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Market Analysis: May 22, 2009: Darin Newsom talks about the Markets

posted on May 22, 2009

Spring planting numbers grew significantly this week thanks to dry weather in much of the grain belt. Nevertheless, prices moved higher.

For the week, July wheat gained 35 cents, and the nearby corn contract was up more than 13 cents.

The specter of a reduced crop in South America sustained the rally in soybeans, as the July contract gained more than 35 cents and the nearby meal contract was up $16.75 per ton.

In the softs, cotton surpassed the 60 dollar level again with the December contract posting a gain of $1.31.

In livestock, June cattle gained 15 cents. Nearby feeders were up 27 cents. And the June lean hog contract posted a loss of 53 cents.

In other markets of interest, it was a rough week for the dollar as the 16-nation Euro gained a whopping 542 basis points against the greenback. Crude oil soared to a 6-month high en route to a weekly gain of more than $4.50 per barrel. Comex Gold was up $27.00 per ounce. And the Goldman Sachs Commodity Index gained 20 points to close at 420 even.

Market Analysis: May 22, 2009: Darin Newsom talks about the Markets Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Darin Newsom. Darin, good to see you.

Newsom: Thank you, Mark.

Pearson: I don't know, I kind of thought last week we were maybe on the other side of the economic turn around, at least here in the United States, and for that matter globally but this week things have kind of turned. As you look at the leading economic indicators and how those all line up and how they affect us in agriculture what are your thoughts broadly on the world economy tonight?

Newsom: I think all the talk that we've reached the bottom and it's nowhere but up from here I think is a bit premature. We're not seeing this consistent string as you talked about earlier in the reports, we're not seeing these consistent string of reports, these bullish reports coming out, they keep getting mixed up and chopped up with these more bearish numbers that continue to come out. So, while we should continue our spring and summer rally it would certainly seem logical that we could up through say July, August, but I think once we start to turn to fall I would not be that surprised at all to see the market start to come under pressure again.

Pearson: You're talking the general equity markets.

Newsom: Exactly, Dow Jones as a whole, the overall economic feel of the United States, I think we start to see some pressure building in the late third, early fourth quarter.

Pearson: You talked about a turn around back in February when we saw copper prices start to turn as kind of an early indicator of what's happening, the canary in the mine shaft if you will, for prices starting to turn maybe this economy starting to turn. Copper prices, what are they doing now?

Newsom: We seem to have run up against some resistance, I believe it was up around 124 level and since then what we've also seen is the spreads are starting to weaken again indicating that the commercial buying that helped to push us higher is starting to dry up, that we're not seeing that type of fundamental support in this market. And so what we're seeing is starting to back off and it's handing the baton off now to the gold market and that is one of the other metals but from an economic point of view rally in copper is bullish, rally in gold not so much.

Pearson: And, of course, it's Memorial Day weekend, people are out driving again. This is a seasonal time, isn't it, for gas prices to go higher, crude oil has gone sharply higher as well?

Newsom: Right, it would not surprise me at all to see the gasoline futures and the cash gas price go another 40, 50 cents higher pushing that national average cash price up to about $2.80. I think we'll see crude oil approach that $70 level but, again, the fundamentals just don't support much beyond that unless we see some dramatic change between now and the fourth of July weekend. That's normally when this thing peaks and starts to come back down.

Pearson: Speaking of that, as we look at crude oil, we look at the world economy the dollar, big fall off this week.

Newsom: It was, we saw it move through some key support right around the 80 point level, certainly looks like now it's going to drop back down below 78 and I think we're going to continue to see this pressure building. The dollar, again, has been needing to come down, the talk that all this money being traded is going to create some inflationary talk, dollar doing what it should do should continue. If it gets weaker it should continue to support commodities.

Pearson: Absolutely, let's talk specifics here, let's talk about the wheat market. Worldwide plenty of wheat is what everybody keeps telling me.

Newsom: Right, we have an abundant wheat supply right now, not just U.S., but as you pointed out wheat is a worldwide crop. So, world ending stocks are bountiful and we're not going to run out of wheat any time soon. I think the rally that we saw here this week has more to do with the non-commercial side of the market squaring up, adding a little bit to their net long position, they've been short for quite some time but there's also this little skirmish going on over the wheat between Russia and Egypt, the quality of some of the wheat that Russia has been shipping. There is a hope out there that this is going to lead to some better exports for the United States as we get into the new crop. We're still so overpriced in the market that if we start to combine that with the dollar coming down there is some hope out there of better export demand for U.S. wheat.

Pearson: Are you in a hurry to sell wheat right now then?

Newsom: I think I'll hold off a little bit. I want to see -- we've been looking for this post-harvest rally for quite some time and if the other grains can stay strong I think there is a chance that the wheat market could certainly follow them higher.

Pearson: A friend of mine in the seed corn business said a lot of short season corn is headed to my home state of Illinois this weekend, a big load of it in fact, maybe not the switch to beans, maybe the switch to shorter season corn? Is that kind of their thinking in the corn pit now?

Newsom: It is, if we look throughout this spring and even the late winter we were watching these new crop corn spreads and new crop bean spreads for any sign that we were going to see this huge switchover that everyone is talking about and it just isn't there. We've still got a pretty stout carry going on in the Dec. and March corn and a very weak carry almost going into an inverted situation in the November and January beans certainly hinting at they're going to try to keep these acres in the corn market, certainly looks like at this point that the interest is still in corn, we've had a nice week, possibly stretches out to ten days, two weeks of relatively benign weather throughout the Corn Belt and we should see a lot of progress made as far as corn planting goes.

Pearson: So, selling standpoint, what do we need to do here?

Newsom: The old crop I think we could still see this thing push over the next few weeks up to about the $4.45 to $4.60 level in the July contract. In the new crop I think we're going to see a little more than that, possibly up to $4.65, $4.80 because there's going to be all these weather threats and so on. So, I think there's still some room both seasonally and looking at the trends and the way these markets are setting up that we could push it a little bit. The one thing against it, again, is the fundamental spreads aren't really going to be providing much support so I think we're going to see increased selling along the way and it's going to make it a much more difficult rally than what we've seen in some of the other markets.

Pearson: So, maybe take advantage of it when we get to those levels. Let's talk about the soybean market and what you see happening there, obviously that's the flip side. You have heard a lot about the seven million acres, you heard about acres switching over in northern wheat country, in spring wheat country, acres switching over elsewhere and maybe looking like a pretty burdensome supply in 2010. Do you agree with that?

Newsom: No, I don't. Again, if we look at that November/January spread and it's already going inverted that's telling us that the market believes that we're looking at a pretty bullish situation. I think Argentina is dropping dramatically from what they were, down 32, 33 million metric tons right now. U.S. ending stocks, the market is just now catching wind that this thing could drop down to that 100 million bushel level again. I know we've been talking about it since last December of that possibility happening. Export demand remains strong, we're on a record pace. That is going to cut into the beginning stocks of '09, '10 and I really don't think we're going to be looking at ending stocks for '09, '10 being up above that 200 million bushel like everyone is projecting at this point.

Pearson: Again, still relatively tight numbers.

Newsom: They are, we start dropping that back below 200 and there's a very little margin of error then in the new crop because it's not that large of ending stocks.

Pearson: Old crop beans are $12 this week, new crop is up there, you don't want to make sales here?

Newsom: No, I'm still holding back because we normally see beans rally up into early July so I think there's still some room. Again, the spread is inverted. I'm not going to tell anyone not to sell at these levels, certainly very good prices but I think there's still some more to come.

Pearson: Let's switch gears, let's talk livestock and this has just been tough, this cattle and hog business, dairy, it's just been frustrating, no money for eighteen months in the hog business, fed cattle market has been lousy, dairy has been a debacle. Talk fed cattle for us, where do you see that going second half of the year? Maybe these economic underpinnings we'd hope arrive haven't arrived?

Newsom: Well, a couple of things that bother me in the cattle market right now, usually you see the summer buying end about the time we move into summer around Memorial Day so that's this week. Buyers start to come back, they've done all the buying that they need so if that is indeed the case then we really never saw the cash market move, that's kind of a gloomy outlook then for the cash if the cash buyers actually start to move back away from this market. Secondly, if we are nearing the end of this economic recovery or at least the short phase of this recovery and we start to see some pressure coming from that side of the market as well then all of a sudden we've got both sides of the market bearish and it could mean some lower numbers for cattle as we go forward. So, the fed cattle market is not looking all that bullish, we didn't get the rally in the cash market that we were really needing to support this thing and now if that goes away there's not much to fall back to at this point.

Pearson: No hedging opportunities?

Newsom: I wouldn't be too wild about doing it. What I would do is if we see the Dow continue to pull these markets higher and get them a little higher than maybe we're anticipating right now then look at starting to lock something in.

Pearson: Real quick, calf market, what do you see happening there?

Newsom: Calf market, I think it's going to stay a bit more stable than the fed cattle market has. Again, it hasn't been that good over the last six months to nine months but hopefully we can still get this little bit of a late spring, early summer bounce to get some better prices here over the next 30, 60 days.

Pearson: A lot of people talking about 2010 will be the livestock year, do you think that might happen?

Newsom: I think it's very possible because at that point we should see the Dow and the economy as a whole starting to get some footing, make a bit of a beach head and really start to make a serious rally rather than just this recovery rally that we're seeing at this point.

Pearson: And hopefully that will spill over into the dairy sector too.

Newsom: Yes, the dairy market is giving some indications that in time it could start to get better, it's starting to trend a little bit more sideways now than just this freefall that we've been in, that's always a good sign. The bad thing about that market, the bearish thing about that market is we're coming to the end of the school season so we might have to wait again until August or September for buying to become interested in that market again.

Pearson: Real quick, the hog market, what do you see?

Newsom: The hog market is kind of ugly, has been for quite some time, cash market really hasn't been any help. The biggest thing we could see in the hog market is if cash starts to strengthen next week, weather stays good, farmers are more interested in planting and field work, hogs aren't coming to town we could force the hands, we could force the packers to bid up a bit.

Pearson: And what are you thinking?

Newsom: Hopefully we can start the week with calls of $1, $1.50 higher. I think that is the first step is get through this weekend. We have a short week next week. If we can see those bids on Tuesday come in $1, $1.50 higher I think that's going to give us a good sign.

Pearson: Very good, Darin Newsom, thank you so much, we appreciate it. That's going to wrap up this edition of Market to Market. But if you'd like more information from Darin on where these markets just may be headed please join us for Market Plus, it's at our Web site, you'll find streaming video of our program and you can download audio podcasts of our Market Analysis and our Market Plus segments absolutely free at our Web site. Of course, join us again next week when we'll journey to the end of the line on the Fresh Express, the unique train route that saves fuel and reduces greenhouse gas emissions. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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