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Market Analysis: Mar 27, 2009: Virgil Robinson, Pioneer Hi-Bred International

posted on March 27, 2009

Grain markets trended lower this week as the trade braces for USDA's much-anticipated Planting Intentions Report due to be released Tuesday.

For the week, May wheat fell more than 40 cents, while the nearby corn contract lost nearly a dime.

Soybeans also were under pressure, as the May contract posted a loss of 35 cents, while the nearby meal contract was down more than $16 per ton.

In the softs, cotton gave back more than a third of last week's advance as the May contract declined 51 cents.

In livestock, April cattle moved 88 cents lower. Nearby feeders were off 25 cents. And the April lean hog contract was down $1.28.

In other markets of interest, the Euro lost more than 400 basis points against the dollar. Crude oil was down 34 cents per barrel. Comex Gold declined $33 per ounce. And the Goldman Sachs Commodity Index fell more than 6 points to close at 367.50.

Market Analysis: Mar 27, 2009: Virgil Robinson, Pioneer Hi-Bred International Pearson: Here now to lend us his insight on these and other trends is one of our regular market analysts, Virgil Robinson. Virgil, good to have you with us.

Robinson: Thank you, Mark, nice to see you.

Pearson: Good to see you. Let's talk first broadly about what's happening worldwide in the commodity world. South America is harvesting, we've got China buying trying to stimulate their economy some more, challenges to wheat yields here in the United States and overseas. Broadly as you look at this market right now as we get ready to approach that planting intentions report what do you see?

Robinson: Our securities markets did in fact close pretty well and have a pretty good month going here.

Pearson: Capital markets recovered nicely here.

Robinson: A lot of analysts will be I think speaking relatively well about the behaviors month over month of many of the markets you just mentioned including energies, gasoline, ethanol. It appears corn futures, soybean futures, even with today's declines are in line to have a pretty good month. So, I think the attitude -- this is just one snapshot of a whole host of things we could discuss, have turned a bit more positive. Perhaps it is the perception of the stimulus program in conjunction with other major countries or major economies trying to stimulate their economies. So tonight's conversation is a little more upbeat than we've had in times past.

Pearson: They always say the equities markets leads the general economy by six to nine months so hopefully that means the recession that we're going through hopefully will start to clear itself away by 2010.

Robinson: Often times the futures markets will proceed the physical change in a market by several weeks or several months. So, I think that is one of the important features of tracking and watching the futures markets as closely as we all profess to do.

Pearson: Well, let's talk about these markets in particular that we track. First up is wheat. Wheat, corn and soybeans, cotton, all the ones that we track a lot of evening up this week, not a lot of new positions because everyone seems to be so focused on this report Tuesday.

Robinson: Well, to speak to the issue of wheat the hard red wheat areas have had a change in weather pattern and another is forecast next week. So, many are equating this behavior to what developed last year where the crop was highly suspect during the month of February only to be improved, much improved through the month of March and I think that's kind of the same behavior that we're discussing tonight. When you look at the balance sheet, the old crop balance sheet in wheat it's difficult to find anything there that's terribly bullish. So, having said that I would suggest, again, when there are short covering rallies for whatever reasons they are most likely intended for producers to take a look at selling what remains in old crop and perhaps creating floors or making even new crop wheat sales.

Pearson: Would that be obviously a way to slide this week in anticipation of this report but if we do get a bounce of ten, twenty cents what are you looking for?

Robinson: I think old crop wheat should probably be sold and if there are those who wish to retain ownership expecting or hoping for some type of change in behavior maybe an option strategy would be appropriate for them. Again, I think at a minimum creating price floors particularly if one's crop budget supports creating a price floor with the opportunity for additional price advances moving forward is always a pretty good strategy at this point in the calendar.

Pearson: I talked to some friends of mine up in the Red River Valley and they said that spring wheat number is going to shrink up there with all the flooding they've had. Any thoughts on acreage on wheat?

Robinson: Well, overall all wheat acres will be down and we could lost potentially an additional million acres of spring red wheat due to the circumstances in North Dakota. But even given that with the carry in from last season and the amount of competition globally it's difficult to get wildly bullish on wheat and wheat prices. So, proceed accordingly, be conscious and cognoscente of your crop budget at all times, protect those margins when the opportunity arises and preserve equity moving forward is probably the key theme tonight.

Pearson: Continuing with that theme let's talk about the corn market and, of course, we talked about this March intentions report and it is intentions and we've seen in the last couple of years some big swings between the end of March and June. So, again, it's a snapshot, like you say, of what's going to happen. What are you looking for out of the report?

Robinson: Well, in that context let's just make this notation -- in each of the last five years from March survey to final number corn acres have actually been underestimated in March and have grown larger with the exception of last year due to weather difficulties and just the opposite in soybeans. So, let's keep that in the back of our minds as we think about the number coming out here Tuesday afternoon. And, again, analysts are all of the opinion, or at least the majority, corn acres will be down year over year and the average estimate is off 1.5 million acres while bean acres will grow year over year in the vicinity of about 3 million.

Pearson: Depending, of course, where we come out and it's still early in the game but our first look here about what 2009 is going to look like. From a marketing standpoint, from a making sales standpoint for producers are we going to be in the zone to make sales here as people get ready to start planting?

Robinson: Old crop?

Pearson: Old crop and new crop.

Robinson: I think old crop, again, if we accept the old crop corn balance sheet at face value it's difficult to build a bullish case unless some phenomenal event should occur moving forward. Again, the $4 mark basis old crop futures -- I'll define those as May and July -- has provided pretty substantial resistance in each of the last couple of efforts there. So, I think anything approaching $4 would represent an opportunity to finish up old crop sales with perhaps the exception of a small amount just for the speculative end of things. And in soybeans, again, $9, $9 plus in the old crop soybean market has provided pretty significant resistance. So, at a minimum I'd create a price floor on that opportunity and for those that have maybe more than 50% of last year's production I'd make a sale.

Pearson: What are you hearing from people about the on-farm storage? The corn that's actually in farmer's hands is still quite substantial is what I keep hearing.

Robinson: Quite a bit of it and in that context, again, there is a carry being offered in the futures market, corn futures market. So, those that do have corn on-farm, unpriced there is an opportunity here, I think, to capture a little better price by selling that carry, making sure you have quality grain as well here, we don't want to be surprised by a quality issue moving forward.

Pearson: That can be very expensive.

Robinson: Yes, it can but you can capture something of a carry and as we move into the planting season, the full tilt of the planting season the basis traditionally will narrow providing you an opportunity to attach a basis to that futures fixed price and improve the price from what is being offered today to something better in the late spring, early summer of 2009.

Pearson: Let's talk about soybeans and what you see happening there. That's going to be another key number. And, like you say, everyone is anticipating a bigger bean number.

Robinson: Cross currents, Mark, give me an illustration. China in this week's export sales report pretty active buyer of both beans and soybean oil while in the same breath, assumedly now, rumor has it they are releasing a quantity of beans into the northern part of their country to relieve margin pressure. So, talk about cross currents, buying here and releasing in-country reserve beans in the country itself. We have an inverse in the soybean market, old crop values are valued at a premium to new crop and as long as you and I have been around the grain markets we know that over the course of time the laws of supply and demand traditionally will correct that inverse. So, it's a matter of timing here before that occurs. If we see the kind of soybean increase acre wise in the U.S. that is currently being projected, they all happen to yield at trend or better, a year from this summer we could be talking about an inventory in the U.S. that is twice or even better than twice what we have today. So, please be advised, again, analyze that crop budget and when you have the opportunity to capture some margin don't hesitate to do that. I think it's pretty good business. Or worst case scenario create some kind of a price floor at or near break even if you wish to see what develops over the course of the next many months regarding weather and other macroeconomic events.

Pearson: So, look at an option strategy there but with an eye towards 2010 we may see some pressure as those inventories build.

Robinson: I would agree and, again, let's keep in mind historically what traditionally happens in inverted markets. They traditionally, based on laws of supply and demand, change and move into a carry situation at some point in time. So, I can't precisely tell you when but let's remember that as we move forward here.

Pearson: Let's talk about cotton for just a minute. I've been down south a lot lately and it seems like they're a lot more enthusiastic about soybeans right now than cotton.

Robinson: Well, both old crop cotton and new crop cotton values are beneath loan values so it would be kind of silly for me to suggest selling either or both at this point in time. I think best case scenario, or worst case scenario, however you wish to look at that, I guess I would wait patiently here. Let's get a read on acres and if cotton acres do decline pretty significantly year over year and there is some type of weather concern, which traditionally there is at some point in the crop cycle, it should provide a better opportunity to make a new strategy given what we know tonight.

Pearson: Let's shift gears and talk livestock, a lot of red ink in the cattle business, we talked about dairy earlier in the show. I've talked to a lot of dairy producers here in the last month really under water, a lot of pressure compared to last year. Fed cattle first, what do you see happening going forward for 2009?

Robinson: Again, talk about cross currents here. Lower production and lower prices, very difficult to rationalize that. But, again, demand is a problem and trying to forecast demand is very, very difficult in this kind of an environment. But I do sense because of numbers, because of supply push at some point prices are likely to begin creeping higher and I think that will commence in the second and third quarters of this year. So, as we visit tonight I see no good opportunity regarding the futures market and regarding short hedges so at this point I would reconcile myself to a wait and see attitude with the opportunity I think of better live prices in the second and third quarters of 2009.

Pearson: And keeping that in mind a small calf crop too, as you mentioned a reduced herd. On the calf side what do you see there?

Robinson: Well, I think if we're correct here in our assumptions about improved demand and smaller numbers feeder cattle prices are likely to ratchet higher in an irregular manner over the course of the next many months. If I were in the business of procuring feeders I would make sure I had a supply procured either physically or with some kind of an option strategy.

Pearson: Hog market, what do you see?

Robinson: Hogs I think, again, the supply push will take an effect, smaller numbers, smaller tonnage, improved price second and third quarters of 2009, something into the mid to upper 40s is what I would project.

Pearson: Nice to move up to where we've been and on that positive note on hogs we'll call it good for this week. Big planting intentions report and we'll have all that for you on next Friday's show. I want to thank Virgil very much. That's going to wrap up this edition of Market to Market. If you'd like more information from 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 our Market Plus segments absolutely free right there at the Market to Market Web site. And be sure to join us again next week when we'll examine a unique crop rotation system that is uniting farmers and environmentalists. Until then, thanks for watching. I'm Mark Pearson. Have a great week.

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