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Market Analysis: May 15, 2009: Erin Golly and Virgil Robinson Examine the Effects of Wet Weather on Grain Prices

posted on May 15, 2009

Despite some forecasts of dry conditions in the days ahead, heavy rains this week – particularly in "Corn Country" -- supported prices.

For the week, May wheat gained a penny, and the nearby corn contract moved more than 13 cents higher.

Soybeans staged the week's best rally though, with the May contract gaining 32 cents, and the nearby meal contract was up $22 per ton.

In the softs, cotton's run above $60 lasted less than a week as the December contract posted a loss of $3.30.

In livestock, June cattle lost 60 cents. Nearby feeders were down 30 cents. And the May lean hog contract shook off lingering fallout from the H1N1 debacle with a gain of $1.00.

In other markets of interest, the Euro lost 147 basis points against the dollar. Crude oil fell more than $2.25 per barrel. Comex Gold gained $16.40 per ounce. And the Goldman Sachs Commodity Index lost 10 points to close at 400 even.


Market Analysis: May 15, 2009: Erin Golly and Virgil Robinson Examine the Effects of Wet Weather on Grain Prices

Pearson: Here now to lend us their insight on these and other trends two of our regular market analysts, Erin Golly and Virgil Robinson. Welcome back, good to have you both with us.

Golly: Thank you.

Robinson: Thank you, Mark.

Pearson: Let's talk about what's happening in the world because it's the global marketplace that we are all in today and this week, well, a little bit softer, the equity markets a little bit softer, kind of an undergirding in all these markets and better prices.

Robinson: That's true, Mark. One thing I wanted to note, May corn futures expired earlier in the week, the July contract actually closed a little lower.

Pearson: We look at that May contract which we use on the show, the nearby, you're going to say it was a little bit better but in fact we were a little bit softer when we come to the next month which is July, good point. But besides that, Virgil, we have all this positive news and then we had this May 12th crop report which looks fairly positive for corn, we have all these other factors out there and international trade is a big factor.

Robinson: And the dollar is a driving force of that, Mark, and of late has been weak and trending lower which is the complete opposite of when you and I talked last. So, that dynamic has changed. A tough week, the S&P, tough week for the crude oil market, tough week for the metals markets but pretty good months going here. We have the opportunity to make some awfully good closes here by the end of the month and should that occur I think the trends of those aforementioned will continue to move irregularly higher.

Pearson: I want to get to livestock in a moment but Erin, as we look at this thing talk a little bit about you're close to the hog business, this H1N1 situation that we had, the pandemic and the unfortunate miscue of calling it swine flu had a huge impact on the hog business. What is your reaction to it now? Are we working through it? Are we going to start to see this hog market improve?

Golly: We are, we've recovered nearly halfway of what the futures have lost since the H1N1 situation arose. So, we're starting to, it's surely been a debacle and pork producers are already being devastated by the markets already and already losing between $20 and $40 a head so this on top of it was just the topping on the cake for them. It's put a lot of producers in a very strenuous situation.

Pearson: We're hearing there's a lot of stress out there in dairy country and in pork country despite the fact we've had these strong grain prices and oil seed prices, that feed meal has stayed high as prices have stayed level. We thought we were making a turn on these hogs.

Golly: We were going to and there was just a pork lending conference down in Florida last week and the big talk there was that 50% of the pork producers in the United States were going to be out of money in the next 60 days. That's a very strenuous situation and a lot of pork producers are wondering what to do with their lives.

Pearson: We're going to talk about marketing and hogs coming up in just a moment but I want to get back to Virgil. Virgil, worldwide crop situation, this WASDE report, what was your overall reaction to it?

Robinson: Well, there were some changes from when last we spoke but I think the underlying theme, first of all, in wheat and rice, we'll start with the two primary food grains, the projections are for an increase in ending inventories in each of those two commodities, a small reduction here in the U.S. but global wheat supplies just continue to throttle and keep business in check and I think that's going to continue to be the case barring some kind of catastrophe in the next few months. There is some concern about drought in parts of Eastern Europe so certainly we'll need to watch that closely. The situation in the spring wheat belt, particularly North Dakota, is concerning. But overall, again, I think global supplies of both of those two commodities, wheat and rice, are large and are projected to grow larger year over year. That should keep both of those commodities price wise pretty much in check.

Pearson: Following up on that, Virgil, we are going to see some acres displaced and some acres change in some of that wheat country. The wet weather in the Corn Belt is probably going to cause some acreage shifts. We'll know for sure when we see what USDA says in June. But as we're looking at this market right now, the wheat market in particular worldwide, are we going to see much of an increase in global production based on the prices that we're seeing today?

Robinson: The WASDE report projected global wheat production at 658 million metric tons. Should that come to fruition that would be the second largest crop on record.

Pearson: So, at this stage of the game for producers down there, we talked about this situation in Oklahoma with the drought and the freeze and the problems down there as bad as that is, the worldwide situation is still so negative that impact is relatively small.

Robinson: Negative to the extent that there's adequate supply. There are other factors that my come into play over the course of the next many months but they will evolve around various economic and macroeconomic developments, all of which are very difficult to handicap. So, please be advised that while I'm suggesting wheat prices are probably destined for a period of consolidation they have the opportunity, of course, to follow some of the other leads, particularly out of the oil seed market and then secondly the coarse grain market. So, any appreciable gain in futures, at least in the soft red wheat market as well as the hard red, the hard spring wheat crops I think would be offset by basis deteriorations. I see that very frequently, get a 30 to 40 cent run in futures and the basis deteriorates by half or more of that. So, I kind of like the idea of moving through inventory, replacing that just for the what-if situations with some type of option strategy, gives you a lot more leverage on your money, quality is no longer an issue, the costs accrued with storage and quality concerns are also eliminated in that kind of a scenario.

Pearson: So, an option strategy like maybe doing something about now or maybe within a dime or 20 cents of where we are?

Robinson: Truth be told I've already done it. I sold cash wheat long ago, put on a few option positions and they have done okay.

Pearson: And let's talk about the corn market because that's what everybody is worried about, big viewership over in Illinois, they're all sitting there able to watch the show today because they can't plant, continuous wet weather over there, way behind. We've got big equipment, I know we can get the crop in awfully fast once the weather shakes out but at this stage of the game are we going to see much shifting?

Robinson: I don't think quite yet. A week or ten days from tonight I'd probably change my tune. The market has dialed in I think as of this afternoon the prospect or the forecast of awfully good weather next week and that is, in fact, forecast at least as I read it. That had best materialize or be advised the markets are awfully explosive.

Pearson: Producers at this stage of the game this is when we're having our biggest weather impact so far for this crop growing season right here at the get-go. Is this time to make sales?

Robinson: New crop or old?

Pearson: Well, old crop and then new crop.

Robinson: Okay, old crop I think the dynamics in old crop are much different than those that are projected in new simply because of the supply part of the equation. We're talking about a billion and a half or a billion, six hundred million bushels of corn carryout. That is clearly an adequate supply. This week was a good illustration. I think at or near $4 or fractionally above we bought a lot of cash grain this week and this is one of those weeks where futures, July futures anyway, closed lower on the week and the basis simultaneously widened. That suggests to me the pipe took on a pretty good chunk of corn and I think it's well supplied as we visit tonight. So, old crop, again, I'd be looking to wrap up whatever old crop remains in hand between now and the Fourth of July. New crop I'm destined always for this kind of a comment, I like minimum price. I like to protect the cost of production if possible and I like the opportunity of time in terms of what kind of acreage do we really have and how does it develop.

Pearson: Golly: Erin, how nervous are livestock producers? Are producers on the livestock side buying this week?

Golly: I know a lot of our producers started buying calls just because there is some worriness going on within the industry. Margins are already tight, lenders are sort of forcing their hand saying, well, if you don't have your corn covered you need to be finding something else to do.

Pearson: Fair enough. Virgil, what about in soybeans? USDA report looks to me like a lot of beans next year, is that right?

Robinson: If the projections are accurate and, again, I think that's a big if as we visit here tonight. Let's talk quickly about old crop, old crop inventory, ending stocks are projected by the department at about 130 million bushel and I think that number could be debated. Export sales to date as well as the fact that processing margins are very attractive and very profitable. We're using old crop beans market a very rapid clip. I think many would argue that the USDA's projection here is too large and we could clearly be thinking and looking at pipeline or perhaps even something below pipeline due to the fact that the Argentinean crop was significantly smaller than we had thought and usage has continued unabatedly to increase. So, that projection for 2009-2010 I'm rather dubious of. Clearly it's the projection that we're working with in the market and this wet weather has led people to believe that there's likely to be more acres diverted out of corn, cotton and wheat to soybeans. I still think that's a bit premature, that assumption. So, the supply and demand equation in old crop beans razor thin and bordering on that depending on who's S&D you look at regarding 2009-2010. We're firmly underpinned here price wise.

Pearson: Okay, sales strategy on beans?

Robinson: I sold old, replaced it with a bull call spread, worked through that and at this point I'm exhausted, have no old crop inventory on hand, I'm done. New crop I have created on at least 40% of intended production minimum price.

Pearson: Where are you trying to get that minimum price in?

Robinson: It depends on your crop budget but at this point if you can protect $9 or thereabouts I think that will create a pretty safe floor, at least production cost wise.

Pearson: Real quick on the cotton market, big selloff this week, it's had a nice move.

Robinson: Yes, it really has. We've moved $20 since you and I last visited. Again, supplies, both U.S. and world, are projected to decline year over year. I think we'll make another swing at $60. For those who have new crop cotton unpriced I'd create a minimum price there.

Pearson: Get started there. Erin Golly, let's talk about the livestock markets and what you see happening there. Let's talk first about the fed cattle market, beef demand, what do you see going forward? What do you think if the general economy improves beef is going to improve? What's your take?

Golly: I think that consumer demand is going to start to pick up as it seasonally does as we head into Memorial Day. I believe that the cash market may have bottomed but we're just going to have to watch a product and watch how fast the product moves out of the freezers and such. I do think that we're going to see less numbers, of course, this year than we did see last year but the global economy is the number one factor that's going to be affecting what the fed cattle market does.

Pearson: So, at this stage of the game it doesn't sound like you have a lot of optimism. Where do you think we're going to see fed cattle prices at the balance of the year?

Golly: I think we have a very good shot at seeing dollar cattle this fall and the reason I say that is because I think we are starting to see a slight bit of recovery within the global economy, we're just starting to see that and I think it's going to inch its way up throughout the year and I think we're going to see further consolidation and liquidation within the cattle industry.

Pearson: The smallest cow herd since 1950 -- the numbers on the supply side for the livestock business the house is in order.

Golly: It is and I am very bullish the animal protein sector just because we're going to see liquidation throughout the entire industry.

Pearson: As you go forward is there anything producers should do? Obviously there's not a great hedge out there.

Golly: There is not a great hedge, you could hedge for less if you wanted to or barely at break even but I just would recommend purchasing put options on the bottom side because it could be a demand driven market and you don't want to put a top on it and just buying calls for the input side just so you're protected just in case something goofy happens with the markets and the grains this year.

Pearson: Calf market, what do you see the cow calf guy doing? Is he going to be part of this liquidation or restructuring?

Golly: A small part of it but I think that there are going to be some opportunities later on for the cow calf producers just because the liquidation. We are seeing a lot less feeder cattle out there right now so I think there's going to be some opportunities but it's going to be later on and part of the problem is being able to stay in the game that long to take advantage of that and then I think there's going to be less and less producers that are going to be able to do that.

Pearson: Of course, we're going to have some weather factors and some other issues as always affecting all these markets. Let's talk about the hog business. You mentioned ... there's some very dire statistics for outlook for what's ahead for pork producers and it's not bright. H1N1 didn't do us any good, there's no way you're going to get the flu from eating pork but that seemed to be what was created by the media hysteria over this event. Now that seems to have been overblown, we're getting back to -- at the start of the show you said we're about halfway back but that's not cutting it for a lot of producers.

Golly: No, it is not and like Virgil said we were looking at having a good summer this year and we're certainly set back from that. Retailers have already finished their Memorial Day purchases and seasonally the market sets back during this timeframe but after Memorial Day I think we'll see another surge higher that's going to take the futures up into the 70s for the summer. But one of the key things I think we need to watch is the Mexican tourism industry and how quickly it rebounds because the Mexican export market is very important to the U.S. pork producers. We export a lot of hams down there and I do think that it's going to take a lot longer for that export market to fully come back to where it was so we're missing out on that export market as well as the other ones that we are banned from as well.

Pearson: So, from a producer's standpoint right now there's really not much in the way of a hedging opportunity?

Golly: No, there is very little but I do think there's going to be better prices this fall than the summer which is going to lead us into the big bull market I believe in 2010.

Pearson: So, livestock producers if they can hang on 2010 could be your year.

Golly: It could be, absolutely, it's just getting to that point.

Pearson: The house is in order, they've done a good job, produce a great product and now they need to get paid for it. Hopefully by '10 that will be what happens. Erin Golly, thank you so much. Virgil Robinson, thank you very much. That's going to wrap up this edition of Market to Market. If you'd like more information from Erin and Virgil on where these markets just may be headed visit the Market Plus page at our Web site where you'll 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. Be sure to join us again next week when we'll take a ride on the Fresh Express, a unique train route connecting farmers and consumers from coast to coast. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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