously they're getting a break now on the feed side at least for livestock.

Newsom: I think that's a big part of it because we've seen corn coming down. Now, soybean meal tried to break early but had a strong rally. The demand for soybean meal remains very strong. It's going to be difficult to break that market unless soybeans really start to come down as is their seasonal tendency. But yes, the corn market, feed corn certainly has come down quite a ways.

Pearson: Would you tell a producer to buy cash?

Newsom: I would sit back and let the corn market continue to come down, buy as needed, wait to lock in longer.

Pearson: Darin Newsom, that's going to wrap it up, appreciate you being with us for this week on Market to Market. Now, if you'd like more information from Darin on where these markets may be headed visit the Market Plus page, it's right there at our Web site, you'll also find streaming video of our program and you can download audio podcasts of our Market Analysis and Market Plus segments absolutely free at our Web site. Of course, join us again next week when we'll examine the profits and pitfalls of urban sprawl. 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