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Market Analysis: Jan 02, 2009: Virgil Robinson, Pioneer Hi-Bred International

posted on January 2, 2009

Commodity markets were closed New Year's Day, so prices referenced on this week's show were quoted from Wednesday's close.

For the holiday-shortened week, March wheat gained nearly 30 cents while the nearby corn contract moved 9 cents higher.

Soybeans also rallied, as the January contract gained more than 55 cents, and the nearby meal contract was up more than $12 per ton.

In the softs, cotton flirted with $50 dollars this week with the March contract posting a gain of $2.66.

In livestock, January cattle lost $3.00. Nearby feeders were off 82 cents. And the February lean hog contract moved 2 cents higher.

In other markets of interest, the Euro lost 23 basis points against the dollar. Crude oil gained $6.69 per barrel. Comex Gold rose more than $36.00 per ounce. And the Goldman Sachs Commodity Index gained more than 25 points to close at 345.50.

Market Analysis: Jan 02, 2009: Virgil Robinson, Pioneer Hi-Bred International Pearson: Here now to lend us his insight on these and other trends one of our regular market analysts, Virgil Robinson. Virgil, good to have you with us.

Robinson: Thank you, Mark. Happy New Year.

Pearson: Well, as we visit the oil market jumped up some this week, again, because of some events in the Middle East. Are we starting to delink some of the oil price move with what's happening in our traditional corn and soybean commodities?

Robinson: No strong indications of that thus far, Mark, at least in my opinion. Clearly that can happen over the course of time but to answer your question, no, I don't see that delinking as we visit tonight. Crude oil did jump today but clearly end of month here as we visit tonight did not have a particularly good month. So, the trend of that market, at least to a bar chartist's eye remains down. It would be, I think, very misleading for me to suggest that any kind of bottom has taken shape.

Pearson: Let's move over to the wheat market and the one that truly does trade on fundamentals and what's happening worldwide. And we do have wheat growing everywhere in the world. We've had pretty good production in 2008, I think that's been one of the positives again this year. But that has caused some price pressure. What is your outlook for wheat going into 2009?

Robinson: Before I forget, Mark, January 12th the USDA will give us an idea of winter wheat seedings and the industry is of the opinion they will be smaller as will wheat acreage throughout 2009 in the U.S. as well as globally. So, I think that has come into play. Wheat futures, if I can divert here for just a moment and address that subject, put in a particularly strong month in December. To a traditional bar chartist, of which I profess to be, the price behavior, a reversal type month, a classic outside month, often times suggests that a market has reached a low. So, over the course of the next several months given that criteria, less production, stocks will probably give us an indication of wheat used for feed on the 12th, I think we can expect and anticipate some gradual price improvement over the course of the next many weeks in wheat futures and subsequently cash wheat.

Pearson: So, the action this month kind of portends a stronger market going forward?

Robinson: It does to me, Mark, it does to me in that particular indicator, a technical indicator was strong this month.

Pearson: Let's talk about the corn market. Did you see something there? Actually before we move onto corn do you have a target in mind for making some wheat sales?

Robinson: Mark, I don't. I think at this point assuming a clean slate I would prefer the minimum price idea, keeping that opportunity open for improved price. I think there will be gradually improving demand to accommodate that with an improving global economy over the next many months.

Pearson: I'll take that. What about on corn? What is your outlook now as we move into 2009 after the most volatile year in history? What do you see ahead?

Robinson: I can't really add much to what's been discussed in previous programs regarding export sales, domestic use for feed and the ethanol margin issue. Those have not changed appreciably. Ethanol remains at a very healthy premium to gasoline futures and that is not conducive to increasing ethanol production and capacities. However, again, a more positive spin on that market would be this, I believe. Much like wheat I did see some very impressive price behavior from a bar chartist's perspective in the month of December. Now, either it's a colossal short covering phase in this market or it portends a price improvement over the course of the next many months. I'm going to lean in that latter camp. I think there are indications of improved usage as a result of a little cheaper dollar, a little weaker dollar, ocean freight as has been discussed, unbelievably inexpensive as compared to a few short months ago and I think that is the underpinning for some improvement in price over the course of the next several months, not Monday morning mind you, but the next several months.

Pearson: So, going into the New Year both wheat and corn you would expect to see some kind of a general maybe kind of a grind higher here until we kind of get a feel for what acreage looks like and so forth?

Robinson: I think that's a good point, yes. As measured by the futures market I would concur with that. Now, if futures do improve over the course of the next several weeks be advised there is another function here that should be addressed and that is your local basis. There's a lot of corn, a lot of wheat, a lot of feed grains stored on farms so those who are in that particular camp be advised that a stronger futures market often times weakens your local basis.

Pearson: And we might see that diversion as we move through spring. The basis has been fairly tight at the end of 2008.

Robinson: Post the harvest, kind of an elongated harvest, yes. In certain geographies the basis improvement has been very impressive.

Pearson: Same kind of strategy, kind of a minimum price strategy for corn?

Robinson: Well, certainly in the new crop that's where I would reside. As you mentioned we're still in this acreage uncertainty and how that all shakes out remains to be seen. Old crop corn, again, please be advised as we move forward here the element of time is a factor. Storing grain commercially, storing grain on the farm is not free. I think the March corn futures contracts positioned here sometime in January, early February to trade to around $4.50. Now, if it occurs in that January, February time window and you need cash, if you need to generate cash then the first quarter of the year I like to sell based on a $4.45 March futures contract.

Pearson: Looking forward to the 2009 crop, again, we've got a long ways to go and I know people don't want to get in that big of a hurry about it but as we look out there there's starting to be some attractive opportunities out there.

Robinson: They have improved, they certainly have depending on your crop budget. Therein lies the real key here in terms of where you want to make sales and how you want to approach your marketing throughout the course of 2009. At this point for fear of being too general here I still like the minimum price idea even though option premium is clearly expensive.

Pearson: Let's talk about soybeans and what you see happening on the soybean front. You mentioned some of the positives going on in corn, the weaker dollar, that's a plus for soybeans too.

Robinson: It is and export sales as has been mentioned numerous times remain strong to this point in time led by the Chinese. There is some concern in this up and coming production report on the 12th that bean yields could be tweaked a bit, crush could be adjusted a bit as could exports. I don't sense there's going to be a significant change in the carryout or the basic supply and demand in the '08-'09 time period. As we look forward again the industry is of the opinion that bean acres will, in fact, increase year over year. I wouldn't argue that, at least as of tonight. Having said that, please be advised then you are obligated to watch seriously price behavior in that new crop futures contract. Here again, I fully understand options are expensive but I would look to do some type of a vertical put spread in that January, February period and as that November '09 futures contract approaches that $10.60 to $10.70 area.

Pearson: Real quick on cotton, talk about a turnaround definitely occurred there up around $50 again.

Robinson: I think some concern about acres, perhaps some forecasts of improved demand are surfacing, pretty strong five year seasonal in cotton futures January through February to strengthen in value. This year appears to be tracking in that same pattern. So, I would think either the March or May cotton futures contract is in position to trade in that $55 to $60 zone at which point I would clearly create some type of floor or defensive strategy.

Pearson: Let's talk about livestock, fed cattle market not a great month and a lot of cattlemen are out there scratching their heads when is this market going to turn. What are your thoughts?

Robinson: Well, again, looking forward here in 2009 a little theme has kind of come to my attention that I'll share. I think the economy, U.S. and global, will gradually improve through 2009. We know for a fact that placements have consistently been smaller, at least versus last year and the five year average, so tighter numbers and I think given the value of currency and the prospect of improved export trade should underpin live cattle and feeder cattle values in the first quarter of '09 and they should gradually improve, at least in my opinion, through the balance of 2009. I think live cattle will average annually something in that mid perhaps upper mid $90 area through 2009.

Pearson: So, fairly friendly on the cattle market going forward which is some good news out there. You mentioned the feeder market. I keep hearing these numbers, smallest cow herd since 1950. That's substantial. Are we doing that much better of a job managing beef and with genetics and we have that much product out there for us?

Robinson: Well, there's certainly an argument in that direction but as mentioned if our thoughts are correct here looking into 2009 regarding tighter numbers, improved demand and gradual improving economic conditions it should create some strength in those feeder cattle markets and feeder cattle futures into and through 2009.

Pearson: Some good news there. Let's talk about the hog market. The USDA hogs and pigs report released yesterday, our last one obviously for the year, hog numbers surprised people. You're telling me that the numbers are shrinking.

Robinson: I don't think unexpectedly, Mark. They were within pre-report estimates and ranges but here again if you buy into this argument I've tried to make here, this little theme, tighter numbers, improved demand with the prospect of better exports I think lean hog futures and subsequently cash hogs will improve through the course of 2009 as well. I'm not looking for a significant spike in value but I think the average price through 2009 will be something in the vicinity of $3 to $5 a hundred, better than was the case in this last year and the average price last year was around $47 or $48 live. So, something in the low $50s in my opinion is likely to be the price range or the price average for lean hogs through 2009.

Pearson: Virgil Robinson, thank you so much. That is going to wrap up this edition of Market to Market. But if you'd like more information from Virgil on where these markets just may be headed visit the Market Plus page right there at our Web site where you'll find streaming video of our program. You can also download audio podcasts of our Market Analysis and, of course, the popular Market Plus segments free at our Web site. Before we go we'll pause this week to honor the memory of a key contributor to Market to Market.

Market to Market is a production of Iowa Public Television which is solely responsible for its content. Funding for Market to Market is provided by Pioneer Hi-Bred ... working to provide growers with local knowledge and support to help get the right product into each field. Pioneer ... science with service delivering success.

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