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Market Analysis: Mar 13, 2009: Sue Martin Analyzes Late-Winter Commodity Markets

posted on March 13, 2009

Further exacerbating already tight supplies could be a dose of negative results from a dour Mother Nature. According to government climatologists, the first two months of 2009 were the driest start of any year since the USA began keeping records in 1895.

For the week, March wheat fell nearly 10 cents. And the nearby corn contract moved more than 22 cents higher.

Soybean prices inched upwards with the March contract posting a gain of more than 3 cents, and the nearby meal contract was up $11.80 per ton.

In the softs, cotton trended up this week as the May contract posted a gain of $1.40.

In livestock, April cattle moved $2.20 cents higher. Nearby feeders were up nearly $1.50. And the April lean hog contract gained 70 cents.

In other markets of interest, the Euro gained 238 basis points against the dollar. Crude oil was up 73 cents per barrel. Comex Gold fell $12.60 per ounce. And the Goldman Sachs Commodity Index gained more than 3 points to close at 337.50.


Market Analysis: Mar 13, 2009: Sue Martin Analyzes Late-Winter Commodity Markets

Pearson: Here now to lend us her insight on these and other trends is one of our regular market analysts, Sue Martin. Sue, good to have you with us.

Martin: Thank you, Mark.

Pearson: Last week we talked a little bit about the fact that the commodity markets were divorcing themselves somewhat from the equity in the capital markets as they moved higher a week ago. This week the equity markets moved higher. We did have a little bit of an up move in corn. What is your take right now on the general economic sphere when it comes to the general economy and the global economy as it relates to commodities?

Martin: Well, I think that first off, of course, the commodity sector is probably one of the better sectors that's going to come through this whole economic mess that we're in. I think that we're hearing more positive news this past week. I think that the releasing of some details of the bad loan bank plan along with more details about the budget, balancing the budget, I think that a lot of this is starting to give us a little hint of positiveness at a time when we really need it. You also have funding of IRAs and Keogh accounts coming here before very long, within a month and I think that they want positive news out there to get people to have faith to do this. In the meantime, you're getting a little bit of rhetoric around the world, especially China, that things are going to be a little better. We're getting some mixed signals but basically they are talking that their economy, they believe, will be eight percent growth this year. That's a phenomenal growth, it's a benchmark where if it gets to seven percent they're not putting people back to work. So, they are expecting a reprieve now and people coming back to work. They also noted that in February consumer use of electricity in China grew and so that's a good sign. I almost feel like the media and President Barack Obama are thinking if we just talk positive we could talk our way out of this because we certainly talked negative and got everybody protectionistic. So, I think that at the moment we're looking at a more positive time. I think as we go into the spring here and into at least mid-spring if not into early summer we're going to have maybe a little more positiveness in the atmosphere and things will kind of show up in commodities. China is investing in oil industries throughout the world. They're investing in agriculture which I think is real important. And they are also investing in metals like gold. So, I think the fact that that's where they are placing their money is showing probably some interest especially when it comes to agriculture. I like that a lot.

Pearson: Let's talk about some specifics. Let's talk first about the wheat market. USDA supply and demand numbers came out this week. There's plenty of wheat out there it appears.

Martin: Oh, there is. There was not one bright spot in that report. World stocks grew appreciably and so did the U.S. supplies or the ending carry. We went from up to 717 million bushels from I think around 652 or something like that. So, we did increase. The concern is that we do have, if you look around the world, production is going to drop this year. We've got acres dropping or declining or are estimated to fall. China is talking that they may lose 1.3%. That doesn't sound like a lot but in a country of that size and we still don't know if there's been much damage with the drought. In the meantime, you've got the Ukraine who is a big competitor of ours out of the Black Sea and they are looking at a reduction of about six million metric tons from a year ago. They produced about 25.9 million metric tons and this year they are estimating 20. If you look at the EU they are talking as much as about a 15% decline there in acreage. And if you look at Britain they're looking at a 7%. And the U.S. is looking at less production as well, it's just we have this bigger old crop carry with us and so in the meantime with the contraction of demand from around the world it's a concern but yet we're also looking at a drought in the southern plains and into wheat country, into Texas and Oklahoma, parts of Kansas into Colorado experiencing some pretty cruel temperatures this past week. I think that wheat got down on the Chicago Board of Trade to about the $5 level. To me that is a benchmark or a big base price at this time. So, it's kind of like don't cross that line and it's a little premature. I think we're going into a seasonal rally, it's like the pre-harvest rally like you'll get in grains in September. I think as we go into April to the first of May we have a potential for a seasonal rally on wheat. It will be led by other things though first.

Pearson: So, again, if you're thinking of making sales you'd probably say hold off on wheat?

Martin: I would say hold off at this time but over the course of the next two months you best get everything sold.

Pearson: Would you sell the '09 crop too?

Martin: Yeah, I would, I would sell everything that you don't really want to bin and carry into 2010. I would probably be pretty aggressive. We've got our sights set on when we want to pull the trigger. We believe that this market is giving you a reprieve here for the time being. We do not expect good things this summer.

Pearson: Let's talk about how that relates to the corn market and what you see happening there. Obviously there's been some pressure. We had a nice little post-harvest rally into the first of the year and last time you were on you were not optimistic on corn futures down the road but maybe opportunities to sell maybe the next 60 to 90 days. What is your take now?

Martin: Still there. I feel that we're through with the February break. Today Informa came out with their estimate on acres at 81.4 million acres and, of course, the USDA had it tagged as about 86, same as last year, and they had that in the form and so I think that when we look at 81.4 million acres I think the trade said, oops, we've got to have more acres than that and I think a lot of people didn't ever believe that we would be at 86 million acres and yet I think there's things going on, fringe areas I think will probably look at possibly switching to beans but when you look at Illinois, Iowa and part of Minnesota so to speak and probably even Nebraska, part of it, they're going to stay with corn I think. We've had decreases in fertilizer and the farmer is now making these decisions where a year ago and the year before that they made them as they came off the combine. But last year was so late they didn't have time to put the fertilizer on and that type of thing so now they have the opportunity. If you look at beans they are less than two to one on the corn, usually they're two and a half over corn and then you look at corn in relationship to wheat and here again that's up. Wheat is kind of like a thorn in corn's side because of the competition with feed wheat and there's plentiful supplies of that to kind of hurt us a little bit but in the meantime U.S. stocks lowered this past week on the USDA numbers and I thought that was very impressive. Most people were looking for an increase. We do have March 1st stocks coming out here at the end of the month and those should be pretty burdensome I think for corn but in the meantime world carries also increased about six million metric tons so that was not a friendly thing so to speak when you've got so much wheat around. In the meantime, though, the market is going to be about an acreage fight and they also feel that the demand is going to start to pick up for ethanol because gasoline has risen and therefore ethanol is back to starting to compete.

Pearson: That's right, the USDA did call for that and as we look past this USDA report the next big thing is going to be that March plantings report. We've learned in the past that doesn't necessarily mean that's where we're going to end up for acreage.

Martin: Exactly and, of course, this year we believe that we're going to come into -- kind of listening to our weather sources that we use it appears that we're going to come into a decent at least April, so to speak, where we're going to get the chance to let this ground get the frost out of the ground because it's in pretty deep and maybe get in with a better start than we had a year ago. So, that is going to be a plus too because the earlier the farmer can get in the more corn acres he's likely to put in especially if we're up.

Pearson: Exactly. But, again, you're saying if we get that rally this spring that's your chance to sell?

Martin: I'm very, very negative for summer. I feel that you've got April, part of May and you want it sold. There might be one little spring up around the 14th to the 21st of June and if you come into that time period higher you just sell it. If you come into it down expect a rally at that time and use it and sell it. That rally should be less than the previous two. The January highs I think you're going to go back and look at them. We'll hesitate there but I think we may be able to take that out and do something even better. But in the meantime this is an opportunity. Mark, you've got South America, Argentina, Brazil and the U.S. sitting with very little new crop sold and lots of old crop on hand, not so much maybe in Brazil as Argentina and the U.S. We're all coming here at the same time but the farmer also needs to keep an eye on his bins because as we warm up that corn did not go into those bins under the best conditions.

Pearson: That's right and, again, if you had $100,000 cash in those bins you'd be checking them all the time and with the weather conditions we had in that long harvest and slow dry down and everything else it could be a problem. What is your target? Do you think we'll get a chance to sell above those January highs?

Martin: I think we will. We're going to hesitate probably the first time we get there but I think we'll get there and then I think eventually if I'm right that the February break lows are in and I believe they are then if that's the case then we should go try possibly for May corn futures to get up around $4.87 to $4.92.

Pearson: Again, a sales opportunity.

Martin: Right.

Pearson: Soybeans, do we have the same scenario there? Are we going to get a chance to sell this spring and that's going to be it?

Martin: I think so. Right now we're pretty blessed as far as here again the Brazilian farmer is only about maybe 37% or 40% sold. Normally at this time of the year over the average of years he'd be 49% sold, maybe even closer to fifty-something. A year ago he was over 56%, almost 60% sold at this time. So you can see he's really hung on because of the fact that he doesn't like the market declining all the time. Yes, the dollars had a rally. Conversely I also think the dollar is going down through this period which is not going to be helpful and so they're hanging on. You've had the economic issues in Argentina with the producers being very upset with the 35% tax. Argentina the bright spot is that they're going to become the primary exporter of soy oil into Europe and so that is a blessing because the EU is not real happy with the taxation or I should say the subsidies that the biodiesel plants are getting here in the U.S. so they have in turn put import duties on us so we're going to lose favor there and Argentina is going to pick that up. In the meantime, Brazil's demand for biodiesel is growing and so the crush is going to grow in those areas for the soy oil. In the meantime, exports out of Argentina are going to remain slow I believe on beans and the farmer is very upset equally to what he was a year ago. The drought we're looking at a 9% to 10%, maybe 11% decline in production because of drought issues that they had not to mention that they backed off on fertilizer and technology inputs this past growing season and so I think with the drought and the other political issues they've got going on that has deferred demand that would have been to them it has taken and brought it right into us. You see China buying, China has bought way more beans than what they were given credit for just in the first quarter of the year. We're already at 75% of our USDA estimates for exports. We're going to outstrip that and I think that as we go into the May, June period, April, May we don't want to last into July because by that time I think China will bypass us and be done and, of course, they have already made statements here today that they're still going to be importing beans, that they don't feel that they've got enough supplies yet of beans in their reserves.

Pearson: Again, you think this is all kind of front loading and to make sales your 60 to 90 days is probably going to be your opportunity to make sales for the year?

Martin: I think so. I think we're going to be extremely disappointed if we wait into the Fourth of July and beyond. I think that once we get there I'll look for corn to go to $2.90 again and look at that. I think beans will drop down and make new lows. New crop beans will probably be dragged up but it's the bull spreads that for now will work. Everybody likes the July no spread but I like the May no spread better.

Pearson: So, take advantage of that and be on the lookout, opportunities are going to come and may be knocking lightly and it may be right when you're on the tractor seat planting that crop.

Martin: Yes, it is but luckily farmers have cell phones and they can maybe be getting quotes off of the radio or if they have Blackberries or something like that they can get Internet. They'll be able to see what the markets are doing and it doesn't take much time to just put in a phone call. Basis -- watch your basis. We've got good basis right now, maybe lock in some of that basis and as you go into spring basis should remain fairly tight as well but lock in your basis and then just pick up the phone and sell it.

Pearson: Let's talk about the livestock markets. The fed cattle market is a little bit more positive this week but a long way to go.

Martin: The choice select spread is still subpar. We don't really like the way it's sitting. In the meantime that makes you feel like the demand isn't good but it's because the consumer in a recession is going for the cheaper cuts and so we're grinding, our grind is up appreciably going into hamburger. But in the meantime the cattle market has tested about four times this 80 cent level and it seems like it runs out of selling when it gets down there. When you look at a chart we're in a nice sideways channel almost perfectly parallel from the top to the bottom. I'm not crazy about selling cattle down here. I think we're going to get a lift on cattle as well. Now, there is a seasonal tendency for cattle to try to soften the latter part of March into early April but beyond that I still think the cattle market is going to try to hold and push up in here. As we go into the spring I think we're going to have a lot of markets, crude included, that's going to feel more optimistic than it has. And these are opportunities, this will be an opportunity time.

Pearson: Let's talk about the hog market and what you see happening as far as pork is concerned. Obviously a competitive product -- a lot of vertical integration out there but they have been hit pretty hard on returns and we've seen a little bit of response here lately on futures.

Martin: Well, the hog market here's another market, of course, in recession if your production on poultry is down then the demand just shifts over bigger to pork and in a recession and domestically we utilize a lot of pork in the U.S. anyway. I look at the hog market your slaughter was down 5% this week, that should be good because your cutout was up every day this week. Should be good to help us clean out those pipelines a little bit. In the meantime I look at this hog market and I feel like it needs to try to hold here and I think here again is another market that tries to push stronger but I think that follow your traditional seasonals because I think they're going to play out this year.

Pearson: Sue Martin, thank you so much. That's going to wrap up this edition of Market to Market. Before we go though we'd like to remind you that many public television stations across the country are seeking your investment in quality public television programming. If you value the information you receive each week on programs like Market to Market why not phone in a pledge and invest in the service that brings you timely information and accurate market analysis. Until next time, thanks for watching. I'm Mark Pearson. Have a great week.

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